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EXHIBIT 13
ALLERGAN 1997 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1997
This financial review presents the Company's operating results for each of the
three years in the period ended December 31, 1997, and its financial condition
at December 31, 1997. 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 1997 and 1996, the Company entered into three research and development
collaboration agreements:
In September 1997, the Company and Acadia Pharmaceuticals entered into a
collaboration of discovery efforts on five potential drug targets including the
prostanoid and alpha adrenergic receptors. The Company invested $6 million in
Acadia Pharmaceuticals, and will pay Acadia up to $12.5 million for the first
product developed for each receptor target. Upon commercialization of products,
the Company will pay Acadia royalties on product sales.
In November 1996, the Company and Cambridge NeuroScience, Inc. entered into
a collaboration to develop treatments for glaucoma and other ophthalmic diseases
based on ion channel blocking technology. The Company invested $3 million in
Cambridge NeuroScience common stock, and will pay Cambridge NeuroScience $3
million for collaborative research over a three year period.
In October 1996, the Company and SUGEN, Inc. entered into an exclusive
collaboration to identify compounds for the treatment of ophthalmic diseases
utilizing SUGEN's proprietary signal transduction inhibition technology. The
Company invested $7 million in SUGEN common stock, and paid SUGEN $2 million in
technology fees which were charged to research and development in 1996. In
addition, the Company will pay $4.5 million in collaborative research fees over
a three year period.
In 1995, the Company acquired four businesses:
Optical Micro Systems Inc. (OMS), a manufacturer of phacoemulsification
equipment, in North Andover, Massachusetts, in January 1995.
Laboratorios Frumtost SA (Frumtost), the largest manufacturer of eye care
pharmaceuticals in Brazil, in June 1995.
Herald Pharmacal (Herald) skin care product line based in Colonial Heights,
Virginia, in August 1995.
Pilkington Barnes Hind contact lens care product line (Barnes Hind) marketed
worldwide with a leading product in Japan, in November 1995.
In addition, the Company acquired the minority ownership portion of its
Santen-Allergan joint venture, which markets contact lens care products in
Japan, in August 1995.
RESULTS OF OPERATIONS
>Net Sales
Net sales for 1997 were $1.138 billion, which was a decrease of $9.0 million or
1% from 1996. Foreign currency fluctuations in 1997 decreased sales by $46.0
million or 4% as compared to average rates in effect through 1996. Excluding the
impact of foreign currency fluctuations, sales increased by $37.0 million or 3%
over 1996.
Net sales for 1996 were $1.147 billion, which was an increase of $79.8
million or 7% over 1995. Foreign currency fluctuations in 1996 decreased sales
by $13.9 million or 2% as compared to average rates in effect through 1995.
Excluding the impact of foreign currency fluctuations, sales increased by $93.7
million or 9% over 1995. Sales in 1996 of products of acquired businesses in
their first twelve months after acquisition contributed $78.4 million to 1996
sales.
The following table sets forth, for the periods indicated, net sales by
major product line.
Year Ended December 31,
In millions 1997 1996 1995
- ------------------------------------------------------------------------------
Specialty Pharmaceuticals:
Eye Care Pharmaceuticals $ 408.5 $ 425.1 $ 415.1
Skin Care 80.6 64.7 44.7
Botox/Neuromuscular 90.1 67.2 48.9
------------------------------------------
Total 579.2 557.0 508.7
Medical Devices and OTC
Product Lines:
Ophthalmic Surgical 182.2 184.0 188.7
Optical Contact
Lens Care 376.6 406.0 369.8
------------------------------------------
Total 558.8 590.0 558.5
------------------------------------------
Total Product Net Sales $ 1,138.0 $ 1,147.0 $ 1,067.2
==========================================
Domestic 42.8% 41.4% 43.6%
International 57.2% 58.6% 56.4%
------------------------------------------
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ALLERGAN 1997 ANNUAL REPORT
Historically, the Company has used special sales and promotional incentives
to distributors to promote the sale of eye care pharmaceuticals and skin care
pharmaceuticals. A curtailment of these special programs in the United States in
1997 reduced wholesaler inventories and net sales by approximately $17 million
or 1.5% of net sales for 1997 in comparison with comparable 1996 amounts.
>Eye Care Pharmaceutical Sales
Eye Care pharmaceutical sales include a broad range of products for glaucoma
therapy, ocular inflammation, infection, allergy and dry eye. Eye Care
pharmaceutical sales decreased by 4% in 1997 compared to 1996 after increasing
2% in 1996 compared to 1995.
United States sales decreased by $5.0 million while international sales
decreased $11.6 million in 1997 compared to 1996. Excluding the impact of
foreign currency changes, international sales were unchanged in 1997 compared to
1996. The decrease in U.S. sales was primarily the result of the reduction in
1997 in inventories held by wholesalers. In addition, sales of certain glaucoma
and anti-infective products decreased significantly due to generic competition.
The decreases were offset by growth in sales of a new glaucoma product,
Alphagan, introduced in late 1996. Alphagan sales in the United States were
$46.3 million compared to $5.0 million in 1996.
United States sales in 1996 decreased by $22.9 million or 11% compared to
1995. Such decrease was the result of decreases in sales unit volumes of
glaucoma therapy products. Sales in international markets increased by $32.9
million or 16% in 1996 compared to 1995 as a result of increased sales of
Frumtost products and growth in other international markets.
>Skin Care Sales
Skin Care sales include products for acne, psoriasis and other prescription and
over the counter dermatological products. Sales increased by $15.9 million or
25% in 1997 compared to 1996, and by $20.0 million or 45% in 1996 compared to
1995. Sales growth in 1997 was driven by $16.2 million in sales of Tazorac
(Zorac), a topical gel used to treat psoriasis and acne, which was introduced in
1997. Growth in 1997 was negatively impacted by the reduction in wholesaler
inventories and a decrease in sales of anti-fungal products. Sales in 1996
included a full year of Herald product sales compared to five months sales in
1995. In addition, the Company introduced Azelex (azelaic acid) cream in 1996.
Sales of Azelex accounted for the remainder of the increase in sales in 1996.
>Botox/Neuromuscular Sales
Botox (Botulinum Toxin Type A) purified neurotoxin complex is the Company's
product for movement disorders. Botox sales growth was 34% in 1997 and 37% in
1996. Sales growth in both years was the result of increased market penetration
in both the U.S. and international markets.
>Ophthalmic Surgical Sales
Surgical sales represent products for the ophthalmic surgical market, including
intraocular lenses (IOLs), pharmaceuticals and other products related to
cataract surgery. Surgical sales decreased by 1% in 1997 compared to 1996 and by
2% in 1996 compared to 1995. Domestic sales increased by 2% in 1997 and
decreased by 15% in 1996, while sales in international markets decreased by 3%
in 1997 and increased by 9% in 1996. Total IOL unit sales in the U.S. market
increased 14% in 1997 after decreasing 5% in 1996. During 1996, surgical sales
were negatively impacted by the initiation of a limited voluntary recall of
certain IOLs in the first quarter. Silicone IOL unit sales in the U.S. market
increased by 24% in 1997 and 5% in 1996. Competitive pressures have resulted in
declines in average selling prices of IOLs in 1997 and 1996 in both the United
States and international markets. In addition, sales in international markets
decreased by 8 percentage points in 1997 and 5 percentage points in 1996 by the
impact of foreign currency fluctuations.
>Optical Contact Lens Care Sales
Optical Lens Care sales decreased by 7% from 1996 to 1997 and increased by 10%
from 1995 to 1996. Domestic sales decreased by 10% in 1997 and increased by 13%
in 1996. Domestic sales decreased in 1997 as a result of decreases in sales of
ancillary contact lens care products. This decrease is the result of increasing
use of disposable and frequent replacement contact lenses. Sales of Barnes Hind
products, acquired in 1995, account for most of the increase in United States
sales in 1996. International lens care product sales decreased
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ALLERGAN 1997 ANNUAL REPORT
by 6% in 1997 compared to 1996 and increased by 9% in 1996 compared to 1995.
Currency fluctuations had a negative impact on 1996 and 1997 international sales
growth. Excluding currency fluctuations, international sales increased by 5%
from 1996 to 1997 and by 11% from 1995 to 1996. Sales of Barnes Hind products
increased international sales in 1997 and 1996. These increases were offset by
decreases in sales of peroxide based disinfection products as consumers
increased use of lower priced one bottle cold chemical disinfection systems.
>Income and Expenses
The following table sets forth the relationship to sales of various income
statement items:
Year Ended December 31,
1997 1996 1995
----------------------------------
Product net sales 100.0% 100.0% 100.0%
Cost of sales 35.1 33.5 30.7
---------------------------------
Product gross margin 64.9 66.5 69.3
Research services margin 0.1 0.1 0.0
Other operating costs and
expenses:
Selling, general and
administrative 40.3 39.8 41.5
Research and
development 11.5 10.3 10.9
Restructuring charge -- 6.1 --
Asset write-offs -- 0.6 --
Contribution to ALRT -- -- 4.7
---------------------------------
Operating income 13.1 9.6 12.1
Nonoperating income (expense) 0.7 (0.2) (0.4)
---------------------------------
Earnings before income taxes
and minority interest 13.8 9.4 11.7
==================================
Net earnings 11.3% 6.7% 6.8%
==================================
>Gross Margins
The Company's gross margin percentage decreased by 1.6 percentage points from
66.5% in 1996 to 64.9% in 1997. The decrease in gross margin was primarily the
result of the negative impact of currency fluctuations. Partially offsetting the
decrease, the gross margin percentage was increased by sales of newly introduced
higher margin products offset by increased royalty costs. The Company's gross
margin percentage decreased by 2.8 percentage points from 69.3% in 1995 to 66.5%
in 1996. The decrease in gross margin percentage was primarily the result of the
shift in sales mix to include lower margin products of businesses acquired in
1995. In addition, margins declined as global pricing pressures decreased
selling prices in 1996. Pricing pressures were the result of competitor actions,
governmental cost control measures, and reductions in net realized prices of
products sold to managed care organizations.
