UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
(Mark
One)
FORM
10-K
x ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the
fiscal year ended December
31, 2005
or
o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the
transition period from ________________________ to
Commission
file number 1-4105
BAUSCH
& LOMB INCORPORATED
(Exact
name of registrant as specified in its charter)
|
NEW
YORK
|
16-0345235
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
|
ONE
BAUSCH & LOMB PLACE, ROCHESTER, NY
|
14604-2701
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant's
telephone number, including area code 585.338.6000
Securities
registered pursuant to Section 12(b) of the Act:
|
Title
of each class
|
Name
of each exchange on which registered
|
|
Common
Stock, $0.40 par value
|
New
York Stock Exchange
|
Securities
registered pursuant to section 12(g) of the Act:
None
(Title
of
class)
(Title
of
class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
o
Yes x
No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
o
Yes x
No
PAGE
2
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
o
Yes x
No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer x Accelerated
filer o Non-accelerated
filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
o
Yes x
No
The
aggregate market value of the voting stock, computed using the average bid
and
asked price of such stock, held by non-affiliates of the registrant as of June
2005 was $4,066,870,420. For the sole purpose of making this calculation, the
term "non-affiliate" has been interpreted to exclude directors and officers.
Such interpretation is not intended to be and should not be construed to be,
an
admission by Bausch & Lomb Incorporated or such directors or officers that
such directors and officers are "affiliates" of Bausch & Lomb Incorporated,
as that term is defined under the Securities Act of 1933.
The
number of shares of Voting Stock of the registrant, outstanding as of January
27, 2007, was 54,338,016, consisting of 54,308,836 shares of Common stock and
29,180 shares of Class B stock, which are identical with respect to dividend
and
liquidation rights and vote together as a single class for all
purposes.
DOCUMENTS
INCORPORATED BY REFERENCE
Part
III
Not
applicable.
PAGE
3
Table
of Contents
|
Part
I
|
Page
|
||
|
Item
1.
|
Business
|
4
|
|
|
Item
1A.
|
Risk
Factors
|
9
|
|
|
Item
1B.
|
Unresolved
Staff Comments
|
22
|
|
|
Item
2.
|
Properties
|
22
|
|
|
Item
3.
|
Legal
Proceedings
|
22
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
26
|
|
|
Part
II
|
|||
|
Item
5.
|
Market
for Bausch & Lomb Incorporated's Common Stock, Related Shareholder
Matters and Issuer Purchases of Equity Securities
|
28
|
|
|
Item
6.
|
Selected
Financial Data
|
29
|
|
|
Item
7.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
29
|
|
|
Item
7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
60
|
|
|
Item
8.
|
Financial
Statements and Supplementary Data
|
60
|
|
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
117
|
|
|
Item
9A.
|
Controls
and Procedures
|
117
|
|
|
Item
9B.
|
Other
Information
|
122
|
|
|
Part
III
|
|||
|
Item
10.
|
Directors
and Executive Officers of Bausch & Lomb Incorporated
|
123
|
|
|
Item
11.
|
Executive
Compensation
|
130
|
|
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
138
|
|
|
Item
13.
|
Certain
Relationships and Related Transactions
|
140
|
|
|
Item
14.
|
Principal
Accounting Fees and Services
|
142
|
|
|
Part
IV
|
|||
|
Item
15.
|
Exhibits
and Financial Statement Schedules
|
143
|
|
|
Signatures
|
144
|
||
|
Exhibit
Index
|
149
|
||
|
Exhibits
|
(Attached
to the Report on Form 10-K)
|
||
PAGE
4
Part
I
Item
1. Business
Unless
the context indicates otherwise, the terms "we", "our" "ours" and "the Company"
are used herein to refer to Bausch & Lomb Incorporated and its consolidated
subsidiaries. All dollar amounts in Part I of this Form 10-K, except for per
share data, are expressed in millions unless specified otherwise, and earnings
per share are presented on a diluted basis.
(a)
Restatement of Previously Issued Financial Statements
The
Company restated its consolidated financial statements, as more fully discussed
in Item
8. Financial Statements and Supplementary Data
under
Note
2 — Restatement
to the
consolidated financial statements included in this Annual Report on Form 10-K.
The Company restated its consolidated balance sheet, its consolidated statements
of income, of changes in shareholders' equity and of cash flows as of December
25, 2004 and for the fiscal years 2003 and 2004. In addition, the Company
restated selected financial data as of 2003, 2002 and 2001 and for fiscal years
2002 and 2001. See Item
8. Financial Statements and Supplementary Data
under
Note
22 — Quarterly Results, Stock Prices and Selected Financial Data (Unaudited)
of
this
Annual Report on Form 10-K and beginning shareholders' equity for the impact
of
the restatement for periods prior to 2001. The impact of the restated financial
results for the first and second quarterly periods of 2005 and the quarterly
periods of 2004 are also presented in Item
8. Financial Statements and Supplementary Data
under
Note
22 — Quarterly Results, Stock Prices and Selected Financial Data
(Unaudited)
of this
Annual Report on Form 10-K.
The
restatement corrects for errors made in the application of generally accepted
accounting principles (GAAP), including revenue recognition, accounting for
reserves, accounting for foreign currency adjustments, accounting for income
taxes including income taxes payable, tax reserves, deferred income tax assets
and liabilities, related valuation allowances and income tax expense, and the
accounting for the Company's Long-Term Deferred Compensation Plan. For a
discussion of the significant restatement adjustments and the background leading
to these adjustments see Item
8. Financial Statements and Supplementary Data under
Note
2 — Restatement
and
Note
22 — Quarterly Results, Stock Prices and Selected Financial Data (Unaudited)
of
this
Annual Report on Form 10-K.
After
filing this report, the Company will work toward filing its Quarterly Reports
on
Form 10-Q for the third quarter of 2005 and the first, second and third quarters
of 2006 and its Annual Report on Form 10-K for 2006. While the Company is
working diligently to complete the filings referred to, there can be no
assurance as to when the Company will be current in its reporting
obligations.
(b)
General Development of Business
Founded
in 1853 and incorporated in the State of New York in 1908, we are a world leader
in the development, manufacture and marketing of eye health products, including
contact lenses, contact lens care solutions and ophthalmic surgical and
pharmaceutical products.
We
made
no significant acquisitions or dispositions of businesses in either 2003 or
2004. In the fourth quarter of 2005, we acquired a 70-percent controlling
interest in Shandong Chia Tai Freda Pharmaceutical Group (Freda), the leading
ophthalmic pharmaceutical company in China, from Sino Biopharmaceutical Ltd.
The
total purchase price for the Freda acquisition was $255, or $248 net of cash
acquired. Freda primarily develops, manufactures and markets medications used
to
treat ocular inflammation and infection, glaucoma and dry eye. We believe the
acquisition has accelerated our expansion into the rapidly growing ophthalmic
pharmaceuticals market in China and provides a national pharmaceuticals sales
and distribution network, a locally compliant manufacturing facility, and
expertise in regulatory affairs and product development.
(c)
Financial Information about Operating Segments
Information
concerning sales, operating earnings and assets attributable to each of our
operating segments is set forth in Item
7. Management's Discussion and Analysis of Financial Condition and Results
of
Operations of
this
Annual Report on Form 10-K under the section entitled Net
Sales and Income by Business Segment and Geographic Region
and in
Item
8. Financial Statements and Supplementary Data
under
Note
5 — Business Segment and Geographic Information
of this
Annual Report on Form 10-K. This information is incorporated herein by
reference.
PAGE
5
(d)
Narrative Description of Business
Operating
Segments We
are
organized into five business segments: three commercial geographic segments
and
two additional segments managed globally (Research & Development and Global
Operations & Engineering). Commercial regions are responsible for the sale
and marketing of our products within their defined geographies (the Americas;
Europe, Middle East and Africa [Europe]; and Asia). The Research &
Development segment is responsible for activities associated with research,
preclinical development, new product development, clinical affairs, medical
affairs, regulatory affairs, and product quality. The Global Operations &
Engineering segment is responsible for demand planning, engineering,
manufacturing, logistics and procurement.
Products
In each
geographic region, we market products in five product categories: contact
lenses, lens care products, ophthalmic pharmaceuticals, cataract and
vitreoretinal surgery, and refractive surgery.
Contact
Lenses
We
pioneered the development of soft contact lens technology and are one of the
largest manufacturers of contact lenses in the world. Our product portfolio
is
one of the broadest in the industry and includes traditional, planned
replacement disposable, daily disposable, multifocal, and toric soft contact
lenses and rigid gas permeable (RGP) materials. These products are marketed
by
our own sales force and through distributors to licensed eye care professionals
and health product retailers under the Bausch
& Lomb,
Boston,
Medalist, PureVision
and
SofLens
brand
names. Major competitors in the contact lens market include CIBA Vision
Corporation (a subsidiary of Novartis AG) (CIBA); CooperVision (a subsidiary
of
The Cooper Companies, Inc.); and Vistakon, Inc. (a subsidiary of Johnson &
Johnson).
Net
sales
of contact lenses constituted 31 percent of our total revenues in fiscal year
2005, growing 9 percent from the prior year. This growth rate compares to
overall estimated contact lens market growth in the mid-to-upper single
digits.
We
believe that contact lenses will be a growth driver over the next several years,
due to our strong portfolio of specialty contact lenses and the market’s rapid
conversion to contact lenses made of silicone hydrogel materials. In the
specialty business, our SofLens
Toric
lens, a planned replacement lens for people with astigmatism, and our
SofLens
Multi-Focal lens for people with presbyopia, are leading products in their
categories worldwide. In 2005, we introduced in the United States and Europe
Nike MAXSIGHT sport-tinted contact lenses, specialty lenses designed to aid
visual performance in athletic settings. In Japan, we launched Medalist
II,
a
two-week disposable spherical (or non-specialty) lens, and a redesigned version
of Medalist
One Day
daily disposable contact lenses in 2006; and Medalist
Multi-Focal contact lenses in the fourth quarter of 2006.
Silicone
hydrogel contact lenses are becoming an increasingly larger portion of the
overall market. Based on syndicated data and internal estimates, we believe
that
approximately 40 percent of new fit and refit prescriptions for spherical
contact lenses in the United States in the fourth quarter of 2005 were for
silicone hydrogel contact lenses, about double the rate in the prior year
period. In 2005, we reintroduced our PureVision
line of
silicone hydrogel contact lenses into the U.S. market and further expanded
the
geographic reach of PureVision
Toric
contact lenses in Europe and Asia. In 2006, we introduced PureVision
Multi-Focal, the first presbyopia correcting lens made of this new generation
of
materials. We also received approval to market the PureVision
line in
Japan, and anticipate a commercial launch in 2007.
Our
future development efforts in contact lenses will concentrate on new silicone
hydrogel offerings featuring novel materials, surface treatments and optical
design characteristics.
Lens
Care
Our lens
care portfolio includes multipurpose solutions, cleaning and conditioning
solutions for RGP lenses, re-wetting drops and saline solutions. We are a global
leader in market share for lens care products, which we market through our
own
sales force and distributors to licensed eye care professionals, health product
retailers, independent pharmacies, drug stores, food stores and mass
merchandisers. Our strategy is to outpace market trends and increase our share
through continued leadership in the multipurpose segment, the only growing
category in the overall lens care market. Prior to the May 2006 withdrawal
of
ReNu
with
MoistureLoc
solution
(MoistureLoc),
our
flagship brand, ReNu,
had the
leading market position in this segment in the United States. Subsequent to
the
withdrawal, we lost about 10 market share points in the United States, placing
us behind Alcon, Inc. in the multipurpose segment of the market. We are
currently executing brand rebuilding initiatives to recoup some of that lost
market share. Our Boston
brand of
products for RGP lens care holds a commanding market share worldwide. Major
competitors in the lens care category include Advanced Medical Optics, Inc.
(AMO); Alcon, Inc.; and CIBA.
PAGE
6
Net
sales
of lens care products constituted 22 percent of our total revenues in fiscal
year 2005, with sales flat from the prior year, and included the impact of
the
launch of
ReNu MultiPlus
in
Japan,
where it is among the most technologically advanced lens care products on the
market. In 2005, the global market exhibited no growth to low-single digit
declines. Our reported sales include the impact of our recalling MoistureLoc
following an increase in reported fungal infections among contact lens wearers
in the United States and certain Asian markets. In accordance with GAAP, we
recorded certain items associated with the recall in our 2005 financial results.
The charges related to: customer returns; consumer rebates; returned products;
disposal and write-off of inventory; and costs associated with the notification
to customers and consumers required in market withdrawal instances. The
adjustments were recorded as third-quarter events, because that is the earliest
reporting period for which we have not filed quarterly financial results on
Form
10-Q. See further discussion in Item
7. Management's Discussion and Analysis of Financial Condition and Results
of
Operations
and in
Item
8. Financial Statements and Supplementary Data under
Note
23 — Subsequent Event
of this
Annual Report on Form 10-K.
Pharmaceuticals
Our
pharmaceuticals product category includes generic and branded prescription
ophthalmic pharmaceuticals, ocular vitamins and over-the-counter (OTC)
medications. Pharmaceutical products are marketed by our sales force and
distributed through wholesalers, independent pharmacies, drug stores, food
stores, mass merchandisers and hospitals. Our key pharmaceutical trademarks
are
Bausch
& Lomb,
Alrex, Indocollyre,
Liposic,
Lotemax,
Moisten,
Mioclear,
Ocuvite,
PreserVision,
Retisert
and
Zylet.
The
ophthalmic pharmaceuticals market is significantly fragmented. Major competitors
include Alcon, Inc.; Allergan, Inc.; Merck & Co., Inc.; Novartis AG; Pfizer
Inc.; and Santen Incorporated.
Net
sales
of pharmaceuticals products comprised 25 percent of consolidated revenues in
fiscal year 2005, representing growth of 11 percent in a market we estimate
to
be growing in the mid-to-upper single digits. During the fourth quarter we
completed the acquisition of Freda, which accounted for approximately
four-percentage points of our reported growth.
Our
longer-term strategy in pharmaceuticals is to build a pipeline and launch new
proprietary prescription drugs, but that takes time, considering the
development, regulatory review and approval process. Nearer term, we are focused
on growing the consumer health portion of the business by launching new OTC
eye
care products, expanding the geographic availability of existing products,
and
developing and launching new entries in our nutritionals portfolio.
Until
recently, our nutritionals business has been aimed toward a specific ocular
condition — age-related macular degeneration (AMD), with our PreserVision
line of
ocular vitamins. Scientific literature suggests that nutritional products can
be
used to improve or even prevent a variety of other conditions. In 2004, we
launched in Europe a nutritional product containing Omega-3 and Omega-6 fatty
acids, naturally occurring substances found in fish oils and certain plants.
Studies have linked higher intake of fatty acids with a reduction in symptoms
of
dry eye. We have also identified other potential formulations, and expect to
launch a proprietary nutritional formulation for diabetics as early as 2007.
A
nutritional formulation for people over age 50 was launched in 2006. By the
end
of 2007, our portfolio of nutritionals products should contain products that
target not only general eye health, AMD, diabetes and dry eye; but also other
ocular conditions.
Elsewhere
in our OTC portfolio, we expect to introduce a long-lasting dry eye product
later in 2007. In 2006, we repositioned our lines of general eye care products
under the Bausch
& Lomb Advanced
Eye Relief
sub-brand. We are also working on ways to deliver products in a
preservative-free multi-dose system to fulfill doctors’ desire for safer,
gentler preservative-free products and consumers’ preferences for the
convenience of bottled drops over single-use vials.
Turning
to prescription pharmaceuticals, in 2005 in the United States we launched
Zylet,
a
combination anti-inflammatory/anti-infective product containing loteprednol
etabonate and tobramycin, and
Retisert,
our drug
delivery implant to treat posterior segment uveitis.
Cataract
and Vitreoretinal Surgery
Cataract
surgery is one of the most commonly performed surgical procedures. Our cataract
and vitreoretinal offerings include a broad line of intraocular lenses (IOLs)
as
well as the Millennium
and
Stellaris
lines of
phacoemulsification equipment. (Phacoemulsification is the procedure by which
the patient's natural lens is extracted during cataract surgery.) We also sell
disposable surgical packs and instruments that are used during the procedure.
Our cataract and vitreoretinal surgery products and equipment are marketed
by
our sales force and through distributors to ophthalmic surgeons, hospitals
and
ambulatory surgery centers. We believe we have developed substantial
professional recognition for our products marketed under the Bausch
& Lomb,
Akreos,
AMVISC,
Millennium,
SofPort
and
Storz
trademarks. We are the third largest manufacturer of cataract and vitreoretinal
products. Major competitors in the category include AMO and Alcon,
Inc.
PAGE
7
Cataract
and vitreoretinal net sales increased 6 percent and comprised 16 percent of
our
fiscal 2005 revenues. The overall cataract and vitreoretinal market is estimated
to be growing in the mid-single digits. Our goal in the cataract and
vitreoretinal category is to improve our market share position.
In
2005,
we introduced an advanced optics version of our successful Akreos
acrylic
IOL in markets outside the United States and globally introduced the
Easy-Load
Lens
Delivery System for our SofPort
Advanced
Optics (AO) silicone IOL. In 2006, we enhanced our SofPort
line of
IOLs with the introduction of technology that blocks harmful violet light.
We
also launched in certain markets outside the United States a new acrylic IOL
on
our Akreos
platform
that can be inserted through an incision of less than two millimeters — 33
percent smaller than most incisions today. In
2007,
we expect to bring our newest Akreos
Advance
Optics (AO) lens into the large U.S. market. Beyond IOLs, our new
phacoemulsification platform, Stellaris,
was
recently cleared for sale in the United States by the Food and Drug
Administration. We expect to launch Stellaris
in the
first half of 2007. Designed specifically from customer input and feedback,
it
incorporates ergonomic improvements and better fluidics to facilitate faster
turnaround between surgeries. It is also capable of performing cataract surgery
using incisions smaller than two millimeters. Finally, we are pursuing surgical
solutions for presbyopic correction, targeting our development and external
partnering efforts on products designed to allow the eye to focus at all
distances.
Refractive
Surgery
Products
in this category include lasers, microkeratomes, diagnostic equipment and other
products used in the LASIK (Laser in-situ Keratomileusis) surgical procedure.
Our refractive surgery products are marketed by our sales force and through
distributors to ophthalmic surgeons, hospitals and ambulatory surgery centers.
We believe we have developed substantial professional recognition of our
refractive surgery products and equipment marketed under the Hansatome,
Technolas
and
Zyoptix
trademarks. We are the second largest manufacturer of refractive surgery
products. Major competitors include Alcon, Inc.; AMO; Intralase Corp.; and
Moria
S.A.
Net
sales
of refractive surgery products accounted for 6 percent of our 2005 revenues
and
declined 8 percent from 2004.
Our
strategy is to improve our market share of LASIK and other refractive surgical
procedures in the United States and to increase the number of custom LASIK
procedures in markets outside the United States, which will increase our annuity
stream of revenues from procedural fees and microkeratome blades. This would
have the added benefit of increasing profitability, as annuity products
generally carry higher operating margins than capital equipment. Our
Hansatome
and
Zyoptix
XP
microkeratomes, the precision cutting tools to create the corneal flap, are
the
most widely used microkeratomes today. We also manufacture and market the
disposable blades that are replaced after each LASIK procedure. The Zyoptix
XP
microkeratome was launched in 2005 along with networked service solutions for
our laser, which allow us to remotely monitor product performance and alert
our
service team to perform preventive maintenance before a problem occurs. In
2006,
we launched enhancements to the algorithms used in our Zyoptix
personalized LASIK procedure which will improve procedure efficiency, ease
of
use, clinical outcome and predictability, and in 2007 we plan to make available
an Epi-LASIK option for our Zyoptix
microkeratomes.
Suppliers
and Customers
We
purchase the materials and components for each of our product categories from
a
wide variety of suppliers. We believe that the loss of any one supplier would
not adversely affect our business to a significant extent.
Our
five
product categories have different customer bases, from local drug stores to
hospital chains to independent practitioners and group purchasing and other
managed care organizations. No material part of our business, taken as a whole,
is dependent upon a single or a few customers.
Patents
and Licenses
We
actively pursue technology development and acquisition as a means to enhance
our
competitive position. In the aggregate our patents are of material importance
to
our business taken as a whole and no single patent or patent license or group
of
patent licenses relating to any particular product or process is material to
any
segment or to the business as a whole, except for our license agreement with
CIBA Vision AG related to the sale of our PureVision
contact
lens products.
Trademarks
The
trademarks of Bausch & Lomb Incorporated and its subsidiary companies are
italicized throughout this report and include: Akreos,
Alrex, AMVISC, Bausch & Lomb, Bausch & Lomb Advanced
Eye Relief, Boston, Easy-Load, Hansatome, Indocollyre, Liposic, Lotemax,
Medalist, Millennium, Mioclear, Moisten, MoistureLoc, Ocuvite, PreserVision,
PureVision, ReNu, ReNu MultiPlus, Retisert, SofLens, SofLens59, SofPort, Storz,
Technolas, Zylet and Zyoptix.
All
other brands or product names are trademarks of their respective
owners.
PAGE
8
Seasonality
and Working Capital
Because
of the nature of the products sold, we are not significantly impacted by
seasonality issues. In general, the working capital requirements in each of
our
segments are typical of those businesses.
Competition
and Markets
We
market each of our product categories throughout the world. Each category is
highly competitive in both U.S. and non-U.S. markets. For all products, we
compete on the basis of product performance, quality, technology, price,
service, warranty and reliability.
Research
and Development
Research
and development constitutes an important part of our activities. Research and
development expenditures included in continuing operations totaled $177 in
2005,
$163 in 2004 and $150 in 2003. To ensure we have a robust pipeline of new
products to support future growth initiatives, we intend to continue to increase
our level of spending for research and development activities.
Government
Regulation
Our
products are subject to regulation by governmental authorities in the United
States and other markets. These authorities, including the Food and Drug
Administration (FDA) in the United States, generally require extensive testing
of new products prior to sale and have jurisdiction over the safety, efficacy
and manufacturing of products, as well as product labeling and marketing. In
most cases, significant resources must be spent to bring a new product to market
in compliance with these regulations. The regulation of pharmaceutical products
and medical devices, both in the United States and in other markets, has
historically been subject to change. Delays in the regulatory approval process
may result in delays in coming to market with new products and extra costs
to
satisfy regulatory requirements.
Environment
Our
facilities and operations are subject to federal, state and local environmental
and occupational health and safety requirements of the United States and foreign
countries, including those relating to discharges of substances into the air,
water and land, the handling, storage and disposal of wastes and the cleanup
of
properties affected by pollutants. While we are unable to predict what
legislation or regulations may be adopted or enacted in the future with respect
to environmental protection and waste disposal, existing legislation and
regulations have had no material adverse effect on our capital expenditures,
earnings or competitive position. Capital expenditures for property, plant
and
equipment for environmental control facilities were not material during 2005
and
are not anticipated to be material in 2006.
Employee
Relations
As of
December 31, 2005, we employed approximately 13,700 people throughout the world,
including approximately 3,800 in the United States. In general, we believe
our
employee relations to be very good. Less than five percent of our U.S. employees
(mainly in our surgical products manufacturing facilities) are represented
by
unions.
(d)
Financial Information about Foreign and Domestic
Operations
Information
as to sales and long-lived assets attributable to U.S. and non-U.S. geographic
regions is set forth under the section entitled Geographic
Region
in
Item
8. Financial Statements and Supplementary Data
under
Note
5 — Business Segment and Geographic Information
of this
Annual Report on Form 10-K and is incorporated herein by reference.
(e)
Available Information
Our
internet address is http://www.bausch.com. Our filings with the U.S. Securities
and Exchange Commission (SEC), including our Annual Report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments
to
those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act, are accessible free of charge on our web site as soon as
reasonably practicable after we electronically file or furnish the material
to
the SEC. The public may read or copy any materials we file or furnish with
the
SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, D.C.
20549 or may obtain information on the operation of the Public Reference Room
by
calling the SEC at 1-800-SEC-0330. Moreover, the SEC maintains an Internet
site
that contains reports, proxy and information statements, and other information
regarding reports we file or furnish electronically with them at
http://www.sec.gov. Additionally, our Corporate Governance Guidelines, Code
of
Business Conduct and Ethics and charters of the Executive, Audit, Compensation
and Nominating and Governance Committees of our Board of Directors are available
at http://www.bausch.com/en_US/corporate/ir/general/board_members.aspx. This
information is also available in print to any shareholder requesting
it.
PAGE
9
Item
1A. Risk
Factors
The
business, prospects and value of the Company are subject to a number of risk
factors, which are identified in this filing and have been identified by us
in a
number of our filings with the SEC, including our Form 12b-25, filed August
8,
2006, and Form 8-K, filed on September 20, 2006.
(a)
Risks Related to Our Business and Industry
The
markets for our eye care products are intensely competitive and new medical
and
technological developments may reduce the need for our
products.
The eye
care industry is characterized by continuous product development. Our success
and future growth depend, in part, on our ability to develop products which
are
more effective in treating conditions of the eye or that incorporate the latest
technologies. In addition, we must be able to manufacture and effectively market
those products and convince a sufficient number of consumers and eye care
practitioners to use them. Our existing products face the risk of obsolescence
if a new product is introduced by one of our competitors or if we announce
a new
product that, in either case, represents a substantial improvement over our
existing products. Similarly, if we fail to make sufficient investments in
research and development programs or if we focus on technologies that do not
lead to more effective or acceptable products, our current and planned products
may not be accepted in the marketplace or could be surpassed by more effective
or advanced products. Conversely, products and new technologies that we develop
or that are developed by our competitors may reduce the need for our other
existing and future products.
We
have
numerous competitors in the United States and abroad, including, among others,
Alcon, Inc.; Allergan, Inc.; AMO; The Cooper Companies, Inc.; Intralase Corp.;
Merck & Co., Inc.; Moria S.A.; Novartis AG; Pfizer Inc.; Santen
Incorporated; STAAR Surgical Company; and Vistakon, Inc. (a Johnson &
Johnson subsidiary). These competitors may develop technologies and products
that are more effective or less costly than any of our current or future
products or that could render our products obsolete or noncompetitive. Some
of
these competitors have substantially more resources and a greater marketing
scale than we do. In addition, the medical technology and device industry
continues to experience consolidation, resulting in an increasing number of
larger and more diversified companies. Among other things, some of these
companies can spread their research and development costs over much broader
revenue bases and have more resources to influence customer and distributor
buying decisions. In addition, some of our competitors may enter into markets
in
which they do not currently compete with us, such as the announcement of Johnson
& Johnson's potential entry into the contact lens solutions business. Our
inability to produce and develop products that compete effectively against
our
competitors' products, or to effectively advertise, promote and market our
products against competitors' offerings, could have a material adverse effect
on
our business.
Resources
devoted to research and development may not yield new products that achieve
commercial success.
We
devote substantial resources to research and development. We recently expanded
our research and development facilities in Rochester, New York. However, the
research and development process is expensive, prolonged and entails
considerable uncertainty, especially for companies in the eye care industry.
Because of the complexities and uncertainties associated with ophthalmic
research and development in particular, and healthcare related research and
development in general, products we are currently developing, or that we develop
in the future, may not complete the development process or obtain the regulatory
approvals required for us to market such products successfully.
PAGE
10
Market
acceptance of our products requires, in many cases, that users of our products
obtain adequate reimbursement from third-party payers.
Managed
care organizations and governments continue to place increased emphasis on
the
delivery of more cost-effective medical therapies. For example, major
third-party payers for hospital services, including government insurance plans,
Medicare and Medicaid in the United States, and private health care insurers,
have substantially revised their payment methodologies during the last few
years, resulting in stricter standards for reimbursement of hospital and
outpatient charges for some medical procedures, including cataract procedures
and intraocular lenses. Managed care organizations restrict the pharmaceutical
products that doctors in those organizations can prescribe through the use
of
formularies (the lists of drugs which physicians are permitted to prescribe
to
patients in a managed care organization). Failure of our pharmaceutical products
to be included on formularies could have an adverse effect on our revenues
and
profits. This cost-cutting emphasis could adversely affect sales and prices
of
our products. Physicians, hospitals and other health care providers may be
reluctant to purchase our products if they do not receive substantial
reimbursement for the cost of our pharmaceutical and surgical products and
for
procedures performed using our surgical medical device products from third-party
payers. Reductions in the prices for our products in response to these trends
could reduce our profits.
Federal,
state and non-U.S. laws pertaining to healthcare fraud and abuse could
materially adversely affect our business and results of
operations.
Certain
of our businesses are subject to various federal, state and non-U.S. laws
pertaining to healthcare fraud and abuse, including anti-kickback laws and
physician self-referral laws. Violations of these laws are punishable by
criminal and civil sanctions, including, in some instances, exclusion from
participation in government healthcare programs, including, in the United
States, Medicare, Medicaid, Veterans Administration health programs and TRICARE.
Such laws and regulations are complex and far-reaching in nature, and, as a
result, there can be no assurance that we would not be required in the future
to
further alter one or more of our practices to be in compliance with these laws.
Any violations of these laws or regulations could result in a material adverse
effect on our business, financial condition and results of operations. In
addition, if there is a change in law, regulation, administrative or judicial
interpretation, which renders our practices noncompliant, we may have to change
our business practices or our existing business practices could be challenged
as
unlawful, which could have a material adverse effect on our business, financial
condition and results of operations.
Healthcare
initiatives and other cost-containment pressures could cause us to sell our
products at lower prices, resulting in less revenue to us.
Government and private sector initiatives to manage healthcare costs, including
price regulation and competitive pricing, are continuing in many countries
and
regions where we do business, including the United States and Europe. Federal
and state programs that reimburse at typically predetermined fixed rates,
interpretations of policy and governmental funding restrictions, and legislative
proposals restricting payment increases to hospitals and other providers through
reimbursement systems, may all decrease or otherwise limit amounts available
through reimbursement. We are not able to predict whether new legislation or
changes to existing legislation will take effect, whether other changes will
be
made in the rates prescribed by these governmental programs or, if they are
made, what effect that they could have on our business. However, approved
governmental rate changes could have a material adverse effect on us, including
our prospects for future sales of our products.
Economic
conditions and price competition may cause sales of our products used in
elective surgical procedures to decline and reduce our
profitability.
Sales of
products used in elective surgical procedures, such as laser refractive surgery,
have been and may continue to be adversely impacted by economic conditions.
Generally, the costs of elective surgical procedures are borne by individuals
without reimbursement from their medical insurance providers or government
programs. Accordingly, individuals may be less willing to incur the costs of
these procedures in weak or uncertain economic conditions and there may be
a
decline in the number of these procedures. Sales of our laser refractive
surgical equipment and disposable products used in laser refractive surgery
have
come under pressure during periods of economic uncertainty. A softening in
demand for laser refractive surgery could impact us by reducing our profits
if
customers with whom we have placed laser refractive surgical equipment are
unable to make required payments to us.
PAGE
11
If
we fail to maintain our relationships with healthcare providers, including
ophthalmologists, optometrists, opticians, hospitals, ambulatory surgical
centers, corporate optometry chains and group purchasing organizations,
customers may not buy our products and our revenue and profitability may
decline.
We
market our products to numerous healthcare providers, including eye care
professionals, public and private hospitals, ambulatory surgical centers,
corporate optometry chains and group purchasing organizations. We have developed
and strive to maintain close relationships with members of each of these groups
who assist in product research and development and advise us on how to satisfy
the full range of surgeon and patient needs. We rely on these groups to
recommend our products to their patients and to other members of their
organizations. The failure of our existing products and any new products we
may
introduce to retain the support of these various groups could have a material
adverse effect on our business, financial condition and results of
operations.
The
majority of our business is conducted outside the United States, subjecting
us
to additional business risks, including increased costs, market and currency
fluctuations, business interruption and changing demands, all of which may
result in fluctuations and declines in our sales and
profits.
Our
products are sold in more than 100 countries. We have approximately 13,700
employees in more than 50 countries and more than half of our revenues in 2005
came from customers outside the United States. The results of operations and
the
financial position of our local operations are generally reported in the
relevant local currencies and then translated into U.S. dollars at the
applicable exchange rates for inclusion in our consolidated financial
statements, exposing us to currency translation risk. In 2005, our most
significant currency exposures were to the euro and the Japanese yen. The
exchange rates between these and other local currencies and the U.S. dollar
may
fluctuate substantially. In addition, we are exposed to transaction risk because
some of our expenses are incurred in a different currency from the currency
in
which our revenues are received. Fluctuations in the value of the U.S. dollar
against other currencies have had in the past, and may have in the future,
an
adverse effect on our operating margins and profitability. Economic, social
and
political conditions, laws, practices and local customs vary widely among the
countries in which we sell our products. Our operations outside the United
States are subject to a number of risks and potential costs, including lower
product margins, less stringent protection of intellectual property and
economic, political and social uncertainty in countries in which we operate,
especially in emerging markets. Our continued success as a global company
depends, in part, on our ability to develop and implement policies and
strategies that are effective in anticipating and managing these and other
risks
in the countries where we do business. These and other risks may have a material
adverse effect on our operations in any particular country and on our business
as a whole.
Our
international operations are, and will continue to be, subject to a number
of
further risks and potential costs, including:
| · |
unexpected
changes in foreign regulatory
requirements;
|
| · |
differing
local product preferences and product
requirements;
|
| · |
political
and economic instability;
|
| · |
changes
in foreign medical reimbursement and coverage policies and
programs;
|
| · |
diminished
protection of intellectual property in some countries outside the
United
States;
|
| · |
trade
protection measures and import or export licensing
requirements;
|
| · |
potential
tax costs associated with repatriating cash from our non-U.S.
subsidiaries;
|
| · |
difficulty
in staffing and managing foreign
operations;
|
| · |
differing
labor regulations; and
|
| · |
potentially
negative consequences from changes in tax
laws.
|
Any
of
these factors may, individually or as a group, have a material adverse effect
on
our business and results of operations.
If
we were to experience an interruption of our manufacturing operations, our
business, financial condition and operating results would be materially
harmed.
Any
prolonged disruption in the operation of our manufacturing facilities or those
of our third party manufacturers, whether due to technical, labor or other
difficulties, contamination, destruction of or damage to any facility or other
reasons, could materially harm our business, financial condition and operating
results. In 2006, the FDA completed a regulatory inspection of our Greenville,
South Carolina facility and concluded that the facility was non-compliant in
a
number of areas. We have informed the FDA of our efforts to remedy many of
the
noted deficiencies, but our inability to address the FDA's concerns with the
Greenville facility, or the concerns of any regulatory agency with any of our
facilities, could have an adverse impact on our performance, financial condition
or operating results.
PAGE
12
We
rely on independent suppliers for raw materials and we could experience
inventory shortages if we were required to use an alternative supplier on short
notice. We
rely
on independent suppliers for key raw materials, consisting primarily of various
chemicals and packaging materials. We generally use raw materials available
from
more than one source. However, because some products require specialized
manufacturing procedures, we could experience inventory shortages if we were
required to use an alternative manufacturer on short notice. A disruption in
the
supply of certain raw materials could disrupt production of certain of our
products thereby adversely impacting our ability to market and sell such
products and our ability to compete.
If
we fail to attract, hire and retain qualified personnel, we may not be able
to
design, develop, market or sell our products or successfully manage our
business.
Our
ability to attract new customers, retain existing customers and pursue our
strategic objectives depends on the continued services of our current
management, sales, product development and technical personnel and our ability
to identify, attract, train and retain similar personnel. Competition for top
management personnel generally, and within the health care industry
specifically, is intense and we may not be able to recruit and retain the
personnel we need. The loss of any one of our management personnel, or our
inability to identify, attract, retain and integrate additional qualified
management personnel, could make it difficult for us to manage our business
successfully and pursue our strategic objectives.
Similarly,
competition for skilled sales, product development and technical personnel
is
intense and we may not be able to recruit and retain the personnel we need.
The
loss of the services of any key sales, product development and technical
personnel, or our inability to hire new personnel with the requisite skills,
could restrict our ability to develop new products or enhance existing products
in a timely manner, sell products to our customers or manage our business
effectively.
We
may
not be able to hire or retain qualified personnel if we are unable to offer
competitive salaries and benefits, or if our stock does not perform
well.
(b)
Risks Related to Our Financial Condition
Our
indebtedness could adversely affect our financial health.
We have
now and expect to continue to have indebtedness that could:
| · |
increase
our vulnerability to general adverse economic and industry
conditions;
|
| · |
require
us to dedicate a substantial portion of our cash flow from operations
to
payments on our indebtedness, thereby reducing the availability of
our
cash flow to fund working capital, capital expenditures, acquisitions,
research and development efforts and other general corporate
purposes;
|
| · |
limit
our flexibility in planning for, or reacting to, changes in our business
and the industry in which we
operate;
|
| · |
place
us at a competitive disadvantage if any of our competitors have less
debt;
|
| · |
limit
our ability to borrow additional funds;
and
|
| · |
make
it more difficult for us to satisfy our obligations with respect
to our
debt, including our obligation to repay amounts borrowed under our
credit
facilities or repurchase outstanding public debentures under certain
circumstances.
|
Our
credit facilities contain representations, warranties and covenants which if
breached could lead to an event of default and could, thereby, accelerate
payment of our debt. In addition, our credit facilities contain financial and
other restrictive covenants that could limit our ability to engage in activities
that may be in our long-term best interests. Our failure to comply with those
covenants could result in an event of default which, if not cured or waived,
could result in the acceleration of all of our debt.
We
have
obtained waivers under certain of our bank facilities and with respect to our
public debt. Primarily, these waivers are related to our inability to file
timely periodic reports with the SEC. See Item
7. Management's Discussion and Analysis of Financial Condition and Results
of
Operations
and in
Item
8. Financial Statements and Supplementary Data under
Note
11 — Debt
of this
Annual Report on Form 10-K. The bank waivers have been extended until April
30,
2007; but public debt waivers expired on January 31, 2007. In early February,
we
expect to complete a pending consent solicitation extending the public debt
waivers to April 30, 2007.
PAGE
13
We
are vulnerable to interest rate risk with respect to our debt.
We
are
subject to interest rate risk in connection with the issuance of debt. In order
to maintain our desired mix of fixed-rate and variable-rate debt, we may from
time to time use interest rate swap agreements and exchange fixed-rate and
variable-rate interest payment obligations over the lives of the arrangements,
without exchange of the underlying principal amounts. We may not be successful
in structuring such swap agreements to effectively manage our risks, which
could
adversely affect our business, earnings and financial condition.
The
market price of our Common stock has been volatile and may continue to be
volatile, and the value of any investment may decline.
We have
experienced and may continue to experience market volatility that has caused
and
may cause wide fluctuations in the price of our Common stock, which is listed
on
the New York Stock Exchange (NYSE). The market price may fluctuate in response
to many factors including:
| · |
our
business performance and financial
results;
|
| · |
changes
in our markets;
|
| · |
pending
and threatened litigation against
us;
|
| · |
the
recall of MoistureLoc
from the market;
|
| · |
our
restatement of financial statements for prior
periods;
|
| · |
the
Audit Committee's and/or other Company investigations; and
|
| · |
our
assessment of our internal control over financial
reporting.
|
We
incur substantial costs with respect to pension benefits and providing
healthcare for our employees.
Our
estimates of liabilities and expenses for pensions and other post-retirement
healthcare benefits require the use of assumptions. They include the rate used
to discount the future estimated liability, the rate of return on plan assets
and several assumptions relating to the employee workforce (salary increases,
medical costs, retirement age and mortality). Actual results may differ which
may have a material adverse effect on future results of operations, liquidity
or
shareholders’ equity. In addition, rising healthcare and retirement benefit
costs in the United States may put us under significant cost pressure as
compared to our competitors, if they can provide the benefits at lower
costs.
Changes
in accounting may affect our reported earnings and operating income.
Generally
accepted accounting principles and accompanying pronouncements, implementation
guidelines and interpretations for many aspects of our business, such as revenue
recognition, accounting for financial instruments, treatment of goodwill or
amortizable intangible assets, and accounting for income taxes are highly
complex and involve judgments. Changes in these rules, their interpretation,
or
changes in our products or business could significantly change our reported
earnings and operating income and could add significant volatility to those
measures, without a comparable underlying change in cash flow from
operations.
Catastrophic
events may disrupt our business.
We have
operations and facilities which sell and distribute our products in many parts
of the world. Natural events (such as a hurricane or major earthquake),
terrorist attack or other catastrophic events could cause delays in developing,
manufacturing or selling our products. Such events that occur in major markets
where we sell our products could reduce the need for our products in those
areas
and, as a result impact our sales into those markets. In either case, any such
disruption could have a material adverse effect on our business.
PAGE
14
Acquisitions
and joint ventures may have an adverse effect on our
business.
We
expect to continue making acquisitions or entering into joint ventures as part
of our long-term business strategy. For example, in 2005 we acquired a
70-percent controlling interest in Freda in order to gain additional access
to
markets in China. Future acquisitions could result in potentially dilutive
issuances of equity securities, the incurrence of debt and contingent
liabilities and an increase in amortization and/or write-offs of other
intangible assets and goodwill, which could have a material adverse effect
upon
our business, financial condition and results of operations. Risks we could
face
with respect to acquisitions include, among others:
| · |
difficulties
in the integration of the operations, technologies, products and
personnel
of the acquired company and establishment of appropriate accounting
controls and reporting procedures and other regulatory compliance
procedures;
|
| · |
risks
of entering markets in which we have no or limited prior
experience;
|
| · |
potential
loss of employees;
|
| · |
an
inability to identify and consummate future acquisitions on favorable
terms or at all;
|
| · |
diversion
of management’s attention away from other business
concerns;
|
| · |
expenses
of any unknown or potential liabilities of the acquired
company;
|
| · |
expenses,
including restructuring expenses, to shut-down our own locations
and/or
terminate our employees;
|
| · |
dilution
of earnings per share; and
|
| · |
risks
inherent in accounting allocations and consequences
thereof.
|
We
are in the process of upgrading certain of our management information systems
and we cannot ensure that there will not be associated excessive costs or
disruption of our business.
We have
implemented a global management information system at several of our locations
and are in the process of implementing that system for most of our businesses
worldwide. Many other companies have had significant problems with computer
system implementations of this nature and scope. We are using a controlled
project plan, and we believe we have assigned adequate staffing and other
resources to the project to ensure its successful implementation. However,
we
cannot provide assurance that the design will meet our current and future
business needs or that it will operate as designed. We are heavily dependent
on
such computer systems, and any failure or delay in the system implementation
would cause a substantial interruption to our business, additional expense
and
loss of sales, customers and profits.
The
spending to address the MoistureLoc
recall,
our investigations and consent solicitations and bank waiver matters could
negatively affect our financial performance.
Our
announced recall of MoistureLoc
will
result in lost revenues and expenses associated with taking product returns
and
rebuilding the lens care and non-lens care brands, and has resulted in and
may
continue to result in market share loss in the lens care category and,
potentially, the non-lens care categories. See MoistureLoc
risk
factors in subsection (d)
Risks Related to Regulatory Matters.
In
addition, we anticipate that higher than normal spending in several areas
associated with recent events will negatively impact financial performance.
These include, without limitation, (1) higher selling, administrative and
general expenses which reflect recall and legal expenses associated with the
MoistureLoc
situation and pending product liability and shareholder lawsuits, increased
marketing expense to support brand rebuilding activities, and professional
fees
associated with the independent investigations and expanded year-end audit
procedures, and (2) higher net financing expenses, which include the consent
and
waiver fees associated with the consent solicitation and tender offer we
completed on June 2, 2006, the consent solicitation completed on September
28,
2006, the consent solicitation we expect to complete in early February 2007
and
the several bank waivers obtained in November 2005 and February, May, August
and
December 2006, and January 2007.
Lens
care
is the most profitable of our five product categories, and a significant portion
of our lens care sales have historically been generated in the United States.
As
a result, it is anticipated that (1) our U.S. operations will be unprofitable
in
2006 and likely beyond, and (2) that no tax benefit will be recorded on U.S.
operations as a result of the determination of the need for a valuation
allowance that was recorded in 2005 on deferred tax assets (as reported in
our
Current Report on Form 8-K dated August 7, 2006).
Our
2006
cash flow from operating activities has been negatively impacted by the outflows
associated with the MoistureLoc
recall,
as well as the cost of the investigations and brand rebuilding expenditures.
We
anticipate that 2006 operating cash flows will be essentially offset by capital
expenditures, reflecting costs associated with completing the installation
of
manufacturing equipment for PureVision
contact
lenses and expanding our main R&D facility in Rochester, New
York.
PAGE
15
We
have made certain assumptions and could experience other risks concerning our
financial performance.
Our
financial performance could be adversely impacted if any of our assumptions
are
incorrect or if we actually experience any of the risks concerning our financial
performance that we have identified. Additional specific assumptions and risk
factors that could or will impact full year 2007 performance include (1) as
it
relates to marketing and selling of our products, no significant changes in
the
competitive landscape; return of our ReNu
MultiPlus
and
ReNu
MPS
contact
lens care products to the Singapore and Hong Kong markets; success of brand
rebuilding initiatives, with particular emphasis on Asia, given direct and
collateral product line impacts of the MoistureLoc
withdrawal in these markets; successful and timely introduction of new products,
particularly in our cataract business and in the geographic expansion of contact
lens products; lack of further negative price impact from changes in government
pricing and reimbursement of our products, including with respect to
pharmaceuticals products in Europe; and (2) as it relates to expenses of the
business, historical normal expense and spending rates, with moderate increases
in actual expenses over prior years; no unusual expense items related to
impairment or accelerated depreciation of tangible or intangible assets of
the
Company; no unusual additional severance or other restructuring expenses
associated with changes in our business structure; no unusual additional
expenses resulting from investigations or additional review procedures with
respect to matters other than those presently outstanding; and no significant
settlement of, or judgments adverse to us in contested matters.
(c)
Risks Related to Litigation, Actions, Claims, Investigations, Internal Control
Deficiencies, the Restatement of Our Financial Statements, the Delay in Filing
Our Periodic Reports and Intellectual Property
Unfavorable
results in pending and future claims and litigation matters as well as the
outcome of pending or future investigations could have an adverse impact on
us.
We have
been named as a party in various lawsuits and are aware of the filing of others.
We have identified pending material litigation to which we are a party (or
to
which our current and certain former officers and directors are parties). See
Item
3. Legal Proceedings
for
further discussion. In some cases, certain present and former officers and
directors have also been named as parties in the actions. While we intend to
vigorously defend ourselves in these actions, we could be required to pay
judgments or settlements in connection with these matters and they could
otherwise have a material adverse effect on our business, results of operations,
financial condition and liquidity.
In
addition to pending litigation matters, we may from time to time learn of
alleged non-compliance with laws or regulations or other improprieties through
compliance hotlines, communications by employees, former employees or other
third parties, as a result of our internal audit procedures, or otherwise.
As
disclosed in Item
8. Financial Statements and Supplementary Data under
Note
2 — Restatement of
this
Annual Report on Form 10-K, in response to such allegations, the Audit Committee
conducted certain investigations during 2005 and 2006, which led, among other
things, to the restatement of previously reported financial information, and
current charges. The restatement, in turn, resulted in our being unable to
file
timely certain periodic financial information and our obtaining certain waivers
from creditors as well as an extension from the NYSE to permit continued trading
notwithstanding the delay in filing our 2005 Annual Report on Form
10-K.
The
Audit
Committee of the Board of Directors is currently investigating the potential
U.S. Foreign Corrupt Practices Act implications of our Spanish subsidiary’s
providing free product, principally intraocular lenses used in cataract surgery,
and other things of value to doctors performing surgical procedures at public
hospitals in Spain. This investigation was initiated following reports of
potentially improper sales practices by a former employee. The investigation
has
been voluntarily reported to the Northeast Regional Office of the SEC. We cannot
predict the outcome of this pending investigation, and at this time cannot
reasonably estimate the potential liability of the Company or its Spanish
subsidiary in connection with these matters.
Our
policy is to comply with applicable laws and regulations in each jurisdiction
in
which we operate and, if we become aware of a potential or alleged violation,
to
conduct an appropriate investigation, to take appropriate remedial action and
to
cooperate fully with any related governmental inquiry.
We
may
become parties to, or the subject of, other claims, lawsuits, investigations
or
inquiries in the future. See Item
3. Legal Proceedings
of this
Annual Report on Form 10-K.
PAGE
16
We
may not have sufficient insurance to cover our liability in our pending
litigation claims and future claims either due to coverage limits or as a result
of insurance carriers seeking to deny coverage of such claims, which in either
case could have a material adverse effect on our business and financial
condition.
We
maintain third party insurance coverage against various liability risks,
including securities, shareholder derivative, ERISA, and product liability
claims, as well as other claims that form the basis of litigation matters
pending against us. While we believe these arrangements are an effective way
to
ensure against liability risks, the potential liabilities associated with the
litigation matters pending against us, or that could arise in the future, could
exceed the coverage provided by such arrangements. In addition, our insurance
carriers have sought or may seek to rescind or deny coverage with respect to
completed investigations or pending or future investigations and actions. If
we
do not have sufficient coverage under our policies, or if the insurance
companies are successful in rescinding or denying coverage to us, our business,
results of operations and financial condition may be materially adversely
affected.
Our
potential indemnification obligations and limitations of our director and
officer liability insurance could have a material adverse effect on our
business, results of operations and financial condition.
Certain
of our present and former directors, officers and employees are the subject
of
lawsuits. Under New York law and our bylaws, we may have an obligation to
indemnify our current and former directors, officers and employees in relation
to completed investigations or pending and/or future investigations and actions.
Indemnification payments that we make may have a material adverse effect on
our
business, results of operations and financial condition to the extent insurance
does not cover our costs. The insurance carriers that provide our directors’ and
officers’ liability policies have sought or may seek to rescind or deny coverage
with respect to those completed investigations or pending and future
investigations and actions, or we may not have sufficient coverage under such
policies. If the insurance companies are successful in rescinding or denying
coverage to us and/or some of our current directors, officers and employees,
or
if we do not have sufficient coverage under our policies, our business, results
of operations and financial condition may be materially adversely
affected.
Our
potential liability relating to a Notice of Final Partnership Administrative
Adjustment from the Internal Revenue Service could
have a material adverse effect on our financial results.
On May
12, 2006, we received a Notice of Final Partnership Administrative Adjustment
from the Internal Revenue Service relating to partnership tax periods ended
June
4, 1999 and December 25, 1999, for Wilmington Partners L.P. (Wilmington), a
partnership formed in 1993 in which the majority of partnership interests are
held by certain of our subsidiaries. The Final Partnership Administrative
Adjustment (FPAA) proposes adjustments increasing the ordinary income reported
by Wilmington for its December 25, 1999 tax year by a total of $10, and
increasing a long-term capital gain reported by Wilmington for that tax year
by
$190. The FPAA also proposes a $550 negative adjustment to Wilmington's basis
in
a financial asset contributed to it by one of its partners in 1993; this
adjustment would also affect the basis of that partner — one of our subsidiaries
— in its partnership interest in Wilmington. The asserted adjustments could,
if
sustained in full, increase the tax liabilities of the partnership's partners
for the associated tax periods by more than $200, plus penalties and interest.
We have not made any financial provision for the asserted additional taxes,
penalties or interest as we believe
the asserted adjustments are not probable and estimable.
Since
1999, our consolidated financial statements have included a deferred tax
liability relating to the partnership. As of December 31, 2005, this deferred
tax liability equaled $157. This deferred tax liability is currently reducing
net deferred tax assets for which a valuation allowance has been recorded as
of
December 31, 2005.
On
August
7, 2006, we made a petition to the U.S. Tax Court to challenge the asserted
adjustments. Internal Revenue Service's answer was filed on October 4, 2006,
and
we initiated a motion to strike portions of the answer on November 1, 2006.
We
believe we have numerous substantive and procedural tax law arguments to dispute
the adjustments. Tax, penalties and interest cannot be assessed until a Tax
Court determination is made, and an assessment, if any, would likely not be
made
until some time after 2007. While we intend to vigorously defend against the
asserted adjustments, our failure to succeed in such a defense could
significantly increase the liability of the partnership's partners for taxes,
plus interest and penalties, which in turn would have a material adverse effect
on our financial results and cash flows.
PAGE
17
Management
has identified a number of material weaknesses in our internal control over
financial reporting.
Effective internal control over financial reporting is necessary for compliance
with the Sarbanes-Oxley Act of 2002 and appropriate financial reporting.
