1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 25, 1998.........................
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTER ENDED COMMISSION FILE NUMBER
SEPTEMBER 25, 1998 1-10269
ALLERGAN, INC.
A DELAWARE CORPORATION IRS EMPLOYER IDENTIFICATION
95-1622442
2525 DUPONT DRIVE, IRVINE, CALIFORNIA 92612
TELEPHONE NUMBER 714/246-4500
Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) X yes no
------ ------
(2) X yes no
------ ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
As of October 30, 1998 there were 65,990,389 shares of common stock outstanding.
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ALLERGAN, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 25, 1998
INDEX
Page
PART I - FINANCIAL INFORMATION
ITEM 1 - CONSOLIDATED FINANCIAL STATEMENTS
(A) Consolidated Statements of Earnings - 3
Three Months and Nine Months Ended
September 25, 1998 and September 26, 1997
(B) Consolidated Balance Sheets - 4
September 25, 1998 and December 31, 1997
(C) Consolidated Statements of Cash Flows - 5
Nine Months Ended September 25, 1998 and
September 26, 1997
(D) Notes to Consolidated Financial Statements 6-10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11-20
PART II - OTHER INFORMATION
ITEM 5 21
ITEM 6 22
Signature 23
Exhibits
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PART I - FINANCIAL INFORMATION
Allergan, Inc.
Consolidated Statements of Earnings
(In millions, except per share amounts)
Three months Nine months
Ended, Ended,
------ ------
September 25, September 26, September 25, September 26,
1998 1997 1998 1997
---- ---- ---- ----
Product Sales
Net sales $321.2 $287.7 $ 915.5 $828.4
Cost of sales 98.1 100.6 298.1 293.3
------ ------ ------- ------
Product gross margin 223.1 187.1 617.4 535.1
Research Services
Research service revenues 8.2 2.9 24.1 8.9
Cost of research services 7.6 2.8 22.4 8.4
------ ------ ------- -----
Research services margin 0.6 0.1 1.7 0.5
Operating costs and expenses
Selling, general and
administrative 124.5 106.3 374.5 340.4
Research and development 32.8 31.6 92.6 90.1
Restructuring charges 62.8 -- 70.6 --
Asset write-offs 36.0 -- 36.0 --
Contribution to ASTI -- -- 171.4 --
------ ----- ------- -----
Operating income (loss) (32.4) 49.3 (126.0) 105.1
Nonoperating income (expense):
Interest income 2.8 2.3 8.0 6.1
Interest expense (5.9) (2.5) (12.9) (7.2)
Gain on investments, net 0.2 12.4 53.7 12.4
Contribution to Allergan
Foundation -- -- (11.0) --
Other, net (1.2) -- (1.6) --
------ ------ ------- ------
(4.1) 12.2 36.2 11.3
------ ------ ------- ------
Earnings (loss) from continuing
operations before income
taxes and minority interest (36.5) 61.5 (89.8) 116.4
Provision for income taxes (5.1) 17.8 29.1 33.7
Minority interest -- 0.1 (0.1) (0.1)
------ ------ ------- ------
Net earnings (loss) $(31.4) $ 43.6 $(118.8) $ 82.8
====== ====== ======= ======
Earnings (loss) per share
Basic $ (0.48) $ 0.67 $ (1.82) $ 1.27
======= ======= ======== =======
Diluted $ (0.48) $ 0.66 $ (1.82) $ 1.25
======= ======= ======== =======
See accompanying notes to consolidated financial statements.
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Allergan, Inc.
Consolidated Balance Sheets
(In millions, except share data)
September 25, December 31,
1998 1997
------------- ------------
ASSETS
Current assets:
Cash and equivalents $ 200.0 $ 180.9
Trade receivables, net 208.6 187.0
Inventories 135.0 147.8
Other current assets 134.4 120.7
-------- --------
Total current assets 678.0 636.4
Investments and other assets 140.8 191.3
Property, plant and equipment, net 318.9 357.8
Goodwill and intangibles, net 188.0 213.4
-------- --------
Total assets $1,325.7 $1,398.9
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 72.6 $ 80.5
Accounts payable 74.1 83.3
Accrued expenses 211.5 167.0
Income taxes 20.2 32.5
-------- --------
Total current liabilities 378.4 363.3
Long-term debt 221.6 142.5
Other liabilities 65.5 51.7
Commitments and contingencies -- --
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 67,153,000
and 67,196,000 shares 0.7 0.7
Additional paid-in capital 216.2 208.1
Accumulated other comprehensive income (1.3) 11.7
Retained earnings 497.5 670.8
-------- --------
713.1 891.3
Less - treasury stock, at cost
(1,505,000 and 1,903,000 shares) (52.9) (49.9)
-------- --------
Total stockholders' equity 660.2 841.4
-------- --------
Total liabilities and
stockholders' equity $1,325.7 $1,398.9
======== ========
See accompanying notes to consolidated financial statements.
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Allergan, Inc.