>Selling, General and Administrative
Selling, general and administrative expenses as a percentage of product net
sales increased in 1997 to 40.3% from 39.8% in 1996. The percentage decreased in
1996 from a rate of 41.5% in 1995. The percentage increase in 1997 was primarily
the result of product launch costs relating to Alphagan and Tazorac (Zorac)
estimated at in excess of $23.0 million. The increased costs were partially
offset by certain transactions including $9.6 million in income from sales of
product rights, $7.5 million in income from settlement of a product related
lawsuit, and $4.5 million in income from Ligand Pharmaceuticals Incorporated
(Ligand) from the sale of rights to certain compounds in connection with the
dissolution of Allergan Ligand Retinoid Therapeutics, Inc. (ALRT). The
percentage decrease in 1996 was primarily the result of decreases in product
launch expenses from 1995 and overhead related to acquisitions in 1995 and the
favorable effect of currency changes, offset by an increase in amortization of
goodwill related to recent acquisitions. In addition, restructuring activities
in 1996 reduced the Company's administrative cost structure lowering selling,
general and administrative costs in the second half of the year.
>Research and Development
Research and development expenses increased by 11% in 1997 to $131.2 million
compared to $118.3 million in 1996 and $116.7 million in 1995. In addition, in
1995 the Company contributed $50.0 million to ALRT to conduct research related
to small molecule retinoid products. Beginning in 1995, Allergan research and
development costs related to retinoid products were reimbursed by ALRT. Research
and development spending in 1995 and 1996 does not include the $50.0 million
contribution to ALRT in 1995, or research and development spending performed
under contracts with ALRT in 1995, 1996 and 1997. The 1997 and 1996 increases in
research and development spending are the result of increased
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ALLERGAN 1997 ANNUAL REPORT
spending on selected research opportunities. In addition, 1997 spending includes
$3.4 million in net cost to acquire a portion of the assets of ALRT at its
dissolution, and approximately $4.0 million in costs of research which would
have been reimbursed by ALRT had it not been dissolved. Research and development
expenditures are allocated to each product line, with higher rates of
investments allocated to Eye Care pharmaceuticals, Botox and Skin Care.
>Special Charges
Results for 1996 and 1995 include three special charges disclosed on specific
lines in the Consolidated Statements of Earnings.
During 1996, the Company recorded a $70.1 million restructuring charge,
$49.7 million after taxes. The restructuring charge related to a comprehensive
program anticipated to streamline operations and reduce costs through management
restructuring and facilities consolidation resulting in a workforce reduction of
approximately 500 people. The restructuring and facilities consolidation
activities affected employees in various activities in 22 locations worldwide.
The restructuring charge was recorded over the last three quarters of 1996 as
employees at each location were notified of the restructuring plan and its
effect on their location. The restructuring charge was originally estimated to
consist of $34.0 million of employee severance costs, $29.6 million of facility
consolidation costs and $6.5 million of other costs. During 1997, $7.6 million
was paid to approximately 140 terminated employees and $10.1 million was paid
for facilities consolidation and other costs. During 1996, $9.9 million was paid
to approximately 300 terminated employees and $26.5 million was paid for
facility consolidation and other costs.
As the Company implemented its streamlined business plan, certain assets
were determined to be of limited or no future value. The Company recorded $7.4
million in write-offs, $5.3 million after taxes, of computer hardware and
software and certain intangible assets in 1996.
Since 1992, the Company and Ligand operated 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, ALRT, to
function as the successor to the joint venture. In June 1995, Ligand contributed
$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 contributed
$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 did not exercise its right. The Company also purchased $6.0
million of Ligand common stock at the time of its contribution to ALRT. The
Company accounted for its $50.0 million contribution as a charge to operating
expense at the time of the contribution.
>Operating Income
Operating income was $149.0 million or 13.1% of product net sales in 1997, and
$110.6 million or 9.6% of product net sales in 1996. The 1996 amount included
special charges for restructuring costs of $70.1 million and asset write-offs of
$7.4 million. Operating income in 1995 was $129.6 million or 12.1% of product
net sales. The 1995 amount included the special charge for the $50.0 million
contribution to ALRT. Excluding the special charges in 1996 and 1995, operating
income was $188.1 million or 16.4% of product net sales in 1996 and $179.6
million or 16.8% of product net sales in 1995. Operating income and the
operating income percentage, excluding special charges, decreased by $39.1
million from $188.1 million or 16.4% of product net sales in 1996 to $149.0
million or 13.1% of product net sales in 1997. Such decreases were primarily the
result of the decrease in gross margin of $23.6 million and the increase in
research and development costs of $12.9 million. Operating income, excluding
special charges, increased in 1996 as a result of the increase in net sales. The
operating income percentage, excluding special charges, declined in 1996 as a
result of the decline in gross margin percentage offset by the reduction in
selling, general and administrative costs as a percentage of net sales.
>Net Earnings
Net earnings were $128.3 million in 1997 compared to $77.1 million in 1996. The
1996 results include the restructuring charge of $49.7 million net of income
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ALLERGAN 1997 ANNUAL REPORT
taxes, and asset write-offs of $5.3 million net of income taxes. Excluding the
after tax effect of special charges, net earnings were $128.3 million in 1997
compared to $132.1 million in 1996. The decrease in 1997 was the result of the
$39.1 million decrease in operating income, offset by a $12.4 million ($8.8
million net of income taxes) gain on sale of an investment included in other
non-operating expense and a $16.5 million one-time reduction in income taxes.
Income taxes were reduced by a tax benefit resulting from the termination of
ALRT in 1997. Such reduction was related to a portion of the $50.0 million
contributed to ALRT in 1995.
Net earnings were $77.1 million in 1996 compared to $72.5 million in 1995.
The increase in net earnings in 1996 was primarily the result of the increase in
operating income excluding the effect of the special charges in 1996 and 1995.
Such increase was offset by the increase in the effect of the special charges in
1996 compared to 1995. The contribution to ALRT in 1995 reduced net earnings by
$50 million.
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128).
SFAS No. 128 replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options.
Diluted earnings per share is very similar to the previously reported primary
earnings per share. All earnings per share amounts for all periods have been
restated to conform to SFAS No. 128 requirements.
Diluted net earnings per common share increased to $1.95 in 1997 from $1.17
in 1996. The 1996 amount was reduced by $0.75 for the after tax effect of the
restructuring charge, and by $0.08 for the after tax effect of asset write-offs.
Excluding the effects of the special charges for restructuring costs and asset
write-offs in 1996, diluted net earnings per common share decreased $0.05 or
2.5% from $2.00 in 1996 to $1.95 in 1997.
Diluted earnings per common share increased to $1.17 in 1996 from $1.12 in
1995. The 1995 amount was reduced by $0.77 for the effect of the contribution to
ALRT. Excluding the effect of the special charges for restructuring costs and
asset write-offs in 1996 and the contribution to ALRT in 1995, diluted net
earnings per common share increased $0.11 or 6% to $2.00 in 1996 from $1.89 in
1995.
Basic earnings per common share were $1.97 in 1997, $1.18 in 1996 and $1.13
in 1995. Excluding special charges of $0.76 for restructuring and $0.08 for
asset write-offs in 1996 and $0.78 for the contribution to ALRT in 1995, basic
earnings per common share were $2.03 in 1996 and $1.91 in 1995.
Results for the second quarter, third quarter, fourth quarter, and total
year of 1996 include special charges in operating costs and expenses for
restructuring costs and asset write-offs. Excluding the charges, the following
amounts would have been reported:
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
- ------------------------------------------------------------------------------------
Operating
income $ 33.2 $ 43.6 $ 51.6 $ 59.7 $ 188.1
Net earnings 23.1 29.8 37.7 41.5 132.1
Basic earnings
per share 0.36 0.46 0.58 0.63 2.03
Diluted earnings
per share 0.35 0.45 0.57 0.63 2.00
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 was
$209.8 million in 1997 compared to $175.2 million in 1996 and $76.7 million in
1995. Operating cash flow in 1997 was increased due to a reduction in accounts
receivable balances. Operating cash flow in 1995 was reduced by the $50.0
million contribution to ALRT. In addition, the Company reduced income taxes
pay-able in 1995 as a result of acceleration of certain tax payments as required
by taxation provisions of the new United States GATT legislation enacted in
December 1994.
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ALLERGAN 1997 ANNUAL REPORT
Cash used in investing activities was $83.9 million in 1997 including $64.4
million in expenditures for plant and equipment, more fully described under
"Capital Expenditures" below, and $17.4 million to acquire software. Cash used
in investing activities of $74.4 million in 1996 included $23.5 million to
acquire software, and $59.7 million of expenditures for plant and equipment.
Such expenditures were partially offset by proceeds from sales of investments
and other assets. Cash used in investing activities totaled $277.8 million in
1995. The acquisitions of OMS, Frumtost, and the Herald Pharmacal and Barnes
Hind product lines, along with acquisition of the minority ownership portion of
the Santen-Allergan joint venture represent $162.0 million of such activities.
Cash utilized for investing activities in 1995 also includes $17.5 million used
to prepay product royalties, $30.7 million used primarily to acquire software,
and $62.5 million of expenditures for plant and equipment.
