1
EXHIBIT 13
ALLERGAN FINANCIAL OVERVIEW
Year Ended December 31,
In millions, except per share data 1994 1993 % Inc.
- ------------------------------------------------------------------
Income Statement Highlights
Net Sales $947.2 $858.9 10%
Earnings from continuing operations 110.7 104.5 6%
Net earnings 110.7 108.9 2%
Per share
Continuing operations 1.73 1.58
Net earnings 1.73 1.65
Dividends 0.42 0.40
Net Sales by Product Line
Eye Care
Pharmaceuticals $390.7 $360.9 8%
Surgical 144.3 115.3 25%
Optical Lens Care 339.4 325.0 4%
------ ------
874.4 801.2 9%
Skin Care 37.3 32.4 15%
Botox 35.5 25.3 40%
------ ------
Total Net Sales $947.2 $858.9 10%
====== ======
Domestic 47.3% 47.5%
International 52.7% 52.5%
Employee Data
Number of employees 4,903 4,749 3%
Net Sales Earnings per Share from
$ in millions Continuing Operations
947.2 1.73
858.9 1.58
830.7 1.42
761.7 1.31
713.5 1.26
[CHART] [CHART]
- --------------------------------- -----------------------------
1990 1991 1992 1993 1994 1990 1991 1992 1993 1994
Research & Development Expenditures SG&A Expenses as a Percentage of Sales
$ in millions
111.5 46.8
102.5 44.0 43.7
89.5 42.2
70.4 41.4
62.5
[CHART] [CHART]
- ------------------------------ ----------------------------
1990 1991 1992 1993 1994 1990 1991 1992 1993 1994
2
ALLERGAN
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE THREE YEAR PERIOD ENDED DECEMBER 31, 1994
This financial review presents the Company's operating results for each of the
three years in the period ended December 31, 1994, and its financial condition
at December 31, 1994. This review should be read in connection with the
information presented in the Consolidated Financial Statements and the related
Notes to the Consolidated Financial Statements. In the fourth quarter of 1992,
the Company sold its North and South American contact lens business. In the
third quarter of 1993, the Company sold the remainder of the contact lens
business. The divestiture of the contact lens business, together with the prior
operating results of that division are presented in the Company's financial
results as a discontinued operation. In September 1994, the Company acquired
the assets of Ioptex Research Inc. (Ioptex), a producer of intraocular lenses
(IOLs). See Notes 2 and 3 to the Consolidated Financial Statements.
RESULTS OF OPERATIONS
Net Sales
Net sales for 1994 were $947.2 million, which was an increase of $88.3 million
or 10% over 1993. Sales of Ioptex products contributed $6.9 million to 1994
sales. Net sales for 1993 were $858.9 million, which was an increase of 3% over
1992. On a geographical basis, Company-wide sales in markets outside the United
States continue to represent an increasing portion of the Company's sales,
growing from 52% in 1992 to 53% in 1993 and 1994. Foreign currency fluctuations
in 1994 increased sales by $2.0 million as compared to average rates in effect
throughout 1993. Foreign currency fluctuations in 1993 decreased sales by $38.5
million or 5% as compared to average rates in effect throughout 1992. Sales
growth rates on a comparable exchange rate basis were 10% in 1994 and 8% in
1993.
The following table sets forth, for the periods indicated, net sales by major
product line.
Year Ended December 31,
In millions 1994 1993 1992
- ------------------------------------------------
Eye Care
Pharmaceuticals $390.7 $360.9 $339.7
Surgical 144.3 115.3 111.8
Optical Lens Care 339.4 325.0 322.4
------ ------ ------
874.4 801.2 773.9
Skin Care 37.3 32.4 37.3
Botox 35.5 25.3 19.5
------ ------ ------
Total Net Sales $947.2 $858.9 $830.7
====== ====== ======
Domestic 47.3% 47.5% 47.9%
International 52.7% 52.5% 52.1%
Eye Care Pharmaceutical Sales
$ in millions
390.7
360.9
339.7
305.1
277.4
[CHART]
---------------------------------
1990 1991 1992 1993 1994
Eye Care pharmaceutical sales include a broad range of products for glaucoma
therapy, ocular inflammation, infection, allergy and dry eye. Eye Care
pharmaceutical sales increased by 8% in 1994 compared to 1993 and by 6% in 1993
compared to 1992. The largest sales volume products in this product line are
glaucoma therapy products, including Betagan and Propine ophthalmic solutions.
Sales of Betagan and Propine were comparable to the prior year due to the
introduction of generic versions of these products by the Company and others in
1994 in the United States. U.S. sales growth in 1994 in glaucoma therapy
products was the result of sales of generic versions of these products
introduced in 1994. Sales growth in 1993 was primarily the result of the
introduction of Acular solution in the United States. Price increases in the
U.S. market in 1994 and 1993 have also contributed to sales growth. In the
international markets, expansion into new markets, continuing introductions of
new products and sales of existing products favorably impacted sales in 1994
and 1993.
Surgical Sales
$ in millions
144.3
115.3
111.1 111.8
108.2
[CHART]
-------------------------------
1990 1991 1992 1993 1994
Surgical sales represent products for the ophthalmic surgical market, including
IOLs, pharmaceuticals and other products related to cataract surgery. Surgical
sales
3
increased 25% in 1994 compared to 1993 and by 3% in 1993 compared to 1992.
Domestic sales increased by 18% in 1994 after declining 3% in 1993, while sales
in international markets increased by 36% in 1994 and 14% in 1993. Total IOL
unit sales in the U.S. market increased 42% in 1994 after decreasing 5% in
1993. Silicone IOL unit sales in the U.S. market increased by 48% in 1994 and
12% in 1993, offsetting the weakness in the PMMA IOL market in 1993. The
Company introduced a new silicone IOL, the SI-30NB, in 1993. Strong market
demand for this new product was a significant contributor to sales growth in
1994, particularly in international markets. Four months of sales of Ioptex
products totaling $6.9 million are also included in 1994 results. The decline
in U.S. sales in 1993 was primarily the result of a decline in PMMA IOL sales
offset by growth in sales of surgical adjunct products. Competitive pressures
in the U.S. market have resulted in declines in average selling prices of IOLs
in both 1994 and 1993.
Optical Lens Care Sales
$ in millions
339.4
325.0
322.4
299.3
291.8
[CHART]
---------------------------------
1990 1991 1992 1993 1994
Optical Lens Care sales increased by 4% from 1993 to 1994 and by 1% from 1992
to 1993. Increased sales in international markets were offset by declines in
sales in U.S. markets in both 1994 and 1993. Domestic sales decreased by 4% in
both 1994 and 1993. Such decreases were the result of continuing competitive
pressures within the U.S. contact lens care market including, among other
things, the introduction of disposable contact lenses and lens disinfection
systems that are easier to use. In 1992, the Company introduced a new contact
lens disinfection system marketed in the United States under the name
UltraCare, which slowed the overall decrease in U.S. sales in 1993. In 1994,
the Company introduced Complete brand multi-purpose one-bottle lens
disinfection system in the United States. Sales of Complete and growth in sales
of UltraCare in 1994 partially offset declines in sales of other optical lens
care products. International lens care product sales increased by 7% in 1994
compared to 1993 and by 3% in 1993 compared to 1992. International sales
increases were the result of the introduction of UltraCare in 1992,
introduction of Complete in 1993 and increased market penetration. Currency
fluctuations had a strong negative impact on 1993 international sales growth.
Excluding currency fluctuations, international sales increased by 12% from 1992
to 1993.
Skin Care Sales
$ in millions
37.3 37.3
36.5
33.2 32.4
[CHART]
----------------------------
1990 1991 1992 1993 1994
Skin Care sales represent the Company's line of dermatological products. Sales
growth in 1994 was 15% compared to 1993. Such growth was the result of strong
growth in Elimite cream, offset by declines in sales of other products. Sales
in 1993 declined by 13% compared to 1992 as a result of declines in sales of
most skin care products and a decline in contract manufacturing sales, offset
by an increase in sales of Elimite cream. Medicaid rebate costs also increased
in 1993 compared to the prior year.
4
Botox Sales
$ in millions
35.5
25.3
19.5
12.6
0.0
[CHART]
----------------------------
1990 1991 1992 1993 1994
Botox (Botulinum Toxin Type A) purified neurotoxin complex is the Company's
neuromuscular product. Botox sales growth was 40% in 1994 and 30% in 1993.
Sales growth in both years was the result of increased market penetration in
both the U.S. and international markets.
