ITEM 1. BUSINESS.
Metropolitan Realty Corporation (the "Company") is a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Tax Code"). The Company was incorporated under Michigan law on November 13, 1986. In November 1988, the Company issued 4,512,169 shares of common stock in an initial public offering and received net proceeds of $43,200,851.
As a REIT, the Company is required to invest most of its assets in real estate assets, cash and government securities. The Company intends to invest substantially all of its assets in mortgage loans to real estate projects located in southeastern Michigan in the counties of Wayne and Macomb. At December 31, 1994, the Company's total mortgage loan portfolio is invested 74% in projects located in the City of Detroit, 11% in projects located in the County of Macomb, and 15% in projects located in the County of Wayne outside of the City of Detroit.
The Company's mortgage loans include financing for industrial and mixed-use facilities, office buildings, and retail and residential centers. The Company has favored investments that will provide a competitive return and permanent financing for projects which were constructed with union labor. All mortgage loans to date are collateralized by a first lien on real property. At December 31, 1994, the Company's largest loan approximates 10% of its total assets and the carrying value of all mortgage loans approximates 62% of its total assets.
Funds that have not yet been invested in mortgage loans are primarily invested in marketable mortgage-backed securities until needed for the Company's operations or investments in mortgage loans. As of December 31, 1994, approximately 26% of the Company's net assets remained invested in marketable mortgage-backed securities. The Company believes that its mortgage loans and marketable mortgage-backed securities will provide a competitive economic return to its shareholders while protecting their capital.
The Company continues to evaluate real estate projects and intends to liquidate its remaining marketable securities to make additional mortgage loans to qualified projects located in southeastern Michigan. Although the Company has competed and is competing with financial institutions such as banks, insurance companies, savings and loan associations, mortgage bankers, pension funds and other real estate investment vehicles with investment objectives similar to those of the Company, the Company believes it has targeted a market niche which is underserved.
During 1994, the Company had one full-time administrative employee. The day-to-day operations of the Company are administered by the Executive Vice President who serves on a part- time basis under the direction of the President and the Executive Committee. Members of the Board of Directors serve without pay as officers and committee members and devote a considerable amount of time to the administration and operations of the Company.
ITEM 2.

ITEM 2. PROPERTIES.
The Company's executive offices are located at Suite 748, 535 Griswold, Detroit, Michigan 48226. The Company rents this office space under a month-to-month lease which provides for a monthly rental of approximately $1,426, which is comparable to prevailing rentals for similar facilities. The Company's offices are suitable and adequate for the current operations of the Company.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS.
There are no material legal proceedings pending or, to the knowledge of the Company, threatened, to which the Company is a party or by which its property may be bound.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's shareholders since the Annual Meeting of Shareholders held June 10, 1994.
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is traded on the American Stock Exchange (the "Exchange"). The Company is listed for trading on the Exchange under the symbol "MET". The following table sets forth the high and low sales prices on the Exchange and dividends paid per share during each quarter of the years ended December 31, 1994 and 1993:
As of March 15, 1995, 4,532,169 shares of common stock were issued and outstanding and the number of shareholders of record was 53.
The Company intends to continue to pay cash dividends to shareholders on a quarterly basis in aggregate amounts sufficient to distribute at least 95% of its "real estate investment trust taxable income" in order to maintain its status as a REIT under the Tax Code. The Company will continue to furnish annually to each shareholder a statement setting forth distributions paid during the preceding year and their characterization as ordinary income, return of capital or capital gain.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected financial data as of December 31, 1994, 1993, 1992, 1991 and 1990 and for the years then ended:
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Results of Operations
During fiscal year 1994, one of the Company's mortgage loans with an outstanding principal balance of $3,300,000 matured and was repaid. In addition, one of the Company's mortgage loans with an outstanding principal balance of approximately $1,200,000 was prepaid with prepayment penalties approximating $114,000. The Company's net investment in mortgage loans to real estate projects represented 62% of its assets, or $25,393,979, at December 31, 1994 and 71% of its assets, or $29,587,662, at December 31, 1993. The yields on the Company's outstanding mortgage loans range from 8% to 12.25%. The weighted average yield of earning mortgage loans is 10.58% at December 31, 1994, as compared to 10.33% at December 31, 1993. The weighted average term of outstanding mortgage loans is 9.1 years. At December 31, 1994, the Company had no outstanding loan commitments. The amount of foreclosed property held for sale, net of valuation allowance, represents 2% of the Company's assets, or $900,000, at December 31, 1994 and 5% of its assets, or $1,960,000, at December 31, 1993. The amount of marketable mortgage-backed (Federal National Mortgage Association and Federal Home Loan Mortgage Corporation) securities held by the Company during 1994 averaged $8,164,000 and earned an average yield of 4.6%, as compared to average marketable mortgage-backed security holdings of $8,101,000 which earned an average yield of 5.1% during 1993. The average yield on all performing interest earning assets was 8.9% for the year ended December 31, 1994 and 9.1% for the year ended December 31, 1993.
Investment income from marketable mortgage-backed securities decreased $51,851 to $370,725 for the year ended December 31, 1994 from $422,576 for the year ended December 31, 1993. Of the decrease, $9,508 was the result of a decrease in the average amount invested in marketable securities and $42,343 was the result of a decrease in the average yield earned.
Investment income from mortgage loans decreased $40,646 to $3,073,230 for the year ended December 31, 1994 from $3,113,876 for the year ended December 31, 1993. Of the decrease, $210,745 was the result of a decrease in average mortgage loans offset by a $45,326 increase in the stated average yield on all mortgage loans, and a $124,773 increase in interest income from loans which were non-earning at December 31, 1993.
Operating expenses increased 25% to $1,270,478 for the year ended December 31, 1994 from $1,015,087 for the year ended December 31, 1993. The majority of this increase is due to a $957,717 increase in net loss from foreclosed property held for sale, which was largely attributable to an increase in the provision for valuation allowance, offset by a $461,500 decrease in the allowance for loan losses. Other operating expenses decreased $240,826 to $436,562 for the year ended December 31, 1994 from $677,388 for the year ended December 31, 1993. This decrease is due to a $147,363 reduction in general and administrative expenses, primarily as a result of decreased professional service fees, and a $93,463 reduction in amortization of organization costs, which became fully amortized in 1993.
Two mortgage loans with net carrying values aggregating $3,709,891 at December 31, 1994, collateralized by shopping centers in Detroit, Michigan and personal guarantees aggregating approximately $498,000, were in default at December 31, 1991 for nonpayment of principal, interest and late charges. The mortgagors are affiliated through a common borrower. In 1991, the Company established a loan loss reserve to reduce the carrying value of these loans to their estimated net realizable value. During 1992, the Company entered into loan modification agreements with these borrowers, pursuant to which the borrowers agreed to bring the loans current by December 31, 1992 and agreed to have the deeds to the properties placed in escrow. The Company also exercised its right to receive rental payments directly from the tenants. All events of default were cured on February 1, 1993 and the loans are now current. The Company continues to exercise its right to receive assigned rents directly from the tenants and the deeds to the properties remain in escrow. Both of these notes are classified as earning at December 31, 1994. An allowance has been provided to reduce the carrying value of these loans to their estimated net realizable value.
A mortgage loan with a carrying amount of $1,369,349 at December 31, 1994, collateralized by an apartment building located in Detroit, Michigan, was in default at December 31, 1992 for nonpayment of principal, interest and late charges. During 1993, the Company entered into a loan modification agreement with the borrower which cured the events of default. Pursuant to this agreement the interest rate has been reduced, effective April 1, 1993, from 11.125% to 8% through April 1, 1995 and to 9.5% thereafter until maturity. This agreement also deferred payments until November 1993, when monthly installments of interest only commenced and continued through April 1994. Commencing May 1994, varying installments of principal and interest are due monthly until maturity, at which time the remaining unpaid principal and accrued interest is due. This agreement also includes personal guarantees aggregating approximately $570,000 at December 31, 1994. This loan is now current and is classified as earning at December 31, 1994. An allowance has been provided to reduce the carrying amount of the loan to its estimated net realizable value. The Company also has three additional loans, which are carried at an aggregate value of approximately $1.9 million at December 31, 1994, to entities affiliated with this borrower through common ownership which are all current and are classified as mortgage notes, earning at December 31, 1994.
Management reviews, on a regular basis, factors which may adversely affect its mortgage loans, including occupancy levels, rental rates and property values. It is possible that economic conditions in southeastern Michigan and the nation in general may adversely affect certain of the Company's other loans. The Company believes that the allowance for loan losses of $1,000,000 at December 31, 1994 is adequate to reflect mortgage loans at their estimated net realizable value.