Cash used in financing activities was $54.5 million in 1997, composed
primarily of $33.4 million for payment of dividends, $34.0 million for purchases
of treasury stock and $37.6 million in net repayments of debt including notes
payable and long-term debt. Cash was provided by $31.9 million in net borrowings
under commercial paper obligations and long-term debt, and $18.6 million in
proceeds from sales of stock to employees. Cash used in financing activities was
$93.5 million in 1996, composed primarily of $31.5 million for payment of
dividends and $100.1 million in net repayments of debt including commercial
paper, notes payable and long-term debt. Cash was provided from $18.2 million in
proceeds from sales of stock to employees and $19.9 million in long-term
borrowings. Net cash provided by financing activities was $175.7 million in
1995. Cash was provided primarily by net borrowings under commercial paper
obligations of $64.0 million, and long-term debt borrowings of $129.1 million.
The primary financing activity use of cash was $29.9 million in payment of
dividends.
As of December 31, 1997, the Company had three long-term credit facilities
and a medium term note program. The credit facilities allow for borrowings of up
to $44.6 million through 1999, $252.0 million through 2001, and $39.1 million
through 2003. The note program allows the Company to issue up to an additional
$115 million in notes on a non-revolving basis. 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,
1997, the Company had $93.7 million in borrowings under certain of the credit
facilities, $65.0 million under the note program, and commercial paper
borrowings of $40.6 million. As of December 31, 1997, the Company classified
$10.6 million of its commercial paper borrowings as long-term debt based upon
the Company's ability to refinance such debt on a long-term basis under terms of
the credit facilities described above.
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. The Company has approximately
$295.8 million in unremitted earnings outside the United States for which
withholding and U.S. taxes have not been provided. Tax costs could be incurred
if these funds were remitted to the United States.
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.
>Capital Expenditures
Expenditures for property, plant and equipment totaled $64.4 million for 1997,
$59.7 million for 1996 and $62.5 million for 1995. Expenditures for 1997 include
expansion of manufacturing facilities and a variety of other projects designed
to improve productivity.
>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
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ALLERGAN 1997 ANNUAL REPORT
mitigate the adverse effects of inflation through cost containment and improved
productivity and manufacturing processes.
>Foreign Currency Fluctuations
Approximately 57% of the Company's revenues in 1997 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 was as follows: a $46.0 million decrease in
1997; a $13.9 million decrease in 1996; and a $33.0 million increase in 1995.
The 1997 sales decrease included decreases of $31.3 million related to European
currencies and $9.7 million related to the Japanese Yen. The 1996 sales decrease
included decreases of $6.3 million related to European currencies and $7.7
million related to the Japanese Yen. The 1995 sales increase included increases
of $30.6 million related to European currencies and $2.6 million related to the
Japanese Yen. See Note 1 to the Consolidated Financial Statements relative to
the Company's accounting policy on foreign currency translation.
In the normal course of business, operations of the Company are exposed to
risks associated with fluctuations in currency exchange rates and interest
rates. The Company addresses these risks through controlled risk management that
includes the use of derivative financial instruments to hedge these exposures.
The Company does not enter into financial instruments for trading or speculative
purposes. See Note 10 to the Consolidated Financial Statements for activities
relating to foreign currency risk management. The recent economic instability in
Asia has not had, and is not expected to have, a material impact on the
Company's operations, cash flows, or financial position. The Company believes
its assets in Asia have suffered no permanent impairment in value as a result of
recent economic events.
>Allergan Specialty Therapeutics, Inc.
In 1997 the Company formed a new subsidiary, Allergan Specialty Therapeutics,
Inc. (ASTI), to conduct research and development of potential pharmaceutical
products based on the Company's retinoid and neuroprotective technologies. In
November, the Company filed a registration statement with the Securities and
Exchange Commission on behalf of ASTI relating to a proposed special
distribution of ASTI Class A Common Stock to the Company's stockholders. The
distribution is expected to occur on or about March 10, 1998 to stockholders of
record on February 17, 1998.
Prior to the distribution, the Company will contribute $200 million to ASTI.
The market value of ASTI stock is anticipated to be approximately $23 to $35
million at the date of distribution. The Company will record a dividend for the
amount of the market value of ASTI stock at the distribution. The remainder of
the $200 million will be recorded as a charge against operating income. The
Company's stockholders will receive one share of ASTI Class A Common Stock for
each 20 shares of common stock held as of the record date. Based on 65,292,628
shares of common stock outstanding as of December 31, 1997, approximately
3,264,600 shares of ASTI Class A Common Stock are expected to be issued in the
distribution. The Company's stockholders will not be required to pay any cash or
other consideration for the ASTI Class A Common Stock received in the
distribution. The distribution is expected to be taxable as a dividend to each
holder in the amount of the fair market value of ASTI Shares distributed to such
holder.
As the sole holder of ASTI's outstanding Class B Common Stock following the
distribution, the Company will have the option to repurchase all of the
outstanding ASTI Shares under specified conditions. The Company has also granted
certain technology licenses and agreed to make specified payments on sales of
certain products in exchange for the payment by ASTI of a technology fee and the
option to independently develop certain compounds funded by ASTI prior to the
filing of an Investigational New Drug application with the U.S. Food and Drug
Administration with respect thereto and to license any products and technology
developed by ASTI. The Company will recognize the technology fee as revenue as
it is earned and received.
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ALLERGAN 1997 ANNUAL REPORT
ASTI's technology and product research and development activities will take
place under a research and development agreement with the Company. The Company
will recognize revenues and related costs as services are performed under such
contracts. It is currently expected that substantially all of ASTI's funds will
be directed toward continuing the research and development of products based on
retinoid and neuroprotective technologies. In addition, ASTI may fund the
research and development of pharmaceutical products in therapeutic categories of
interest to the Company, other than those based on retinoid and neuroprotective
technologies, that complement the Company's product pipeline or otherwise are
believed to provide a potential commercialization opportunity for the Company.
>Year 2000
The Company has developed plans to address issues related to the impact on its
computer systems of the year 2000. Financial and operational systems have been
assessed and plans have been developed to address systems modification
requirements. The financial impact of making the required systems changes is not
expected to be material to the Company's consolidated financial position,
results of operations or cash flows.
>Forward Looking Statements
Any of the above statements that refer to the Company's estimated or anticipated
future results are forward looking and reflect the Company's current analysis of
existing trends and information. Actual results may differ from current
expectations based on a number of factors affecting the Company's businesses,
including new product performance and related introduction and launch expenses,
competitive conditions, changing market conditions, the timing and uncertainty
of results of the research, development and regulatory processes, the
performance, including consumer acceptance of higher margin products, and the
realization of the favorable gross profit margin resulting from product mix
shifts and efforts to control expenses. In addition, matters affecting the
economy generally, such as currency exchange rates and the state of the economy
worldwide and in certain regions, can affect the Company's results. These
forward looking statements represent the Company's judgment only as of the date
of this Annual Report. Actual results could differ materially, and, as a result,
the reader is cautioned not to rely on these forward looking statements. The
Company disclaims, however, any intent or obligation to update these forward
looking statements.
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CONSOLIDATED BALANCE SHEETS
December 31,
In millions, except share data 1997 1996
- ---------------------------------------------------------------------------------------------------------------
Assets
Current assets
Cash and equivalents $ 180.9 $ 112.0
Trade receivables, net 187.0 242.5
Inventories 147.8 130.1
Other current assets 120.7 115.1
--------------------------
Total current assets 636.4 599.7
Investments and other assets 191.3 163.0
Property, plant and equipment, net 357.8 348.5
Goodwill and intangibles, net 213.4 238.6
--------------------------
Total assets $ 1,398.9 $ 1,349.8
==========================
Liabilities and Stockholders' Equity
Current liabilities
Notes payable $ 80.5 $ 66.6
Accounts payable 83.3 75.4
Accrued compensation 46.2 41.7
Other accrued expenses 120.8 144.4
Income taxes 32.5 47.2
--------------------------
Total current liabilities 363.3 375.3
Long-term debt 142.5 170.0
Other liabilities 51.4 54.1
Commitments and contingencies
Minority interest 0.3 0.6
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 67,196,000 and 67,244,000 shares 0.7 0.7
Additional paid-in capital 208.1 205.6
Foreign currency translation adjustment (5.0) 4.0
Other 16.7 3.1
Retained earnings 670.8 574.8
--------------------------
891.3 788.2
Less treasury stock, at cost (1,903,000 and 1,731,000 shares) (49.9) (38.4)
--------------------------
Total stockholders' equity 841.4 749.8
Total liabilities and stockholders' equity $ 1,398.9 $ 1,349.8
==========================
See accompanying notes to consolidated financial statements.
33
10
ALLERGAN 1997 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended December 31,
In millions, except per share data 1997 1996 1995
- ------------------------------------------------------------------------------------------------------
Product sales
Net sales $ 1,138.0 $ 1,147.0 $ 1,067.2
Cost of sales 399.3 384.7 328.0
---------------------------------------------
Product gross margin 738.7 762.3 739.2
---------------------------------------------
Research services
Research service revenues 11.0 9.9 6.4
Cost of research services 10.4 9.2 5.9
---------------------------------------------
Research services margin 0.6 0.7 0.5
---------------------------------------------
Selling, general and administrative 459.1 456.6 443.4
Research & development 131.2 118.3 116.7
Restructuring charge -- 70.1 --
Asset write-offs -- 7.4 --
Contribution to ALRT -- -- 50.0
---------------------------------------------
Operating income 149.0 110.6 129.6
Interest income 8.9 13.1 10.0
Interest expense (8.9) (12.5) (13.9)
Other, net 8.1 (3.2) (0.5)
---------------------------------------------
Earnings before income taxes and minority interest 157.1 108.0 125.2
Provision for income taxes 29.0 31.3 51.7
Minority interest (0.2) (0.4) 1.0
---------------------------------------------
Net earnings $ 128.3 $ 077.1 $ 72.5
=============================================
Basic earnings per common share $ 1.97 $ 1.18 $ 1.13
=============================================
Diluted earnings per common share $ 1.95 $ 1.17 $ 1.12
=============================================
See accompanying notes to consolidated financial statements.