Income and Expenses
The following table sets forth the relationship to sales of various income
statement items:
Year Ended December 31,
1994 1993 1992
- --------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 30.3 29.1 29.1
----- ----- -----
Gross margin 69.7 70.9 70.9
Other operating costs and
expenses:
Selling, general and
administrative 41.4 42.2 43.7
Research and development 11.8 11.9 10.8
------ ----- -----
Operating income 16.5 16.8 16.4
Nonoperating income (expense) 0.3 (0.1) (0.6)
----- ----- -----
Earnings from continuing
operations before income
taxes and minority interest 16.8 16.7 15.8
===== ===== =====
Earnings from continuing
operations before cumulative
effect of accounting changes 11.7% 12.2% 11.5%
===== ===== =====
Gross Margins
The Company's gross margin percentage decreased by 1.2 percentage points from
70.9% in 1993 to 69.7% in 1994. The decline in gross margin percentage was
primarily the result of shifts in product sales mix accompanied by declines in
both IOL unit prices and margins on optical lens care product sales. The gross
margin percentage was unchanged at 70.9% in 1993 and 1992 as a result of
various offsetting changes in prices and costs. Margins decreased as a result
of declines in the average selling price of IOLs and lower average price
increases for pharmaceutical products in 1993 in the U.S. and various European
markets compared to price increases in the prior year. Such decreases were
offset by an overall gross margin percentage increase resulting from a shift in
the mix of sales to higher margin product lines.
Selling, General and Administrative
Selling, general and administrative expenses as a percentage of net sales
decreased in 1994 to 41.4% from 42.2% in 1993 and 43.7% in 1992. Such decreases
are primarily the result of continuing cost reductions and efficiencies
resulting from the realignment of the Company's organization in 1991 and
continued growth in net sales.
Research and Development
Research and development expenses increased by 9% in 1994 to $111.5 million
compared to $102.5 million in 1993. Such expenses in 1993 were $13.0 million or
15% greater than the $89.5 million spent on research and development in 1992.
The 1993 and 1994 increases in research and development expenditures were
primarily in the areas of emerging technologies, such as Botox and
receptor-selective retinoid research. The 1993 and 1994 increases are the
result of increased spending on selected research opportunities in line with
the Company's intent since 1991 to increase research and development and
decrease selling, general and administrative expenses as a percentage of sales.
Research and development expenditures are allocated to each product line, with
higher rates of investments allocated to Eye Care, Botox and Skin Care
pharmaceuticals.
5
In 1995, the Company anticipates that it will contribute $50.0 million
to a new company that will research and develop drugs based on retinoids. In
exchange, the Company will receive rights to acquire one half of all
technologies and other assets, or all of the stock of such company. The Company
will account for its $50.0 million contribution as a charge to operating expense
at the time of the contribution. See Note 12 to the Consolidated Financial
Statements.
Operating Income
Operating income in 1994 of $156.6 million or 16.5% of sales was $12.0 million
greater than 1993 operating income of $144.6 million or 16.8% of sales. The
increase in operating income from 1993 to 1994 was primarily the result of the
increase in sales. Such increase was offset by the decline in the gross margin
percentage from 70.9% in 1993 to 69.7% in 1994 and the increase in research and
development and selling, general and administrative expenses. The decline in
operating income percentage from 1993 to 1994 was primarily the result of the
decrease in gross margin percentage offset by the decrease in selling, general
and administrative expense as a percent of net sales.
Operating income in 1993 was $144.6 million or 16.8% of net sales compared to
$136.5 million or 16.4% of net sales in 1992. The increase in operating income
from 1992 to 1993 was primarily the result of the increase in sales offset by
the increase in research and development expenses. The increase in the
operating income percentage from 1992 to 1993 was primarily the result of the
decrease in the selling, general and administrative expense percentage offset
by an increase in research and development costs as a percent of net sales.
Earnings from Continuing Operations
Earnings from continuing operations in 1994 were $110.7 million or 11.7% of net
sales compared to $104.5 million or 12.2% of net sales in 1993. The increase in
earnings from continuing operations was primarily the result of the increase in
operating income in 1994 offset by an increase in income taxes. Income taxes
increased as a result of the increase in operating income and an increase in
the effective tax rate from 25% in 1993 to 29% in 1994. The effective tax rate
increased in 1994 as a result of changes in the U.S. tax laws enacted in 1993,
governing taxation of Puerto Rican operations. Earnings from continuing
operations in 1993 were $104.5 million or 12.2% of net sales compared to $95.8
million or 11.5% of net sales in 1992. The increase in 1993 was primarily the
result of the increase in operating income and a $3.6 million decrease in
interest expense, offset by an increase in income taxes resulting from the
increase in income before income taxes. The effective tax rate was unchanged
from 1992 at 25% in 1993.
Net Earnings
Net earnings were $110.7 million in 1994 compared to $108.9 million in 1993.
The 1993 earnings include $4.0 million of earnings from discontinued operations
and $0.4 million from gain on disposal of the discontinued contact lens
business.
Net earnings were $108.9 million in 1993 compared to $103.6 million in 1992.
The increase in net earnings in 1993 was the result of the increase in earnings
from continuing operations offset by decreases in earnings from discontinued
operations and gain on disposal of discontinued operations. In the fourth
quarter of 1992, the Company sold its North and South American contact lens
business and recognized a gain on such sale of $2.3 million. In the third
quarter of 1993, the Company sold the remainder of the contact lens business
and recognized a gain of $0.4 million. As a result, 1992 earnings from
discontinued operations include the operation of the entire contact lens
business for substantially all of 1992. The 1993 results from discontinued
operations relate to the remaining operations outside North and South America
for the first three quarters of the year.
The Company purchased treasury stock totaling $21.6 million in 1994 and $71.0
million in 1993. Such purchases were the primary cause of a decrease in
weighted average common shares outstanding from 67.7 million in 1992 to 66.2
million in 1993 and 63.9 million in 1994. Net earnings per common share
increased by $.08 or 5% from $1.65 in 1993 to $1.73 in 1994 and by $0.12 or 8%
from $1.53 in 1992 to $1.65 in 1993. The decrease in weighted average common
shares outstanding resulting primarily from the purchase of treasury stock
resulted in $0.06 of the increase in net earnings per common share from 1993 to
1994, and $0.04 of such increase from 1992 to 1993.
6
Liquidity and Capital Resources
Management assesses the Company's liquidity by its ability to generate cash to
fund its operations. Significant factors in the management of liquidity are:
funds generated by operations; levels of accounts receivable, inventories,
accounts payable and capital expenditures; the extent of the Company's stock
repurchase program; adequate lines of credit; and financial flexibility to
attract long-term capital on satisfactory terms.
Historically, the Company has generated cash from operations in excess of
working capital requirements. The net cash provided by operating activities in
1994 was $166.4 million compared to $156.0 million in 1993. The increase in
cash provided from operations was primarily the result of a decrease in
inventories and increases in income taxes payable and accrued liabilities,
offset by an increase in accounts receivable and other current assets. In 1995,
the Company anticipates that it will contribute $50.0 million to a new research
and development company. The Company will account for the $50.0 million
contribution as a one-time charge to operating expense. See Note 12 to the
Consolidated Financial Statements.
Cash utilized for investing activities in 1994 includes $58.3 million of
expenditures for plant and equipment more fully described under "Capital
Expenditures," below. Cash utilized for investing activities in 1994 also
includes $35.5 million used to prepay product royalties, and $25.3 million to
acquire product licenses and rights, marketing rights and software. In
addition, $17.5 million was utilized to acquire businesses including the
acquisition of the assets of Ioptex.
Net cash used in financing activities was $49.4 million in 1994, composed
primarily of $21.6 million for purchases of treasury stock and $26.5 million
for payments of dividends. Net cash used in financing activities was $70.2
million in 1993, composed primarily of $71.0 million for purchases of treasury
stock and $26.4 million for payments of dividends, offset by $30.2 million in
net borrowings under commercial paper obligations. Net cash used in financing
activities was $66.9 million in 1992, composed primarily of $25.6 million for
payments of dividends, $24.0 million for purchases of treasury stock and $24.0
million for reductions in debt. Purchases of treasury stock in 1994 and 1993
have been the primary cause of a decrease in common stock outstanding from 66.8
million shares at December 31, 1992, to 64.0 million shares at December 31,
1993 and 63.7 million shares at December 31, 1994.
Cash vs. Debt
$ in millions
200----------------------------------
*190.1
150----------------------------------
*145.1
*142.6
-141.8
*132.3
-130.7
-127.4
-121.3
*119.8
100----------------------------------
-84.4
50----------------------------------
1990 1991 1992 1993 1994
-Cash *Debt
As of December 31, 1994, the Company had two credit facilities and a medium
term note program. The credit facilities allow for aggregate borrowings on a
revolving basis of up to $260 million through 1999. The note program allows the
Company to issue up to $200 million in notes. Borrowings under the credit
facilities are subject to certain financial and operating covenants, including
a requirement that the Company maintain certain financial ratios and other
customary covenants for credit facilities of similar kind. As of December 31,
1994, the Company had $32.4 million in borrowings under one of the credit
facilities and $10.0 million under the note program. As of December 31, 1994,
the Company has classified $12.8 million of its commercial paper borrowings and
the $32.4 million borrowed under one of the facilities as long-term debt based
upon the Company's ability to maintain such debt under terms of the credit
facilities described above. As of December 31, 1994, the Company had commercial
paper borrowings of $42.8 million.
A substantial portion of the Company's existing cash and equivalents are held
by non-U.S. subsidiaries. These funds are planned to be utilized in the
Company's operations outside the United States. Tax considerations could limit
the use of these funds for domestic purposes.