Consolidated Statements of Cash Flows
(In millions)
Nine months
Ended,
------
September 25, September 26,
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $(118.8) $ 82.8
Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities:
Depreciation and amortization 56.7 53.1
Amortization of prepaid royalties 7.5 7.3
Restructuring charges 70.6 --
Asset write-offs 36.0 --
Gain on investments, net (53.7) (12.4)
Contribution to Allergan Foundation 11.0 --
Deferred income taxes (5.2) (0.9)
Loss on disposal of assets 0.1 1.2
Expense of compensation plans 5.8 5.1
Minority interest (0.1) (0.1)
Adjustment in reporting foreign subsidiaries (1.0) --
Changes in assets and liabilities:
Trade receivables (24.6) 8.9
Inventories 5.0 (17.4)
Accounts payable (7.2) (11.4)
Accrued liabilities 35.4 (13.5)
Income taxes (6.8) (2.4)
Other (9.6) (7.3)
----- ------
Net cash provided by operating activities 1.1 93.0
----- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (31.4) (35.2)
Proceeds from sale of property, plant and equipment 3.4 5.8
Proceeds from sale of investments 55.5 12.4
Other, net (21.1) (30.9)
------ ------
Net cash provided by/(used in) investing activities 6.4 (47.9)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends to stockholders (25.3) (25.1)
ASTI dividend (28.6) --
Net borrowings under commercial
paper obligations 28.8 52.0
Decrease in notes payable (8.6) (23.8)
Sale of stock to employees 24.6 16.4
Increase in long term debt 59.7 3.6
Decrease in long-term debt (1.8) (1.5)
Acquisition of capital leases -- (0.7)
Payments to acquire treasury stock (32.9) (34.0)
------ ------
Net cash provided by/(used in) financing activities 15.9 (13.1)
------ ------
Effect of exchange rates on cash and equivalents (4.3) (2.5)
------ ------
Net increase in cash and equivalents 19.1 29.5
Cash and equivalents at beginning of period 180.9 112.0
------ ------
Cash and equivalents at end of period $200.0 $141.5
====== ======
See accompanying notes to consolidated financial statements.
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Allergan, Inc.
Notes to Consolidated Financial Statements
1. In the opinion of management, the accompanying consolidated financial
statements contain all adjustments necessary (consisting only of normal
recurring accruals) to present fairly the financial information contained
therein. These statements do not include all disclosures required by generally
accepted accounting principles and should be read in conjunction with the
audited financial statements of the Company for the year ended December 31,
1997. The results of operations for the nine months ended September 25, 1998 are
not necessarily indicative of the results to be expected for the year ending
December 31, 1998.
2. Components of inventory were:
September 25, December 31,
1998 1997
------------- ------------
(in millions)
Finished goods $ 88.7 $ 96.8
Work in process 17.8 15.7
Raw materials 28.5 35.3
------ ------
Total $135.0 $147.8
====== ======
3. Income taxes are determined using an estimated annual effective tax rate,
which is less than the U.S. Federal statutory rate, primarily because of lower
tax rates in Puerto Rico and in certain non U.S. jurisdictions. Withholding and
U.S. taxes have not been provided for unremitted earnings of certain non U.S.
subsidiaries because the Company expects that such earnings have been or will be
reinvested in operations, or will be offset by appropriate credits for foreign
income taxes paid.
4. During 1998, the Company has recorded a $70.6 million restructuring charge,
$48.1 million after taxes, through the end of the third quarter. The
restructuring charge represented the costs of a comprehensive plan to streamline
operations and reduce costs through reductions in global general &
administrative(G&A) staff and the closure of five of 11 manufacturing facilities
in connection with the outsourcing and consolidation of manufacturing
operations. In addition, operations in many countries were transferred to
distributors, and business activities were concentrated into regional centers.
The changes in operations will result in a net workforce reduction of
approximately 550 positions over a three-year period. The reductions in G&A
staff and manufacturing facilities are primarily the result of a strategic
assessment of the Company's product lines and businesses during the first
quarter of 1998, and a review of the G&A cost structure and manufacturing
capabilities during the second and third quarters.
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Allergan, Inc.
Notes to Consolidated Financial Statements (Continued)
The restructuring charge was recorded primarily in the third quarter as most
restructuring activities were announced on September 14, 1998. Certain
restructuring activities in the first and second quarters totaling $7.8 million
were previously reported as operating expenses in prior quarters. The
restructuring charge consists of $19.7 million in employee severance costs,
$28.5 in facility closure and consolidation costs, $10.6 million in write-offs
of computer software, and $11.8 million in other costs.
In the third quarter of 1998 management completed a critical review of its asset
bases in light of the strategic decisions made in the restructuring activities
discussed above. Management made business decisions relating to the future use
of certain assets resulting in a reassessment of the carrying value of such
assets. As a result, the Company recorded a $36.0 million charge, $31.2 million
after taxes, for asset write-offs in the third quarter. Such assets included a
portion of the value of a manufacturing facility and certain product rights.
5. The Company is involved in various litigation and claims arising in the
normal course of business. The Company's management believes that recovery or
liability with respect to these matters would not have a material adverse effect
on the consolidated financial position and results of operations of the Company.
6. On October 21, 1998 the Board of Directors declared a quarterly cash dividend
of $0.13 per share, payable December 7, 1998 to stockholders of record on
November 6, 1998.
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Allergan, Inc.
Notes to Consolidated Financial Statements (Continued)
7. The reconciliations of the numerators and denominators of the basic and
diluted earnings per share computations in accordance with SFAS No. 128 are as
follows:
Third Quarter
------------------------------------------------------------------------------------------
1998 1997
------------------------------------------------------------------------------------------
(In millions,
except per share Income Shares Per-Share Income Shares Per-Share
data) (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
--------- ---------
Computation of
basic EPS:
Income available
to common
stockholders $ (31.4) 65.4 $(0.48) $43.6 64.9 $0.67
====== =====
Effect of
dilutive
options -- 0.7
------------------ ------------------
Computation of
diluted EPS:
Income available
to common
stockholders
assuming
exercises $ (31.4) 65.4 $(0.48) $43.6 65.6 $0.66
================== ====== ================== =====
Nine Months
------------------------------------------------------------------------------------------
1998 1997
------------------------------------------------------------------------------------------
(In millions,
except per share Income/(loss) Shares Per-Share Income Shares Per-Share
data) (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
--------- ---------
Computation of
basic EPS:
Income (loss)
available to
common
stockholders $(118.8) 65.4 $(1.82) $82.8 65.2 $1.27
====== =====
Effect of
dilutive
options -- 0.8
------------------ ------------------
Computation of
diluted EPS:
Income (loss)
available to
common
stockholders
assuming
exercises $(118.8) 65.4 $(1.82) $82.8 66.0 $1.25
================== ====== ================== =====
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Allergan, Inc.