34
11
ALLERGAN 1997 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Additional Unearned
Par Paid-In Compen- Retained Treasury Stock
In millions Shares Value Capital sation Other Earnings Shares Amount Total
- ------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1994 67.4 $0.7 $223.1 $(26.4) $4.2 $485.3 (3.7) $(83.6) $603.3
Net earnings 72.5 72.5
Foreign currency translation
adjustment 0.5 0.5
Change in unrealized gain (loss)
on investments (0.6) (0.6)
Additional minimum liability
for qualified pension plan (0.8) (0.8)
Dividends ($0.47 per share) (30.2) (30.2)
Stock options exercised 2.4 (1.2) 0.7 17.1 18.3
Activity under other stock plans (0.1) (1.4) (2.0) 1.0 0.2 4.3 1.9
Expense of compensation plans 4.0 4.0
--------------------------------------------------------------------------------------------
Balance December 31, 1995 67.3 0.7 224.1 (24.4) 3.3 527.4 (2.8) (62.2) 668.9
Net earnings 77.1 77.1
Foreign currency translation
adjustment (0.7) (0.7)
Change in unrealized gain (loss)
on investments 3.7 3.7
Adjust minimum liability
for qualified pension plan 0.8 0.8
Dividends ($0.49 per share) (31.9) (31.9)
Stock options exercised 5.7 (0.2) 0.9 19.7 25.2
Activity under other stock plans (0.1) (2.1) (1.5) 2.4 0.2 4.1 2.9
Expense of compensation plans 3.8 3.8
--------------------------------------------------------------------------------------------
Balance December 31, 1996 67.2 0.7 227.7 (22.1) 7.1 574.8 (1.7) (38.4) 749.8
Net earnings 128.3 128.3
Foreign currency translation
adjustment (9.0) (9.0)
Change in unrealized gain (loss)
on investments 13.6 13.6
Dividends ($0.52 per share) (33.8) (33.8)
Stock options exercised 1.0 0.1 0.8 18.3 19.4
Activity under other stock plans (1.0) (1.3) 1.5 0.2 4.2 3.4
Adjustment in reporting of
foreign subsidiaries
(see Note 1) (0.1) (0.1)
Purchases of treasury stock (1.2) (34.0) (34.0)
Expense of compensation plans 3.8 3.8
--------------------------------------------------------------------------------------------
Balance December 31, 1997 67.2 $0.7 $227.7 $(19.6) $11.7 $670.8 (1.9) $(49.9) $841.4
============================================================================================
See accompanying notes to consolidated financial statements.
35
12
ALLERGAN 1997 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
In millions 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
Cash flows provided by operating activities
Net earnings $ 128.3 $ 77.1 $ 72.5
Non-cash items included in net earnings
Depreciation and amortization 68.8 72.9 60.5
Amortization of prepaid royalties 11.0 7.4 8.2
Deferred income taxes (7.1) (8.1) 1.3
Gain on sale of investments (12.4) -- --
Loss on sale of assets 2.2 4.1 0.1
Expense of compensation plans 7.2 5.5 2.5
Minority interest (0.2) (0.4) 1.0
Restructuring charge -- 70.1 --
Asset write-offs -- 7.4 --
Changes in assets and liabilities
Trade receivables 44.4 (45.3) (14.9)
Inventories (18.7) (15.0) (6.3)
Accounts payable 9.0 19.6 (4.6)
Income taxes (12.8) 16.5 (28.9)
Accrued liabilities (3.6) (28.0) 1.3
Other (6.3) (8.6) (16.0)
------------------------------------
Net cash provided by operating activities 209.8 175.2 76.7
------------------------------------
Cash flows from investing activities
Additions to property, plant and equipment (64.4) (59.7) (62.5)
Disposals 10.4 7.2 0.9
Proceeds from sale of investments 12.4 -- --
Investment in Ligand Pharmaceuticals -- -- (6.0)
Prepayment of royalties -- -- (17.5)
Acquisitions of businesses, net of cash acquired -- -- (162.0)
Other (42.3) (21.9) (30.7)
------------------------------------
Net cash used in investing activities (83.9) (74.4) (277.8)
------------------------------------
Cash flows from financing activities
Dividends to stockholders (33.4) (31.5) (29.9)
Increase (decrease) in notes payable (35.0) (12.3) 8.1
Sale of stock to employees 18.6 18.2 15.4
Net borrowings (repayments) under commercial paper obligations 25.6 (76.5) 64.0
Long-term debt borrowings 6.3 19.9 129.1
Repayments of long-term debt (2.6) (11.3) (11.0)
Payments to acquire treasury stock (34.0) -- --
------------------------------------
Net cash provided by (used in) financing activities (54.5) (93.5) 175.7
Effect of exchange rates on cash and equivalents (2.5) 2.4 (3.0)
------------------------------------
Net increase (decrease) in cash and equivalents 68.9 9.7 (28.4)
Cash and equivalents at beginning of year 112.0 102.3 130.7
------------------------------------
Cash and equivalents at end of year $ 180.9 $ 112.0 $ 102.3
====================================
Supplemental disclosure of cash flow information
Cash paid during the year for
Interest (net of amount capitalized) $ 13.5 $ 16.2 $ 13.8
====================================
Income taxes $ 46.1 $ 28.6 $ 70.4
====================================
See accompanying notes to consolidated financial statements.
36
13
ALLERGAN 1997 ANNUAL REPORT
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. All significant transactions among the consolidated
entities have been eliminated from the financial statements. The accounts of
most non-U.S. subsidiaries are included on the basis of their fiscal years ended
November 30.
The Company is in the process of changing financial systems in its
significant non-U.S. subsidiaries. Future results of such operations will be
accounted for on a calendar year basis. Certain non-U.S. subsidiaries underwent
this system conversion in 1997. Subsidiaries undergoing this conversion in 1997
had revenues of $4.8 million and a net loss of $0.1 million for the month of
December 1997, which was recorded as an adjustment to retained earnings.
>Use of Estimates
The financial statements have been prepared in conformity with generally
accepted accounting principles and, as such, include amounts based on informed
estimates and judgments of management with consideration given to materiality.
Actual results could differ from those estimates.
>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 in highly inflationary economies
are included in earnings. Foreign currency transaction and translation losses
totaled $5.6 million in 1997, $3.3 million in 1996 and $1.8 million in 1995.
>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.
>Long-Lived Assets
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. 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 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 7 to 30 years. Intangibles include patents, licensing
agreements and marketing rights which are being amortized over their estimated
useful lives. Amortization expense was $20.0 million in 1997, $21.6 million in
1996 and $14.3 million in 1995.
Long-lived assets and certain identifiable intangibles are reviewed for
impairment in value based upon undiscounted future operating cash flows, and
appropriate losses are recognized, whenever the carrying amount of an asset may
not be recovered.
>Revenue Recognition
The Company recognizes revenue from product sales when the goods are shipped to
the customer. Research service revenue is recognized and related costs are
recorded as services are performed under research service agreements.
>Stock-Based Compensation
The Company measures stock based compensation using a method which assumes that
options granted at market price at the date of grant have no intrinsic value.
Pro forma net income and earnings per share are
37
14
ALLERGAN 1997 ANNUAL REPORT
presented in Note 9 as if the fair value method had been applied.
>Reclassifications
Certain reclassifications have been made to the 1996 and 1995 consolidated
financial statements to conform them to the 1997 presentation.
>New Accounting Standards
In June 1997, Statement of Financial Accounting Standards No. 130 - "Reporting
Comprehensive Income" (SFAS No. 130) and SFAS No. 131 - "Disclosures about
Segments of an Enterprise and Related Information" (SFAS No. 131) were issued
and are effective for periods beginning after December 15, 1997. SFAS No. 130
establishes standards for reporting comprehensive income and its components.
SFAS No. 131 establishes standards for reporting financial and descriptive
information regarding an enterprise's operating segments. These standards
increase disclosure in the financial statements, and will have no impact on the
Company's financial position or results of operations.
>Income Taxes
The Company recognizes deferred tax assets and liabilities 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.
NOTE 2 ACQUISITIONS
In 1995, the Company acquired four businesses:
Optical Micro Systems Inc. (OMS), a manufacturer of phacoemulsification
equipment, in North Andover, Massachusetts, in January 1995.
Laboratorios Frumtost SA (Frumtost), the largest manufacturer of eye care
pharmaceuticals in Brazil, in June 1995.
Herald Pharmacal (Herald) skin care product line based in Colonial Heights,
Virginia, in August 1995.
Pilkington Barnes Hind contact lens care product line (Barnes Hind) marketed
worldwide with a leading product in Japan, in November 1995.
The cost of the acquisitions totaled $149.8 million. The acquisitions were
accounted for using the purchase method. Goodwill related to the acquisitions of
$139.6 million is being amortized over periods of 7 to 30 years. Results of
operations of each of the acquisitions have been included in the Company's
income statements since their respective dates of acquisition. On the basis of
an unaudited pro forma consolidation of the results of operations as if the
acquisitions had taken place at the beginning of 1995, the Company would have
reported net sales of $1,148.5 million, net earnings of $73.0 million, basic
earnings per common share of $1.14 and diluted earnings per common share of
$1.12.
The unaudited pro forma results of operations are not necessarily indicative
of the results of operations that would have occurred had the acquisitions
occurred at the beginning of 1995, or of future results of operations.
In addition to the acquisitions discussed above, the Company acquired the
minority ownership of the Santen-Allergan joint venture, which markets contact
lens care products in Japan, for $25.7 million in August 1995.