The Company believes that the net cash provided by operating activities,
supplemented as necessary with borrowings available under the Company's
existing credit facilities, will provide it with sufficient resources to meet
current and long-term working capital requirements, debt service and other cash
needs.
7
Capital Expenditures
Expenditures for property, plant and equipment totaled $58.3 million for 1994,
$59.9 million for 1993 and $65.6 million for 1992. Expenditures for 1994
include expansion of manufacturing facilities in Ireland and a variety of other
projects designed to improve productivity. The Company expects to invest
approximately $55.0 to $60.0 million in property, plant and equipment in 1995.
Inflation
Although at reduced levels in recent years, inflation continues to apply upward
pressure on the cost of goods and services used by the Company. The competitive
and regulatory environments in many markets substantially limit the Company's
ability to fully recover these higher costs through increased selling prices.
The Company continually seeks to mitigate the adverse effects of inflation
through cost containment and improved productivity and manufacturing processes.
Foreign Currency Fluctuations
Approximately 53% of the Company's revenues in 1994 were derived from
operations outside the U.S., and a portion of the Company's international cost
structure is denominated in currencies other than the U.S. dollar. As a result,
the Company is subject to fluctuations in sales and earnings reported in U.S.
dollars as a result of changing currency exchange rates. The Company routinely
monitors its transaction exposure to currency rates and implements certain
hedging strategies to limit such exposure, as appropriate. The impact of
foreign currency fluctuations on the Company's sales has been as follows: a
$2.0 million increase in 1994; a $38.5 million decrease in 1993; and a $10.4
million increase in 1992. See Note 1 to the Consolidated Financial Statements.
Accounting Changes
Effective January 1, 1992, the Company adopted Statement of Financial
Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes." SFAS
109 generally provides that deferred tax assets and liabilities be recognized
for temporary differences between the financial reporting basis and the tax
basis of the Company's assets and liabilities and expected benefits of
utilizing net operating loss and credit carryforwards. The impact on deferred
taxes of changes in tax rates and laws, if any, are applied to the years during
which temporary differences are expected to be settled and reflected in the
financial statements in the period of enactment. The cumulative effect of the
adoption of SFAS 109 increased net earnings by $2.3 million. The effect of
adoption of SFAS 109 on 1992 earnings was not material.
In 1992, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 106 (SFAS 106), "Employers' Accounting for
Postretirement Benefits Other Than Pensions." The cumulative effect of adoption
of the new standard on postretirement benefits other than pensions decreased
net earnings by $4.5 million in 1992. In 1992, adoption of SFAS 106 decreased
1992 operating income and net earnings by $1.5 million and $0.9 million,
respectively.
8
ALLERGAN
CONSOLIDATED BALANCE SHEETS
December 31,
In millions, except share data 1994 1993
- ---------------------------------------------------------
Assets
Current assets
Cash and equivalents $ 130.7 $141.8
Trade receivables, net 179.7 146.8
Inventories 96.8 90.2
Other current assets 78.3 65.1
-------- ------
Total current assets 485.5 443.9
Investments and other assets 133.4 89.9
Property, plant and equipment,
net 314.8 288.1
Goodwill and intangibles, net 126.1 117.9
-------- ------
Total assets $1,059.8 $939.8
======== ======
Liabilities and Stockholders' Equity
Current liabilities
Notes payable $ 48.6 $ 38.0
Accounts payable 59.9 59.1
Accrued compensation 46.6 42.8
Other accrued expenses 102.1 89.8
Income taxes 66.5 46.7
------- ------
Total current liabilities 323.7 276.4
Long-term debt 83.7 104.6
Other liabilities 38.5 29.6
Commitments and contingencies
Minority interest 10.6 14.7
Stockholders' equity
Preferred stock, $.01 par value;
authorized 5,000,000 shares;
none issued - -
Common stock, $.01 par value;
authorized 150,000,000 shares;
issued 67,387,000 and
67,495,000 shares 0.7 0.7
Additional paid-in capital 196.7 194.5
Foreign currency translation
adjustment 4.2 (5.0)
Retained earnings 485.3 403.2
686.9 593.4
-------- ------
Less treasury stock, at
cost (3,724,000 and
3,512,000 shares) (83.6) (78.9)
Total stockholders' equity 603.3 514.5
Total liabilities and -------- ------
stockholders' equity $1,059.8 $939.8
======== ======
See accompanying notes to consolidated financial statements.
9
ALLERGAN
CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended December 31,
In millions, except per share data 1994 1993 1992
- -----------------------------------------------------------------
Net sales $947.2 $858.9 $830.7
Operating costs and expenses
Cost of sales 286.6 249.6 241.8
Selling, general and administrative 392.5 362.2 362.9
Research and development 111.5 102.5 89.5
------ ------ ------
790.6 714.3 694.2
------ ------ ------
Operating income 156.6 144.6 136.5
Nonoperating income (expense)
Interest income 8.2 6.7 7.7
Interest expense (11.0) (8.1) (11.7)
Other, net 5.1 0.4 (0.9)
------ ------ ------
2.3 (1.0) (4.9)
------ ------ ------
Earnings from continuing operations
before income taxes and minority
interest 158.9 143.6 131.6
Provision for income taxes 46.2 36.5 33.3
Minority interest 2.0 2.6 2.5
------ ------ ------
Earnings from continuing operations
before cumulative effect of
accounting changes 110.7 104.5 95.8
Discontinued operations
Earnings from operations, net of
income taxes - 4.0 7.7
Gain on disposal, net of income taxes - 0.4 2.3
------ ------ ------
Earnings before cumulative effect of
accounting changes 110.7 108.9 105.8
Cumulative effect of accounting changes - - (2.2)
------ ------ ------
Net earnings $110.7 $108.9 $103.6
====== ====== ======
Net earnings (loss) per common share
Continuing operations $1.73 $1.58 $1.42
Discontinued operations
Earnings from operations - 0.06 0.11
Gain on disposal - 0.01 0.03
Cumulative effect of accounting
changes - - (0.03)
------ ------ ------
$1.73 $1.65 $1.53
====== ====== ======
Weighted average common shares
outstanding 63.9 66.2 67.7
====== ====== ======
See accompanying notes to consolidated financial statements.
10
ALLERGAN CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
In millions 1994 1993 1992
- ------------------------------------------------------------
Cash flows provided by
operating activities
Net earnings $110.7 $108.9 $103.6
Non-cash items included in net
earnings
Cumulative effect of accounting
changes - - 2.2
Depreciation and amortization 52.3 46.8 42.9
Amortization of prepaid royalties 5.5 - -
Deferred income taxes (2.9) (6.5) (0.1)
Gain on disposal of business - (0.9) (3.7)
Loss on sale of assets 3.7 4.1 1.0
Expense of compensation plans 1.8 6.6 4.4
Minority interest 2.0 2.6 2.5
Changes in assets and liabilities
Trade receivables (25.8) (15.3) 6.7
Inventories 2.7 (8.3) 0.7
Accounts payable (0.5) 6.9 7.6
Income taxes 20.6 5.3 (6.1)
Accrued liabilities 10.6 1.0 10.7
Other (14.3) 4.8 (2.9)
------ ------ ------
Net cash provided by operating
activitie 166.4 156.0 169.5
------ ------ ------
Cash flows from investing activities
Additions to property, plant and
equipment (58.3) (59.9) (65.6)
Disposals 1.5 25.1 2.6
Investment in Ligand Pharmaceuticals - (4.0) (20.0)
Prepayment of royalties (35.5) (9.8) -
Acquisitions of businesses (17.5) - (8.1)
Other (25.3) (17.2) (12.8)
------ ------ ------
Net cash used in investing
activities (135.1) (65.8) (103.9)
------ ------ ------
Cash flows from financing activities
Dividends to stockholders (26.5) (26.4) (25.6)
Increase (decrease) in notes payable 8.4 (2.1) (11.8)
Sale of stock to employees 10.3 3.5 6.6
Net borrowings (repayments) under
commercial paper obligations (60.1) 30.2 -
Long-term debt borrowings 42.4 - 0.1
Repayments of long-term debt (2.3) (4.4) (12.2)
Payments to acquire treasury stock (21.6) (71.0) (24.0)
------ ------ ------
Net cash used in financing activities (49.4) (70.2) (66.9)
------ ------ ------
Effect of exchange rates on cash and
equivalents 7.0 0.5 (4.8)
------ ------ ------
Net increase (decrease) in cash and
equivalents (11.1) 20.5 (6.1)
Cash and equivalents at beginning
of year 141.8 121.3 127.4
------ ------ ------
Cash and equivalents at end of year $130.7 $141.8 $121.3
====== ====== ======
Supplemental disclosure of cash
flow information
Cash paid during the year for
Interest (net of amount
capitalized) $10.1 $6.2 $9.3
====== ====== ======
Income taxes $29.7 $39.9 $39.7
====== ====== ======
See accompanying notes to consolidated financial statements.