Notes to Consolidated Financial Statements (Continued)
Options to purchase 3,970,000 shares of common stock at prices ranging from
$13.50 per share to $52.88 per share were outstanding since dates ranging from
December 13, 1988 through July 29, 1998. These options were not included in the
computation of diluted earnings per share for the three and nine months ended
September 25, 1998 because the effect would be antidilutive due to the loss for
the periods.
8. In 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" which is effective for fiscal years beginning
after December 15, 1997. SFAS No. 130 requires that the components of
comprehensive income be disclosed. Such amounts are as follows:
Third Quarter
-------------------------------------------------------------------------------------
(in millions) 1998 1997
------------------------------------------ -----------------------------------------
Tax Tax
Before-tax (expense) Net-of-tax Before-tax (expense) Net-of-tax
amount or benefit amount amount or benefit amount
----------- ---------- ---------- ----------- ---------- ----------
Foreign currency $ 2.2 -- $ 2.2 $ (4.5) -- $ (4.5)
translation
adjustments
Unrealized holding (7.9) 2.9 (5.0) 34.8 (12.1) 22.7
gains/(losses)
arising during
period
Reclassification (0.2) 0.1 (0.1) (12.4) 4.3 (8.1)
adjustment for net
gains realized in
net income
------ ------ ------ ------ ------ ------
Other comprehensive
income $ (5.9) $ 3.0 $ (2.9) $ 17.9 $ (7.8) $ 10.1
====== ====== ====== ====== ====== ======
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Allergan, Inc.
Notes to Consolidated Financial Statements (Continued)
Nine Months Ended
-------------------------------------------------------------------------------------
(in millions) September 25, 1998 September 26, 1997
------------------------------------------ -----------------------------------------
Tax Tax
Before-tax (expense) Net-of-tax Before-tax (expense) Net-of-tax
amount or benefit amount amount or benefit amount
---------- ------------ ---------- ---------- ----------- ----------
Foreign currency $ 3.4 -- $ 3.4 $ (13.4) -- $ (13.4)
translation
adjustments
Unrealized holding 28.2 (9.7) 18.5 33.9 (11.9) 22.0
gains/(losses)
arising during
period
Reclassification (53.7) 18.8 (34.9) (12.4) 4.3 (8.1)
adjustment for net
gains realized in
net income
------ ------ ------ ------ ------ ------
Other
comprehensive income $(22.1) $ 9.1 $(13.0) $ 8.1 $ (7.6) $ 0.5
====== ====== ====== ====== ====== ======
9. In June 1997, SFAS No. 131 - "Disclosures about Segments of an Enterprise and
Related Information" was issued and is effective for periods beginning after
December 15, 1997. SFAS No. 131 establishes standards for reporting financial
and descriptive information regarding an enterprise's operating segments. In
February 1998, SFAS No. 132 - "Employee's Disclosures about Pension and Other
Postretirement Benefits" was issued and is effective for periods after December
15, 1997. SFAS No. 132 revises disclosures about pension and other
postretirement benefit plans. These standards increase disclosure in the
financial statements and will have no impact on the Company's financial position
or results of operations.
In June 1998, SFAS No. 133 - "Accounting for Derivative Instruments and Hedging
Activities" was issued and is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
Company is currently evaluating the impact of SFAS No. 133 will have on its
financial statements, if any.
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ALLERGAN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 25, 1998
RESULTS OF OPERATIONS
The following table compares 1998 and 1997 net sales by Product Line for the
third quarter and year-to-date periods (in millions):
Three Months Nine Months
Ended Ended
----- -----
September 25, September 26, September 25, September 26,
1998 1997 1998 1997
---- ---- ---- ----
Specialty Pharmaceuticals
Eye Care Pharmaceuticals $131.0 $ 97.6 $369.8 $294.7
Skin Care 22.3 26.4 57.6 60.0
Botox(R)/Neuromuscular 31.9 22.8 88.1 64.8
------ ------ ------ ------
Total 185.2 146.8 515.5 419.5
Medical devices and OTC
Product Lines
Ophthalmic Surgical 47.1 45.1 139.0 130.3
Optical Contact Lens Care 88.9 95.8 261.0 278.6
------ ------ ------ ------
Total 136.0 140.9 400.0 408.9
------ ------ ------ ------
Total Product Net Sales $321.2 $287.7 $915.5 $828.4
====== ====== ====== ======
For the quarter ended September 25, 1998 total net sales increased 12% to $321.2
million as compared to the third quarter of 1997. Net sales for the nine months
ended September 25, 1998 were $915.5 million, an 11% increase from the
comparable 1997 amount.
The impact of foreign currency changes since the comparable prior year period
decreased net sales by $9.2 million or 3% for the quarter and by $28.4 million
or 3% for the nine months ended September 25, 1998 compared with the same
periods during the prior year. Excluding the impact of foreign currency changes,
sales increased by $42.7 million or 15% during the quarter, and $115.5 million
or 14% for the nine months ended September 25, 1998 compared with the same
periods during the prior year.