NOTE 3 SPECIAL CHARGES
During 1996, the Company recorded a $70.1 million restructuring charge, $49.7
million after taxes. The restructuring charge related to a comprehensive program
anticipated to streamline operations and reduce costs through management
restructuring and facilities consolidation resulting in a workforce reduction of
approximately 500 people. The restructuring and facilities consolidation
activities affected employees in various activities in 22 locations worldwide.
The restructuring charge was recorded over the last three quarters of 1996 as
employees at each location were notified of the restructuring plan and its
effect on their location. The restructuring charge was originally estimated to
consist of $34.0 million of employee severance costs, $29.6 million of facility
consolidation costs and $6.5 million of other costs. During 1997, $7.6 million
was paid to approximately 140 terminated employees and $10.1 million was paid
for facilities consolidation and other costs. During 1996, $9.9 million was paid
to approximately 300 terminated employees and $26.5 million was paid for
facility consolidation and other costs.
38
15
ALLERGAN 1997 ANNUAL REPORT
As the Company implemented its streamlined business plan, certain assets
were determined to be of limited or no future value. The Company recorded $7.4
million in write-offs, $5.3 million after taxes, of computer hardware and
software and certain intangible assets in 1996.
NOTE 4 ALLERGAN LIGAND RETINOID THERAPEUTICS, INC.
Since 1992, the Company and Ligand Pharmaceuticals Incorporated (Ligand)
operated 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) to function as the successor to the joint venture. In June 1995, Ligand
contributed $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
contributed $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 did not exercise its right. The Company also purchased
$6.0 million of Ligand common stock at the time of its contribution to ALRT. The
Company accounted for its $50.0 million contribution as a charge to operating
expense at the time of the contribution.
In November 1997 Ligand acquired all of the stock of ALRT. At the same time,
Allergan paid $8.9 million to Ligand to acquire one-half of all technologies and
cash of approximately $5.5 million. The net cost of assets acquired was charged
to research and development. At that time, Allergan and Ligand changed their
agreements so that, among other things, ALRT compounds and development programs
were divided between Allergan and Ligand, and each party received exclusive
rights to ALRT technology for use with their respective compounds and programs.
The Company performed contract research services for ALRT from 1995 to 1997.
Revenues from such services represent a recovery of the research and development
costs incurred with an amount added to compensate the Company for general
corporate overhead costs. The Company recognized revenues and related costs as
services were performed under such contracts.
NOTE 5 COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
December 31,
In millions 1997 1996
- -------------------------------------------------------------------
Trade receivables, net
Trade receivables $ 193.8 $ 250.0
Less allowance for doubtful accounts 6.8 7.5
---------------------
$ 187.0 $ 242.5
=====================
Inventories
Finished products $ 96.8 $ 87.5
Work in process 15.7 11.1
Raw materials 35.3 31.5
---------------------
$ 147.8 $ 130.1
=====================
Other current assets
Prepaid expenses $ 54.4 $ 42.3
Deferred taxes 44.8 41.7
Other 21.5 31.1
---------------------
$ 120.7 $ 115.1
=====================
Property, plant and equipment, net
Land $ 13.0 $ 14.7
Buildings 293.8 275.0
Machinery and equipment 297.3 289.1
---------------------
604.1 578.8
Less accumulated depreciation 246.3 230.3
---------------------
$ 357.8 $ 348.5
=====================
Goodwill and intangibles, net
Goodwill $ 288.5 $ 297.1
Intangibles 37.3 36.0
---------------------
325.8 333.1
Less accumulated amortization 112.4 94.5
---------------------
$ 213.4 $ 238.6
=====================
39
16
ALLERGAN 1997 ANNUAL REPORT
NOTE 6 NOTES PAYABLE AND LONG-TERM DEBT
1997 1996
Average Average
Effective Effective
Interest December Interest December
In millions Rate 31, 1997 Rate 31, 1996
- ----------------------------------------------------------------------------
Bank loans 8.24% $ 16.1 6.47% $ 26.7
Commercial paper 7.08% 40.6 6.86% 15.0
Capitalized leases 5.8 7.3
5.93% - 6.92%
medium term
notes due from
1998 - 2002 6.54% 65.0 6.50% 85.0
Yen denominated
notes due from
1999 - 2003 1.55% 78.6 1.57% 80.3
ESOP loan
due 2003 4.82% 15.8 4.73% 18.2
Other 1.1 4.1
-------------------------------------
$ 223.0 $ 236.6
Less current
maturities 80.5 66.6
-------------------------------------
Total long-term
debt $ 142.5 $ 170.0
=====================================
At December 31, 1997 and 1996, the Company had $250 million of domestic
unused committed lines of credit which support general corporate purposes and
domestic commercial paper borrowing arrangements. The commitment fees under the
agreements are nominal. In addition, the Company had foreign unused committed
lines of credit of approximately $6.1 million in 1997 and $16.3 million in 1996.
At December 31, 1997, $10.6 million of commercial paper was classified as
long-term debt because the Company had the ability to refinance these debts on a
long term basis under terms of its unused committed lines of credit.
The credit facilities and medium term note program entered into by the
Company provide 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. Certain covenants also
limit subsidiary debt and restrict dividend payments. The Company was in
compliance with these covenants as of December 31, 1997. The Employee Stock
Ownership Plan and related loan is discussed in Note 9 and three interest rate
swap agreements totaling $40.0 million are described in Note 10.
The aggregate maturities of debt for each of the next five years and
thereafter are as follows: 1998, $80.5 million; 1999, $61.0 million; 2000, $2.6
million; 2001, $16.8 million; 2002, $23.0 million; and $39.1 million thereafter.
Interest incurred of $1.1 million in 1997, $1.0 million in 1996 and $1.2 million
in 1995 has been capitalized and included in property, plant and equipment.
Noncash additions to capitalized leases and capital lease obligations of $1.7
million in 1997 and $0.8 million in 1996 were recorded on the Company's balance
sheet and excluded from the Consolidated Statements of Cash Flows.
NOTE 7 INCOME TAXES
The components of earnings before income taxes and minority interest were:
Year Ended December 31,
In millions 1997 1996 1995
- ----------------------------------------------------------------------------------
Earnings before income taxes
and minority interest
U.S $ 44.3 $ 31.9 $ 46.5
Non-U.S 112.8 76.1 78.7
--------------------------------------
Earnings before income taxes
and minority interest $ 157.1 $ 108.0 $ 125.2
======================================
The provision for income taxes consists of the following:
Year Ended December 31,
In millions 1997 1996 1995
- --------------------------------------------------------------------------------
Income tax expense (benefit)
Current
U.S. federal $ (4.2) $ 9.9 $ 12.3
Non-U.S 28.3 22.7 26.8
U.S. state and
Puerto Rico 3.8 6.8 11.3
-----------------------------------------
Total current 27.9 39.4 50.4
-----------------------------------------
Deferred
U.S. federal (3.5) (11.5) 1.7
Non-U.S 4.9 5.9 (1.8)
U.S. state and
Puerto Rico (0.3) (2.5) 1.4
-----------------------------------------
Total deferred 1.1 (8.1) 1.3
-----------------------------------------
Total $ 29.0 $ 31.3 $ 51.7
=========================================
40
17
ALLERGAN 1997 ANNUAL REPORT
The reconciliations of the U.S. federal statutory tax rate to the combined
effective tax rate follow:
1997 1996 1995
- --------------------------------------------------------------------------------
Statutory tax rate 35.0% 35.0% 35.0%
State taxes, net of U.S.
tax benefit 0.7 (0.7) 1.3
Ireland and Puerto Rico
income (10.7) (13.7) (13.9)
U.S. tax effect of foreign
earnings and dividends,
net of foreign tax credits 1.3 5.4 --
Other credits (1.7) (0.5) (0.8)
Taxes on unremitted
earnings of subsidiaries 9.7 7.8 8.0
Valuation allowance, federal
& state, on ALRT
contribution (10.9) -- 15.6
Other (4.9) (4.3) (3.9)
---------------------------------
Effective tax rate 18.5% 29.0% 41.3%
=================================
The Company's effective tax rate, exclusive of the impact of reversing the
valuation allowance associated with the deferred tax benefit on the ALRT
contribution, would have been 29.0% in 1997.
The Company's effective tax rate, exclusive of the impact of the one-time
charge to earnings for the contribution to ALRT, would have been 29.5% for 1995.
Withholding and U.S. taxes have not been provided on approximately $295.8
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 domestic subsidiaries file a consolidated U.S. federal
income tax return. Such returns have been audited and settled through the year
1993. The Company and its consolidated subsidiaries are not currently under
examination.
At December 31, 1997, the Company has net operating loss carryforwards in
certain non-U.S. subsidiaries, with various expiration dates, of approximately
$44.9 million.
Temporary differences and carryforwards which give rise to a significant
portion of deferred tax assets and liabilities at December 31, 1997, 1996 and
1995 are as follows:
In millions 1997 1996 1995
- ----------------------------------------------------------------------------------
Deferred tax assets
Net operating loss
carryforwards (foreign) $ 10.5 $ 13.0 $ 11.7
Accrued expenses 23.4 16.0 17.1
Foreign tax credit
carryforwards -- 2.0 1.4
Capitalized expenses 7.9 13.4 11.9
Pension expense 7.1 7.4 4.9
Medicaid rebates 4.2 4.9 4.7
Postretirement medical
benefits 6.7 6.1 5.7
Intercompany profit in
inventory 8.2 7.0 3.6
ALRT contribution 15.5 19.5 19.5
All other 17.4 24.8 14.5
-------------------------------------
100.9 114.1 95.0
Less: valuation allowance (16.9) (35.8) (33.9)
-------------------------------------
Total deferred tax asset 84.0 78.3 61.1
-------------------------------------
Deferred tax liabilities
Depreciation 13.0 13.4 10.9
All other 25.1 17.9 11.3
-------------------------------------
Total deferred tax liabilities 38.1 31.3 22.2
-------------------------------------
Net deferred tax asset $ 45.9 $ 47.0 $ 38.9
=====================================
The balances of net current deferred tax assets and net non-current deferred
tax assets at December 31, 1997 were $44.8 million and $1.1 million,
respectively. The balances of net current deferred tax assets and net
non-current deferred tax assets at December 31, 1996 were $41.7 million and $5.3
million, respectively. Such amounts are included in other current assets and
investments and other assets in the consolidated balance sheets.