11
ALLERGAN
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Allergan and all
of its subsidiaries. Results of operations of businesses sold have been
reported as discontinued operations, and the consolidated statements of
earnings exclude sales and expenses of such businesses from results of
continuing operations. All significant transactions among the consolidated
entities have been eliminated from the financial statements. The Company's
financial position and results of operations include amounts for a joint
venture in Japan on a consolidated basis. The accounts of non-U.S. subsidiaries
are included on the basis of their fiscal years ended November 30.
Foreign Currency Translation
The financial position and results of operations of the Company's foreign
subsidiaries are generally determined using local currency as the functional
currency. Assets and liabilities of these subsidiaries are translated at the
exchange rate in effect at each year-end. Income statement accounts are
translated at the average rate of exchange prevailing during the year.
Translation adjustments arising from the use of differing exchange rates from
period to period are included in the cumulative translation adjustment account
in stockholders' equity. Gains and losses resulting from foreign currency
transactions and translation adjustments relating to foreign entities deemed to
be operating in U.S. dollar functional currency or in highly inflationary
economies are included in earnings. Foreign currency transaction and
translation losses were $2.0 million in 1994, $3.1 million in 1993 and $3.8
million in 1992.
Cash and Equivalents
The Company considers cash and equivalents to include cash in banks and
deposits with financial institutions which can be liquidated without prior
notice or penalty.
Inventories
Inventories are valued at the lower of cost or market (net realizable value).
Cost is determined by the first-in, first-out method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Additions, major renewals and
improvements are capitalized, while maintenance and repairs are expensed. Upon
disposition, the net book value of assets is relieved and resulting gains or
losses are reflected in earnings.
Depreciation
For financial reporting purposes, depreciation is generally provided on the
straight-line method over the useful life of the related asset. Accelerated
depreciation methods are generally used for income tax purposes.
Goodwill and Intangibles
Goodwill represents the excess of acquisition costs over the fair value of net
assets of purchased businesses and is being amortized on a straight-line basis
over periods from ten to thirty years. Intangibles include patents, licensing
agreements and marketing rights which are being amortized over their estimated
useful lives. The Company periodically evaluates the recoverability of goodwill
and other intangible assets based upon future cash flows. Amortization expense
was $10.2 million in 1994, $9.8 million in 1993 and $10.4 million in 1992.
Income Taxes
Effective January 1, 1992, Allergan adopted Statement of Financial Accounting
Standards No. 109 (SFAS 109), "Accounting for Income Taxes" (see Note 6). SFAS
109 generally provides that deferred tax assets and liabilities be recognized
for temporary differences between the financial reporting basis and the tax
basis of the Company's assets and liabilities and expected benefits of
utilizing net operating loss and credit carryforwards. The impact on deferred
taxes of changes in tax rates and laws, if any, are applied to the years during
which temporary differences are expected to be settled and reflected in the
financial statements in the period of enactment. No provision is made for taxes
on unremitted earnings of certain non-U.S. subsidiaries which are or will be
reinvested indefinitely in such operations.
Postretirement Benefits Other Than Pensions
In 1992, the Company adopted Statement of Financial Accounting Standards No.
106 (SFAS 106), "Employers' Accounting for Postretirement Benefits Other Than
Pensions," which requires the Company to accrue, during the years of employee
service, the expected costs of providing postretirement benefits other than
pensions to retired employees, employees' beneficiaries and covered dependents
(see Note 8).
12
NOTE 2
ACQUISITIONS
During 1994, certain businesses were acquired for a total of $17.5 million and
accounted for using the purchase method. These acquisitions included the
purchase of the assets of Ioptex Research Inc., a producer of intraocular
lenses, in September 1994. Pro forma results, assuming the acquisitions had
been made at the beginning of each year presented, would not be materially
different from the results reported. Goodwill resulting from the acquisitions
was $9.6 million.
NOTE 3
DISCONTINUED OPERATIONS
In the fourth quarter of 1992, the Company sold its contact lens business in
North and South America and recognized a gain on the sale of $2.3 million, net
of $1.4 million of income taxes. In the third quarter of 1993, the Company
divested its contact lens business outside of the Americas and recognized a
gain on the sale of $0.4 million, net of income taxes of $0.5 million. The
results of operations of the contact lens business are as follows:
In millions 1993 1992
- ---------------------------------------------------------------
Net sales $29.1 $67.0
Earnings from operations before income taxes 6.7 8.7
Earnings from operations, net of income taxes 4.0 7.7
NOTE 4
COMPOSITION OF CERTAIN FINANCIAL
STATEMENT CAPTIONS
December 31,
In millions 1994 1993
- -------------------------------------------------------
Trade receivables, net
Trade receivables $186.9 $152.6
Less allowance for doubtful accounts 7.2 5.8
------ ------
$179.7 $146.8
====== ======
Inventories
Finished products $ 69.7 $ 58.7
Work in process 8.4 13.8
Raw materials 18.7 17.7
------ ------
$ 96.8 $ 90.2
====== ======
Property, plant and equipment, net
Land $ 15.9 $ 14.0
Buildings 237.8 220.7
Machinery and equipment 247.7 206.3
------ ------
501.4 441.0
Less accumulated depreciation 186.6 152.9
------ ------
$314.8 $288.1
====== ======
Goodwill and intangibles, net
Goodwill $151.3 $139.9
Intangibles 39.9 30.9
------ ------
191.2 170.8
Less accumulated amortization 65.1 52.9
------ ------
$126.1 $117.9
====== ======
NOTE 5
NOTES PAYABLE AND LONG-TERM DEBT
December 31,
In millions 1994 1993
- -----------------------------------------------------------------
Notes payable
Bank loans $10.7 $ 4.0
Commercial paper 30.0 30.0
Current maturities of long-term debt 7.9 4.0
----- -----
Total notes payable $48.6 $38.0
===== =====
Long-term debt
Bank loans $32.4 $ -
Commercial paper 12.8 72.9
ESOP loan 22.6 24.6
Medium term notes 10.0 -
Capitalized leases 8.6 8.7
Other 5.2 2.4
----- -----
91.6 108.6
Less current maturities 7.9 4.0
----- -----
Total long-term debt $83.7 $104.6
===== ======
13
In December 1993, the Company entered into a domestic $200 million revolving
credit facility with several banks. This credit facility replaced a similar
facility entered into in July 1989. This new facility was amended in September
1994 to $225 million expiring in September 1999. The facility offers various
interest rates at the Company's option based on a percentage of prime or the
London interbank borrowing rates (LIBOR), or other negotiated rates, and is
used to support general corporate purposes and the issuance of commercial paper
in the United States. The facility provides that the Company will maintain
certain financial and operating covenants which include, among other
provisions, maintaining minimum debt to capitalization ratios and minimum
consolidated net worth. The facility also limits subsidiary debt and restricts
dividend payments. The Company was in compliance with these covenants as of
December 31, 1994. At December 31, 1994 and 1993, there was no debt outstanding
under the revolving credit facilities.
In November 1994, a subsidiary of the Company entered into a $35 million
revolving credit facility. This facility, which expires in December 1999, is
guaranteed by the Company. This facility offers various interest rates based on
the Yen LIBOR and is used to support working capital and general corporate
purposes. The facility provides that the Company will maintain the same
financial and operating covenants as contained in the domestic credit facility
discussed above. The Company was in compliance with these covenants as of
December 31, 1994. At December 31, 1994, the Company had $32.4 million
outstanding under the credit facility. Such amount is classified as long-term
debt because the Company has the ability to refinance this debt on a long-term
basis under the terms of the facility.
In September 1994, the Company entered into a $200 million medium term note
program. This program ends in September 1997. This program allows the Company
to issue notes at various interest rates and maturities in various currencies
at the Company's option based on a percentage of prime, the LIBOR or other
negotiated rates as defined in the program agreement. This program is intended
to be used to support general corporate purposes. At December 31, 1994, the
Company had $10.0 million outstanding under this program at a fixed rate of
6.8% with interest due semi-annually and principal due upon maturity. In
conjunction with this amount, the Company entered into a $10.0 million swap
agreement. The swap agreement terminates in September 1996, but can be extended
to September 1997 at the discretion of the other party. Under the swap
agreement, the other party is obligated to pay a fixed rate while the Company
is obligated to pay a floating rate based upon the LIBOR. Any gains or losses
incurred as a result of the swap agreement are recorded as interest expense.
The Company would be required to pay $0.4 million to terminate the swap
agreement based upon its fair value at December 31, 1994. The Company is
exposed to credit loss in the event of nonperformance by the other party to the
swap. Management believes such risk is remote.
At December 31, 1994 and 1993, the Company classified $12.8 million and $72.9
million, respectively, of commercial paper as long-term debt because the
Company has the ability to refinance this debt on a long-term basis under the
terms of the revolving credit facility. The commercial paper is issued at
current market rates and the carrying value approximates the fair value. The
Employee Stock Ownership Plan is discussed in Note 8.