Management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting
is a
process, under the supervision of the Company’s Chief Executive Officer and
Chief Financial Officer, designed to provide reasonable assurance regarding
the
reliability of financial reporting and the preparation of our financial
statements for external reporting purposes in accordance with GAAP. As disclosed
in this Annual Report on Form 10-K, management’s assessment of our internal
control over financial reporting identified material weaknesses in various
areas
as discussed in Item
9A. Controls
and Procedures which
resulted in the restatement of the Company's 2004, 2003, 2002 and 2001 annual
consolidated financial statements and all quarterly periods of 2004 and the
first two quarters of 2005. The impact of restatement adjustments identified
relating to fiscal years prior to 2003 decreased beginning retained earnings
for
that year, by $23 net of tax. Several material weaknesses were remediated in
2006 (see Item
9A. Controls and Procedures
of this
Annual Report on Form 10-K) and we are working to remediate the others as soon
as practicable. While the Company has not completed its 2006 internal control
evaluation, it is expected that the Company will report one or more material
weaknesses in internal control over financial reporting for 2006 when it files
its Annual Report on Form 10-K for the year ended December 30, 2006. Delay
in
the implementation of remedial actions could affect the accuracy or timing
of
future filings with the SEC and other regulatory authorities.
We
may face risks related to the recent restatement of our financial
statements. The
Company restated its consolidated financial statements, as more fully discussed
in Item
8. Financial Statements and Supplementary Data
under
Note
2 — Restatement
to the
consolidated financial statements included in this Annual Report on Form 10-K.
The Company restated its consolidated balance sheet, its consolidated statements
of income, of changes in shareholders' equity and of cash flows as of December
25, 2004 and for the fiscal years 2003 and 2004. In addition, the Company
restated selected financial data as of 2003, 2002 and 2001 and for fiscal years
2002 and 2001. See Item
8. Financial Statements and Supplementary Data
under
Note
22 — Quarterly Results, Stock Prices and Selected Financial Data (Unaudited)
of
this
Annual Report on Form 10-K and beginning shareholders' equity for the impact
of
the restatement for periods prior to 2001. The impact of the restated financial
results for the first and second quarterly periods of 2005 and the quarterly
periods of 2004 are also presented in Item
8. Financial Statements and Supplementary Data
under
Note
22 — Quarterly Results, Stock Prices and Selected Financial Data
(Unaudited)
of this
Annual Report on Form 10-K.
Companies
that restate their financial statements sometimes face litigation claims, some
of which we have already been made aware, and/or SEC proceedings following
such
a restatement. We could face monetary judgments, penalties or other sanctions
which could adversely affect our financial condition and could cause our stock
price to decline. See further discussion in Item
3. Legal Proceedings,
Item
7. Management's Discussion and Analysis of Financial Condition and Results
of
Operations
and in
Item
8. Financial Statements and Supplementary Data under
Note
21 — Other Matters
of this
Annual Report on Form 10-K.
We
expect to continue to incur significant expenses related to our internal control
over financial reporting and the preparation of our financial
statements. We
have
devoted substantial internal and external resources to the completion of the
restatement and our financial statements for the year ended December 31, 2005.
As a result of these efforts, along with efforts to complete our assessment
of
internal control over financial reporting as of December 31, 2005, as required
by Section 404 of the Sarbanes-Oxley Act of 2002, we have incurred and expect
that we will continue to incur significant incremental fees and expenses for
additional auditor services, financial and other consulting services, legal
services and debt related waiver fees. While we do not expect fees and expenses
relating to the preparation of our financial results in 2007 and future years
to
be as high as 2005 and 2006, we expect that these fees and expenses will remain
significantly higher than historical fees and expenses in this category for
the
next several quarters. These expenses, as well as the substantial time devoted
by our management towards addressing these weaknesses, could have a material
adverse effect on our financial condition, results of operations and cash
flows.
PAGE
18
We
have postponed the filing of this Annual Report and of our Quarterly Reports
on
Form 10-Q for the quarters ended September 24, 2005, April 1, 2006, July 1,
2006
and September 30, 2006. As a result, we do not have current financial
information available and will be limited in our ability to register our
securities for offer and sale until we are deemed a current filer with the
SEC.
As a
result, there is a lack of current publicly available financial information
concerning the Company. Investors must evaluate whether to purchase or sell
our
securities in light of the lack of current financial information. We are not
in
a position to predict at what date current financial information will be
available. Accordingly, any investment in our securities involves a high degree
of risk. Until current periodic reports and financial statements are filed,
we
will be precluded from registering our securities with the SEC for offer and
sale. This precludes us from raising debt or equity financing in the public
markets and will limit our ability to use stock options and other equity-based
awards to attract, retain and provide incentives to our employees.
As
a result of the delays in filing our periodic reports, we required certain
waivers in connection with the delivery of financial statements and related
matters under financing arrangements for our public and bank debt. We may
require additional waivers in the future, and failure to obtain the necessary
waivers could have a material adverse effect on our business, liquidity and
financial condition.
We have
previously obtained certain waivers and may continue to seek additional waivers
under our indenture or bank loan agreements. The waivers waive certain potential
breaches of representations and covenants under our indenture or bank loan
agreements and establish the extended deadlines for the delivery of certain
financial reports. Our current waivers under the bank loan agreements expire
on
April 30, 2007. The waivers applicable to our indenture expired January 31,
2007. In early February, we expect to complete the consent solicitations
extending the deadline for expiration of waivers related to our indenture until
April 30, 2007. Due to the delays in completing this annual report, we have
not
been able to issue our 2006 quarterly financial statements within this extended
date, which may impact whether we are able to file our 2006 Report on Form
10-K
within the extended period, and therefore, we may seek additional waivers under
the indenture and the bank loan agreements. It is also uncertain as to whether
we can issue our 2007 quarterly financial statements within the deadlines
prescribed by the indenture and bank loan agreements.
Under
our
indenture and certain of our bank loan agreements, the trustee or lenders have
the right to notify us if they believe we have breached a representation or
covenant under the operative debt instruments and may declare an event of
default. If one or more notices of default were to be given, we believe we
would
have various periods in which to cure such events of default or obtain necessary
waivers. If we do not cure the events of default or obtain necessary waivers
within the required time periods or certain extended time periods, the maturity
of some of our debt could be accelerated and our ability to incur additional
indebtedness could be restricted. Moreover, defaults under our indenture and
bank loan agreements could trigger cross-default provisions under those and
other arrangements. There can be no assurance that any additional waivers will
be received on a timely basis, if at all, or that any waivers obtained,
including the waivers we have already obtained, will extend for a sufficient
period of time to avoid an acceleration event, an event of default or other
restrictions on our business operations. The failure to obtain such waivers
could have a material adverse effect on our business, liquidity and financial
condition.
The
delay in filing this Annual Report on Form 10-K with the SEC and any failure
to
satisfy other NYSE listing requirements could cause the NYSE to commence
suspension or delisting procedures with respect to our common
stock.
As a
result of the delay in filing this Annual Report on Form 10-K, we were in breach
of certain continued listing requirements of the NYSE. We had received from
the
NYSE an additional period in which to trade our securities until March 1, 2007
in order for us to file this Annual Report on Form 10-K before that date. Any
other failure to satisfy NYSE listing requirements, if not waived by the NYSE,
could cause the NYSE to commence suspension or delisting procedures with respect
to our common stock. The commencement of any suspension or delisting procedures
by the NYSE remains, at all times, at the discretion of the NYSE and would
be
publicly announced by the NYSE. The delisting of our common stock from the
NYSE
may have a material adverse effect on us by, among other things,
limiting:
| · |
the
liquidity of our common stock;
|
| · |
the
market price of our common stock;
|
| · |
the
number of institutional and other investors that will consider investing
in our common stock;
|
| · |
the
availability of information concerning the trading prices and volume
of
our common stock;
|
| · |
the
number of broker-dealers willing to execute trades in shares of our
common
stock; and
|
| · |
our
ability to obtain equity financing for the continuation of our
operations.
|
PAGE
19
We
depend on proprietary technologies, and may not be able to protect our
intellectual property rights adequately.
We rely
on a combination of contractual provisions, confidentiality procedures and
patent, trademark, copyright and trade secrecy laws to protect the proprietary
aspects of our technology. These legal measures afford limited protection and
may not prevent our competitors from gaining access to our intellectual property
and proprietary information. Any of our patents may be challenged, invalidated,
circumvented or rendered unenforceable. Furthermore, we cannot ensure that
any
pending patent application held by us will result in an issued patent, or that
if patents are issued to us, such patents will provide meaningful protection
against competitors or competitive technologies. Litigation may be necessary
to
enforce our intellectual property rights, to protect our trade secrets and
to
determine the validity and scope of our proprietary rights. Any litigation
could
result in substantial expense, may reduce our profits and may not adequately
protect our intellectual property rights. In addition, we may be exposed to
future litigation by third parties based on claims that our products infringe
their intellectual property rights. Any litigation or claims against us, whether
or not successful, could result in substantial costs and harm our reputation.
In
addition, intellectual property litigation or claims could force us to do one
or
more of the following:
| · |
cease
selling or using any of our products that incorporate the challenged
intellectual property, which would adversely affect our
revenue;
|
| · |
obtain
a license from the holder of the intellectual property right alleged
to
have been infringed, which license may not be available on reasonable
terms, if at all; and
|
| · |
redesign
or, in the case of trademark claims, rename our products to avoid
infringing the intellectual property rights of third parties, which
may
not be possible and could be costly and time-consuming if it is possible
to do so.
|
We
may
license technology from third parties as part of our efforts to develop new
products or improve existing products. There can be no assurance that
technology, compounds, concepts or other materials that we license will allow
us
to develop new products or make improvements to existing products, or will
result in products available for commercial sale. The failure of licensing
arrangements to create new products or make improvements could have a material
adverse effect on our business.
Our
products could be subject to claims of infringement. Our
competitors and others in both the United States and foreign countries, may
have
applied for or obtained, or may in the future apply for and obtain, patents
that
will prevent, limit or otherwise interfere with our ability to make and sell
our
existing and planned products. Claims that our products infringe the proprietary
rights of others often are not asserted until after commencement of commercial
sales incorporating our technology.
Significant
litigation regarding intellectual property rights exists in our industry. Third
parties have made, and it is possible that they will make in the future, claims
of infringement against us or our contract manufacturers in connection with
their use of our technology. Any claims, even those without merit,
could:
| · |
be
expensive and time consuming to
defend;
|
| · |
cause
us to cease making, licensing or using products that incorporate
the
challenged intellectual property;
|
| · |
require
us to redesign or reengineer our products, if
feasible;
|
| · |
divert
management’s attention and resources;
or
|
| · |
require
us to enter into royalty or licensing agreements in order to obtain
the
right to use a necessary product, component or
process.
|
Any
royalty or licensing agreements, if required, may not be available to us on
acceptable terms or at all. A successful claim of infringement against us or
our
contract manufacturers in connection with the use of our technology, in
particular if we are unable to manufacture or sell any of our planned products
in any major market, could adversely affect our business.
PAGE
20
(d)
Risks Related to Regulatory Matters
We
are subject to extensive government regulation that increases our costs and
could prevent us from selling our products.
The
research, development, testing, manufacturing and marketing of our products
are
subject to extensive governmental regulations. Government regulations include
inspection of and controls over testing and manufacturing; safety and
environmental controls; efficacy; labeling; advertising and promotion;
requirements for record keeping, including for various electronic records and
electronic signature programs; and regulation of the sale and distribution
of
pharmaceutical and medical device products and samples. We are also subject
to
government regulation with respect to the prices we charge and the rebates
we
offer to customers. Government regulation substantially increases the cost
of
developing, manufacturing and selling our products.
In
the
United States, we must obtain approval from the FDA for each pharmaceutical
product that we market and FDA approval or clearance for each medical device
that we market. The FDA approval process is typically lengthy and expensive,
and
approval is never certain. Products distributed outside the United States are
also subject to government regulation, which may be equally or more demanding
than in the United States. Our new products could take a significantly longer
time than we expect to gain regulatory approval or may never gain approval.
If a
regulatory authority delays approval of a potentially significant product,
our
market value and operating results may decline, which could have a material
adverse effect on our business, operations or financial condition. Even if
the
FDA or another regulatory agency approves a product, the approval may limit
its
indicated uses, may otherwise limit our ability to promote, sell and distribute
it or may require post-marketing studies.
Currently,
we are actively pursuing approval for a number of products from regulatory
authorities in a number of countries, including, among others, the United
States, countries in the European Union and certain countries in Asia. The
clinical trials required to obtain such approvals are complex and expensive
and
their outcomes are uncertain. We incur substantial expense for, and devote
significant time to, clinical trials, yet cannot be certain that the trials
will
ever result in the commercial sale of a product. Positive results from
preclinical studies and early clinical trials do not ensure positive results
in
later clinical trials that form the basis of an application for regulatory
approval. We may suffer significant setbacks in clinical trials, even after
earlier clinical trials show promising results. Any of our products may produce
undesirable side effects that could cause us or regulatory authorities to
interrupt, delay or halt clinical trials of a pharmaceutical or medical device
candidate or rescind its regulatory approval, even after the product is in
the
market. We, the FDA or another regulatory authority may suspend or terminate
clinical trials at any time if we or they believe the trial participants face
unacceptable health risks. Non-compliance with applicable regulatory
requirements can result in fines, injunctions, penalties, mandatory recalls
or
seizures, suspensions of production, denial or withdrawal of pre-marketing
approvals, or recommendations by the regulatory body against governmental
contracts and criminal prosecution, each of which could have a material adverse
effect on our business, operations or financial condition.
The
FDA
and other regulatory agencies also inspect facilities at which we manufacture
our products. Failure to meet FDA and other regulations could result in
penalties being assessed against us or, in extreme cases, result in the closure
of a facility. For example, the FDA recently cited our Greenville, South
Carolina facility, where we manufacture lens care products, for a number of
non-compliant issues. While we have mechanisms in place to monitor compliance,
we cannot ensure that the FDA or other regulatory agencies will not find
indications of non-compliance. Fines or other enforcement responses could have
a
material adverse effect on our business, operations or financial
condition.
Our
development and marketing of products may fail or be delayed by many factors
relative to the requirements for product approval, including, for example,
the
following:
| · |
inability
to attract clinical investigators for
trials;
|
| · |
inability
to recruit patients at the expected
rate;
|
| · |
failure
of the trials to demonstrate a product's safety or
efficacy;
|
| · |
unavailability
of FDA or other regulatory agencies' accelerated approval
processes;
|
| · |
inability
to follow patients adequately after
treatment;
|
| · |
changes
in the design or formulation of a
product;
|
| · |
inability
to manufacture sufficient quantities of materials to use for clinical
trials;
|
| · |
unforeseen
governmental or regulatory delays;
|
| · |
failure
of manufacturing facilities to meet regulatory requirements;
or
|
| · |
failure
of clinical trial management, oversight or implementation to meet
regulatory requirements.
|
PAGE
21
Any
such
failure or delay, or the impact of a failure or delay, could have a material
adverse effect on our business, operations or financial condition.
We
have undertaken, and may in the future implement, a product recall or voluntary
market withdrawal, or could be required by a governmental authority to do so,
and could be exposed to significant product liability claims; we may have to
pay
significant amounts to those harmed and may suffer from adverse publicity as
a
result.
The
manufacturing and marketing of pharmaceuticals, medical devices and surgical
equipment and instruments involve an inherent risk that our products may prove
to be defective and cause a health risk. In that event, we may voluntarily
implement a recall or market withdrawal or may be required to do so by a
regulatory authority. In the past, we have recalled products, such as our
MoistureLoc
product,
voluntarily and we have been required to withdraw products by regulatory
authorities and, based on this experience, believe that the occurrence of a
recall could result in significant costs to us, potential disruptions in the
supply of our products to our customers and adverse publicity, all of which
could harm our ability to market our products. A recall of one of our products
or a product manufactured by another manufacturer could impair sales of other
similar products we market as a result of confusion concerning the scope of
the
recall. In the event of such actions, we have worked actively with regulatory
authorities to coordinate our response and to ensure the health and safety
of
our customers. We currently rely on a combination of self-insurance and
third-party insurance to cover potential product liability exposure. The
combination of our insurance coverage, cash flows and reserves may not be
adequate to satisfy product liabilities we may incur in the future. Even
meritless claims could subject us to adverse publicity, hinder us from securing
insurance coverage in the future and require us to incur significant legal
fees.
Successful product liability claims could have a material adverse effect on
our
financial condition.
Our
worldwide voluntary withdrawal of our ReNu
with MoistureLoc
product has had an adverse effect on our business, which could continue longer
than previously estimated, even permanently.
On May
15, 2006, we announced a worldwide voluntary recall of MoistureLoc lens
care
solution. Our decision was made following an investigation into an increase
in
fungal infections among contact lens wearers in the United States and certain
Asian markets. We have incurred and can be expected to incur substantial costs
in connection with the withdrawal of this product, associated investigations,
and commercial actions and related legal actions brought against us. Our
financial condition has been and will be negatively affected by the impact
of
sales returns and coupon redemptions estimated with the MoistureLoc
recall.
Lost MoistureLoc
revenues
combined with lower revenues for other lens care products, reflecting market
share losses caused by trade consumer uncertainty resulting from our
investigations into the outbreak of fungal infections among contact lens wearers
and subsequent market withdrawal of MoistureLoc,
will
have an impact on our financial condition. There has been, to date, and could
continue to be a negative effect on our non-lens care product categories,
primarily in Asia, as a result of the MoistureLoc
recall.
There can be no assurances that these impacts will not continue in the future.
While we intend to vigorously defend ourselves in these actions, as a result
of
this withdrawal, we have been, and may be in the future, named as a party to
claims, lawsuits and other actions that could result in liability exposure,
including liability exposure as to which the Company's third party product
liability insurance is inadequate, insufficient or unavailable, as highlighted
in further detail elsewhere in this report, including in this Item
1A. Risk Factors
of this
report. Any judgments, settlements or awards of damages could have an adverse
effect on our business, earnings and financial condition. See Item
7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
and in
Item
8. Financial Statements and Supplementary Data under
Note
21 — Other Matters
of this
Annual Report on Form 10-K.
Our
activities involve hazardous materials and emissions and may subject us to
environmental liability.
Our
manufacturing, research and development practices involve the controlled use
of
hazardous materials. We are subject to federal, state and local laws and
regulations in the various jurisdictions in which we have operations governing
the use, manufacturing, storage, handling and disposal of these materials and
certain waste products. Although we believe that our safety and environmental
procedures for handling and disposing of these materials comply with legally
prescribed standards, we cannot completely eliminate the risk of accidental
contamination or injury from these materials. We may also be liable for actions
of previous owners on properties we acquire. Remedial environmental actions
could require us to incur substantial unexpected costs which would materially
and adversely affect our results of operations. If we were involved in a major
environmental accident or found to be in substantial non-compliance with
applicable environmental laws, we could be held liable for damages or penalized
with fines.
PAGE
22
We
may incur increased costs or suffer competitive disadvantage as a result of
recently enacted and proposed changes in laws and
regulations.
Recently
enacted and proposed changes in the laws and regulations affecting public
companies, including the provisions of the Sarbanes-Oxley Act of 2002 and rules
implemented or proposed by the SEC and by the NYSE, have resulted in and are
expected to continue to result in increased costs to us as a public company.
The
new rules could make it more difficult or more costly for us to obtain certain
types of insurance, including directors’ and officers’ liability insurance, and
we may be forced to accept reduced policy limits and coverage or incur
substantially higher costs to obtain the same or similar coverage. The impact
of
these events could also make it more difficult for us to attract and retain
qualified persons to serve on our board of directors, our board committees
or as
executive officers. We are presently evaluating and monitoring developments
with
respect to new and proposed rules and cannot predict or estimate the amount
of
the additional costs we may incur or the timing of such costs.
Item
1B. Unresolved
Staff Comments
Not
applicable.
Item
2. Properties
We
own
and lease a number of important principal physical properties. Our headquarters
and one of our manufacturing facilities are located in Rochester, New York.
We
also have U.S.-based manufacturing facilities in Clearwater, Florida;
Greenville, South Carolina; St. Louis, Missouri; and Tampa, Florida. Outside
the
United States, we have manufacturing facilities in Brazil, China, France,
Germany, India, Ireland, Italy and Scotland.
Administrative,
marketing, research/laboratory, distribution and warehousing facilities are
located in various parts of the world.
We
consider our facilities suitable and adequate for the operations involved.
All
facilities are being productively utilized. The majority of our facilities
are
being utilized to perform more than one operating function and, as such, may
house the functions of multiple segments.
Item
3. Legal
Proceedings
Legal
Matters The
Company is involved as a party in a number of material matters in litigation,
including general litigation related to the restatement of the Company's
financial information and the MoistureLoc
withdrawal, material intellectual property litigation, and material tax
litigation. The Company intends to vigorously defend itself in all of these
matters. At this time, the Company is unable to predict the outcome of, and
cannot reasonably estimate the impact of, any pending litigation matters,
matters concerning allegations of non-compliance with laws or regulations,
and
matters concerning other allegations of other improprieties. The Company has
not
made any financial provision for potential liability in connection with these
matters.
PAGE
23
Shareholder
Securities Class Actions
There is
a consolidated securities class action, entitled In
re
Bausch & Lomb Incorporated Securities Litigation,
Case
Nos. 06-cv-6294 (master file), 06-cv-6295, 06-cv-6296, and 06-cv-6300, pending
in Federal District Court for the Western District of New York, Rochester
Division, against the Company and certain present and former officers and
directors. Initially, four separate shareholder actions were filed between
March
and May of 2006 in Federal District Court for the Southern District of New
York,
and these were later transferred to the Western District of New York and
consolidated into the above-captioned matter. Plaintiffs in these actions
purport to represent a putative class of shareholders who purchased Company
stock at allegedly artificially inflated levels between January 27, 2005 and
May
3, 2006. Among other things, plaintiffs allege that the defendants issued
materially false and misleading public statements regarding the Company's
financial condition and operations by failing to disclose negative information
relating to the Company's Brazilian and Korean subsidiaries, internal controls,
and problems with MoistureLoc,
thereby
inflating the price of Company stock during the alleged class period. Plaintiffs
seek unspecified damages. The cases are currently awaiting appointment of lead
plaintiff and lead plaintiff's counsel in accordance with the Private Securities
Litigation Reform Act. Pursuant to a stipulated schedule ordered by the Court,
the lead plaintiff appointed by the Court must file a consolidated amended
complaint by the earlier of (a) 45 days after the Company files its Annual
Report on Form 10-K for the year ended December 31, 2005, or (b) 90 days after
entry of the Court's order appointing the lead plaintiff, provided, however,
that, at a minimum, the lead plaintiff will have 45 days after entry of the
Court's order appointing the lead plaintiff to file such consolidated amended
complaint.
ERISA-Based
Class Actions There
is
a consolidated ERISA class action, entitled In
re
Bausch & Lomb Incorporated ERISA Litigation,
Case
Nos. 06-cv-6297 (master file), 06-cv-6315, and 06-cv-6348, pending in the
Federal District Court for the Western District of New York, Rochester Division,
against the Company and certain present and former officers and directors.
Initially, three separate actions were filed between April and May of 2006
in
Federal District Court for the Southern District of New York, and these were
later transferred to the Western District of New York and consolidated into
the
above-captioned matter. Plaintiffs in these actions purport to represent a
class
of participants in the Company's defined contribution 401(k) Plan for whose
individual accounts the plan held an interest in Company stock between May
25,
2000 and the present. Among other things, plaintiffs allege that the defendants
breached their fiduciary duties to plan participants by allowing the plan to
invest in Company Common stock despite the fact that it was allegedly
artificially inflated due to the failure to disclose negative information
relating to the Company's Brazilian and Korean subsidiaries, internal controls,
and problems with MoistureLoc.
Plaintiffs seek unspecified damages as well as certain declaratory and
injunctive relief. On August 28, 2006, the Court entered an order appointing
co-lead plaintiffs and co-lead plaintiffs' counsel. Pursuant to a stipulated
schedule ordered by the Court, plaintiffs in the consolidated ERISA action
will
have until 10 days after a consolidated amended complaint is filed in the
consolidated securities action described above, to file a consolidated amended
complaint.
Shareholder
Derivative Actions
The
shareholder derivative actions, in which a shareholder seeks to assert the
rights of the Company derivatively against certain present and former officers
and directors, fall into two categories: (a) those asserting allegations
relating to accounting issues at the Company's Brazilian and Korean
subsidiaries; and (b) those asserting allegations relating to the MoistureLoc
withdrawal.
There
is
a consolidated derivative action asserting allegations relating to accounting
issues at the Company's Brazilian and Korean subsidiaries, entitled In
re
Bausch & Lomb Incorporated Derivative Litigation,
Case
Nos. 06-cv-6298 (master file) and 06-cv-6299, pending in Federal District Court
for the Western District of New York, Rochester Division, against certain
present and former officers and directors of the Company, and also naming the
Company as nominal defendant. Initially, two separate derivative actions were
filed in April 2006 in Federal District Court for the Southern District of
New
York, and were later transferred to the Western District of New York and
consolidated. Among other things, plaintiffs allege that the individual
defendants breached their fiduciary duties to the Company by causing or allowing
the Company to issue materially false and misleading public statements regarding
the Company's financial condition and operations that failed to disclose
negative information about the Company's Brazilian and Korean subsidiaries
and
internal controls, thereby inflating the price of Company stock during the
relevant time period. Plaintiffs purport to allege damage to the Company as
a
result of, among other things, a decrease in the Company's market
capitalization, exposure to liability in securities fraud actions, and the
costs
of internal investigations and financial restatements. Plaintiffs seek
unspecified damages as well as certain declaratory and injunctive relief,
including for misappropriation of inside information for personal benefit by
certain of the individual defendants. Pursuant to a stipulated schedule ordered
by the Court, plaintiffs in this consolidated derivative action will have until
30 days after a consolidated amended complaint is filed in the consolidated
securities action described above, to file a consolidated amended
complaint.
PAGE
24
On
January 3, 2006, the Company received a demand letter dated December 28, 2005,
from a law firm not involved in the now consolidated derivative actions
described above, on behalf of a shareholder who also is not involved in the
derivative actions, demanding that the Board of Directors bring claims on behalf
of the Company based on allegations substantially similar to those that were
later alleged in the two derivative actions relating to accounting issues at
the
Brazilian and Korean subsidiaries. In response to the demand letter, the Board
of Directors adopted a board resolution establishing an Evaluation Committee
(made up of independent directors) to investigate, review and analyze the facts
and circumstances surrounding the allegations made in the demand letter, but
reserving to the full Board authority and discretion to exercise its business
judgment in respect of the proper disposition of the demand. The Committee
has
engaged independent outside counsel to advise it.
There
are
also two purported derivative actions asserting allegations relating to the
MoistureLoc
withdrawal. The first case, entitled Little
v. Zarrella,
Case
No. 06-cv-6337, was filed in June 2006 in the Federal District Court for the
Southern District of New York and was transferred to the Western District of
New
York, Rochester Division, where it is currently pending against certain
directors of the Company, and also naming the Company as nominal defendant.
The
second case, entitled Pinchuck
v. Zarrella,
Case
No. 06-6377, was filed in June 2006 in the Supreme Court of the State of New
York, County of Monroe, where it is currently pending against the directors
of
the Company, and also naming the Company as nominal defendant. Among other
things, plaintiffs in these actions allege that the individual defendants
breached their fiduciary duties to the Company in connection with the Company's
handling of the MoistureLoc
withdrawal. Plaintiffs purport to allege damage to the Company as a result
of,
among other things, costs of litigating product liability and personal injury
lawsuits, costs of the product recall, costs of carrying out internal
investigations, and the loss of goodwill and reputation. Plaintiffs seek
unspecified damages as well as certain declaratory and injunctive
relief.
Pursuant
to a stipulated schedule ordered by the Court, plaintiff in the state-court
Pinchuck
action
served an amended complaint on September 15, 2006 and defendants served a motion
to dismiss the amended complaint on November 15, 2006; plaintiff's opposition
to
the motion was served on January 15, 2007, and defendants' reply is due February
15, 2007. Pursuant to a stipulated schedule ordered by the Court in the federal
Little
action,
plaintiff in that case will have until 60 days after a ruling on a motion to
dismiss in the consolidated securities action is entered or, if no such motion
is filed, 60 days after defendants' answer to a consolidated amended complaint
in the consolidated securities action is filed, to file an amended
complaint.
Product
Liability Lawsuits As
of
February 1, 2007, the Company has been served or is aware that it has been
named
as a defendant in approximately 196 product liability lawsuits pending in
various federal and state courts as well as certain other non-U.S.
jurisdictions. Of the 196 cases, 117 actions have been filed in U.S. federal
courts, 77 cases have been filed in various U.S. state courts and two actions
have been filed in non-U.S. jurisdictions. These also include 170 individual
actions filed on behalf of individuals who claim they suffered personal injury
as a result of using a ReNu
solution
and 26 putative class actions alleging personal injury as a result of using
a
ReNu
solution
and/or violations of one or more state consumer protection statutes. In the
personal injury actions, plaintiffs allege liability based on, among other
things, negligence, strict product liability, failure to warn and breach of
warranty. In the consumer protection actions, plaintiffs seek economic damages,
claiming that they were misled to purchase products that were not as safe as
advertised. Several lawsuits contain a combination of these allegations. On
August 14, 2006, the Judicial Panel on Multidistrict Litigation (JPML)
created a coordinated
proceeding and transferred
an initial set of MoistureLoc
product
liability lawsuits to the U.S. District Court for the District of South
Carolina. The
Company has advised the JPML of all federal cases available for transfer and
has
urged the issuance of conditional transfer orders. As of February 1, 2007,
104
of the 117 federal cases noted above have been transferred to the
JPML.
Material
Intellectual Property Litigation
In
October 2005, Rembrandt Vision Technologies, L.P. filed a patent infringement
lawsuit against the Company and CIBA Vision Corporation. The action is entitled,
Rembrandt
Vision Technology, L.P. v. Bausch & Lomb Incorporated and CIBA Vision
Corporation,
bearing
case number 2:05 CV 491, and is pending in the U.S. District Court for the
Eastern District of Texas (Marshall Division). Rembrandt asserts that the
Company and CIBA have infringed certain of Rembrandt’s oxygen permeability and
tear-wettability technology that it claims to be protected by a U.S. Patent
No.
5,712,327 entitled “Soft Gas Permeable Lens Having Improved Clinical
Performance” (the 327 Patent). Rembrandt claims that the Company infringes the
327 Patent by selling soft gas permeable contact lenses that have tear-wettable
surfaces in the United States, which would include the Company’s PureVision
silicone
hydrogel lens products. The Company denies, and intends to vigorously defend
itself against, Rembrandt’s claims. The court has issued a scheduling order and
has set a trial date of November 5, 2007.
PAGE
25
Material
Tax Litigation
As
disclosed in Item
8. Financial Statements and Supplementary Data under
Note
10 — Provision for Income Taxes
of this
Annual Report on Form 10-K, on May 12, 2006, the Company received a Notice
of
Final Partnership Administrative Adjustment from the Internal Revenue Service
relating to partnership tax periods ended June 4, 1999 and December 25, 1999,
for Wilmington Partners L.P. (Wilmington), a partnership formed in 1993 in
which
the majority of partnership interests are held by certain of our subsidiaries.
The Final Partnership Administrative Adjustment (FPAA) proposes adjustments
increasing the ordinary income reported by Wilmington for its December 25,
1999
tax year by a total of $10, and increasing a long-term capital gain reported
by
Wilmington for that tax year by $190. The FPAA also proposes a $550 negative
adjustment to Wilmington's basis in a financial asset contributed to it by
one
of its partners in 1993; this adjustment would also affect the basis of that
partner — one of our subsidiaries — in its partnership interest in Wilmington.
The asserted adjustments could, if sustained in full, increase the tax
liabilities of the partnership's partners for the associated tax periods by
more
than $200, plus penalties and interest. We have not made any financial provision
for the asserted additional taxes, penalties or interest as we believe
the asserted adjustments are not probable and estimable.
Since
1999, the Company's consolidated financial statements have included a deferred
tax liability relating to the partnership. As of December 31, 2005, this
deferred tax liability equaled $157. This deferred tax liability is currently
reducing net deferred tax assets for which a valuation allowance has been
recorded as of December 31, 2005.
On
August
7, 2006, we made a petition to the U.S. Tax Court to challenge the asserted
adjustments. Internal Revenue Service's answer was filed on October 4, 2006,
and
we initiated a motion to strike portions of the answer on November 1, 2006.
We
believe we have numerous substantive and procedural tax law arguments to dispute
the adjustments. Tax, penalties and interest cannot be assessed until a Tax
Court determination is made, and an assessment, if any, would likely not be
made
until some time after 2007. While we intend to vigorously defend against the
asserted adjustments, our failure to succeed in such a defense could
significantly increase the liability of the partnership's partners for taxes,
plus interest and penalties, which in turn would have a material adverse effect
on our financial results and cash flows.
General
Litigation Statement
From
time to time, the Company is engaged in, or is the subject of, various lawsuits,
claims, investigations and proceedings, including product liability, patent,
trademark, commercial and other matters, in the ordinary course of
business.
In
addition to pending litigation matters, the Company may from time to time learn
of alleged non-compliance with laws or regulations or other improprieties
through compliance hotlines, communications by employees, former employees
or
other third parties, as a result of its internal audit procedures, or otherwise.
As disclosed in Item
8. Financial Statements and Supplementary Data under
Note
2 — Restatement of
this
Annual Report on Form 10-K, in response to such allegations, the Company's
Audit
Committee conducted certain investigations during 2005 and 2006, which led,
among other things, to the restatement of previously reported financial
information and the recording of current charges. The restatement, in turn,
resulted in the Company's being unable to file timely certain periodic financial
information and the Company's obtaining certain waivers from creditors, as
well
as an extension from the NYSE to permit continued trading notwithstanding the
delay in filing the Company's 2005 Annual Report on Form 10-K.
The
Audit
Committee of the Board of Directors is currently investigating the potential
U.S. Foreign Corrupt Practices Act implications of the Company’s Spanish
subsidiary’s providing free product, principally intraocular lenses used in
cataract surgery, and other things of value to doctors performing surgical
procedures at public hospitals in Spain. This investigation was initiated
following reports of potentially improper sales practices by a former employee.
The investigation of the Company’s Spanish subsidiary has been voluntarily
reported to the Northeast Regional Office of the SEC. We cannot predict the
outcome of this pending investigation, and at this time cannot reasonably
estimate the potential liability of the Company or its Spanish subsidiary in
connection with these matters.
The
Company’s policy is to comply with applicable laws and regulations in each
jurisdiction in which it operates and, if the Company becomes aware of a
potential or alleged violation, to conduct an appropriate investigation, to
take
appropriate remedial action and to cooperate fully with any related governmental
inquiry. There can be no assurance that any pending or future investigation
or
resulting remedial action will not have a material adverse financial,
operational or other effect on the Company.
PAGE
26
Item
4. Submission
of Matters to a Vote of Security Holders
Not
applicable.
Executive
Officers of the Registrant
Set
forth below are the names, ages (as of December 1, 2006), positions and offices
held by and a brief account of the business experience during the past five
years of each executive officer.
|
Name
and Age
|
Position
|
|
Ronald
L. Zarrella (57)
|
Chairman
and Chief Executive Officer since 2001; Executive Vice President
and
President, General Motors North America, General Motors Corporation
(1998-2001).
|
|
Gerhard
Bauer (50)
|
Senior
Vice President, Global Operations and Engineering since May 2006;
Vice
President, Global Operations and Engineering for Europe (2001-May
2006).
|
|
Alan
H. Farnsworth (54)
|
Senior
Vice President and President, Europe, Middle East and Africa Region
since
2001; Corporate Vice President, Pharmaceuticals/Europe
(2000-2001).
|
|
Dwain
L. Hahs (54)
|
Senior
Vice President and President Asia Region since May 2006; Senior Vice
President, Global Operations and Engineering
(2000-2006).
|
|
Paul
G. Howes (52)
1
|
Senior
Vice President and President, Americas Region (2003-2007); Vice President,
Mid-Atlantic Business Group, Merck & Co., Inc. (2000-2003); Vice
President Sales and Marketing, Specialty Products, Merck & Co., Inc.
(1998-2001).
|
|
John
M. Loughlin (56)
2
|
Senior
Vice President since May 2006; Senior Vice President and President
Asia
Region (2000-2006).
|
|
Stephen
C. McCluski (54)
|
Senior
Vice President and Chief Financial Officer since 1995.
|
|
David
R. Nachbar (44)
|
Senior
Vice President, Human Resources since 2002; Senior Vice President,
Human
Resources, The St. Paul Companies, Inc. (1998-2002).
|
|
Robert
B. Stiles (57)
|
Senior
Vice President and General Counsel since 1997.
|
|
Praveen
Tyle (46)
|
Senior
Vice President, Research & Development and Chief Scientific Officer
since 2004; Group Vice President, Pharmaceutical Sciences and
Manufacturing, Biovail Corporation (2003-2004); Vice President, Global
Head, Global Pharmaceutical Sciences, Pharmacia Corporation (2001-2003);
Vice President, Pharmaceutical Sciences - U.S., Pharmacia Corporation
(1999-2001).
|
|
Evon
L. Jones (42)
|
Corporate
Vice President and Chief Information Officer since January 2005;
Senior
Vice President and Chief Information Officer, The Dial Corporation
(2001-2004); Senior Vice President and Chief Information Officer,
America
West Holdings Corporation (1998-2001).
|
|
Barbara
M. Kelley (60)
|
Corporate
Vice President, Communications and Investor Relations since
2001.
|
|
Jurij
Z. Kushner (56)
|
Corporate
Vice President, Controller since 1995.
|
|
Brian
Levy (55)
|
Corporate
Vice President and Chief Medical Officer since 2004; Vice President,
Clinical & Medical Affairs (2000-2004).
|
|
Angela
J. Panzarella (48)
|
Corporate
Vice President, Global Vision Care since 2001.
|
PAGE
27
|
Gary
M. Phillips (40)
|
Corporate
Vice President and Vice President Commercial Operations, U.S. Surgical
and
Pharmaceuticals since January 2007; Corporate Vice President, Global
Pharmaceuticals (2002-2006); Executive Director, Strategic Planning,
Novartis Pharmaceuticals
(2000-2002).
|
|
Efrain
Rivera (50)
|
Corporate
Vice President and Treasurer since 2004; Corporate Vice President
and
Assistant Treasurer (2003-2004); Leave of Absence (2003); Corporate
Vice
President and President, Latin America and Canada (2002-2003); President,
Bausch & Lomb Latin America and General Manager, Bausch & Lomb
Mexico (2001-2002); Vice President and Controller, Vision Care
(1998-2001).
|
|
Henry
C. Tung (47)
|
Corporate
Vice President, Global Surgical since February 2005; Vice President,
New
Business Development, Boston Scientific Corporation (2000-February
2005).
|
1 As
announced in our Current Report on Form 8-K, filed January 5, 2007, Paul G.
Howes intends to resign from the Company.
2 As
announced in April 2006, John M. Loughlin is retiring from the
Company.
All
officers serve on a year-to-year basis through the day of the annual meeting
of
shareholders of the Company and there is no arrangement or understanding among
any of the officers of the Company and any other persons pursuant to which
such
officer was selected as an officer.
PAGE
28
Part
II
Item
5. Market
for Bausch & Lomb Incorporated's Common Stock, Related Shareholder Matters
and Issuer Purchases of Equity Securities
The
section entitled Dividends
as set
forth in Item
7. Management's Discussion and Analysis of Financial Condition and Results
of
Operations of
this
Annual Report on Form 10-K is incorporated herein by reference.
The
table
entitled Quarterly
Stock Prices as
set
forth in Item
8. Financial Statements and Supplementary Data
under
Note
22 — Quarterly Results, Stock Prices and Selected Financial Data
(Unaudited)
of this
Annual Report on Form 10-K is incorporated herein by reference.
Equity
Compensation Plan Information
The
following table represents options and restricted shares outstanding under
the
1990 and 2001 Stock Incentive Plans, the 2003 Long-Term Incentive Plan and
the
Annual Retainer Stock Plan for Non-Employee Directors as of December 31,
2005:
|
Plan
Category
|
Number
of Securities to be Issued Upon Exercise of Outstanding Options,
Warrants
and Rights
|
Weighted
Average Exercise Price of Outstanding Options, Warrants and
Rights
|
Number
of Securities Remaining Available for Future Issuance
|
|
Options
|
|||
|
Equity
compensation plans approved by shareholders
|
5,375,970
1
|
$50.77
|
6,313,107
1
|
|
Equity
compensation plans not approved by shareholders
|
448,267
2
|
$40.28
|
-
2
|
|
Total
Options
|
5,824,237
|
$49.96
|
6,313,107
|
|
Restricted
Stock Awards
|
|||
|
Equity
compensation plans approved by shareholders
|
566,268
3
|
-
|
|
|
Equity
compensation plans not approved by shareholders
|
-
2
|
-
|
|
|
Total
Restricted Stock Awards
|
566,268
|
-
|
|
1
|
Represents
awards issued under the 1990 Stock Incentive Plan and the 2003 Long-Term
Incentive Plan. Shares remaining available for issuance consist of
6,243,287 from the 2003 Plan of which no more than 1,619,205 shares
may be
issued as grants other than options and SARs and 69,820 shares under
the
Annual Retainer Stock Plan for Non-Employee Directors. There are
no shares
available under the 1990 Stock Incentive
Plan.
|
|
2
|
The
2001 Stock Incentive Plan was approved by the Board of Directors
on
January 22, 2001. The Plan provides for an annual pool of shares
for grant
of options and restricted shares equal to two percent of outstanding
shares. Eligible participants include all employees but not officers
or
directors. Options granted under the Plan have an option price equal
to
100 percent of the fair market value of the stock on the date of
grant and
a term of ten years. The options typically vest ratably over three
years
and restricted shares typically vest 50 percent after two years and
50
percent after three years with vesting contingent upon a continued
employment relationship with the Company. Effective January 1, 2003,
the
Board amended this Plan to allow for no further awards under this
Plan.
|
|
3
|
Included
in this number are performance share awards that were granted under
the
1990 Stock Incentive Plan which upon achievement of performance goals
may
be distributed immediately or deferred under the Restricted Stock
Deferred
Compensation Plan as elected by the participant. At December 31,
2005,
278,057 shares had been deferred and will be paid out in shares based
on
the election made by the
participant.
|
PAGE
29
Issuer
purchases of equity securities
|
Period
|
Total
Number of Shares Purchased 1
|
Average
Price Paid Per Share
|
Total
Number of Shares Purchased as Part of Publicly Announced Programs
2,
3
|
Maximum
Number of Shares that May Yet Be Purchased Under the Programs 2,3
|
|
September
25, 2005 - October 22, 2005
|
1,040
|
$78.38
|
-
|
2,219,838
|
|
October
23, 2005 - November 19, 2005
|
4,674
|
$79.86
|
2,830
|
2,217,008
|
|
November
20, 2005 - December 31, 2005
|
10,067
|
$79.10
|
4,707
|
2,212,301
|
|
Total
|
15,781
|
$79.28
|
7,537
|
2,212,301
|
|
1
|
Shares
purchased during the fourth quarter ended December 31, 2005 include
purchases pursuant to a publicly announced repurchase program (see
footnote 2 below), stock compensation plans and deferred compensation
plans.
|
|
2
|
On
January 27, 2004, the Board of Directors authorized a program to
repurchase up to two million shares of the Company's outstanding
Common
stock. There is no expiration date for this program. During the fourth
quarter ended December 31, 2005, 7,537 shares were repurchased at
an
average price of $80.70. Shares repurchased after November 2005 were
through private transactions with the rabbi trust for the Company's
Deferred Compensation Plan.
|
|
3
|
On
July 26, 2005, the Board of Directors approved the purchase of up
to an
additional two million shares of the Company's outstanding Common
stock.
There is no expiration date for this program, and since its approval
no
shares have been repurchased.
|
Item
6. Selected
Financial Data
The
table
entitled Selected
Financial Data as
set
forth in Item
8. Financial Statements and Supplementary Data
under
Note
22 — Quarterly Results, Stock Prices and Selected Financial Data
(Unaudited)
of this
Annual Report on Form 10-K is incorporated herein by reference.
Item
7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations
This
management’s discussion and analysis of financial condition and results of
operations (MD&A) should be read in conjunction with the accompanying
financial statements of Bausch & Lomb Incorporated (“Bausch & Lomb,”
“we,” or “the Company”). All dollar amounts in this MD&A, except for per
share data, are expressed in millions unless specified otherwise, and earnings
per share are presented on a diluted basis.
The
MD&A includes a non-GAAP constant-currency measure which we use as a key
performance metric in assessing organic business growth trends.
Constant-currency results are calculated by translating actual current- and
prior-year local currency revenues and expenses at the same predetermined
exchange rates. The translated results are then used to determine year-over-year
percentage increases or decreases that exclude the impact of currency. Since
a
significant portion of our revenues are derived in markets outside the United
States, we monitor constant-currency performance for Bausch & Lomb in total
as well as for each of our business segments. In addition, we use
constant-currency results to assess non-U.S. operations' performance against
yearly targets for the purpose of calculating bonuses for certain regional
employees.
All
figures and comparisons in this MD&A reflect restatements of our financial
results from 2001 through the second quarter of 2005 that are more fully
described in the Recent
Developments
section
below and in Item
8. Financial Statements and Supplementary Data
under
Note
2 — Restatement
of this
Annual Report on Form 10-K.
The
cumulative impact of restatement adjustments increased prior-2001 net earnings
by $34.
As
more
fully described in the Recent
Developments
section
and in Item
8. Financial Statements and Supplementary Data
under
Note
23 — Subsequent Event,
of this
Annual Report on Form 10-K following the close of fiscal year 2005, but prior
to
the filing of this Annual Report on Form 10-K, we instituted a worldwide recall
of ReNu
with
MoistureLoc
contact
lens care solution (MoistureLoc).
Certain charges associated with this recall were recorded as part of 2005
operating results, while others will be recorded in 2006. In the discussion
of
2005 operating performance which follows, we have quantified the charges, and
in
some cases have provided certain information about growth rates and operating
ratios prior to the recording of the charges. We believe this additional
disclosure is useful and relevant because it provides a basis for understanding
underlying business performance independent of this unusual
situation.
PAGE
30
Additionally,
during the third quarter of 2005 we disposed of our Woehlk contact lens business
in Germany, and in the fourth quarter of 2005 we completed the acquisition
of
Freda, a Chinese ophthalmic pharmaceuticals company. These events impacted
the
reported growth rates for our regions and product categories. In certain
instances in the discussion of 2005 operating performance which follows, we
have
disclosed growth rates for the total company, Europe and Asia regions, as well
as the contact lens and pharmaceuticals product categories, that are calculated
by removing incremental revenues associated with Freda from 2005 and revenues
associated with Woehlk from both 2005 and 2004. We believe this additional
disclosure is useful and relevant because it provides a basis for understanding
and assessing underlying performance of those portions of our business which
were fully in place for both periods.
Business
Overview
Bausch
& Lomb is a global eye health company dedicated to perfecting vision and
enhancing life for consumers around the world. We develop, manufacture and
sell
contact lenses and lens care products, ophthalmic pharmaceuticals and products
used in ophthalmic surgery. With products available in more than 100 countries,
the Bausch
& Lomb
name is
one of the best known and most respected eye health brands in the
world.
Our
fiscal quarter consists of 13 weeks, whereby the first and second months of
each
quarter contain four weeks of results and the third month of each quarter
contains five weeks of results. Accordingly, net sales are typically higher
in
the third month of any given quarter. In addition, the execution of a broad
portfolio of our customer incentive programs typically has been higher at the
end of each quarter.
We
closely monitor and evaluate customer incentives and other customer programs,
such as extended credit terms. Should we determine that certain customer
programs result in excessive levels of inventory in certain channels of trade
(such as retailers, mass merchandisers, wholesalers and distributors) or the
risks and rewards have not transferred to the customer, net sales in conjunction
with the associated programs would be accounted for as consignment sales. Our
revenue recognition policy is further discussed in Item
8. Financial Statements and Supplementary Data
under
Note
1 — Significant Accounting Policies
of this
Annual Report on Form 10-K.
We
manage
the business through five business segments. These include three regional
commercial segments (the Americas; Europe, Middle East and Africa [Europe];
and
Asia); and two centralized functions (Global Operations & Engineering and
Research & Development). The Global Operations & Engineering segment is
responsible for manufacturing, distribution, logistics and engineering
activities for all product categories in all geographies. The Research &
Development segment has global responsibility across all product categories
for
product research and development, clinical and medical affairs, and regulatory
affairs and quality.
Because
our products are sold worldwide (with approximately 60 percent of sales derived
outside the United States), our reported financial results are impacted by
fluctuations in foreign currency exchange rates. At the net sales line, our
greatest translation risk exposures are principally to the euro and the Japanese
yen. At the earnings level, we are somewhat naturally hedged to the euro because
top-line exposures are offset by euro-denominated expenses resulting from
manufacturing, research and sales activities in Europe. In general, we do not
use financial instruments to hedge translation risk, other than occasionally
for
the yen. In each of the three years discussed in this MD&A, foreign currency
fluctuations have generally provided positive benefits to reported results
as
compared to constant-currency results, although that trend began to reverse
in
the second half of 2005.
The
eye
health market is intensely competitive, characterized by continuous product
development, frequent new product introductions and price competition. Our
goal
is to build upon our already strong presence in this market by:
| · |
focusing
on research and development programs to yield a robust
pipeline;
|
| · |
expanding
the geographic reach of key products, especially in under-penetrated
markets;
|
| · |
enhancing
our organizational capabilities by further implementing disciplined
business processes in all areas, particularly sales;
and
|
| · |
protecting
the equity represented by the Bausch
& Lomb
brand. In the shorter term, this will include activities to rebuild
that
equity in certain markets where brand image has suffered following
the
outbreak of fungal infections among contact lens wearers and the
MoistureLoc
recall.
|
PAGE
31
We
expect
drivers of sales and earnings growth over the next several years to
include:
| · |
a
continued focus on faster growing business segments and the launch
of
higher-margin new products in each of our product
categories;
|
| · |
favorable
demographic trends, such as the aging of the population and an increase
in
the incidence of myopia and presbyopia;
and
|
| · |
opportunities
to further implement Lean manufacturing techniques and other cost
improvements to enhance margins, particularly for contact lenses
and
intraocular lenses.
|
We
remain
focused on bringing innovations to the market to sustain and improve our leading
positions and improve overall profitability. Our success and future growth
depend, in part, on whether we can develop, efficiently manufacture and
effectively market products for the treatment of eye conditions that incorporate
the latest technologies.
We
devote
substantial resources to research and development (R&D). We currently hold
approximately 2,100 patents and have approximately 1,900 pending patent
applications. The R&D process is expensive, prolonged and entails
considerable uncertainty. Because of the complexities and uncertainties
associated with ophthalmic R&D, products currently in development may take
years to complete, or may not complete the development process or obtain the
regulatory approvals required to market them.
Our
ability to maintain operating margins (defined as operating income divided
by
net sales) may be affected by regulatory actions, particularly for
pharmaceutical and surgical products. Further, managed care organizations and
governments continue to emphasize the delivery of more cost-effective medical
therapies. Many third-party payers for hospital services have substantially
revised their payment methodologies in recent years, resulting in stricter
standards for reimbursement of hospital and outpatient charges.
To
offset
these developments, we are intensely focused on improving manufacturing
efficiency and controlling costs. We believe the profitability improvement
initiatives in place since mid-2002 yielded an infrastructure capable of
supporting a much higher revenue base than we have historically experienced.
Manufacturing initiatives that incorporate Lean principles and automation have
yielded gross margin improvements. Our goal also is to manage selling,
administrative and general expenses to help support increased levels of R&D
spending. Together, these activities are designed to further increase operating
margins in the future.
Recent
Developments
Restatement
of Financial Information As
previously disclosed in our Notification of Late Filings on Form 12b-25 with
the
Securities and Exchange Commission (SEC) on March 17, 2006, May 11, 2006, August
8, 2006 and November 9, 2006, we were unable to file this Annual Report on
Form
10-K on a timely basis due to ongoing independent investigations conducted
by
the Audit Committee of our Board of Directors; expanded year-end procedures
that
were not complete; expanded procedures with respect to the accounting for income
taxes that were not complete; and continued efforts to complete our assessment
of our internal control over financial reporting. Our review and evaluation
of
internal control over financial reporting concluded that we did not maintain
effective internal control over financial reporting as of December 31, 2005.
For
additional information regarding our assessment of internal controls, see
Item
9A. Controls
and Procedures of
this
Annual Report on Form 10-K.