At December 23, 1992, the Company obtained an apartment building located in Detroit, Michigan through a foreclosure sale. This property was the collateral for a construction loan under which the borrower defaulted during 1992. Under Michigan law, title passed to the Company on June 23, 1993 at the expiration of a six month redemption period. The carrying value of the property was written down to its estimated fair value at the time of foreclosure of $2,100,000, which resulted in a $639,000 writeoff against the allowance for loan losses. The fair value was determined based upon a July 1992 independent appraisal of the property. A valuation allowance of $140,000 was also established at the time of foreclosure for the estimated costs to sell the property. At December 31, 1994, the carrying value of the property has been reduced to $900,000 to reflect an updated property valuation based on the results of the Company's marketing efforts to locate a buyer for the property. The Company intends to continue to actively market this property for sale during 1995.
During 1994, the Company reached settlements with the guarantors of the foreclosed loan aggregating $320,000. These settlements are payable over four to eight years, with interest rates ranging from non-interest bearing to 7.5%. Income from settlements is recorded as miscellaneous income when received and totalled $43,000 for the year ended December 31, 1994. The property's operating income and expenses from the date of foreclosure are reflected in the statement of operations as net loss from foreclosed property held for sale and total $1,295,416 for the year ended December 31, 1994.
Net investment income decreased by 4% to $2,587,550, or $.57 per share, for the year ended December 31, 1994 from $2,700,898, or $.60 per share, for the year ended December 31, 1993. The decrease is attributable to a $957,717 increase in net loss from foreclosed property held for sale, offset by a $461,500 reduction in the allowance for loan losses, a $147,363 reduction of general and administrative costs, a $93,463 reduction in amortization of organization costs, and a $142,043 increase in total income.
Investment income from FNMA marketable securities decreased $245,920 to $422,576 for the year ended December 31, 1993 from $668,496 for the year ended December 31, 1992. Of the decrease, $134,519 was the result of a decrease in the average amount invested in marketable securities and $111,401 was the result of a decrease in the average yield earned.
Investment income from mortgage loans increased $105,192 to $3,113,876 for the year ended December 31, 1993 from $3,008,684 for the year ended December 31, 1992. Of the increase, $354,411 was the result of an increase in average mortgage loans offset by a $38,918 decrease in the stated average yield on all mortgage loans, a $54,381 decrease in interest income due to property received in foreclosure and a $155,920 decrease in interest income due to the Company's decision to discontinue accruing interest on certain loans.
Operating expenses decreased 41% to $1,015,087 for the year ended December 31, 1993 from $1,716,288 for the year ended December 31, 1992. The majority of this decrease is due to a $900,000 decrease in the allowance for loan losses offset by a $337,699 net loss from foreclosed property held for sale. Other operating expenses, consisting primarily of general and administrative expenses, decreased $138,900 as a result of decreased professional fees.
Net investment income increased by approximately 28% to $2,700,898, or $.60 per share, for the year ended December 31, 1993 from $2,112,662, or $.47 per share, for the year ended December 31, 1992. The increase in net investment income from 1992 to 1993 is primarily attributable to a $900,000 decrease in the allowance for loan losses expense offset by a $112,965 decline in total income.
Investment income from marketable securities decreased $480,229 to $668,496 for the year ended December 31, 1992 from $1,148,725 for the year ended December 31, 1991. Of the decrease, $275,932 was the result of a decrease in the average amount invested in marketable securities and $204,297 was the result of a decrease in the average yield earned.
Investment income from mortgage loans increased $341,369 to $3,008,684 for the year ended December 31, 1992 from $2,667,315 for the year ended December 31, 1991. Of the increase, $390,501 was the result of an increase in average investment in mortgage loans and $50,074 was the result of an increase in average yield offset by a $99,206 decrease in average yield due to the Company's decision to discontinue accruing interest on loans in default.
During 1992, the Company increased its allowance for loan losses by $900,000. Operating expenses other than the allowance for loan losses decreased 3.7% from $846,733 for the year ended December 31, 1991 to $816,288 for the year ended December 31, 1992. Operating expenses other than the allowance for loan losses during both 1992 and 1991 consisted primarily of general and administrative expenses.
Net investment income increased by approximately 9% to $2,112,662, or $.47 per share, for the year ended December 31, 1992 from $1,934,853, or $.43 per share, for the year ended December 31, 1991. The increase in net investment income from 1991 to 1992 was primarily attributable to a $440,500 decrease in the allowance for loan losses expense offset by a $306,236 decline in total income.
The Company intends to continue to invest its available funds at competitive market rates in mortgage loans to real estate projects located in southeastern Michigan. Cycles in the local and national economy have affected and could continue to affect the Company's ability to invest its remaining funds in mortgage loans and the yields attainable on such investments. Decreases in market interest rates may result in lower returns on future mortgage loans than on the mortgage loans closed to date. The Company expects to have the balance of its available assets fully invested in mortgage loans by the end of 1995.
Liquidity and Capital Resources
Funds that have not yet been invested in mortgage loans are primarily invested in marketable mortgage-backed securities until needed for the Company's operations or investments in mortgage loans. Income and principal received with respect to the Company's investments in mortgage loans are also invested in marketable mortgage backed securities pending distribution to shareholders in the form of dividends or reinvestment in mortgage loans. At December 31, 1994, the Company had $26,393,979 invested in mortgage loans, $2,034,134 invested in real estate owned, $10,783,048 invested in marketable mortgage-backed securities and approximately $3,298,886 invested in money market funds.
At December 31, 1994, the Company had no outstanding loan commitments. The Company anticipates that its sources of cash are more than adequate to meet its liquidity needs.
On March 14, 1995, the Company's Board of Directors announced its preliminary approval for the private placement of asset-backed bonds through a wholly owned subsidiary to be formed. The Company expects to generate proceeds of approximately $50 million. At December 31, 1994, $131,000 of professional fees have been incurred and deferred in connection with this transaction.
Net cash generated by operating activities during 1994 aggregated $2,957,011 including $3,087,188 in net investment income adjusted for noncash depreciation and amortization expense, the valuation provisions for mortgage loans and foreclosed property held for sale, and amortization of net loan origination fees.
Net cash provided by investing activities during 1994 aggregated $1,090,650 and consisted primarily of loan repayments and collections of principal from marketable securities offset by loan disbursements and purchases of marketable securities. The Company collected $4,876,191 of loan repayments and net commitment fees and purchased $4,767,232 of marketable securities with the proceeds. Collections of principal from marketable securities totalled $1,093,691. Loan disbursements of $150,000 represent a final disbursement to a current borrower.
Financing activities in 1994 consisted of dividend payments to shareholders of $2,855,266 which represented $.63 per outstanding share.
The Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Debt and Equity Securities" (SFAS 115), on January 1, 1994. Under SFAS No. 115, marketable securities available for sale are carried at market value and unrealized gains and losses are included in a separate component of shareholders' equity. At December 31, 1994, shareholders' equity includes net unrealized holding losses on marketable securities of $356,949. In accordance with SFAS No. 115, prior period financial statements have not been restated to reflect the change in accounting principle.
The Financial Accounting Standards Board ("FASB") has issued Statement of Financial Accounting Standards No. 107 ("SFAS 107"), "Disclosures about Fair Value of Financial Instruments," and SFAS 114, "Accounting by Creditors for Impairment of a Loan", which was amended by SFAS 118, "Accounting by Creditors for Impairment of Loan Income Recognition and Disclosures". These pronouncements require the disclosure of the fair value of financial instruments along with the valuation method and significant assumptions used, and the measurement of the impairment of a loan based on the present value of expected future cash flows discounted at the loan's effective interest rate, respectively. The FASB requires adoption of these pronouncements in 1995. Based on current information available, management does not believe these pronouncements will have a significant impact on the Company's financial statements.