The aggregate maturities of long-term debt are $7.9 million in 1995, $2.9
million in 1996, $12.9 million in 1997, $3.0 million in 1998, $48.3 million in
1999 and $16.6 million thereafter. For purposes of summarizing the maturities
of long-term debt, the commercial paper outstanding of $12.8 million at
December 31, 1994 was treated as maturing in 1999 upon expiration of the
current credit facility. Interest incurred of $0.3 million in 1994, $1.3
million in 1993 and $2.3 million in 1992 has been capitalized and included in
property, plant and equipment. Noncash additions to capitalized leases and
capital lease obligations of $0.4 million in 1994 and $0.6 million in 1993 were
recorded on the Company's balance sheet and excluded from the Consolidated
Statements of Cash Flows.
NOTE 6
INCOME TAXES
As discussed in Note 1, the Company adopted SFAS 109 as of January 1, 1992. The
cumulative effect of the adoption of SFAS 109 increased net earnings by $2.3
million in 1992. The effect of adoption of SFAS 109 on 1992 earnings was not
material.
14
The components of earnings before income taxes and minority interest were:
Year Ended December 31,
In millions 1994 1993 1992
- --------------------------------------------------------------------------------
Earnings from continuing operations before
income taxes and minority interest
U.S. $ 76.0 $ 62.1 $ 57.0
Non-U.S. 82.9 81.5 74.6
------ ------ ------
158.9 143.6 131.6
Discontinued operations
Earnings from operations - 6.7 8.7
Gain on disposal - 0.9 3.7
------ ------ ------
Earnings before income taxes and
minority interest $158.9 $151.2 $144.0
====== ====== ======
The provision for income taxes consists of the following:
Year Ended December 31,
In millions 1994 1993 1992
- ---------------------------------------------------------
Income tax expense (benefit)
Continuing operations $46.2 $36.5 $33.3
Discontinued operations - 3.2 2.4
----- ----- -----
$46.2 $39.7 $35.7
===== ===== =====
Current
U.S. federal $21.0 $9.8 $2.0
Non-U.S. 18.6 27.6 26.1
U.S. state and Puerto Rico 9.5 8.6 7.7
----- ----- -----
Total current 49.1 46.0 35.8
Deferred
U.S. federal (6.1) (2.3) 1.1
Non-U.S. 3.2 (0.2) (2.0)
U.S. state and Puerto Rico - (3.8) 0.8
----- ----- -----
Total deferred (2.9) (6.3) (0.1)
----- ----- -----
Total $46.2 $39.7 $35.7
===== ===== =====
The balances of net current deferred tax assets and net non-current deferred
tax assets at December 31, 1994 were $32.7 million and $7.4 million,
respectively. The balances of net current deferred tax assets and net
non-current deferred tax assets at December 31, 1993 were $29.2 million and
$8.0 million, respectively. Such amounts are included in other current assets
and investments and other assets in the consolidated balance sheets.
Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities at December 31, 1994, 1993 and
1992 are as follows:
In millions 1994 1993 1992
- -----------------------------------------------------------------
Deferred tax assets
Net operating loss carryforwards
(foreign) $12.5 $10.3 $20.6
Accrued expenses 18.2 21.9 18.5
Foreign tax credit carryforwards 1.7 14.5 9.8
Capitalized expenses 9.6 7.2 3.8
Pension expense 5.3 4.0 3.7
Medicaid rebate 4.9 4.0 3.6
Postretirement medical benefits 5.4 4.3 3.4
Intercompany profit in inventory 2.8 4.0 3.1
Alternative minimum tax credit - - 1.4
All other 10.9 11.0 12.3
----- ----- -----
71.3 81.2 80.2
----- ----- -----
Less: valuation allowance (17.9) (32.6) (36.5)
----- ----- -----
Total deferred tax asset 53.4 48.6 43.7
----- ----- -----
Deferred tax liabilities
Depreciation 10.7 7.9 7.5
All other 2.6 3.5 5.5
----- ----- -----
Total deferred tax liabilities 13.3 11.4 13.0
----- ----- -----
Net deferred tax asset $40.1 $37.2 $30.7
===== ===== =====
The 1994 decrease in the valuation allowance results from the utilization of
foreign tax credit carryforwards and utilization of certain foreign net
operating loss benefits. The 1993 decrease is comprised of a reversal of
allowance for state tax assets, an increase in the allowance related to foreign
tax credit carryforwards and a change in the allowance related to foreign net
operating loss benefits.
15
Based on the Company's current and historical pre-tax earnings, management
believes it is more likely than not that the Company will realize the benefit
of the existing net deferred tax asset at December 31, 1994. Management
believes the existing net deductible temporary differences will reverse during
periods in which the Company generates net taxable income, however, there can
be no assurance that the Company will generate any earnings or any specific
level of continuing earnings in future years. Certain tax planning or other
strategies could be implemented, if necessary, to supplement income from
operations to fully realize recorded tax benefits.
The reconciliations of the U.S. federal statutory tax rate to the combined
effective tax rate follow:
1994 1993 1992
- ----------------------------------------------------------------------
Statutory tax rate 35.0% 35.0% 34.0%
State taxes, net of U.S. tax benefit 1.4 - 1.6
Ireland and Puerto Rico income (12.8) (13.1) (14.0)
U.S. tax effect of foreign
earnings and dividends,
net of foreign tax credits 1.9 2.7 0.2
Other credits (2.2) (4.0) -
Taxes on unremitted earnings
of subsidiaries 2.0 6.6 6.7
Other 3.8 (0.9) (3.7)
----- ----- -----
Effective tax rate 29.1% 26.3% 24.8%
===== ===== =====
Certain income of subsidiaries operating in Puerto Rico and Ireland is
substantially exempt from income taxes. The exemptions reduced expected income
taxes and increased net earnings by approximately $20.3 million ($0.32 per
share) in 1994, $19.8 million ($0.30 per share) in 1993 and $20.1 million
($0.30 per share) in 1992. The Puerto Rico exemption expires December 31, 2007.
Withholding and U.S. taxes have not been provided on approximately $162.1
million of unremitted earnings of certain non-U.S. subsidiaries because such
earnings are or will be reinvested in operations or will be offset by
appropriate credits for foreign income taxes paid. Such earnings would become
taxable upon the sale or liquidation of these non-U.S. subsidiaries or upon the
remittance of dividends. It is not practicable to estimate the amount of the
deferred tax liability on such unremitted earnings. Upon remittance, certain
foreign countries impose withholding taxes that are then available, subject to
certain limitations, for use as credits against the Company's U.S. tax
liability, if any.
The Company and its former parent through July 26, 1989, SmithKline Beckman
Corporation (SmithKline), entered into a Tax Agreement dated April 11, 1989,
which provides for the allocation of tax liabilities between SmithKline, the
Company, and their respective subsidiaries for the period during which
SmithKline was the parent of the Company. The Company and its domestic
subsidiaries file a consolidated U.S. federal income tax return. Such returns
have been audited and settled through the year 1986. SmithKline and its
consolidated subsidiaries (including the Company) are under examination for the
years 1987-1989. The Company and its consolidated subsidiaries are under
examination for the years 1989-90. The Company believes the additional tax
liability, if any, for such years and subsequent years will not have a material
effect on the financial position of the Company.
At December 31, 1994, the Company has foreign tax credit carryforwards for
federal income tax purposes of approximately $1.7 million which are available
to reduce future federal income taxes, if any, through 1998.
At December 31, 1994, the Company has net operating loss carryforwards of
certain non-U.S. subsidiaries, with various expiration dates, of approximately
$54.9 million.
16
NOTE 7
STOCKHOLDERS' EQUITY
An analysis of activity in stockholders' equity for the three years ended
December 31, 1994 follows:
Common Stock Foreign
------------ Additional Unearned Currency Treasury Stock
Par Paid-In Compen- Translation Retained ---------------
In millions Shares Value Capital sation Adjustment Earnings Shares Amount
- --------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1991 67.6 $0.7 $223.6 $(33.0) $14.2 $242.8 (0.2) $ (3.4)
Net earnings 103.6
Translation adjustment (12.2)
Dividends ($0.38 per share) (25.6)
Issuance of shares under stock plans 1.6 (2.0) 0.1 2.8
Stock options exercised 0.6 0.4 6.7
Purchase of treasury stock (1.1) (24.0)
Expense of compensation plans 3.4
---------------------------------------------------------------------------------
Balance December 31, 1992 67.6 0.7 225.8 (31.6) 2.0 320.8 (0.8) (17.9)
Net earnings 108.9
Translation adjustment (7.0)
Dividends ($0.40 per share) (26.4)
Issuance of shares under stock plans (0.1) (1.3) (1.3) 0.3 5.3
Stock options exercised (0.9) (0.1) 0.2 4.7
Purchase of treasury stock (3.2) (71.0)
Expense of compensation plans 3.8
---------------------------------------------------------------------------------
Balance December 31, 1993 67.5 0.7 223.6 (29.1) (5.0) 403.2 (3.5) (78.9)
Net earnings 110.7
Translation adjustment 9.2
Dividends ($0.42 per share) (26.7)
Issuance of shares under stock plans (0.1) (1.8) (1.0) (0.2) 0.3 4.5
Stock options exercised 1.3 (1.7) 0.5 12.4
Purchase of treasury stock (1.0) (21.6)
Expense of compensation plans 3.7
---------------------------------------------------------------------------------
Balance December 31, 1994 67.4 $0.7 $223.1 $(26.4) $ 4.2 $485.3 (3.7) $(83.6)
==================================================================================
In May 1989, the Board of Directors adopted a Stockholder Rights Plan and
declared a dividend distribution of one Right for each outstanding share of
Common Stock of the Company. Each Right entitles a holder to purchase one
one-hundredth of a share of Series A Participating Preferred Stock at an
exercise price of $115, subject to adjustment. The Rights do not become
exercisable or transferable apart from the Common Stock until the earlier of
(i) any person or group becoming the beneficial owner of 20% or more of the
voting power of the outstanding voting securities of the Company (Acquiring
Person) other than an employee benefit plan of the Company or pursuant to a
"permitted offer" (i.e., an offer for all outstanding shares at a price and
terms determined by a majority of the independent directors to be adequate and
in the best interests of the Company and its stockholders), or (ii) ten days
after the commencement of a tender or exchange offer which would result in any
person or group becoming an Acquiring Person.