As
a
result of the Audit Committee’s investigations and the expanded year-end
procedures and expanded procedures with respect to the accounting for income
taxes, we identified errors made in the application of generally accepted
accounting principles (GAAP) that impacted previously reported financial
statements. Consequently, management determined that our previously issued
consolidated financial statements for fiscal years 2003 and 2004 and our
financial information for the years ended 2001 and 2002 (including a cumulative
increase to 2001 beginning retained earnings of $34) and the first and second
quarters of 2005 should be restated to correct for such errors and departures
from GAAP. The restated financial statements contained in this Annual Report
on
Form 10-K contain a number of adjustments associated with revenue recognition,
accounting for reserves, accounting for foreign currency adjustments, accounting
for income taxes including income taxes payable, tax reserves, deferred income
tax assets and liabilities, related valuation allowances and income tax expense,
and the accounting for the Company's Long-Term Deferred Compensation Plan.
For
further details regarding the Audit Committee investigations and restatement
of
financial results, see Item
8. Financial Statements and Supplementary Data
under
Note
2 — Restatement and Note 22 — Quarterly
Results, Stock Prices and Selected Financial Data (Unaudited)
of this
Annual Report on Form 10-K.
PAGE
32
Market
Withdrawal of MoistureLoc On
May
15, 2006, we announced a worldwide voluntary recall of MoistureLoc.
Our
decision was made following an investigation into increased fungal infections
among contact lens wearers in the United States and certain Asian markets.
The
decision represents a subsequent event occurring prior to filing this Annual
Report on Form 10-K, but related to product manufactured and sold in 2005.
In
accordance with GAAP, we have recorded certain items associated with the recall
in our 2005 financial results. The adjustments were recorded as third-quarter
events, because that is the earliest reporting period for which we have not
filed quarterly financial results on a Quarterly Report on Form
10-Q.
The
charges associated with the withdrawal reduced full-year 2005 earnings before
income taxes and minority interest by $39, net income by $27, and earnings
per
share by $0.49. Of the pre-tax amount, $17 related to estimated customer returns
and consumer rebates and was recorded as a reduction to net sales; $14 related
to costs associated with returned product and the disposal and write-off of
inventory, which was recorded as cost of products sold; and $8 related to costs
associated with the notification to customers and consumers required in market
withdrawal instances, which were recorded as selling, administrative and general
expense. Charges include $2 for settled, unlitigated, claims; however, we have
not recorded any provisions for potential legal actions related to
MoistureLoc because
we are not able to predict the outcome of such actions, if any (see further
discussion in Item
3. Legal Proceedings,
and in
Item
8. Financial Statements and Supplementary Data under
Note
21—
Other Matters of
this
Annual Report on Form 10-K and the discussion in Legal
Matters
below).
The
decision to withdraw the product will negatively impact 2006 financial
performance, and likely beyond. In addition to provisions for sales returns
and
coupon redemptions that we will record in 2006 associated with the MoistureLoc
recall
(primarily in Europe), performance will be hampered by the impact from lost
MoistureLoc
revenues; lower revenues for other lens care products, reflecting market share
losses caused by trade and consumer uncertainty; negative collateral effect
on
our non-lens care product categories, primarily in Asia; and higher expenses
associated with the recall, legal expenses associated with product liability
lawsuits, and increased promotional expense to regain distribution and brand
equity in the lens care category. For an additional discussion on the market
withdrawal of MoistureLoc
lens
care solution, see Item
8. Financial Statements and Supplementary Data under
Note
23 — Subsequent Event
of this
Annual Report on Form 10-K.
Legal
Matters
The
Company is involved as a party in a number of material matters in litigation,
including general litigation related to the restatement of the Company's
financial information and the MoistureLoc
withdrawal, material intellectual property litigation, and material tax
litigation. The Company intends to vigorously defend itself in all of these
matters. At this time, the Company is unable to predict the outcome of, and
cannot reasonably estimate the impacts of, any pending litigation matters,
matters concerning allegations of non-compliance with laws or regulations,
and
matters concerning other allegations of other improprieties. The Company has
not
made any financial provision for potential liability in connection with these
matters.
Shareholder
Securities Class Actions
There is
a consolidated securities class action, entitled In
re
Bausch & Lomb Incorporated Securities Litigation,
Case
Nos. 06-cv-6294 (master file), 06-cv-6295, 06-cv-6296, and 06-cv-6300, pending
in Federal District Court for the Western District of New York, Rochester
Division, against the Company and certain present and former officers and
directors. Initially, four separate shareholder actions were filed between
March
and May of 2006 in Federal District Court for the Southern District of New
York,
and these were later transferred to the Western District of New York and
consolidated into the above-captioned matter. Plaintiffs in these actions
purport to represent a putative class of shareholders who purchased Company
stock at allegedly artificially inflated levels between January 27, 2005 and
May
3, 2006. Among other things, plaintiffs allege that defendants issued materially
false and misleading public statements regarding the Company's financial
condition and operations by failing to disclose negative information relating
to
the Company's Brazilian and Korean subsidiaries, internal controls, and problems
with MoistureLoc,
thereby
inflating the price of Company stock during the class period. Plaintiffs seek
unspecified damages. The cases are currently awaiting appointment of lead
plaintiff and lead plaintiff's counsel in accordance with the Private Securities
Litigation Reform Act. Pursuant to a stipulated schedule ordered by the Court,
the lead plaintiff appointed by the Court must file a consolidated amended
complaint by the earlier of (a) 45 days after the Company files its Annual
Report on Form 10-K for the year ended December 31, 2005, or (b) 90 days after
entry of the Court's order appointing the lead plaintiff, provided, however,
that, at a minimum, the lead plaintiff will have 45 days after entry of the
Court's order appointing the lead plaintiff to file such consolidated amended
complaint.
PAGE
33
ERISA-Based
Class Actions
There is
a consolidated ERISA class action, entitled In
re
Bausch & Lomb Incorporated ERISA Litigation,
Case
Nos. 06-cv-6297 (master file), 06-cv-6315, and 06-cv-6348, pending in the
Federal District Court for the Western District of New York, Rochester Division,
against the Company and certain present and former officers and directors.
Initially, three separate actions were filed between April and May of 2006
in
Federal District Court for the Southern District of New York, and these were
later transferred to the Western District of New York and consolidated into
the
above-captioned matter. Plaintiffs in these actions purport to represent a
class
of participants in our 401(k) Plan for whose individual accounts the plan held
an interest in Company stock between May 25, 2000 and the present. Among other
things, plaintiffs allege that the defendants breached their fiduciary duties
to
plan participants by allowing the plan to invest in Company Common stock despite
the fact that it was allegedly artificially inflated due to the failure to
disclose negative information relating to the Company's Brazilian and Korean
subsidiaries, internal controls, and problems with MoistureLoc.
Plaintiffs seek unspecified damages as well as certain declaratory and
injunctive relief. On August 28, 2006, the Court entered an order appointing
lead plaintiffs and lead plaintiffs' counsel. Pursuant to a stipulated schedule
ordered by the Court, plaintiffs in the consolidated ERISA action will have
until 10 days after a consolidated amended complaint is filed in the
consolidated securities action described above, to file a consolidated amended
complaint.
Shareholder
Derivative Actions
The
shareholder derivative actions, in which a shareholder seeks to assert the
rights of the Company derivatively against certain present and former officers
and directors, fall into two categories: (a) those asserting allegations
relating to accounting issues at the Company's Brazilian and Korean
subsidiaries; and (b) those asserting allegations relating to the MoistureLoc
withdrawal.
There
is
a consolidated derivative action asserting allegations relating to accounting
issues at the Company's Brazilian and Korean subsidiaries, entitled In
re
Bausch & Lomb Incorporated Derivative Litigation,
Case
Nos. 06-cv-6298 (master file) and 06-cv-6299, pending in Federal District Court
for the Western District of New York, Rochester Division, against certain
present and former officers and directors of the Company, and also naming the
Company as nominal defendant. Initially, two separate derivative actions were
filed in April 2006 in Federal District Court for the Southern District of
New
York, and were later transferred to the Western District of New York and
consolidated. Among other things, plaintiffs allege that the individual
defendants breached their fiduciary duties to the Company by causing or allowing
the Company to issue materially false and misleading public statements regarding
the Company's financial condition and operations that failed to disclose
negative information about the Company's Brazilian and Korean subsidiaries
and
internal controls, thereby inflating the price of Company stock during the
relevant time period. Plaintiffs purport to allege damage to the Company as
a
result of, among other things, a decrease in the Company's market
capitalization, exposure to liability in securities fraud actions, and the
costs
of internal investigations and financial restatements. Plaintiffs seek
unspecified damages as well as certain declaratory and injunctive relief,
including for misappropriation of inside information for personal benefit by
certain of the individual defendants. Pursuant to a stipulated schedule ordered
by the Court, plaintiffs in this consolidated derivative action will have until
30 days after a consolidated amended complaint is filed in the consolidated
securities action described above, to file a consolidated amended
complaint.
On
January 3, 2006, we received a demand letter dated December 28, 2005, from
a law
firm not involved in the now consolidated derivative actions described above,
on
behalf of a shareholder who also is not involved in the derivative actions,
demanding that the Board of Directors bring claims on behalf of the Company
based on allegations substantially similar to those that were later alleged
in
the two derivative actions relating to accounting issues at our Brazilian and
Korean subsidiaries. In response to the demand letter, the Board of Directors
adopted a board resolution establishing an Evaluation Committee (made up of
independent directors) to investigate, review and analyze the facts and
circumstances surrounding the allegations made in the demand letter, but
reserving to the full Board authority and discretion to exercise its business
judgment in respect of the proper disposition of the demand. The Committee
has
engaged independent outside counsel to advise it.
There
are
also two purported derivative actions asserting allegations relating to the
MoistureLoc
withdrawal. The first case, entitled Little
v. Zarrella,
Case
No. 06-cv-6337, was filed in June 2006 in the Federal District Court for the
Southern District of New York and was transferred to the Western District of
New
York, Rochester Division, where it is currently pending against certain
directors of the Company, and also naming the Company as nominal defendant.
The
second case, entitled Pinchuck
v. Zarrella,
Case
No. 06-6377, was filed in June 2006 in the Supreme Court of the State of New
York, County of Monroe, where it is currently pending against the directors
of
the Company, and also naming the Company as nominal defendant. Among other
things, plaintiffs in these actions allege that the individual defendants
breached their fiduciary duties to the Company in connection with the Company's
handling of the MoistureLoc
withdrawal. Plaintiffs purport to allege damage to the Company as a result
of,
among other things, costs of litigating product liability and personal injury
lawsuits, costs of the product recall, costs of carrying out internal
investigations, and the loss of goodwill and reputation. Plaintiffs seek
unspecified damages as well as certain declaratory and injunctive
relief.
PAGE
34
Pursuant
to a stipulated schedule ordered by the Court, plaintiff in the state-court
Pinchuck
action
served an amended complaint on September 15, 2006 and defendants served a motion
to dismiss the amended complaint on November 15, 2006; plaintiff's opposition
to
the motion was served on January 15, 2007, and defendants' reply is due February
15, 2007. Pursuant to a stipulated schedule ordered by the Court in the federal
Little
action,
plaintiff in that case will have until 60 days after a ruling on a motion to
dismiss in the consolidated securities action is entered or, if no such motion
is filed, 60 days after defendants' answer to a consolidated amended complaint
in the consolidated securities action is filed, to file an amended
complaint.
Product
Liability Lawsuits
As of
February 1, 2007, the Company has been served or is aware that it has been
named
as a defendant in approximately 196 product liability lawsuits pending in
various federal and state courts as well as certain other non-U.S.
jurisdictions. Of the 196 cases, 117 actions have been filed in U.S. federal
courts, 77 cases have been filed in various U.S. state courts and two actions
have been filed in non-U.S. jurisdictions. These also include 170 individual
actions filed on behalf of individuals who claim they suffered personal injury
as a result of using a ReNu
solution
and 26 putative class actions alleging personal injury as a result of using
a
ReNu
solution
and/or violations of one or more state consumer protection statutes. In the
personal injury actions, plaintiffs allege liability based on, among other
things, negligence, strict product liability, failure to warn and breach of
warranty. In the consumer protection actions, plaintiffs seek economic damages,
claiming that they were misled to purchase products that were not as safe as
advertised. Several lawsuits contain a combination of these allegations. On
August 14, 2006, the Judicial Panel on Multidistrict Litigation (JPML) created
a
coordinated proceeding and transferred an initial set of MoistureLoc
product
liability lawsuits to the U.S. District Court for the District of South
Carolina. The Company has advised the JPML of all federal cases available for
transfer and has urged the issuance of conditional transfer orders. As of
February 1, 2007, 104 of the 117 federal cases noted above have been transferred
to the JPML.
Material
Intellectual Property Litigation In
October 2005, Rembrandt Vision Technologies, L.P. filed a patent infringement
lawsuit against the Company and CIBA Vision Corporation. The action is entitled,
Rembrandt
Vision Technology, L.P. v. Bausch & Lomb Incorporated and CIBA Vision
Corporation,
bearing
case number 2:05 CV 491, and is pending in the U.S. District Court for the
Eastern District of Texas (Marshall Division). Rembrandt asserts that the
Company and CIBA have infringed certain of Rembrandt’s oxygen permeability and
tear-wettability technology that it claims to be protected by a U.S. Patent
No.
5,712,327 entitled “Soft Gas Permeable Lens Having Improved Clinical
Performance” (the 327 Patent). Rembrandt claims that the Company infringes the
327 Patent by selling soft gas permeable contact lenses that have tear-wettable
surfaces in the United States, which would include the Company’s PureVision
silicone
hydrogel lens products. The Company denies, and intends to vigorously defend
itself against, Rembrandt’s claims. The Court has issued a scheduling order and
has set a trial date of November 5, 2007.
Material
Tax Litigation
As
disclosed in Item
8. Financial Statements and Supplementary Data
under
Note
10 — Provision for Income Taxes
of this
Annual Report on Form 10-K, on May 12, 2006, the Company received a Notice
of
Final Partnership Administrative Adjustment from the Internal Revenue Service
relating to partnership tax periods ended June 4, 1999 and December 25, 1999,
for Wilmington Partners L.P. (Wilmington), a partnership formed in 1993 in
which
the majority of partnership interests are held by certain of the Company's
subsidiaries. The Final Partnership Administrative Adjustment (FPAA) proposes
adjustments increasing the ordinary income reported by Wilmington for its
December 25, 1999 tax year by a total of $10, and increasing a long-term capital
gain reported by Wilmington for that tax year by $190. The FPAA also proposes
a
$550 negative adjustment to Wilmington's basis in a financial asset contributed
to it by one of its partners in 1993; this adjustment would also affect the
basis of that partner — one of the Company's subsidiaries — in its partnership
interest in Wilmington. The asserted adjustments could, if sustained in full,
increase the tax liabilities of the partnership's partners for the associated
tax periods by more than $200, plus penalties and interest. The Company has
not
made any financial provision for the asserted additional taxes, penalties or
interest as the Company believes
the asserted adjustments are not probable and estimable.
Since
1999, the Company's consolidated financial statements have included a deferred
tax liability relating to the partnership. As of December 31, 2005, this
deferred tax liability equaled $157. This deferred tax liability is currently
reducing net deferred tax assets for which a valuation allowance has been
recorded as of December 31, 2005.
PAGE
35
On
August
7, 2006, the Company made a petition to the U.S. Tax Court to challenge the
asserted adjustments. Internal Revenue Service's answer was filed on October
4,
2006, and the Company initiated a motion to strike portions of the answer on
November 1, 2006. The Company believes it has numerous substantive and
procedural tax law arguments to dispute the adjustments. Tax, penalties and
interest cannot be assessed until a Tax Court determination is made, and an
assessment, if any, would likely not be made until some time after 2007. While
the Company intends to vigorously defend against the asserted adjustments,
its
failure to succeed in such a defense could significantly increase the liability
of the partnership's partner for taxes, plus interest and penalties, which
in
turn would have a material adverse effect on the Company's financial results
and
cash flows.
For
additional information on these actions, as well as other litigation matters,
matters concerning allegations and/or investigations of non-compliance with
laws
or regulations, and other matters concerning allegations of improprieties,
please refer to Item
3. Legal Proceedings
and in
Item
8. Financial Statements and Supplementary Data under
Note
21 — Other Matters
of this
Annual Report on Form 10-K.
Financial
Overview
Reported
net income was $19 or $0.35 per share for the year ended December 31, 2005,
compared to 2004 net income of $154 or $2.83 per share and 2003 net income
of
$106 or $1.98 per share. Net income for the year ended December 27, 2003
includes a charge of $1 or $0.02 per share as a cumulative change in accounting
principle related to the adoption of Statement of Financial Accounting Standards
(SFAS) No. 143. A reconciliation of net income and earnings per share to income
and earnings per share before cumulative effect of change in accounting
principle is presented below:
|
2005
|
2004
(Restated)
|
2003
(Restated)
|
|||||||||||||||||
|
Amount
|
Per
Share
|
Amount
|
Per
Share
|
Amount
|
Per
Share
|
||||||||||||||
|
Net
income
|
$
|
19.2
|
$
|
0.35
|
$
|
153.9
|
$
|
2.83
|
$
|
106.0
|
$
|
1.98
|
|||||||
|
Cumulative
effect of change in accounting principle, net of taxes, due to
adoption of
SFAS No. 143
|
-
|
-
|
-
|
-
|
0.9
|
0.02
|
|||||||||||||
|
Income
before cumulative effect of change
in accounting principle
|
$
|
19.2
|
$
|
0.35
|
$
|
153.9
|
$
|
2.83
|
$
|
106.9
|
$
|
2.00
|
|||||||
|
Average
Shares Outstanding - Diluted (000s)
|
55,684
|
54,504
|
53,519
|
||||||||||||||||
Our
results for 2005 and 2003 were impacted by several significant events,
summarized below. There were no significant events impacting 2004
results.
The
2005
significant events in the aggregate reduced reported net income by $160 or
$2.87
per share. They included:
| · |
A
valuation allowance against deferred income tax assets which reduced
reported net income by $149, or $2.67 per share, recorded in the
third
quarter. The need for the allowance resulted from anticipated losses
in
early future periods attributed to the U.S. entities to which the
deferred
tax assets relate and uncertainties surrounding when we will return
to
U.S. profitability. The expected losses result from, among other
things,
the costs associated with the MoistureLoc
recall and its expected impact on 2006 financial
results;
|
| · |
Incremental
income tax expense of $9, or $0.17 per share, recorded in the third
quarter associated with our repatriating foreign earnings under the
American Jobs Creation Act of 2004 (AJCA);
and
|
| · |
Amortization
of inventory step-up totaling $2 before taxes ($1 or $0.03 per share
after
taxes) related to purchase accounting adjustments associated with
the 2005
acquisition of Freda.
|
For
a
further discussion of the two income tax related items, see the section entitled
Income
Taxes below
and
in Item
8. Financial Statements and Supplementary Data under
Note
10 — Provision for Income Taxes
of this
Annual Report on Form 10-K.
PAGE
36
The
2003
significant events, excluding the $1 loss on adoption of SFAS No. 143 already
reflected in net income, in the aggregate increased reported net income by
$0.4
or $0.01 per share. They included:
| · |
Reversals
of severance-related restructuring charges of $6 before taxes ($4
or $0.07
per share after taxes), when certain anticipated termination actions
and
plant closures did not occur due to increased demand for certain
product
lines; and
|
| · |
R&D
expense of $6 before taxes ($4 or $0.06 per share after taxes) recorded
in
the fourth quarter associated with acquiring an early-stage pharmaceutical
technology we had previously been developing with a third-party
partner.
|
Net
Sales and Income by Business Segment and Geographic Region
Geographic
Net Sales
The
following table summarizes net sales by geographic region.
|
Net
Sales
|
Percent
Increase
Actual
Dollars
|
Percent
Increase
Constant
Currency
|
Percent
of Total Company Net Sales
|
||||||||||
|
2005
|
|||||||||||||
|
Non-U.S.
|
$
|
1,462.8
|
7
|
%
|
6
|
%
|
62
|
%
|
|||||
|
U.S.
1
|
891.0
|
3
|
%
|
3
|
%
|
38
|
%
|
||||||
|
Total
Company 2
|
$
|
2,353.8
|
5
|
%
|
5
|
%
|
|||||||
|
2004
(Restated)
|
|||||||||||||
|
Non-U.S.
|
$
|
1,370.0
|
14
|
%
|
6
|
%
|
61
|
%
|
|||||
|
U.S.
1
|
863.5
|
6
|
%
|
6
|
%
|
39
|
%
|
||||||
|
Total
Company
|
$
|
2,233.5
|
11
|
%
|
6
|
%
|
|||||||
|
2003
(Restated)
|
|||||||||||||
|
Non-U.S.
|
$
|
1,204.0
|
15
|
%
|
3
|
%
|
60
|
%
|
|||||
|
U.S.
1
|
814.5
|
7
|
%
|
7
|
%
|
40
|
%
|
||||||
|
Total
Company
|
$
|
2,018.5
|
12
|
%
|
5
|
%
|
|||||||
1
U.S.
revenues represented approximately 90 percent of the Americas segment revenue
in
each year.
|
2
|
2005
amounts reflect the impact of the voluntary recall of MoistureLoc
discussed in Recent
Developments
above and in Item
8. Financial Statements and Supplementary Data
under Note
23 —Subsequent Event
of
this Annual Report on Form 10-K. Charges associated with the recall
reduced U.S. net sales by $12.0 and non-U.S. net sales by $5.1,
respectively.
|
Business
Segment
Net Sales We
are
organized on a regionally based management structure for commercial operations,
with our research and development and product supply functions managed on a
global basis. Beginning in 2005, the engineering function, which had previously
been part of the research and development segment, became part of the product
supply function. Our business segments (after this realignment of the
engineering function) are the Americas region; the Europe, Middle East and
Africa region (Europe); the Asia region; the Research & Development
organization; and the Global Operations & Engineering organization. In each
geographic segment, we market products in five categories: contact lens, lens
care, pharmaceuticals, cataract and vitreoretinal, and refractive. The contact
lens category includes traditional, planned replacement disposable, daily
disposable, multifocal, and toric soft lenses and rigid gas permeable (RGP)
lenses and materials. The lens care category includes multipurpose solutions,
cleaning and conditioning solutions for RGP lenses, re-wetting drops and saline
solutions. The pharmaceuticals category includes generic and proprietary
prescription ophthalmic drugs, ocular vitamins and over-the-counter medications.
The cataract and vitreoretinal category includes intraocular lenses (IOLs),
phacoemulsification and vitreoretinal surgical equipment and related disposable
products, hand-held surgical instruments, viscoelastics and other products
used
in cataract and vitreoretinal surgery. The refractive category includes lasers,
microkeratomes, diagnostic equipment and other products and equipment used
in
refractive surgery. There are no transfers of products between product
categories.
PAGE
37
Operating
income is the primary measure of segment income. Segment income excludes the
significant items noted in the Financial
Overview.
The
following table summarizes net sales and operating income by segment and
presents consolidated operating income:
|
2005
1
|
2004
|
2003
|
|||||||||||||||||
|
As
Reported
|
Percent
of Total Net Sales
|
Restated
|
Percent
of Total Net Sales
|
Restated
|
Percent
of Total Net Sales
|
||||||||||||||
|
Net
Sales
|
|||||||||||||||||||
|
Americas
|
$
|
1,005.3
|
43
|
%
|
$
|
960.2
|
43
|
%
|
$
|
903.3
|
45
|
%
|
|||||||
|
Europe
|
859.9
|
36
|
%
|
818.9
|
37
|
%
|
724.4
|
36
|
%
|
||||||||||
|
Asia
|
488.6
|
21
|
%
|
454.4
|
20
|
%
|
390.8
|
19
|
%
|
||||||||||
|
$
|
2,353.8
|
$
|
2,233.5
|
$
|
2,018.5
|
||||||||||||||
|
Operating
Income (Costs)
|
|||||||||||||||||||
|
Americas
|
$
|
333.0
|
$
|
326.1
|
$
|
282.6
|
|||||||||||||
|
Europe
|
250.8
|
251.2
|
201.5
|
||||||||||||||||
|
Asia
|
123.6
|
128.5
|
106.1
|
||||||||||||||||
|
Research
& Development
|
(200.5
|
)
|
(180.6
|
)
|
(166.1
|
)
|
|||||||||||||
|
Global
Operations & Engineering
|
(131.7
|
)
|
(157.2
|
)
|
(123.1
|
)
|
|||||||||||||
|
Segment
Income
|
375.2
|
368.0
|
301.0
|
||||||||||||||||
|
Corporate
Administration 2
|
(89.8
|
)
|
(88.9
|
)
|
(73.5
|
)
|
|||||||||||||
|
Restructuring
reversals 3
|
-
|
-
|
6.3
|
||||||||||||||||
|
Other
significant charges 4
|
(1.9
|
)
|
-
|
(5.6
|
)
|
||||||||||||||
|
Operating
Income
|
$
|
283.5
|
$
|
279.1
|
$
|
228.2
|
|||||||||||||
|
1
|
2005
amounts reflect the impact of the voluntary recall of MoistureLoc
discussed in Recent
Developments
above and in Item
8. Financial Statements and Supplementary Data
under Note
23 — Subsequent Event
of
this Annual Report on Form 10-K. Charges associated with the recall
reduced Americas region net sales and operating income by $12.4 and
$25.0,
respectively; Asia region net sales and operating income by $4.7
and
$11.0, respectively; increased Global Operations & Engineering
operating costs by $1.2; and increased corporate administration expense
by
$1.7.
|
2
Corporate
administration costs are discussed in Operating
Costs and Expenses.
3
Income
associated with certain restructuring plans, as described in Restructuring
Charges and Asset Write-offs.
|
4
|
Other
significant charges in 2005 represent purchase accounting adjustments
related to the acquisition of Freda. Other significant charges in
2003
pertain to R&D expense associated with the acquisition of an
early-stage pharmaceutical
technology.
|
The
following table summarizes net sales by geographic segment:
|
2005
vs. 2004
|
2004
vs. 2003
|
|||||||||||||||||||||
|
2005
1
|
2004
(Restated)
|
Percent
Change
Actual
Dollars
|
Percent
Change
Constant
Currency
|
2003
(Restated)
|
Percent
Change
Actual
Dollars
|
Percent
Change
Constant
Currency
|
||||||||||||||||
|
Americas
|
$
|
1,005.3
|
$
|
960.2
|
5
|
%
|
4
|
%
|
$
|
903.3
|
6
|
%
|
6
|
%
|
||||||||
|
Europe
|
859.9
|
818.9
|
5
|
%
|
5
|
%
|
724.4
|
13
|
%
|
3
|
%
|
|||||||||||
|
Asia
|
488.6
|
454.4
|
8
|
%
|
7
|
%
|
390.8
|
16
|
%
|
12
|
%
|
|||||||||||
|
Total
Company
|
$
|
2,353.8
|
$
|
2,233.5
|
5
|
%
|
5
|
%
|
$
|
2,018.5
|
11
|
%
|
6
|
%
|
||||||||
|
1
|
2005
amounts reflect the impact of the voluntary recall of MoistureLoc
discussed in Recent
Developments
above and in Item
8. Financial Statements and Supplementary Data
under Note
23 — Subsequent Event
of
this Annual Report on Form 10-K. Provisions for sales returns and
consumer
rebates associated with the recall reduced Americas region net sales
by
$12.4 and Asia region net sales by
$4.7.
|
PAGE
38
2005
Versus 2004
Consolidated net sales increased 5 percent compared to 2004 on both a reported
and constant-currency basis. The 2005 amounts include the impact of
approximately $17 in customer returns and rebate provisions associated with
the
voluntary recall of MoistureLoc
in Asia
and the Americas (see further discussion in Item
8. Financial Statements and Supplementary Data
under
Note
23 —Subsequent Event
of this
Annual Report on Form 10-K), which largely offset $18 in incremental revenues
from the acquisition of Freda.
| · |
Americas
segment net sales increased 5 percent from 2004, or 4 percent in
constant
currency. Those figures include $12 in sales return and consumer
rebate
provisions associated with the MoistureLoc
recall.
Excluding those items, Americas segment net sales grew 6 percent,
or 5
percent in constant currency. Gains were led by above-market performance
for contact lenses and higher sales of cataract surgery
products.
|
| · |
Europe
segment net sales increased 5 percent on both a reported and
constant-currency basis. Gains were led by higher sales of pharmaceutical
and vision care products, which more than offset declines for the
refractive surgery category and the impact of divesting our German
Woehlk
contact lens business in the 2005 third quarter. The MoistureLoc
product recalled in Europe was both manufactured and sold in 2006;
therefore, sales return and customer rebates of $18 associated with
the
MoistureLoc
recall in the Europe segment were not provided for in 2005, but have
been
expensed in 2006.
|
| · |
The
Asia segment reported net sales gains of 8 percent compared to 2004,
or 7
percent in constant currency. Those figures include $5 in sales return
and
consumer rebate provisions associated with the MoistureLoc
recall as well as $18 in incremental sales associated with the acquisition
of Freda. Excluding those items, Asia segment net sales grew 5 percent,
or
4 percent in constant currency, with gains led by higher sales of
contact
lenses and cataract surgery
products.
|
2004
Versus 2003
Consolidated net sales increased 11 percent on a reported basis and increased
6
percent in constant currency.
| · |
Americas
segment net sales grew 6 percent from 2003, with gains in all product
categories.
|
| · |
Europe
segment net sales increased 13 percent, mainly reflecting favorable
currency benefits. Constant-currency sales growth was 3 percent.
Gains
were driven by the contact lens, surgical and pharmaceutical categories.
Constant-currency European lens care sales were flat with the prior
year,
which was encouraging given overall market
dynamics.
|
| · |
Asia
segment net sales grew 16 percent, or 12 percent on a constant-currency
basis. Growth was experienced in all product categories, but especially
our lines of vision care products.
|
A
more
detailed discussion of net sales trends by geographic region
follows.
Americas
The
following table summarizes net sales trends for the Americas region by product
category:
|
2005
vs. 2004 Restated
Percent
Increase (Decrease)
|
2004
Restated vs. 2003 Restated
Percent
Increase
|
||||||||||||
|
Actual
Dollars
|
Constant
Currency
|
Actual
Dollars
|
Constant
Currency
|
||||||||||
|
Contact
Lens
|
15
|
%
|
14
|
%
|
8
|
%
|
7
|
%
|
|||||
|
Lens
Care 1
|
-
|
%
|
(1
|
)%
|
1
|
%
|
1
|
%
|
|||||
|
Pharmaceuticals
|
3
|
%
|
3
|
%
|
11
|
%
|
11
|
%
|
|||||
|
Cataract
and Vitreoretinal
|
7
|
%
|
6
|
%
|
2
|
%
|
1
|
%
|
|||||
|
Refractive
|
(4
|
)%
|
(6
|
)%
|
20
|
%
|
20
|
%
|
|||||
|
Total
Americas
|
5
|
%
|
4
|
%
|
6
|
%
|
6
|
%
|
|||||
|
1
|
2005
amounts reflect the impact of the voluntary recall of MoistureLoc
discussed in Recent
Developments
above and in Item
8. Financial Statements and Supplementary Data
under Note
23 — Subsequent Event
of
this Annual Report on Form 10-K.
Provisions for sales returns and consumer rebates associated with
the
recall reduced Americas region net sales by
$12.4.
|
PAGE
39
2005
Versus 2004
| · |
Contact
lens category growth reflected
the reintroduction of the PureVision
brand of silicone hydrogel contact lenses in the United States as
well as
continued growth for SofLens
Toric and SofLens
Multi-Focal contact lenses. Moderating that performance was a continued
decline in sales of our older, conventional hydrogel two-week contact
lenses, reflecting the overall market shift to silicone hydrogel
materials. Sales of SofLens
Toric
contact lenses for people with astigmatism increased more than 10
percent
from 2004. As expected, dollar growth for this product has begun
to
moderate, reflecting the competitive impact of new silicone hydrogel
toric
offerings. We launched PureVision
Toric contact lenses in the United States on a limited basis in October
2005 and reached full commercial distribution in the second quarter
of
2006. Sales of SofLens
Multi-Focal contact lenses for people with presbyopia grew more than
30
percent in the Americas region in 2005, reflecting our continued
leading
market position.
|
| · |
Sales
in the lens care category were essentially flat mainly due to sales
returns and consumer rebate provisions associated with our voluntary
recall of MoistureLoc
which was reflected as a subsequent event (see Item
8. Financial Statements and Supplementary Data
under Note
23 — Subsequent Event
of
this Annual Report on Form 10-K for further discussion). Excluding
the
impact of the recall, Americas region constant-currency lens care
sales
increased 3 percent, reflecting U.S. market share gains for our lines
of
multipurpose solutions and higher sales of Boston
lens care solutions for RGP contact lenses. As described above, lens
care
category sales have declined in 2006 in all regions, due to additional
charges associated with the MoistureLoc
recall combined with market share losses resulting from customer
and trade
concerns during our investigation into increased fungal infections
among
contact lens wearers.
|
| · |
Pharmaceuticals
sales increases were mainly attributable to incremental sales of
Zylet
combination eye drops, as well as higher sales of Lotemax
steroid eye drops. Those gains were largely offset by expected declines
in
sales of two non-ophthalmic drugs in our multisource pharmaceuticals
portfolio. Prescriptions for our lines of steroid eye drops containing
loteprednol etabonate continued to trend positively throughout 2005,
with
Lotemax
and Alrex
prescriptions reaching all-time highs. Our vitamins business grew
1
percent in constant currency. As expected, we faced difficult comparisons
to the prior year, when we launched PreserVision
soft gels and customers were carrying inventories of both tablets
and gel
formulations. The underlying dynamics of the vitamins market remain
strong, with consumption growing more than 15 percent in dollars,
and our
PreserVision
brand continuing to gain market
share.
|
| · |
Sales
gains for cataract and vitreoretinal products were led by our lines
of
silicone IOLs, which increased more than 15 percent. That performance
was
mainly due to our SofPort
lines of silicone IOLs, which grew at an even faster rate and benefited
from market share gains and strong market acceptance for the SofPort
AO
IOL featuring an aspheric optics design. Phacoemulsification product
sales
increased more than 5 percent, reflecting an increase in revenues
for
Millennium
microsurgical systems and disposable products used in cataract surgery
procedures. The increase in Millennium
net sales reflects primarily a change in the type of system placements
in
2005 as compared to the prior year. We placed more units under direct
sales agreements in 2005 compared to 2004, when we placed more units
under
operating lease arrangements requiring revenue to be recognized over
a
longer period of time.
|
| · |
Sales
declines in the refractive category were mainly due to lower sales
of
lasers and microkeratome blades. These declines were partially offset
by
higher sales of per-procedure cards, especially those used for
Zyoptix
personalized vision correction
procedures.
|
2004
Versus 2003
| · |
Contact
lens sales growth was led by the SofLens
Multi-Focal and SofLens
Toric brands. SofLens
Multi-Focal contact lens sales nearly doubled, and SofLens
Toric
contact lens revenues grew slightly less than 20 percent and achieved
an
all-time high share of patient fits in 2004. Performance for these
two
lines was somewhat tempered by weakness in U.S. two-week disposable
SVS
products, reflecting market shifts toward competitive silicone hydrogel
offerings and our lack of such a product prior to the U.S. reintroduction
of the PureVision
brand of contact lenses in 2005.
|
| · |
Lens
care sales growth was mainly due to our lines of solutions for soft
contact lenses, and reflected incremental sales from the initial
shipments
of MoistureLoc
solution in the third quarter. We maintained our leading position
in the
U.S. market for both multipurpose solutions and rigid gas permeable
solutions in 2004.
|
PAGE
40
| · |
Sales
gains in the pharmaceuticals category in the Americas region were
led by
our lines of ocular vitamins, proprietary pharmaceuticals and multisource
products. Ocular vitamin sales grew more than 20 percent, with the
PreserVision
brand up more than 40 percent. Late in the third quarter, we introduced
an
easy-to-swallow soft gel version of the original AREDS formula, as
well as
a line extension containing lutein in place of beta carotene. In
the
proprietary pharmaceuticals portfolio, sales of Alrex
and Lotemax
steroid drops each grew more than 20 percent in 2004, reflecting
more
prescriptions written for both
products.
|
| · |
Cataract
and vitreoretinal category sales growth was due to our lines of IOLs,
which registered overall gains of approximately 10 percent. Sales
growth
in our lines of silicone IOLs, most notably the SofPort
brand, were even stronger, at more than 20 percent. IOL performance
was
partially offset by lower revenues for phacoemulsification products,
reflecting a higher mix of equipment placed under operating lease
arrangements than in 2003.
|
| · |
Despite
a decline in refractive category net sales in the fourth quarter
compared
to the same period in 2003, full-year 2004 growth reflected incremental
sales of U.S. equipment and higher margin per-procedure cards associated
with the Zyoptix
system for personalized vision correction. We launched that product
late
in 2003. Other factors contributing to 2004 performance included
higher
sales of standard LASIK procedure cards and microkeratome
blades.
|
Europe
The
following table summarizes net sales trends for the Europe region by product
category:
|
2005
vs. 2004 Restated
Percent
Increase (Decrease)
|
2004
Restated vs. 2003 Restated
Percent
Increase
|
||||||||||||
|
Actual
Dollars
|
Constant
Currency
|
Actual
Dollars
|
Constant
Currency
|
||||||||||
|
Contact
Lens
|
5
|
%
|
5
|
%
|
14
|
%
|
4
|
%
|
|||||
|
Lens
Care
|
6
|
%
|
8
|
%
|
9
|
%
|
-
|
%
|
|||||
|
Pharmaceuticals
|
11
|
%
|
11
|
%
|
12
|
%
|
2
|
%
|
|||||
|
Cataract
and Vitreoretinal
|
2
|
%
|
2
|
%
|
16
|
%
|
6
|
%
|
|||||
|
Refractive
|
(13
|
)%
|
(13
|
)%
|
16
|
%
|
7
|
%
|
|||||
|
Total
Europe
|
5
|
%
|
5
|
%
|
13
|
%
|
3
|
%
|
|||||
2005
Versus 2004
| · |
Contact
lens sales comparisons were impacted by the divestiture of our German
Woehlk business in the third quarter of 2005. Excluding that impact,
contact lens net sales would have grown approximately 8 percent on
a
reported basis and 9 percent in constant currency. Gains were mainly
due
to our lines of specialty products and
PureVision
silicone hydrogel spherical contact lenses. Monthly replacement toric
contact lens revenues increased more than 20 percent, with gains
coming
from a combination of expanded distribution for the PureVision
Toric line and high-single-digit growth for
SofLens
Toric contact lenses. Our multifocal product also posted strong growth,
and we continued to gain market
share.
|
| · |
Increased
lens care sales reflected market share gains, especially for our
lines of
multipurpose solutions, which grew approximately 10 percent on the
continued market acceptance of MoistureLoc
prior to the recall. As described above, lens care category sales
have
declined in 2006 in all regions, due to additional charges associated
with
the MoistureLoc
recall combined with market share losses resulting from customer
and trade
concerns during our investigation into increased fungal infections
among
contact lens wearers. We recorded additional charges associated with
the
MoistureLoc
recall for product manufactured and sold in Europe in
2006.
|
| · |
European
pharmaceuticals sales growth was mainly attributable to our lines
of dry
eye products, ocular nutritionals and anti-infective drugs, coupled
with
expansion into new geographic
markets.
|
| · |
Higher
cataract and vitreoretinal sales reflected overall strong performance
in
most markets with the exception of the United Kingdom, where the
number of
procedures declined in 2005 following government initiatives in the
prior
year to decrease the number of patients waiting to have the procedure.
On
a total region basis, growth was largely due to our Akreos
line of acrylic IOLs, as well as higher sales of
viscoelastics.
|
PAGE
41
| · |
Declines
in sales of refractive surgery products in Europe were consistent
with
overall market trends. Lower sales of equipment and microkeratome
blades
more than offset increased sales of Zyoptix
treatment cards.
|
2004
Versus 2003
| · |
Contact
lens sales growth was primarily due to the continued strength and
market
leading positions for SofLens
Toric and SofLens
Multi-Focal lenses, growth for the PureVision
brand, as well as favorable currency benefits. The PureVision
lens franchise grew more than 20 percent in 2004, benefiting from
the
introduction of PureVision
Toric lenses and strong growth in the PureVision
SVS line.
|
| · |
Constant-currency
European lens care sales declined through the first three quarters
of
2004, but rebounded in the fourth quarter following the launch of
MoistureLoc,
yielding full-year flat constant-currency
performance.
|
| · |
Pharmaceuticals
gains in Europe were led by higher sales of ocular vitamins,
anti-infective and anti-inflammatory products, as well as favorable
exchange rate movements, somewhat offset by general sales declines
for
most other product lines in Germany, where government pharmaceuticals
pricing and reimbursement legislation negatively impacted
revenues.
|
| · |
Higher
sales of cataract and vitreoretinal products mainly reflected gains
for
phacoemulsification products and IOLs. Revenues from our Akreos
line of acrylic IOLs rose more than 30 percent on a constant-currency
basis, as European surgeons continued to use more advanced designs
and
foldable materials. Sales of phacoemulsification products increased
approximately 10 percent for the year, excluding favorable currency
benefits.
|
| · |
Growth
within the refractive product category reflected higher revenues
from
Zyoptix
system upgrades, per-procedure cards, diagnostic equipment and
microkeratome blades, as well as favorable currency
movements.
|
Asia
The
following table summarizes net sales trends for the Asia region by product
category:
|
2005
vs. 2004 Restated
Percent
Increase (Decrease)
|
2004
Restated vs. 2003 Restated
Percent
Increase
|
||||||||||||
|
Actual
Dollars
|
Constant
Currency
|
Actual
Dollars
|
Constant
Currency
|
||||||||||
|
Contact
Lens
|
8
|
%
|
7
|
%
|
17
|
%
|
11
|
%
|
|||||
|
Lens
Care 1
|
(5
|
)%
|
(7
|
)%
|
13
|
%
|
9
|
%
|
|||||
|
Pharmaceuticals
2
|
NM
|
NM
|
72
|
%
|
60
|
%
|
|||||||
|
Cataract
and Vitreoretinal
|
16
|
%
|
13
|
%
|
19
|
%
|
14
|
%
|
|||||
|
Refractive
|
(7
|
)%
|
(9
|
)%
|
13
|
%
|
10
|
%
|
|||||
|
Total
Asia
|
8
|
%
|
7
|
%
|
16
|
%
|
12
|
%
|
|||||
|
1
|
2005
amounts reflect the impact of the voluntary recall of MoistureLoc
discussed in Recent
Developments
above and in Item
8. Financial Statements and Supplementary Data
under Note
23 — Subsequent Event
of
this Annual Report on Form 10-K. Provisions for sales returns and
consumer
rebates associated with the recall reduced Asia region net sales
by
$4.7.
|
|
2
|
NM
denotes "not meaningful." 2005 pharmaceuticals category sales include
$17.8 incremental revenues from the acquisition of Freda, resulting
in a
calculated growth rate of more than 100
percent.
|
2005
Versus 2004
| · |
Contact
lens sales growth in Asia reflected gains for our lines of specialty
and
silicone hydrogel lenses, including incremental sales from the launch
in
Japan of our latest conventional hydrogel two-week disposable lenses.
Throughout much of the year, our Chinese contact lens sales growth
was
lower than historical trends and internal expectations, reflecting,
in
part, trade disruption following changes we made in some of our
distributor programs early in 2005. That business rebounded in the
fourth
quarter, posting constant-currency growth of approximately 15 percent
compared to the same period in 2004. In 2006, the MoistureLoc
recall created negative collateral impacts on our non-lens care product
lines, especially contact lenses and pharmaceuticals products in
China. As
a result, Asia region contact lens sales have moderated from levels
experienced in 2005.
|
PAGE
42
| · |
Lens
care sales declines reflect the sales returns and customer rebate
provisions associated with the voluntary recall of MoistureLoc
(see Item
8. Financial Statements and Supplementary Data
under Note
23 — Subsequent Event
of
this Annual Report on Form 10-K for further discussion). Excluding
the
impact of the recall, Asian constant-currency lens care sales were
down 3
percent. Declines in China, due to the same distributor issues discussed
above, more than offset 1 percent constant-currency gains in Japan,
reflecting the market introduction of ReNu
MultiPlus
solution. As described above, lens care category sales have declined
in
2006 in all regions, due to additional charges associated with the
MoistureLoc
recall combined with market share losses resulting from customer
and trade
concerns during our investigation into increased fungal infections
among
contact lens wearers. In the Asia region, our Chinese business has
been
most impacted by these events.
|
| · |
Historically
we have not had a significant pharmaceuticals business in Asia. In
the
fourth quarter of 2005 we acquired a controlling interest in Freda.
The
acquisition should help accelerate our expansion into the rapidly
growing
Chinese ophthalmic pharmaceuticals market and provide a national
pharmaceuticals sales and distribution network. Further information
with
respect to the Freda acquisition can be found in Item
8. Financial Statements and Supplementary Data
under Note
3 — Acquisitions
of
this Annual Report on Form 10-K. Excluding the Freda acquisition,
our
Asian pharmaceuticals revenues grew about 20 percent on a
constant-currency basis, led by gains for ocular
nutritionals.
|
| · |
Growth
in the cataract and vitreoretinal category was mainly driven by gains
for
our lines of IOL and phacoemulsification products. IOL revenues were
up
strongly, largely due to the continued rollout of the Akreos
line
of acrylic IOLs throughout the
year.
|
| · |
Lower
sales in the refractive category in Asia reflected declines in laser
and
diagnostic equipment sales. Part of this decline was expected, as
prior-year results included revenues associated with initial customer
adoption of our Zyoptix
laser platform.
|
2004
Versus 2003
| · |
Strong
contact lens sales gains were registered in most markets, especially
Japan, where constant-currency sales were up nearly 10 percent, reflecting
the launch of Medalist
One Day contact lenses in the first half of 2004 and continued strong
sales growth for disposable toric contact lenses. In markets outside
of
Japan, constant-currency sales grew approximately 15 percent during
2004.
|
| · |
Lens
care sales growth was led by our lines of multipurpose solutions,
which
were up more than 10 percent for the year on a constant-currency
basis. We
launched MoistureLoc
solution in several markets in the fourth quarter, with encouraging
response from the trade. Our other ReNu
brand solutions continued to perform well in 2004, particularly in
China
and Japan.
|
| · |
Net
sales of pharmaceuticals in Asia were immaterial to our overall results
of
operations in 2004 and 2003. Sales gains reflected our efforts to
expand
and introduce our pharmaceutical products in the region, particularly
vitamins.
|
| · |
Increased
sales of cataract and vitreoretinal products reflected growth in
markets
outside of Japan, where sales of the SofPort
and Akreos
lines of IOLs grew strongly, as well as higher sales of
phacoemulsification products.
|
| · |
Refractive
surgery product sales gains in 2004 were driven by Zyoptix
system upgrades, per-procedure cards and microkeratome blades, somewhat
offset by fewer new laser placements, reflecting the launch of the
Technolas
z100
laser in 2003.
|
PAGE
43
Net
Sales by Product Category
The
following table presents total Company net sales by product category for the
years 2005, 2004 and 2003:
|
Net
Sales
|
Percent
Increase
(Decrease)
Actual
Dollars
|
Percent
Increase
(Decrease)
Constant
Currency
|
||||||||
|
2005
|
||||||||||
|
Contact
Lens
|
$
|
728.5
|
9
|
%
|
9
|
%
|
||||
|
Lens
Care 1
|
522.2
|
-
|
%
|
(1
|
)%
|
|||||
|
Pharmaceuticals
|
584.8
|
11
|
%
|
11
|
%
|
|||||
|
Cataract
and Vitreoretinal
|
377.8
|
6
|
%
|
5
|
%
|
|||||
|
Refractive
|
140.5
|
(8
|
)%
|
(9
|
)%
|
|||||
|
$
|
2,353.8
|
5
|
%
|
5
|
%
|
|||||
|
2004
(Restated)
|
||||||||||
|
Contact
Lens
|
$
|
671.0
|
13
|
%
|
7
|
%
|
||||
|
Lens
Care
|
523.3
|
5
|
%
|
2
|
%
|
|||||
|
Pharmaceuticals
|
528.2
|
12
|
%
|
7
|
%
|
|||||
|
Cataract
and Vitreoretinal
|
358.2
|
10
|
%
|
5
|
%
|
|||||
|
Refractive
|
152.8
|
17
|
%
|
13
|
%
|
|||||
|
$
|
2,233.5
|
11
|
%
|
6
|
%
|
|||||
|
2003
(Restated)
|
||||||||||
|
Contact
Lens
|
$
|
593.2
|
14
|
%
|
7
|
%
|
||||
|
Lens
Care
|
496.5
|
8
|
%
|
2
|
%
|
|||||
|
Pharmaceuticals
|
471.2
|
19
|
%
|
10
|
%
|
|||||
|
Cataract
and Vitreoretinal
|
327.1
|
8
|
%
|
2
|
%
|
|||||
|
Refractive
|
130.5
|
(1
|
)%
|
(7
|
)%
|
|||||
|
$
|
2,018.5
|
12
|
%
|
5
|
%
|
|||||
|
1
|
2005
lens care amounts reflect the impact of the voluntary recall of
MoistureLoc
discussed in Recent
Developments
above and in Item
8. Financial Statements and Supplementary Data
under Note
23 — Subsequent Event
of
this Annual Report on Form 10-K. Provisions for sales returns and
consumer
rebates associated with the recall reduced full-year lens care net
sales
by $17.1.
|
2005
Versus 2004
Net
sales in 2005 include the impact of approximately $17 in customer returns and
rebate provisions associated with the voluntary recall of MoistureLoc
(see
further discussion in Item
8. Financial Statements and Supplementary Data
under
Note
23 — Subsequent Event
of this
Annual Report on Form 10-K), which mostly offset $18 in incremental sales from
the acquisition of Freda.
| · |
Contact
lens sales growth was led by our specialty and silicone hydrogel
spherical
offerings, which offset continued declines for older technology products.
That growth rate reflects the impact of divesting our German
Woehlk contact lens business during the third quarter of 2005. Excluding
that impact, contact lens net sales would have grown approximately
10
percent.
|
| · |
Sales
in the lens care category, which were flat with the prior year, mainly
reflected the impact of the MoistureLoc
recall. Excluding that impact, lens care sales grew 3 percent on
a
reported basis and 2 percent in constant currency, with gains for
multipurpose solutions in Europe and the Americas region partially
offset
by declines in Asia.
|
| · |
Full-year
pharmaceutical net sales growth includes the impact of the Freda
acquisition. Excluding revenues from Freda, growth was approximately
7
percent on both a reported and constant-currency basis. That reflects
incremental sales of Zylet
combination ophthalmic drops in the United States, combined with
higher
global sales of ocular vitamins and Lotemax
steroid drops containing loteprednol etabonate. Those gains were
somewhat
offset by sales declines for two non-ophthalmic drugs in our U.S.
multisource (generic) pharmaceuticals
portfolio.
|
| · |
Cataract
and vitreoretinal product category growth was led by gains in IOLs
of more
than 10 percent on the strength of our SofPort
and Akreos
lines of foldable IOLs.
|
PAGE
44
| · |
Net
sales declines in the refractive category reflected lower equipment
and
microkeratome blade sales in all regions, partially offset by higher
service revenues and sales of per-procedure
cards.
|
| · |
As
discussed above, the decision to withdraw MoistureLoc
will negatively impact 2006 sales performance. In addition to provisions
for sales returns and coupon redemptions that we will record (primarily
in
Europe), performance will be hampered by the impact from lost MoistureLoc
revenues; lower revenues for other lens care products, reflecting
market
share losses caused by trade and consumer uncertainty; and the negative
collateral impact on our non-lens care product categories, primarily
in
Asia.
|
2004
Versus 2003
The
significant drivers of 2004 net sales gains as compared to 2003 include the
following.
| · |
Contact
lens sales growth was attributable to strong gains for the SofLens
Toric, SofLens
One Day, SofLens
Multi-Focal and SofLens59
brands, as well as the PureVision
line of contact lenses. Combined, these products represented more
than 50
percent of contact lens revenues, benefiting from continued market
expansion and share gains.
|
| · |
Lens
care sales growth was mainly due to higher sales of all-in-one solutions,
particularly in the Americas and Asia
regions.
|
| · |
Pharmaceuticals
sales growth mainly reflected the continued market success and geographic
expansion of the PreserVision
and Ocuvite
lines of ocular vitamins. Strong gains were also noted in the Americas
region for Lotemax
and Alrex
prescription steroid eye drops. In Europe, growth was tempered by
the
continued impact of pharmaceuticals pricing legislation in
Germany.
|
| · |
Higher
sales of cataract and vitreoretinal surgery products were attributable
to
our lines of IOLs, phacoemulsification products and viscoelastics
as well
as service revenues.
|
| · |
Refractive
surgery revenues increased due to higher sales of per-procedure cards,
lasers and microkeratome blades.
|
Segment
Income
Segment
income excludes certain significant items such as restructuring charges and
reversals, asset write-offs and purchase accounting adjustments, as well as
corporate administration expenses.