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
the third quarter of 1997 reduced wholesaler inventories and total net sales by
an estimated $14 million or 4% of third quarter net sales and 2% of net sales
for the nine months ended September 26, 1997 in comparison with comparable 1998
amounts.
For the three months ended September 25, 1998 Eye Care Pharmaceutical sales
increased by 34% from the comparable 1997 period. For the first nine months of
1998 sales increased by 25% from the comparable 1997 amount. Sales in the United
States increased $30.6 million in the third quarter of 1998 and $63.7 million in
the first nine months of 1998 primarily as a
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Allergan, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 25, 1998 (Continued)
RESULTS OF OPERATIONS (Continued)
result of increases in sales of Alphagan(R) (brimonidine tartrate ophthalmic
solution), Acular(R) (ketorolac tromethamine ophthalmic solution), and
Ocuflox(R) (ofloxacin ophthalmic solution). The 1998 sales increases are also
the result, in part, of the reductions in wholesaler inventory in 1997 discussed
above. Sales in international markets increased by $2.8 million in the quarter
and $11.4 million in the first nine months of 1998 primarily as a result of
increased sales of Alphagan(R) and Acular(R) offset by decreases in sales of
Betagan(R) and Propine(R) ophthalmic solutions. The negative effect of currency
changes amounted to $1.9 million in the quarter and $7.6 million for the nine
months ended September 25, 1998.
Skin Care Pharmaceuticals third quarter 1998 sales decreased by 16% from the
comparable quarter in 1997. Sales for the nine months ended September 25, 1998
were 4% lower than the comparable period in 1997. The decreases in sales in 1998
were the result of a decrease in sales of Tazorac(R)/Zorac(R) (tazarotene
topical gel). Third quarter 1997 sales included significant sales of this
product in connection with its launch in the United States and corresponding
filling of retail pharmacy inventories.
Botox(R) (Botulinum Toxin Type A) purified neurotoxin complex sales increased by
40% in the third quarter and 36% in the first nine months of 1998 compared to
1997 results. The increases were the result of strong growth in both the United
States and international markets.
Surgical sales increased 4% in the third quarter of 1998 and 7% for the first
nine months of 1998 compared to comparable 1997 amounts. For the third quarter,
domestic sales increased 9% while international sales increased 1% from the
third quarter of 1997. For the nine month period ended September 25, 1998,
domestic sales increased 15% and international sales were flat compared to the
first nine months of 1997. Sales increased in both domestic and international
markets as a result of increased sales of SI-40 silicone intraocular lenses
(IOLs) and the AMO(R)Array(R) multifocal IOL partially offset by decreases in
sales of PMMA IOLs and other silicone IOL models. International sales were
decreased as a result of foreign currency changes. Absent the effects of foreign
currency changes, international surgical sales increased by 10% in the third
quarter and 8% for the first nine months of 1998 compared with 1997 results for
comparable periods.
Optical Contact Lens Care sales of $88.9 million for the three months ended
September 25, 1998 decreased by 7% from the third quarter of 1997. Sales for the
nine months ended September 25, 1998 of $261.0 million decreased by 6% compared
to 1997 sales. Domestic optical sales decreased by 12% in the third quarter and
by 14% in the first nine months of 1998 compared to comparable 1997 amounts.
Optical sales in international markets decreased by 6% in the third quarter and
4% in the first nine months of 1998 compared to comparable 1997 results.
Domestic and international optical sales decreased during the third quarter and
for the nine months ended September 25, 1998 as a result of decreases in sales
of peroxide based disinfection products offset by increases in sales of
Complete(R) brand products, and an increase in sales of Concept F(R)
disinfection solution in the Japan market. Domestic results for the first nine
months of 1998 were also negatively
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Allergan, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 25, 1998 (Continued)
RESULTS OF OPERATIONS (Continued)
impacted by a reduction of inventory in the trade in the first quarter of 1998.
International sales were also negatively impacted by foreign currency changes.
Absent the effects of foreign currency changes, international optical sales were
flat during the third quarter of 1998, and increased by 2% for the first nine
months, compared to comparable periods in 1997.
Allergan's gross margin percentage for the third quarter of 1998 was 69.5% of
net sales, which represents a 4.5 percentage point increase from the third
quarter of 1997. The gross margin percentage for the nine months ended September
25, 1998 was 67.4% representing a 2.8 percentage point increase from the
comparable 1997 percentage. The gross margin percentages increased in 1998
compared to 1997 primarily as a result of shifts in the mix of products sold to
higher margin products including Botox(R) and eye care pharmaceuticals.
Gross margin in dollars increased by $36.0 million or 19% in the third quarter
and $82.3 million or 15% in the first nine months of 1998 from comparable 1997
results. Such increases were the result of the increases in net sales combined
with the increases in gross margin percentage.
Operating income was a loss of $32.4 million in the third quarter of 1998. Such
loss included special charges of $62.8 million for restructuring costs and $36.0
million in asset write-offs which are further described in note 4 to the
consolidated financial statements. Excluding the effect of the special charges,
operating income was $66.4 million in the third quarter of 1998, compared to
$49.3 million for the third quarter of 1997. The $17.1 million increase in
operating income is primarily the result of the $36.0 million increase in gross
margin offset by an $18.2 million increase in selling, general and
administrative expense. Selling, general and administrative expense increased,
in part, as a result of increased product marketing costs in 1998. Selling,
general and administrative costs were reduced by certain income items totaling
$12.9 million in 1998 and $17.1 million in 1997. The 1998 items related to
income from product development licensing agreements. Results in 1997 included
$9.6 million in income from sales of product rights and $7.5 million in income
from settlement of a product related lawsuit. The increase in selling, general
and administrative expense in 1998 was also partially offset by $2.5 million in
technology fees received by Allergan from Allergan Specialty Therapeutics, Inc.