The Company's policy is to declare and pay cash dividends on a quarterly basis. The Company declared and paid dividends aggregating $.63 per share during the year ended December 31, 1994, compared to $.54 per share during the year ended December 31, 1993 and $.70 per share during the year ended December 31, 1992. The Company declared a dividend of $.13 per share of common stock to its shareholders of record on March 21, 1995 which will be paid on March 31, 1995 from the Company's money market funds.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements of the Company, consisting of balance sheet, statement of operations, statement of shareholders' equity, statement of cash flows and the notes to financial statements, are set forth in the separate financial section which begins on page and is incorporated herein by reference.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
There have been no changes in the Company's independent public accountants during the past two fiscal years and the Company does not disagree with such accountants on any matter of accounting principles, practices or financial statement disclosure.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item 10 has been omitted as the Company intends to file with the Securities and Exchange Commission (the "SEC") not later than 120 days after the Company's year ended December 31, 1994, pursuant to Regulation 14A, a proxy statement which will relate to the election of directors and other matters. The information which will be included in such definitive proxy statement under the captions "Election of Directors" and "Executive Officers and Executive Compensation" is incorporated herein by reference.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item 11 has been omitted as the Company intends to file with the SEC not later than 120 days after the Company's year ended December 31, 1994, pursuant to Regulation 14A, a proxy statement which will relate to the election of directors and other matters. The information which will be included in such definitive proxy statement under the caption "Executive Officers and Executive Compensation" is incorporated herein by reference.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item 12 has been omitted as the Company intends to file with the SEC not later than 120 days after the Company's year ended December 31, 1994, pursuant to Regulation 14A, a proxy statement which will relate to the election of directors and other matters. The information which will be included in such definitive proxy statement under the caption "Principal Shareholders" is incorporated herein by reference.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item 13 has been omitted as the Company intends to file with the SEC not later than 120 days after the Company's year ended December 31, 1994, pursuant to Regulation 14A, a proxy statement which will relate to the election of directors and other matters. The information which will be included in such definitive proxy statement under the caption "Certain Relationships and Related Transactions" is incorporated herein by reference.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
a. Documents Filed as part of Report. The following documents are filed as part of this Report.
1. A list of the financial statements required to be filed as part of this Form 10-K are shown in the "Index to the Financial Statements and Schedule" filed herewith.
2. The financial statement schedule required to be filed as a part of this Form 10-K is shown in the "Index to the Financial Statements and Schedule" filed herewith.
3. A list of the exhibits required by Item 601 of the Regulation S-K to be filed as a part of this Form 10-K are shown in the "Index to Exhibits" filed herewith.
b. Reports on Form 8-K. The Company did not file any reports on Form 8-K during the last quarter of 1994.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: March 25, 1995 METROPOLITAN REALTY CORPORATION
By: /s/ Jay B. Rising ---------------------------------- Jay B. Rising, President (Principal Executive Officer and Principal Financial Officer)
And By: /s/ Russell P. Flynn ----------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ----
/s/ Jay B. Rising Attorney-In-Fact March 25, 1995 -------------------------- *Jay B. Rising
* Director March 25, 1995 -------------------------- Daniel L. Boone
* Director March 25, 1995 -------------------------- David M. Diegel
* Director March 25, 1995 -------------------------- Wayne S. Doran
* Director March 25, 1995 -------------------------- Russell P. Flynn
* Director March 25, 1995 -------------------------- David B. Hanson
* Director March 25, 1995 -------------------------- Kenneth L. Hollowell
* Director March 25, 1995 -------------------------- Robert G. Jackson
* Director March 25, 1995 -------------------------- Richard P. Kughn
* Director March 25, 1995 -------------------------- F. Thomas Lewand
* Director March 25, 1995 -------------------------- Ernest Lofton
* Director March 25, 1995 -------------------------- Daniel F. McNamara
* Director March 25, 1995 -------------------------- Robert H. Naftaly
* Director March 25, 1995 -------------------------- Timothy L. Nichols
Director March 25, 1995 -------------------------- Joel A. Schwartz
* Director March 25, 1995 -------------------------- Oliver H. Smith
Signature Title Date --------- ----- ----
* Director March 25, 1995 -------------------------- Frank D. Stella
* Director March 25, 1995 -------------------------- Marc Stepp
Director March 25, 1995 -------------------------- James M. Tervo
* Director March 25, 1995 -------------------------- Samuel H. Thomas, Jr.
* Director March 25, 1995 -------------------------- R. Douglas Trezise
* Director March 25, 1995 -------------------------- Ronald C. Yee
INDEX TO THE FINANCIAL STATEMENTS AND SCHEDULE ____________
PAGES
REPORT OF INDEPENDENT ACCOUNTANTS
BALANCE SHEET, DECEMBER 31, 1994 AND 1993
STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
STATEMENT OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
NOTES TO FINANCIAL STATEMENTS -
FINANCIAL STATEMENT SCHEDULE:
Schedule II - Valuation and Qualifying Accounts
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Metropolitan Realty Corporation:
We have audited the financial statements and the financial statement schedule of Metropolitan Realty Corporation listed on page of this Form 10-K. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule 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 financial statements referred to above present fairly, in all material respects, the financial position of Metropolitan Realty Corporation as of December 31, 1994 and 1993, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
Coopers & Lybrand L.L.P.
Detroit, Michigan March 10, 1995
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS ____________
1. ORGANIZATION:
Metropolitan Realty Corporation (the "Company"), incorporated November 13, 1986, was organized to qualify as a real estate investment trust under the provisions of the Internal Revenue Code.
2. ACCOUNTING POLICIES:
Cash Equivalents
The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.
Marketable Securities
The Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS No. 115), effective January 1, 1994. Under SFAS No. 115, marketable securities available for sale are carried at market value and unrealized gains and losses are included in a separate component of shareholders' equity. Shareholders' equity at December 31, 1994 includes net unrealized holding losses on marketable securities of $356,949. In accordance with the provisions of SFAS No. 115, prior period financial statements have not been restated to reflect the change in accounting principle. The cumulative effect of adopting the provisions of SFAS No. 115 was not significant. Prior to January 1, 1994, marketable securities were carried at the lower of cost or market. Marketable securities at December 31, 1994 and 1993 consist of Federal National Mortgage Association and Federal Home Loan Mortgage Corporation mortgage backed securities. Realized gains or losses on sales of securities are determined based upon specific identification. The realized net loss on marketable securities, included in investment income in the accompanying statement of operations, resulted from called securities and aggregated $16,557 for the year ended December 31, 1994 and $24,223 for the year ended December 31, 1993. At December 31, 1994, all marketable securities are considered available for sale.
Allowance for Loan Losses
The Company provides for possible losses on its portfolio of mortgage notes receivable based on an evaluation of each mortgage note. In determining the allowance for possible losses, the Company has considered various indicators of value, including market evaluations of the underlying collateral, the cost of money, operating cash flow from the property during the projected holding period and expected capitalization rates applied to the stabilized net operating income of the specified property.
Continued
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
2. ACCOUNTING POLICIES, continued:
The allowance is based upon management's estimates and ultimate losses may vary from the current estimates. These estimates are periodically reviewed, and as adjustments become necessary, they are reported in the statement of operations in the period in which they become known.
Foreclosed Property Held for Sale
Property acquired through loan foreclosure is initially recorded at the lesser of mortgage loan balance or fair value at the date of foreclosure. Losses, if any, attributable to the excess of the recorded investment including accrued interest over fair value are charged to the allowance for loan losses on mortgage loans at the time of foreclosure. A valuation allowance is also established at the time of foreclosure for the estimated costs to sell the property as the Company is dependent on the liquidation of the property for the recovery of its investment in foreclosed real estate. Subsequent to foreclosure, the property is carried at the lower of cost or fair value less estimated costs to sell. The property's operating income and expenses from the date of foreclosure are reflected in the statement of operations. Depreciation of the property commences one year from the date of foreclosure. Income from guarantor settlements is recognized when received.
Organization Costs
Certain costs related to the organization of the Company were capitalized at cost and amortized on a straight-line basis over 60 months. Organization costs became fully amortized in fiscal 1993.
Income Taxes
The Company intends to operate at all times to qualify as a real estate investment trust under the provisions of the Internal Revenue Code. In general, each year qualification is met, income is not subject to federal income tax at the Company level to the extent distributed to shareholders.
Revenue Recognition
Loan origination fees received from the borrower, in excess of loan origination costs paid, are amortized to interest income using the effective interest method over the life of the mortgage loan.
Continued
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
2. ACCOUNTING POLICIES, continued:
Interest income is accrued when earned. The Company discontinues the accrual of interest income when circumstances exist which cause the collection of interest to be doubtful. The determination to discontinue accruing interest is made after a review by the Company's management of all relevant facts, including delinquency of principal and/or interest, and financial stability of the borrower. Loans classified as nonearning are loans on which the accrual of interest has been discontinued.
Other
Certain prior year accounts have been reclassified to conform with current year presentations.
Continued
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
3. MORTGAGE NOTES RECEIVABLE:
Mortgage notes receivable as of dates indicated are summarized as follows:
Continued
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
3. MORTGAGE NOTES RECEIVABLE, Continued:
Continued
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
3. MORTGAGE NOTES RECEIVABLE, Continued:
Continued
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
3. MORTGAGE NOTES RECEIVABLE, Continued:
Continued
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
3. MORTGAGE NOTES RECEIVABLE, Continued:
Continued
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
3. MORTGAGE NOTES RECEIVABLE, Continued:
Continued
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
3. MORTGAGE NOTES RECEIVABLE, Continued:
Continued
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
3. MORTGAGE NOTES RECEIVABLE, continued:
A reconciliation of the carrying value of mortgage notes receivable for the years ended December 31, 1994, 1993 and 1992 is as follows:
During the year ended December 31, 1994, the Company earned approximately $395,000 or 10.2% of its total income on one mortgage note with a carrying value of approximately $4,238,000.