2005
Versus 2004
Segment
income increased 2 percent, including a $37 negative impact associated with
customer return and consumer rebate provisions and incremental expenses
associated with the MoistureLoc
recall.
Excluding that impact, segment income increased 12 percent, reflecting gross
margin expansion resulting from sales mix shifts.
Research
& Development segment operating costs increased 11 percent in 2005,
reflecting additional headcount and higher spending in support of projects
in
late-stage development. We remain committed to investing in research and
development activities at a higher rate than sales growth. Global Operations
& Engineering segment operating costs decreased 16 percent, primarily
reflecting changes in foreign currency exchange rates and cost savings realized
through restructuring actions and manufacturing initiatives incorporating Lean
principles and automation.
2004
Versus 2003
Segment
income increased 22 percent due to favorable sales mix in all commercial
segments. Continued manufacturing cost savings initiatives, ongoing
administrative savings realized through our profitability improvement programs
and changes in foreign currency exchange rates also contributed to improved
profitability. The 2004 growth was somewhat offset by increased marketing and
advertising costs primarily associated with new product launches and increased
information technology (IT) expense associated with global systems
integration.
Research
& Development segment operating costs increased 9 percent in 2004,
reflecting our commitment to new product development. Global Operations &
Engineering segment operating costs increased 28 percent, primarily due to
changes in foreign currency, partially offset by cost savings realized through
restructuring actions and manufacturing initiatives incorporating Lean
principles and automation.
PAGE
45
Operating
Costs and Expenses
The
following tables show operating costs and expenses as a percentage of
sales:
|
2005
|
2004
(Restated)
|
2003
(Restated)
|
||||||||
|
Percentage
of Net Sales
|
||||||||||
|
Cost
of products sold
|
41.8
|
%
|
41.6
|
%
|
42.4
|
%
|
||||
|
Selling,
administrative and general expenses
|
38.6
|
%
|
38.6
|
%
|
39.1
|
%
|
||||
|
Research
and development expenses
|
7.5
|
%
|
7.3
|
%
|
7.4
|
%
|
||||
Cost
of
products sold was $983 in 2005, $929 in 2004 and $857 in 2003. The 2005 amount
includes the cost of sales impact of the MoistureLoc
recall
($14) and inventory step-up charges associated with the Freda acquisition ($2).
Excluding both of those items, the ratio of cost of products sold to sales
would
have improved to 40.8 percent, reflecting a favorable sales mix shift toward
higher margin products combined with benefits from our ongoing profitability
improvement initiatives. Similar trends were responsible for the 2004 gross
margin improvement as compared to 2003. Foreign currency exchange rate changes
had a slightly negative impact on gross margin during 2005 and a positive impact
on gross margin during 2004.
Selling,
administrative and general expenses include corporate administration expenses.
Absolute spending totaled $910 in 2005, compared to $863 in 2004 and $790 in
2003. The $47 increase in 2005 primarily reflected higher costs associated
with
selling and marketing, which includes promoting new products. In addition,
approximately $13 of costs associated with the MoistureLoc
recall,
the Audit Committee's independent investigations, expanded year-end procedures
and expanded procedures with respect to the accounting for income taxes were
essentially offset by lower performance-based compensation expense and lower
mark-to-market expense related to certain deferred compensation liabilities
invested in our Common stock. As described in Item
8. Financial Statements and Supplementary Data
under
Note
2 — Restatement
of this
Annual Report on Form 10-K,
expense
associated with these liabilities was recorded as part of the financial
restatement, resulting in additional compensation expense of $1, $3 and $4
in
2005, 2004 and 2003, respectively. Due to recent declines in our stock price,
$4
of mark-to-market income was recorded in the second half of 2005 and an
additional $5 of income was recorded in 2006. The 2004 increase in selling,
administrative and general expenses reflected the impact of foreign currency
exchange rates, higher investments in marketing and advertising, primarily
associated with new product launches, increased IT expense in connection with
our global systems integration project, Sarbanes-Oxley compliance costs and
higher expenses associated with performance-based compensation plans and other
employee benefit program expenses.
R&D
expenses totaled $177, $163 and $150 in 2005, 2004 and 2003, respectively.
A
charge of $6 associated with the acquisition of an early-stage pharmaceutical
technology contributed to 2003 expense. We expect to continue investing in
R&D at a faster rate than sales to support our goal of consistently bringing
new products to market to fuel long-term growth.
Non-Operating
Income and Expense
Other
Income and Expense
Interest
and investment income was $20 in 2005, $14 in 2004 and $16 in 2003. The increase
in 2005 over 2004 primarily related to higher interest rates (somewhat offset
by
lower average investment balances in 2005) and interest income associated with
income tax refunds. Mark-to-market adjustments on assets held in our
nonqualified deferred compensation plan represented the majority of the decrease
in 2004 when compared to 2003.
Interest
expense was $53 in 2005, $50 in 2004 and $55 in 2003. The 2005 increase
reflected higher interest rates on variable-rate debt, incremental borrowings
in
2005, and the write-off of $3 in unamortized debt issuance costs associated
with
our convertible debt instruments which became convertible on July 1, 2005 (see
further discussion in Item
8. Financial Statements and Supplementary Data
under
Note
4 — Earnings Per Share
of this
Annual Report on Form 10-K and in the section entitled Access
to Financial Markets
below),
partially offset by interest expense savings associated with debt retired in
2004 and 2005. As explained in Item
8. Financial Statements and Supplementary Data
under
Note
12 — Accounting for Derivatives and Hedging Activities
of this
Annual Report on Form 10-K, we decided to permanently invest an intercompany
loan in the Europe region in the third quarter of 2003. That loan was previously
hedged by foreign exchange forward contracts classified as cash flow hedges.
The
2004 decline in interest expense resulted primarily from the termination of
these cash flow hedges, although lower average debt levels and interest rates
were also factors.
PAGE
46
We
will
report higher interest expense in 2006, primarily as a result of increased
debt
balances, increased interest rates associated with variable rate debt, costs
associated with the purchase of outstanding public debt resulting from a tender
offer we completed in 2006, and the payment of consent fees associated with
consent solicitations we completed in June and September 2006; as well as waiver
fees paid to banks in connection with our syndicated revolving credit facility
and the $375 unsecured variable-rate term loan arrangement of our Dutch
subsidiary (B.V. Term Loan). The consent solicitations and fees are more fully
described in the section below entitled Sources
of Liquidity.
Net
foreign currency losses were $4 in 2005, $1 in 2004 and $13 in 2003. These
amounts were primarily associated with our ongoing foreign exchange hedging
programs. However, the 2003 amount includes approximately $4 in foreign exchange
losses associated with the sale of a Korean entity to a minority interest
partner.
Income
Taxes
Our
reported tax rate for continuing operations was 89.9 percent in 2005 and
included the impact of recording a valuation allowance against our U.S. deferred
tax assets as described previously and in Item
8. Financial Statements and Supplementary Data
under
Note
10 — Provision for Income Taxes
of this
Annual Report on Form 10-K.
The
reported tax rates for continuing operations were 34.4 percent and 37.3 percent
in 2004 and 2003, respectively.
In
the
third quarter of 2005, we recorded a valuation allowance of $156 with respect
to
U.S. deferred tax assets. A valuation allowance against deferred tax assets
is
required when, based upon the weight of the evidence, we determine that it
is
more likely than not — a probability level of more than 50 percent — that the
assets will not be realized. Likelihood of realization is determined using
all
available positive and negative evidence such as cumulative losses in prior
years, losses expected in early future years, and a history of potential tax
benefits expiring unused. In making this assessment, more weight is assigned
to
objectively verifiable evidence, such as cumulative losses in recent years,
than
to subjective evidence like future projections. In this case, we anticipate
losses in early future periods attributable to the U.S. entities to which the
deferred tax assets relate and there are uncertainties surrounding when we
will
return to U.S. profitability. Specifically, expected losses in our U.S. tax
entities resulting from, among other things, costs associated with the
MoistureLoc
withdrawal and the expected impact of the withdrawal on our 2006 results, led
us
to conclude that a valuation allowance was necessary. In order to realize our
deferred tax assets, it will be necessary for us to significantly increase
future U.S. taxable income. This adjustment was recorded as a third quarter
event because that is the earliest reporting period for which we have not filed
quarterly financial results on Form 10-Q. We will continue to assess
realizability of our deferred tax assets, including consideration of the
reversal of these and other temporary basis differences, future earnings, and
prudent and feasible tax planning strategies. If we make a later determination
that it is more likely than not that the deferred tax assets for which there
is
a valuation allowance would be realized, the related valuation allowance would
be reduced and a benefit to earnings would be recorded.
On
August
3, 2005, we received approval from the U.S. Joint Committee on Taxation that
our
income tax refund request for tax years ended 1995 through 1997 was approved,
concluding the Internal Revenue Service's examination of such years. In
connection with the closure of this examination, we recognized $21 of tax
benefits related primarily to favorable resolution of tax positions raised
during the examination and the reversal of tax reserves associated with our
previously divested oral care business.
In
addition, on May 12, 2006, we received a Notice of Final Partnership
Administrative Adjustment from the Internal Revenue Service relating to
partnership tax periods ended June 4, 1999 and December 25, 1999, for Wilmington
Partners L.P. (Wilmington), a partnership formed in 1993 in which the majority
of partnership interests are held by certain of our subsidiaries. The Final
Partnership Administrative Adjustment (FPAA) proposes adjustments increasing
the
ordinary income reported by Wilmington for its December 25, 1999 tax year by
a
total of $10, and increasing a long-term capital gain reported by Wilmington
for
that tax year by $190. The FPAA also proposes a $550 negative adjustment to
Wilmington's basis in a financial asset contributed to it by one of its partners
in 1993; this adjustment would also affect the basis of that partner — one of
our subsidiaries — in its partnership interest in Wilmington. The asserted
adjustments could, if sustained in full, increase the tax liabilities of the
partnership’s partners for the associated tax periods by more than $200, plus
penalties and interest. We have not made any financial provision for the
asserted additional taxes, penalties or interest as we believe
the asserted adjustments are not probable and estimable.
Since
1999, our consolidated financial statements have included a deferred tax
liability relating to the partnership. As of December 31, 2005, this deferred
tax liability equaled $157. This deferred tax liability is currently reducing
net deferred tax assets for which a valuation allowance has been recorded as
of
December 31, 2005.
PAGE
47
On
August
7, 2006, we made a petition in U.S. Tax Court to challenge the asserted
adjustments. Internal Revenue Service's answer was filed on October 4, 2006
and
we initiated a motion to strike portions of the answer on November 1, 2006.
We
believe we have numerous substantive and procedural tax law arguments to dispute
the adjustments. Tax, penalties and interest cannot be assessed until a Tax
Court determination is made, and an assessment, if any, would likely not be
made
until some time after 2007. While we intend to vigorously defend against the
asserted adjustments, our failure to succeed in such a defense could
significantly increase the liability of the partnership's partners for taxes,
plus interest and penalties, which in turn would have a material adverse affect
on our financial results and cash flows.
Minority
Interest
Minority
interest expense totaled $6, $5 and $3 in 2005, 2004 and 2003,
respectively.
Restructuring
Charges and Asset Write-offs
Profitability
Improvement Program and Transfer of PureVision
Contact Lens Manufacturing In
July
2002, we announced plans to improve operating profitability through a
comprehensive program which included
plant
closures
and consolidations; manufacturing efficiencies and yield enhancements;
procurement process enhancements; the rationalization of certain contact lens
and surgical product lines; distribution initiatives; and the development of
a
global IT platform. These plans included the elimination of approximately 465
jobs worldwide associated with those actions. Restructuring charges and asset
write-offs of $23 before taxes associated with these initiatives were recorded
in the third quarter of 2002. We also recorded a pre-tax amount of $4 during
the
third quarter of 2002 for severance associated with the elimination of
approximately 145 jobs due to the transfer of PureVision
contact
lens manufacturing from the United States to Waterford, Ireland following a
ruling against us in a U.S. patent law suit. During the fourth quarter of 2003,
we reversed $6 in severance charges as certain termination actions and plant
closures did not occur due to an increased demand for certain product
lines.
At
the
conclusion of the Profitability Improvement Program and the transfer of
PureVision
contact
lens manufacturing, 468 jobs were eliminated. Related expenses of $17 and $3
of
asset write-offs were charged against the liability. Cash payments for severance
and other related expenses were $11 and $6 in 2003 and 2002, respectively.
All
actions related to this restructuring plan were completed by the end of
2003.
Liquidity
and Financial Resources
We
maintained strong liquidity throughout 2005, ending the year with cash and
cash
equivalents totaling $721, compared to $502 at the end of 2004. The increase
was
mainly due to borrowings we made in December as part of our program to
repatriate foreign profits under the AJCA and positive cash flows from
operations, partially offset by cash used for the Freda acquisition, the
retirement of maturing debt and higher capital spending.
Cash
Flows from Operating Activities
We
generated cash of $239 from operating activities in 2005, compared to $285
in
2004. The decrease in 2005 was mainly due to higher inventory levels to
accommodate new product launches, increased working capital requirements and
higher payments under foreign currency contracts; partially offset by lower
net
cash payments for income taxes and lower U.S. pension plan funding (funding
was
$11 and $18 in 2005 and 2004, respectively). Average days sales outstanding
(DSO) improved to 71 days in 2005, compared to 74 days in 2004.
Cash
provided by operating activities totaled $252 in 2003. The increase in 2004
primarily reflected higher earnings and net cash inflows under foreign currency
contracts (versus net cash outflows in 2003), partially offset by an increase
of
$57 in net cash payments for income taxes and an increase in funding of our
U.S.
pension plan (funding was $18 and $4 in 2004 and 2003, respectively). Average
DSO were 74 days in 2004, a decrease from 77 days in 2003, reflecting our
continued focus on asset management, particularly in the area of cash
collections.
Cash
Flows from Investing Activities
In 2005,
we used $353 for investing activities. These were primarily $227 associated
with
the acquisition of a controlling interest in Freda and capital spending of
$116,
representing continued capacity expansion for
PureVision
contact
lenses as well as initial spending associated with an expansion of our U.S.
R&D facility.
Net
cash
used in investing activities of $122 in 2004 and $94 in 2003 primarily
represented capital spending in each of those years.
PAGE
48
Cash
Flows from Financing Activities
On a net
basis, we generated $342 in 2005 through financing activities. Cash inflows
were
mainly attributable to $677 proceeds from new borrowings and $70 received from
employee stock option exercises. The new borrowings mainly reflect $425
borrowings outside the United States as part of our program to repatriate
foreign profits under the AJCA and $225 in borrowings under our revolving credit
agreement, the majority of which were to partially fund the Freda acquisition.
These inflows were partially offset by debt repayments of $326, including
repayment of the $225 revolver borrowings described above; $45 to purchase
shares of our Common stock under our ongoing share repurchase authorization,
stock compensation plans and deferred compensation plans of which $40 was used
to purchase 537,537 shares of our Common stock at an average price of $75.06
per
share; and dividend payments of $28.
In
2004,
net cash outflows for financing activities totaled $229. This amount consisted
primarily of debt repayments of $197; $77 to repurchase 1,250,162 shares of
our
Common stock at an average price of $61.27 per share under our ongoing share
repurchase authorization; and $28 of dividend payments, partially offset by
proceeds of $78 from employee stock option exercises.
Net
cash
outflows for financing activities were $84 in 2003, consisting primarily of
$201
in debt repayments; $41 to repurchase one million shares of our stock; $31
paid
in the first quarter to settle forward equity contracts as described in
Item
8. Financial Statements and Supplementary Data
under
Note
18 — Forward Equity Contracts
of this
Annual Report on Form 10-K;
and $28
for dividends. These cash outflows were partially offset by $210 in proceeds
from concurrent offerings of notes and convertible notes.
Sources
of Liquidity
Our
total short- and long-term borrowings totaled $993 at the end of 2005 and $647
at the end of 2004. The ratio of total debt to capital was 43.6 percent and
32.2
percent at year-end 2005 and 2004, respectively.
We
believe our existing credit facilities, in conjunction with the financing
activities mentioned below, provide adequate liquidity to meet our obligations,
fund capital expenditures and invest in potential growth opportunities. However,
we note that we have obtained and may need in the future to obtain waivers
and/or concessions from lenders under existing credit arrangements, as discussed
further below, and we note risk factors associated with contingent obligations
of the Company, including as noted under the Legal
Matters
heading
in Recent
Developments,
in this
MD&A.
Credit
Facilities In
July
2005, we replaced our prior $250 syndicated revolving credit facility scheduled
to expire in January 2008 with a new five-year, $400 syndicated revolving credit
facility. The terms of the new revolving credit facility include our option
to
increase the limit to $550 at any time during the five-year term. The interest
rate under the agreement is based on our credit rating and, at our option,
LIBOR
or the base rate of one of the lending banks. The new credit facility includes
financial covenants similar in nature to covenants contained in the former,
which require us to maintain certain EBITDA to interest and debt ratios. In
the
event a violation of the financial covenants occurs, the facility would not
be
available for borrowing until the covenant provisions were waived, amended
or
satisfied. In November 2005, and subsequently in February, May, August and
December 2006, and January 2007, we obtained a waiver from our banks of any
breach of representation or covenant under the revolving credit agreement or
any
default associated with the events related to the Brazil and Korea
investigations, or from the impact of such events to the extent that they did
not result in reductions in after-tax profits of more than $50 in aggregate.
The
waivers, in the aggregate, also extended the deadline to file our required
financial statements for 2005 (including restatements for certain prior periods)
and 2006 year to date until April 30, 2007. Delivery of all required financial
statements for 2005 was satisfied by the filing of this Annual Report on Form
10-K and delivery of our Annual Report on Form 10-K for fiscal year ending
December 30, 2006 by April 30, 2007 will satisfy our obligation to file all
2006
periodic reports. The impact of the Brazil and Korea investigations did not
exceed $50 in aggregate as discussed in Item
8. Financial Statements and Supplementary Data
under
Note
2 — Restatement
of this
Annual Report on Form 10-K. There were no violations of our financial covenants
during the fiscal years ended December 31, 2005 or December 25, 2004 under
either our former or our new syndicated revolving credit facilities. We had
no
outstanding borrowings under syndicated revolving credit agreements as of
December 31, 2005 or December 25, 2004.
A
number
of subsidiary companies outside the United States have credit facilities to
meet
their liquidity requirements. There were $27 of outstanding borrowings under
these non-U.S. credit facilities as of December 31, 2005. There were no
outstanding borrowings as of December 25, 2004. The non-U.S. credit facilities'
covenants require our subsidiaries to make payments when due and to comply
with
local laws. There were no covenant violations under the non-U.S. credit
facilities during the fiscal years ended December 31, 2005 or December 25,
2004.
PAGE
49
Bank
Term Loans In
November 2005, our Dutch subsidiary entered into a $375 Term Loan (BV Term
Loan). The facility involves a syndicate of banks and is guaranteed by us.
The
December 2005 borrowing under this BV Term Loan was a component of our efforts
to repatriate foreign earnings from non-U.S. legal entities under the provisions
of the AJCA (see Item
8. Financial Statements and Supplementary Data
under
Note
10 — Provision for Income Taxes
of this
Annual Report on Form 10-K for further discussion of the AJCA). Borrowings
under
the BV Term Loan totaled $375 at December 31, 2005, and are due in December
2010, unless otherwise extended under the terms of the agreement. The interest
rate is based on six-month LIBOR and is reset on a semiannual basis. The BV
Term
Loan includes covenants which require us to maintain certain EBITDA to interest
and debt ratios. The initial interest rate was set at 5.0 percent. In February,
May, August and December 2006, and January 2007 we obtained waivers from our
banks of any breach of representation or covenant under the term loan agreement
or any default associated with the events related to the Brazil and Korea
investigations, or from the impact of such events to the extent that they did
not result in reductions in after-tax profits of more than $50 in aggregate.
The
waivers also extended the deadline to file required financial statements for
2005 (including restatements for certain prior periods) and 2006 year to date,
with the most recent extension being until April 30, 2007. Delivery of required
financial statements for 2005 was satisfied by filing this Annual Report on
Form
10-K and delivery of our Annual Report on Form 10-K for fiscal year ending
December 30, 2006 by April 30, 2007 will satisfy our obligation to file all
2006
periodic reports. The impact of the Brazil and Korea investigations did not
exceed $50 in aggregate as further discussed in Item
8. Financial Statements and Supplementary Data
under
Note
2 — Restatement
of this
Annual Report on Form 10-K. There were no violations of our financial covenants
under the BV Term Loan during the fiscal year ended December 31,
2005.
In
July
2005, we agreed to guarantee, on behalf of our Japan subsidiary, a variable-rate
bank term loan facility denominated in Japanese yen, in an amount approximately
equivalent to $50. This term loan was also established in connection with the
repatriation of foreign earnings under the provisions of the AJCA. The facility
will mature in July 2010. The outstanding borrowings under this Japan term
loan
at December 31, 2005 were approximately $48. The Japan term loan covenants
require our Japan subsidiary to submit their statutory financial statements
to
the lenders once a year and to maintain a positive balance of net assets. There
were no covenant violations under the Japan term loan during the fiscal year
ended December 31, 2005.
Capital
Markets Offerings We
are
required to file periodic financial reports with the SEC to comply with certain
covenants in the indenture that pertain to our public debt instruments. As
a
result of our inability to file timely this Annual Report on Form 10-K and
certain quarterly financial statements for 2005 and 2006, we sought waivers
from
holders of our outstanding debt. In September 2006, we announced a solicitation
of consents with respect to all series of outstanding debt securities and
outstanding convertible debt. The solicitations sought, for a fee, permission
from the holders for amendments to the indenture applicable to each series
of
notes that would, among other things, extend to January 31, 2007 our deadline
to
file periodic reports with the SEC and to deliver compliance certificates to
the
Trustee under each indenture. We received the requisite number of consents
for
all series of outstanding debt securities and outstanding convertible debt.
We
did not file the periodic reports due for the periods prior to January 31,
2007
by that date. As a result, the Trustee or the holders of 10 percent of the
principal amount of any series of our outstanding debt could give us a notice
of
default. If we do not file the reports within 60 days after that notice is
given, and the Trustee or the holders of 25 percent of the principal amount
of
any series of the debt outstanding give a further notice, all principal and
accrued interest on that series of debt would be due and payable. Such an
acceleration of any series of our debt may be satisfied by our payment of
principal and accrued interest on that series, but if not otherwise waived,
may
trigger defaults under other series of public debt or other indebtedness of
the
Company. We have announced a consent solicitation seeking consents to additional
limited waivers of the reporting obligations from the holders of our public
debt
to extend until April 30, 2007 the period during which we may become current
on
our periodic reports without potential default under the indenture.
In
May
2006, we announced a tender offer and consent solicitation with respect to
$384
of outstanding debt, and a consent solicitation with respect to $160 of
outstanding convertible debt. The consents requested in this solicitation were
similar to the consents in the solicitation announced in September, except
that
our deadline to file periodic reports with the SEC and to deliver compliance
certificates to the Trustee was October 2, 2006. On June 5, 2006, we announced
that $116 of the $384 aggregate principal amount of debt had been tendered,
and
these obligations were repaid. Furthermore, we received the requisite number
of
consents necessary to grant the waivers sought at that time. In October 2006,
we
retired an additional $18 of this outstanding debt.
PAGE
50
In
December 2004, we completed an offer to exchange up to $160 of variable-rate
convertible senior notes due in 2023 (the Old Notes) for an equal amount of
2004
Senior Convertible Securities due 2023 (New Securities). The terms of the New
Securities are largely consistent with those of the Old Notes except that
settlement upon conversion of the New Securities will be paid in cash up to
the
principal amount of the converted New Securities with any excess of the
conversion value settled in shares of our Common stock. An amount equal to
$156
of the Old Notes was tendered in exchange for an equal amount of the New
Securities. On June 17, 2005, the conversion right was triggered giving the
holders the option to convert the Old Notes and the New Securities beginning
July 1, 2005. In the event a holder elects to convert its note, we expect to
fund a cash settlement of any such conversion from borrowings under our
syndicated revolving credit agreement.
Two
tranches of our long-term debt due in 2013 and 2015 allowed remarketing agents
to call the debt from the holders in 2003 and 2005, respectively, and in certain
cases remarket the debt at a higher interest rate than the then-current market
rate. Following a downgrade of our debt rating by Moody's Investors Service
in
March 2002, the agents exercised their right to put the remarketing agreements
back to us. As a result of this action, a $100 tranche of long-term debt,
originally due in 2013, matured and was repaid in 2003, and an additional $100
tranche of long-term debt, originally due in 2015, matured and was repaid in
2005.
Access
to Financial Markets
As of
December 31, 2005, our long-term debt was rated BBB by Standard & Poor's and
Fitch Ratings, and Baa3 by Moody's Investors Service, and all three rating
agencies described our outlook as stable.
Subsequently,
on March 23, 2006, Moody’s Investors Service placed our credit rating on review
for possible downgrade. This action was prompted by our failure to file timely
financial statements with the SEC and by concerns related to the Audit Committee
investigations into allegations in Brazil and Korea. Moody’s expanded this
ongoing review on April 12, 2006 to include our decision to suspend sales of
MoistureLoc
solution
from our U.S. plant. On December 22, 2006, Moody's affirmed that our credit
rating continued to be on review. On February 2, 2007, Moody's lowered our
credit rating to Ba1 from Baa3 primarily reflecting Moody's belief that revenue
growth for 2007 will be lower than their previous expectations.
On
April
11, 2006, Standard & Poor’s affirmed its BBB rating on our debt, but revised
its rating outlook to negative from stable, reflecting our decision to suspend
shipments of MoistureLoc
from our
U.S. plant.
On
April
12, 2006, Fitch Ratings placed our long-term debt ratings on watch negative,
following our decision to suspend shipments of MoistureLoc
from our
U.S. plant and our announcement of a further delay in the filing of our 2005
Annual Report on Form 10-K. On May 12, 2006, Fitch Ratings lowered our credit
rating to BBB- from BBB and it remains on watch negative.
Until
current periodic reports and financial statements are filed, we will be
precluded from registering our securities with the SEC for offer and sale.
This
precludes us from raising debt or equity financing in the public
markets.
Working
Capital
Working
capital was $618 and $528, respectively, at year-end 2005 and 2004. The current
ratio was 1.6 for both periods.
Dividends
Dividends on Common stock, declared and payable quarterly, totaled $0.52 per
share for the years ended 2005, 2004 and 2003. Total cash dividends of $28
were
paid in each year.
Return
on Equity and Capital
Return
on average shareholders' equity was 1.4 percent in 2005, compared to 12.6
percent in 2004 and 10.5 percent in 2003. Return on invested capital was 3.5
percent in 2005, 9.9 percent in 2004, and 8.6 percent in 2003. The decline
in
ratios in 2005 reflects lower net income resulting from the valuation allowance
recorded on deferred income tax assets and the costs associated with the
MoistureLoc
recall.
PAGE
51
Contractual
Cash Obligations
At
December 31, 2005, we had the following contractual cash obligations due by
the
following periods:
|
Total
|
Less
than 1 Year
|
1-3
years
|
3-5
years
|
More
than 5 years
|
||||||||||||
|
Contractual
Obligations 1
|
||||||||||||||||
|
Short-
and long-term debt
|
$
|
992
|
$
|
161
|
$
|
184
|
$
|
423
|
$
|
224
|
||||||
|
Purchase
obligations 2
|
82
|
49
|
18
|
5
|
10
|
|||||||||||
|
Minimum
operating lease commitments
|
76
|
23
|
28
|
15
|
10
|
|||||||||||
|
Total
|
$
|
1,150
|
$
|
233
|
$
|
230
|
$
|
443
|
$
|
244
|
||||||
|
1
|
We
had no capital lease obligations at December 31, 2005. Other long-term
liabilities reflected on our Balance
Sheets
consisted primarily of obligations associated with employee benefit
plans.
(See Critical
Accounting Policies
for a discussion of our estimated future statutory minimum funding
requirements.)
|
|
2
|
Purchase
obligations include minimum obligation to purchase goods and services,
or
to make royalty payments, under agreements that are enforceable and
legally binding on us. The amounts above include payments due under
a
utility contract that can be terminated in the tenth year with the
payment
of $1. If we choose to terminate the utility contract, the total
payments
due would decrease by $9.
|
Off-Balance
Sheet Arrangements
We
have a
minority equity interest valued at $0 on the balance sheet that results from
a
strategic partnering arrangement entered into during 1999 involving implant
technology for treating retinal and other back-of-the-eye diseases. Under the
original agreement, we remitted payments to the strategic partner for R&D
activities and the achievement of certain milestones such as completion of
clinical testing, NDA filings and FDA approvals. As described in Item
8. Financial Statements and Supplementary Data
under
Note
9 — Related Party Transaction
of this
Annual Report on Form 10-K, a delay of up to three years in U.S. regulatory
filings for the Retisert
drug
delivery product for the diabetic macular edema indication was announced in
May
2003. As a result, we reevaluated our role in the ongoing development and
approval process, and decided to conduct and supervise directly the day-to-day
development and clinical activities. During the fourth quarter of 2003, we
negotiated our arrangement to formalize this change.
We
also
have an equity investment of $0.2 as of December 31, 2005 and December 25,
2004
recorded as an other long-term asset, associated with a licensing agreement
signed during 2002 to develop treatments for ocular infections. During the
quarter ended June 28, 2003, we recorded an other-than-temporary impairment
charge of $2 based on negative earnings and cash flow trends of the licensor,
and inconclusive efforts by the licensor to secure interim financing. The
licensing agreement and $4 of preferred stock were canceled in December 2003
in
conjunction with our decision to invest in and internally develop this ocular
infection technology, which is in late-stage clinical development. As such,
we
are no longer required to remit payments to the licensor originally due upon
the
achievement of certain milestones. As a result of our restatement of financial
results, as further discussed in Item
8. Financial Statements and Supplementary Data
under
Note
1 —Significant Accounting Policies
of this
Annual Report on Form 10-K the $2 impairment charge was determined to be
out-of-period as the equity investment was first impaired as of 2001. At that
time, we believed the decline in market value was temporary. As the investment
did not recover, our restated financial statements reflect a $1 impairment
charge in 2001 to adjust the equity investment to its market value at that
time;
and a $1 impairment charge in 2002 to recognize a further decline in market
value, as well as a reversal of the $2 impairment charge originally recorded
in
June 2003.
As
a
result of the renegotiation and license cancellation described above, future
payments for R&D activities and milestone achievements over the next five
years are estimated to be immaterial.
We
have
obligations under certain guarantees, letters of credit, indemnifications
(including indemnification obligations with respect to the MoistureLoc
matters
and for directors, officers and employees with respect to other matters) and
other contracts that contingently require us to make payments to guaranteed
parties upon the occurrence of specified events. We believe the likelihood
is
remote that material payments will be required under these contingencies, and
that they do not pose potential risk to our future liquidity, capital resources
and results of operations. See Item
8. Financial Statements and Supplementary Data
under
Note
17 — Commitments and Contingencies
of this
Annual Report on Form 10-K for further descriptions and discussions regarding
our obligations.
PAGE
52
Market
Risk
As
a
result of our global operating and financing activities, we are exposed to
changes in interest rates and foreign currency exchange rates that may adversely
affect our results of operations and financial position. In seeking to minimize
the risks and/or costs associated with such activities, we manage exposure
to
changes in interest rates and foreign currency exchange rates primarily through
the use of derivatives. We do not use financial instruments for trading or
other
speculative purposes, nor do we use leveraged financial
instruments.
We
primarily use foreign exchange forward contracts to hedge foreign currency
transactions and equity investments in non-U.S. subsidiaries. For contracts
outstanding at the end of 2005 and 2004, foreign currencies purchased were
primarily euros, British pounds, Hong Kong dollars and Swiss francs. Foreign
currencies sold in 2005 were primarily euros, Hong Kong dollars, Japanese yen,
Korean won and British pounds. In 2004, foreign currencies sold were primarily
euros, British pounds, Japanese yen, Hong Kong dollars, Korean won and Swiss
francs. The magnitude and nature of our hedging activities are explained further
in Item
8. Financial Statements and Supplementary Data
under
Note
13 — Financial Instruments
of this
Annual Report on Form 10-K. A sensitivity analysis to measure the potential
impact that a change in foreign currency exchange rates would have on our net
income indicates that, if the U.S. dollar strengthened against all foreign
currencies by 10 percent, we would realize a loss of approximately $23 on
foreign exchange forward contracts outstanding at year-end 2005. Similar
analysis conducted at the end of 2004 indicated that, had the U.S. dollar then
strengthened against all foreign currencies by 10 percent, we would have
realized a loss of approximately $6 on foreign exchange forward contracts
outstanding at year-end 2004. Such losses would be substantially offset by
gains
from the revaluation or settlement of the underlying positions
hedged.
We
may
enter into interest rate swap, interest rate lock and cap agreements to
effectively limit exposure to interest rate movements within the parameters
of
our interest rate hedging policy. For foreign currency-denominated borrowing
and
investing transactions, cross-currency interest rate swap contracts may be
used,
which, in addition to exchanging cash flows derived from interest rates,
exchange currencies at both inception and termination of the contract. There
were no cross-currency interest rate swap contracts outstanding at December
31,
2005 or December 25, 2004. A sensitivity analysis to measure the potential
impact that a change in interest rates would have on our net income indicates
that a one-percentage point decrease in interest rates, which represents a
greater than 10 percent change, would increase our net financial expense by
approximately $1 and $3 based on 2005 and 2004 year-end positions,
respectively.
Counterparties
to the financial instruments discussed above expose us to credit risks to the
extent of non-performance. The credit ratings of the counterparties, which
consist of a diversified group of high quality investment or commercial banks,
are regularly monitored and thus credit loss arising from counterparty
non-performance is not anticipated. In addition, there can be no assurances
that
the arrangements described above will protect the Company against or limit
its
exposure to all market risks.
Critical
Accounting Policies
The
accompanying consolidated financial statements and notes to consolidated
financial statements contain information that is pertinent to this MD&A. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Actual results may differ from these
estimates and assumptions.
The
Company believes that the critical accounting policies discussed below involve
additional management judgment due to the sensitivity of the methods,
assumptions and estimates necessary in determining the related asset, liability,
revenue and expense amounts. The impact of and any risks related to these
policies on its business operations are discussed below. Senior management
has
discussed the development and selection of the critical accounting estimates
and
the related disclosure included herein with the Audit Committee of the Company's
Board of Directors.
PAGE
53
Revenue
Recognition
The
Company recognizes revenue when it is realized or realizable and earned and
when
substantially all the risks and rewards of ownership have transferred to the
customer. The Company believes its revenue recognition policies are appropriate,
and that its policies are reflective of complexities arising from customer
arrangements. In certain transactions with distributors and wholesalers,
substantially all the risks and rewards of ownership do not transfer upon
delivery and, accordingly, such shipments are accounted for as consignment
sales. For the sale of multiple-element arrangements whereby equipment is
combined with services, including maintenance and other elements, such as
supplies, the Company allocates to and recognizes revenue from the various
elements based on verifiable objective evidence of fair value. Revisions to
these determinants of fair value would affect the timing of revenue allocated
to
the various elements in the arrangement and would impact the results of
operations of the Company.
The
Company records estimated reductions to revenue for customer incentive programs
offered including cash discounts, promotional and advertising allowances, volume
discounts, contractual pricing allowances, rebates and specifically established
customer product return programs. If market conditions were to change, the
Company may take actions to expand these customer offerings, which may result
in
incremental reductions to revenue. Also, under certain conditions, the Company
may offer other customer programs that do not impact revenue such as extended
credit terms.
The
Company's fiscal quarter consists of 13 weeks, whereby the first and second
months of each quarter contain four weeks of results and the third month of
each
quarter contains five weeks of results. Accordingly, net sales are typically
higher in the third month of any given quarter. In addition, the execution
of a
broad portfolio of customer incentive programs, particularly volume discounts,
certain customer rebates and extended credit terms have been higher at the
end
of each quarter. As a result, net sales for the third month of each quarter
in
2005 and 2004 were higher than average net sales for the third month of a
quarter if aligned with the fiscal quarter described above. While this trend
was
consistent among all regions and all product categories, net sales of lens
care
products and pharmaceuticals in the United States (which are marketed primarily
to health product retailers, mass merchandisers, wholesalers and distributors)
and net sales of contact lenses and lens care products in Japan (which are
marketed primarily to distributors), were the main drivers.
The
Company closely monitors and evaluates customer incentives and other customer
programs, such as extended credit terms. Should the Company determine that
certain customer programs result in excessive levels of inventory in certain
channels of trade (such as retailers, mass merchandisers, wholesalers and
distributors) or the risks and rewards have not transferred to the customer,
net
sales in conjunction with the associated programs would be accounted for as
consignment sales. As explained in Item
8. Financial Statements and Supplementary
Data
under
Note
2 — Restatement
of this
Annual Report on Form 10-K, vision care sales in BL Korea from 2002 through
2005; certain vision care transactions with a single distributor in Thailand;
vision care transactions with two large distributors in Japan; and vision care
and cataract transactions with the distributor network in India are accounted
for as consignment sales. See Item
8. Financial Statements and Supplementary Data
under
Note
1 — Significant Accounting Policies
of this
Annual Report on Form 10-K for a further discussion of the Company's revenue
recognition policy. Reductions to revenues for customer incentive programs,
as
restated, represented approximately 12 percent, 10 percent and 9 percent of
gross customer sales in 2005, 2004 and 2003, respectively.
Provisions
for Uncollectible Trade Receivables
The
Company maintains provisions for uncollectible accounts for estimated losses
resulting from the inability of its customers to remit payments. If the
financial condition of customers were to deteriorate, thereby resulting in
an
inability to make payments, additional allowances could be required. The Company
performs ongoing credit evaluations of its customers and adjusts credit limits
based upon customer payment history and current creditworthiness, as determined
by the Company's review of customers' current credit information. The Company
continuously monitors collections and payments from customers and maintains
a
provision for estimated credit losses based upon its historical experience
and
any specific customer collection issues that have been identified. While such
credit losses have historically been within the Company's expectations and
the
provisions established, the Company cannot guarantee that it will continue
to
experience the same credit loss rates that it has in the past. Measurement
of
such losses requires consideration of historical loss experience, including
the
need to adjust for current conditions, and judgments about the probable effects
of relevant observable data, including present economic conditions such as
delinquency rates and financial health of specific customers. The change in
the
provision for doubtful accounts increased 2005 operating income by $1. In 2004
and 2003, the change in the provision for doubtful accounts decreased operating
income by $4 and $3, respectively.
The
Company considers all available information in its quarterly assessments of
the
adequacy of the reserves for uncollectible accounts. If the provision for
uncollectible trade receivables were to change by one-percentage point of the
Company's gross trade receivables, operating income is estimated to increase
or
decrease by less than $6.
PAGE
54
Inventory
Allowances
The
Company provides estimated inventory allowances for excess, slow moving and
obsolete inventory as well as inventory whose carrying value is in excess of
net
realizable value. These reserves are based on current assessments about future
demands, market conditions and related management initiatives. If market
conditions and actual demands are less favorable than those projected by
management, additional inventory write-downs may be required. The Company values
its inventory at the lower of cost or net realizable market values. The Company
regularly reviews inventory quantities on hand and records a provision for
excess and obsolete inventory based primarily on estimated forecasts of product
demand and production requirements for the next twelve months. Several factors
may influence the realizability of its inventories, including decisions to
exit
a product line, technological change and new product development. These factors
could result in an increase in the amount of obsolete inventory quantities
on
hand. Additionally, estimates of future product demand may prove to be
inaccurate, in which case the provision required for excess and obsolete
inventory may be understated or overstated. If in the future, the Company
determined that its inventory was overvalued, it would be required to recognize
such costs in cost of products sold at the time of such determination. Likewise,
if the Company determined that its inventory was undervalued, cost of products
sold in previous periods could have been overstated and the Company would be
required to recognize such additional operating income at the time of sale.
While such inventory losses have historically been within the Company's
expectations and the provisions established, the Company cannot guarantee that
it will continue to experience the same loss rates that it has in the past.
Therefore, although the Company makes every effort to ensure the accuracy of
forecasts of future product demand, including the impact of planned future
product launches, any significant unanticipated changes in demand or
technological developments could have a significant impact on the value of
its
inventory and its reported operating results. The Company recorded $25, $18
and
$11 in provisions to the Statements
of Income
for
excess, slow moving and obsolete inventory in 2005, 2004, and 2003,
respectively. At this time, management does not believe that anticipated product
launches would have a material adverse effect on the recovery of the Company's
existing net inventory balances. If the inventory allowance were to change
by
one-percentage point of the Company's gross inventory, operating income is
estimated to increase or decrease by less than $3.
Fair
Value of Assets
The
Company assesses the carrying value of its identifiable intangible assets,
long-lived assets and goodwill whenever events or changes in circumstances
indicate that the carrying amount of the underlying asset may not be
recoverable, or at least annually in the case of goodwill. Certain factors
which
may occur and indicate that an impairment exists include, but are not limited
to: significant underperformance relative to expected historical or projected
future operating results; significant changes in the manner of the Company's
use
of the underlying assets; and significant adverse industry or market economic
trends. In the event that the carrying value of assets is determined to be
unrecoverable, the Company would estimate the fair value of the assets or
reporting unit and record an impairment charge for the excess of the carrying
value over the fair value. The estimate of fair value requires management to
make a number of assumptions and projections, which could include, but would
not
be limited to, future revenues, earnings and the probability of certain outcomes
and scenarios. The Company's policy is consistent with the current accounting
guidance as prescribed by SFAS No. 142, Goodwill
and Intangible Assets
and SFAS
No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets.
See
Item
8. Financial Statements and Supplementary Data
under
Note
1 — Significant Accounting Policies
of this
Annual Report on Form 10-K for a further discussion of SFAS No. 142 and SFAS
No.
144. The Company also assesses the fair value of identifiable intangible assets,
long-lived assets, goodwill and purchased in-process research and development
at
the inception of an acquisition.
On
May
15, 2006, the Company announced a worldwide voluntary recall of MoistureLoc
lens
care solution. As explained in Item
8. Financial Statements and Supplementary Data
under
Note
23 — Subsequent Event
of this
Annual Report on Form 10-K,
the
Company determined that this event would more likely than not reduce the fair
value of a reporting unit. The Company revised the fair values of each of the
reporting units to reflect the anticipated impact of the MoistureLoc
recall
and concluded that the probability of the voluntary recall reducing the fair
value of any reporting unit below its carrying amount was remote. In addition,
the Company performed a separate analysis as it relates to its recent
acquisition of Freda and determined that the fair value of Freda exceeded its
carrying value.
PAGE
55
Restructuring
Actions
The
Company had no open restructuring programs as of December 31, 2005. Prior to
2003, the Company had engaged in several significant restructuring actions,
which required the development of formalized plans as they relate to exit
activities based on guidance provided by Emerging Issues Task Force (EITF)
Issue
No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an
Activity (including Certain Costs Incurred in a Restructuring).
These
plans required the Company to utilize estimates related to severance and other
employee separation costs, lease cancellations and other exit costs. Given
the
significance and the timing of the execution of such actions, this process
was
complex and involved periodic reassessments of estimates calculated at the
time
the original decisions were made. The Company's policies for future
restructuring actions, based on guidance provided by SFAS No. 146, Accounting
for Costs Associated with Exit or Disposal Activities,
which
replaced EITF Issue No. 94-3, require recognition of costs associated with
exit
or disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. Therefore, if employees are not required
to render service until they are terminated in order to receive the termination
benefits, a liability for the termination benefits would be recognized and
measured at its fair value at the communication date. Conversely, if employees
are required to render service until they are terminated in order to receive
the
termination benefits, a liability for the termination benefits would be measured
initially at the communication date based on the fair value of the liability
as
of the termination date. The Company would recognize the liability ratably
over
the future service period.
Deferred
Tax Assets and Reserves
The
Company evaluates the recoverability of its deferred tax assets on an ongoing
basis. This evaluation includes assessing the available positive and negative
evidence to determine whether, based on its judgment, the Company believes
the
assets, or some portion thereof, are more likely than not to be realized. To
the
extent the Company does not believe the assets will more likely than not be
realized, a valuation allowance is recorded. In determining whether, and to
what
extent, a valuation allowance is required, the Company considers whether it
will
have sufficient taxable income in the appropriate period and jurisdiction that
is also of the appropriate character. Potential sources of taxable income that
are evaluated include: (i) future reversals of existing taxable temporary
differences; (ii) future taxable income exclusive of reversing temporary
differences; (iii) taxable income in prior carryback years; and (iv) tax
planning strategies that would be implemented, if necessary. Should the Company
determine that it is more likely than not it will realize its deferred tax
assets in the future, an adjustment would be required to reduce the existing
valuation allowance. Generally, this would result in a corresponding increase
to
income. Conversely, if the Company determined that it would not be able to
realize its deferred tax assets, an adjustment would be required to increase
the
valuation allowance. Generally, this would result in a decrease to income.
Additional tax expense or (benefit) related to changes in the valuation
allowance were $121, $21 and $(2) in 2005, 2004 and 2003,
respectively.
In
the
normal course of business, the Company is regularly audited by federal, state
and foreign tax authorities, and is periodically challenged regarding the amount
of taxes due. These challenges include, among other issues, questions regarding
the timing and amount of deductions and the allocation of income among various
taxing jurisdictions. The Company believes its tax positions comply with
applicable tax law and, if challenged, intends to vigorously defend such
positions. As the likelihood of successfully defending many of these positions
is uncertain, the Company evaluates these positions and records tax reserves
when the likelihood of ultimately sustaining a loss is probable, and the amount
of such loss is reasonably estimable. The Company's effective tax rate in a
given financial statement period could be materially impacted if the Company
prevailed in matters for which reserves have been established, or was required
to pay amounts in excess of established reserves.
PAGE
56
Employee
Benefits
The
Company's benefit plans include defined benefit pension plans, defined
contribution plans and a participatory defined benefit postretirement plan.
The
determination of defined benefit pension and postretirement plan obligations
and
their associated expenses requires the use of actuarial valuations to estimate
the benefits the employees earn while working, as well as the present value
of
those benefits. Inherent in these valuations are economic assumptions including
expected returns on plan assets, discount rates at which liabilities could
be
settled, rates of increase of health care costs, rates of future compensation
increases as well as employee demographic assumptions such as retirement
patterns, mortality and turnover. The actuarial assumptions used may differ
materially from actual results due to changing market and economic conditions,
higher or lower turnover rates or longer or shorter life spans of participants.
Actual results that differ from the actuarial assumptions used are recorded
as
unrecognized gains and losses. The total unrecognized actuarial losses for
the
Company defined benefit pension plans and defined benefit postretirement plan
as
of December 31, 2005 were $112 and $22, respectively. Total unrecognized
actuarial losses increased $23 for the defined benefit pension plans and $21
for
the defined benefit postretirement plan, primarily due to reductions in the
discount rate used to determine benefit obligations and an increase in the
assumed life expectancy of plan participants. Unrecognized gains and losses
that
exceed 10 percent of the greater of the plan’s projected benefit obligations or
the market-related value of assets are amortized to earnings over the shorter
of
the estimated future service period of the plan participants or the period
until
any anticipated final plan settlements. The Company reviews the assumptions
annually and makes any necessary changes. The following is a discussion of
the
most significant estimates and assumptions used in connection with the Company's
U.S. employee benefit plans. See Item
8. Financial Statements and Supplementary Data
under
Note
14 — Employee Benefits
of this
Annual Report on Form 10-K for additional information on the Company’s benefit
plans.
The
expected return on plan assets for the Company's U.S. defined benefit pension
plan for 2005 was 8.75 percent and for the defined benefit postretirement plan
was 7.75 percent. The fair value of plan assets in the Company's U.S. pension
and postretirement benefit plans comprise approximately 74 percent of the fair
value of all Company defined benefit plan assets. The expected return reflects
the average rate of earnings expected on the funds invested to provide for
the
benefits included in the benefit obligations. The expected return was developed
using forward-looking return assumptions for equity and fixed income asset
classes taking into consideration the plan’s mix of actively and passively
managed investments. The expected return developed in 2005 was 25 basis points
lower than the expected return of 9 percent developed in 2004. The expected
return for the postretirement benefit plan is based on the expected return
for
the U.S. pension plan, reduced by one percent to reflect an estimate of
additional administrative costs. A one-percentage point change in the expected
return on plan assets would result in an increase or decrease in employee
benefit costs of approximately $2.
The
discount rate reflects the current rate at which the benefit plan liabilities
could be effectively settled considering the timing of expected payments for
plan participants. The discount rate used for the U.S. pension and
postretirement benefit plans decreased to 5.5 percent in 2005 from 5.75 percent
in 2004 due to changes in market interest rate conditions. The discount rate
for
the U.S. plans, which comprise approximately 70 percent of the Company’s benefit
plan obligations, is based on the Moody’s Aa Corporate Bond Index. The
reasonableness of the discount rate was verified through the use of a cash
flow
model that calculated a discount rate by matching the estimated plan cash flows
to the average of pension yield curves constructed of a large population of
high
quality non-callable corporate bonds. If the discount rate were to decrease
by
one percent for the U.S. pension and postretirement plans, the plan liabilities
would increase by approximately $33 and the expense would increase by
approximately $2.
The
most
important estimate associated with the Company's postretirement plan is the
assumed health care cost trend rate. A one-percentage point change in this
estimate would increase or decrease the benefit obligation by approximately
$9
and the expense would increase or decrease by approximately $1.
Based
on
the Company's U.S. defined benefit pension plan's current assets and liabilities
and using the current statutory minimum funding requirements and interest rates,
including the provisions of the Pension Protection Act of 2006, no employer
contributions to the pension fund would be required until the years 2009 and
2010 when contributions of approximately $3, and $11 would be required,
respectively. Any changes to the assumptions described above or statutory
changes including the current IRS methodology would have a significant impact
on
this estimate.
PAGE
57
Derivative
Financial Instruments and Hedging Activity
The
Company, as a result of its global operating and financing activities, is
exposed to changes in interest rates and foreign currency exchange rates that
may adversely affect its results of operations and financial position. In
seeking to minimize the risks and/or costs associated with such activities,
the
Company manages exposure to changes in interest rates and foreign currency
exchange rates primarily through its use of derivatives. The Company enters
into
financial derivative instruments only for the purpose of minimizing those risks
and thereby reducing volatility in income. Derivative instruments utilized
as
part of the Company's risk management strategy may include interest rate swaps,
locks and caps, and foreign exchange forward contracts and options. All
derivatives are recognized on the balance sheet at fair value. The Company
establishes the fair value of its derivatives using quoted market prices, which
is the preferred method of establishing fair value as prescribed by SFAS No.
133, Accounting
for Derivative Instruments and Hedging Activities.
The
Company uses the quoted market price of an instrument with similar
characteristics if none exists for its derivative. Additionally, the Company
may
also use prescribed valuation techniques such as discounted future cash flows,
option pricing models or matrix pricing models to establish fair value in the
event quoted market prices of the derivative or of an instrument with similar
characteristics are not available. The fair value (also the carrying value)
of
foreign exchange instruments and interest rate instruments were each a net
payable of $2 as of December 31, 2005 and a net receivable of $2 and a net
payable of less than $1, respectively, at December 25, 2004. The Company does
not employ leveraged derivative instruments, nor does it enter into derivative
instruments for trading or speculative purposes. In using derivative
instruments, the Company is exposed to credit risk. The Company's derivative
instrument counterparties are high quality investment or commercial banks with
significant experience with such instruments. The Company manages exposure
to
counterparty risk by requiring specific minimum credit standards,
diversification of counterparties, and by regularly monitoring credit ratings
of
its counterparties.
Other
Matters
Environment
The
Company believes it is in compliance in all material respects with applicable
environmental laws and regulations. The Company is presently involved in
remedial and investigatory activities at certain locations in which the Company
has been named a responsible party. At all such locations, the Company believes
such efforts will not have a material adverse effect on its results of
operations or financial position.
New
Accounting Guidance
In
December 2004, the Financial Accounting Standards Board (FASB) issued its
standard on accounting for share-based payments, SFAS No. 123 (revised 2004),
Share-Based
Payment (SFAS No. 123R) which
replaced FASB Statement No. 123, Accounting
for Stock-Based Compensation,
and
supercedes APB Opinion No. 25, Accounting
for Stock Issued to Employees.