The 1997 decrease of $18.9 million in the valuation allowance relates
substantially to the reversal of the valuation allowance associated with the
deferred tax benefit on the ALRT contribution.
The 1996 increase of $1.9 million in the valuation allowance relates
substantially to increased future net operating loss benefits in foreign
jurisdictions.
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, 1997. 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
41
18
ALLERGAN 1997 ANNUAL REPORT
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.
NOTE 8 EMPLOYEE RETIREMENT AND OTHER BENEFIT PLANS
>Pension 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
$10.5 million in 1997, $12.7 million in 1996 and $7.4 million in 1995.
Components of pension expense under the Company's U.S. and major non-U.S.
plans for 1997, 1996 and 1995 were:
Year Ended December 31,
In millions 1997 1996 1995
- --------------------------------------------------------------------------------
Service cost $ 9.0 $ 8.8 $ 6.8
Interest cost 10.8 9.8 8.2
Actual return on assets (17.7) (9.1) (12.3)
Net amortization and deferral 8.4 3.2 4.7
---------------------------------------
Total pension expense $ 10.5 $ 12.7 $ 7.4
=======================================
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 are presented as follows.
December 31,
1997 1996
----------------------- -----------------------
Non- Non-
In millions Qualified Qualified Qualified Qualified
- -------------------------------------------------------------------------------
Plan assets at fair
market value $ 124.0 $ -- $ 101.4 $ --
-------------------------------------------------
Accumulated benefit
obligation
Vested $ 98.6 $ 10.1 $ 83.9 $ 8.5
Nonvested 7.1 0.1 7.4 0.2
-------------------------------------------------
105.7 10.2 91.3 8.7
-------------------------------------------------
Plan assets in excess
of (less than)
accumulated benefit
obligations 18.3 (10.2) 10.1 (8.7)
Projected compensation
increases 30.8 2.8 33.3 5.0
-------------------------------------------------
Projected benefit
obligation in excess
of plan assets 12.5 13.0 23.2 13.7
Unrecognized transition
asset 2.3 -- 2.8 --
Unrecognized net loss (2.2) (0.8) (13.5) (2.6)
Unrecognized prior
service cost 0.3 (1.4) 0.3 (1.7)
Fourth quarter plan
contributions (1.2) (0.1) -- --
-------------------------------------------------
Accrued pension cost $ 11.7 $ 10.7 $ 12.8 $ 9.4
================================================
The funded status of the qualified and non-qualified plans presented as of
December 31, 1997 includes the U.S. plan which was measured as of September 30,
1997 and adjusted to reflect amounts paid during the fourth quarter. The Company
adopted this measurement date to conform to its internal cost management
systems. The effect of changing the measurement date is immaterial to the
financial statements.
The expected long-term rate of return on plan assets ranged from 2.5% to
9.0% in 1997 and 3.5% to 9.5% in 1996. The discount rate used in determining
obligations ranged from 3.0% to 7.75% in 1997 and 3.5% to 8% in 1996, and the
assumed average rate of increase in future compensation levels ranged from 3.0%
to 5.14% in 1997 and 3% to 5.2% in 1996.
42
19
ALLERGAN 1997 ANNUAL REPORT
>Postretirement Benefits
The Company has one retiree health plan that covers United States retirees and
dependents. 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 modifications 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:
December 31,
In millions 1997 1996
- -----------------------------------------------------------------------
Retirees $ 2.4 $ 2.2
Fully eligible plan participants 0.2 0.1
Other active plan participants 9.5 6.9
-----------------------
Accumulated postretirement benefit
obligation $ 12.1 $ 9.2
=======================
Plan assets at fair value $ -- $ --
Accumulated postretirement benefit
obligation in excess of plan assets 12.1 9.2
Unrecognized net income from past
experience different from that assumed
and from changes in assumptions 3.0 4.8
Past service costs 1.7 1.8
-----------------------
Accrued postretirement benefit cost $ 16.8 $ 15.8
=======================
Net periodic postretirement benefit cost included the following components:
Year Ended December 31,
In millions 1997 1996 1995
- -------------------------------------------------------------------
Service cost -- benefits
attributed to service
during the period $ 0.8 $ 0.9 $ 0.9
Interest cost on accumulated
postretirement
benefit obligation 0.7 0.7 0.8
Net amortization and deferral (0.3) (0.2) (0.2)
------------------------------
Net periodic postretirement
benefit cost $ 1.2 $ 1.4 $ 1.5
==============================
Cost increases of 2.5% were assumed for the indemnity medical plan and 4.5%
for the HMO medical plan in 1997. Annual cost increases were assumed to increase
gradually to 5.5% for the medical plans by 1999 and remain 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, 1997 by $2.6
million and the aggregate of the service and interest cost components of net
periodic postretirement benefit cost for the year then ended by $0.3 million.
The discount rates used in determining the accumulated postretirement benefit
obligation and the net periodic postretirement benefit cost were 7.25% and 8.0%,
respectively.
>Savings and Investment Plans
In May 1989, the Company established Savings and Investment Plans, which provide
for all U.S. and Puerto Rico employees to become participants upon 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 $3.2 million in 1997, $3.1
million in 1996, and $2.8 million in 1995.
NOTE 9 EMPLOYEE STOCK OWNERSHIP PLAN AND INCENTIVE COMPENSATION PLANS
>Employee Stock Ownership Plan
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 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 consolidated financial statements as debt, offset by unearned
compensation included in stockholders' equity. 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 shares are divided
among participants based on relative compensation. Allocated and unallocated
shares in the ESOP as of December 31, 1997 and 1996 are:
Number of Shares
In thousands 1997 1996
- --------------------------------------------------------------------------------
Allocated shares 681 582
Shares committeed to be allocated 99 99
Unallocated shares 555 654
---------------------
Total ESOP shares 1,335 1,335
=====================
43
20
ALLERGAN 1997 ANNUAL REPORT
The loan has a fifteen year maturity, with quarterly principal and interest
payments. Under the current repayment plan, the loan will be repaid in October
2003. 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 an interest rate swap agreement, maturing in
1999, to reduce the impact that interest rate changes have on $10 million of the
ESOP loan (see Note 10).
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 1997, 1996 and 1995
was $0.8 million, $1.2 million and $1.3 million, respectively. Compensation
expense is recognized based on the amortization of the related loan.
Compensation expense for 1997, 1996 and 1995 was $2.0 million, $1.9 million and
$1.9 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 granting of non-qualified
stock options, restricted stock and other stock-based incentive awards for
officers and key employees. As of December 31, 1997, an aggregate of 5,878,000
shares of stock have been authorized for issuance under the incentive
compensation plan and 50,000 shares have been authorized for issuance under the
nonemployee director stock plan.
Options become exercisable 25% per year beginning twelve months after the
date of grant. Options generally expire ten years after their original date of
grant. 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, 1997.
Stock option activity under the Company's incentive compensation plan was as
follows:
1997 1996 1995
-------------------- -------------------- ---------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
In thousands, except option price data Shares Price Shares Price Shares Price
- ------------------------------------------------------------------------------------------------------------------------
Outstanding, beginning of year 3,978 $ 25.18 4,084 $ 22.55 4,189 $ 21.35
Options granted 1,486 27.25 870 35.13 767 27.68
Options exercised (839) 21.97 (866) 22.54 (747) 21.02
Options cancelled (154) 29.86 (110) 27.05 (125) 23.20
----------------------------------------------------------------------
Outstanding, end of year 4,471 26.30 3,978 25.18 4,084 22.55
======================================================================
Exercisable, end of year 2,149 23.64 2,423 22.13 2,384 21.21
======================================================================
Weighted average fair value of options granted
during the year $ 10.61 $ 14.84 $ 11.49
======= ======= =======
The fair value of each option granted during 1997, 1996 and 1995 is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following assumptions: dividend yield of 1.9% in 1997, 1.4% in 1996 and 1.7%
in 1995, expected volatility of 39% for 1997 and 43% for 1996 and 1995,
risk-free interest rate of 6.7% in 1997 and 1996 and 6.95% in 1995, and expected
life of 7 years for 1997, 1996 and 1995 grants.
The following table summarizes stock options outstanding at December 31,
1997 (shares in thousands):
Options Outstanding Options Exercisable
----------------------------------------------- ------------------------------
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Range of Exercise Prices at 12/31/97 Contractual Life Exercise Price at 12/31/97 Exercise Price
- ---------------------------------------------------------------------------------------------------------------
$13.50 - $20.16 224 2.2 years $16.74 224 $16.74
$20.34 - $29.75 3,453 6.6 years 24.93 1,708 23.09
$33.19 - $35.13 794 8.2 years 34.98 217 35.13
----- -----
4,471 2,149
===== =====
44
21
ALLERGAN 1997 ANNUAL REPORT
No compensation expense has been recognized for stock-based incentive
compensation plans other than for the restricted stock award plan and the
nonemployee director stock plan. Had compensation expense for the Company's
incentive compensation plan been recognized based upon the fair value for awards
granted, as prescribed under SFAS No. 123, the Company's net earnings would have
been reduced by $6.6 million or $0.10 for both basic and diluted earnings per
share in 1997, $5.3 million or $0.08 for both basic and diluted earnings per
share in 1996, and $2.1 million or $0.03 basic earnings per share and $0.04
diluted earnings per share in 1995. These proforma effects are not indicative of
future amounts. The Company expects to grant additional awards in future years.