If any person or group becomes a 20% or more beneficial owner of Company voting
securities, except pursuant to a "permitted offer," then each Rightholder
(other than the Acquiring Person and related persons) will be entitled to
receive upon exercise Common Stock (or, in certain circumstances, other
consideration) having a value equal to two times the exercise price of the
Right. If, after the Rights have become exercisable, the Company is acquired in
a merger or other business combination in which the Company is not the
surviving corporation or in which 50% or more
17
of the assets or earning power is sold, each Rightholder (other than the
Acquiring Person and related persons) will then be entitled to receive, upon
exercise, common stock of the acquiring company having a value of two times the
exercise price of the Right.
The Board may redeem the Rights at any time prior to a person becoming an
Acquiring Person. Pursuant to an amendment adopted by the Board in September
1993 and approved by the stockholders in April 1994 (the Amendment), if, within
60 days after receiving an offer meeting certain conditions (i.e., an offer for
all outstanding shares at the same price which is not subject to financing,
funding or due diligence conditions and, if for cash, is fully financed or, if
not for cash, is for New York Stock Exchange-listed securities and will provide
tax-deferred treatment for stockholders), the Board has not either redeemed all
of the outstanding Rights or approved a financially superior transaction, then
the Board is required to call a special meeting of stockholders for the purpose
of allowing the stockholders to vote on the acceptance of such offer.
Pursuant to the Amendment, the Rights will expire on the date of the Annual
Meeting of stockholders in 1997 unless stockholders vote at such meeting to
extend the Plan, in which case the Rights will expire at the Annual Meeting of
stockholders in 2000.
NOTE 8
EMPLOYEE RETIREMENT AND OTHER BENEFIT PLANS
The Company sponsors qualified defined benefit pension plans covering
substantially all of its employees. In addition, the Company sponsors two
supplemental nonqualified plans, covering certain management employees and
officers. U.S. pension benefits are based on years of service and compensation
during the five highest consecutive earnings years. Combined pension expense
was $9.3 million in 1994, $7.3 million in 1993 and $5.7 million in 1992.
Components of pension expense under the Company's U.S. and major non-U.S. plans
for 1994, 1993 and 1992 were:
In millions 1994 1993 1992
- ---------------------------------------------------------
Service cost $7.1 $6.2 $5.4
Interest cost 7.1 6.4 5.7
Actual return on assets (0.5) (4.5) (3.4)
Net amortization and deferral (4.4) (0.8) (2.0)
---- ---- ----
Total pension expense $9.3 $7.3 $5.7
==== ==== ====
The Company's funding policy for its U.S. qualified plan is to provide
currently for accumulated benefits, subject to federal regulations. Plan assets
of the qualified plan consist primarily of fixed income and equity securities.
Benefits for the nonqualified plans are paid as they come due. Funded status of
the Company's U.S. and major non-U.S. plans' pension liabilities and assets at
December 31 was:
1994 1993
-------------------- --------------------
Non- Non-
In millions Qualified Qualified Qualified Qualified
- ----------------------------------------------------------------------------
Vested benefit obligation $51.5 $ 5.5 $55.0 $ 5.5
===== ===== ===== =====
Accumulated benefit obligation $56.6 $ 5.5 $60.1 $ 5.6
Projected compensation increases 23.4 4.5 26.8 1.1
----- ----- ----- -----
Projected benefit obligation 80.0 10.0 86.9 6.7
Plan assets at fair market value 67.8 - 62.5 -
----- ----- ----- -----
Projected benefit obligation in
excess of plan assets (12.2) (10.0) (24.4) (6.7)
Unrecognized transition asset (3.7) - (4.3) -
Unrecognized net loss 7.3 1.2 20.3 0.8
Unrecognized prior service cost (0.6) 2.1 1.4 0.2
Adjustment to recognize minimum
liability (0.2) - - -
----- ----- ----- -----
Accrued pension cost $(9.4) $(6.7) $(7.0) $(5.7)
===== ===== ===== =====
The expected long-term rate of return on plan assets ranged from 5.5% to 10% in
1994 and from 6% to 9.5% in 1993. The discount rate used in determining
obligations ranged from 5% to 9% in 1994 and from 5% to 8% in 1993, and the
assumed average rate of increase in future compensation levels ranged from 3.5%
to 6.1% in 1994 and from 4% to 6% in 1993.
18
Postretirement Benefits
The Company has one retiree health plan that covers United States retirees and
dependents. As of January 1, 1992, the Company adopted SFAS 106 and recognized
the full amount of its estimated liability for postretirement benefits of $7.5
million. The recognition of such liability, net of estimated deferred tax
benefits of $3.0 million amounted to a $4.5 million charge to earnings in 1992
reflected in the Statement of Earnings as the cumulative effect of an
accounting change. The adoption of SFAS 106 resulted in additional
postretirement benefit expense in 1992 of $1.5 million.
Retiree contributions are required depending on the year of retirement and the
number of years of service at the time of retirement. Disbursements exceed
retiree contributions and the plan currently has no assets. The accounting for
the health care plan anticipates future cost-sharing changes to the written
plan that are consistent with the Company's past practice and management's
intent to manage plan costs. The Company's history of retiree medical plan
modification indicates a consistent approach to increasing the cost sharing
provisions of the plan.
The following table sets forth the plan's funded status reconciled with the
amount shown in the Company's balance sheet at December 31:
In millions 1994 1993
- ---------------------------------------------------------
Retirees $ 2.6 $ 3.7
Fully eligible plan participants - -
Other active plan participants 8.1 10.9
----- -----
Accumulated postretirement
benefit obligation $10.7 $14.6
----- -----
Plan assets at fair value $ - $ -
Accumulated postretirement
benefit obligation in
excess of plan assets 10.7 14.6
Unrecognized net income
(loss) from past experience
different from that assumed
and from changes in
assumptions 0.6 (3.8)
Past service costs 1.9 -
----- -----
Accrued postretirement benefit cost $13.2 $10.8
===== =====
Net periodic postretirement benefit cost included the following components:
In millions 1994 1993
- -----------------------------------------------------------
Service cost-benefits attributed
to service during the period $ 1.5 $ 1.1
Interest cost on accumulated
postretirement benefit obligation 1.0 0.9
Net amortization and deferral 0.1 -
----- -----
Net periodic postretirement benefit cost $ 2.6 $ 2.0
===== =====
For measurement purposes, a 7.5% annual rate of increase for 1994 in the per
capita cost of covered health care benefits was assumed for the medical plan
for retirees and dependents, and a 5.5% increase for all participants in the
dental plan. The medical trend rate was assumed to decrease gradually to 5.5%
by 2003 and remain at that level thereafter. The dental trend rate was assumed
to decrease to 5.0% by 1996 and remain at that level thereafter. The health
care cost trend rate assumption has a significant effect on the amounts
reported. A one percentage point increase in each year would increase the
accumulated postretirement benefit obligation as of December 31, 1994 by $2.8
million and the aggregate of the service and interest cost components of net
periodic postretirement benefit cost for the year then ended by $0.6 million.
The discount rates used in determining the accumulated postretirement benefit
obligation and the net periodic postretirement benefit cost were 8.9% and 7.3%,
respectively.
Savings and Investment Plans
In May 1989, the Company established Savings and Investment Plans, which
provide for most U.S. and Puerto Rico employees to become participants after
six months of employment. In general, participants' contributions, up to 5% of
compensation, qualify for a 50% Company match. Company contributions are
generally used to purchase Allergan common stock. The Company's costs of the
Plans were $2.7 million in 1994, $2.9 million in 1993 and $2.1 million in 1992.