Two mortgage notes carried at an aggregate carrying value of approximately $3,700,000 and four mortgage notes carried at an aggregate carrying value of approximately $3,200,000 at December 31, 1994 made with entities affiliated through common ownership earned the Company $448,941 and $321,079, respectively, during the year ended December 31, 1994.
Continued
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
3. MORTGAGE NOTES RECEIVABLE, continued:
Two mortgage loans with net carrying values aggregating $3,709,891 at December 31, 1994, collateralized by shopping centers in Detroit, Michigan and personal guarantees aggregating approximately $498,000, were in default at December 31, 1991 for nonpayment of principal, interest and late charges. The mortgagors are affiliated through a common borrower. In 1991, the Company established a loan loss reserve to reduce the carrying value of these loans to their estimated net realizable value. During 1992, the Company entered into loan modification agreements with these borrowers, pursuant to which the borrowers agreed to bring the loans current by December 31, 1992 and agreed to have the deeds to the properties placed in escrow. The Company also exercised its right to receive rental payments directly from the tenants. All events of default were cured on February 1, 1993 and the loans are now current. The Company continues to exercise its right to receive assigned rents directly from the tenants and the deeds to the properties remain in escrow. Both of these notes are classified as earning at December 31, 1994. An allowance has been provided to reduce the carrying value of these loans to their estimated net realizable value.
A mortgage loan with a carrying amount of $1,369,349 at December 31, 1994, collateralized by an apartment building located in Detroit, Michigan, was in default at December 31, 1992 for nonpayment of principal, interest and late charges. During 1993, the Company entered into a loan modification agreement with the borrower which cured the events of default. Pursuant to this agreement the interest rate has been reduced, effective April 1, 1993, from 11.125% to 8% through April 1, 1995 and to 9.5% thereafter until maturity. This agreement also deferred payments until November 1993, when monthly installments of interest only commenced and continued through April 1994. Commencing May 1994, varying installments of principal and interest are due monthly until maturity, at which time the remaining unpaid principal and accrued interest is due. This agreement also includes personal guarantees aggregating approximately $570,000 at December 31, 1994. This loan is now current and is classified as earning at December 31, 1994. An allowance has been provided to reduce the carrying amount of the loan to its estimated net realizable value. The Company also has three additional loans, which are carried at an aggregate value of approximately $1.9 million at December 31, 1994, to entities affiliated with this borrower through common ownership which are all current and are classified as mortgage notes, earning at December 31, 1994.
The Company evaluates its portfolio of mortgage loans on an individual basis, comparing the amount at which the investment is carried to its estimated net realizable value. In making its evaluations, the Company has assumed that it will be able to acquire property collateralizing mortgage loans by foreclosure, if deemed appropriate, and hold and dispose of such assets and real estate currently owned in the ordinary course of business to maximize the return to the Company. The evaluations and related assumptions are dependent upon current estimates of future operations, proceeds, costs, events and general market and economic conditions all of which are influenced by many unpredictable factors. Accordingly, the ultimate realizations of the Company's investments, including future income, may differ from amounts presently estimated. The Company believes that the allowance for loan losses of $1,000,000 at December 31, 1994 is adequate to properly reflect the portfolio of mortgage loans at estimated net realizable value.
Continued
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
4. REAL ESTATE OWNED:
At December 23, 1992, the Company obtained an apartment building located in Detroit, Michigan through a foreclosure sale. This property was the collateral for a construction loan under which the borrower defaulted during 1992. Under Michigan law, title passed to the Company on June 23, 1993, at the expiration of a six month redemption period. The carrying value of the property was written down to its estimated fair value at the time of foreclosure of $2,100,000, which resulted in a $639,000 writeoff against the allowance for loan losses. The fair value was determined based upon a July 1992 independent appraisal. A valuation allowance of $140,000 was also established at the time of foreclosure for the estimated costs to sell the property. At December 31, 1994, the carrying value of the property has been reduced to $900,000 to reflect an updated property valuation based on the results of the Company's marketing efforts to locate a buyer for the property.
During 1994, the Company reached settlements with the guarantors of the foreclosed loan aggregating $320,000. These settlements are payable over four to eight years, with interest rates ranging from non-interest bearing to 7.5%. The settlements bear interest at an average rate of 6%. Income from the settlements is recognized by the Company when received and is recorded as miscellaneous income on the statement of operations. Settlement income totalled $43,000 for the year ended December 31, 1994.
The property's operating income and expenses from the date of foreclosure are reflected in the statement of operations. The net loss from foreclosed property held for sale, totalling $1,295,416 for the year ended December 31, 1994 and $337,699 for the year ended December 31, 1993, consisted of the following:
Continued
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
5. FEDERAL INCOME TAX:
A real estate investment trust is not subject to federal income tax on taxable income distributed to its shareholders during its fiscal year and subsequent year, but prior to filing its federal tax return. If, however, the real estate investment trust has retained income within the limits allowed under the federal tax laws, it must pay tax at corporate rates on its undistributed income. Furthermore, if the real estate investment trust fails to distribute, during the fiscal year, an amount equal to 85% of its taxable income for that year, it is subject to a 4% excise tax on the shortfall. The excise tax is not deductible for federal income tax purposes. Income for tax and financial reporting purposes is reconciled as follows:
Continued
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
6. RELATED PARTY TRANSACTIONS:
The Company was involved in various transactions with affiliates as follows:
o One of the Company's legal counselors is also a member of the Company's Board of Directors. Fees for legal services provided by the director's law firm amount to $153,296, of which $70,076 are deferred by the Company (see Note 8), $57,599 and $186,285 for the years ended December 31, 1994, 1993 and 1992, respectively. Accrued legal fees of $22,524 and $3,087 are included in accounts payable in the accompanying balance sheet at December 31, 1994 and 1993, respectively.
o Fees aggregating $19,831, $19,261 and $23,176 for the years ended December 31, 1994, 1993 and 1992, respectively, were earned by a shareholder of the Company for providing various investment and other services to the Company.
o Consulting fees under a contractual agreement aggregating $42,400, $40,000 and $56,442 were earned by an officer of the Company in 1994, 1993 and 1992 respectively. Accrued consulting fees of $1,667 are included in accounts payable in the accompanying balance sheet at December 31, 1993.
7. DIVIDEND DECLARATION:
Under pertinent provisions of the Internal Revenue Code, a real estate investment trust may consider a dividend declared in a subsequent year to be a distribution of income of the immediately prior year and thus reduce income subject to income tax. On March 10, 1995, the Board of Directors of the Company declared a cash dividend of $.13 per share of common stock to its shareholders of record on March 21, 1995, payable on March 31, 1995. Of this dividend, $.06 will be paid from income earned by the Company in 1994. This dividend will be taxable to shareholders as ordinary income.
8. SUBSEQUENT EVENT:
On March 14, 1995, the Company's Board of Directors announced its preliminary approval for the private placement of asset-backed bonds through a wholly-owned subsidiary to be formed. The Company expects to generate proceeds of approximately $50 million. At December 31, 1994 $131,000 of professional fees have been incurred and deferred in connection with this transaction.