(ASTI) in the third quarter of 1998.
Operating income was a loss of $126.0 million for the first nine months of 1998.
Such loss included special charges of $70.6 million for restructuring costs and
$36.0 million in asset write-offs which are further described in note 4 to the
consolidated financial statements, and a charge of $171.4 million in the first
quarter relating to a dividend of stock of ASTI to Allergan shareholders. ASTI
is a newly established company formed to conduct research and development of
potential pharmaceutical products based primarily upon Allergan's retinoid and
neuroprotective technologies. Allergan contributed $200 million and certain
related technologies to ASTI prior to the dividend distribution. Excluding the
effect of the special
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14
Allergan, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 25, 1998 (Continued)
RESULTS OF OPERATIONS (Continued)
charges and the charge in the first quarter for the dividend distribution of
ASTI stock of $171.4 million, operating income was $152.0 million (hereinafter
referred to as adjusted operating income) in the first nine months of 1998, a
$46.9 million or 45% increase over operating income of $105.1 million in the
first nine months of 1997. Adjusted operating income increased as a result of
the $82.3 million increase in gross margin, offset by a $2.5 million increase in
research and development and a $34.1 million increase in selling, general and
administrative expense. Research and development costs were decreased in the
first quarter of 1998 as a result of recovery from ASTI of $3.8 million in costs
incurred and expensed in the fourth quarter of 1997. Selling, general and
administrative expense increased in 1998 as a result of increased product launch
expenses relating to Alphagan(R) ophthalmic solution, Tazorac(R)/Zorac(R)
topical gel and the AMO(R)Array(R) IOL. Such increases were partially offset by
$9.4 million in technology fees received by Allergan from ASTI in 1998. Selling,
general and administrative expenses were reduced by one-time income items in the
third quarter, as discussed above, totaling $12.9 million in 1998 and $17.1
million in 1997.
Allergan recorded a net loss of $31.4 million in the third quarter of 1998. Such
loss included the after tax effect of the special charges for restructuring
costs of $42.6 million and asset write-offs of $31.2 million. Excluding the
after tax effect of the special charges, net earnings were $42.4 million
(hereinafter referred to as adjusted net earnings), a $1.2 million or 3%
decrease from the net earnings of $43.6 million in the third quarter of 1997.
Adjusted net earnings decreased as a result of a $13.4 million decrease in other
non-operating income, a $3.4 million increase in interest expense, and a $2.1
million increase in income taxes on adjusted pretax income in 1998, offsetting
the $17.1 million increase in operating income in 1998. Other non-operating
income in 1997 included a $12.4 million gain on sale of an investment. Interest
expense increased in the third quarter of 1998, primarily as a result of an
increase in debt resulting from the $200 million contribution to ASTI in the
first quarter of 1998. The provision for income taxes increased in 1998 from
1997 as a result of an increase of Allergan's effective tax rate from 29% in
1997 to 32% in 1998.
Allergan recorded a net loss of $118.8 million in the first nine months of 1998.
Excluding the after tax effect of the special charges for restructuring costs of
$48.1 million and asset write-offs of $31.2 million, and the effect of a $171.4
million charge relating to ASTI, net earnings were $131.9 million (hereinafter
referred to as adjusted net earnings), a $49.1 million or 59% increase over net
earnings of $82.8 million in the first nine months of 1997. Adjusted net
earnings increased during the first nine months of 1998 primarily as a result of
the $46.9 million increase in adjusted operating income and a $28.7 million
increase in other non-operating income in 1998, offset by a $5.7 million
increase in interest expense and a $22.7 million increase in income taxes on
adjusted pretax income. Other non-operating income included four significant
items totaling $42.5 million in 1998 and the $12.4 million gain on sale of
investments in 1997. In the first quarter of 1998, the Company realized a gain
of $51.8 million on its investment in Ocular Sciences, Inc. (OSI) stock. The
Company contributed a portion of its OSI stock to The
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Allergan, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 25, 1998 (Continued)
RESULTS OF OPERATIONS (Continued)
Allergan Foundation, a charitable foundation, resulting in a charge of $11.0
million. The Company and the foundation sold their investments in OSI in the
first quarter of 1998. The Company also recorded a charge of $3.8 million in the
first quarter of 1998 to recognize the permanent impairment in value of certain
other investments. In addition, the Company realized the $5.5 million gain on
sale of Ligand Pharmaceuticals, Incorporated stock in the second quarter of
1998. Interest expense increased in 1998 primarily as a result of an increase in
debt resulting from the $200 million contribution to ASTI in the first quarter
of 1998. The increases in adjusted operating income and non-operating income,
offset by the increase in interest expense, increased adjusted pretax income to
$188.2 million for the first nine months of 1998 compared to $116.4 million for
the comparable period in 1997. As a result of the increase in adjusted pretax
income, income taxes increased by $22.7 million in 1998 over the amount for the
comparable period in 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of September 25, 1998, the Company had a medium term note program and five
long-term credit facilities, one of which supports a commercial paper borrowing
arrangement. The note program allows the Company to issue up to an additional
$60 million in notes on a non-revolving basis. The credit facilities allow for
borrowings of up to $26.3 million through December 1999, $34.0 million through
2001, and $267.8 million through 2003. 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 September 25,
1998, the Company had $109.0 million in borrowings under the note program, $69.4
million in commercial paper borrowings and $77.1 million in borrowings under the
credit facilities. As of September 25, 1998 the Company has classified $39.4
million of its commercial paper borrowings as long-term debt based upon the
Company's ability to maintain such debt under terms of the credit facilities
described above.