SFAS
No. 123R requires companies to recognize compensation cost relating to
share-based payment transactions, including grants of employee stock options,
in
the financial statements based on the grant date fair value. The pro forma
disclosures previously permitted under SFAS No. 123 will no longer be an
alternative to financial statement recognition. SFAS No. 123R is effective
for
fiscal periods beginning after June 15, 2005. In March 2005, the SEC issued
Staff Accounting Bulletin No. 107 (SAB 107) regarding the SEC’s interpretations
of SFAS No. 123R and the valuation of share-based payments for public companies.
SFAS No. 123R covers a wide range of share-based compensation arrangements
including share options, restricted share plans, performance-based awards,
share
appreciation rights and employee share purchase plans. The Company adopted
SFAS
No. 123R in the first quarter of 2006 using the modified prospective application
method. Under this method, the Company will apply SFAS No. 123R for new awards
granted after the adoption of SFAS No. 123R and any unvested portion of awards
that were granted prior to the adoption of SFAS No. 123R. The Company will
apply
the Black-Scholes model to estimate the fair value of share-based payments
to
employees, which will then be amortized on a ratable basis over the requisite
service period. The
Company estimates the impact of new stock-based compensation programs and the
adoption of SFAS No. 123R requiring the expensing of stock options will be
approximately $13 before taxes in 2006. This compares to a previous estimate
of
approximately $23 before taxes. The revised estimate reflects the postponement
of the 2006 annual stock option grant due to the delay in the Company’s filing
of this Annual Report on Form 10-K. The Company’s annual grant typically occurs
during the first quarter of each fiscal year. The current estimate is also
based
on assumptions regarding a number of subjective variables, which include
estimating the expected term of stock options and the current volatility of
the
Company’s stock price.
PAGE
58
In
May
2005, the FASB issued SFAS No. 154, Accounting
Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB
Statement No. 3.
SFAS
No. 154 requires retrospective application to prior period financial statements
for changes in accounting principles, unless it is impracticable to determine
either the period-specific effects or the cumulative effect of the change.
SFAS
No. 154 also requires that retrospective application of a change in accounting
principle be limited to the direct effects of the change. Indirect effects
of a
change in accounting principle should be recognized in the period of the
accounting change. SFAS No. 154 further requires a change in depreciation,
amortization or depletion method for long-lived, non-financial assets to be
accounted for as a change in accounting estimate effected by a change in
accounting principle. SFAS No. 154 will become effective for the Company's
fiscal year beginning January 1, 2006.
In
June
2005, the FASB issued FASB Staff Position No. FAS 143-1 (FSP FAS 143-1),
Accounting
for Electronic Equipment Waste Obligations.
FSP FAS
143-1 addresses the accounting for obligations associated with the Directive
2002/96/EC on Waste Electrical and Electronic Equipment (the Directive) adopted
by the European Union (EU). FSP FAS 143-1 is effective the later of the first
reporting period that ends after June 8, 2005 or the date that the EU-member
country adopts the law. The obligation arising from the adoption by all
EU-member countries in which the Company conducts business did not have a
material effect on the Company's financial condition or results of
operations.
In
June
2006, the FASB issued FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109
(FIN 48).
FIN 48
clarifies the accounting for uncertainty in income taxes by prescribing a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken
in a
tax return. The Interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, and
disclosure. FIN 48 is effective for fiscal years beginning after December 15,
2006. The Company is in the process of evaluating the impact FIN 48 will have
on
its results of operations and financial position.
In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements. SFAS
No.
157 defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles and expands disclosures about fair value
measurements.
Specifically,
this Statement sets forth a definition of fair value, and establishes a
hierarchy prioritizing the inputs to valuation techniques, giving the highest
priority to quoted prices in active markets for identical assets and liabilities
and the lowest priority to unobservable inputs. The provisions of SFAS No.
157
are generally required to be applied on a prospective basis, except to certain
financial instruments accounted for under SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities,
for
which the provisions of SFAS No. 157 should be applied retrospectively. The
Company will adopt SFAS No. 157 in the first quarter of 2008 and is still
evaluating the effect, if any, on its financial position or results of
operations.
In
September 2006, the FASB issued SFAS No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans, an
amendment of FASB Statements No. 87, 88, 106 and 132(R). SFAS
No.
158 requires an employer to recognize the funded status of its defined benefit
pension and postretirement plans as an asset or liability in its statement
of
financial position and to recognize changes in that funded status in the year
in
which the changes occur through comprehensive income. In addition, SFAS No.
158
requires an employer to measure the funded status of a plan as of the date
of
the employer’s fiscal year-end statement of financial position, which is
consistent with the measurement date for the Company’s defined benefit plans.
SFAS No. 158 made no changes to the recognition of expense. SFAS No. 158 will
be
effective as of the fiscal year ending December 30, 2006. The Company has not
yet completed its evaluation of the tax effect of adoption of SFAS No. 158.
Based on the year-end measurement of plan assets and liabilities, the impact
of
adopting the provisions of SFAS No. 158, before any tax effect, is expected
to
be an increase in total liabilities of approximately $12.3, a decrease in total
assets of approximately $0.4 and a decrease in accumulated other comprehensive
income of approximately $12.7. The decrease in accumulated other comprehensive
income will be reported in total shareholders’ equity, net of any tax benefits
(including the impact of any valuation allowance deemed appropriate), with
the
tax benefits reported in deferred tax assets. The adoption of SFAS No. 158
has
no impact on financial covenant compliance included in the Company’s debt
agreements.
In
September 2006, the SEC staff issued Staff Accounting Bulletin No. 108,
Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements
(SAB
108). SAB 108 was issued in order to eliminate the diversity in practice
surrounding how public companies quantify financial statement misstatements.
SAB
108 requires that registrants quantify errors using both a balance sheet and
income statement approach and evaluate whether either approach results in a
misstated amount that, when all relevant quantitative and qualitative factors
are considered, is material. The adoption of this statement is not expected
to
have a material impact on the Company's consolidated financial condition or
results of operations.
PAGE
59
Information
Concerning Forward-Looking Statements
Forward-looking statements include statements concerning plans, objectives,
goals, projections, strategies, future events or performance, and underlying
assumptions and other statements which are other than statements of historical
facts. When used in this discussion, the words “anticipate”, “appears”,
“foresee”, “should”, “expect”, “estimate”, “project”, “will”, “are likely” and
similar expressions are intended to identify forward-looking statements. The
forward-looking statements contained in this report are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
These statements involve predictions of future Company performance, and are
thus
dependent on a number of factors including, without limitation, assumptions
and
data that may be imprecise or incorrect. Specific factors that may impact
performance or other predictions of future actions and in many cases those
with
a material impact, have, in many but not all cases, been identified in
connection with specific forward-looking statements. Forward-looking statements
are subject to risks and uncertainties including, without limitation: the
inability of the Company to achieve the various marketing and selling objectives
described above or to achieve the stabilization of expenses described above;
the
inability to successfully return the Company’s lens care products to certain
markets; changes in the competitive landscape; the inability to recoup lost
market share; general global and local economic, political and sociological
conditions including, without limitation, periods of localized disease outbreak
and the effect on economic, commercial, social and political systems caused
by
natural disasters (such as, without limitation, earthquakes,
hurricanes/typhoons, tornadoes and tsunamis); changes in such conditions; the
impact of competition, seasonality and general economic conditions in the global
lens and lens care, ophthalmic cataract and refractive and pharmaceutical
markets where the Company’s businesses compete; effects of war or terrorism;
changing currency exchange rates; the general political climate existing between
and within countries throughout the world; events affecting the ability of
the
Company to timely deliver its products to customers, including those which
affect the Company’s carriers’ ability to perform delivery services; changing
trends in practitioner and consumer preferences and tastes; changes in
technology; medical developments relating to the use of the Company’s products;
competitive conditions, including entries into lines of business of the Company
by new or existing competitors, some of whom may possess resources equal to
or
greater than those of the Company; the impact of product performance or failure
on other products and business lines of the Company; success of the Company's
compliance initiatives to detect and prevent violations of law or regulations;
the results of pending or future investigations by the Company of alleged
failure of the Company to comply with applicable laws or regulations; legal
proceedings initiated by or against the Company, including those related to
securities and corporate governance matters, products and product liability,
commercial transactions, patents and other intellectual property, whether in
the
United States or elsewhere throughout the world; the impact of Company
performance on its financing costs; enactment of new legislation or regulations
or changes in application or interpretation of existing legislation or
regulations that affect the Company; changes in government regulation of the
Company’s products and operations; changes in governmental laws and regulations
relating to the import and export of products; government pricing changes and
initiatives with respect to healthcare products in the United States and
throughout the world; changes in private and regulatory schemes providing for
the reimbursement of patient medical expenses; changes in the Company’s credit
ratings or the cost of access to sources of liquidity; the Company’s ability to
maintain positive relationships with third-party financing resources; the
financial well-being and commercial success of key customers, development
partners and suppliers; changes in the availability of and other aspects
surrounding the supply of raw materials used in the manufacture of the Company’s
products; changes in tax rates or policies or in rates of inflation; the
uncertainty surrounding the future realization of deferred tax assets; changes
in accounting principles and the application of such principles to the Company;
the performance by third parties upon whom the Company relies for the provision
of goods or services; the ability of the Company to successfully execute
marketing strategies; the ability of the Company to secure and maintain
intellectual property protections, including patent rights, with respect to
key
technologies in the United States and throughout the world; the ability of
the
Company to secure and maintain copyright protections relative to its
customer-valued names, trademarks, trade names and other designations in the
United States and throughout the world; investment in research and development;
difficulties or delays in the development, laboratory and clinical testing,
regulatory approval, manufacturing, release or marketing of products; the
successful completion and integration of acquisitions by the Company; the
successful relocation of certain manufacturing processes; the Company’s
implementation of changes in internal controls; the Company’s success in the
process of management testing, including the evaluation of results, and auditor
attestation of internal controls, as required under the Sarbanes-Oxley Act
of
2002; the occurrence of a material weakness in the Company’s internal controls
over financial reporting, which could result in a material misstatement of
the
Company’s financial statements; the Company’s ability to correct any such
weakness; the Company’s success in introducing and implementing its
enterprise-wide information technology initiatives, including the corresponding
impact on internal controls and reporting; the effect of changes within the
Company’s organization, including the selection and development of the Company’s
management team and such other factors as are described in greater detail in
the
Company’s filings with the Securities and Exchange Commission, including,
without limitation, Item
I-A. Risk Factors
of this
2005 Annual Report on Form 10-K.
PAGE
60
Item
7A. Quantitative
and Qualitative Disclosures about Market Risk
The
section entitled Market
Risk
as set
forth in Item
7. Management's Discussion and Analysis of Financial Condition and Results
of
Operations
of this
Annual Report on Form 10-K is incorporated herein by reference.
Item
8. Financial
Statements and Supplementary Data
Statements
of Income
|
For
the Years Ended
December
31, 2005, December 25, 2004 and December 27, 2003
Dollar
Amounts in Millions - Except Per Share Data
|
2005
|
2004
(Restated)
|
2003
(Restated)
|
|||||||
|
Net
Sales
|
$
|
2,353.8
|
$
|
2,233.5
|
$
|
2,018.5
|
||||
|
Costs
and Expenses
|
||||||||||
|
Cost
of products sold
|
983.1
|
929.2
|
856.8
|
|||||||
|
Selling,
administrative and general
|
909.7
|
862.7
|
789.9
|
|||||||
|
Research
and development
|
177.5
|
162.5
|
149.9
|
|||||||
|
Reversal
of restructuring charges
|
-
|
-
|
(6.3
|
)
|
||||||
|
2,070.3
|
1,954.4
|
1,790.3
|
||||||||
|
Operating
Income
|
283.5
|
279.1
|
228.2
|
|||||||
|
Other
(Income) Expense
|
||||||||||
|
Interest
and investment income
|
(20.1
|
)
|
(13.8
|
)
|
(15.7
|
)
|
||||
|
Interest
expense
|
52.8
|
49.6
|
55.2
|
|||||||
|
Foreign
currency, net
|
4.4
|
0.6
|
13.4
|
|||||||
|
37.1
|
36.4
|
52.9
|
||||||||
|
Income
before Income Taxes and Minority Interest
|
246.4
|
242.7
|
175.3
|
|||||||
|
Provision
for income taxes
|
221.4
|
83.8
|
65.3
|
|||||||
|
Minority
interest in subsidiaries
|
5.8
|
5.0
|
3.1
|
|||||||
|
Income
before Cumulative Effect of Change in Accounting
Principle
|
19.2
|
153.9
|
106.9
|
|||||||
|
Cumulative
Effect of Change in Accounting Principle, Net of
Taxes
|
-
|
-
|
(0.9
|
)
|
||||||
|
Net
Income
|
$
|
19.2
|
$
|
153.9
|
$
|
106.0
|
||||
|
Basic
Earnings (Loss) Per Share:
|
||||||||||
|
Before
Cumulative Effect of Change in Accounting Principle
|
$
|
0.36
|
$
|
2.94
|
$
|
2.04
|
||||
|
Cumulative
Effect of Change in Accounting Principle
|
-
|
-
|
(0.02
|
)
|
||||||
|
$
|
0.36
|
$
|
2.94
|
$
|
2.02
|
|||||
|
Average
Shares Outstanding - Basic (000s)
|
53,146
|
52,433
|
52,426
|
|||||||
|
Diluted
Earnings (Loss) Per Share:
|
||||||||||
|
Before
Cumulative Effect of Change in Accounting Principle
|
$
|
0.35
|
$
|
2.83
|
$
|
2.00
|
||||
|
Cumulative
Effect of Change in Accounting Principle
|
-
|
-
|
(0.02
|
)
|
||||||
|
$
|
0.35
|
$
|
2.83
|
$
|
1.98
|
|||||
|
Average
Shares Outstanding - Diluted (000s)
|
55,684
|
54,504
|
53,519
|
|||||||
See
Notes
to Financial Statements
PAGE
61
Balance
Sheets
|
December
31, 2005 and December 25, 2004
Dollar
Amounts in Millions - Except Per Share Data
|
2005
|
2004
(Restated)
|
|||||
|
Assets
|
|||||||
|
Cash
and cash equivalents
|
$
|
720.6
|
$
|
501.8
|
|||
|
Trade
receivables, less allowances of $16.2 and $22.1,
respectively
|
491.7
|
511.4
|
|||||
|
Inventories,
net
|
219.8
|
212.1
|
|||||
|
Other
current assets
|
124.6
|
108.6
|
|||||
|
Deferred
income taxes
|
71.2
|
112.1
|
|||||
|
Total
Current Assets
|
1,627.9
|
1,446.0
|
|||||
|
Property,
Plant and Equipment, net
|
604.4
|
580.8
|
|||||
|
Goodwill
|
799.0
|
682.2
|
|||||
|
Other
Intangibles, net
|
273.8
|
204.3
|
|||||
|
Other
Long-Term Assets
|
100.3
|
106.9
|
|||||
|
Deferred
Income Taxes
|
11.0
|
25.6
|
|||||
|
Total
Assets
|
$
|
3,416.4
|
$
|
3,045.8
|
|||
|
Liabilities
and Shareholders' Equity
|
|||||||
|
Notes
payable
|
$
|
0.2
|
$
|
2.6
|
|||
|
Current
portion of long-term debt
|
161.2
|
100.8
|
|||||
|
Accounts
payable
|
88.1
|
94.8
|
|||||
|
Accrued
compensation
|
126.0
|
153.3
|
|||||
|
Accrued
liabilities
|
495.5
|
453.2
|
|||||
|
Federal,
state and foreign income taxes payable
|
137.7
|
109.6
|
|||||
|
Deferred
income taxes
|
1.5
|
3.7
|
|||||
|
Total
Current Liabilities
|
1,010.2
|
918.0
|
|||||
|
Long-Term
Debt, less current portion
|
831.2
|
543.3
|
|||||
|
Other
Long-Term Liabilities
|
145.9
|
131.9
|
|||||
|
Deferred
Income Taxes
|
120.7
|
75.2
|
|||||
|
Total
Liabilities
|
2,108.0
|
1,668.4
|
|||||
|
Minority
Interest
|
24.5
|
14.6
|
|||||
|
Commitments
and Contingencies (Note 17)
|
|||||||
|
Common
Stock, par value $0.40 per share, 200 million shares authorized 60,427,172
shares issued (60,340,522 shares in 2004)
|
24.1
|
24.1
|
|||||
|
Class
B Stock, par value $0.08 per share, 15 million shares authorized,
253,699
shares issued (443,584 shares in 2004)
|
-
|
-
|
|||||
|
Capital
in Excess of Par Value
|
102.4
|
105.6
|
|||||
|
Common
and Class B Stock in Treasury, at cost, 6,741,731 shares (7,888,001
shares
in 2004)
|
(356.3
|
)
|
(409.2
|
)
|
|||
|
Retained
Earnings
|
1,471.6
|
1,480.4
|
|||||
|
Accumulated
Other Comprehensive Income
|
50.9
|
167.8
|
|||||
|
Other
Shareholders' Equity
|
(8.8
|
)
|
(5.9
|
)
|
|||
|
Total
Shareholders' Equity
|
1,283.9
|
1,362.8
|
|||||
|
Total
Liabilities and Shareholders' Equity
|
$
|
3,416.4
|
$
|
3,045.8
|
|||
See
Notes
to Financial Statements
PAGE
62
Statements
of Cash Flows
|
For
the Years Ended
December
31, 2005, December 25, 2004 and December 27, 2003
Dollar
Amounts in Millions
|
2005
|
2004
(Restated)
|
2003
(Restated)
|
|||||||
|
Cash
Flows from Operating Activities
|
||||||||||
|
Net
Income
|
$
|
19.2
|
$
|
153.9
|
$
|
106.0
|
||||
|
Adjustments
to Reconcile Net Income to Net Cash Provided by Operating
Activities
|
||||||||||
|
Depreciation
|
98.5
|
99.4
|
98.8
|
|||||||
|
Amortization
|
27.3
|
24.9
|
25.6
|
|||||||
|
Reversal
of restructuring charges
|
-
|
-
|
(6.3
|
)
|
||||||
|
Deferred
income taxes
|
93.2
|
(21.4
|
)
|
(21.5
|
)
|
|||||
|
Stock-based
compensation expense
|
5.3
|
10.2
|
10.7
|
|||||||
|
Tax
benefits associated with exercise of stock options
|
16.9
|
16.1
|
-
|
|||||||
|
Gain
from sale of investments available-for-sale
|
-
|
(0.3
|
)
|
-
|
||||||
|
Loss
on divestiture of German Woehlk contact lens business
|
2.3
|
-
|
-
|
|||||||
|
Loss
on retirement of fixed assets
|
2.4
|
11.0
|
3.2
|
|||||||
|
Changes
in Assets and Liabilities
|
||||||||||
|
Trade
receivables
|
5.4
|
(18.9
|
)
|
(13.7
|
)
|
|||||
|
Inventories
|
(16.3
|
)
|
11.9
|
16.0
|
||||||
|
Other
current assets
|
(17.2
|
)
|
11.9
|
7.9
|
||||||
|
Other
long-term assets, including equipment on operating lease
|
(2.7
|
)
|
(21.6
|
)
|
(11.1
|
)
|
||||
|
Accounts
payable and accrued liabilities
|
(31.9
|
)
|
59.3
|
(3.8
|
)
|
|||||
|
Income
taxes payable
|
27.7
|
(24.4
|
)
|
27.7
|
||||||
|
Other
long-term liabilities
|
9.3
|
(27.5
|
)
|
12.9
|
||||||
|
Net
Cash Provided by Operating Activities 1
|
239.4
|
284.5
|
252.4
|
|||||||
|
Cash
Flows from Investing Activities
|
||||||||||
|
Capital
expenditures
|
(116.0
|
)
|
(118.9
|
)
|
(91.5
|
)
|
||||
|
Net
cash paid for acquisition of businesses and other
intangibles
|
(236.7
|
)
|
(2.1
|
)
|
(6.4
|
)
|
||||
|
Purchase
of available-for-sale securities
|
-
|
(43.4
|
)
|
(19.7
|
)
|
|||||
|
Cash
received from sale of investments available-for-sale
|
-
|
44.0
|
19.7
|
|||||||
|
Other
|
(0.4
|
)
|
(1.3
|
)
|
3.8
|
|||||
|
Net
Cash Used in Investing Activities
|
(353.1
|
)
|
(121.7
|
)
|
(94.1
|
)
|
||||
|
Cash
Flows from Financing Activities
|
||||||||||
|
Repurchases
of Common and Class B shares
|
(45.1
|
)
|
(79.0
|
)
|
(72.0
|
)
|
||||
|
Exercise
of stock options
|
69.6
|
77.8
|
12.1
|
|||||||
|
Net
repayments of notes payable
|
(2.1
|
)
|
0.3
|
(1.1
|
)
|
|||||
|
Repayment
of long-term debt
|
(325.7
|
)
|
(196.6
|
)
|
(200.7
|
)
|
||||
|
Proceeds
from issuance of debt
|
676.7
|
0.1
|
210.1
|
|||||||
|
Cash
paid to minority interests
|
(3.8
|
)
|
(4.2
|
)
|
(4.5
|
)
|
||||
|
Payment
of dividends
|
(28.1
|
)
|
(27.6
|
)
|
(27.7
|
)
|
||||
|
Net
Cash Provided by (Used in) Financing Activities
|
341.5
|
(229.2
|
)
|
(83.8
|
)
|
|||||
|
Effect
of exchange rate changes on cash and cash equivalents
|
(9.0
|
)
|
5.6
|
23.0
|
||||||
|
Net
Change in Cash and Cash Equivalents
|
218.8
|
(60.8
|
)
|
97.5
|
||||||
|
Cash
and Cash Equivalents, Beginning of Year
|
501.8
|
562.6
|
465.1
|
|||||||
|
Cash
and Cash Equivalents, End of Year
|
$
|
720.6
|
$
|
501.8
|
$
|
562.6
|
||||
|
Supplemental
Cash Flow Disclosures
|
||||||||||
|
Cash
paid for interest
|
$
|
44.9
|
$
|
48.3
|
$
|
57.4
|
||||
|
Net
cash payments for income taxes
|
82.1
|
115.2
|
58.2
|
|||||||
|
Supplemental
Schedule of Non-Cash Financing Activities
|
||||||||||
|
Dividends
declared but not paid
|
$
|
7.1
|
$
|
6.9
|
$
|
6.8
|
||||
1 Exclusive
of acquisitions.
See
Notes
to Financial Statements
PAGE
63
Statements of Changes in Shareholders' Equity
|
For
the Years Ended
December
31, 2005, December 25, 2004 (Restated) and December 27, 2003
(Restated)
Dollar
Amounts in Millions
|
||||||||||||||||||||||
|
Total
|
Common
and Class B Stock 1,
2
|
Capital
in Excess of Par
|
Treasury
Stock
|
Retained
Earnings
|
Accumulated
Other Compre-hensive (Loss)
Income
|
Other
Shareholders' Equity
|
||||||||||||||||
|
Balance
at December 28, 2002 (As reported)
|
$
|
1,017.8
|
$
|
24.1
|
$
|
102.2
|
$
|
(359.8
|
)
|
$
|
1,298.9
|
$
|
(38.5
|
)
|
$
|
(9.1
|
)
|
|||||
|
Impact
of Restatement
|
(12.5
|
)
|
-
|
4.0
|
(8.3
|
)
|
(23.3
|
)
|
15.1
|
-
|
||||||||||||
|
Balance
at December 28, 2002 (Restated)
|
$
|
1,005.3
|
$
|
24.1
|
$
|
106.2
|
$
|
(368.1
|
)
|
$
|
1,275.6
|
$
|
(23.4
|
)
|
$
|
(9.1
|
)
|
|||||
|
Components
of comprehensive income
|
||||||||||||||||||||||
|
Net
income
|
106.0
|
-
|
-
|
-
|
106.0
|
-
|
-
|
|||||||||||||||
|
Currency
translation adjustments
|
123.5
|
-
|
-
|
-
|
-
|
123.5
|
-
|
|||||||||||||||
|
Net
loss on cash flow hedges
|
(0.2
|
)
|
-
|
-
|
-
|
-
|
(0.2
|
)
|
-
|
|||||||||||||
|
Reclassification
adjustment into net income for net loss on cash flow
hedges
|
3.2
|
-
|
-
|
-
|
-
|
3.2
|
-
|
|||||||||||||||
|
Minimum
additional pension liability
|
4.4
|
-
|
-
|
-
|
-
|
4.4
|
-
|
|||||||||||||||
|
Total
comprehensive income 3
|
236.9
|
|||||||||||||||||||||
|
Net
change in shares under employee plans (106,426 shares) 4
|
(0.6
|
)
|
-
|
3.2
|
-
|
-
|
-
|
(3.8
|
)
|
|||||||||||||
|
Treasury
shares issued under employee plans (460,056 shares)
|
15.6
|
-
|
-
|
15.6
|
-
|
-
|
-
|
|||||||||||||||
|
Treasury
shares repurchased (1,758,796 shares)
|
(72.0
|
)
|
-
|
-
|
(72.0
|
)
|
-
|
-
|
-
|
|||||||||||||
|
Activity
related to deferred stock awards held by the rabbi trust under a
deferred
compensation
program 5 |
(1.7
|
)
|
-
|
-
|
(1.7
|
)
|
-
|
-
|
-
|
|||||||||||||
|
Amortization
of unearned compensation
|
4.8
|
-
|
-
|
-
|
-
|
-
|
4.8
|
|||||||||||||||
|
Dividends
6
|
(27.5
|
)
|
-
|
-
|
-
|
(27.5
|
)
|
-
|
-
|
|||||||||||||
|
Balance
at December 27, 2003 (Restated)
|
$
|
1,160.8
|
$
|
24.1
|
$
|
109.4
|
$
|
(426.2
|
)
|
$
|
1,354.1
|
$
|
107.5
|
$
|
(8.1
|
)
|
||||||
|
Components
of comprehensive income
|
||||||||||||||||||||||
|
Net
income
|
153.9
|
-
|
-
|
-
|
153.9
|
-
|
-
|
|||||||||||||||
|
Currency
translation adjustments
|
63.7
|
-
|
-
|
-
|
-
|
63.7
|
-
|
|||||||||||||||
|
Reclassification
adjustment into net income for net loss on cash flow
hedges
|
1.9
|
-
|
-
|
-
|
-
|
1.9
|
-
|
|||||||||||||||
|
Minimum
additional pension liability
|
(5.3
|
)
|
-
|
-
|
-
|
-
|
(5.3
|
)
|
-
|
|||||||||||||
|
Total
comprehensive income 3
|
214.2
|
|||||||||||||||||||||
|
Net
change in shares under employee plans (45,300 shares) 4
|
(6.3
|
)
|
-
|
(4.1
|
)
|
-
|
-
|
-
|
(2.2
|
)
|
||||||||||||
|
Treasury
shares issued under employee plans (1,986,353 shares)
|
97.6
|
-
|
-
|
97.6
|
-
|
-
|
-
|
|||||||||||||||
|
Treasury
shares repurchased (1,293,625 shares)
|
(79.2
|
)
|
-
|
-
|
(79.2
|
)
|
-
|
-
|
-
|
|||||||||||||
|
Activity
related to deferred stock awards held by the rabbi trust under a
deferred
compensation
program 5 |
(1.1
|
)
|
-
|
0.3
|
(1.4
|
)
|
-
|
-
|
-
|
|||||||||||||
|
Amortization
of unearned compensation
|
4.4
|
-
|
-
|
-
|
-
|
-
|
4.4
|
|||||||||||||||
|
Dividends
6
|
(27.6
|
)
|
-
|
-
|
-
|
(27.6
|
)
|
-
|
-
|
|||||||||||||
|
Balance
at December 25, 2004 (Restated)
|
$
|
1,362.8
|
$
|
24.1
|
$
|
105.6
|
$
|
(409.2
|
)
|
$
|
1,480.4
|
$
|
167.8
|
$
|
(5.9
|
)
|
||||||
|
Components
of comprehensive income
|
||||||||||||||||||||||
|
Net
income
|
19.2
|
-
|
-
|
-
|
19.2
|
-
|
-
|
|||||||||||||||
|
Currency
translation adjustments
|
(100.2
|
)
|
-
|
-
|
-
|
-
|
(100.2
|
)
|
-
|
|||||||||||||
|
Reclassification
adjustment into net income for net loss on cash flow
hedges
|
3.3
|
-
|
-
|
-
|
-
|
3.3
|
-
|
|||||||||||||||
|
Minimum
additional pension liability
|
(20.0
|
)
|
-
|
-
|
-
|
-
|
(20.0
|
)
|
-
|
|||||||||||||
|
Total
comprehensive income 7
|
(97.7
|
)
|
||||||||||||||||||||
|
Net
change in shares under employee plans (89,750 shares)
|
(10.1
|
)
|
-
|
(3.8
|
)
|
-
|
-
|
-
|
(6.3
|
)
|
||||||||||||
|
Treasury
shares issued under employee plans (1,790,096 shares)
|
100.9
|
-
|
-
|
100.9
|
-
|
-
|
-
|
|||||||||||||||
|
Treasury
shares repurchased (600,464 shares)
|
(44.9
|
)
|
-
|
-
|
(44.9
|
)
|
-
|
-
|
-
|
|||||||||||||
|
Activity
related to deferred stock awards held by the rabbi trust under a
deferred
compensation program
|
(2.5
|
)
|
-
|
0.6
|
(3.1
|
)
|
-
|
-
|
-
|
|||||||||||||
|
Amortization
of unearned compensation
|
3.4
|
-
|
-
|
-
|
-
|
-
|
3.4
|
|||||||||||||||
|
Dividends
6
|
(28.0
|
)
|
-
|
-
|
-
|
(28.0
|
)
|
-
|
-
|
|||||||||||||
|
Balance
at December 31, 2005
|
$
|
1,283.9
|
$
|
24.1
|
$
|
102.4
|
$
|
(356.3
|
)
|
$
|
1,471.6
|
$
|
50.98
|
$
|
(8.8
|
)
|
||||||
PAGE
64
|
1
|
There
are also 10 thousand shares of $100 par value 4 percent cumulative
preferred stock authorized, none of which has been
issued.
|
2
There
are
also 25 million shares of $1 par value Class A preferred stock authorized,
none
of which has been issued.
|
3
|
See
Note
2 — Restatement
for a discussion of the impact of restatement regarding the components
of
total comprehensive income.
|
|
4
|
Activity
reflects restatement adjustments associated with the Company's
comprehensive review of its accounting for income taxes. The after-tax
impact of these adjustments was $1.5 and $(3.9) for 2003 and 2004,
respectively.
|
5
See
Note
2 — Restatement
for a
discussion regarding the Deferred Compensation Plan matter.
6
Cash
dividends of $0.52 per share were declared on Common and Class B stock in 2003,
2004 and 2005.
|
7
|
Total
comprehensive income was reported net of any related tax effects.
Amounts
of income tax expense for minimum additional pension liability
for the
year ended December 31, 2005 was $2.3. There was no income tax
benefit or
expense related to currency translation adjustments and reclassification
adjustments for net loss on cash flow hedges as a result of the
Company
recording a valuation allowance as further discussed in Note
10 — Provision for Income Taxes.
|
|
8
|
Accumulated
other comprehensive income was $50.9 at December 31, 2005 and included
the
following accumulated income (loss) amounts: currency translation
adjustment, $116.2; net loss on cash flow hedges, $(1.7); and minimum
additional pension liability, $(63.6). Accumulated other comprehensive
income was $167.8 at December 25, 2004 and included the following
accumulated income (loss) amounts: currency translation adjustment,
$216.4; net loss on cash flow hedges, $(5.0); and minimum additional
pension liability, $(43.6).
|
See
Notes
to Financial Statements
PAGE
65
Notes
to Financial Statements
Dollar
Amounts in Millions Except Per Share Data
1. Significant
Accounting Policies
Company
Operations Bausch
& Lomb Incorporated (the Company) is a world leader in the development,
manufacture and marketing of eye health products, including contact lenses,
contact lens care solutions and ophthalmic surgical and pharmaceutical
products.
The
Company restated its consolidated financial statements for fiscal years 2003
and
2004 and its financial information for the years ended 2001 and 2002 (including
a cumulative increase to 2001 beginning retained earnings of $34.0) and the
first and second quarters of 2005. See Note
2 — Restatement
for a
discussion of the nature of the restatement adjustments and the impact on
previously issued financial statements.
Basis
of Presentation Throughout
the consolidated financial statements and accompanying notes, all referenced
amounts related to prior periods reflect the balances and amounts on a restated
basis.
Principles
of Consolidation
The
financial statements include all majority-owned U.S. and non-U.S. subsidiaries.
The consolidation of non-wholly owned subsidiaries results in the recognition
of
minority interest on the consolidated Balance Sheets and Statements of Income
representing the minority shareholders’ interest in the net assets and net
income of such subsidiaries. Intercompany accounts, transactions and profits
are
eliminated. The fiscal year is the 52- or 53-week period ending the last
Saturday in December.
Segment
Reporting
In
accordance with Statement of Financial Accounting Standards (SFAS) No. 131,
Disclosures
about Segments of an Enterprise and Related Information,
the
Company reports its results consistent with the manner in which financial
information is viewed by management for decision-making purposes.
The
Company is organized on a regionally based management structure for commercial
operations. The research and development and product supply functions of the
Company are managed on a global basis. Beginning in 2005, the Company’s
engineering function, which had previously been part of the research and
development segment, became part of the product supply function. Following
the
realignment of the engineering function, the Company's segments are the Americas
region; the Europe, Middle East and Africa region (Europe); the Asia region;
the
Research & Development organization and the Global Operations &
Engineering organization.
Use
of Estimates
The
financial statements have been prepared in conformity with generally accepted
accounting principles (GAAP) and, as such, include amounts based on informed
estimates and judgments of management with consideration given to materiality.
For example, estimates are used in determining valuation allowances for
uncollectible trade receivables, obsolete inventory, deferred income taxes
and
tax reserves, and in valuing purchased intangible assets. Actual results could
differ from those estimates.
Cash
Equivalents
Cash
equivalents include time deposits and highly liquid investments with original
maturities of three months or less.
Inventories
Inventories are valued at the lower of cost or market using the first-in,
first-out (FIFO) method. Inventories include the cost of raw materials, labor
and manufacturing overhead. The Company provides estimated inventory allowances
for excess, slow moving and obsolete inventory as well as inventory whose
carrying value is in excess of net realizable value to properly reflect
inventory at the lower of cost or market. Allowances for excess, slow moving
and
obsolete inventory were $30.9 and $30.6 as of December 31, 2005 and December
25,
2004, respectively.
Property,
Plant and Equipment
Property, plant and equipment, including improvements that significantly add
to
productive capacity or extend useful life, are recorded at cost, while
maintenance and repairs are expensed as incurred. Depreciation is calculated
for
financial reporting purposes using the straight-line method based on the
estimated useful lives of the assets as follows: buildings, 30 to 40 years;
machinery and equipment, two to ten years; and leasehold improvements, the
shorter of the estimated useful life or the lease periods. In accordance with
SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets,
the
Company assesses all long-lived assets, including property, plant and equipment,
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Interest cost capitalization
associated with various projects commences with the first expenditure for the
project and continues until the project is substantially complete and ready
for
its intended use.
PAGE
66
Goodwill
and Other Intangibles
The
Company’s policy is in accordance with current accounting guidance as prescribed
by SFAS No. 141, Business
Combinations
and SFAS
No. 142, Goodwill
and Intangible Assets.
The
Company accounts and evaluates its goodwill balances and tests them for
impairment in accordance with the provisions of SFAS 142. The Company performs
an annual impairment test of goodwill during its fourth fiscal quarter and
when
an event occurs or circumstances change that would more likely than not reduce
the fair value of any of its reporting units below its carrying amount. The
impairment test compares the carrying value of the Company’s reporting units to
their respective fair values. The Company’s business segments have been
identified as the reporting units. Fair value is based on the average of the
indications of value derived from the income and market approaches, weighted
equally. The income approach measures the fair value by discounting expected
cash flows by reporting unit to their present value at a rate of return that
is
commensurate with their inherent risk. The market approach measures the fair
value by analyzing and comparing the operating performance and financial
condition of public companies within the ophthalmic pharmaceutical industry
and
companies subject to similar market conditions adjusted for differences in
profitability, financial position, products and markets. The Company completed
its annual impairment test on each of its reporting units during the fourth
quarters of 2005 and 2004. As the carrying value (including goodwill) of each
of
the Company's reporting units was less than their respective fair values,
goodwill was not considered to be impaired.
The
Company assesses the carrying value of its identifiable intangible assets
whenever events or changes in circumstances indicate that the carrying amount
of
the underlying asset may not be recoverable. Certain factors which may occur
and
indicate that an impairment exists include, but are not limited to the
following: significant underperformance relative to expected historical or
projected future operating results; significant changes in the manner of the
Company’s use of underlying assets; and significant adverse industry or market
economic trends. In the event the carrying value of assets is determined to
be
unrecoverable, the Company would estimate the fair value of the assets and
record an impairment charge for the excess of the carrying value over the fair
value.
On
May
15, 2006, the Company announced a worldwide voluntary recall of MoistureLoc
lens
care solution. As explained in Note
23 — Subsequent Event,
the
Company determined that this event would more likely than not reduce the fair
value of a reporting unit. The Company revised the fair values of each of the
reporting units to reflect the anticipated impact of the MoistureLoc
recall
and concluded that the probability of the voluntary recall reducing the fair
value of any reporting unit below its carrying amount was remote. In addition,
the Company performed a separate analysis as it relates to its recent
acquisition of Freda and determined that the fair value of Freda exceeded its
carrying value.
Revenue
Recognition and Related Provisions and Allowances
The
Company’s revenue recognition policy is in accordance with the requirements of
Staff Accounting Bulletin No. 104, Revenue
Recognition, corrected copy
(SAB
104), Emerging Issues Task Force (EITF) 00-21, Accounting
for Revenue Arrangements with Multiple Deliverables,
and
other applicable revenue recognition guidance and interpretations.
The
Company markets products in five product categories: contact lens, lens care,
pharmaceuticals, cataract and vitreoretinal, and refractive. The Company
recognizes revenue for each of these product categories when it is realized
or
realizable and earned and when substantially all the risks and rewards of
ownership have transferred to the customer. Revenue is considered realized
and
earned when:
| · |
persuasive
evidence of an arrangement exists;
|
| · |
delivery
has occurred or services have been
rendered;
|
| · |
the
Company's price to its customers is fixed or determinable;
and
|
| · |
collection
of the resulting receivable is reasonably
assured.
|
PAGE
67
In
addition to the Company’s sales force, distributors and wholesalers are utilized
to market and distribute the Company’s products to secondary customers. Revenue
from distributors and wholesalers must meet all of the revenue recognition
criteria previously discussed. The Company’s revenue recognition policy requires
that based on the distributor’s anticipated sell-through, a reasonable base
amount of inventory must be established for each distributor or wholesaler
that
represents a significant amount of the Company’s business. This base amount of
inventory is used as a benchmark in assessing total inventory available to
secondary customers. In certain transactions with distributors and wholesalers,
substantially all the risks and rewards of ownership do not transfer upon
delivery and, accordingly, such shipments are accounted for as consignment
sales. For the previously described consignment sales, the Company invoices
the
distributor or wholesaler upon shipment, records deferred revenue at gross
invoice sales price and classifies the inventory held by the distributors or
wholesalers as consignment inventory at the Company’s cost of such inventory.
Deferred revenue for consignment sales was $33.1 and $27.7 as of December 31,
2005 and December 25, 2004, respectively. Balances are included in Accrued
Liabilities on the Balance
Sheets.
Associated consignment inventory was $7.9 and $7.1 as of December 31, 2005
and
December 25, 2004, respectively. Balances are included in Inventories on the
Balance
Sheets.
The
Company recognizes revenue (net of discounts, rebates, sales allowances and
accruals for returns, all of which involve significant estimates and judgments)
when the risks and rewards of ownership have transferred but not later than
when
such inventory is sold to the wholesalers’ or distributors' customers. Also, as
explained in the paragraph below entitled Cataract
and Vitreoretinal, and Refractive,
the
Company offers IOLs to surgeons and hospitals on a consignment basis and
recognizes revenue when the IOL is implanted during surgery and not upon
shipment to the surgeon.
Within
each product category the Company has ongoing programs that, under specified
conditions, allow customers to return products and, in accordance with SFAS
No.
48, Revenue
Recognition When Right of Return Exists,
records
liabilities for estimated returns and allowances at the time revenue is
recognized. The Company's liability for estimated returns considers historical
trends, the impact of new product launches, the entry of a competitor, product
rationalization and the various terms and arrangements offered, including sales
with extended credit terms.
Also,
within each product category the Company has established certain customer
incentive programs such as cash discounts, promotional and advertising
allowances, volume discounts, contractual pricing allowances, and rebates and
coupons. The Company records an estimated reduction to revenue for these
programs in accordance with Emerging Issues Task Force 01-9, Accounting
for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor's
Products
(EITF
01-9). The Company closely monitors and evaluates customer incentives and other
customer programs. Should the Company determine that certain customer programs
result in excessive levels of inventory in certain channels of trade (such
as
retailers, mass merchandisers, wholesalers and distributors) or the risks and
rewards have not transferred to the customer, net sales in conjunction with
the
associated programs would be accounted for as consignment sales.
The
Company maintains provisions for uncollectible accounts for estimated losses
resulting from the inability of its customers to remit payments. The Company
continuously monitors collections and payments from customers and maintains
a
provision for estimated credit losses based upon its historical experience
and
any specific customer collection issues that have been identified. Amounts
billed to customers in sales transactions related to shipping and handling
are
classified as revenue in accordance with EITF 00-10, Accounting
for Shipping and Handling Fees and Costs.
Some
of
the Company's sales programs are unique to a specific product category. These
are discussed below.
Lens
and Lens Care
The
contact lens category includes traditional, planned replacement, daily
disposable, multifocal, continuous wear and toric soft lenses and rigid gas
permeable lenses and materials. These products are marketed to licensed eye
care
professionals, health product retailers and distributors. The lens care category
includes multipurpose solutions, cleaning and conditioning solutions for RGP
lenses, re-wetting drops and saline solutions. These products are marketed
to
licensed eye care professionals, health product retailers, independent
pharmacies, drug stores, food stores, mass merchandisers and distributors.
The
Company offers co-operative advertising programs within the contact lens and
lens care categories. These programs are made available to large retailers
and
mass merchandisers that provide frequent advertising to their customers. The
Company also offers manufacturer's coupons and mail-in rebates to end consumers.
These programs are recorded as a reduction in revenue at the time the program
is
offered in accordance with EITF 01-9 as the fair value of the benefit cannot
be
reasonably estimated or, in the case of coupons and rebates, the Company does
not receive a separable identifiable benefit.
PAGE
68
Pharmaceuticals
The
pharmaceuticals category includes generic and proprietary prescription
ophthalmic drugs, ocular vitamins, and over-the-counter medications. These
products are marketed through the Company's sales force and distributed
primarily through wholesalers, with additional sales to independent pharmacies,
drug stores, food stores, mass merchandisers, hospitals and distributors. The
Company enters into contractual pricing agreements with indirect customers
that
result in rebates to wholesalers and price protection allowances to certain
customers. These rebates and allowances are recorded as a reduction in revenue
in accordance with EITF 01-9 as the Company does not receive a separable
identifiable benefit.
Cataract
and Vitreoretinal, and Refractive
The
cataract and vitreoretinal category includes intraocular lenses (IOLs),
phacoemulsification and vitreoretinal surgical equipment and related disposable
products, hand-held surgical instruments, viscoelastics and other products
used
in cataract and vitreoretinal surgery. The refractive category includes lasers,
microkeratomes, diagnostic equipment, other products used in refractive surgery
and service fees. These products are marketed to ophthalmic surgeons, hospitals,
ambulatory surgery centers or vision centers, and distributors. In these product
categories, the Company will market disposable and consumable products either
individually or in combination with equipment. If sold in combination with
equipment, the Company allocates revenue to the separate revenue elements in
accordance with EITF 00-21. Revenues from equipment sales are recorded either
at
the time risk of loss passes to the customer or, in the case of lasers, upon
customer acceptance for outright sales and sales-type leasing arrangements,
or
over the lease term for operating leases in accordance with SAB 104 and SFAS
No.
13, Accounting
for Leases.
Customer acceptance is evidenced by a certificate of installation. The Company
offers 12-month warranties on equipment and records a reserve at the time of
sale for the cost associated with the warranty in accordance with SFAS No.
5,
Accounting
for Contingencies.
Also in
the cataract and vitreoretinal product category, the Company offers IOLs to
surgeons and hospitals on a consignment basis. In accordance with SAB 104,
the
Company recognizes revenue for consignment inventory when the IOL is implanted
during surgery and not upon shipment to the surgeon.
Advertising
Expense
External
costs incurred in producing media advertising are expensed the first time the
advertising takes place. At December 31, 2005 and December 25, 2004, $2.8 and
$2.2 of deferred advertising costs, respectively, were reported as other current
assets representing primarily production and design costs for advertising to
be
run in the subsequent fiscal year. Advertising expenses of $212.4, $205.7 and
$186.3 were included in selling, administrative and general expenses for 2005,
2004 and 2003, respectively. Advertising expense for 2005 included $4.5 of
expense associated with an announcement of the voluntary recall of MoistureLoc
lens
care solution from worldwide markets (see Note
23 — Subsequent Event).
Research
and Development Costs
Internal
research and development costs, which are primarily comprised of direct
salaries, external consulting fees and occupancy costs, are expensed as
incurred. Third-party research and development costs are expensed as the
contracted work is performed. Where certain milestone payments are due to third
parties under research and development arrangements, the milestone payment
obligations are expensed as the milestone results are achieved, up to the point
of certain regulatory approvals. In the event payments are made to third parties
subsequent to certain regulatory approvals, they are either expensed or
capitalized depending upon the nature of the payment. For example, royalty
payments are expensed, whereas payments to purchase an associated intangible
asset are capitalized and amortized over the remaining useful life of the
related product. Amounts capitalized for such payments are included in other
intangibles, net of accumulated amortization (see Note
8 — Acquired Intangible Assets).
Legal
Fees
Legal
fees are expensed as incurred.
PAGE
69
Stock-Based
Compensation
The
Company has granted stock options to its key employees and non-employee
directors under several stock-based compensation plans, with employee grants
typically vesting ratably over three years and expiring ten years from the
date
of grant. Vesting is contingent upon a continued employment relationship with
the Company. Director stock option grants are made pursuant to a formula and
are
vested 100 percent after one year. In addition, the Company issues restricted
stock awards to officers and other key personnel with vesting periods up to
seven years based on continued employment until applicable vesting dates and,
prior to 2005, the attainment of specific performance goals. The Company
measures stock-based compensation for option grants under the provisions of
Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees.
Accordingly, given the fixed nature of the equity instruments granted under
such
plans, no compensation cost has been recognized other than for restricted stock
awards. Compensation expense for restricted stock awards is recorded based
on
applicable vesting criteria, and for those awards with performance goals, as
such goals are met. The Company's net income and earnings per share would have
been reduced to the pro forma amounts shown below if compensation cost had
been
determined based on the fair value at the grant dates using the Black-Scholes
option-pricing model in accordance with SFAS No. 123, Accounting
for Stock-Based Compensation
as
amended by SFAS No. 148, Accounting
for Stock-Based Compensation-Transition and Disclosure:
|
2004
|
2003
|
|||||||||
|
2005
|
(Restated)
|
(Restated)
|
||||||||
|
Net
income, as reported
|
$
|
19.2
|
$
|
153.9
|
$
|
106.0
|
||||
|
Stock-based
compensation cost included in reported net income, net of tax2
|
3.31
|
6.21
|
6.51
|
|||||||
|
Stock-based
compensation cost determined under the fair value method for all
awards,
net of tax2
|
(16.6)1
|
(18.0)1
|
(16.8)1
|
|||||||
|
Pro
forma net income
|
$
|
5.9
|
$
|
142.1
|
$
|
95.7
|
||||
|
Basic
earnings per share:
|
||||||||||
|
As
reported
|
$
|
0.36
|
$
|
2.94
|
$
|
2.02
|
||||
|
Pro
forma
|
0.11
|
2.71
|
1.83
|
|||||||
|
Diluted
earnings per share:
|
||||||||||
|
As
reported
|
$
|
0.35
|
$
|
2.83
|
$
|
1.98
|
||||
|
Pro
forma
|
0.11
|
2.61
|
1.79
|
|||||||
|
1
|
Amounts
reflect the deferred compensation plan restatement adjustments net
of tax
(see Note
2 — Restatement for
further discussion).
|
|
2
|
Net
of tax amounts were calculated using the U.S. statutory rate (38.3%
in
2005 and 39.0% in 2004 and 2003).
|
The
Company adopted the provisions of SFAS No. 123 (revised 2004), Share-Based
Payment
on
January 1, 2006 (see New
Accounting Guidance
below
for further discussion). See Note
15 — Employee Stock Plans for
further discussion regarding the Company’s long-term incentive plan and its
provisions.
Comprehensive
Income
The
Company defines comprehensive income as net income plus the sum of currency
translation adjustments, unrealized gains/losses on derivative instruments,
unrealized holding gains/losses on securities and minimum pension liability
adjustments (collectively "other comprehensive income") and presents
comprehensive income in the Statements
of Changes in Shareholders' Equity.
PAGE
70
Investments
in Debt and Equity Securities
At the
end of 2005 and 2004, the Company held investments in equity securities, which
are accounted for using the cost method of accounting. Cost method investments
that do not have a readily determined market value, and for which the Company
does not have the ability to exercise significant influence, are reviewed
periodically for events or changes in circumstances that may have a significant
adverse effect on the carrying amount of the investment. Examples of events
or
circumstances that may indicate that an investment is impaired include, but
are
not limited to, a significant deterioration in earnings performance; a
significant adverse change in the regulatory, economic or technological
environment of an investee; or a significant doubt about an investee’s ability
to continue as a going concern. If the Company determines that impairment exists
and it is other-than-temporary, the carrying value of the investment would
be
reduced to its estimated fair value and an impairment loss would be recognized
in its consolidated Statements
of Income.
The
carrying amounts of these investments were $5.9 and $5.5 as of December 31,
2005
and December 25, 2004, respectively, and are reported in other long-term assets
in the accompanying Balance
Sheets.
The
Company bought and sold auction rate securities and variable-rate demand notes
for the same principal amounts totaling $43.4 and $19.7 during 2004 and 2003,
respectively. At the end of 2005 and 2004, the Company had no investments in
debt securities.
Foreign
Currency
For most
subsidiaries outside the United States, the local currency is the functional
currency, and translation adjustments are accumulated as a component of other
comprehensive income. The accumulated income balances of currency translation
adjustments were $116.2, $216.4 and $152.7 at the end of 2005, 2004 and 2003,
respectively.
For
subsidiaries that operate in U.S. dollars, the U.S. dollar is the functional
currency, and gains and losses that result from remeasurement are included
in
income. Foreign currency translation resulted in a loss of $1.5 in 2005, and
gains of $16.6 and $4.3 in 2004 and 2003, respectively.
The
Company hedges certain foreign currency transactions, firm commitments and
net
assets of certain non-U.S. subsidiaries by entering into foreign exchange
forward contracts. Gains and losses associated with currency rate changes on
forward contracts hedging foreign currency transactions are recorded in income.
The effects of foreign currency transactions, including related hedging
activities, were losses of $2.9, $17.2 and $17.7 in 2005, 2004 and 2003,
respectively.
Derivative
Financial Instruments and Hedging Activity
In
accordance with SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities,
the
Company records all derivative instruments on the balance sheet at their
respective fair values. Changes in the fair value of derivatives are recorded
each period in current income unless the instruments have been designated as
cash flow or net investment hedges, in which case such changes are recorded
in
other comprehensive income. The Company does not apply hedge accounting to
contracts that offset foreign exchange exposures related to foreign currency
denominated assets and liabilities because they are marked to market through
income at the same time that the exposed asset/liability is remeasured through
income; both are recorded in foreign exchange loss (gain).
Upon
entering into a derivative contract, the Company may designate, as appropriate,
the derivative as a fair value hedge, cash flow hedge, foreign currency hedge
or
hedge of a net investment in a foreign operation. At inception, the Company
formally documents the relationship between the hedging instrument and
underlying hedged item, as well as risk management objective and strategy.
In
addition, the Company assesses, both at inception and on an ongoing basis,
whether the derivative used in a hedging transaction is highly effective in
offsetting changes in the fair value or cash flow of the respective hedged
item.
When it is determined that a derivative is no longer highly effective as a
hedge, the Company will discontinue hedge accounting prospectively.