Continued
METROPOLITAN REALTY CORPORATION
NOTES TO FINANCIAL STATEMENTS, Continued
9. INTERIM FINANCIAL INFORMATION (unaudited):
Continued
Continued
INDEX TO EXHIBITS
Page Exhibit Incorporated Herein Filed Number No. Description by Reference to Herewith Herein ------------------------------------------------------------------------------- 3.1 Second Restated Exhibit 3.1 to the Articles of Company's Form 10-K for Incorporation the fiscal year ended December 31, 1988 ------------------------------------------------------------------------------- 3.2 Amendments to ByLaws Exhibit 3.2 to 1991 10-K adopted May 17, 1991 ------------------------------------------------------------------------------- 3.3 Restated ByLaws adopted Exhibit 3.3 to 1991 10-K July 19, 1989, as amended October 27, 1989, May 15, 1990 and May 17, 1991 ------------------------------------------------------------------------------- 10.1 Investment Management Exhibit 10.2 to 1988 Service Agreement 10-K dated February 15, 1989 between the Company and NBD Bank, N.A. (formerly National Bank of Detroit) ------------------------------------------------------------------------------- 10.2 Agency and Consulting Exhibit 10.2 to 1990 Agreement dated as of 10-K November 15, 1989 between the Company and Walters & Associates, Inc. ------------------------------------------------------------------------------- 10.3 Letter agreement dated Exhibit 10.1 to 1990 July 1990 between the 10-K Company and Acquest Capital Management, Inc. ------------------------------------------------------------------------------- 10.4 Buhl Building Lease Exhibit 10.4 to 1991 dated April 25, 1991 10-K between the Company and Buhl Realty Company ------------------------------------------------------------------------------- 10.5 Agency and Consulting Exhibit 10.5 to 1992 Agreement dated as of 10-K February 4, 1993 between the Company and Mattar Consulting Services, Inc. ------------------------------------------------------------------------------- 10.6 First lease amendment Exhibit 10.6 to 1992 to Buhl Building Lease 10-K dated May 14, 1992 between the Company and Buhl Realty Company ------------------------------------------------------------------------------- 10.7 Letter agreement dated Exhibit 10.7 to 1993 March 8, 1994 between 10-K the Company and Mattar Consulting Services, Inc. ------------------------------------------------------------------------------- 10.8 Second lease amendment Exhibit 10.8 to 1993 to Buhl Building Lease 10-K dated May 14, 1992 between the Company and Buhl Realty Company ------------------------------------------------------------------------------- 10.9 Minutes of Executive Committee of the Board of Directors meeting dated X E-2 March 3, 1995 modifying Agency and Consulting Agreement dated as of February 4, 1993 between the Company and Mattar Consulting Services, Inc. ------------------------------------------------------------------------------- 25 Powers of Attorney X E-3 -------------------------------------------------------------------------------
E-1


ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
Allergan, Inc. ("Allergan" or the "Company") is a leading provider of specialty therapeutic eye care products throughout the world with niche pharmaceutical products in skin care and neural care. Its worldwide consolidated revenues are principally generated by prescription and non-prescription pharmaceutical products in the areas of ophthalmology and skin care, intraocular lenses and other ophthalmic surgical products, and contact lens care products.
Allergan was incorporated in California in 1948 and reincorporated in Delaware in 1977. In 1980, the Company was acquired by SmithKline Beckman Corporation (then known as "SmithKline Corporation" and herein "SmithKline"). The Company operated as a wholly-owned subsidiary of SmithKline from 1980 until 1989 when Allergan again became a stand-alone public company through a spin-off distribution by SmithKline.
During the fourth quarter of 1991, the Company divested its computer-based ophthalmic diagnostic instrument business, Allergan Humphrey. In November 1992, the Company sold its contact lens business in North and South America. In August 1993, the Company sold its contact lens business outside of the Americas.
ALLERGAN BUSINESSES
The following table sets forth, for the periods indicated, the net sales from continuing operations for each of the Company's specialty therapeutics businesses and product lines:
The foregoing table does not include sales of discontinued operations. See Note 11 of Notes to Consolidated Financial Statements on page 41 of the 1994 Annual Report for further information concerning foreign and domestic operations.
Ophthalmic Pharmaceuticals Business
Allergan develops, manufactures and markets a broad range of prescription and non-prescription products designed to treat diseases and disorders of the eye, including glaucoma,
inflammation, infection and allergy. In addition, the specialty over-the-counter product line consists of products designed to treat ocular surface disease, including artificial tears and ocular decongestants.
The largest segment of the market for ophthalmic prescription drugs is for the treatment of glaucoma, a sight-threatening disease characterized by elevated intraocular pressure. Allergan's largest selling pharmaceutical product is Betagan(R) ophthalmic solution, a beta blocker used in the initial treatment of glaucoma. Allergan also markets and sells Propine(R) ophthalmic solution, which is used alone or in combination with other drugs when initial drug therapy for glaucoma becomes inadequate. Patent protection for both products expired in the United States in 1991. In 1993, in anticipation of generic competition, Allergan entered into an agreement with Schein Pharmaceutical, Inc. ("Schein") whereby Schein will market generic versions of certain Allergan products that are off-patent in the United States. During 1994, Bausch & Lomb and Alcon Laboratories separately announced receipt of marketing approval from the FDA for a generic version of Betagan(R) and Propine(R), respectively. In each instance, Schein began marketing a generic version of the corresponding Allergan product immediately after each announcement.
The Company also markets several leading ophthalmic products to treat ocular inflammation and infection. Allergan holds a major share of the U.S. market for ophthalmic corticosteroids. Pred Forte(R) and FML(R) Liquifilm(R) suspensions are leading products in the ocular corticosteroid inflammation market. Allergan's major products in the anti-infective market are Blephamide(R) suspension, a topical anti-inflammatory and anti-infective, Polytrim(R) solution, a synthetic antimicrobial which treats surface ocular bacterial infections and Ocuflox(R) solution, a fluroquinolone which treats bacterial conjunctivitis. Ocuflox(R) solution was first marketed in the U.S. in August 1993. It is also marketed in many countries internationally and is awaiting approval in Spain and Canada.
In 1993, Allergan entered into a strategic alliance with Fisons Corporation to co-promote certain ophthalmic pharmaceuticals in the United States. The alliance currently involves Allergan's Acular(R)1 ophthalmic solution for the relief of itch associated with seasonal allergic conjunctivitis. Later, under the terms of the alliance, co-promotion is planned to expand to include Fisons' Opticrom(R)2 ophthalmic solution and nedocromil sodium ophthalmic solution.
Ophthalmic Surgical Business
Allergan's surgical business (known as Allergan Medical Optics or "AMO") develops, manufactures and markets intraocular lenses ("IOLs"), surgically related pharmaceuticals, phacoemulsification equipment and other ophthalmic surgical products.
The largest segment of the surgical market is for the treatment of cataracts. Cataracts are a condition, usually age related, in which the natural lens of the eye becomes progressively clouded. This clouding obstructs the passage of light and can lead to blindness. Most patients blinded by cataracts can be surgically cured by removing the clouded lens and replacing it with an IOL. AMO currently offers a full line of products used in the performance of cataract surgery, including rigid multi-piece, single-piece and small incision design IOLs. Sales of all models of the Company's IOLs represented 9.7%, 9.1% and 10% of total Company sales in 1992, 1993 and 1994, respectively. Intraocular lenses marketed by Allergan for small incision cataract surgery __________________________________
1 Acular(R) is a registered trademark, which is licensed from Syntex (U.S.A.) Inc.
2 Opticrom(R) is a registered trademark of Fisons Corporation.
include the AMO(R)Phacoflex(R) small incision IOL, introduced in 1989, the AMO(R)Foldable Phacoflex(R)II SI-30NB(TM) small incision IOL, introduced in April 1993, and the AMO(R)DuraLens(TM) IOL which was introduced in various European countries during 1994. AMO(R)Array(R) multifocal IOL is also available in several European countries including Germany, France and Spain and is currently undergoing clinical trials in the U. S. Sales growth of IOLs in the U.S. has been adversely impacted by price erosion resulting from competitive pressures and government pricing policies.
Small incision IOLs continue to grow in popularity along with increasing use of phacoemulsification, a method of cataract extraction that uses ultrasound waves to break the natural lens into small fragments that can be removed through a hollow needle. Phacoemulsification requires only a 3 to 4 millimeter incision, compared to incisions of up to 12 millimeters for other techniques. Phacoemulsification accounts for more than 80 percent of cataract procedures in the United States. In 1993 Allergan introduced the AMO(R)Prestige(TM) phacoemulsification machine. AMO(R)Prestige(TM) makes small-incision cataract surgery easier than other phacoemulsification machines by using a sophisticated microprocessor that monitors vacuum and fluid in the eye. Allergan also markets AMO(R)Vitrax(R), a viscoelastic used to maintain the anterior chamber and protect endothelial cells during cataract surgery.
In September 1994, Allergan acquired the worldwide IOL business of Ioptex Research Inc., formerly a division of Smith & Nephew. In January 1995, Allergan acquired Optical Micro Systems ("OMS"). OMS develops and manufactures phacoemulsification equipment. These two acquisitions provide the Company with additional IOL and phacoemulsification equipment product offerings and the capability to manufacture phacoemulsification equipment.
Optical Business
The Company has been in the contact lens care market since 1960. It develops, manufactures and markets a broad range of products worldwide for use with every available type of contact lens. These products include disinfecting solutions to destroy harmful microorganisms on the surface of contact lenses; daily cleaners to remove undesirable film and deposits from contact lenses; and enzymatic cleaners to remove protein deposits from contact lenses. The Company offers products that can be used in each of the three disinfecting systems now available: hydrogen peroxide systems, convenient chemical systems and heat systems. UltraCare(R) neutralizer/disinfectant, Allergan's one-step hydrogen peroxide disinfection system, was approved by the FDA in March 1992 for general marketing in the United States. In the third quarter of 1994, Allergan received U.S. marketing approval for UltraCare(R) with a new color indicator. The new system, which had been previously launched in Germany, relies on a Vitamin B-12 color indicator which turns the solution pink to indicate complete neutralization of the peroxide. Allergan's Complete(R) brand Multi-Purpose convenient chemical disinfection system for soft contact lenses was launched in Australia, Canada, China Germany and Italy during 1993 and in the United States, the United Kingdom and Mexico in 1994.