The net cash provided by operating activities for the nine months ended
September 25, 1998 was $1.1 million. Such amount includes the $171.4 million
charge relating to ASTI. Excluding such charge, cash provided by operating
activities in the first nine months of 1998 was $172.5 million compared to cash
provided by operating activities of $93.0 million for the respective 1997
period. The increase in cash provided by operating activities, excluding the
charge relating to ASTI, was primarily the result of an increase in adjusted net
income along with increases in accrued liabilities in 1998 combined with
decreases in such accounts in 1997, and a decrease in inventories in 1998
combined with an increase in such accounts in 1997. Offsetting these increases
was a decrease in cash provided by operating activities resulting from an
increase in accounts receivable in 1998, combined with a decrease in such
accounts in 1997.
Cash provided by investing activities in the first nine months of 1998 was $6.4
million. Such amounts included $55.5 million in proceeds from the
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Allergan, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 25, 1998 (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
sale of investments. Excluding these transactions, cash used in investing
activities was $49.1 million in the first nine months of 1998 compared to cash
used in such activities of $47.9 million in the first nine months of 1997. The
Company invested $31.4 million in new facilities and equipment during the nine
months ended September 25, 1998 compared to $35.2 million during the same period
in 1997.
Cash provided by financing activities was $15.9 million in the nine months ended
September 25, 1998 compared to $13.1 million cash used in financing activities
in 1997. Borrowings, net of repayments of debt totaled $78.1 million in the
first nine months of 1998 compared to $30.3 million for the comparable period in
1997. The increased borrowings in 1998 were used to make a portion of the $200
million contribution to ASTI. The balance of the amount contributed was provided
by cash from operations and the proceeds from the sale of investments. The
amounts are net of dividend outflows of $53.9 million in 1998 and $25.1 million
in 1997. The 1998 dividends include $28.6 million representing the dividend of
ASTI stock to Allergan shareholders. The 1998 amount of cash provided by
financing activities includes $32.9 million used to repurchase treasury stock,
and the amount of cash used in financing activities in 1997 includes $34.0
million used to repurchase treasury stock.
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. The
Company anticipates that the special charges recorded in 1998 will ultimately
require cash expenditures of approximately $25 million over a period of three
years which are expected to be funded by cash provided by operating activities.
Such expenditures are expected to be approximately $13 million in 1998.
YEAR 2000 ISSUES
Introduction. Most businesses, including the Company, are faced with a
potentially serious threat to their operations, known as the "year 2000 issue"
which has been widely publicized. The year 2000 issue is a general term used to
describe the various problems arising from the inability of computers to
properly identify the year associated with information. This problem could
potentially cause system interruptions or failures or result in systems
providing incorrect data. The effect of the year 2000 issue could impact the
performance of operations within the Company as well as the Company's
relationships with third parties, including vendors and customers who could also
experience year 2000 compliance issues.
The Company has begun a process to address the year 2000 issue with respect to
computer systems and applications within the Company. In addition, the process
extends to relationships with key suppliers and customers who are also expected
to be impacted by year 2000 issues. The discussion below provides a description
of the Company's activities to address year 2000 compliance and minimize
disruption to the Company's business.
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Allergan, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 25, 1998 (Continued)
YEAR 2000 ISSUES (Continued)
State of readiness. The Company has formed a task force to manage a four- phase
process to promote year 2000 compliance. The four phases are:
Phase 1 is the compilation of an inventory of systems and relationships
with suppliers, key customers and other business partners.
Phase 2 is the assessment of each item identified in the inventory and
the prioritization of such items based on potential impact to the
Company. Systems and relationships are categorized as business critical,
important, limited, or not critical.
Phase 3 involves the verification of compliance with year 2000
requirements and the development of contingency plans in the event that
year 2000 issues are encountered. The extent of verification of
individual systems or relationships and of the development of
contingency plans is dependent upon the assessment of business risk. All
systems and relationships deemed to be business critical will be tested
or audited to address year 2000 compliance. A concerted effort will be
made for systems and relationships defined as important or limited, at a
minimum, to verify by confirmation with business partners or hardware
and software suppliers that applicable systems are year 2000 compliant.
If compliance is not verified, the Company will pursue various
alternatives to address remaining year 2000 issues.
Phase 4 is the assembly during the fourth quarter of 1999 of rapid
response teams to be prepared to deal with any failures of systems in
the year 2000, if any.
The Phase 1 inventory and Phase 2 assessment of systems operated by the
Information Technology (IT) function have been completed. In 1994 the Company
committed to a broad-based strategy of replacement of core IT systems with
systems using SAP R/3 software. Such systems provide control and management of
manufacturing, distribution, billing, collection, purchasing and accounts
payable, human resources and general accounting functions. This core system is
represented to be, and the Company believes is, year 2000 compliant. This system
has already been installed in sites producing a majority of the Company's
revenue. The Company expects that by July 1999, approximately 90% of the
Company's revenue will be managed by SAP, and almost all manufacturing locations
will be using SAP software. Sites not using SAP will use software that has been
validated as year 2000 compliant for core processes. The IT function is
validating the compliance of systems and developing contingency plans. Such
process to complete Phase 3 for the critical systems in the IT function is
expected to be substantially complete by April 1999.
The Company's research and development and manufacturing functions have
completed Phase 1. These functions anticipate completion of their Phase 2
assessments by the end of 1998 and completion of their Phase 3 validations by
the end of the third quarter of 1999. The Company's manufacturing function has,
in addition, started its remediation efforts for systems that it has identified
as non-compliant.