19
NOTE 9
EMPLOYEE STOCK OWNERSHIP PLAN AND
INCENTIVE COMPENSATION PLANS
In May 1989, the Company established an Employee Stock Ownership Plan (ESOP)
for U.S. employees. The ESOP was funded by a $31.7 million loan borrowed by the
ESOP in July 1989. The ESOP trust purchased 1,335,000 shares from the Company
using the proceeds of the loan. Participants receive an allocation of shares
held in the plan based on the amortization schedule of the loan borrowed by the
ESOP to purchase the shares, and generally become vested over five years of
Company service. Allocated and unallocated shares in the ESOP as of December
31, 1994 and 1993 are:
Number of Shares
In thousands 1994 1993
- -----------------------------------------------------
Allocated shares 398 312
Shares committed to be allocated 85 86
Unallocated shares 852 937
----- -----
Total ESOP shares 1,335 1,335
===== =====
The loan has a fifteen year maturity ending in July 2004, with quarterly
principal and interest payments. Interest rates are determined at the Company's
option based upon a percent of prime or the LIBOR and the Company's
consolidated debt to capitalization ratio. The Company has entered into
interest rate swap agreements to reduce the impact that interest rate changes
have on the loan. These agreements effectively fix the interest rate on $20.0
million of the loan at 6.03%. The agreements mature in 1996 and 1999. The
Company is exposed to credit loss in the event of nonperformance by the other
parties to the swaps. Management believes such risk is remote.
The loan is guaranteed by the Company as to payment of principal and interest
and, accordingly, the unpaid balance of the loan is included in the Company's
financial statements as debt, offset by unearned compensation included in
stockholders' equity. Dividends accrued on unallocated shares held by the ESOP
are used to repay the loan and totaled $0.4 million for each of the three years
presented. Dividends received on allocated shares held by the ESOP are
allocated directly to participants' accounts. Interest incurred on ESOP debt in
1994, 1993 and 1992 was $1.6 million, $1.7 million and $1.9 million,
respectively. Compensation expense is recognized based on the amortization of
the related loan. Compensation expense for 1994, 1993 and 1992 was $1.7
million, $1.6 million and $1.4 million, respectively.
Incentive Compensation Plans
The Company has an incentive compensation plan and a nonemployee director stock
plan. The incentive compensation plan provides for the issuance of
non-qualified stock options, restricted stock and other stock-based incentive
awards for officers and key employees. Options become exercisable 25% per year
beginning twelve months after the date of grant. All options expire ten years
after their original date of grant. As of December 31, 1994, a total of 363,000
shares of restricted stock and options to purchase 4,189,000 shares of common
stock were issued and outstanding.
Stock option activity in 1994, 1993 and 1992 under the Company's incentive
plan was as follows:
Number of Shares
-----------------------------------------
In thousands 1994 1993 1992
- -------------------------------------------------------------------------------------------------------
Outstanding, beginning of year 4,137 3,604 3,277
Options granted at fair market value 778 858 857
Options exercised (548) (208) (361)
Options cancelled (178) (117) (169)
----- ----- -----
Outstanding, end of year 4,189 4,137 3,604
===== ===== =====
Exercisable, end of year 2,051 2,287 1,812
===== ===== =====
Price range of options outstanding, end of year $11.57 - $26.41 $11.57 - $26.41 $11.41 - $26.41
=============== ================ ===============
Price range of options exercised $11.85 - $24.83 $11.41 - $24.83 $11.36 - $23.43
=============== ================ ===============
20
Options granted under the Company's incentive compensation plan provide that an
employee holding a stock option may exchange stock which the employee already
owns as payment against the exercise of their option. This provision applies to
all options outstanding at December 31, 1994.
Under the terms of the nonemployee director stock plan, each eligible director
received an initial grant of restricted stock and will receive additional
grants upon re-election to the Board. As of December 31, 1994, there were
20,000 shares issued and outstanding.
NOTE 10
COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities, equipment and automobiles. Certain of
the leases provide for payment of taxes, insurance and other charges by the
lessee. Rental expense was $12.0 million in 1994, $12.6 million in 1993 and
$12.4 million in 1992.
Minimum rentals payable under noncancelable operating leases, net of minimum
sublease rentals, as of December 31, 1994, aggregate $34.0 million and for each
of the next five years are $11.0 million in 1995, $6.2 million in 1996, $3.0
million in 1997, $2.3 million in 1998, $1.8 million in 1999 and $9.7 million
thereafter.
The Company is involved in various litigation and claims arising in the normal
course of business. The Company's management believes that recovery or
liability with respect to these matters would not have a material adverse
effect on the consolidated financial position and results of operations of the
Company.
The Company has only limited involvement with derivative financial instruments
and does not use them for trading purposes. Derivative financial instrument
arrangements are used to manage well-defined interest rate and foreign currency
fluctuation risks. The Company enters into forward exchange contracts to
eliminate the impact that exchange rate changes have on certain foreign
currency transactions. Actual gains and losses realized on the settlement of
the forward exchange contracts are anticipated to be offset by gains and losses
on the related foreign currency transactions. At December 31, 1994, the Company
had forward exchange contracts outstanding, with maturities not exceeding six
months, which require the Company to exchange foreign currencies for $29.6
million which approximates fair value.
NOTE 11
BUSINESS SEGMENT INFORMATION
The Company operates primarily in one business segment engaged in the
development, manufacture and marketing of a broad range of eye care products
that are used to treat diseases of the eye and to correct and enhance vision.
Geographic Areas
For the Year Ended December 31,
In millions 1994 1993 1992
- -------------------------------------------------------------
Net sales
United States $ 501.4 $458.8 $432.0
-------- ------ ------
Europe 370.1 340.9 329.4
Other 173.1 142.7 121.5
-------- ------ ------
Total international 543.2 483.6 450.9
-------- ------ ------
Transfers between areas(a)
United States (52.2) (43.7) (26.0)
Europe (45.2) (39.8) (26.2)
-------- ------ ------
Total transfers between areas (97.4) (83.5) (52.2)
-------- ------ ------
Total net sales $ 947.2 $858.9 $830.7
======== ====== ======
Operating income
United States before
research and development $ 194.1 $180.9 $169.6
Research and development
expenses(b) (93.3) (87.6) (77.3)
-------- ------ ------
United States 100.8 93.3 92.3
-------- ------ ------
Europe 108.5 97.9 93.2
Other 6.4 12.3 14.2
-------- ------ ------
Total international 114.9 110.2 107.4
-------- ------ ------
215.7 203.5 199.7
Corporate expenses (59.1) (58.9) (63.2)
-------- ------ ------
Total operating income $ 156.6 $144.6 $136.5
======== ====== ======
Identifiable assets(c)
United States $ 529.7 $482.6 $470.5
-------- ------ ------
Europe 301.6 242.5 236.2
Other 97.8 72.9 57.8
-------- ------ ------
Total international 399.4 315.4 294.0
Corporate 130.7 141.8 121.3
-------- ------ ------
Total assets $1,059.8 $939.8 $885.8
======== ====== ======
a) Net sales include both sales to unaffiliated customers and transfers between
geographic areas. Transfers between geographic areas are made at terms that
allow for a reasonable profit to the seller.
b) The Company's principal research and development efforts are performed in
the United States.
c) Identifiable assets are those used by the operations in each geographic
location. Corporate assets consist of cash, time deposits and short-term
investments.
21
NOTE 12
SUBSEQUENT EVENTS
The Company and Ligand Pharmaceuticals Incorporated (Ligand) operate a joint
venture for the purpose of performing certain research and development
activities. In December 1994, Allergan and Ligand formed a new research and
development company, Allergan Ligand Retinoid Therapeutics, Inc. (ALRT) which
is intended to function as the successor to the current joint venture between
the Company and Ligand. Subject to certain conditions including regulatory
approval, Ligand will contribute $17.5 million to ALRT for a right to acquire
all of the stock of ALRT at specified future dates and amounts. At the same
time, the Company will contribute $50.0 million to ALRT in exchange for rights
to acquire one half of all technologies and other assets, or a similar right to
acquire all of the stock of ALRT if Ligand does not exercise its right. The
Company will also purchase $6.0 million of Ligand common stock at the time of
its contribution to ALRT. The Company will account for its $50.0 million
contribution as a charge to operating expense at the time of the contribution.
On January 24, 1995, the Board of Directors declared a cash dividend of $0.11
per share, payable March 10, 1995, to stockholders of record on February 17,
1995.
NOTE 13
EARNINGS PER SHARE
Earnings per common and common equivalent share were computed by dividing net
earnings by the weighted average number of common and common equivalent shares
outstanding during the respective year. All shares held by the Employee Stock
Ownership Plan have been included as common shares outstanding. Common
equivalent shares consist of shares issuable upon exercise of stock options,
calculated using the treasury stock method. For all years presented, fully
diluted earnings per share approximates primary earnings per share.
22
ALLERGAN
REPORT OF MANAGEMENT
Management is responsible for the preparation and integrity of the consolidated
financial statements appearing in this Annual Report. The financial statements
were prepared in conformity with generally accepted accounting principles
appropriate in the circumstances and, accordingly, include some amounts based
on management's best judgments and estimates. Financial information in this
Annual Report is consistent with that in the financial statements.
Management is responsible for maintaining a system of internal control and
procedures to provide reasonable assurance, at an appropriate cost/benefit
relationship, that assets are safeguarded and that transactions are authorized,
recorded and reported properly. The internal control system is augmented by a
program of internal audits and appropriate reviews by management, written
policies and guidelines, careful selection and training of qualified personnel
and a written Business Ethics Policy adopted by the Board of Directors,
applicable to all employees of the Company and its subsidiaries. Management
believes that the Company's system of internal control provides reasonable
assurance that assets are safeguarded against material loss from unauthorized
use or disposition and that the financial records are reliable for preparing
financial statements and other data and maintaining accountability for assets.