Sales of the Company's proprietary enzymatic cleaners represented 11%, 11% and 10% of total Company sales in 1992, 1993 and 1994, respectively, and sales of the Company's hydrogen peroxide disinfection systems represented 13%, 14% and 14% of total Company sales in 1992, 1993 and 1994, respectively.
Skin Care Business
Building upon its strength in marketing to medical specialties and taking advantage of synergies in research and development, Allergan's skin care business (known as Allergan
Herbert) develops, manufactures and markets a line of therapeutic skin care products primarily to dermatologists in the United States. Its product line includes Gris-Peg(R) tablets, a systemic anti-fungal product, Elimite(R) cream for the treatment of scabies and Naftin(R), a topical anti-fungal gel and cream.
Botox(R)/Neuromuscular Business
Allergan's Botox(R) (Botulinum Toxin Type A) purified neurotoxin complex is used in the treatment of certain neuromuscular disorders which are characterized by involuntary muscle contractions or spasms. Botox(R) purified neurotoxin complex is marketed in the United States, Canada, Germany, France, Italy, New Zealand and a number of other countries for the treatment of blepharospasm (the uncontrollable abnormal contraction of the eyelid muscles which can force the eye closed) and strabismus (misalignment of the eyes) in people 12 years of age and over. In May 1994, Botox(R) purified neurotoxin complex was approved in the United Kingdom for blepharospasm and hemifacial spasm. In March 1991, an application was filed with the FDA for approval of a nonophthalmic claim for an indication related to a neck and shoulder neuromuscular disorder known as cervical dystonia (torticollis). Allergan has been asked to provide supplemental clinical data to support the torticollis filing. Botox(R) has been approved in several European countries for the treatment of cervical dystonia.
EMPLOYEE RELATIONS
At December 31, 1994, the Company employed approximately 4,900 persons throughout the world, including approximately 2,220 in the United States. None of the Company's U.S.-based employees are represented by unions. The Company considers that its relations with its employees are, in general, very good.
INTERNATIONAL OPERATIONS
The Company believes that international markets represent a significant opportunity for continued growth. International sales have represented approximately 52.1%, 52.5% and 52.7% of total sales for the years ended December 31, 1992, 1993 and 1994, respectively. Allergan believes that its well-established international market presence provides it with a competitive advantage, enabling the Company to maximize the return on its investment in research, product development and manufacturing.
Allergan established its first foreign subsidiary in 1964 and currently sells products in approximately 100 countries. Marketing activities are coordinated on a worldwide basis and resident management teams provide leadership and infrastructure for customer focused rapid introduction of new products in their local markets.
In Japan, the second largest eye care market in the world, certain of Allergan's eye care pharmaceutical products are licensed to Santen Pharmaceuticals (the largest eye care pharmaceutical manufacturer in Japan), and Allergan's contact lens care products are sold through a joint venture between Santen and Allergan. IOLs and other eye care surgical products are sold directly in Japan. In 1994, Allergan and Nicholas Piramal India Limited formed a joint venture to manufacture and market eye care products in India. Also in 1994, fifteen ophthalmic pharmaceutical products and Botox(R) purified neurotoxin complex were approved for sale in India. In October 1994, Allergan launched its first two prescription products, Propine(R) and Betagan(R) solutions, in the Peoples' Republic of China. This followed the earlier introduction of its Complete(R) system in 1993. The Company is scheduled to begin construction of a new manufacturing facility in Hangzhou in 1995.
SALES AND MARKETING
Allergan maintains global marketing and regional sales organizations. Supplementing the sales efforts and promotional activities aimed at eye and skin care professionals, as well as neurologists outside the U.S., who use, prescribe and recommend its products, Allergan has been shifting its resources increasingly toward managed care providers. In addition, Allergan advertises in professional journals and has an extensive direct mail program of descriptive product literature and scientific information to specialists in the ophthalmic and dermatological fields. The Company's specialty therapeutic products are sold to drug wholesalers, independent and chain drug stores, commercial optical chains, mass merchandisers, food stores, hospitals, ambulatory surgery centers and medical practitioners, including neurologists. At December 31, 1994, the Company employed approximately 820 sales representatives throughout the world.
RESEARCH AND DEVELOPMENT
The Company's global research and development efforts focus on eye care, skin care and neuromuscular products that are safe, effective, convenient and have an economic benefit. The Company's own research and development activities are supplemented by a commitment to identifying and obtaining new technologies through in-licensing, joint ventures and acquisition efforts including the establishment of research relationships with academic institutions and individual researchers.
Research and development efforts for the ophthalmic pharmaceuticals business focus primarily on new therapeutic products for glaucoma, inflammation, dry eye, allergy and new anti-infective pharmaceuticals for eye care. The Company is conducting research on new compounds that control intraocular pressure by either reducing the inflow or production, or improving the outflow of aqueous humor. Alpha2 agonists are a new class of glaucoma treatments currently being tested. They may be used by patients who cannot use beta-blockers or as an adjunct therapy. Allergan's lead compound in this category is brimonidine, which has completed Phase III clinical trials for the control of post-surgical intraocular pressure elevation and is currently undergoing Phase III trials for ocular hypertension and glaucoma. During the third quarter of 1994, Allergan filed a drug approval application with the FDA on brimonidine for acute post-surgical elevated pressure in the eye following argon laser trabeculoplasty. The Company is also conducting research and clinical trials on a class of compounds called prostaglandins. Unlike beta-blockers and alpha2 agonists that decrease the inflow or production of aqueous humor, prostaglandins reduce intraocular pressure by improving its outflow. The Company is also developing topical cyclosporine A for the treatment of severe dry eye.
Research and development activities for the surgical business concentrate on improved cataract surgical systems, implantation instruments and methods, and new IOL materials and designs, including the AMO(R)Array(R) multifocal IOL, designed to allow patients to see well over a range of distances.
Research and development in the optical business is aimed at contact lens care systems which are effective and more convenient for patients to use, thus lead to a higher rate of compliance with recommended lens care procedures. Improved compliance can enhance safety and extend the time a patient will be a contact lens wearer. The Company believes that continued development and commercialization of disinfection systems that are both easy-to-use and efficacious will be important for the future success of this part of the Company's business.
During the first quarter of 1993, Allergan began Phase III clinical trials with its proprietary topical retinoid tazarotene (previously known as AGN190168) for both acne and psoriasis. In July 1994, the Company released initial Phase III clinical trial results for
tazarotene for psoriasis, which met expectations based on results of earlier clinical studies. By mid-1995, the Company intends to file with the FDA an application for marketing approval for tazarotene in the treatment of psoriasis and acne, based on the results of this initial trial and six additional trials with more than 2,000 patients. Also, during the first quarter of 1994, an application was filed with the FDA seeking approval to market Azelex(TM) (azelaic acid) cream in the U.S. for the treatment of acne.
During 1992, the Company entered into a joint venture ("Joint Venture") with Ligand Pharmaceuticals Incorporated ("Ligand") to combine Ligand's knowledge of intracellular receptor technology with the Company's experience in receptor-selective retinoids for topical use. The Joint Venture filed an Investigational New Drug Application ("IND") with the FDA in November 1993 for the use of 9-cis Retinoic acid (LGD1057) to be given orally for cancer therapy. In March 1994, the Joint Venture filed an IND for the topical use of LGD 1057 for cancers involving the skin.
In December 1994, the Company and Ligand announced the formation of a new research and development company, Allergan Ligand Retinoid Therapeutics, Inc. ("ALRT"), to devote $100 million to the accelerated research and development of retinoid products. Allergan and Ligand will fund ALRT in part through a public offering of $32.5 million of ALRT units through a rights offering to their respective shareholders. ALRT will be the successor to the Joint Venture which will be dissolved immediately prior to the consummation of the offering. Allergan and Ligand will contribute all Joint Venture technology and assets to ALRT. Upon consummation of the transaction, Allergan and Ligand will make cash payments to ARLT of $50 million and $17.5 million, respectively, and expense these cash payments as a one-time charge to earnings. A registration statement relating to the units has been filed with the SEC but has not yet become effective. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This disclosure shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state.
The continuing introduction of new products supplied by the Company's research and development efforts and in-licensing opportunities is critical to the success of the Company. Delays or failures in one or more significant research projects could have a material adverse impact on the future operations of the Company. At December 31, 1994, there were an aggregate of approximately 650 people involved in the Company's research and development efforts. The Company's research and development expenditures associated with continuing operations for 1992, 1993 and 1994 were $89.5 million, $102.5 million and $111.5 million, respectively.