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Allergan, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 25, 1998 (Continued)
YEAR 2000 ISSUES (Continued)
The selling, general and administrative areas of the Company are performing
their inventories of non-IT systems and business relationships, and anticipate
completion of this activity in December 1998. Phase 2 assessments of business
risk are expected to be completed by the end of the first quarter of 1999, and
validation and contingency plans are expected to be completed by the end of the
third quarter of 1999.
Allergan manufactures one product that includes a date field in its embedded
technology: the AMO(R)Prestige(R) Phacoemulsification System. The Company has
tested this system and has confirmed that the system accurately processes and
stores date and time data during, from, into and between the twentieth and
twenty-first centuries, and the years 1999 and 2000, including correct
processing of the leap year in the year 2000. All other phacoemulsification
systems manufactured by the Company do not include a date field.
Costs to address the Company's year 2000 issues. In 1994, the Company chose to
install SAP R/3 systems in order to establish software systems necessary to meet
business needs. Costs to install SAP would have been incurred had there been no
year 2000 issue. The Company expects to have estimates of costs incurred and
remaining costs required to complete its year 2000 compliance effort by the time
it files its 1998 annual report on Form 10-K. Such costs to bring other software
and business relations into compliance with year 2000 requirements have not
been, and are not anticipated to be, material to the Company's results of
operations or financial position. The Company has funded, and intends to
complete the funding of, the year 2000 compliance effort using cash provided by
operations. While the Company has incurred an opportunity cost for implementing
its year 2000 project, the Company has not deferred any specific IT project
solely as a result of the implementation of its year 2000 effort.
Risks of the Company's year 2000 issues. The greatest risks to the Company are
the failure of any software application or business partner relationship that
has been identified as business critical. These critical business applications,
including SAP and its associated interfaces with other software and business
partners, are undergoing disaster recovery and validation testing. This testing
is expected to be completed by April 1999. Once the testing and validation is
completed, a further assessment of business risks will be performed.
The Company's contingency plans. As discussed above, the development of
contingency plans is an integral part of the process of verification of business
risk. The depth of contingency planning will be determined by the importance of
each area under assessment to the ongoing operation of the Company's business.
Contingency plans under development are action plans to keep the Company in
operation should there be a failure in systems despite the testing and
validation performed to determine and eliminate such risks.
Contingency plans are being refined for business critical IT systems. Plans for
non-IT systems will be developed as a part of the assessment and validation work
discussed above. In addition, as previously discussed, the Company will form
rapid response teams in the fourth quarter of 1999 to address year 2000 issues
as they arise, notwithstanding the efforts described above to identify and
eliminate such problems. These teams will be composed of both IT and non-IT
personnel.
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Allergan, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 25, 1998 (Continued)
CERTAIN FACTORS AND TRENDS AFFECTING ALLERGAN AND ITS BUSINESSES
Certain disclosures made by the Company in this report and in other reports and
statements released by the Company are and will be forward-looking in nature,
such as comments which express the Company's opinions about trends and factors
which may impact future operating results. Disclosures which use words such as
the Company "believes," "anticipates," "expects" and similar expressions are
intended to identify forward-looking statements. Such statements are subject to
certain risks and uncertainties which could cause actual results to differ
materially from expectations. Any such forward-looking statements, whether made
in this report or elsewhere, should be considered in context with the various
disclosures made by the Company about its businesses including the factors
discussed below.
* The three largest parts of the Company's overall business in terms of
revenue- eye care pharmaceuticals, ophthalmic surgical and optical contact
lens care- did not experience any significant overall revenue growth in the
three-year period from 1995 to 1997.
* The pharmaceutical industry and other healthcare-related industries
continue to experience consolidation, resulting in larger, more diversified
companies with greater resources than the Company. Among other things, these
larger companies can spread their research and development costs over much
broader revenue bases than Allergan and can influence customer buying
decisions.
* Betagan(R) and Propine(R), which were formerly two of the Company's largest
ophthalmic pharmaceutical products, are off patent in the U.S. and continue
to face competition from generic versions of these compounds as well as from
recently introduced new technology glaucoma products. Other significant
products are also off patent and may face similar generic competition.
* The Company's Optical Contact Lens Care business continues to be impacted
by trends in the contact lens and lens care marketplace, including
technological and medical advances in surgical techniques for the correction
of vision impairment; the popularity of one-bottle chemical disinfection
systems among soft contact lens wearers instead of peroxide-based lens care
products which have historically been Allergan's strongest family of lens
care products; and the growing use and acceptance of disposable and frequent
replacement contact lenses which could have the effect of reducing demand
for lens care products generally. While the Company believes it has
established appropriate marketing and sales plans that will mitigate the
impact of these trends upon its Optical Contact Lens Care business, no
assurance can be given in this regard.
* Sales of the Company's surgical and pharmaceutical products have been and
are expected to continue to be impacted by continuing pricing pressures
resulting from various government initiatives as well as from the purchasing
and operational decisions made by managed care
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Allergan, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 25, 1998 (Continued)
CERTAIN FACTORS AND TRENDS AFFECTING ALLERGAN AND ITS BUSINESSES (Continued)
organizations. Failure of the AMO(R)Array(R) multifocal IOL to be designated
as an "advanced technology IOL" by Health Care Financing Administration will
adversely affect the Company's profit margin for the product.
* Wholesaler purchases in excess of consumer demand may be followed by
reduced wholesaler purchases in the coming quarters.
* In the third quarter of 1998, the Company announced comprehensive plans to
streamline operations and reduce costs through global G&A restructuring and
manufacturing consolidation. These initiatives, which are expected to
improve profitability, may not provide the anticipated cost reductions. The
failure of the Company to successfully reduce these costs could adversely
affect the Company's operating results.