Fair
value hedges may be employed by the Company to hedge changes in the fair value
of recognized financial assets or liabilities or unrecognized firm commitments.
Changes in the fair value of the derivative instrument and the hedged item
attributable to the hedged risk are recognized in income, and will generally
be
offsetting. The Company attempts to structure fair value hedges so as to qualify
for the shortcut method of hedge effectiveness analysis, thereby assuming no
ineffectiveness in the hedge relationship. In the event it is determined that
the hedging relationship no longer qualifies as an effective fair value hedge,
the derivative will continue to be carried on the balance sheet at its fair
value, with changes in fair value recorded in income. Upon termination of a
derivative in an effective fair value hedge, any associated gain or loss will
be
an adjustment to income over the remaining life of the hedged item, if
any.
PAGE
71
The
Company may implement cash flow hedges to protect itself from fluctuation in
cash flows associated with recognized variable-rate assets or liabilities or
forecasted transactions. Changes in the fair value of the hedging derivative
are
initially recorded in other comprehensive income, then recognized in income
in
the same period(s) in which the hedged transaction affects income. The Company
attempts to structure cash flow hedges such that all the critical terms of
the
derivative match the hedged item, thereby assuming no ineffectiveness in the
hedge relationship at inception. The Company performs and documents an
assessment of hedge effectiveness on a quarterly basis throughout the hedge
period. In the event it is determined that the hedging relationship no longer
qualifies as an effective cash flow hedge, the derivative will continue to
be
carried on the balance sheet at its fair value, with changes in fair value
recorded in income. If hedge accounting is discontinued because it becomes
probable a forecasted transaction will not occur, the derivative will continue
to be carried on the balance sheet at its fair value, with changes in fair
value
recorded in income, and any amounts previously recorded in other comprehensive
income will immediately be recorded in income.
The
Company may enter into foreign currency derivatives to protect itself from
variability in cash flows associated with recognized foreign currency
denominated assets or liabilities. Changes in the fair value of the hedging
derivative are initially recorded in other comprehensive income, and then
recognized in income in the same period(s) in which the hedged transaction
affects income.
The
Company has numerous investments in foreign subsidiaries, and the net assets
of
these subsidiaries are exposed to currency exchange rate volatility. To hedge
this exposure the Company may utilize foreign exchange forward contracts. Net
investment hedges are implemented for material subsidiaries on a selective
basis. The effective portion of the change in fair value of the hedging
instrument is reported in the same manner as the translation adjustment for
the
hedged subsidiary; namely, reported in the cumulative translation adjustment
section of other comprehensive income. The fair value of the derivative
attributable to changes between the forward rate and spot rate is excluded
from
the measure of hedge effectiveness and that difference is reported in income
over the life of the contract. The Company evaluates its hedges of net
investments in foreign subsidiaries quarterly for effectiveness and adjusts
the
value of hedge instruments or redesignates the hedging relationship as
necessary.
The
Company enters into foreign exchange forward contracts, with terms normally
lasting less than six months, to hedge against foreign currency transaction
gains and losses on foreign currency denominated assets and liabilities based
on
changes in foreign currency spot rates. Although allowable, a hedging
relationship for this risk has not been designated, as designation will not
achieve different financial reporting results. Foreign exchange forward
contracts within this category are carried on the balance sheet at fair value
with changes in fair value recorded in income.
Deferred
Tax Assets and Reserves
The
Company evaluates the recoverability of its deferred tax assets on an ongoing
basis. This evaluation includes assessing the available positive and negative
evidence to determine whether, based on its judgment, the Company believes
the
assets, or some portion thereof, are more likely than not to be realized. To
the
extent the Company does not believe the assets will more likely than not be
realized, a valuation allowance is recorded. In determining whether, and to
what
extent, a valuation allowance is required, the Company considers whether it
will
have sufficient taxable income in the appropriate period and jurisdiction that
is also of the appropriate character. Potential sources of taxable income that
are evaluated include: (i) future reversals of existing taxable temporary
differences; (ii) future taxable income exclusive of reversing temporary
differences; (iii) taxable income in prior carryback years; and (iv) tax
planning strategies that would be implemented, if necessary. Should the Company
determine that it is more likely than not it will realize its deferred tax
assets in the future, an adjustment would be required to reduce the existing
valuation allowance. Generally, this would result in a corresponding increase
to
income. Conversely, if the Company determined that it would not be able to
realize its deferred tax assets, an adjustment would be required to increase
the
valuation allowance. Generally, this would result in a decrease to income.
Additional tax expense or (benefit) related to changes in the valuation
allowance were $121, $21 and $(2) in 2005, 2004 and 2003,
respectively.
In
the
normal course of business, the Company is regularly audited by federal, state
and foreign tax authorities, and is periodically challenged regarding the amount
of taxes due. These challenges include, among other issues, questions regarding
the timing and amount of deductions and the allocation of income among various
taxing jurisdictions. The Company believes its tax positions comply with
applicable tax law and, if challenged, intends to vigorously defend such
positions. As the likelihood of successfully defending many of these positions
is uncertain, the Company evaluates these positions and records tax reserves
when the likelihood of ultimately sustaining a loss is probable, and the amount
of such loss is reasonably estimable. The Company's effective tax rate in a
given financial statement period could be materially impacted if the Company
prevailed in matters for which reserves have been established, or was required
to pay amounts in excess of established reserves.
PAGE
72
Minority
Interest
The
consolidation of non-wholly owned subsidiaries results in the recognition of
minority interest on the consolidated Balance
Sheets
and
Statements
of Income
representing the minority shareholders’ interest in the net assets and net
income of such subsidiaries. The minority interest liability at the end of
2005
and 2004 represented outside interests in non-U.S. commercial and manufacturing
joint ventures.
New
Accounting Guidance
In
December 2004, the Financial Accounting Standards Board (FASB) issued its
standard on accounting for share-based payments, SFAS No. 123 (revised 2004),
Share-Based
Payment (SFAS 123R)
which
replaced FASB Statement No. 123, Accounting
for Stock-Based Compensation,
and
supercedes APB Opinion No. 25, Accounting
for Stock Issued to Employees.
SFAS
No. 123R requires companies to recognize compensation cost relating to
share-based payment transactions, including grants of employee stock options,
in
the financial statements based on the grant date fair value. The pro forma
disclosures previously permitted under SFAS No. 123 will no longer be an
alternative to financial statement recognition. SFAS No. 123R is effective
for
fiscal periods beginning after June 15, 2005. In March 2005, the SEC issued
Staff Accounting Bulletin No. 107 (SAB 107) regarding the SEC’s interpretations
of SFAS No. 123R and the valuation of share-based payments for public companies.
SFAS No. 123R covers a wide range of share-based compensation arrangements
including share options, restricted share plans, performance-based awards,
share
appreciation rights and employee share purchase plans. The Company adopted
SFAS
No. 123R in the first quarter of 2006 using the modified prospective application
method. Under this method, the Company will apply SFAS No. 123R for new awards
granted after the adoption of SFAS No. 123R and any unvested portion of awards
that were granted prior to the adoption of SFAS No. 123R. The Company will
apply
the Black-Scholes model to estimate the fair value of share-based payments
to
employees, which will then be amortized on a ratable basis over the requisite
service period. The Company estimates the impact of new stock-based compensation
programs and the adoption of SFAS No. 123R requiring the expensing of stock
options will be approximately $13.3 before taxes in 2006. This compares to
a
previous estimate of approximately $23.0 before taxes. The revised estimate
reflects the postponement of the 2006 annual stock option grant due to the
delay
in the Company’s filing of this Annual Report on Form 10-K. The Company’s annual
grant typically occurs during the first quarter of each fiscal year. The current
estimate is also based on assumptions regarding a number of subjective
variables, which include estimating the expected term of stock options and
the
current volatility of the Company’s stock price.
In
May
2005, the FASB issued SFAS No. 154, Accounting
Changes and Error Corrections,
a
replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS No. 154
requires retrospective application to prior period financial statements for
changes in accounting principles, unless it is impracticable to determine either
the period-specific effects or the cumulative effect of the change. SFAS No.
154
also requires that retrospective application of a change in accounting principle
be limited to the direct effects of the change. Indirect effects of a change
in
accounting principle should be recognized in the period of the accounting
change. SFAS No. 154 further requires a change in depreciation, amortization
or
depletion method for long-lived, non-financial assets to be accounted for as
a
change in accounting estimate affected by a change in accounting principle.
SFAS
No. 154 will become effective for the Company's fiscal year beginning January
1,
2006.
In
June
2005, the FASB issued FASB Staff Position No. FAS 143-1 (FSP FAS 143-1),
Accounting
for Electronic Equipment Waste Obligations.
FSP FAS
143-1 addresses the accounting for obligations associated with the Directive
2002/96/EC on Waste Electrical and Electronic Equipment (the Directive) adopted
by the European Union (EU). FSP FAS 143-1 is effective the later of the first
reporting period that ends after June 8, 2005 or the date that the EU-member
country adopts the law. The obligation arising from the adoption by all
EU-member countries in which the Company conducts business did not have a
material effect on the Company's financial condition or results of
operations.
In
June
2006, the FASB issued FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes - an Interpretation of FASB Statement No.
109
(FIN
48). FIN 48 clarifies the accounting for uncertainty in income taxes by
prescribing a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to
be
taken in a tax return. The Interpretation also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, and disclosure. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The Company is in the process of evaluating the impact FIN
48
will have on its results of operations and financial position.
PAGE
73
In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements. SFAS
No.
157 defines
fair value, establishes a framework for measuring fair value in GAAP and expands
disclosures about fair value measurements.
Specifically,
this Statement sets forth a definition of fair value, and establishes a
hierarchy prioritizing the inputs to valuation techniques, giving the highest
priority to quoted prices in active markets for identical assets and liabilities
and the lowest priority to unobservable inputs. The provisions of SFAS No.
157
are generally required to be applied on a prospective basis, except to certain
financial instruments accounted for under SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities,
for
which the provisions of SFAS No. 157 should be applied retrospectively. The
Company will adopt SFAS No. 157 in the first quarter of 2008 and is still
evaluating the effect, if any, on its financial position or results of
operations.
In
September 2006, the FASB issued SFAS No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans, an
amendment of FASB Statements No. 87, 88, 106 and 132(R). SFAS
No.
158 requires an employer to recognize the funded status of its defined benefit
pension and postretirement plans as an asset or liability in its statement
of
financial position and to recognize changes in that funded status in the year
in
which the changes occur through comprehensive income. In addition, SFAS No.
158
requires an employer to measure the funded status of a plan as of the date
of
the employer’s fiscal year-end statement of financial position, which is
consistent with the measurement date for the Company’s defined benefit plans.
SFAS No. 158 made no changes to the recognition of expense. SFAS No. 158 will
be
effective as of the fiscal year ending December 30, 2006. The Company has not
yet completed its evaluation of the tax effect of adoption of SFAS No. 158.
Based on the year-end measurement of plan assets and liabilities, the impact
of
adopting the provisions of SFAS No. 158, before any tax effect, is expected
to
be an increase in total liabilities of approximately $12.3, a decrease in total
assets of approximately $0.4 and a decrease in accumulated other comprehensive
income of approximately $12.7. The decrease in accumulated other comprehensive
income will be reported in total shareholders’ equity, net of any tax benefits
(including the impact of any valuation allowance deemed appropriate), with
the
tax benefits reported in deferred tax assets. The adoption of SFAS No. 158
has
no impact on financial covenant compliance included in the Company’s debt
agreements.
In
September 2006, the SEC staff issued Staff Accounting Bulletin No. 108,
Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements
(SAB
108). SAB 108 was issued in order to eliminate the diversity in practice
surrounding how public companies quantify financial statement misstatements.
SAB
108 requires that registrants quantify errors using both a balance sheet and
income statement approach and evaluate whether either approach results in a
misstated amount that, when all relevant quantitative and qualitative factors
are considered, is material. The adoption of this statement is not expected
to
have a material impact on the Company's consolidated financial condition or
results of operations.
Reclassifications
Certain
amounts have been reclassified to maintain comparability among the periods
presented.
2. Restatement
For
the
matters discussed below, the Company restated its consolidated financial
statements presented in this report as of December 25, 2004 and for fiscal
years
2003 and 2004. In addition, the Company restated selected financial data as
of
2003, 2002 and 2001 and for fiscal years 2002 and 2001. See Note
22 — Quarterly Results, Stock Prices and Selected Financial Data (Unaudited)
and
beginning shareholders' equity for the impact of the restatement for periods
prior to 2001. The restatement also reflects certain entries that the Company
determined, while not individually or in the aggregate material to the periods
in which they were recorded or to the relevant periods, are now required to
be
recorded in the prior periods to which they relate. For the impact of the
restated financial results for the first and second quarterly periods of 2005
and the quarterly periods of 2004, see Note
22 — Quarterly Results, Stock Prices and Selected Financial Data
(Unaudited).
The
nature and impact of these adjustments are described below. The impact of these
adjustments is shown in the following tables.
PAGE
74
Brazil
Matters
In
September 2005, the Audit Committee of the Board of Directors commenced an
independent investigation into allegations of misconduct by the management
of
the Company’s Brazilian subsidiary, BL Industria Otica, Ltda. (BLIO), which had
been reported to the Company’s senior management by a BLIO employee pursuant to
the Company’s established compliance program. The Company also voluntarily
reported these matters to the staff of the Northeast Regional Office of the
SEC,
which has commenced an informal inquiry. In connection with the Audit Committee
investigation of the BLIO matters, the Company learned that the general manager,
the controller and other employees of BLIO, in violation of Company policies,
engaged in improper management and accounting practices. The Company also
learned certain Brazilian tax authorities had made tax assessments relating
to
or arising from Brazilian VAT, social contribution, income and certain
import-related taxes against BLIO for a total of approximately $33.0 in unpaid
taxes, interest and penalties which relate back to various earlier periods.
Appropriate reserves relating to these assessments were not reflected by BLIO
in
its subsidiary financial statements, as required by the Company's established
policies and procedures. In addition, the Company learned that BLIO had failed
to comply with certain local payroll tax obligations and also mischaracterized
approximately $0.6 in expenses to fund an approximately $1.5, unauthorized
local
pension arrangement for the benefit of the general manager, the controller
and
other members of local management. The Company conducted a further review of
these tax matters, and determined that cumulative after-tax charges in periods
prior to 2003 through the first half of 2005 of $27.8 were appropriate. The
majority of these charges related to and were recorded in 2001, 2002 and 2003.
In October 2006, the Company applied for and expects to be granted amnesty
from
the state government of Sao Paulo, Brazil as to a portion of the penalties
and
interest associated with one such assessment. As a result, the Company expects
to reverse approximately $20 of approximately $27 of penalties and interest
expense that were recorded as part of the financial restatement upon formal
notification of cancellation by the state government of Sao Paulo,
Brazil.
Asia
and Other Revenue Recognition Matters
In
late
November 2005, following employee reports regarding improper sales practices
at
the Company’s Korean vision care joint venture, BL Korea, the Audit Committee
commenced an independent investigation into revenue recognition practices at
BL
Korea and engaged an outside law firm to assist with the investigation. The
investigation was voluntarily reported to the Northeast Regional Office of
the
SEC. As a result of the Audit Committee’s independent investigation, the Company
determined that from 2002 to 2005 sales management at BL Korea, in violation
of
the Company’s policies, engaged in improper vision care-related sales practices
including, at various times, granting customers improper rights to return
product, facilitating product exchanges between customers without properly
accounting for such exchanges, failing to properly process product returns
and
granting excessive credit. As a result of these sales practices which violated
Company policies, risk of loss of the product did not properly transfer to
customers. The Company has determined that pursuant to GAAP, all BL Korea vision
care transactions during this period should be recorded as consignment
sales.
PAGE
75
In
light
of the investigations of the Company’s Brazil and Korea subsidiaries, the
Company undertook expanded year-end procedures focused on, among other things,
revenue recognition and sales practices at certain other subsidiaries. As a
result of these procedures, the Company determined that it did not maintain
effective controls over certain subsidiaries' relationships with their key
distributors, particularly in the Company's Japan and India subsidiaries, and
did not maintain effective controls over the installation of refractive laser
surgery equipment in multiple locations where the Company does business, to
ensure that revenue associated with such distributor and laser sales was
recognized in accordance with GAAP. Specifically, the Company determined that
the customer arrangements were not adequately reviewed by the appropriate
persons at such subsidiaries to identify and provide reasonable assurance
regarding the proper application of the appropriate method of revenue
recognition. In addition, the Company determined that it did not maintain
effective controls to prevent subsidiary management from overriding established
financial controls or making errors in the application of policies concerning
the accuracy and valuation of accounts receivable and the maintenance of
distributor inventory at established threshold levels, as well as regarding
administration of credit limits, extensions of credit terms, price discounting,
sales returns and exchanges, transfer of the risk of ownership, and sales order
entry and control. The Company’s restatement of prior-period financial
statements includes additional adjustments relating to revenue recognition
for
the following matters: the BL Korea vision care sales discussed previously;
certain refractive laser sales; certain vision care transactions with a single
distributor in Thailand; vision care transactions with two large distributors
in
Japan; vision care and cataract transactions with the distributor network in
India; and the improper handling of certain sales related reserves in China.
Of
these adjustments, the largest relates to the vision care transactions in Japan
which reduced net sales in periods prior to 2003 through the first six months
of
2005 by a cumulative total of $12.3 and reduced net earnings by a cumulative
total of $5.3. The revenue recognition adjustments for vision care sales in
Korea from periods prior to 2003 through the first half of 2005 reduced net
sales by a cumulative total of $8.4 and reduced net earnings by a cumulative
total of $3.3. All other revenue recognition matter adjustments prior to 2003
through the first six months of 2005 in the aggregate reduced net sales by
a
cumulative total of $6.7 and reduced net earnings by a cumulative total of
$2.5.
Tax
Matters In
2005,
the Company undertook a comprehensive review of its accounting for income taxes.
As a result, the Company’s restatement of prior-period financial statements
includes adjustments from periods prior to 2003 through the first six months
of
2005 that reduce net earnings by $2.1. These adjustments related primarily
to
the Company’s determination of deferred income tax assets and liabilities. The
most significant adjustment related to the recognition of deferred tax
liabilities for outside basis differences in foreign subsidiaries where the
earnings of such subsidiaries are not permanently re-invested. This adjustment
reduced net earnings by $27.8, the majority of which was recorded prior to
2003.
The Company also determined that it had not properly reconciled the tax effects
of differences between its financial reporting and tax-based balance sheets
to
the reported deferred tax assets and liabilities. This adjustment increased
net
earnings for periods prior to 2003 through the first six months of 2005 by
$21.3. In addition, the Company determined that it did not properly account
for
deferred income tax assets and liabilities related to certain acquired entities,
which required an adjustment in periods prior to 2003, and did not properly
assess the realizability of certain tax attributes in determining its valuation
allowance needs, which required adjustments primarily in periods prior to 2003
and in 2004. These adjustments increased earnings for periods prior to 2003
through the first six months of 2005 by $23.8. Other adjustments related to
income taxes payable and income tax expense were also required. These
adjustments related primarily to the determination of 2001 income tax related
to
the Company’s discontinued Eyewear business and the determination of reserves
for uncertain tax positions, which reduced net earnings for periods prior to
2003 through the first six months of 2005 by $9.4 and $5.3, respectively.
Adjustments from periods prior to 2003 through the first six months of 2005
for
other tax matters reduced earnings by $4.7.
PAGE
76
Deferred
Compensation Plan The
Company determined that the liability associated with the deferral of certain
Company stock under its approved Long-Term Deferred Compensation Plan should
have been marked to market. Under the Plan, employees have the opportunity
to
defer stock awards granted under the Company's Long-Term Incentive Plan.
Deferred stock awards are held in a rabbi trust and diversification is not
permitted. Although it was the Compensation Committee's and the Company’s
intention to settle the liability only in shares of the Company’s stock, the
Plan document included a clause which allowed the Company to pay the participant
upon distribution in Company stock or, at the sole option of the Company, in
cash, based upon the market value of the Company Common stock at the time of
distribution. EITF 97-14: Accounting
for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi
Trust and Invested,
outlines four potential scenarios for deferred compensation arrangements and
how
the obligations and assets held in trust should be accounted for. As the
Company’s Plan did not permit diversification and may be settled by the delivery
of cash or shares of the Company’s stock, the deferred compensation obligation
should be classified as a liability and adjusted with a corresponding charge
(or
credit) to compensation cost, to reflect the changes in the fair value of the
amount owed to the employee. Stock held by the rabbi trust should be classified
in equity in a manner similar to the manner in which treasury stock is accounted
for and subsequent changes in the fair value of the Company’s stock are not
recognized. The Company's restatement of prior-period financial statements
includes adjustments from periods prior to 2003 through the first six months
of
2005 that reduce net earnings by a cumulative total of $6.2. In May 2006, the
Company amended the Plan requiring all future distributions of participant
deferrals of stock awards be settled only in shares of Company stock,
eliminating the sole option of the Company to settle in cash, and thereby
eliminating the requirement under GAAP to recognize subsequent changes in the
fair value of Company stock.
Other
Items
In the
course of completing the Audit Committee's previously discussed BL Korea
investigation, evidence was discovered that indicated managers in the Company's
Asian operations improperly recorded reserve account entries. Therefore, the
Audit Committee undertook an investigation into the timing and appropriateness
of reserve entries. As a result, the Company has recorded in its financial
statements from periods prior to 2003 through the first six months of 2005
cumulative adjustments to net earnings of less than $1 in the aggregate, all
of
which relate to the Asia Region, for Japan subsidiary litigation reserves and
other Asia business-related reserves. In addition, the Company reviewed all
significant accounting entries, including out-of-period adjustments, made in
the
periods covered by the restatement and determined that a number of adjustments
were not in accordance with GAAP or belonged in different quarterly periods
within the restated periods. The largest of these adjustments related to the
reversal of approximately $13.5 of currency translation adjustments (CTA) which
had been released to income upon liquidation of certain of the Company's
subsidiaries. These transactions should have been viewed as a change in
functional currency, rather than as a liquidation. The remaining adjustments,
in
the aggregate, increased net earnings by a cumulative total of $3.4. In
addition, the Company identified certain amounts that were immaterial both
individually and in the aggregate from both a quantitative and qualitative
perspective that were not included in the restatement.
PAGE
77
The
following tables present the impact of the restatement adjustments on the
Company’s consolidated Statements
of Income
for the
years ended December 25, 2004 and December 27, 2003:
|
For
the Year Ended December 25, 2004
|
||||||||||||||||||||||
|
As
Previously Reported
|
Brazil
Matters
|
Asia
and Other Revenue Recognition Matters
|
Tax
Matters
|
Deferred
Compensation Plan
|
Other
Items
|
Restated
|
||||||||||||||||
|
Net
Sales
|
$
|
2,232.3
|
$
|
-
|
$
|
(2.6
|
)
|
$
|
-
|
$
|
-
|
$
|
3.8
|
$
|
2,233.5
|
|||||||
|
Costs
and Expenses
|
||||||||||||||||||||||
|
Cost
of products sold
|
934.9
|
-
|
(1.0
|
)
|
-
|
-
|
(4.7
|
)
|
929.2
|
|||||||||||||
|
Selling,
administrative and general
|
855.3
|
1.3
|
-
|
-
|
3.1
|
3.0
|
862.7
|
|||||||||||||||
|
Research
and development
|
162.5
|
-
|
-
|
-
|
-
|
-
|
162.5
|
|||||||||||||||
|
1,952.7
|
1.3
|
(1.0
|
)
|
-
|
3.1
|
(1.7
|
)
|
1,954.4
|
||||||||||||||
|
Operating
Income
|
279.6
|
(1.3
|
)
|
(1.6
|
)
|
-
|
(3.1
|
)
|
5.5
|
279.1
|
||||||||||||
|
Other
(Income) Expense
|
||||||||||||||||||||||
|
Interest
and investment income
|
(13.8
|
)
|
-
|
-
|
-
|
-
|
-
|
(13.8
|
)
|
|||||||||||||
|
Interest
expense
|
48.4
|
1.0
|
-
|
-
|
-
|
0.2
|
49.6
|
|||||||||||||||
|
Foreign
currency, net
|
(1.8
|
)
|
0.3
|
-
|
-
|
-
|
2.1
|
0.6
|
||||||||||||||
|
32.8
|
1.3
|
-
|
-
|
-
|
2.3
|
36.4
|
||||||||||||||||
|
Income
before Income Taxes and
Minority Interest
|
246.8
|
(2.5
|
)
|
(1.6
|
)
|
-
|
(3.1
|
)
|
3.1
|
242.7
|
||||||||||||
|
Provision
for income taxes
|
82.7
|
(0.7
|
)
|
(0.8
|
)
|
2.1
|
(1.2
|
)
|
1.7
|
83.8
|
||||||||||||
|
Minority
interest in subsidiaries
|
4.5
|
-
|
0.5
|
-
|
-
|
-
|
5.0
|
|||||||||||||||
|
Net
Income
|
$
|
159.6
|
$
|
(1.8
|
)
|
$
|
(1.3
|
)
|
$
|
(2.1
|
)
|
$
|
(1.9
|
)
|
$
|
1.4
|
$
|
153.9
|
||||
|
Basic
Earnings Per Share
|
$
|
3.03
|
$
|
(0.03
|
)
|
$
|
(0.02
|
)
|
$
|
(0.04
|
)
|
$
|
(0.04
|
)
|
$
|
0.03
|
$
|
2.94
|
||||
|
Diluted
Earnings Per Share
|
$
|
2.93
|
$
|
(0.03
|
)
|
$
|
(0.02
|
)
|
$
|
(0.04
|
)
|
$
|
(0.04
|
)
|
$
|
0.03
|
$
|
2.83
|
||||
PAGE
78
|
For
the Year Ended December 27, 2003
|
||||||||||||||||||||||
|
As
Previously Reported
|
Brazil
Matters
|
Asia
and Other Revenue Recognition Matters
|
Tax
Matters
|
Deferred
Compensation
Plan
|
Other
Items
|
Restated
|
||||||||||||||||
|
Net
Sales
|
$
|
2,019.5
|
$
|
-
|
$
|
(5.4
|
)
|
$
|
-
|
$
|
-
|
$
|
4.4
|
$
|
2,018.5
|
|||||||
|
Costs
and Expenses
|
||||||||||||||||||||||
|
Cost
of products sold
|
858.0
|
-
|
(1.9
|
)
|
-
|
-
|
0.7
|
856.8
|
||||||||||||||
|
Selling,
administrative and general
|
782.3
|
7.4
|
(0.3
|
)
|
-
|
3.7
|
(3.3
|
)
|
789.9
|
|||||||||||||
|
Research
and development
|
149.9
|
-
|
-
|
-
|
-
|
-
|
149.9
|
|||||||||||||||
|
Restructuring
(reversal) charges
and asset write-offs
|
(6.3
|
)
|
-
|
-
|
-
|
-
|
-
|
(6.3
|
)
|
|||||||||||||
|
1,783.9
|
7.4
|
(2.2
|
)
|
-
|
3.7
|
(2.6
|
)
|
1,790.3
|
||||||||||||||
|
Operating
Income
|
235.6
|
(7.4
|
)
|
(3.3
|
)
|
-
|
(3.7
|
)
|
7.1
|
228.2
|
||||||||||||
|
Other
(Income) Expense
|
||||||||||||||||||||||
|
Interest
and investment income
|
(15.7
|
)
|
-
|
-
|
-
|
-
|
-
|
(15.7
|
)
|
|||||||||||||
|
Interest
expense
|
54.2
|
1.0
|
-
|
-
|
-
|
-
|
55.2
|
|||||||||||||||
|
Foreign
currency, net
|
0.1
|
-
|
-
|
-
|
-
|
13.3
|
13.4
|
|||||||||||||||
|
38.6
|
1.0
|
-
|
-
|
-
|
13.3
|
52.9
|
||||||||||||||||
|
Income
before Income Taxes and
Minority Interest
|
197.0
|
(8.4
|
)
|
(3.3
|
)
|
-
|
(3.7
|
)
|
(6.2
|
)
|
175.3
|
|||||||||||
|
Provision
for income taxes
|
67.0
|
(0.9
|
)
|
(0.8
|
)
|
(0.7
|
)
|
(1.5
|
)
|
2.2
|
65.3
|
|||||||||||
|
Minority
interest in subsidiaries
|
3.6
|
-
|
(0.5
|
)
|
-
|
-
|
-
|
3.1
|
||||||||||||||
|
Income
before Cumulative Effect
of Change in
Accounting
Principle
|
126.4
|
(7.5
|
)
|
(2.1
|
)
|
0.7
|
(2.3
|
)
|
(8.4
|
)
|
106.9
|
|||||||||||
|
Cumulative
Effect of Change in
Accounting Principle,
Net of
Taxes
|
(0.9
|
)
|
-
|
-
|
-
|
-
|
-
|
(0.9
|
)
|
|||||||||||||
|
Net
Income
|
$
|
125.5
|
$
|
(7.5
|
)
|
$
|
(2.1
|
)
|
$
|
0.7
|
$
|
(2.3
|
)
|
$
|
(8.4
|
)
|
$
|
106.0
|
||||
|
Basic
Earnings Per Share
|
$
|
2.37
|
$
|
(0.14
|
)
|
$
|
(0.04
|
)
|
$
|
0.01
|
$
|
(0.04
|
)
|
$
|
(0.16
|
)
|
$
|
2.02
|
||||
|
Diluted
Earnings Per Share
|
$
|
2.34
|
$
|
(0.14
|
)
|
$
|
(0.04
|
)
|
$
|
0.01
|
$
|
(0.04
|
)
|
$
|
(0.16
|
)
|
$
|
1.98
|
||||
Adjustments
identified relating to fiscal years prior to 2003 are reflected in beginning
retained earnings in the accompanying Statement
of Changes in Shareholders’ Equity.
The
cumulative impact of these adjusting entries decreased 2003 beginning retained
earnings by $23.3 net of tax, and primarily represent adjustments relating
to
the Brazil matters and the Company's comprehensive review of its accounting
for
income taxes (see Note
22 — Quarterly Results, Stock Prices and Selected Financial Data
(Unaudited))
for the
impact of restatement on individual years.
PAGE
79
The
following
table presents the impact of the restatement adjustments on the Company’s
consolidated Balance
Sheets
as of
December 25, 2004:
|
December
25, 2004
|
||||||||||
|
As
Previously Reported
|
Effect
of Restatement
|
Restated
|
||||||||
|
Assets
|
||||||||||
|
Cash
and cash equivalents
|
$
|
501.8
|
$
|
-
|
$
|
501.8
|
||||
|
Trade
receivables, less allowances of $22.1
|
511.4
|
-
|
511.4
|
|||||||
|
Inventories,
net
|
204.4
|
7.7
|
212.1
|
|||||||
|
Other
current assets
|
95.7
|
12.9
|
108.6
|
|||||||
|
Deferred
income taxes
|
67.2
|
44.9
|
112.1
|
|||||||
|
Total
Current Assets
|
1,380.5
|
65.5
|
1,446.0
|
|||||||
|
Property,
Plant and Equipment, net
|
580.9
|
(0.1
|
)
|
580.8
|
||||||
|
Goodwill
|
736.3
|
(54.1
|
)
|
682.2
|
||||||
|
Other
Intangibles, net
|
204.3
|
-
|
204.3
|
|||||||
|
Other
Long-Term Assets
|
108.7
|
(1.8
|
)
|
106.9
|
||||||
|
Deferred
Income Taxes
|
11.4
|
14.2
|
25.6
|
|||||||
|
Total
Assets
|
$
|
3,022.1
|
$
|
23.7
|
$
|
3,045.8
|
||||
|
Liabilities
and Shareholders' Equity
|
||||||||||
|
Notes
payable
|
$
|
-
|
$
|
2.6
|
$
|
2.6
|
||||
|
Current
portion of long-term debt
|
100.8
|
-
|
100.8
|
|||||||
|
Accounts
payable
|
93.6
|
1.2
|
94.8
|
|||||||
|
Accrued
compensation
|
149.1
|
4.2
|
153.3
|
|||||||
|
Accrued
liabilities
|
390.8
|
62.4
|
453.2
|
|||||||
|
Federal,
state and foreign income taxes payable
|
97.8
|
11.8
|
109.6
|
|||||||
|
Deferred
income taxes
|
0.4
|
3.3
|
3.7
|
|||||||
|
Total
Current Liabilities
|
832.5
|
85.5
|
918.0
|
|||||||
|
Long-Term
Debt, less current portion
|
543.3
|
-
|
543.3
|
|||||||
|
Other
Long-Term Liabilities
|
130.3
|
1.6
|
131.9
|
|||||||
|
Deferred
Income Taxes
|
73.6
|
1.6
|
75.2
|
|||||||
|
Total
Liabilities
|
1,579.7
|
88.7
|
1,668.4
|
|||||||
|
Minority
Interest
|
15.5
|
(0.9
|
)
|
14.6
|
||||||
|
Commitments
and Contingencies (Note 17)
|
||||||||||
|
Common
Stock
|
24.1
|
-
|
24.1
|
|||||||
|
Class
B Stock
|
-
|
-
|
-
|
|||||||
|
Capital
in Excess of Par Value
|
103.8
|
1.8
|
105.6
|
|||||||
|
Common
and Class B Stock in Treasury, at cost
|
(397.8
|
)
|
(11.4
|
)
|
(409.2
|
)
|
||||
|
Retained
Earnings
|
1,528.9
|
(48.5
|
)
|
1,480.4
|
||||||
|
Accumulated
Other Comprehensive Income
|
173.8
|
(6.0
|
)
|
167.8
|
||||||
|
Other
Shareholders' Equity
|
(5.9
|
)
|
-
|
(5.9
|
)
|
|||||
|
Total
Shareholders' Equity
|
1,426.9
|
(64.1
|
)
|
1,362.8
|
||||||
|
Total
Liabilities and Shareholders' Equity
|
$
|
3,022.1
|
$
|
23.7
|
$
|
3,045.8
|
||||
PAGE
80
Significant
adjustments to the balance sheet, reflected above, include the
following:
| · |
The
Company's comprehensive review of its accounting for income taxes
had the
following impact:
|
| · |
other
current assets increased $12.9, primarily reflecting the reclassification
of tax on intercompany profit reserves from current deferred income
tax
assets to prepaid tax;
|
| · |
current
deferred income tax assets increased $44.9 primarily reflecting the
reconciliation of tax effects on the differences between financial
reporting and tax bases in various current assets and liability accounts
including inventories $10.3, accrued employee benefits $10.6, and
other
current liabilities $13.0;
|
| · |
goodwill
decreased $54.1 reflecting restatement adjustments made to goodwill
associated with a 1998 acquisition;
|
| · |
non-current
deferred income tax assets increased $14.2 primarily reflecting
restatement adjustments of $55.5 to deferred tax assets associated
with
certain acquired entities, partially offset by an adjustment of $45.4
to
deferred tax liabilities on earnings of foreign subsidiaries which
are not
re-invested; and
|
| · |
federal,
state & foreign income taxes payable increased $11.8, reflecting the
adjusted tax liability associated with the restatement adjustments
in
aggregate.
|
| · |
Accrued
liabilities increased $62.4 primarily reflecting restatement adjustments
made to record deferred consignment revenue of $27.7 for Asia revenue
recognition matters, other accrued liabilities of $26.6 for Brazil
matters, and deferred compensation liability of $15.3 for the deferred
compensation plan matter.
|
| · |
Common
and Class B stock in treasury, at cost, increased $11.4 reflecting
restatement adjustments associated with the deferred compensation
plan
matter.
|
| · |
The
$48.5 decrease in retained earnings reflects the cumulative impact
of
restatement adjustments.
|
The
following table presents the major subtotals for the Company’s Statements
of Cash Flows
and the
related impact of the restatement adjustments discussed above for the years
ended December 25, 2004 and December 27, 2003:
|
2004
|
2003
|
||||||||||||
|
As
Previously Reported
|
Restated
|
As
Previously Reported
|
Restated
|
||||||||||
|
Net
Cash Provided by (Used In):
|
|||||||||||||
|
Operating
activities
|
$
|
280.5
|
$
|
284.5
|
$
|
248.2
|
$
|
252.4
|
|||||
|
Investing
activities
|
(121.6
|
)
|
(121.7
|
)
|
(94.1
|
)
|
(94.1
|
)
|
|||||
|
Financing
activities
|
(225.3
|
)
|
(229.2
|
)
|
(79.6
|
)
|
(83.8
|
)
|
|||||
|
Effect
of Exchange Rate Changes on Cash and Cash Equivalents
|
5.6
|
5.6
|
23.0
|
23.0
|
|||||||||
|
Net
Change in Cash and Cash Equivalents
|
(60.8
|
)
|
(60.8
|
)
|
97.5
|
97.5
|
|||||||
|
Cash
and Cash Equivalents, Beginning of Year
|
562.6
|
562.6
|
465.1
|
465.1
|
|||||||||
|
Cash
and Cash Equivalents, End of Year
|
$
|
501.8
|
$
|
501.8
|
$
|
562.6
|
$
|
562.6
|
|||||
PAGE
81
The
following
table presents the impact of the restatement adjustments discussed above on
the
Company's consolidated comprehensive income for the years ended December 25,
2004 and December 27, 2003:
|
2004
|
2003
|
||||||||||||
|
As
Previously Reported
|
Restated
|
As
Previously Reported
|
Restated
|
||||||||||
|
Net
Income
|
$
|
159.6
|
$
|
153.9
|
$
|
125.5
|
$
|
106.0
|
|||||
|
Currency
Translation Adjustments
|
70.7
|
63.7
|
135.1
|
123.5
|
|||||||||
|
Net
Loss on Cash Flow Hedges
|
-
|
-
|
(0.2
|
)
|
(0.2
|
)
|
|||||||
|
Reclassification
Adjustment into Net Income for Net Loss
on
Cash
Flow Hedges
|
1.9
|
1.9
|
1.7
|
3.2
|
|||||||||
|
Minimum
Additional Pension Liability
|
(1.6
|
)
|
(5.3
|
)
|
4.7
|
4.4
|
|||||||
|
Total
Comprehensive Income
|
$
|
230.6
|
$
|
214.2
|
$
|
266.8
|
$
|
236.9
|
|||||
Adjustments
to the Company’s consolidated comprehensive income for the years ended December
25, 2004 and December 27, 2003 are mainly attributable to the
following:
2004
| · |
Restated
net income decreased from $159.6 to
$153.9.
|
| · |
Currency
translation adjustments decreased from $70.7 to $63.7 primarily as
a
result of adjustments made as part of the Company's comprehensive
review
of its accounting for income taxes, of which, $6.3 represents adjustments
to tax liabilities recorded under APB
23.
|
| · |
The
change in minimum additional pension liability increased from $(1.6)
to
$(5.3) reflecting tax adjustments made as part of the Company’s
comprehensive review of its accounting for income taxes as well as
other
adjustments made for accounting entries not in accordance with
GAAP.
|
2003
| · |
Restated
net income decreased from $125.5 to
$106.0.
|
| · |
Currency
translation adjustments decreased from $135.1 to $123.5 primarily
representing adjustments made as part of the Company's comprehensive
review of its accounting for income taxes, of which, $10.1 represents
adjustments to tax liabilities recorded under APB 23. The decrease
in
currency
translation adjustments
as
a result of these tax entries was partially offset by a $4.3 increase
to
currency translation adjustments reflecting a reclassification adjustment
related to the reversal of the liquidation of a non-U.S. subsidiary
as it
was determined that this transaction should have been viewed as a
change
in functional currency rather than as a
liquidation.
|
| · |
The
change in minimum additional pension liability decreased from $4.7
to $4.4
reflecting tax adjustments made as part of the Company's comprehensive
review of its accounting for income
taxes.
|
The
notes
to the financial statements also reflect the impact of the restatement
adjustments discussed above.
PAGE
82
3.
Acquisitions
On
September 26, 2005, the Company acquired a 55-percent controlling interest
in
the Shandong Chia Tai Freda Pharmaceutical Group (Freda), the leading ophthalmic
pharmaceutical company in China, from Sino Biopharmaceutical Ltd. (Sino). Freda
develops, manufactures and markets medications used to treat ocular inflammation
and infection, glaucoma and dry eye including the Moisten
and
Mioclear
lines of
eye drops. In November 2005, the Company effectively acquired an additional
15-percent interest in Freda held by two other entities for an amount equivalent
on a per-share basis to the price paid to Sino. Total purchase price for the
Freda acquisition was $254.5, or $248.1 net of cash acquired. Additionally,
the
Company incurred direct transaction costs of $5.6. As of December 31, 2005,
total cash paid for the acquisition (excluding acquisition costs) was $226.8
or
$220.4 net of cash acquired. In January 2006, an additional cash payment of
$26.6 was made and the remaining $1.1 will be paid no later than January 2009.
The acquisition of the 55-percent interest was partially financed with $175.0
of
borrowings under the Company's syndicated revolving credit facility, which
was
repaid in December 2005. The additional 15-percent interest was partially
financed with a $26.8 non-U.S. line of credit borrowing, which was repaid in
January 2006.
The
acquisition brings immediate presence in a rapidly growing market through the
broadest ophthalmic pharmaceuticals sales and distribution organization in
China. It also provides in-country regulatory expertise and a state-of-the-art
manufacturing facility, which management believes should help the Company bring
branded products to the Chinese market.
Supplemental
pro forma information per SFAS
No. 141, Business Combinations,
and
SFAS
No. 142, Goodwill and Other Intangible Assets,
are not
provided, as the impact of the Freda acquisition did not have a material effect
on the Company’s 2005 results of operations, cash flows or financial position.
The results of operations of Freda were included in the consolidated financial
statements of the Company beginning in the fourth quarter 2005.
The
purchase price allocation was substantially complete at the end of 2005. In
accordance with the purchase method of accounting, the excess of the purchase
price over the fair value of the identified assets and liabilities has been
recorded as goodwill. As part of the purchase price allocation, $7.8 was
recorded as a minority interest liability representing the minority
shareholders’ 30-percent interest in Freda. The following table summarizes the
fair values of the assets acquired and liabilities assumed in the Freda
acquisition:
|
Current
Assets (includes $6.4 of cash acquired) 1
|
$
|
26.4
|
||
|
Property,
Plant & Equipment
|
23.8
|
|||
|
Other
Long-Term Assets
|
0.9
|
|||
|
Intangible
Assets Subject to Amortization 2
|
||||
|
Distributor
Relationships
|
57.9
|
|||
|
Tradenames
|
23.7
|
|||
|
Technology
|
7.1
|
|||
|
Non-Compete
Agreements
|
1.8
|
|||
|
Goodwill
|
160.5
|
|||
|
Total
Assets Acquired
|
302.1
|
|||
|
Current
Liabilities
|
20.2
|
|||
|
Long-Term
Liabilities
|
14.0
|
|||
|
Minority
Interest
|
7.8
|
|||
|
Total
Liabilities Assumed
|
42.0
|
|||
|
Net
Assets Acquired
|
$
|
260.1
|
|
1
|
Includes
a purchase accounting adjustment of $1.9 associated with the step-up
of
inventory which was fully amortized in the fourth quarter of
2005.
|
|
2
|
Weighted
average remaining useful life of acquired intangible assets were
as
follows: distributor relationships - 16 years; tradenames - 24 years;
technology - 19 years; and non-compete agreements - 3
years.
|
Consistent
with the integration objectives of the acquisition, the Company ascribed $154.9
of goodwill to the Global Operations & Engineering business segment and $5.6
to its Asia business segment. None of the goodwill is deductible for tax
purposes.
PAGE
83
4.
Earnings
Per Share
Basic
earnings per share is computed based on the weighted average number of Common
and Class B shares outstanding during a period. Diluted earnings per share
reflect the assumed conversion of dilutive stock. In computing the per share
effect of assumed conversion, funds which would have been received from the
exercise of options were considered to have been used to repurchase Common
shares at average market prices for the period, and the resulting net additional
Common shares are included in the calculation of average Common shares
outstanding.
In
a
given period there may be outstanding stock options considered anti-dilutive
as
the options' exercise price was greater than the average market price of Common
shares during that period and, therefore, excluded from the calculation of
diluted earnings per share. Anti-dilutive stock options to purchase
approximately 0.1 million shares of Common stock at an exercise price of $83.55
were outstanding at December 31, 2005. Anti-dilutive stock options to purchase
1.1 million shares of Common stock at exercise prices ranging from $61.97 to
$72.97 were outstanding at December 25, 2004. At December 27, 2003,
anti-dilutive stock options to purchase 3.5 million shares of Common stock
with
exercise prices ranging from $40.31 to $72.97 were outstanding.
In
August
2003, the Company issued $160.0 variable-rate Convertible Senior Notes (Old
Notes) due in 2023. The Old Notes were convertible into shares of the Company's
Common stock under certain conditions, such as when the closing sale price
of
the Company's Common stock is greater than 120 percent of the initial conversion
price of $61.44 for at least 20 trading days in a period of 30 consecutive
trading days ending on the last trading day of a calendar quarter. In December
2004, the Company completed its offer to exchange up to $160.0 of the Old Notes
for an equal amount of its 2004 Senior Convertible Securities due 2023 (New
Securities). The terms of the New Securities are consistent with those of the
Old Notes except that settlement upon conversion of the New Securities will
be
paid in cash up to the principal amount of the converted New Securities with
any
excess of the conversion value settled in shares of the Company's stock. An
amount equal to $155.9 of the Old Notes, or 97.4 percent of the outstanding
issue, was tendered in exchange for an equal amount of the New Securities.
None
of the conditions that would permit conversion had been satisfied during fiscal
2004. The conversion right was triggered on June 17, 2005, and the Old Notes
and
New Securities were convertible at the option of the holder beginning July
1,
2005. In the event a holder elects to convert its note, the Company expects
to
fund a cash settlement of any such conversion from borrowings under its
syndicated revolving credit facility as described in Note
11 — Debt.
The
exchange of the majority of the outstanding Old Notes has essentially eliminated
the potential dilution under the provisions of EITF Issue 04-8, The
Effect of Contingently Convertible Debt on Diluted Earnings per
Share.
The
impact of the Old Notes on the diluted EPS calculation was an adjustment of
approximately $0.2 to net income for 2005 and less than $0.1 for 2004 and 2003,
representing the interest and amortization expense attributed to the remaining
Old Notes. The effects of the Old Notes and the New Securities on dilutive
shares for fiscal years 2005, 2004 and 2003 are reflected in the table
below.
The
following table summarizes the amounts used to calculate basic and diluted
EPS:
|
2005
|
2004
(Restated)
|
2003
(Restated)
|
||||||||
|
Income
Before Cumulative Effect of Change in Accounting Principle
|
$
|
19.2
|
$
|
153.9
|
$
|
106.9
|
||||
|
Cumulative
Effect of Change in Accounting Principle, Net of Taxes
|
-
|
-
|
(0.9
|
)
|
||||||
|
Net
Income
|
$
|
19.2
|
$
|
153.9
|
$
|
106.0
|
||||
|
Weighted
Average Basic Shares Outstanding (000s)
|
53,146
|
52,433
|
52,426
|
|||||||
|
Effect
of Dilutive Shares
|
1,981
|
2,004
|
1,065
|
|||||||
|
Effect
of Convertible Senior Notes Shares (Old Notes)
|
67
|
67
|
28
|
|||||||
|
Effect
of 2004 Senior Convertible Securities Shares (New
Securities)
|
490
|
-
|
-
|
|||||||
|
Weighted
Average Diluted Shares Outstanding (000s)
|
55,684
|
54,504
|
53,519
|
|||||||
|
Basic
Earnings Per Share
|
$
|
0.36
|
$
|
2.94
|
$
|
2.02
|
||||
|
Diluted
Earnings Per Share
|
$
|
0.35
|
$
|
2.83
|
$
|
1.98
|
||||
PAGE
84
5.
Business
Segment and Geographic Information
The
Company is organized on a regionally based management structure for commercial
operations. The research and development and product supply functions of the
Company are managed on a global basis. Beginning in 2005, the Company’s
engineering function, which had previously been part of the research and
development segment, became part of the product supply function. The Company's
segments, after the realignment of the engineering function, are the Americas
region; the Europe, Middle East and Africa region (Europe); the Asia region;
the
Research & Development organization and the Global Operations &
Engineering organization.
Operating
income is the primary measure of segment income. No items below operating income
are allocated to segments. Restructuring charges and charges related to certain
significant events, although related to specific segments, are also excluded
from management basis results. The accounting policies used to generate segment
results are the same as the Company's overall accounting policies. Inter-segment
sales were $725.8, $666.9 and $498.6 for the years ended December 31, 2005,
December 25, 2004, and December 27, 2003, respectively. All inter-segment sales
have been eliminated upon consolidation and have been excluded from the amounts
in the tables on the following pages.
Segment
assets for the three geographic regions represent net trade receivables; net
inventories; net property, plant and equipment; goodwill; net intangibles and
other current and long-term assets. In the Research & Development
organization, assets are comprised of net property, plant and equipment and
other current and long-term assets. Assets in the Global Operations &
Engineering organization segment include net inventories; net property, plant
and equipment; goodwill; net intangibles and other current and long-term assets.
Corporate administration assets are mainly cash and cash equivalents; deferred
income taxes; net property, plant and equipment and other current and long-term
assets not allocated to other segments.
PAGE
85
Business
Segment
The
following table presents sales and other financial information by business
segment for the years 2005, 2004 and 2003:
|
Net
Sales
|
Operating
Income
|
Depreciation
and Amortization
|
Capital
Expenditures
|
Assets1
|
||||||||||||
|
2005
|
||||||||||||||||
|
Americas
|
$
|
1,005.3
|
$
|
333.0
|
$
|
8.3
|
$
|
3.5
|
$
|
327.9
|
||||||
|
Europe
|
859.9
|
250.8
|
10.4
|
3.9
|
359.9
|
|||||||||||
|
Asia
|
488.6
|
123.6
|
7.6
|
4.8
|
297.8
|
|||||||||||
|
Research
& Development
|
-
|
(200.5
|
)
|
5.3
|
24.9
|
54.7
|
||||||||||
|
Global
Operations & Engineering
|
-
|
(131.7
|
)
|
73.3
|
70.8
|
1,344.8
|
||||||||||
|
2,353.8
|
375.2
|
104.9
|
107.9
|
2,385.1
|
||||||||||||
|
Corporate
administration
|
-
|
(89.8
|
)
|
20.9
|
8.1
|
1,031.3
|
||||||||||
|
Other
significant charges 2
|
- |
(1.9
|
)
|
- | - | - | ||||||||||
|
$
|
2,353.8
|
$
|
283.5
|
$
|
125.8
|
$
|
116.0
|
$
|
3,416.4
|
|||||||
|
2004
(Restated)
|
||||||||||||||||
|
Americas
|
$
|
960.2
|
$
|
326.1
|
$
|
8.7
|
$
|
3.5
|
$
|
313.7
|
||||||
|
Europe
|
818.9
|
251.2
|
16.5
|
2.8
|
401.9
|
|||||||||||
|
Asia
|
454.4
|
128.5
|
5.9
|
3.7
|
224.1
|
|||||||||||
|
Research
& Development
|
-
|
(180.6
|
)
|
5.4
|
12.5
|
50.8
|
||||||||||
|
Global
Operations & Engineering
|
-
|
(157.2
|
)
|
69.3
|
69.4
|
1,167.5
|
||||||||||
|
2,233.5
|
368.0
|
105.8
|
91.9
|
2,158.0
|
||||||||||||
|
Corporate
administration
|
-
|
(88.9
|
)
|
18.5
|
27.0
|
887.8
|
||||||||||
|
$
|
2,233.5
|
$
|
279.1
|
$
|
124.3
|
$
|
118.9
|
$
|
3,045.8
|
|||||||
|
2003
(Restated)
|
||||||||||||||||
|
Americas
|
$
|
903.3
|
$
|
282.6
|
$
|
13.0
|
$
|
5.0
|
||||||||
|
Europe
|
724.4
|
201.5
|
16.2
|
4.2
|
||||||||||||
|
Asia
|
390.8
|
106.1
|
6.9
|
3.3
|
||||||||||||
|
Research
& Development
|
-
|
(166.1
|
)
|
6.0
|
8.1
|
|||||||||||
|
Global
Operations & Engineering
|
-
|
(123.1
|
)
|
73.6
|
42.7
|
|||||||||||
|
2,018.5
|
301.0
|
115.7
|
63.3
|
|||||||||||||
|
Corporate
administration
|
-
|
(73.5
|
)
|
8.7
|
28.2
|
|||||||||||
|
Restructuring
reversal
|
-
|
6.3
|
-
|
-
|
||||||||||||
|
Other
significant charges 2
|
-
|
(5.6
|
)
|
-
|
-
|
|||||||||||
|
$
|
2,018.5
|
$
|
228.2
|
$
|
124.4
|
$
|
91.5
|
|||||||||
|
1
|
Assets
by business segment for 2005 and 2004 reflect restatement adjustments
made
to goodwill in association with the comprehensive tax
review.
|
|
2
|
Other
significant charges in 2005 represent purchase accounting adjustments
related to the acquisition of Freda (see Note
3 — Acquisitions).