The Audit Committee of the Board of Directors, composed solely of Directors who
are not officers or employees of the Company, meets with the independent
auditors, management and internal auditors periodically to discuss internal
accounting controls, auditing and financial reporting matters. The Committee
reviews with the independent auditors the scope and results of the audit
effort. The Committee also meets with the independent auditors and the chief
internal auditor without management present to ensure that the independent
auditors and the chief internal auditor have free access to the Committee.
The independent auditors, KPMG Peat Marwick LLP, were recommended by the Audit
Committee of the Board of Directors and selected by the Board of Directors.
KPMG Peat Marwick LLP was engaged to audit the 1994, 1993 and 1992 consolidated
financial statements of Allergan, Inc. and subsidiaries and conduct such tests
and related procedures as they deemed necessary in conformity with generally
accepted auditing standards. The opinion of the independent auditors, based
upon their audits of the consolidated financial statements, is contained in
this Annual Report.
Gavin S. Herbert
Chairman of the Board of Directors
William C. Shepherd
President and Chief Executive Officer
Dwight J. Yoder
Vice President, Controller
and Principal Accounting Officer
23
ALLERGAN
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of Allergan, Inc.:
We have audited the accompanying consolidated balance sheets of Allergan, Inc.
and subsidiaries as of December 31, 1994 and 1993 and the related consolidated
statements of earnings and cash flows for each of the years in the three year
period ended December 31, 1994. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Allergan, Inc. and
subsidiaries as of December 31, 1994 and 1993 and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 1994, in conformity with generally accepted accounting
principles.
As discussed in Note 6 to the consolidated financial statements, the Company
changed its method of accounting for income taxes in 1992 to adopt the
provisions of the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." As discussed in
Note 8 to the consolidated financial statements, the Company also adopted the
provisions of the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," in 1992.
Costa Mesa, California
January 23, 1995
24
ALLERGAN
QUARTERLY RESULTS (UNAUDITED)
In millions, First Second Third Fourth Total
except per share data Quarter Quarter Quarter Quarter Year
- ------------------------------------------------------------------------------------
1994
Net sales $210.1 $224.7 $242.2 $270.2 $947.2
Gross margin 146.6 157.3 167.3 189.4 660.6
Operating income 33.4 34.3 41.6 47.3 156.6
Net earnings 22.2 23.5 30.2 34.8 110.7
Net earnings per share 0.35 0.37 0.47 0.54 1.73
1993
Net sales $202.8 $207.9 $216.9 $231.3 $858.9
Gross margin 145.2 146.9 153.8 163.4 609.3
Operating income 30.7 33.0 38.7 42.2
144.6
Earnings from continuing
operations 22.3 23.4 28.3 30.5 104.5
Earnings from discontinued
operations 1.4 1.2 1.8 - 4.4
Net earnings 23.7 24.6 30.1 30.5 108.9
Earnings per share from
continuing operations 0.33 0.35 0.43 0.47 1.58
Earnings per share from
discontinued operations 0.02 0.02 0.03 - 0.07
Net earnings per share 0.35 0.37 0.46 0.47 1.65
Amounts previously reported on Form 10-Q for the first quarter of 1993 have
been restated to present the Company's contact lens business as a discontinued
operation.
25
ALLERGAN
SUMMARY OF SELECTED FINANCIAL DATA
Year Ended December 31,
In millions, except per share data 1994 1993 1992 1991 1990
- -----------------------------------------------------------------------------------------------
Summary of Operations
Net sales $ 947.2 $858.9 $830.7 $761.7 $713.5
Operating costs and expenses:
Cost of sales 286.6 249.6 241.8 212.1 217.2
Selling, general & administrative 392.5 362.2 362.9 356.2 313.8
Research and development 111.5 102.5 89.5 70.4 62.5
Operating income 156.6 144.6 136.5 123.0 120.0
Nonoperating income (expense) 2.3 (1.0) (4.9) (6.6) (10.2)
Earnings from continuing operations before
income taxes and minority interest 158.9 143.6 131.6 116.4 109.8
Earnings from continuing operations 110.7 104.5 95.8 88.3 84.8
Earnings (loss) from discontinued operations - 4.4 10.0 (147.8) (3.4)
Cumulative effect of accounting changes - - (2.2) - -
Net earnings (loss) 110.7 108.9 103.6 (59.5) 81.4
Earnings per share from continuing operations 1.73 1.58 1.42 1.31 1.26
Earnings (loss) per share from discontinued
operations - 0.07 0.14 (2.20) (0.05)
Cumulative effect per share of accounting
changes - - (0.03) - -
Net earnings (loss) per share 1.73 1.65 1.53 (0.89) 1.21
Cash dividends per share 0.42 0.40 0.38 0.33 0.28
Financial Position
Current assets $ 485.5 $443.9 $422.8 $448.2 $431.2
Working capital 161.8 167.5 155.2 179.1 175.4
Total assets 1,059.8 939.8 885.8 833.6 947.1
Long-term debt 83.7 104.6 82.0 97.2 148.0
Total stockholders' equity 603.3 514.5 499.8 444.9 523.9
26
ALLERGAN CORPORATE OVERVIEW AND SHAREHOLDER INFORMATION
Corporate Headquarters
2525 Dupont Drive
P.O. Box 19534
Irvine, California 92713-9534
(714) 752-4500
Transfer Agent, Registrar and Dividend Disbursing Agent
First Chicago Trust Company of New York
P.O. Box 2500
Jersey City, NJ 07303-2500
(201) 324-0498
Independent Public Accountants
KPMG Peat Marwick LLP
Costa Mesa, CA
Annual Meeting of Shareholders
The Annual Meeting of Shareholders of Allergan, Inc. will be held at Allergan's
corporate headquarters, 2525 Dupont Drive, Irvine, California, on April 25,
1995, at 10:00 a.m.
Form 10-K
A copy of Allergan, Inc.'s Form 10-K Annual Report as filed with the Securities
and Exchange Commission is available without charge by contacting:
Corporate Communications
P.O. Box 19534
Irvine, California 92713-9534
(714) 752-4500 ext. 4284
Dividend Reinvestment and Stock Purchase Plan
The plan allows Allergan stockholders to reinvest their dividends or invest
cash in Allergan stock without brokerage commissions or service charges. If you
are interested in joining the plan or would like more information, you may
write for a prospectus to:
First Chicago Trust Company of New York
Dividend Reinvestment Plan/Allergan, Inc.
P.O. Box 2500
Jersey City, NJ 07303-2500
Investor Relations
Security analysts, investment professionals, shareholders and the media should
direct their inquiries to:
Jeffrey B. D'Eliscu
Corporate Vice President,
Corporate Communications
(714) 752-4500 ext. 4636
Trademarks
All product names appearing in italics are trademarks or service marks that are
owned by, licensed to, promoted or distributed by Allergan, Inc., its
subsidiaries or affiliates. The following Allergan trademarks appear in this
report:
AcryFlex AMO
Array Azelex
Betagan Botox
C-Cap Complete
DuraLens Elimite
Ocuflox Prestige
Propine UltraCare
Foldable PhacoFlex II SI-30NB
Foldable PhacoFlex II SI-40NB
Acular(R) is a registered trademark licensed from Syntex (U.S.A.) Inc.
Duplicate Mailings
When shareholders own shares under different names, in more than one account,
or when several shareholders live at the same address, they may receive
duplicate mailings of shareholder information. For information on how to
eliminate multiple mailings, contact the First Chicago Trust Company of New
York at (201) 324-0498.
Environmental Commitment
Allergan is strongly committed to preserving the environment by developing
business practices that enhance the welfare of our customers, employees and the
communities in which we operate.
To receive a copy of Allergan's Environmental Health and Safety Performance
Report, call or write:
Corporate Communications
P.O. Box 19534
Irvine, CA 92713-9534
(714) 752-4500 ext. 4284
This annual report is printed entirely on recycled paper.
Market Prices of Common Stock and Dividends
The following table shows the quarterly price range of the common stock and the
cash dividends declared per share during the period listed.
1994 1993
------------------------- --------------------------
Quarter Low High Div. Low High Div.
- ------------------------------------------------------------------
First 20-1/4 25-1/4 $.10 21-1/4 26-3/8 $.10
Second 20 25 $.10 21-1/2 25-1/4 $.10
Third 21-5/8 28 $.11 21-1/2 24-1/2 $.10
Fourth 24-7/8 30-7/8 $.11 20-3/4 23-3/4 $.10
Allergan Common Stock is listed on the New York Stock Exchange and is traded
under the symbol "AGN." In newspapers, stock information is frequently listed
as "Alergn."
The approximate number of shareholders of record was 15,000 as of January 24,
1995.
For the fourth quarter of 1994, the Board declared a cash dividend of $0.11 per
share, payable March 10, 1995 to shareholders of record on February 17, 1995.
See Note 5 to the Consolidated Financial Statements relative to restrictions on
dividend payments.