Under the terms of the incentive compensation plan, the restricted stock
awards are subject to restrictions as to sale or other disposition of the shares
and to restrictions which require continuous employment with the Company. The
restrictions generally expire, and the awards become fully vested, four years
from the date of grant. The Company granted 64,000, 89,000 and 92,000 shares of
stock under the plan in 1997, 1996 and 1995, respectively. The weighted average
grant date exercise price of the restricted stock grants was $27.97 in 1997,
$35.13 in 1996 and $27.68 in 1995. Grants of restricted stock are charged to
unearned compensation in stockholders' equity at their fair value and recognized
in expense over the vesting period. Compensation expense recognized under the
restricted stock award plan was $1.3 million, $1.4 million and $1.7 million in
1997, 1996 and 1995, respectively.
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, 1997, there
were 12,000 shares issued and outstanding under the plan.
NOTE 10 FINANCIAL INSTRUMENTS
In the normal course of business, operations of the Company are exposed to risks
associated with fluctuations in currency exchange rates and interest rates. The
Company addresses these risks through controlled risk management that includes
the use of derivative financial instruments to hedge these exposures. The
Company does not enter into financial instruments for trading or speculative
purposes.
The Company has a policy of only entering into contracts with parties that
have at least an "A" or equivalent credit rating. The counterparties to these
contracts are major financial institutions and the Company does not have
significant exposure to any one counterparty. Even though the Company may be
exposed to losses in the event of non-performance by these counterparties,
management believes that risk of loss is remote and in any event would be
immaterial.
>Foreign Exchange Risk Management
The Company enters into foreign currency forward and option contracts to reduce
the effect of fluctuating currency exchange rates on two types of foreign
currency exposures. These contracts generally have maturities of less than 12
months. Exposures arising from non-U.S. Dollar intercompany borrowings are
managed principally through the use of forward contracts. The Company has
forward contracts outstanding at year-end in various currencies, principally in
Australian Dollars, Singapore Dollars, Deutsche Marks, and Spanish Pesetas.
Gains and losses on forward contracts are deferred and recognized into income
upon settlement. Foreign currency forward contracts do not subject the Company
to market risk from exchange rate movements because such gains and losses offset
losses and gains, respectively on the assets, liabilities or transactions being
hedged.
The Company also enters into option contracts to hedge anticipated foreign
currency cash flows. Premiums paid on option contracts are capitalized as other
current assets and are charged to non-operating expense using the straight-line
method over the life of the option. Gains and losses on purchased options are
recognized in income as incurred.
At December 31, the notional amounts of the Company's outstanding foreign
currency derivative financial instruments were as follows:
(in millions) 1997 1996
- -----------------------------------------------
Forward exchange contracts $28.3 $27.7
Foreign currency options 8.9 --
>Interest Rate Swaps
The Company has entered into interest rate swap agreements with commercial banks
to reduce the impact of interest rate changes on its floating rate long-term
debt. These derivative financial instruments allow the Company to make long-term
borrowings at floating rates and then swap them into fixed rates that are
anticipated to be lower than those available to the
45
22
ALLERGAN 1997 ANNUAL REPORT
Company if fixed-rate borrowings were made directly. Under interest rate swaps,
the Company exchanges at specified intervals, certain notional amounts of its
floating rate debt which are indexed based on LIBOR, with fixed rates.
The following illustrates the notional amounts, maturity dates, and the
effective floating and fixed interest rates as of December 31, 1997:
Interest Rate
Notional Maturity -------------------
(in millions) amount date Floating Fixed
- ---------------------------------------------------------------
Interest Rate Swaps $10.0 1999 4.89% 4.75%
10.0 2000 5.75% 7.00%
20.0 1999 5.88% 6.95%
Gains or losses incurred as a result of the swap agreements are deferred and
recorded as interest expense. The Company would be required to pay $0.5 million
to terminate the swap agreements based upon their fair value at December 31,
1997.
>Fair Value of Financial Instruments
The carrying amount of cash and equivalents approximates fair value due to the
short-term maturities of these instruments. The fair value of marketable
investments, notes payable, long-term debt and foreign currency contracts were
estimated based on quoted market prices at year-end. The fair values of
nonmarketable equity investments, which represent either equity investments in
start-up technology companies or partnerships that invest in start-up technology
companies, are estimated based on the fair value information provided by these
ventures. The fair value and carrying amount of risk management instruments were
not material at December 31, 1997 and 1996.
The estimated fair value of the Company's financial instruments at December
31 are as follows:
1997 1996
--------------------- ---------------------
Carrying Fair Carrying Fair
(in millions) Amount Value Amount Value
- -----------------------------------------------------------------------------------
Cash and equivalents $ 180.9 $ 180.9 $ 112.0 $ 112.0
Non-current investments:
Marketable equity 42.5 42.5 19.7 19.7
Non-marketable
equity 32.5 32.5 28.7 28.7
Notes payable 80.5 80.5 66.6 66.6
Long-term debt 142.5 142.5 170.0 170.0
Marketable equity amounts include unrealized holding gains of $25.6 million
at December 31, 1997 and $4.8 million at December 31, 1996; and unrealized
holding losses of $1.3 million at December 31, 1997.
>Concentration of Credit Risk
Financial instruments that potentially subject the Company to credit risk
principally consist of trade receivables. Wholesale distributors, major retail
chains, and managed care organizations account for a substantial portion of
trade receivables. This risk is limited due to the number of customers
comprising the Company's customer base, and their geographic dispersion. Ongoing
credit evaluations of customers' financial condition are performed and,
generally, no collateral is required. The Company maintains reserves for
potential credit losses and such losses, in the aggregate, have not exceeded
management's expectations.
NOTE 11 COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities, office equipment and automobiles and
provides for payment of taxes, insurance and other charges on certain of these
leases. Rental expense was $23.0 million in 1997, $18.3 million in 1996 and
$13.4 million in 1995.
Future minimum rental payments under non-cancelable operating lease
commitments with a term of more than one year as of December 31, 1997, are as
follows: $23.0 million in 1998; $14.9 million in 1999; $7.7 million in 2000;
$3.4 million in 2001; $2.4 million in 2002; and $12.5 million thereafter.
The Company is involved in various litigation and claims arising in the
normal course of business. Management believes that recovery or liability with
respect to these matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
NOTE 12 BUSINESS SEGMENT INFORMATION
The Company operates primarily in one business segment engaged in the
development, manufacture and marketing of a broad range of specialty health care
products for specific disease areas.
The table on the next page represents the Company's business segment
information by geographic area.
All research service revenues are derived in the United States (see Note 4).
46
23
ALLERGAN 1997 ANNUAL REPORT
Geographic Areas
Year Ended December 31,
In millions 1997 1996 1995
- -----------------------------------------------------------------------------------
Product net sales(a)
United States $ 571.1 $ 547.8 $ 530.6
------------------------------------------
Europe 451.4 426.2 432.6
Asia 169.9 151.0 102.7
Latin America 122.4 112.7 61.8
Other 82.7 83.0 83.9
------------------------------------------
Total international 826.4 772.9 681.0
Transfers between areas(a)
United States (84.0) (73.2) (59.2)
Europe (112.9) (42.4) (43.1)
Latin America (18.6) (15.0) --
Other (44.0) (43.1) (42.1)
------------------------------------------
Total transfers
between areas (259.5) (173.7) (144.4)
------------------------------------------
Total product
net sales $ 1,138.0 $ 1,147.0 $ 1,067.2
==========================================
Operating income (expense)
United States before
research and
development and
contribution to ALRT $ 151.0 $ 157.2 $ 212.1
Research and
development expenses(b) (104.3) (92.8) (91.7)
Contribution to ALRT -- -- (50.0)
------------------------------------------
United States 46.7 64.4 70.4
------------------------------------------
Europe 157.1 100.1 117.4
Asia 0.1 (2.8) (4.3)
Latin America 16.6 16.7 6.4
Other (8.7) (6.1) (4.7)
------------------------------------------
Total international 165.1 107.9 114.8
------------------------------------------
211.8 172.3 185.2
Corporate expenses (62.8) (61.7) (55.6)
------------------------------------------
Total operating
income(c) $ 149.0 $ 110.6 $ 129.6
==========================================
Identifiable assets(d)
United States $ 482.1 $ 494.6 $ 505.9
------------------------------------------
Europe 351.7 351.8 362.6
Asia 123.6 123.1 104.5
Latin America 96.5 103.5 90.5
Other 164.1 164.8 150.5
------------------------------------------
Total international 735.9 743.2 708.1
Corporate 180.9 112.0 102.3
------------------------------------------
Total assets $ 1,398.9 $ 1,349.8 $ 1,316.3
==========================================
(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) Results in 1996 include special charges totaling $77.5 million. Such charges
include $70.1 million in restructuring charges and $7.4 million in asset
write-offs. By geographic segment the special charges were $37.3 million in
the United States, $36.7 million in Europe, $2.1 million in Asia, $1.2
million in Latin America, and $0.2 million in Other.
d) Identifiable assets are those used by the operations in each geographic
location. Corporate assets consist of cash, time deposits and short-term
investments.
NOTE 13 SUBSEQUENT EVENTS
On January 27, 1998, the Board of Directors declared a cash dividend of $0.13
per share, payable March 10, 1998, to stockholders of record on February 17,
1998.
In 1997 the Company formed a new subsidiary, Allergan Specialty
Therapeutics, Inc. (ASTI), to conduct research and development of potential
pharmaceutical products based on the Company's retinoid and neuroprotective
technologies. In November, the Company filed a registration statement with the
Securities and Exchange Commission on behalf of ASTI relating to a proposed
special distribution of ASTI Class A Common Stock to the Company's stockholders.