Other significant charges in 2003 pertain to research and development
expense associated with the acquisition of an early-stage pharmaceutical
technology.
|
PAGE
86
In
each
geographic segment, the Company markets products in five product categories:
contact lens, lens care, pharmaceuticals, cataract and vitreoretinal, and
refractive (see Note
1 — Significant Accounting Policies; Revenue Recognition
for a
discussion of specific products under each product category). There are no
transfers of products between product categories. The following table presents
sales by product category for the years 2005, 2004 and 2003:
|
Net
Sales
|
||||||||||
|
2005
|
2004
(Restated)
|
2003
(Restated)
|
||||||||
|
Contact
Lens
|
$
|
728.5
|
$
|
671.0
|
$
|
593.2
|
||||
|
Lens
Care
|
522.2
|
523.3
|
496.5
|
|||||||
|
Pharmaceuticals
|
584.8
|
528.2
|
471.2
|
|||||||
|
Cataract
and Vitreoretinal
|
377.8
|
358.2
|
327.1
|
|||||||
|
Refractive
|
140.5
|
152.8
|
130.5
|
|||||||
|
$
|
2,353.8
|
$
|
2,233.5
|
$
|
2,018.5
|
|||||
Geographic
Region
The
following table presents sales and long-lived assets by geography for the years
2005, 2004 and 2003. Sales to unaffiliated customers represent net sales
originating in entities physically located in the identified geographic
area.
|
Non-U.S.
|
U.S.
|
Consolidated
|
||||||||
|
2005
|
||||||||||
|
Sales
to unaffiliated customers
|
$
|
1,462.8
|
$
|
891.0
|
$
|
2,353.8
|
||||
|
Long-lived
assets
|
275.5
|
328.9
|
604.4
|
|||||||
|
2004
(Restated)
|
||||||||||
|
Sales
to unaffiliated customers
|
$
|
1,370.0
|
$
|
863.5
|
$
|
2,233.5
|
||||
|
Long-lived
assets
|
259.0
|
321.8
|
580.8
|
|||||||
|
2003
(Restated)
|
||||||||||
|
Sales
to unaffiliated customers
|
$
|
1,204.0
|
$
|
814.5
|
$
|
2,018.5
|
||||
|
Long-lived
assets
|
234.7
|
310.0
|
544.7
|
|||||||
No
non-U.S. country, or single customer, generated more than 10 percent of total
product net sales in 2005. On a restated basis, no non-U.S. country, or single
customer, generated more than 10 percent of total product net sales during
2004
or 2003. Long-lived assets represent net property, plant and equipment, of
which
$92.6, $76.9 and $68.9 of the total non-U.S. long-lived assets for 2005, 2004
and 2003, respectively, were located in Ireland. No other non-U.S. country
individually held more than 10 percent of long-lived assets.
PAGE
87
6.
Net
Investment in Sales-Type and Operating Leases
Transactions
that involve surgical equipment manufactured by the Company, whereby the Company
grants temporary possession and use of that equipment to a customer, usually
for
a specified period of time that approximates the equipment's economic life
at a
periodic charge, are accounted for in accordance with SFAS No. 13, Accounting
for Leases.
The
components of the Company's net investment in sales-type and operating leases
as
of December 31, 2005 and December 25, 2004 are as follows:
|
December
31, 2005
|
December
25, 2004
(Restated)
|
||||||
|
Net
Investment in Sales-Type Leases
|
|||||||
|
Total
minimum lease payments to be received 1
|
$
|
30.6
|
$
|
36.0
|
|||
|
Less
amounts due from service agreements included in total minimum lease
payments
|
(2.5
|
)
|
(2.8
|
)
|
|||
|
Less
allowance for doubtful accounts 1
|
(0.4
|
)
|
(0.6
|
)
|
|||
|
Net
minimum lease payments receivables
|
27.7
|
32.6
|
|||||
|
Less
unearned income 2
|
(2.1
|
)
|
(2.5
|
)
|
|||
|
Net
investment in sales-type leases
|
$
|
25.6
|
$
|
30.1
|
|||
|
1
|
The
current portion of minimum lease payments receivable and the related
allowance for doubtful accounts are included in Trade receivables
on the
Balance
Sheets.
Minimum lease payments receivable and the related allowance for doubtful
accounts due after one year are included with Other Long-Term
Assets.
|
|
2
|
The
current portion of unearned income is included in Accrued liabilities
on
the Balance
Sheets.
Unearned income due after one year is included with Other Long-Term
Liabilities.
|
Minimum
future lease payments on sales-type leases are contractually due as follows:
2006, $16.4; 2007, $9.9; 2008, $3.9 and 2009, $0.4 and none
thereafter.
|
December
31, 2005
|
December
25, 2004
|
||||||
|
Net
Investment in Operating Leases
|
|||||||
|
Equipment
on operating lease
|
$
|
14.4
|
$
|
16.5
|
|||
|
Less
accumulated depreciation
|
(7.6
|
)
|
(6.9
|
)
|
|||
|
Equipment
on operating lease, net
|
$
|
6.8
|
$
|
9.6
|
|||
Net
equipment on operating lease is included in Property, Plant and Equipment,
net
on the Balance
Sheets.
Equipment on operating lease is depreciated for financial reporting purposes
using the straight-line method based on its estimated useful life, as described
in Note
1 — Significant Accounting Policies; Property, Plant and
Equipment.
Minimum
future rentals on operating leases are contractually due as follows: 2006,
$0.3;
2007, $0.2; 2008, $0.1 and 2009, $0.1 and none thereafter.
Contingent
rentals are received under certain operating leases. Contingent rentals for
2005, 2004 and 2003 amounted to $4.3, $4.2 and $0.8, respectively.
7.
Goodwill
In
the
fourth quarter of 2005, the Company completed its acquisition of a 70-percent
controlling interest in Freda. The purchase price was first allocated to
identifiable assets and liabilities based upon their respective fair values.
The
excess of the purchase price over the value of the identified assets and
liabilities has been recorded as goodwill and is reflected in the table below.
See Note
3 — Acquisitions
for
further discussion.
PAGE
88
The
changes in the carrying amount of goodwill for the years ended December 25,
2004
and December 31, 2005 are as follows:
|
Americas
|
Europe
|
Asia
|
Global
Operations & Engineering
|
Research
& Development
|
Total
|
||||||||||||||
|
Balance
as of December 27, 2003
(Restated)
1,
2
|
$
|
38.3
|
$
|
60.4
|
$
|
12.5
|
$
|
544.1
|
$
|
-
|
$
|
655.3
|
|||||||
|
Other
(primarily currency)
|
-
|
3.5
|
0.7
|
22.7
|
-
|
26.9
|
|||||||||||||
|
Balance
as of December 25, 2004 (Restated)
|
$
|
38.3
|
$
|
63.9
|
$
|
13.2
|
$
|
566.8
|
$
|
-
|
$
|
682.2
|
|||||||
|
Acquisition
of Freda
|
-
|
-
|
5.6
|
154.9
|
-
|
160.5
|
|||||||||||||
|
Other
(primarily currency)
|
-
|
(5.8
|
)
|
(0.7
|
)
|
(37.2
|
)
|
-
|
(43.7
|
)
|
|||||||||
|
Balance
as of December 31, 2005
|
$
|
38.3
|
$
|
58.1
|
$
|
18.1
|
$
|
684.5
|
$
|
-
|
$
|
799.0
|
|||||||
|
1
|
Due
to the Company’s restatement of previously issued financial statements as
discussed in Note
2 — Restatement,
the amounts originally reported for goodwill prior to December 27,
2003
have changed in the disclosure above. Goodwill associated with a
1998
acquisition was reduced by $51.9 prior to December 31, 2003, representing
the net impact of a reduction of $58.0 to reflect findings from a
comprehensive review of the Company's accounting for income taxes
and an
increase of $6.1 to correctly reflect the purchase method of accounting.
The adjustments reduced goodwill in the Americas by $8.4 and in Global
Operations & Engineering by $43.5. Goodwill in Europe associated with
a 2002 acquisition was reduced $1.8 to correctly reflect periodic
re-measurement at historical rates. See discussion in Note
2 — Restatement.
|
|
2
|
During
2003, the Company acquired additional interests in its commercial
and
manufacturing joint ventures located in Korea. The $3.5 excess of
the
purchase price of $6.2 over the value of identifiable assets and
liabilities was recorded as goodwill in the Company's Asia business
segment.
|
During
the fourth quarter of 2004, the Company reevaluated its allocation of goodwill
arising from vertically integrated acquisitions. The Company determined that
a
portion of the goodwill previously assigned to the Global Operations &
Engineering segment related to synergies realized by its commercial operations
from vertically integrated acquisitions occurring prior to the beginning of
the
2002 fiscal year. As such, the Company reallocated goodwill among the Global
Operations & Engineering, Americas, Europe and Asia segments using a
relative fair value allocation approach. During the first quarter of 2005,
the
method used to reallocate goodwill at the end of 2004 was further evaluated
and
adjusted for the impact of historical changes in exchange rates as a majority
of
the goodwill is held in non-U.S. legal entities which operate in currencies
other than U.S. dollar. The revised carrying value of each of the Company's
reporting units, including goodwill, was less than their respective fair values
determined in connection with annual impairment tests completed during the
fourth quarters of 2003, 2004 and 2005. The revised allocation and adjustments
have been reflected in all balances included in the previous table.
8.
Acquired
Intangible Assets
In
April
2005, the FDA approved the Company's single-indication orphan drug Retisert
for the
treatment of chronic non-infectious uveitis affecting the posterior segment
of
the eye. This FDA approval represents the achievement of a milestone under
an
agreement with a former partner in the development of implant technology, which
triggered a $3.5 obligation. In connection with the settlement of this
obligation, the Company capitalized $3.5 for the technology and this amount
is
reflected in the table below under technology and patents (see Note
9 — Related Party Transaction).
During
the first quarter of 2005, the Company paid $12.2 to Pharmos Corporation to
acquire additional rights in connection with the FDA approval of Zylet
ophthalmic suspension. In March 2005, the Company acquired a license agreement
for $0.4 to assume full licensing rights of a Japanese pharmaceutical company
to
commercialize Lotemax
anti-inflammatory eye drops in South Korea. These acquired intangibles are
reflected in the following table.
Acquired
intangibles in connection with the Freda acquisition consisted of distributor
relationships ($57.9), tradenames ($23.7), technology ($7.1) and non-compete
agreements ($1.8) and are reflected in the table below (see Note
3 — Acquisitions
for
further discussion).
PAGE
89
The
components of intangible assets as of December 31, 2005 and December 25, 2004
are as follows:
|
December
31, 2005
|
December
25, 2004
|
||||||||||||
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
Gross
Carrying Amount
|
Accumulated
Amortization
|
||||||||||
|
Tradenames
|
$
|
117.7
|
$
|
44.3
|
$
|
97.1
|
$
|
36.7
|
|||||
|
Technology
and patents
|
96.1
|
74.5
|
86.4
|
68.9
|
|||||||||
|
Developed
technology
|
77.6
|
20.7
|
83.6
|
18.1
|
|||||||||
|
Distributor
relationships
|
57.9
|
0.9
|
-
|
-
|
|||||||||
|
Intellectual
property
|
38.2
|
10.6
|
25.9
|
7.0
|
|||||||||
|
License
agreements
|
36.2
|
18.4
|
39.8
|
18.5
|
|||||||||
|
Physician
information & customer database
|
21.8
|
3.9
|
24.3
|
3.6
|
|||||||||
|
Non-Compete
agreements
|
1.8
|
0.2
|
-
|
-
|
|||||||||
|
$
|
447.3
|
$
|
173.5
|
$
|
357.1
|
$
|
152.8
|
||||||
Amortization
expense of intangibles was $27.3 and $24.9 for 2005 and 2004, respectively.
Estimated amortization expense of intangibles presently owned by the Company
for
each of the next five succeeding fiscal years is as follows:
|
Fiscal
Year Ending
|
Amount
|
|||
|
December
30, 2006
|
$
|
29.3
|
||
|
December
29, 2007
|
28.4
|
|||
|
December
27, 2008
|
25.5
|
|||
|
December
26, 2009
|
22.0
|
|||
|
December
25, 2010
|
20.6
|
|||
9. Related
Party Transaction
In
April
2003, the Company advanced $9.3 to Control Delivery Systems (CDS), then a
partner in the development of implant technology for treating retinal and other
back-of-the-eye diseases in which the Company has an equity interest. Such
advances were recoverable through the Company's ability to apply such amounts
to
future obligations due under an arrangement with CDS to provide research and
development (R&D) activities as to certain technologies; the achievement of
certain milestones such as the completion of clinical testing, NDA filings,
and
FDA approvals; royalty payments; or through cash repayment by CDS. In May 2003,
the Company and CDS announced a delay of up to three years in the regulatory
filing for the diabetic macular edema indication for its proposed Retisert
implant.
As a result, the Company decided to conduct and directly supervise the
day-to-day development and clinical activities after a brief transition period
and subsequently announced that it would not at that time pursue approval of
the
diabetic macular edema indication for the proposed Retisert
implant.
The
Company primarily based the recoverability of the funds advanced on the future
milestones and royalties or repayment by CDS, as CDS was no longer performing
R&D activity on the Company's behalf. The Company recorded a $4.1 reserve in
the second quarter of 2003 to reflect the uncertainty relative to the
achievement of such milestones given that the eventual commercialization was
subject to the ordinary risks associated with the development and approval
of
any FDA regulated product. During the fourth quarter of 2003, the Company
renegotiated its arrangement with CDS to formalize the change in the ongoing
development and approval process and as a result received $4.0 from
CDS.
In
June
2004, the Company determined that it had incurred an obligation for an
additional $3.0 milestone payment under the original agreement. As such, the
$3.0 was applied against funds advanced resulting in a charge to R&D
expenses. This charge was partially offset by a decrease in selling,
administrative and general expenses to adjust the reserve established in the
second quarter of 2003.
PAGE
90
In
April
2005, the FDA approved the Company's single-indication orphan drug Retisert
for the
treatment of chronic non-infectious uveitis affecting the posterior segment
of
the eye. This FDA approval represented the achievement of a milestone and
triggered a $3.5 obligation under the original agreement. The Company
capitalized $3.5 for the developed technology, paid $0.7 to CDS and applied
$2.8
against the remaining funds previously advanced. Also, the Company recorded
a
decrease in selling, administrative and general expenses to reverse the
remainder of the previously established reserve. On June 28, 2005, the Company
advanced a royalty payment of $3.0 to CDS. During the fourth quarter of 2005,
the Company recognized approximately $0.4 of royalty expense.
Effective
December 31, 2005, CDS merged with pSivida Inc., a wholly owned subsidiary
of
pSivida Limited. In connection with the merger the Company's 600,000 shares
of
CDS' common stock (minority equity interest valued at $0 on the Company's
balance sheet) were converted into 2,113,694 American Depositary Shares,
representing 21,136,940 ordinary shares of pSivida Limited (5.5 percent of
such
issued and outstanding ordinary shares). There have been no other changes in
the
Company's relationship or arrangement with CDS.
10.
Provision
for Income Taxes
An
analysis of the components of income before income taxes and minority interest
and the related provision for income taxes is presented below:
|
2005
|
2004
(Restated)
|
2003
(Restated)
|
||||||||
|
(Loss)
income before income taxes and minority interest
|
||||||||||
|
U.S.
|
$
|
(12.3
|
)
|
$
|
(24.8
|
)
|
$
|
(33.6
|
)
|
|
|
Non-U.S.
|
258.7
|
267.5
|
208.9
|
|||||||
|
$
|
246.4
|
$
|
242.7
|
$
|
175.3
|
|||||
|
Provision
for income taxes
|
||||||||||
|
Federal
|
||||||||||
|
Current
|
$
|
46.8
|
$
|
28.3
|
$
|
16.7
|
||||
|
Deferred
|
94.2
|
(27.9
|
)
|
(16.6
|
)
|
|||||
|
State
|
||||||||||
|
Current
|
4.7
|
2.4
|
0.5
|
|||||||
|
Deferred
|
1.9
|
(2.2
|
)
|
(1.6
|
)
|
|||||
|
Foreign
|
||||||||||
|
Current
|
70.8
|
74.5
|
63.0
|
|||||||
|
Deferred
|
3.0
|
8.7
|
3.3
|
|||||||
|
$
|
221.4
|
$
|
83.8
|
$
|
65.3
|
|||||
PAGE
91
Deferred
taxes, detailed below, recognize the expected future tax consequences of events
that have been recognized in the financial statements or tax returns. The
Company assesses the available positive and negative evidence regarding the
recoverability of its deferred tax assets and applies judgment in estimating
whether, and how much, of the assets are more likely than not to be realized.
In
general, deferred tax assets, including carryforwards and other attributes,
are
reviewed for expected realization and a valuation allowance is established
to
reduce the assets to their net realizable value. Expected realization is
dependent upon sufficient taxable income in the appropriate jurisdiction and
period that is also of the appropriate character. The Company has evaluated
the
availability of such taxable income, the nature of its deferred tax assets
and
the relevant tax laws in determining the net realizable value of its deferred
tax assets. During 2005, the Company established a valuation allowance against
its U.S. net deferred tax assets because, based upon the weight of the available
positive and negative evidence, including anticipated U.S. losses in early
future years and uncertainties surrounding when it will return to U.S.
profitability, the Company believes it does not meet the “more likely than not”
standard that is applied when determining the net realizable value of deferred
tax assets. This adjustment was recorded as a third quarter event because that
is the earliest reporting period for which the Company has not filed quarterly
results on Form 10-Q. The Company continues to assess the recoverability of
its
deferred tax assets, including strategies that will enable such assets to be
realized, and will reduce the valuation allowance at such time when it is
determined that the assets, or some portion thereof, are "more likely than
not"
to be realized. At December 31, 2005, $0.5 of the year-end valuation allowance
balance was recorded to goodwill of an acquired entity and, therefore, if such
valuation allowance is reduced, the associated tax benefit will be allocated
to
reduce goodwill or non-current intangible assets of the acquired
entity.
At
December 31, 2005, the Company had deferred tax assets related to tax loss
carryforwards of $15.5 [$1.5 of non-U.S. net operating losses, $2.0 U.S. federal
net operating losses (these losses were acquired by the Company and are subject
to certain limitations as a result of the change in ownership) and $12.0 of
U.S.
state net operating and capital losses] and credit carryforwards of $60.8 ($16.4
of which is related to foreign tax credits and $44.4 related to U.S. federal
and
state credits) available to offset future tax liabilities otherwise due. Of
the
$76.3 aggregate deferred tax assets related to these carryforwards, $75.0 will
expire between 2006 and 2025, and $1.3 have no expiration. In addition,
at
December 31, 2005, the Company had cumulative earnings related to non-U.S.
subsidiaries of $200.7 that it considered permanently reinvested. Deferred
income taxes have not been provided on this income as the Company does not
plan
to initiate any action that would precipitate the payment of income taxes
thereon. It is not practicable to estimate the amount of additional tax that
might be payable on this undistributed foreign income.
|
Deferred
Taxes
December
31, 2005
|
Deferred
Taxes
December
25, 2004
(Restated)
|
||||||||||||
|
Assets
|
Liabilities
|
Assets
|
Liabilities
|
||||||||||
|
Current:
|
|||||||||||||
|
Sales
and allowance accruals
|
$
|
45.1
|
$
|
-
|
$
|
40.1
|
$
|
-
|
|||||
|
Employee
benefits and compensation
|
41.9
|
-
|
37.8
|
-
|
|||||||||
|
Inventories
|
12.5
|
-
|
10.9
|
-
|
|||||||||
|
Unrealized
foreign exchange transactions
|
-
|
1.6
|
9.7
|
0.2
|
|||||||||
|
Other
accruals
|
24.0
|
-
|
26.4
|
-
|
|||||||||
|
Valuation
allowance
|
(52.2
|
)
|
-
|
(16.3
|
)
|
-
|
|||||||
|
$
|
71.3
|
$
|
1.6
|
$
|
108.6
|
$
|
0.2
|
||||||
|
Non-current:
|
|||||||||||||
|
Depreciation
and amortization
|
$
|
152.5
|
$
|
82.7
|
$
|
133.8
|
$
|
74.1
|
|||||
|
Tax
loss and credit carryforwards
|
76.3
|
-
|
95.9
|
-
|
|||||||||
|
Employee
benefits and compensation
|
51.1
|
-
|
47.7
|
-
|
|||||||||
|
Other
accruals
|
3.8
|
16.7
|
1.7
|
51.5
|
|||||||||
|
Valuation
allowance
|
(136.9
|
)
|
-
|
(44.4
|
)
|
-
|
|||||||
|
Intercompany
investments
|
-
|
157.1
|
-
|
158.7
|
|||||||||
|
146.8
|
256.5
|
234.7
|
284.3
|
||||||||||
|
$
|
218.1
|
$
|
258.1
|
$
|
343.3
|
$
|
284.5
|
||||||
PAGE
92
A
reconciliation of the statutory U.S. federal income tax rate to the effective
tax rates for continuing operations are as follows:
|
2005
|
2004
(Restated)
|
2003
(Restated)
|
||||||||
|
Statutory
U.S. tax rate
|
35.0
|
%
|
35.0
|
%
|
35.0
|
%
|
||||
|
Earnings
impact of changes in valuation allowances
|
49.3
|
8.8
|
(0.9
|
)
|
||||||
|
Foreign,
including earnings taxed at different rates
|
5.6
|
(6.1
|
)
|
6.8
|
||||||
|
State,
net of federal benefit
|
2.7
|
0.7
|
(0.6
|
)
|
||||||
|
Tax
return and audit adjustments
|
1.1
|
1.8
|
2.3
|
|||||||
|
Orphan
drug credit
|
(0.4
|
)
|
(2.2
|
)
|
(2.9
|
)
|
||||
|
Other
|
(3.4
|
)
|
(3.6
|
)
|
(2.4
|
)
|
||||
|
Effective
tax rate
|
89.9
|
%
|
34.4
|
%
|
37.3
|
%
|
||||
On
October 22, 2004, the American Jobs Creation Act of 2004 (AJCA) was signed
into
law. The bill created a temporary incentive for U.S. corporations to repatriate
accumulated income earned abroad by providing a dividend received deduction
of
85 percent for certain dividends from controlled foreign corporations in excess
of a “Base Period” dividend amount (“Qualifying Dividends”). During 2005, the
Company repatriated $861.9,
of
which $792.7
were
Qualifying Dividends eligible for the special dividend received deduction.
The
net tax expense related to the repatriation was $9.5 and is included the
Foreign,
including earnings taxed at different rates,
section
of the effective tax rate reconciliation above. The net tax expense related
to
the repatriation was reduced by available foreign tax credits, as well as tax
liabilities related to the repatriated earnings that were accrued in prior
years
as part of the Company's restatement. See Note
2 — Restatement
for
further detail.
On
August
3, 2005, the Company received approval from the U.S. Joint Committee on Taxation
that its income tax refund request for tax years ended 1995 through 1997 was
approved, concluding the Internal Revenue Service's examination of such years.
In connection with the closure of this examination, the Company recognized
$20.9
of tax benefits related primarily to favorable resolution of tax positions
raised during the examinations and the reversal of tax reserves associated
with
the Company's previously divested oral care business.
In
addition, on May 12, 2006, the Company received a Notice of Final Partnership
Administrative Adjustment from the Internal Revenue Service relating to
partnership tax periods ended June 4, 1999 and December 25, 1999 for Wilmington
Partners L.P. (Wilmington), a partnership formed in 1993 in which the majority
of the partnership interests are held by certain of the Company's subsidiaries.
The Final Partnership Administrative Adjustment (FPAA) proposes adjustments
increasing the ordinary income reported by Wilmington for its December 25,
1999
tax year by a total of $10.0, and increasing a long-term capital gain reported
by Wilmington for that tax year by $189.9. The FPAA also proposes a $550.0
negative adjustment to Wilmington's basis in a financial asset contributed
to it
by one of its partners in 1993; this adjustment would also affect the basis
of
that partner — one of the Company's subsidiaries — in its partnership interest
in Wilmington. The asserted adjustments could, if sustained in full, increase
the tax liabilities of the partnership's partners for the associated tax periods
by more than $200.0, plus penalties and interest. The
Company has not made any financial provision for the asserted additional taxes,
penalties or interest as the Company believes
the asserted adjustments are not probable and estimable.
Since
1999, the Company's consolidated financial statements have included a deferred
tax liability relating to the partnership. As of December 31, 2005, this
deferred tax liability equaled $157.1. This
deferred tax liability is currently reducing net deferred tax assets for which
a
valuation allowance has been recorded as of December 31, 2005.
On
August
7, 2006, the Company made a petition to the U.S. Tax Court to challenge the
asserted adjustments. Internal Revenue Service's answer was filed on October
4,
2006, and the Company initiated a motion to strike portions of the answer on
November 1, 2006. The Company believes it has numerous substantive and
procedural tax law arguments to dispute the adjustments. Tax, penalties and
interest cannot be assessed until a Tax Court determination is made, and an
assessment, if any, would likely not be made until some time after 2007. While
the Company intends to vigorously defend against the asserted adjustments,
its
failure to succeed in such a defense could significantly increase the liability
of the partnership's partners for taxes, plus interest and penalties, which
in
turn would have a material adverse effect on the Company's financial results
and
cash flows.
PAGE
93
11.
Debt
To
support its liquidity requirements, the Company generally maintains a U.S.
revolving credit agreement. On July 26, 2005, the Company replaced its $250.0
syndicated revolving credit facility expiring in January 2008 with a new
five-year, $400.0 syndicated revolving credit facility. The terms of the new
revolving credit facility are favorable to the terms of the former facility
including the fact that the Company will have the option to increase the limit
to $550.0 at any time during the five-year term. The new facility includes
covenants similar in nature to covenants contained in the former facility,
which
require the Company to maintain certain EBITDA to interest and debt ratios.
In
the event a violation of the covenants occurs, the facility would not be
available for borrowing until the covenant provisions were waived, amended
or
satisfied. In November 2005, and subsequently in February, May, August, and
December 2006, and January 2007, the Company obtained waivers under the
revolving credit agreement of any breach of representation, covenant or default
that may arise from any events disclosed in any public announcements or filings
with the SEC through and including the Company's filing with the SEC on Form
12b-25, filed November 9, 2006. With respect to matters related to the Company's
Brazil and Korea investigations, the waivers are effective to the extent that
the impact does not result in reductions in after-tax profits of more than
$50.0
in aggregate. The impact of the Brazil and Korea investigations did not exceed
$50.0 in aggregate as further discussed in Note
2 — Restatement.
The
waivers, in the aggregate, also extended the Company's deadline to file its
required financial statements for 2005 (including restatements for certain
prior
periods) and 2006 year-to-date until April 30, 2007. Delivery of required
financial statements for 2005 was satisfied by filing this Annual Report on
Form
10-K and delivery of its Annual Report on Form 10-K for fiscal year ending
December 30, 2006 by April 30, 2007 will satisfy its obligation to file all
2006
periodic reports. There were no violations of the financial covenants under
either the new or former revolving credit facilities during the fiscal years
ended December 31, 2005 or December 25, 2004.
The
interest rate under the new revolving credit facility is, at the Company’s
option, based on the Company's credit rating plus LIBOR, or the base rate of
one
of the lending banks. On August 1, 2005, the Company borrowed $50.0 under its
syndicated revolving credit facility to partially fund retirement of its $100.0
of debt maturing on that date. The Company borrowed an additional $175.0 on
September 26, 2005 to partially fund the first $200.0 tranche of the Freda
acquisition (see Note
3 — Acquisitions for
further discussion). The total $225.0 revolving credit borrowing was repaid
on
December 7, 2005, and the effective annual borrowing rate for the period the
funds were outstanding was approximately 4.6 percent. There were no outstanding
borrowings under the syndicated revolving credit agreements as of December
31,
2005 or December 25, 2004.
In
addition, a number of subsidiary companies outside the United States have credit
facilities to meet their liquidity requirements. There were $26.8 of outstanding
borrowings under these non-U.S. credit facilities as of December 31, 2005 with
an interest rate of 4.82 percent (as further described in Note
17 — Commitments and Contingencies).
There
were no outstanding borrowings as of December 25, 2004. The non-U.S. credit
facilities' covenants require the subsidiary companies to make payment when
due
and to comply with applicable local laws. There were no covenant violations
under the non-U.S. credit facilities during the fiscal years ended December 31,
2005 or December 25, 2004.
PAGE
94
The
components of long-term debt were:
|
December
31, 2005
|
December
25, 2004
|
|||||||||||||||
|
Type
|
Maturity
|
Effective
Interest Rate1
|
Amount
Outstanding
|
Effective
Interest Rate1
|
Amount
Outstanding
|
|||||||||||
|
Notes
2
|
2005
|
- |
$
|
-
|
6.29%
|
|
$
|
100.0
|
||||||||
|
Notes
3,
4
|
2007
|
8.63%
|
|
150.0
|
8.63%
|
|
150.0
|
|||||||||
|
Notes
3,
5
|
2008
|
7.87%*
|
50.0
|
6.09%*
|
50.0
|
|||||||||||
|
Debentures
3
|
2028
|
7.19%
|
|
183.9
|
7.19%
|
|
183.9
|
|||||||||
|
Convertible
Notes 6
|
2023
|
5.90%*
|
4.1
|
2.41%*
|
4.1
|
|||||||||||
|
Convertible
Securities 6
|
2023
|
6.14%*
|
155.9
|
2.41%*
|
155.9
|
|||||||||||
|
Bank
Term Loan
|
2010
|
0.50%*
|
48.1
|
- |
-
|
|||||||||||
|
Bank
Term Loan
|
2010
|
5.10%*
|
375.0
|
- |
-
|
|||||||||||
|
Other
7
|
Various
|
Various
|
25.4
|
Various |
0.2
|
|||||||||||
|
992.4
|
644.1
|
|||||||||||||||
|
Less
current portion
7
|
(161.2
|
)
|
(100.8
|
)
|
||||||||||||
|
$
|
831.2
|
$
|
543.3
|
|||||||||||||
*
Represents debt with a variable interest rate.
1
The
effective interest rate includes the impact of interest rate, derivative
instruments and debt issuance costs.
|
2
|
Notes
contained a put/call option exercisable at 100 percent of par in
2005. The
Company had also entered into a remarketing agreement which allowed
the
agent to call the debt from the holders on the option exercisable
date,
and then remarket them. If the rights were exercised, the coupon
rate paid
by the Company would reset to a rate higher than the then current
market
rate. Following the Company's debt rating downgrade by Moody's Investors
Service during March 2002, the agents exercised their right to put
the
remarketing agreement back to the Company. The debt was repaid during
August 2005.
|
|
3
|
The
Company, at its option, may call these notes/debentures at any time
pursuant to a make-whole redemption provision, which would
compensate
holders for any changes in interest rate levels of the notes/debentures
upon early extinguishment.
|
|
4
|
In
May 2002, the Company entered into an interest rate lock agreement
to
hedge the benchmark interest rate associated with this debt issue.
Losses
associated with the hedge have been deferred to other comprehensive
income
and are being amortized to interest expense over the remaining life
of the
debt.
|
|
5
|
In
August 2003, simultaneous with the issuance of this debt maturing
in 2008,
an interest rate swap agreement converted this note to a variable-rate
liability at a rate of six-month LIBOR plus 2.37 percent. Also in
May
2002, the Company entered into an interest rate lock agreement to
hedge
the benchmark interest rate associated with this debt issue. Losses
associated with the hedge have been deferred to other comprehensive
income
and are being amortized to interest expense over the debt
term.
|
|
6
|
These
notes accrue interest at six-month LIBOR plus 0.5 percent, with the
rate
reset on a semi-annual basis in advance. The effective rate for 2005
includes the impact of the write-off of unamortized debt issuance
costs
for the convertible notes and securities due to the triggering of
the
conversion option, which resulted in an increase of $3.0 in interest
expense for 2005.
|
|
7
|
The
amounts outstanding under other and current portion at December 31,
2005
include the $26.8 of outstanding borrowings under non-U.S. credit
facilities.
|
On
September 20, 2006, the Company announced its intention to commence an
undertaking to solicit consents with respect to all series of outstanding public
debt securities and outstanding convertible debt under its indenture. The
solicitation sought, for a fee, consent from the holders for amendments to
the
indenture applicable to each series of notes that would, among other things,
extend to January 31, 2007 the Company's deadlines to file periodic reports
with
the SEC and to deliver compliance certificates to the Trustee under each
indenture. The amendments waive all defaults relating to the failure to properly
comply with these obligations prior to their effectiveness. On September 29,
2006, the Company announced that it received the requisite number of consents,
giving effect to the amendments to the note indentures and the waiver of the
specified defaults until January 31, 2007. The Company did not file certain
periodic reports due for the periods prior to January 31, 2007. However, on
January 30, 2007, the Company announced a consent solicitation, seeking consents
to additional limited waivers of the reporting obligations from the holders
of its public debt to extend until April 30, 2007 the period during
which it may become current on its periodic reports without potential
default under the indenture. If the Company is unable to obtain the requisite
number of consents to the waiver, then the Trustee or the holders of 10 percent
of the principal amount of any series of the outstanding public debt could
give
the Company a notice of default. If the Company does not file the reports within
60 days after that notice is given, and the Trustee or the holders of 25 percent
of the principal amount of any series of the public debt outstanding give a
further notice, all principal and accrued interest on that series of debt would
be due and payable. Such an acceleration of any series of the Company's public
debt may be satisfied by the Company's payment of principal and accrued interest
on that series, but if not otherwise waived, may trigger defaults under other
series of public debt or other indebtedness of the Company.
PAGE
95
On
May 3,
2006, the Company announced its intention to commence cash tender offers and
consent solicitations for three series of outstanding debt securities (the
"Securities") totaling $383.9 and consent solicitations for the two series
of
outstanding convertible debt totaling $160.0. The consents requested in this
solicitation were similar to the consents in the solicitation announced in
September, except that the Company's deadline to file periodic reports with
the
SEC and to deliver compliance certificates to the Trustee was October 2, 2006.
On June 5, 2006, the Company announced that $116.3 of the $383.9 aggregate
principal amount of debt had been tendered and was retired, and further that
the
Company received the requisite number of consents necessary to grant the waivers
sought at that time. On October 20, 2006, the Company retired an additional
$17.9 of the debentures due in 2028.
In
November 2005, the Company agreed to guarantee, on behalf of its Dutch
subsidiary, a $375.0 unsecured variable-rate term loan agreement (BV Term Loan).
The facility involves a syndicate of banks and was a component of the Company’s
effort to repatriate foreign earnings previously invested in non-U.S. legal
entities under the provisions of the AJCA (see Note
10 — Provision for Income Taxes
for
further discussion of the AJCA). Borrowings under the BV Term Loan totaled
$375.0 at December 31, 2005, and will mature in December 2010 unless otherwise
extended under the terms of the agreement. The interest rate is based on
six-month LIBOR and is reset on a semi-annual basis. The BV Term Loan includes
covenants similar in nature to covenants contained in the new U.S. revolving
credit facility, which require the Company to maintain certain EBITDA to
interest and debt ratios. The initial interest rate was set at 5.0 percent.
In
February 2006, May 2006, August 2006, December 2006 and January 2007, the
Company obtained waivers from its banks of any breach of representation or
covenant under the BV Term Loan, or any default associated with the events
related to the Brazil and Korea investigations, or from the impact of such
events to the extent that they did not result in reductions in after-tax profits
of more than $50.0 in aggregate. The waivers also extended the Company’s
deadline to file its required financial statements for 2005 (including
restatements for certain prior periods) and 2006 year-to-date, with the most
recent extension being until April 30, 2007. Delivery of required financial
statements for 2005 was satisfied by filing this Annual Report on Form 10-K
and
delivery of its Annual Report on Form 10-K for fiscal year ending December
30, 2006 by April 30, 2007 will satisfy its obligation to file all 2006
periodic reports. The impact of the Brazil and Korea investigations did not
exceed $50.0 in aggregate as further discussed in Note
2 — Restatement.
There
were no violations of the financial covenants under the BV Term Loan during
the
fiscal year ended December 31, 2005.
In
July
2005, the Company agreed to guarantee, on behalf of its Japan subsidiary, a
bank
term loan denominated in Japanese yen, in an amount approximately equivalent
to
$50.0. The term loan was established in connection with the repatriation of
foreign earnings under the provisions of the AJCA (see Note 10
—Provision
for Income Taxes
for
further discussion of the AJCA). The interest rate is set at the six-month
TIBOR
plus 0.30 percent and resets on a semi-annual basis. The initial interest rate
was set at 0.40 percent. This is a five-year facility that matures in July
2010.
The outstanding borrowing under this Japan term loan at December 31, 2005 was
approximately $48.1. The Japan term loan has covenants which require the Japan
subsidiary to submit its statutory financial statements to the lenders once
a
year and to maintain a positive balance of net assets. There were no covenant
violations under the Japan term loan during the fiscal year ended December
31,
2005.
In
August
2003, the Company issued $160.0 variable-rate Convertible Senior Notes (Old
Notes) due in 2023. In
December 2004, the Company completed its offer to exchange up to $160.0 of
the
Old Notes for an equal amount of its 2004 Senior Convertible Securities due
2023
(New Securities). The terms of the New Securities are largely consistent with
those of the Old Notes except that settlement upon conversion of the New
Securities will be paid in cash up to the principal amount of the converted
New
Securities with any excess of the conversion value settled in shares of the
Company’s stock. An amount equal to $155.9 of the Old Notes, or 97.4 percent of
the outstanding issue, was tendered in exchange for an equal amount of the
New
Securities. On June 17, 2005, the conversion right was triggered giving the
holders the option to convert the Company's Old Notes and New Securities
beginning July 1, 2005. In the event a holder elects to convert its note, the
Company expects to fund a cash settlement of any such conversion from borrowings
under its syndicated revolving credit agreement.
During
2005, the Company retired $100.0 of various notes due in 2005. During 2004,
the
Company retired $194.6 of various notes due in 2004. Interest rate swap
agreements on long-term debt issues resulted in an increase in the long-term
effective interest rate from 6.4 percent to 6.8 percent in 2005, and a decrease
in the long-term effective interest rate from 6.15 percent to 5.70 percent
in
2004. At December 31, 2005 and December 25, 2004, the Company had $50.0 of
outstanding interest rate swaps. The Company retired $133.3 of its 2007 and
2028
bonds through October 2006, and as a result long-term borrowing maturities
during the next five years are expected to be $134.4 in 2006, $133.8 in 2007,
$50.0 in 2008, $0 in 2009 and $423.1 in 2010.
PAGE
96
12.
Accounting
for Derivatives and Hedging Activities
In
accordance with SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, the
Company records all derivative instruments on the balance sheet at their
respective fair values. Changes in the fair value of derivatives are recorded
each period in current income unless the instruments have been designated as
cash flow or net investment hedges, in which case such changes are recorded
in
other comprehensive income. The Company does not apply hedge accounting to
contracts utilized to offset foreign exchange exposures related to foreign
currency denominated assets and liabilities because they are marked to market
through income at the same time that the exposed asset/liability is remeasured
through income; both are recorded in foreign exchange loss (gain).
Derivative
gains and losses attributable to hedge ineffectiveness are also recorded in
current earnings. For instruments designated as either fair value or cash flow
hedges, net interest expense of $0.2 was recognized for hedge ineffectiveness
for the year ended December 27, 2003. Hedge ineffectiveness had no impact on
income for the years ended December 31, 2005 and December 25, 2004.
Fair
Value Hedges In
August
2003, the Company issued $210.0 in concurrent offerings of notes and convertible
notes. The first was a $50.0 public offering of five-year fixed-rate senior
notes with a coupon rate of 5.90 percent. The Company simultaneously executed
a
$50.0 interest rate swap agreement under which the Company receives interest
at
a fixed rate and pays interest at a variable rate. This swap is designated
as a
fair value hedge effectively converting the fixed-rate notes to a variable
rate
of interest, and was outstanding at December 31, 2005 and December 25, 2004.
The
second offering was a $160.0 placement of variable-rate convertible senior
notes
due in 2023 (see Note
11 — Debt
for a
discussion regarding the exchange of $155.9 principal amount of these notes
for
new Senior Convertible Securities due in 2023), containing two embedded
derivatives, a bond parity clause and a contingent interest provision. The
fair
value of the embedded derivatives contained in both the $155.9 exchanged
securities and the $4.1 original issue notes was $0 at December 31, 2005 and
December 25, 2004.
Cash
Flow Hedges The
Company utilizes foreign exchange forward contracts to hedge foreign currency
exposure associated with intercompany loans. The Company designated as cash
flow
hedges foreign exchange forward contracts in the notional amounts of $41.0
at
December 25, 2004 to hedge foreign currency exposure associated with an
intercompany loan denominated in Japanese yen. The intercompany loan was paid
in
July of 2005 with proceeds from a bank term loan (as further discussed in
Note
11 — Debt)
and the
hedge was terminated. There were no cash flow hedges designated at December
31,
2005.
During
2002 and 2003, to hedge interest payments on forecasted borrowings, the Company
entered into, extended and re-designated interest rate lock agreements with
notional amounts totaling $200.0 which were designated as cash flow hedges
of
ten semi-annual interest payments based on the benchmark interest rate related
to changes in the five-year U.S. Treasury rate. In November 2002, the Company
issued $150.0 of fixed-rate debt and in July 2003, the Company issued another
$50.0 of five-year fixed-rate debt. The proportionate amounts associated with
the cash flow hedges were recorded to other comprehensive income and are being
amortized to interest expense in the periods in which interest expense related
to the hedged debt are being recognized.
Reclassifications
from other comprehensive income into income for cash flow hedge transactions
were net losses of $3.3, $1.9 and $3.2 for the years ended December 31, 2005,
December 25, 2004 and December 27, 2003, respectively. As of December 31, 2005
an estimated $3.1 pre-tax loss was expected to be reclassified into income
over
the next twelve months.
Net
Investment Hedges At
December 25, 2004, the Company had designated foreign denominated intercompany
loans with notional amounts of $194.9 as hedges of foreign currency exposure
associated with net investments in non-U.S. subsidiaries. For derivatives
designated as hedging instruments to hedge foreign currency exposures of net
investments in non-U.S. subsidiaries, net after-tax hedging losses of $8.6
were
included in the cumulative translation adjustment for the year ended December
25, 2004. There were no designated foreign denominated intercompany loans at
December 31, 2005.
PAGE
97
13.
Financial
Instruments
The
carrying amount of cash and cash equivalents approximates fair value, as
maturities are less than three months in duration. The Company's remaining
financial instruments consisted of the following:
|
December
31, 2005
|
December
25, 2004
|
||||||||||||
|
Carrying
Value
|
Fair
Value
|
Carrying
Value
|
Fair
Value
|
||||||||||
|
Non-derivatives
|
|||||||||||||
|
Other
investments
|
$
|
5.9
|
$
|
5.9
|
$
|
5.5
|
$
|
5.5
|
|||||
|
Long-term
debt, including current portion
|
(992.4
|
)
|
(1,065.7
|
)
|
(644.1
|
)
|
(718.2
|
)
|
|||||
|
Derivatives
held for purposes other than trading
|
|||||||||||||
|
Foreign
exchange instruments
|
|||||||||||||
|
Other
current assets
|
$
|
2.4
|
$
|
2.4
|
$
|
8.1
|
$
|
8.1
|
|||||
|
Accrued
liabilities
|
(4.2
|
)
|
(4.2
|
)
|
(6.5
|
)
|
(6.5
|
)
|
|||||
|
Net
foreign exchange instruments
|
$
|
(1.8
|
)
|
$
|
(1.8
|
)
|
$
|
1.6
|
$
|
1.6
|
|||
|
Interest
rate instruments
|
|||||||||||||
|
Accrued
liabilities
|
$
|
(1.6
|
)
|
$
|
(1.6
|
)
|
$
|
(0.1
|
)
|
$
|
(0.1
|
)
|
|
At
the
end of 2005 and 2004, the Company held other investments in equity securities,
which are accounted for using the cost method of accounting. As these
investments do not have a readily determinable fair value and the Company does
not have the ability to exercise significant influence, they are reviewed
periodically for events or changes in circumstances that may have a significant
adverse effect on the carrying amount of the investment. During 2005 and 2004,
no such events or circumstances were identified. The carrying amount of these
investments is reported in other long-term assets in the accompanying
Balance
Sheets.
Fair
value of long-term debt was estimated using either quoted market prices for
the
same or similar issues or current rates offered to the Company for debt with
similar maturities. The fair value of foreign exchange and interest rate
instruments was determined using a model that estimates fair value at market
rates, or was based upon quoted market prices for similar instruments with
similar maturities.
The
Company enters into foreign exchange forward contracts primarily to offset
foreign exchange exposures related to foreign currency transactions and equity
investments in non-U.S. subsidiaries. At December 31, 2005 and December 25,
2004, the Company managed aggregate exposures of $549.6 and $692.2,
respectively, by entering into foreign exchange forward contracts requiring
the
purchase or sale of U.S. and foreign currencies. In addition, the Company
selectively hedges firm commitments that represent both a right and an
obligation, mainly for committed purchase orders for foreign-sourced
equipment.
At
December 31, 2005 and December 25, 2004, the Company was party to an interest
rate instrument that had an aggregate notional amount of $50.0.
Counterparties
to the financial instruments discussed above expose the Company to credit risks
to the extent of non-performance. The credit ratings of the counterparties,
which consist of a diversified group of high quality commercial or investment
banks, are regularly monitored and thus credit loss arising from counterparty
non-performance is not anticipated.
14.
Employee
Benefits
The
Company's benefit plans, which in the aggregate cover substantially all U.S.
employees and employees in certain other countries, consist of defined benefit
pension plans, a participatory defined benefit postretirement plan and defined
contribution plans.
PAGE
98
Pension
and Postretirement Benefit Plans The
fair
value of plan assets in the Company's U.S. defined benefit pension plan
represent approximately 70 percent of the fair value of all defined benefit
pension plan assets as of December 31, 2005. The plan is a noncontributory
defined benefit pension plan covering eligible salaried and hourly employees.
Prior to January 1, 2005, each participant earned a benefit, payable at normal
retirement age, expressed as an account balance that was credited annually
with
a percentage of the participant’s compensation and stated interest. In October
2004, the Company’s Board of Directors passed a resolution to freeze the plan
effective December 31, 2004. As of January 1, 2005, no new participants are
being accepted into the plan and no current participants are accruing additional
benefits except for an interest allocation on the December 31, 2004 account
balance. All of the pension benefits that were earned up to December 31, 2004,
however, were preserved and will be paid out when due in accordance with the
normal provisions of the plan. During the fourth quarter of 2004, the Company
recognized a $1.8 curtailment loss associated with the freezing of the pension
plan which is reflected in the table below entitled Net
Periodic Benefit Cost.
The
Company’s postretirement benefit plan provides life and medical insurance
benefits to participating employees of the Company upon retirement. Upon meeting
the eligibility requirements based on age and years of service, retirees and
their eligible dependents are able to retain medical and life insurance after
retirement. Retirees are required to pay for a portion of the coverage provided
at retirement, based upon their years of service. In October 2004, the Company’s
Board of Directors passed a resolution amending the plan to eliminate Company
contributions to postretirement medical and life insurance coverage for
participants who did not meet the minimum requirements of age and service on
January 1, 2005. However, future retirees who did not meet the minimum
requirements of age and service on January 1, 2005, but who attain age 55 and
10
years of service, will be eligible, at retirement, to purchase retiree medical
insurance through the Company. During the fourth quarter of 2004, the Company
recognized a $0.7 curtailment gain associated with the elimination of coverage
for those ineligible employees which is reflected in the table below entitled
Net
Periodic Benefit Cost.
In
December 2003, the Medicare Prescription Drug, Improvement and Modernization
Act
of 2003 (the Act) was signed into law. The Act introduced a prescription drug
benefit under Medicare, as well as a federal subsidy to sponsors of retiree
health care benefit plans that provide a benefit that is at least actuarially
equivalent to Medicare Part D. The Company adopted the provisions of FASB Staff
Position No. FAS 106-2, Accounting
and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act
(FSP FAS
106-2) as of July 1, 2004 which provides final accounting guidance related
to
the Act. FSP FAS 106-2 required companies to record the expected subsidy under
the Act as an actuarial gain to be amortized into income over the average
working life of the Company's employees. The reduction in the accumulated
postretirement benefit obligation due to the effect of the federal subsidy
was
$12.6 as of the date of adoption. The reduction in net periodic postretirement
benefit cost due to the subsidy was $0.8 in 2004, which included a $0.2
reduction in service cost, a $0.4 reduction in interest cost and a $0.2
reduction in amortization of net loss.
Components
of net periodic benefit cost, benefit obligation, change in plan assets, asset
allocation and funded status are summarized below for the Company’s U.S. and
major non-U.S. pension plans and the postretirement plan. For 2005 and 2004,
the
funded status of the pension and postretirement plans presented herein were
measured as of December 31.
For
additional unaudited information on the Company’s employee benefit plans and
related accounting policies and assumptions, see Item
7. Management’s
Discussion and Analysis - Critical Accounting Policies; Employee Benefits
of
this
Annual Report on Form 10-K.
PAGE
99
Net
Periodic Benefit Cost Components
of net periodic benefit cost and weighted-average assumptions used to determine
net periodic cost for the plans for fiscal years 2005, 2004 and 2003 were as
follows:
|
Pension
Benefit Plans
|
Postretirement
Benefit Plan
|
||||||||||||||||||
|
2005
|
2004
2
(Restated)
|
2003
2
(Restated)
|
2005
|
2004
|
2003
|
||||||||||||||
|
Service
cost 1
|
$
|
8.2
|
$
|
15.8
|
$
|
13.7
|
$
|
1.3
|
$
|
1.6
|
$
|
1.4
|
|||||||
|
Interest
cost
|
19.9
|
19.4
|
18.4
|
5.4
|
4.9
|
5.9
|
|||||||||||||
|
Expected
return on plan assets
|
(22.0
|
)
|
(20.3
|
)
|
(16.6
|
)
|
(3.4
|
)
|
(3.1
|
)
|
(2.6
|
)
|
|||||||
|
Amortization
of transition obligation
|
0.1
|
0.1
|
0.2
|
-
|
-
|
-
|
|||||||||||||
|
Amortization
of prior-service cost
|
-
|
0.5
|
2.2
|
(0.3
|
)
|
(0.1
|
)
|
(0.1
|
)
|
||||||||||
|
Amortization
of net loss
|
8.6
|
6.6
|
7.5
|
0.9
|
-
|
0.3
|
|||||||||||||
|
Curtailment
loss (gain)
|
-
|
1.1
|
0.4
|
-
|
(0.7
|
)
|
-
|
||||||||||||
|
Settlement
(gain) loss
|
(6.6
|
)
|
-
|
0.3
|
-
|
-
|
-
|
||||||||||||
|
Net
periodic benefit cost
|
$
|
8.2
|
$
|
23.2
|
$
|
26.1
|
$
|
3.9
|
$
|
2.6
|
$
|
4.9
|
|||||||
|
1
|
The
decline in service cost in 2005 for the pension benefit plans was
primarily due to the freezing of the Company's U.S. defined benefit
pension plan effective December 31,
2004.
|
|
2
|
Due
to the Company's restatement of previously issued financial statements
as
discussed in Note
2 — Restatement
certain amounts originally reported in net periodic benefit cost
for 2004
and 2003 have changed in the disclosure
above.
|
The
2005
settlement gain in the pension benefit plans was related to the divesture of
the
Company’s Woehlk subsidiary, which was sold to a local management group in July
2005. The 2004 curtailment loss in the Pension Benefit Plans primarily related
to the freezing of the Company’s U.S. defined benefit pension plan. The 2004
curtailment gain in the Postretirement Benefit Plan was associated with the
elimination of Company contributions to postretirement medical and life
insurance coverage for participants who did not meet the minimum requirements
of
age and service on January 1, 2005. The 2003 curtailment and settlement losses
in Pension Benefit Plans related to making lump-sum payments to the participants
of one of the Company's foreign plans.