* The Company has allocated significant resources to the development and
introduction of new products. The successful development, as well as
regulatory approval and market acceptance of the products, cannot be
assured.
* There are intrinsic uncertainties associated with Research & Development
efforts and the regulatory process both of which are discussed in greater
details in the "Research and Development" and the "Government Regulation"
sections, respectively, in the Company's Annual Report on Form 10-K for the
Year Ended December 31, 1997.
* Uncertainties of the business include the success of the Company in
identifying systems, applications and relationships that are not year 2000
compliant, the nature and amount of programming required to upgrade or
replace each of the affected programs, the availability, rate and magnitude
of related labor and consulting costs and the success of the Company's
business partners, vendors and clients and customers in addressing the year
2000 issue. See also "Risks of the Company's year 2000 issues" discussion
above at page 18.
* A substantial portion of the Company's sales and expenditures are collected
or paid in currencies other than the U.S. dollar. Therefore, the Company's
operating results are affected by fluctuations in foreign currency exchange
rates. There can be no assurance that in the future exchange rate movements
will not have a material adverse effect on the Company's sales, gross profit
or operating expenses.
* The Company's business is also subject to other risks generally associated
with doing business abroad, such as political unrest and changing economic
conditions in countries where the Company's products are sold or
manufacturing facilities are located.
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Allergan, Inc.
PART II - OTHER INFORMATION
Item 5. Other Information.
Annual Meeting.
The Company's next annual stockholders' meeting will be held on Tuesday,
April 27, 1999 at 10:00 A.M. at the Company's headquarters, Irvine, California.
Nomination of Directors.
The Restated Certificate of Incorporation of the Company provides that
any stockholder entitled to vote for the election of directors at a meeting may
nominate persons for election as directors only if written notice of such
stockholder's intent to make such nomination is given, either by personal
delivery or United States mail, postage prepaid, to Francis R. Tunney, Jr.,
Secretary, Allergan, Inc., 2525 Dupont Drive, Irvine, CA 92612. To be timely, a
stockholder's notice must be delivered to, or mailed and received at, the
address provided not less than 30 days nor more than 60 days prior to the
scheduled annual meeting, regardless of any postponements, deferrals or
adjournments of that meeting to a later date; provided, however, that if less
than 40 days' notice or prior public disclosure of the date of the scheduled
annual meeting is given or made, notice by the stockholder, to be timely, must
be so delivered or received not later than the close of business on the tenth
day following the earlier of the day on which such notice of the date of the
scheduled annual meeting was mailed or the day on which such public disclosure
was made. A stockholder's notice to the Secretary shall set forth (a) as to each
person whom the stockholder proposes to nominate for election or re-election as
a director, (i) the name, age, business address and residence address of the
person, (ii) the principal occupation or employment of the person, (iii) the
class and number of shares of capital stock of the Company which are
beneficially owned by the person, (iv) any other information relating to the
person that is required to be disclosed in solicitations for proxies for
election of directors pursuant to Rule 14a under the Securities Exchange Act of
1934, as amended; and (b) as to the stockholder giving the notice (i) the name
and address, as they appear on the Company's books, of the stockholder and (ii)
the class and number of shares of the Company's stock which are beneficially
owned by the stockholder on the date of such stockholder notice. The Company may
require any proposed nominee to furnish such other information as may be
reasonably required by the Company to determine the eligibility of such proposed
nominee to serve as director of the Company.
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Allergan, Inc.
PART II - OTHER INFORMATION
Item 5. Other Information. (Continued)
Other Business.
As of the date of this Quarterly Report on Form 10-Q, management knows of
no other matters that are expected to be brought before the stockholders at the
Annual Meeting. Pursuant to the Company's Restated Certificate of Incorporation
only such business shall be conducted at an annual meeting of stockholders as is
properly brought before the meeting. For business to be properly brought before
an annual meeting by a stockholder, in addition to any other applicable
requirements, timely notice of the matter must be first given to the Secretary
of the Company. To be timely, written notice must be received by the Secretary
no less than 30 days nor more than 60 days prior to the meeting. If less than 40
days' notice or prior public disclosure of the meeting has been given to
stockholders, then notice of the proposed business matter must be received by
the Secretary not later than ten days after the mailing of notice of the meeting
or such public disclosure. Any notice to the Secretary must include as to each
matter the stockholder proposes to bring before the meeting (a) a brief
description of the proposal desired to be brought before the meeting and the
reason for conducting such business at the annual meeting, (b) the name and
record address of the stockholder proposing such business and any other
stockholders known by such stockholder to be supporting such proposal, (c) the
class and number of shares of the Company which are beneficially owned by the
stockholder on the date of such stockholder notice and by other stockholders
known by such stockholder to be supporting such proposal on the date of such
stockholder notice, and (d) any material interest of the stockholder in such
business.
Item 6. Exhibits and Reports on Form 8-K
- Exhibits
(numbered in accordance with Item 601 of Regulation S-K)
27.1 Financial Data Schedule -- For the quarterly period ended
September 25, 1998
27.2 Financial Data Schedule -- For the quarterly period ended
June 26, 1998
- Reports on Form 8-K. None.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 6, 1998 ALLERGAN, INC.
-----------------------
/s/ Francis R. Tunney, Jr.
--------------------------------------
Francis R. Tunney, Jr.
Principal Financial Officer
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
27.1 Financial Data Schedule -- For the quarterly period ended
September 25, 1998
27.2 Financial Data Schedule -- For the quarterly period ended
June 26, 1998