The distribution is expected to occur on or about March 10, 1998 to stockholders
of record on February 17, 1998.
Prior to the distribution, the Company will contribute $200 million to ASTI.
The market value of ASTI stock is anticipated to be approximately $23 to $35
million at the date of distribution. The Company will record a dividend for the
amount of the market value of ASTI stock at the distribution. The remainder of
the $200 million will be recorded as a charge against operating income. The
Company's stockholders will receive one share of ASTI Class A Common Stock for
each 20 shares of common stock held as of the record date. Based on 65,292,628
shares of common stock outstanding as of December 31, 1997, approximately
3,264,600 shares of ASTI Class A Common Stock are expected to be issued in the
distribution. The Company's stockholders will not be required to pay any cash or
other consideration for the ASTI Class A Common Stock received in the
distribution. The distribution is expected to be taxable as a dividend to each
holder in the amount of the fair market value of ASTI Shares distributed to such
holder.
As the sole holder of ASTI's outstanding Class B Common Stock following the
distribution, the Company will have the option to repurchase all of the
outstanding ASTI Shares under specified conditions. The Company has also granted
certain technology licenses and agreed to make specified payments on sales of
certain products in exchange for the payment by ASTI of a technology fee and the
option to independently develop certain compounds funded by ASTI prior to the
filing of an Investigational New Drug application with the U.S. Food and Drug
Administration with respect thereto and to license any products and technology
developed by ASTI. The Company will recognize the technology fee as revenue as
it is earned and received.
47
24
ALLERGAN 1997 ANNUAL REPORT
ASTI's technology and product research and development activities will take
place under a research and development agreement with the Company. The Company
will recognize revenues and related costs as services are performed under such
contracts. It is currently expected that substantially all of ASTI's funds will
be directed toward continuing the research and development of products based on
retinoid and neuroprotective technologies. In addition, ASTI may fund the
research and development of pharmaceutical products in therapeutic categories of
interest to the Company, other than those based on retinoid and neuroprotective
technologies, that complement the Company's product pipeline or otherwise are
believed to provide a potential commercialization opportunity for the Company.
NOTE 14 EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings
per Share" (EPS). SFAS No. 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options. Diluted earnings per share is very similar to the previously
reported primary earnings per share. All earnings per share amounts for all
periods have been restated to conform to SFAS No. 128 requirements.
The reconciliations of the numerators and denominators of the basic and
diluted earnings per share computations are as follows:
For the Year Ended 1997 For the Year Ended 1996
------------------------------------- -----------------------------------
(In millions, except per Income Shares Per-Share Income Shares Per-Share
share data) (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
- --------------------------------------------------------------------------------------------------------
Computation of basic EPS:
Income available to
common stockholders $128.3 65.2 $1.97 $77.1 65.1 $1.18
----- -----
Effect of dilutive options 0.6 1.0
---- ----
Computation of diluted EPS:
Income available to
common stockholders
assuming conversions $128.3 65.8 $1.95 $77.1 66.1 $1.17
==== ===== ==== =====
For the Year Ended 1995
--------------------------------------
(In millions, except per Income Shares Per-Share
share data) (Numerator) (Denominator) Amount
- ------------------------------------------------------------------
Computation of basic EPS:
Income available to
common stockholders $72.5 64.2 $1.13
------
Effect of dilutive options 0.7
----
Computation of diluted EPS:
Income available to
common stockholders
assuming conversions $72.5 64.9 $1.12
==== =====
Options to purchase 733,000 shares of common stock at $35.13 per share were
outstanding since April 22, 1996 and options to purchase 61,000 shares of common
stock at $33.19 were granted on December 31, 1997. These options were not
included in the computation of diluted earnings per share at December 31, 1997
because the options' exercise price was greater than the average market price of
the common shares and, therefore, the effect would be antidilutive.
48
25
ALLERGAN 1997 ANNUAL REPORT
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 were engaged to audit the 1997, 1996 and 1995
consolidated financial statements of Allergan, Inc. and subsidiaries and
conducted 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.
/s/ DAVID E. I. PYOTT
- ----------------------------------
David E. I. Pyott
President, Chief Executive Officer
/s/ A. J. MOYER
- -----------------------------------
A. J. Moyer
Corporate Vice President and
Chief Financial Officer
/s/ DWIGHT J. YODER
- ------------------------------------
Dwight J. Yoder
Senior Vice President,
Controller and Principal
Accounting Officer
49
26
ALLERGAN 1997 ANNUAL REPORT
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, 1997 and 1996 and the related consolidated
statements of earnings, stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1997. 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, 1997 and 1996 and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG PEAT MARWICK LLP
Costa Mesa, California
January 27, 1998
50
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ALLERGAN 1997 ANNUAL REPORT
QUARTERLY RESULTS (UNAUDITED)
First Second Third Fourth Total
In millions, except per share data Quarter Quarter Quarter Quarter Year
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1997(a)
Product net sales $256.2 $284.5 $287.7 $309.6 $1,138.0
Product gross margin 163.6 184.4 187.1 203.6 738.7
Research service revenues 3.1 2.9 2.9 2.1 11.0
Research services margin 0.2 0.2 0.1 0.1 0.6
Operating income 24.3 31.5 49.3 43.9 149.0
Net earnings 17.8 21.4 43.6 45.5 128.3
Basic earnings per share 0.27 0.33 0.67 0.70 1.97
Diluted earnings per share 0.27 0.33 0.66 0.69 1.95
Primary net earnings per share,
as previously reported(b) 0.27 0.33 0.66
1996
Product net sales $258.1 $289.6 $287.5 $311.8 $1,147.0
Product gross margin 172.4 192.3 187.8 209.8 762.3
Research service revenues 2.1 2.2 3.0 2.6 9.9
Research services margin 0.2 0.1 0.2 0.2 0.7
Operating income 33.2 2.7 22.8 51.9 110.6
Net earnings 23.1 0.7 17.3 36.0 77.1
Basic earnings per share 0.36 0.01 0.27 0.55 1.18
Diluted earnings per share 0.35 0.01 0.26 0.55 1.17
Primary net earnings per share,
as previously reported(b) 0.35 0.01 0.26 0.55 1.17
(a) Fiscal quarters in 1997 ended on March 28, June 27, September 26 and
December 31. In 1996, all quarters were calendar quarters.
(b) Amounts for the first three quarters of 1997 and all four quarters of 1996
have been restated to comply with Statement of Financial Accounting
Standards No. 128, "Earnings per Share" (see Note 14 in the consolidated
financial statements).
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SELECTED FINANCIAL DATA
Year Ended December 31,
In millions, except per share data 1997 1996 1995 1994 1993
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Summary of Operations
Product net sales $ 1,138.0 $ 1,147.0 $ 1,067.2 $ 947.2 $ 858.9
Research service revenues 11.0 9.9 6.4 -- --
Operating costs and expenses:
Cost of product sales 399.3 384.7 328.0 286.6 249.6
Cost of research services 10.4 9.2 5.9 -- --
Selling, general & administrative 459.1 456.6 443.4 392.5 362.2
Research and development 131.2 118.3 116.7 111.5 102.5
Restructuring charge -- 70.1 -- -- --
Asset write-offs -- 7.4 -- -- --
Contribution to ALRT -- -- 50.0 -- --
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Operating income 149.0 110.6 129.6 156.6 144.6
Nonoperating income (expense) 8.1 (2.6) (4.4) (2.3) (1.0)
Earnings from continuing operations before
income taxes and minority interest 157.1 108.0 125.2 158.9 143.6
Earnings from continuing operations 128.3 77.1 72.5 110.7 104.5
Earnings from discontinued operations -- -- -- -- 4.4
Net earnings 128.3 77.1 72.5 110.7 108.9
Cash dividends per share 0.52 0.49 0.47 0.42 0.40
Basic earnings per share:
Earnings per share from continuing operations 1.97 1.18 1.13 1.74 1.59
Earnings per share from discontinued operations -- -- -- -- 0.07
Basic earnings per share 1.97 1.18 1.13 1.74 1.66
Diluted earnings per share:
Earnings per share from continuing operations 1.95 1.17 1.12 1.73 1.58
Earnings per share from discontinued operations -- -- -- -- 0.07
Diluted earnings per share 1.95 1.17 1.12 1.73 1.65
Primary earnings per share,
as previously reported:(a)
Earnings per share from continuing operations 1.17 1.12 1.73 1.58
Earnings per share from discontinued operations -- -- -- 0.07
Net earnings per share 1.17 1.12 1.73 1.65
Financial Position
Current assets $ 636.4 $ 599.7 $ 522.3 $ 485.5 $ 443.9
Working capital 273.1 224.4 190.7 161.8 167.5
Total assets 1,398.9 1,349.8 1,316.3 1,059.8 939.8
Long-term debt 142.5 170.0 266.7 83.7 104.6
Total stockholders' equity 841.4 749.8 668.9 603.3 514.5
(a) Prior year amounts have been restated to comply with Statement of Financial
Accounting Standards No. 128, "Earnings per Share" (see Note 14 in the
consolidated financial statements).
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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.
1997 1996
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Calendar
Quarter Low High Div. Low High Div.
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First 28-3/4 36-1/4 $.13 30-5/8 39-1/4 $.12
Second 25-7/8 33 $.13 34 41-1/4 $.12
Third 29-3/4 36-1/2 $.13 36-3/4 42 $.12
Fourth 31-1/8 37-3/16 $.13 30 38-1/8 $.13
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 stockholders of record was 12,000 as of January 16,
1998.
For the fourth quarter of 1997, the Board declared a cash dividend of $0.13 per
share, payable March 10, 1998 to stockholders of record on February 17, 1998.
See Note 6 to the Consolidated Financial Statements relative to restrictions on
dividend payments.