COMPETITION
Allergan faces strong competition in all of its markets worldwide. Numerous companies are engaged in the development, manufacture and marketing of health care products competitive with those manufactured by Allergan, although these companies do not necessarily compete in all of Allergan's product lines. Major eye care competitors include Alcon Laboratories (a subsidiary of Nestle), Bausch & Lomb, Ciba Vision Corp. (a subsidiary of Ciba-Geigy), IOLab (a subsidiary of Johnson & Johnson), Merck, Pharmacia Ophthalmics (a subsidiary of Kabi Pharmacia), and Sola/Barnes-Hind (a subsidiary of Pilkington plc). These competitors have equivalent or greater resources than Allergan. The Company's skin care business competes against a number of companies, including, among others, Schering-Plough, Johnson & Johnson and Hoffman LaRoche, which have greater resources than Allergan. In marketing its products to health care professionals, the Company competes primarily on the basis of product technology, service and price. The Company believes that it competes favorably in its product markets.
GOVERNMENT REGULATION
Drugs, biologics and medical devices, including IOLs and contact lens care products, are subject to regulation by the FDA, state agencies and, in varying degrees, by foreign health agencies. Government regulation of many of the Company's products generally requires extensive testing of new products and filing applications for approval by the FDA prior to sale in the United States and by foreign health agencies prior to sale in many international markets. The FDA and foreign health agencies review these applications and determine whether the product is safe and effective. The process of developing data to support a pre-market application and governmental review can be costly and take many years to complete.
In general, manufacturers of drugs, medical devices and biologics are operating in an increasingly more rigorous regulatory environment than has been the case in previous years. The total cost of providing health care services has been and will continue to be subject to review by governmental agencies and legislative bodies in the major world markets, including the United States, which are faced with significant pressure to lower health care costs. Prices for some of the Company's products, specifically IOLs and pharmaceutical products, accounting for approximately 52% of the Company's 1994 worldwide sales, are expected to come under increased pressure as governments and managed care providers generally increase their efforts to contain health care costs.
Several legislative and administrative measures to strengthen government regulation of medical devices and drugs have recently been implemented in the United States, such as the Safe Medical Devices Act of 1990, which among other things, increased reporting requirements of adverse events associated with medical devices, and the Prescription Drug User Fee Act of 1992, which requires payment of substantial fees to the FDA for the review of new drug applications. The United States Congress is expected to consider mandating the application of user fees to medical device applications as well. Other measures are pending or have been proposed. In addition, there has been increased scrutiny of drug and device manufacturers by the FDA as a result of a scandal in the generic drug industry and controversies surrounding the safety of certain medical devices. While the Company is not primarily involved in these areas of business, the impact of increased FDA scrutiny is felt by all companies in the drug and device industries. Moreover, in Europe and other major Allergan markets, the regulation of drugs and medical devices is likewise increasing. The Company is working to ensure that its operations remain in compliance with the regulatory requirements of the FDA, its foreign counterparts, and other governmental agencies.
In the United States, a significant percentage of the patients who receive the Company's IOLs are covered by the federal Medicare program. When a cataract extraction with IOL implantation is performed in an ambulatory surgery center ("ASC"), Medicare provides the ASC with a fixed $150 allowance to cover the cost of the IOL. When the procedure is performed in a hospital outpatient department, the hospital's reimbursement is determined using a complex formula that blends the hospital's costs with the $150 allowance paid to ASCs. This $150 IOL payment could be subject to reduced levels by Congress through various legislative actions: health care reform; deficit reduction legislation; or implementation of a balanced budget amendment. The Medicare Technical Corrections Bill of 1994 directed the U.S. Health Care Financing Administration ("HCFA") to establish a system through which the agency would pay ASCs and hospitals a rate above $150 for "advanced technology IOLs". HCFA is not expected to consider applications from manufacturers for preferential "advanced technology" status before 1996. In November 1990, HCFA issued proposed regulations under which Medicare would not recognize hospitals' expenditures for IOLs implanted during outpatient cataract surgery to the extent that those expenditures exceed the ASC allowance of $150. The Company cannot predict whether HCFA will promulgate a final regulation imposing this limitation, or whether limits on IOL payment will be incorporated within a more broadly sweeping reform of the Medicare outpatient hospital reimbursement system.
The cost of prescription drugs is likely to receive some continuing attention in the United States Congress. Legislation enacted in 1990, and amended and strengthened in 1992, requires pharmaceutical manufacturers to rebate to the government a portion of their revenues from drugs furnished to Medicaid patients. In 1992, legislation was enacted that extends these requirements to covered outpatient pharmaceuticals, and also mandates a reduction in pharmaceutical prices charged to certain federally-funded facilities as well as to certain hospitals serving a disproportionate share of low-income patients. A provision of the Omnibus Budget Reconciliation Act of 1993 limits tax benefits currently realized by U.S. manufacturers as a result of the manufacture of certain products in Puerto Rico, beginning in 1994. It is likely that some Congressional attention will continue to focus on the costs of drugs generally, and particularly on increases in drug prices in excess of the rate of inflation.
The United States Congress also devoted significant attention in 1994 and in prior years to proposed amendments to the Orphan Drug Act. Under one proposal, once cumulative sales of an orphan drug exceed a designated dollar amount the FDA would be authorized to approve competitors' marketing applications. The Company currently markets one orphan drug product, Botox(R) purified neurotoxin complex. While legislation was not enacted in 1994, it is expected that Congress will consider further amendments to the Orphan Drug Act in 1995.
As a result of the change in its leadership, the Unites States Congress may reexamine the regulatory burdens imposed on drug and medical device manufacturers by the FDA. Congress will also consider less sweeping health care reform legislation. In Europe, on both a European Union level and at the local national level, governments have implemented legislation directed at, among other things, cost containment in the form of reference pricing (i.e., setting a fixed level of reimbursement by drug category), removing various categories of drugs from reimbursement programs, and encouraging generic prescribing.
The Company cannot predict the likelihood of any significant legislative action in these areas, nor can it predict whether or in what form health care legislation being formulated by various governments will be passed. The Company also cannot predict exactly what effect such governmental measures would have if they were ultimately enacted into law. However, in general, the Company believes that such legislative activity will likely continue and the adoption of such measures can be expected to have some adverse impact on the Company's business.
PATENTS, TRADEMARKS AND LICENSES
Allergan owns or is licensed under numerous patents relating to its products, product uses and manufacturing processes. It now has numerous patents issued in the United States and corresponding foreign patents issued in the major countries in which it does business. Allergan believes that its patents and licenses are important to its business, but that with the exception of those relating to hydrogen peroxide disinfection systems, no one patent or license is currently of material importance in relation to its business as a whole. Allergan markets its products under various trademarks and considers these trademarks to be valuable because of their contribution to the market identification of the various products.
ENVIRONMENTAL MATTERS
The Company is subject to federal, state, local and foreign environmental laws and regulations. The Company believes that its operations comply in all material respects with applicable environmental laws and regulations in each country where the Company has a business presence. Although Allergan continues to make capital expenditures for environmental protection, it does not anticipate any significant expenditures in order to comply with such laws and regulations which would have a material impact on the Company's capital expenditures,
earnings or competitive position. The Company is not aware of any pending litigation or significant financial obligations arising from current or past environmental practices. There can be no assurance, however, that environmental problems relating to properties owned or operated by the Company will not develop in the future, and the Company cannot predict whether any such problems, if they were to develop, could require significant expenditures on the part of the Company. In addition, the Company is unable to predict what legislation or regulations may be adopted or enacted in the future with respect to environmental protection and waste disposal.
ITEM 2.

ITEM 2. PROPERTIES
Allergan's operations are conducted in owned and leased facilities located throughout the world. Its primary administrative and research facilities are located in Irvine, California. The following table describes the general character of the major existing facilities as of March 6, 1995:
The Company believes its present facilities are adequate for its current needs.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in various litigation and claims arising in the normal course of business which Allergan considers to be normal in view of the size and nature of its business. Although the ultimate outcome of pending litigation cannot be precisely ascertained at this time, Allergan believes that any liability resulting from the aggregate amount of uninsured damages for outstanding lawsuits and claims will not have a material adverse effect on its consolidated financial position. However, in view of the unpredictable nature of litigation, no assurances can be given in this regard.
The Company, in cooperation with regulatory authorities in Puerto Rico, is evaluating and implementing operational improvements to the wastewater treatment system at the Company's Hormigueros facility. These improvements, which will reduce the ecological impacts of the Company's operations, will not have a material adverse impact of the Company's business.
In October 1993, the Company disclosed to the U.S. Department of Commerce Office of Export Enforcement (the "Commerce Department") that it had been shipping its medicine, Botox(R) purified neurotoxin complex, under general license authority to various foreign countries in the period since July 15, 1992, when the active ingredient in Botox(R), an attenuated form of botulinum toxin, was reclassified to require validated export licensing. It is the Company's position that the reclassification did not and could not apply to medicines, such as Botox(R), that are exempt from validated export licensing by statute and that have no potential application as biological warfare agents or other undesired uses. After conducting a field investigation, in which the Company cooperated, the Commerce Department advised the Company in the first quarter of 1995 that it did not agree with the Company's position regarding the export classification of Botox(R) and that it had referred the case to the office of the U.S. Attorney in order to determine whether criminal charges might be warranted. The Company does not believe that the filing of criminal charges would be warranted.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matter during the fourth quarter of the fiscal year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise.
ITEM I-A. EXECUTIVE OFFICERS OF ALLERGAN, INC.
The executive officers of the Company and their ages as of March 6, 1995 are as follows:
Officers are appointed by and hold office at the pleasure of the Board of Directors.
Dr. Anido has been Corporate Vice President and President, Americas Region since 1993. Prior thereto, he had 18 years of experience with pharmaceutical companies. Dr. Anido was Vice President, Business Management of the U.S. Prescription Products Division of Marion Merrell Dow, Inc. from 1991 to 1993, President and General Manager (1990-1991) and Vice President, Sales & Marketing (1989-1990) of Nordic Laboratories, Inc. He also held various management positions with Marion Laboratories, Inc.
Mr. D'Eliscu has been Corporate Vice President, Corporate Communications since 1992 and was Vice President, Investor Relations and Public Communications from 1991. Mr. D'Eliscu had been Senior Director, Investor Relations of the Company from 1989 to 1991 and prior thereto, he had been Director of Business Development from 1988 and Senior Product Manager from 1985. Mr. D'Eliscu first joined the Company in 1979.
Mr. Donohoe has been Corporate Vice President and President, Europe Region since 1992. Prior thereto, he was Corporate Vice President and President, Optical, Consumer/OTC Group from 1991. Mr. Donohoe was Senior Vice President and General Manager, Contact Lenses from 1990 to 1991 and Area Vice President, Northern Europe from 1989 to 1990. Mr. Donohoe held the position of Senior Vice President, Worldwide Marketing for the Optical Division from 1988 to 1989 and was Vice President, International Marketing from 1987 to 1988. Mr. Donohoe first joined the Company in 1987.
Mr. Haugen has been Executive Vice President and Chief Operating Officer since April 1992 and had been Corporate Vice President of the Company and President, Worldwide Eye Marketing and Sales & Operations since January 1992. Prior thereto, Mr. Haugen was Corporate Vice President and President, Americas Region in 1991 and had been President of Allergan Optical and Senior Vice President of the Company from 1989 to 1991. Prior thereto he was Senior Vice President and President of Allergan Pharmaceuticals from 1988 to 1989 and was Senior Vice President, Planning and Business Development since 1987. Mr. Haugen first joined the Company in 1976.
Mr. Hilles has been Corporate Vice President, Human Resources since 1991 and prior thereto was Senior Vice President, Human Resources from 1986 to 1991. He was Vice President, Human
Resources from 1981 to 1986. Mr. Hilles first joined SmithKline Beckman Corporation in 1965.
Dr. Kaplan has been Corporate Vice President, Research and Development since 1992. He had been Senior Vice President, Pharmaceutical Research and Development since 1991, Senior Vice President, Research and Development since 1989 and Vice President since 1988. Dr. Kaplan had served as Senior Director in Group Research and Development from 1986 to 1988 and as Associate Director, Discovery Research from 1984 to 1986. Dr. Kaplan first joined the Company in 1983.
Mr. Reichardt has been Corporate Vice President, Optical since 1992. Prior thereto, he was Senior Vice President, Marketing/Business Development, Optical-Europe from 1991 and Senior Vice President, Northern Europe from 1983. Mr. Reichardt first joined the Company in 1972.
Ms. Schiavo has been Corporate Vice President, Worldwide Operations since 1992. She was Senior Vice President, Operations from 1991 and Vice President, Operations from 1989. Prior thereto, she was Senior Director, Operations from 1988 to 1989. Ms. Schiavo first joined the Company in 1980.
Mr. Shepherd has been President and Chief Executive Officer of the Company since 1992 and prior thereto had been President and Chief Operating Officer from 1984 to 1991. Prior to 1984, Mr. Shepherd was President of Allergan U.S., Senior Vice President, U.S. Operations and Vice President, Operations. Mr. Shepherd first joined the Company in 1966.
Mr. Tunney has been Corporate Vice President, General Counsel and Secretary of the Company since 1991 and prior thereto was Senior Vice President, General Counsel and Secretary from 1989 through 1991. Mr. Tunney had served as Vice President, General Counsel and Assistant Secretary of the Company since 1986, and as Associate General Counsel of the Company since 1985. Prior thereto he was Senior International Attorney for SmithKline Beckman Corporation which he joined in 1979.
Mr. Yoder has been Vice President and Controller of the Company since 1990. Prior thereto, Mr. Yoder held various management positions with Del Taco, Inc. from 1983 to 1989, including Vice President, Finance of Del Taco/Naugles Restaurants and Vice President, Controller of Del Taco, Inc. Mr. Yoder first joined the Company in 1990.
The information required by Item 405 of Regulation S-K is included on page 7 of the Proxy Statement and is incorporated herein by reference.
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The section entitled "Market Prices of Common Stock and Dividends" on the inside back cover of the Annual Report is incorporated herein by reference.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
The table entitled "Selected Financial Data" on page 46 of the Annual Report is incorporated herein by reference.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations for the Three Year Period Ended December 31, 1994" on pages 23-28 of the Annual Report is incorporated herein by reference.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements, including the notes thereto, together with the sections entitled "Independent Auditors' Report" and "Quarterly Results (Unaudited)" of the Annual Report included on pages 44 and 45, respectively, are incorporated herein by reference.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The section entitled "Independent Auditors" on page 20 of the Proxy Statement is incorporated herein by reference.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF ALLERGAN, INC.
Information under this Item is included on pages 2-5 of the Proxy Statement and such information is incorporated herein by reference. Information with respect to executive officers is included on pages 10-12 of this Form 10-K.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation," and the subsection entitled "Director Compensation" included in the Proxy Statement on pages 11-12, and page 6, respectively, are incorporated herein by reference.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The common stock information in the section entitled "Security Ownership of Certain Beneficial Owners and Management" on pages 8-10 of the Proxy Statement is incorporated herein by reference.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The subsection entitled "Other Matters" and the section entitled "Compensation Committee Interlocks and Insider Participation" on pages 7 and 19 of the Proxy Statement are incorporated herein by reference.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
* Incorporated by reference from the indicated pages of the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1994 (and except for these pages, the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1994, is not deemed filed as part of this report).
All other schedules have been omitted for the reason that the required information is presented in financial statements or notes thereto, the amounts involved are not significant or the schedules are not applicable.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the last quarter of 1994.
(c) Item 601 Exhibits
Reference is made to the Index of Exhibits beginning at page 18 of this report.
(d) Other Financial Statements
There are no financial statements required to be filed by Regulation S-X which are excluded from the annual report to shareholders by Rule 14 a-3(b)(1).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 22, 1995 ALLERGAN, INC.
By /S/ WILLIAM C. SHEPHERD ------------------------------------- William C. Shepherd President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
INDEX OF EXHIBITS
INDEX OF EXHIBITS
INDEX OF EXHIBITS
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of Allergan, Inc.:
Under date of January 23, 1995, we reported on the consolidated balance sheets of Allergan, Inc. and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of earnings and cash flows for each of the years in the three-year period ended December 31, 1994, as contained in the 1994 Annual Report to Stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the Annual Report on Form 10-K for the year 1994. In connection with our audit of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule in the Form 10-K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits.
In our opinion, this schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in note 6 to the consolidated financial statements, the Company changed its method of accounting for income taxes in 1992 to adopt the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." As discussed in note 8 to the consolidated financial statement, the Company also adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 106, "Employer's Accounting for Postretirement Benefits Other Than Pensions," in 1992.
KPMG PEAT MARWICK LLP
Costa Mesa, California January 23, 1995
SCHEDULE VIII
ALLERGAN, INC.
Allowance for Doubtful Accounts
Years Ended December 31, 1994, 1993 and 1992
(Dollars in millions)
_________________________
(a) Provision charged to earnings. (b) Accounts written off. (c) Allowance of business sold.
S-4