Weighted
Average Assumptions Used to Determine Net Periodic Benefit
Cost
|
Pension
Benefit Plans
|
Postretirement
Benefit Plan
|
||||||||||||||||||
|
2005
|
2004
|
2003
|
2005
|
2004
|
2003
|
||||||||||||||
|
U.S.
Plans
|
|||||||||||||||||||
|
Discount
rate
|
5.75
|
%
|
6.00
|
%
|
6.75
|
%
|
5.75
|
%
|
6.00
|
%
|
6.75
|
%
|
|||||||
|
Expected
return on plan assets
|
8.75
|
%
|
9.00
|
%
|
9.00
|
%
|
7.75
|
%
|
8.00
|
%
|
8.00
|
%
|
|||||||
|
Rate
of compensation increase
|
-
|
4.00
|
%
|
4.25
|
%
|
-
|
-
|
-
|
|||||||||||
|
Non-U.S.
Plans 1
|
|||||||||||||||||||
|
Discount
rate
|
4.43
|
%
|
4.90
|
%
|
5.23
|
%
|
|||||||||||||
|
Expected
return on plan assets
|
5.96
|
%
|
6.12
|
%
|
6.07
|
%
|
|||||||||||||
|
Rate
of compensation increase
|
3.76
|
%
|
3.09
|
%
|
3.05
|
%
|
|||||||||||||
1
The
Company does not have non-U.S. postretirement benefit plans.
For
the
Company's U.S. Pension Plan, the 2005 expected return was 8.75 percent. The
expected return reflects the average rate of earnings expected on the funds
invested to provide for the benefits included in the benefit obligations. The
expected return was developed using forward-looking return assumptions for
equity and fixed income asset classes taking into consideration the plans'
mix
of actively and passively managed investments. Passively managed portfolios
with
asset allocations similar to the Company's U.S. Pension Plan would have earned
in the 9 percent to 12 percent range over the last 10, 20 and 30 years. In
view
of low current interest rates and the recent performance of the equity markets
over the last several years, the Company believes that Plan returns over the
near term may not achieve historical returns.
PAGE
100
The
following
chart summarizes the change in benefit obligations, change in plan assets,
funded status and amounts recognized in the Balance
Sheets
for the
two-year period ended December 31, 2005:
|
Pension
Benefit Plans
|
Postretirement
Benefit Plan
|
||||||||||||
|
2005
|
2004
1
(Restated)
|
2005
|
2004
|
||||||||||
|
Change
in Benefit Obligation
|
|||||||||||||
|
Obligation
at beginning of year
|
$
|
387.8
|
$
|
355.3
|
$
|
78.7
|
$
|
96.5
|
|||||
|
Service
cost
|
8.2
|
15.8
|
1.3
|
1.6
|
|||||||||
|
Interest
cost
|
19.9
|
19.4
|
5.4
|
4.9
|
|||||||||
|
Participant
contributions
|
1.8
|
1.6
|
1.2
|
1.5
|
|||||||||
|
Benefit
payments
|
(19.4
|
)
|
(20.4
|
)
|
(9.1
|
)
|
(10.0
|
)
|
|||||
|
Currency
translation adjustments
|
(13.9
|
)
|
9.1
|
-
|
-
|
||||||||
|
Curtailment
gain
|
(0.2
|
)
|
(22.4
|
)
|
-
|
(2.7
|
)
|
||||||
|
Settlement
gain
|
(8.5
|
)
|
-
|
-
|
-
|
||||||||
|
Actuarial
loss (gain)
2
|
38.2
|
29.4
|
19.8
|
(13.1
|
)
|
||||||||
|
Obligation
at end of year
|
$
|
413.9
|
$
|
387.8
|
$
|
97.3
|
$
|
78.7
|
|||||
|
Change
in Plan Assets
|
|||||||||||||
|
Fair
value of plan assets at beginning of year
|
$
|
281.7
|
$
|
239.0
|
$
|
43.6
|
$
|
37.0
|
|||||
|
Actual
gain on plan assets
|
24.9
|
31.1
|
1.2
|
6.8
|
|||||||||
|
Employer
contributions
|
19.2
|
25.6
|
7.4
|
8.3
|
|||||||||
|
Participant
contributions
|
1.8
|
1.6
|
1.2
|
1.5
|
|||||||||
|
Benefit
payments
|
(19.4
|
)
|
(20.4
|
)
|
(9.1
|
)
|
(10.0
|
)
|
|||||
|
Settlement
payments
|
(0.5
|
)
|
-
|
-
|
-
|
||||||||
|
Currency
translation adjustments
|
(8.4
|
)
|
4.8
|
-
|
-
|
||||||||
|
Fair
value of plan assets at end of year
|
$
|
299.3
|
$
|
281.7
|
$
|
44.3
|
$
|
43.6
|
|||||
|
Funded
Status at end of year
|
$
|
(114.6
|
)
|
$
|
(106.1
|
)
|
$
|
(53.0
|
)
|
$
|
(35.1
|
)
|
|
|
Unrecognized
transition obligation
|
0.2
|
0.4
|
-
|
-
|
|||||||||
|
Unrecognized
prior-service cost (benefit)
|
-
|
0.1
|
(1.2
|
)
|
(1.5
|
)
|
|||||||
|
Unrecognized
actuarial loss
|
111.6
|
89.1
|
22.1
|
1.0
|
|||||||||
|
Net
amount recognized at end of year
|
$
|
(2.8
|
)
|
$
|
(16.5
|
)
|
$
|
(32.1
|
)
|
$
|
(35.6
|
)
|
|
Amounts
recognized in the Balance
Sheets
consist of:
|
|||||||||||||
|
Prepaid
benefit cost
|
$
|
1.8
|
$
|
-
|
$
|
-
|
$
|
-
|
|||||
|
Accrued
benefit liability
|
(91.1
|
)
|
(86.9
|
)
|
(32.1
|
)
|
(35.6
|
)
|
|||||
|
Intangible
asset
|
-
|
0.6
|
-
|
-
|
|||||||||
|
Accumulated
other comprehensive loss
3
|
86.5
|
69.8
|
-
|
-
|
|||||||||
|
Net
amount recognized at end of year
|
$
|
(2.8
|
)
|
$
|
(16.5
|
)
|
$
|
(32.1
|
)
|
$
|
(35.6
|
)
|
|
1
2004
amounts reflect the Company's restatement of previously issued financial
statements as discussed in Note
2 — Restatement.
|
2
|
Unrecognized
actuarial losses increased in 2005 primarily due to reductions in
the
discount rate used to determine benefit obligations and an increase
in the
assumed life expectancy of plan participants. Unrecognized actuarial
losses are deferred and amortized to expense over future periods.
Unrecognized gains and losses that exceed ten percent of the greater
of
the plans' projected benefit obligations or the market-related value
of
assets are amortized to earnings over the shorter of the estimated
future
service period of the plan participants or the period until any
anticipated final plan settlements.
|
3
The
tax
benefits related to the accumulated other comprehensive loss are $22.9 and
$26.2
for 2005 and 2004, respectively.
PAGE
101
Weighted
Average Assumptions Used to Determine Benefit Obligations
|
Pension
Benefit Plans
|
Postretirement
Benefit Plan
|
||||||||||||
|
2005
|
2004
|
2005
|
2004
|
||||||||||
|
U.S.
Plans
|
|||||||||||||
|
Discount
rate
|
5.50
|
%
|
5.75
|
%
|
5.50
|
%
|
5.75
|
%
|
|||||
|
Rate
of compensation increase
1
|
-
|
-
|
-
|
-
|
|||||||||
|
Non-U.S.
Plans 2
|
|||||||||||||
|
Discount
rate
|
3.89
|
%
|
4.43
|
%
|
|||||||||
|
Rate
of compensation increase
|
3.71
|
%
|
3.76
|
%
|
|||||||||
|
1
|
The
rate of compensation increase assumption is not applicable to the
U.S.
Plans since plan participants are accruing no additional benefits
except
for an interest allocation on the December 31, 2004 account
balance.
|
2
The
Company does not have non-U.S. postretirement benefit plans.
Plan
Assets Pension
and postretirement benefit plan assets are invested in several asset classes.
The weighted average asset allocations for the two-year period ended December
31, 2005, by asset category, are as follows:
|
Pension
Benefit Plans
|
Postretirement
Benefit Plan
|
||||||||||||
|
2005
|
2004
|
2005
|
2004
|
||||||||||
|
U.S.
Plans
|
|||||||||||||
|
Equity
securities
|
72
|
%
|
74
|
%
|
97
|
%
|
97
|
%
|
|||||
|
Fixed
income (debt) securities
|
28
|
%
|
26
|
%
|
3
|
%
|
3
|
%
|
|||||
|
Total
|
100
|
%
|
100
|
%
|
100
|
%
|
100
|
%
|
|||||
|
Non-U.S.
Plans 1
|
|||||||||||||
|
Equity
securities
|
69
|
%
|
65
|
%
|
|||||||||
|
Fixed
income (debt) securities
|
20
|
%
|
19
|
%
|
|||||||||
|
Other
|
11
|
%
|
16
|
%
|
|||||||||
|
Total
|
100
|
%
|
100
|
%
|
|||||||||
1 The
Company does not have non-U.S. postretirement benefit plans.
The
Company's U.S. Pension Plan has a target asset allocation of 60 percent U.S.
equity securities, 10 percent non-U.S. equity securities and 30 percent fixed
income (debt) securities. Approximately 70 percent of U.S. equity securities
are
passively managed; the remainder of plan assets are actively
managed.
U.S.
equity securities are diversified among large-, mid- and small-cap value and
growth strategies. Non-U.S. equity securities are invested in a broad range
of
equity securities diversified among equity style and geographic location. Fixed
income (debt) securities are invested in investment grade bonds and similar
instruments.
Equity
securities held by the U.S. Pension Benefit Plan include $3.6 (1.7 percent
of
total plan assets) and $3.4 (1.8 percent of total plan assets) of Company Common
stock at December 31, 2005 and December 25, 2004, respectively.
Plan
Funded Status
A number
of the Company’s pension benefit plans were underfunded at December 31, 2005,
having accumulated benefit obligations exceeding the fair value of plan assets.
Information for the underfunded plans is presented in the following
table:
|
Pension
Benefit Plans
|
|||||||
|
2005
|
2004
(Restated)
|
||||||
|
Projected
benefit obligation
|
$
|
400.8
|
$
|
387.8
|
|||
|
Accumulated
benefit obligation
|
377.9
|
368.5
|
|||||
|
Fair
value of plan assets
|
286.9
|
281.7
|
|||||
PAGE
102
As
a
result of the underfunding of the pension benefit plans, the Company has
recognized accumulated other comprehensive loss of $86.5 at December 31, 2005.
Accumulated other comprehensive loss recognized at December 25, 2004 was $69.8.
The increase in accumulated other comprehensive loss in 2005 resulted in an
after-tax adjustment to the minimum additional pension liability of $20.0 that
was recorded as a decrease to shareholders’ equity. The 2005 increase in
accumulated other comprehensive loss related primarily to reductions in the
discount rate used to determine benefit obligations, an increase in the assumed
life expectancy of plan participants and the valuation allowance recorded on
U.S. deferred tax assets (see Note
10 — Provision for Income Taxes).
Information
for pension benefit plans that are underfunded on a projected benefit obligation
basis is presented below:
|
Pension
Benefit Plans
|
|||||||
|
2005
|
2004
(Restated)
|
||||||
|
Projected
benefit obligation
|
$
|
413.9
|
$
|
387.8
|
|||
|
Fair
value of plan assets
|
299.3
|
281.7
|
|||||
The
Company’s postretirement benefit plan was underfunded for each of the past two
years.
The
accumulated benefit obligation for both the funded and underfunded pension
benefit plans was $388.3 and $368.5 at December 31, 2005 and December 25, 2004
(restated), respectively.
Contributions
The
Company’s funding policy for its pension benefit plans is to make contributions
that meet or exceed the minimum statutory funding requirements. These
contributions are determined based upon recommendations made by the actuary
under accepted actuarial principles. Company contributions for its
postretirement plan are made at intervals and in amounts determined by the
plan
administrator, based on actual claims incurred and reported by participants
and
providers. The Company contributed $10.2 to all pension benefit plans and $6.3
to its postretirement benefit plan in 2006.
Estimated
Future Benefit Payments
Future
benefit payments, which reflect expected future service, as appropriate, are
expected to be paid as follows:
|
Postretirement
Benefit Plan
|
||||||||||
|
Fiscal
Year Ending
|
Pension
Benefit Plans
|
Benefit
Payments
|
Subsidy
Receipts
|
|||||||
|
December
30, 2006
|
$
|
23.5
|
$
|
7.6
|
$
|
0.6
|
||||
|
December
29, 2007
|
23.8
|
7.8
|
0.6
|
|||||||
|
December
27, 2008
|
23.5
|
8.1
|
0.6
|
|||||||
|
December
26, 2009
|
25.2
|
8.2
|
0.6
|
|||||||
|
December
25, 2010
|
22.2
|
8.4
|
0.6
|
|||||||
|
Fiscal
years 2011 - 2015
|
114.6
|
41.7
|
2.8
|
|||||||
Health
Care Cost Trend Rate
Assumed
health care cost trend rates have a significant effect on the amounts reported
as postretirement benefits. For 2005, a 10 percent annual rate of increase
in
the per capita cost of covered health care benefits for all participants was
assumed. The trend rate grades down by up to one percent per year to an ultimate
annual rate of five percent in 2013. To demonstrate the significance of this
rate on the expense reported, a one-percentage point change in the assumed
health care cost trend rate would have the following effect:
|
1%
Increase
|
1%
Decrease
|
||||||
|
Effect
on total service and interest cost components of net periodic
postretirement health care benefit cost
|
$
|
0.7
|
$
|
(0.6
|
)
|
||
|
Effect
on the health care component of the accumulated postretirement benefit
obligation
|
8.6
|
(7.3
|
)
|
||||
PAGE
103
Defined
Contribution Plans The
Company sponsors a 401(k) Plan which is a defined contribution plan covering
substantially all U.S. employees of the Company. In 2005, the 401(k) Plan became
the Company’s principal vehicle for providing retirement income to U.S.
employees, replacing the defined benefit pension plan that was frozen effective
December 31, 2004. Employees may elect to participate in the plan on their
date
of hire if they are scheduled to work at least 1,000 hours per plan year. In
general, participants’ contributions up to 5.0 percent of compensation qualify
for 150 percent Company match. The Company also provides a base contribution
of
2.5 percent of a participant’s eligible compensation. Prior to January 1, 2005,
the 401(k) Plan provided a 100 percent Company match on participants’
contributions up to 3.0 percent of compensation and a 50 percent Company match
for the next 2.0 percent of participant contributions. Additionally, the Company
provided a base contribution of 0.5 percent of eligible compensation for all
participants that had completed one year of service. The Company sponsors
defined contribution plans covering employees outside the U.S. which are managed
on a local basis.
Total
Company costs associated with defined contribution plans were $32.4, $13.5
and
$11.6 for 2005, 2004 and 2003, respectively.
15.
Employee
Stock Plans
2003
Long-Term Incentive Plan The
2003
Long-Term Incentive Plan was approved by the shareholders of the Company on
April 29, 2003 and will terminate on April 29, 2013. Under this plan, a total
of
6,000,000 shares were authorized for issuance, of which no more than 1,800,000
shares may be issued pursuant to awards other than options and stock
appreciation rights. Any employee or non-employee director is eligible to
participate under the plan. Any shares issued may consist, in whole or in part,
of authorized and unissued shares, treasury shares or shares purchased in the
open market or otherwise. Stock options, stock appreciation rights, restricted
stock, performance awards and other stock unit awards may be granted under
such
plan. As of December 31, 2005, the Company had issued stock options, restricted
stock, restricted stock units and performance-based stock units under the
plan.
Prior
to
the 2003 Long-Term Incentive Plan, the Company provided shares available for
grant in each calendar year, equal to three percent of the total number of
outstanding shares of Common stock as of the first day of each such year, under
its Stock Incentive Plan, which had an evergreen provision. In October 2002,
the
Company's Board of Directors amended the plan to eliminate the evergreen feature
and provide a pool of shares of 1,600,000 to be available for future grants.
As
of the adoption of the 2003 Long-Term Incentive Plan on April 29, 2003, no
additional shares will be issued under this plan.
The
Company had also adopted a stock incentive plan for non-officers effective
January 22, 2001. The number of shares available for grant each year were no
greater than two percent of the total number of outstanding shares of Common
stock as of the first day of each such year. Options and awards under this
plan
were granted only to employees of the Company or any subsidiary corporation
of
the Company who were neither officers nor directors of the Company. Effective
January 1, 2003, no additional shares will be issued under this
plan.
Stock
Options
The
Company has granted stock options under the plans discussed above. These options
typically vest ratably over three years for employee options and 100% after
one
year for non-employee director options, and they expire ten years from the
date
of grant. For employee options, vesting is contingent upon a continued
employment relationship with the Company. (See Note
1 — Significant Accounting Policies
for a
discussion relating to the Company's accounting for stock-based employee
compensation plans).
For
purposes of this disclosure in accordance with the requirements under SFAS
No.
123, Accounting
for Stock-Based Compensation,
the
fair value of each fixed option grant was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants issued each year:
|
2005
|
2004
|
2003
|
||||||||
|
Risk-free
interest rate
|
4.33
|
%
|
3.06
|
%
|
3.37
|
%
|
||||
|
Dividend
yield
|
1.13
|
%
|
1.18
|
%
|
1.18
|
%
|
||||
|
Volatility
factor
|
34.61
|
%
|
35.97
|
%
|
36.02
|
%
|
||||
|
Weighted
average expected life (years)
|
5
|
6
|
6
|
|||||||
|
Weighted
average fair value
|
$
|
24.47
|
$
|
19.19
|
$
|
10.98
|
||||
PAGE
104
A
summary
of the status of the Company's fixed stock option plans at year-end 2005, 2004
and 2003 is presented below:
|
2005
|
2004
|
2003
|
|||||||||||||||||
|
Numbers
of Shares (000s)
|
Weighted
Average Exercise Price (Per Share)
|
Number
of Shares (000s)
|
Weighted
Average Exercise Price (Per Share)
|
Number
of Shares (000s)
|
Weighted
Average Exercise Price (Per Share)
|
||||||||||||||
|
Outstanding
at beginning of year
|
6,521
|
$
|
45.31
|
7,530
|
$
|
43.66
|
7,060
|
$
|
46.60
|
||||||||||
|
Granted
|
979
|
72.56
|
1,125
|
54.86
|
1,444
|
30.65
|
|||||||||||||
|
Exercised
|
(1,569
|
)
|
44.40
|
(1,853
|
)
|
42.27
|
(312
|
)
|
38.97
|
||||||||||
|
Forfeited
and canceled
|
(107
|
)
|
54.83
|
(281
|
)
|
60.62
|
(662
|
)
|
48.68
|
||||||||||
|
Outstanding
at year end
|
5,824
|
49.96
|
6,521
|
45.31
|
7,530
|
43.66
|
|||||||||||||
|
Options
exercisable at year end
|
3,781
|
$
|
45.67
|
3,996
|
$
|
46.94
|
4,680
|
$
|
48.80
|
||||||||||
The
following represents additional information about fixed stock options
outstanding at December 31, 2005:
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||
|
Range
of Exercise Prices (Per Share)
|
Number
Outstanding (000s)
|
Weighted
Average Remaining Contractual Life (Years)
|
Weighted
Average Exercise Price (Per Share)
|
Number
Exercisable (000s)
|
Weighted
Average Exercise Price (Per Share)
|
|||||||||||
|
$26.00
to 40.49
|
2,356
|
6.3
|
$
|
34.15
|
1,928
|
$
|
34.97
|
|||||||||
|
40.50
to 45.49
|
556
|
4.2
|
44.22
|
553
|
44.23
|
|||||||||||
|
45.50
to 55.49
|
1,043
|
7.0
|
53.64
|
442
|
52.84
|
|||||||||||
|
55.50
to 65.49
|
523
|
5.2
|
61.50
|
461
|
61.78
|
|||||||||||
|
65.50
to 75.49
|
1,292
|
7.3
|
72.24
|
397
|
72.96
|
|||||||||||
|
75.50
to 83.55
|
54
|
9.6
|
83.55
|
-
|
-
|
|||||||||||
|
5,824
|
6.4
|
$
|
49.96
|
3,781
|
$
|
45.67
|
||||||||||
Restricted
Stock The
Company issues restricted stock awards to officers and other key personnel.
These awards have vesting periods up to seven years with vesting criteria based
on continued employment until applicable vesting dates and, with respect to
certain awards prior to 2005, on the attainment of specific performance goals
such as average sales and cumulative earnings per share targets. Compensation
expense is recorded based on applicable vesting criteria and, for awards prior
to 2005 with performance goals, as such goals are met. During 2005, 2004 and
2003, 89,750, 42,300 and 103,800 shares related to such awards were granted
at
weighted average market values of $74.54, $54.67 and $40.25 per share,
respectively. As of December 31, 2005, 288,211 awards remain
outstanding.
Performance
Awards
The
Company issues performance-unit or performance-share awards to its corporate
officers and other key executives selected by the Company’s CEO. Performance
awards vest 50 percent upon completion of a performance cycle and 50 percent
on
the first anniversary of completion of a performance cycle. Performance cycles
are typically two years, with a new cycle beginning upon completion of the
prior
cycle. Performance awards are paid in cash or shares on the attainment of
vesting criteria and specific performance measures such as average sales growth
and return on invested capital. For the 2004-2005-performance period,
cash-denominated awards were granted in 2004 with a total value for the two-year
cycle of $9.5. In 2005, additional awards were granted to newly hired officers
for a one-year cycle valued at approximately $0.3. During 2004 and 2003,
performance-share awards of 1,800 and 7,700 were granted to newly hired
employees with average market values of $52.79 and $29.85,
respectively.
Employee
Stock Purchase Plan
The
Company has a stock purchase plan for all eligible employees. Shares of the
Company’s Common stock may be purchased by employees at the market price on the
first business day of the month.
PAGE
105
16.
Operating
Leases
The
Company leases land, buildings, machinery and equipment under noncancelable
operating leases. Total annual rental expense for 2005, 2004 and 2003 amounted
to $28.2, $31.3 and $28.0, respectively.
Minimum
future rental commitments having noncancelable lease terms in excess of one
year
aggregated $75.5, net of aggregated sublease rentals of $1.8 as of December
25,
2005 and are payable as follows: 2006, $23.3; 2007, $15.7; 2008, $11.9; 2009,
$8.2; 2010, $6.9 and beyond, $9.5.
17.
Commitments
and Contingencies
Subsidiary
Debt Guarantees The
Company guarantees in writing for its subsidiaries certain indebtedness used
for
working capital and other obligations. Those written guarantees totaled
approximately $482.2 and $24.3 at December 31, 2005 and December 25, 2004,
respectively. The increase from 2004 to 2005 is principally attributed to the
Company’s agreement to guarantee a July 2005 bank term loan facility on behalf
of its Japan subsidiary, a December 2005 bank term loan facility on behalf
of
its Dutch subsidiary and a December 2005 bank line of credit on behalf of its
Hong Kong subsidiary. The Hong Kong line of credit was to partially fund the
acquisition of an additional 15 percent interest in Freda (further described
in
Note
11 — Debt).
Outstanding balances under the guaranteed debt facilities were $449.9 at
December 31, 2005 of which $26.8 was repaid by the Hong Kong subsidiary in
January 2006. There were no outstanding balances at December 25, 2004. From
time
to time, the Company may also make verbal assurances with respect to
indebtedness of its subsidiaries under certain lines of credit, also used for
working capital.
Letters
of Credit
The
Company had outstanding standby letters of credit totaling approximately $22.2
and $20.8 at the end of 2005 and 2004, respectively, to ensure payment of
possible workers' compensation, product liability and other insurance claims.
At
the end of 2005 and 2004, the Company had recorded liabilities of approximately
$9.9 and $11.1, respectively, related to workers' compensation, product
liability and other insurance claims.
Guarantees
As
of
December 25, 2004, the Company guaranteed a real property mortgage loan of
a
research and development partner. The mortgage was secured by the property
with
an appraised value of $4.0. The principal balance of the guaranteed loan totaled
approximately $3.5 at December 25, 2004. In April 2005, the research partner
sold the property and the outstanding debt was retired, thereby terminating
the
guarantee. The Company had not recorded any liabilities under this
guarantee.
The
Company guarantees a lease obligation of a customer in connection with a joint
marketing alliance. The lease obligation has a term of ten years expiring
November 2011. The amount guaranteed at the end of 2005 and 2004 was
approximately $8.2 and $10.0, respectively. In the event of default, the
guarantee would require payment from the Company. Sublease rights as specified
under the agreement would reduce the Company's exposure. The Company believes
the likelihood is remote that material payments will be required in connection
with this guarantee and, therefore, has not recorded any liabilities under
this
guarantee.
Tax
Indemnifications
In
connection with divestitures, the Company has agreed to indemnify certain tax
obligations arising out of tax audits or administrative or court proceedings
relating to tax returns for any periods ending on or prior to the closing date
of the respective divestiture. The Company believes that any claim would not
have a material impact on the Company's financial position. The Company has
not
recorded any liabilities associated with these claims.
Environmental
Indemnifications
The
Company has certain obligations for environmental remediation and Superfund
matters related to current and former Company sites. The Company has an ongoing
program in place designed to identify and manage potential environmental
liabilities through such actions as having a rotating schedule of regular
assessments performed to identify and manage potential issues at Company sites
before they occur, a domestic waste disposal contract which contains
indemnification of the Company from the vendor for disposal of all waste once
it
leaves Company property, a regular schedule of training and prevention programs
designed to keep employees in Company sites aware of their responsibilities,
an
environmental due diligence for business acquisitions and real estate
transactions and ongoing tracking of significant laws and regulations affecting
the Company in any of the countries where it operates. In those instances where
the Company may identify environmental liability, the Company manages directly
all remedial investigations, negotiation of approved remediation plans with
applicable governmental authorities and implementation of all approved
remediation activities.
PAGE
106
At
December 31, 2005 and December 25, 2004, estimated future remediation costs
of
approximately $1.1 and $0.6, respectively, were accrued by the Company,
excluding estimates for legal expenses. The estimate for future remediation
costs follows guidelines established by the American Standards for Testing
and
Materials (ASTM) Document E2137-01. All known current potential Company
environmental liabilities are considered in this estimate. It is reasonable
to
expect that the Company's recorded estimates of its liabilities may change
and
there is no assurance that additional costs greater than the amounts accrued
will not be incurred, or that changes in environmental laws or their
interpretation will not require additional amounts to be spent. The Company
does
not believe that its financial position, results of operations, and cash flows
are likely to be materially affected by environmental liabilities.
Other
Commitments and Contingencies The
Company is involved in lawsuits, claims, investigations and proceedings,
including patent, trademark, commercial and environmental matters, which are
being handled and defended in the ordinary course of business. Pending material
litigation matters are discussed further in Note
21 — Other Matters.
In
addition to pending litigation matters, the Company may from time to time learn
of alleged non-compliance with laws or regulations or other improprieties
through compliance hotlines, communications by employees, former employees
or
other third parties, as a result of its internal audit procedures, or otherwise.
As disclosed in Note
2 — Restatement,
in
response to such allegations, the Company’s Audit Committee conducted certain
investigations during 2005 and 2006, which led, among other things, to the
restatement of previously reported financial information and the recording
of
current charges. The restatement, in turn, resulted in the Company’s being
unable to file timely certain periodic financial information and the Company’s
obtaining certain waivers from creditors as well as an extension from the NYSE
to permit continued trading notwithstanding the delay in filing the Company’s
2005 Annual Report on Form 10-K.
The
Audit
Committee of the Board of Directors is currently investigating the potential
U.S. Foreign Corrupt Practices Act implications of the Company’s Spanish
subsidiary’s providing free product, principally intraocular lenses used in
cataract surgery, and other things of value to doctors performing surgical
procedures at public hospitals in Spain. This investigation was initiated
following reports of potentially improper sales practices by a former employee.
The investigation of the Company’s Spanish subsidiary has been voluntarily
reported to the Northeast Regional Office of the SEC. We cannot predict the
outcome of this pending investigation, and at this time cannot reasonably
estimate the potential liability of the Company or its Spanish subsidiary in
connection with these matters.
The
Company’s policy is to comply with applicable laws and regulations in each
jurisdiction in which it operates and, if the Company becomes aware of a
potential or alleged violation, to conduct an appropriate investigation, to
take
appropriate remedial action and to cooperate fully with any related governmental
inquiry. There can be no assurance that any pending or future investigation
or
resulting remedial action will not have a material adverse financial,
operational or other effect on the Company. The Company cannot at this time
estimate with any certainty the impact of any pending litigation matters,
allegations of non-compliance with laws or regulations or allegations of other
improprieties on its financial position (see Note
21 — Other Matters for
further discussion).
Product
Warranties
The
Company estimates future costs associated with expected product failure rates,
material usage and service costs in the development of its warranty obligations.
Warranty reserves are established based on historical experience of warranty
claims and generally will be estimated as a percentage of sales over the
warranty period or as a fixed dollar amount per unit sold. In the event that
the
actual results of these items differ from the estimates, an adjustment to the
warranty obligation would be recorded. Changes in the Company's product warranty
liability during 2004 and 2005 were as follows:
|
Balance
at December 27, 2003 (Restated)
|
$
|
8.0
|
||
|
Accruals
for warranties issued
|
6.7
|
|||
|
Changes
in accruals related to pre-existing warranties
|
(1.0
|
)
|
||
|
Settlements
made
|
(5.9
|
)
|
||
|
Balance
at December 25, 2004 (Restated)
|
$
|
7.8
|
||
|
Accruals
for warranties issued
|
6.9
|
|||
|
Changes
in accruals related to pre-existing warranties
|
(2.1
|
)
|
||
|
Settlements
made
|
(6.7
|
)
|
||
|
Balance
at December 31, 2005 1
|
$
|
5.9
|
|
1
|
Warranty
reserve changes during 2005 and the 2005 year end balance do not
include
amounts in connection with the MoistureLoc
recall.
|
PAGE
107
Deferred
Service Revenue
Service
revenues are derived from service contracts on surgical equipment sold to
customers and are recognized over the term of the contracts while costs are
recognized as incurred. Changes in the Company's deferred service revenue during
2004 and 2005 were as follows:
|
Balance
at December 27, 2003 (Restated)
|
$
|
6.5
|
||
|
Accruals
for service contracts
|
14.0
|
|||
|
Changes
in accruals related to pre-existing service contracts
|
(0.3
|
)
|
||
|
Revenue
recognized
|
(12.5
|
)
|
||
|
Balance
at December 25, 2004 (Restated)
|
$
|
7.7
|
||
|
Accruals
for service contracts
|
11.8
|
|||
|
Revenue
recognized
|
(12.6
|
)
|
||
|
Balance
at December 31, 2005
|
$
|
6.9
|
18.
Forward
Equity Contracts
During
2001, the Company's Board of Directors authorized the repurchase of up to
2,000,000 shares of the Company's Common stock. The Company executed an
agreement with a financial institution for the future purchase of such shares
through one or more forward purchase transactions. Such purchases, which may
have had settlement dates as long as two years, could have been settled, at
the
Company's election, on a physical share, net cash or net share basis. During
March 2003, at the expiration of the forward purchase agreement, the Company
paid $30.7 for 750,000 shares, at an average price of $40.89 to settle its
obligation. This repurchase of Common stock was recorded as treasury stock
in
the Company's consolidated financial statements during the quarter ended March
29, 2003.
19.
Supplemental
Balance Sheet Information
|
December
31, 2005
|
December
25, 2004
(Restated)
|
December
27, 2003
(Restated)
|
||||||||
|
Allowances
for Losses on Trade Receivables
|
||||||||||
|
Balance
at beginning of year
|
$
|
22.1
|
$
|
20.6
|
$
|
25.1
|
||||
|
Change
in provision
|
(0.6
|
)
|
4.2
|
2.9
|
||||||
|
Gross
write-offs of trade receivables accounts
|
(5.4
|
)
|
(4.0
|
)
|
(9.3
|
)
|
||||
|
Recoveries
on trade receivables accounts previously written off
|
1.2
|
0.6
|
0.1
|
|||||||
|
Currency
effect
|
(1.1
|
)
|
0.7
|
1.8
|
||||||
|
Balance
at end of year
|
$
|
16.2
|
$
|
22.1
|
$
|
20.6
|
||||
|
December
31, 2005
|
December
25, 2004
(Restated)
|
||||||
|
Inventories,
net
|
|||||||
|
Raw
materials and supplies
|
$
|
51.4
|
$
|
50.0
|
|||
|
Work
in process
|
19.5
|
17.8
|
|||||
|
Finished
products
|
148.9
|
144.3
|
|||||
|
$
|
219.8
|
$
|
212.1
|
||||
PAGE
108
|
December
31, 2005
|
December
25, 2004
(Restated)
|
||||||
|
Property,
Plant and Equipment, net
|
|||||||
|
Land
|
$
|
20.0
|
$
|
19.1
|
|||
|
Buildings
|
344.8
|
341.5
|
|||||
|
Machinery
and equipment
|
998.2
|
972.7
|
|||||
|
Leasehold
improvements 1
|
25.5
|
28.7
|
|||||
|
Equipment
on operating lease 2
|
14.4
|
16.5
|
|||||
|
1,402.9
|
1,378.5
|
||||||
|
Less
accumulated depreciation
|
(798.5
|
)
|
(797.7
|
)
|
|||
|
$
|
604.4
|
$
|
580.8
|
||||
|
1
|
Upon
initial application of SFAS No. 143, Accounting
for Asset Retirement Obligations,
the Company recorded an initial liability and an increase to leasehold
improvements of $1.8. Cumulative accretion and accumulated depreciation
were measured from the commencement date of the leases to the date
of
adoption. A cumulative charge of initially applying this statement
of
$0.9, net of tax, was reported in the first quarter of 2003 as a
change in
accounting principle in the Statements of
Income.
|
|
2
|
See
Note
6 — Net Investment in Sales-Type and Operating Leases
for additional information regarding equipment on operating
lease.
|
20.
Restructuring
Charges and Asset Write-offs
Profitability
Improvement Program and Transfer of PureVision
Contact Lens Manufacturing In
July
2002, the Company announced plans to improve operating profitability through
a
comprehensive plan which included
plant
closures
and consolidations; manufacturing efficiencies and yield enhancements;
procurement process enhancements; the rationalization of certain contact lens
and surgical product lines; distribution initiatives; and the development of
a
global information technology (IT) platform. These plans included the
elimination of approximately 465 jobs worldwide associated with those actions.
Restructuring charges and asset write-offs of $22.8 before taxes associated
with
these initiatives were recorded in the third quarter of 2002. The Company also
recorded a pre-tax amount of $3.7 during the third quarter of 2002 for severance
associated with the elimination of approximately 145 jobs due to the transfer
of
PureVision
extended
wear contact lens manufacturing from the United States to Waterford, Ireland
following a ruling against the Company in a U.S. patent law suit. During the
fourth quarter of 2003, the Company reversed $6.3 in severance charges as
certain termination actions and plant closures did not occur due to an increased
demand for certain product lines.
At
the
conclusion of the Profitability Improvement Program and the transfer of
PureVision
contact
lens manufacturing, 468 jobs were eliminated. Related expenses of $16.8 and
$3.4
of asset write-offs were charged against the liability. Cash payments for
severance and other related expenses were $10.8 and $6.0 in 2003 and 2002,
respectively. All actions related to this restructuring plan were completed
by
the end of 2003.
21.
Other
Matters
Legal
Matters
The
Company is involved as a party in a number of material matters in litigation,
including general litigation related to the restatement of the Company's
financial information and the MoistureLoc
withdrawal, material intellectual property litigation, and material tax
litigation. The Company intends to vigorously defend itself in all of these
matters. At this time, the Company is unable to predict the outcome of, and
cannot reasonably estimate the impact of, any pending litigation matters,
matters concerning allegations of non-compliance with laws or regulations,
and
matters concerning other allegations of other improprieties. The Company has
not
made any financial provision for potential liability in connection with these
matters.
PAGE
109
Shareholder
Securities Class Actions
There is
a consolidated securities class action, entitled In
re
Bausch & Lomb Incorporated Securities Litigation,
Case
Nos. 06-cv-6294 (master file), 06-cv-6295, 06-cv-6296, and 06-cv-6300, pending
in Federal District Court for the Western District of New York, Rochester
Division, against the Company and certain present and former officers and
directors. Initially, four separate shareholder actions were filed between
March
and May of 2006 in Federal District Court for the Southern District of New
York,
and these were later transferred to the Western District of New York and
consolidated into the above-captioned matter. Plaintiffs in these actions
purport to represent a putative class of shareholders who purchased Company
stock at allegedly artificially inflated levels between January 27, 2005 and
May
3, 2006. Among other things, plaintiffs allege that defendants issued materially
false and misleading public statements regarding the Company's financial
condition and operations by failing to disclose negative information relating
to
the Company's Brazilian and Korean subsidiaries, internal controls, and problems
with MoistureLoc,
thereby
inflating the price of Company stock during the alleged class period. Plaintiffs
seek unspecified damages. The cases are currently awaiting appointment of lead
plaintiff and lead plaintiff's counsel in accordance with the Private Securities
Litigation Reform Act. Pursuant to a stipulated schedule ordered by the Court,
the lead plaintiff appointed by the Court must file a consolidated amended
complaint by the earlier of (a) 45 days after the Company files its Annual
Report on Form 10-K for the year ended December 31, 2005, or (b) 90 days after
entry of the Court's order appointing the lead plaintiff, provided, however,
that, at a minimum, the lead plaintiff will have 45 days after entry of the
Court's order appointing the lead plaintiff to file such consolidated amended
complaint.
ERISA-Based
Class Actions
There is
a consolidated ERISA class action, entitled In
re
Bausch & Lomb Incorporated ERISA Litigation,
Case
Nos. 06-cv-6297 (master file), 06-cv-6315, and 06-cv-6348, pending in the
Federal District Court for the Western District of New York, Rochester Division,
against the Company and certain present and former officers and directors.
Initially, three separate actions were filed between April and May of 2006
in
the Federal District Court for the Southern District of New York, and these
were
later transferred to the Western District of New York and consolidated into
the
above-captioned matter. Plaintiffs in these actions purport to represent a
class
of participants in the Company's defined contribution 401(k) Plan for whose
individual accounts the plan held an interest in Company stock between May
25,
2000 and the present. Among other things, plaintiffs allege that the defendants
breached their fiduciary duties to plan participants by allowing the plan to
invest in Company Common stock despite the fact that it was allegedly
artificially inflated due to the failure to disclose negative information
relating to the Company's Brazilian and Korean subsidiaries, internal controls,
and problems with MoistureLoc.
Plaintiffs seek unspecified damages as well as certain declaratory and
injunctive relief. On August 28, 2006, the Court entered an order appointing
co-lead plaintiffs and co-lead plaintiffs' counsel. Pursuant to a stipulated
schedule ordered by the Court, plaintiffs in the consolidated ERISA action
will
have until 10 days after a consolidated amended complaint is filed in the
consolidated securities action described above, to file a consolidated amended
complaint.
Shareholder
Derivative Actions
The
shareholder derivative actions, in which a shareholder seeks to assert the
rights of the Company derivatively against certain present and former officers
and directors, fall into two categories: (a) those asserting allegations
relating to accounting issues at the Company's Brazilian and Korean
subsidiaries; and (b) those asserting allegations relating to the MoistureLoc
withdrawal.
There
is
a consolidated derivative action asserting allegations relating to accounting
issues at the Company's Brazilian and Korean subsidiaries, entitled In
re
Bausch & Lomb Incorporated Derivative Litigation,
Case
Nos. 06-cv-6298 (master file) and 06-cv-6299, pending in Federal District Court
for the Western District of New York, Rochester Division, against certain
present and former officers and directors of the Company, and also naming the
Company as nominal defendant. Initially, two separate derivative actions were
filed in April 2006 in Federal District Court for the Southern District of
New
York, and were later transferred to the Western District of New York and
consolidated. Among other things, plaintiffs allege that the individual
defendants breached their fiduciary duties to the Company by causing or allowing
the Company to issue materially false and misleading public statements regarding
the Company's financial condition and operations that failed to disclose
negative information about the Company's Brazilian and Korean subsidiaries
and
internal controls, thereby inflating the price of Company stock during the
relevant time period. Plaintiffs purport to allege damage to the Company as
a
result of, among other things, a decrease in the Company's market
capitalization, exposure to liability in securities fraud actions, and the
costs
of internal investigations and financial restatements. Plaintiffs seek
unspecified damages as well as certain declaratory and injunctive relief,
including for misappropriation of inside information for personal benefit by
certain of the individual defendants. Pursuant to a stipulated schedule ordered
by the Court, plaintiffs in this consolidated derivative action will have until
30 days after a consolidated amended complaint is filed in the consolidated
securities action described above, to file a consolidated amended
complaint.
PAGE
110
On
January 3, 2006, the Company received a demand letter dated December 28, 2005,
from a law firm not involved in the derivative actions described above, on
behalf of a shareholder who also is not involved in the derivative actions,
demanding that the Board of Directors bring claims on behalf of the Company
based on allegations substantially similar to those that were later alleged
in
the two derivative actions relating to accounting issues at the Brazilian and
Korean subsidiaries. In response to the demand letter, the Board of Directors
adopted a board resolution establishing an Evaluation Committee (made up of
independent directors) to investigate, review and analyze the facts and
circumstances surrounding the allegations made in the demand letter, but
reserving to the full Board authority and discretion to exercise its business
judgment in respect of the proper disposition of the demand. The Committee
has
engaged independent outside counsel to advise it.
There
are
also two purported derivative actions asserting allegations relating to the
MoistureLoc
withdrawal. The first case, entitled Little
v. Zarrella,
Case
No. 06-cv-6337, was filed in June 2006 in the Federal District Court for the
Southern District of New York and was transferred to the Western District of
New
York, Rochester Division, where it is currently pending against certain
directors of the Company, and also naming the Company as nominal defendant.
The
second case, entitled Pinchuck
v. Zarrella,
Case
No. 06-6377, was filed in June 2006 in the Supreme Court of the State of New
York, County of Monroe, where it is currently pending against the directors
of
the Company, and also naming the Company as nominal defendant. Among other
things, plaintiffs in these actions allege that the individual defendants
breached their fiduciary duties to the Company in connection with the Company's
handling of the MoistureLoc
withdrawal. Plaintiffs purport to allege damage to the Company as a result
of,
among other things, costs of litigating product liability and personal injury
lawsuits, costs of the product recall, costs of carrying out internal
investigations, and the loss of goodwill and reputation. Plaintiffs seek
unspecified damages as well as certain declaratory and injunctive
relief.
Pursuant
to a stipulated schedule ordered by the Court, plaintiff in the state-court
Pinchuck
action
served an amended complaint on September 15, 2006 and defendants served a motion
to dismiss the amended complaint on November 15, 2006; plaintiff's opposition
to
the motion was served on January 15, 2007, and defendants' reply is due February
15, 2007. Pursuant to a stipulated schedule ordered by the Court in the federal
Little
action,
plaintiff in that case will have until 60 days after a ruling on a motion to
dismiss in the consolidated securities action is entered or, if no such motion
is filed, 60 days after defendants' answer to a consolidated amended complaint
in the consolidated securities action is filed, to file an amended
complaint.
Product
Liability Lawsuits
As of
February 1, 2007, the Company has been served or is aware that it has been
named
as a defendant in approximately 196 product liability lawsuits pending in
various federal and state courts as well as certain other non-U.S.
jurisdictions. Of the 196 cases, 117 actions have been filed in U.S. federal
courts, 77 cases have been filed in various U.S. state courts and two actions
have been filed in non-U.S. jurisdictions. These also include 170 individual
actions filed on behalf of individuals who claim they suffered personal injury
as a result of using a ReNu
solution
and 26 putative class actions alleging personal injury as a result of using
a
ReNu
solution
and/or violations of one or more state consumer protection statutes. In the
personal injury actions, plaintiffs allege liability based on, among other
things, negligence, strict product liability, failure to warn, and breach of
warranty. In the consumer protection actions, plaintiffs seek economic damages,
claiming that they were misled to purchase products that were not as safe as
advertised. Several lawsuits contain a combination of these allegations. On
August 14, 2006, the Judicial Panel on Multidistrict Litigation (JPML)
created a coordinated
proceeding and
transferred an initial set of MoistureLoc
product
liability lawsuits to the U.S. District Court for the District of South
Carolina. The
Company has advised the JPML of all federal cases available for transfer and
has
urged the issuance of conditional transfer orders. As of February 1, 2007,
104
of the 117 federal cases noted above have been transferred to the
JPML.
Material
Intellectual Property Litigation
In
October 2005, Rembrandt Vision Technologies, L.P. filed a patent infringement
lawsuit against the Company and CIBA Vision Corporation. The action is entitled,
Rembrandt
Vision Technology, L.P. v. Bausch & Lomb Incorporated and CIBA Vision
Corporation,
bearing
case number 2:05 CV 491, and is pending in the U.S. District Court for the
Eastern District of Texas (Marshall Division). Rembrandt asserts that the
Company and CIBA have infringed certain of Rembrandt’s oxygen permeability and
tear-wettability technology that it claims to be protected by a U.S. Patent
No.
5,712,327 entitled “Soft Gas Permeable Lens Having Improved Clinical
Performance” (the 327 Patent). Rembrandt claims that the Company infringes the
327 Patent by selling soft gas permeable contact lenses that have tear-wettable
surfaces in the U.S., which would include the Company’s PureVision
silicone
hydrogel lens products. The Company denies, and intends to vigorously defend
itself against, Rembrandt’s claims. The Court has issued a scheduling order and
has set a trial date of November 5, 2007.
PAGE
111
Material
Tax Litigation
As
disclosed in Note
10 — Provision for Income Taxes,
on May
12, 2006, the Company received a Notice of Final Partnership Administrative
Adjustment from the Internal Revenue Service relating to partnership tax periods
ended June 4, 1999 and December 25, 1999, for Wilmington Partners L.P.
(Wilmington), a partnership formed in 1993 in which the majority of partnership
interests are held by certain of the Company's subsidiaries. The Final
Partnership Administrative Adjustment (FPAA) proposes adjustments increasing
the
ordinary income reported by Wilmington for its December 25, 1999 tax year by
a
total of $10.0, and increasing a long-term capital gain reported by Wilmington
for that tax year by $189.9. The FPAA also proposes a $550.0 negative adjustment
to Wilmington's basis in a financial asset contributed to it by one of its
partners in 1993; this adjustment would also affect the basis of that partner
—
one of the Company's subsidiaries — in its partnership interest in Wilmington.
The asserted adjustments could, if sustained in full, increase the tax
liabilities of the partnership's partners for the associated tax periods by
more
than $200.0, plus penalties and interest. The Company has not made any financial
provision for the asserted additional taxes, penalties or interest as the
Company believes
the asserted adjustments are not probable and estimable.
Since
1999, the Company's consolidated financial statements have included a deferred
tax liability relating to the partnership. As of December 31, 2005, this
deferred tax liability equaled $157.1. This deferred tax liability is currently
reducing net deferred tax assets for which a valuation allowance has been
recorded as of December 31, 2005.
On
August
7, 2006, the Company made a petition to the U.S. Tax Court to challenge the
asserted adjustments. Internal Revenue Service's answer was filed on October
4,
2006, and the Company initiated a motion to strike portions of the answer on
November 1, 2006. The Company believes it has numerous substantive and
procedural tax law arguments to dispute the adjustments. Tax, penalties and
interest cannot be assessed until a Tax Court determination is made, and an
assessment, if any, would likely not be made until some time after 2007. While
the Company intends to vigorously defend against the asserted adjustments,
its
failure to succeed in such a defense could significantly increase the liability
of the partnership's partner for taxes, plus interest and penalties, which
in
turn would have a material adverse effect on the Company's financial results
and
cash flows.
General
Litigation Statement From
time
to time, the Company is engaged in,
or is
the subject of, various
lawsuits, claims, investigations and proceedings, including product liability,
patent, trademark, commercial and other matters, in the ordinary course of
business.
In
addition to pending litigation matters, the Company may from time to time learn
of alleged non-compliance with laws or regulations or other improprieties
through compliance hotlines, communications by employees, former employees
or
other third parties, as a result of its internal audit procedures, or otherwise.
As disclosed in Note
2 — Restatement,
in
response to such allegations, the Company’s Audit Committee conducted certain
investigations during 2005 and 2006, which led, among other things, to the
restatement of previously reported financial information and the recording
of
current charges. The restatement, in turn, resulted in the Company’s being
unable to file timely certain periodic financial information and the Company’s
obtaining certain waivers from creditors, as well as an extension from the
NYSE
to permit continued trading notwithstanding the delay in filing the Company’s
2005 Annual Report on Form 10-K.
The
Audit
Committee of the Board of Directors is currently investigating the potential
U.S. Foreign Corrupt Practices Act implications of the Company’s Spanish
subsidiary’s providing free product, principally intraocular lenses used in
cataract surgery, and other things of value to doctors performing surgical
procedures at public hospitals in Spain. This investigation was initiated
following reports of potentially improper sales practices by a former employee.
The investigation of the Company’s Spanish subsidiary has been voluntarily
reported to the Northeast Regional Office of the SEC. We cannot predict the
outcome of this pending investigation, and at this time cannot reasonably
estimate the potential liability of the Company or its Spanish subsidiary in
connection with these matters.
The
Company’s policy is to comply with applicable laws and regulations in each
jurisdiction in which it operates and, if the Company becomes aware of a
potential or alleged violation, to conduct an appropriate investigation, to
take
appropriate remedial action and to cooperate fully with any related governmental
inquiry. There can be no assurance that any pending or future investigation
or
resulting remedial action will not have a material adverse financial,
operational or other effect on the Company.
The
Company may become parties to, or the subject of, other claims, lawsuits,
investigations or inquiries in the future. See Item
3. Legal Proceedings
of this
Annual Report on Form 10-K.
PAGE
112
22.
Quarterly
Results, Stock Prices and Selected Financial Data
(Unaudited)
Quarterly
Results As
described in Note
2 — Restatement,
the
Company restated its consolidated financial statements for fiscal years 2004
and
2003 and its quarterly consolidated financial statements for the first and
second quarters of fiscal 2005. The following table presents unaudited quarterly
financial information for each quarter during the past two years, reflecting
the
impact of restatement. Net sales, gross profit and operating income are reported
on the same basis as amounts in the accompanying Statements
of Income.
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
||||||||||||||||
|
As
Reported
|
As
Restated
|
As
Reported
|
As
Restated
|
||||||||||||||||
|
2005
|
|||||||||||||||||||
|
Net
Sales
|
$
|
554.3
|
$
|
554.7
|
$
|
608.3
|
$
|
605.4
|
$
|
567.3
|
$
|
626.4
|
|||||||
|
Gross
Profit
|
322.3
|
321.9
|
362.2
|
360.4
|
318.6
|
369.7
|
|||||||||||||
|
Operating
Income
|
60.5
|
55.2
|
80.2
|
75.7
|
56.4
|
96.1
|
|||||||||||||
|
Net
Income (Loss)
|
34.5
|
33.3
|
45.0
|
37.3
|
(105.2
|
)
|
53.8
|
||||||||||||
|
Earnings
(Loss) Per Share, Basic
|
$
|
0.65
|
$
|
0.63
|
$
|
0.85
|
$
|
0.70
|
$
|
(1.97
|
)
|
$
|
1.00
|
||||||
|
Earnings
(Loss) Per Share, Diluted
|
$
|
0.63
|
$
|
0.60
|
$
|
0.81
|
$
|
0.67
|
$
|
(1.97
|
)
|
$
|
0.96
|
||||||
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
||||||||||||||||||||||
|
As
Reported
|
As
Restated
|
As
Reported
|
As
Restated
|
As
Reported
|
As
Restated
|
As
Reported
|
As
Restated
|
||||||||||||||||||
|
2004
|
|||||||||||||||||||||||||
|
Net
Sales
|
$
|
510.3
|
$
|
514.0
|
$
|
566.5
|
$
|
564.6
|
$
|
548.9
|
$
|
548.6
|
$
|
606.6
|
$
|
606.3
|
|||||||||
|
Gross
Profit
|
289.9
|
291.6
|
338.9
|
338.2
|
317.5
|
319.5
|
351.1
|
355.1
|
|||||||||||||||||
|
Operating
Income
|
43.5
|
39.7
|
75.2
|
71.2
|
76.8
|
77.9
|
84.1
|
90.3
|
|||||||||||||||||
|
Net
Income
|
23.5
|
22.8
|
41.4
|
32.4
|
43.3
|
46.7
|
51.4
|
51.9
|
|||||||||||||||||
|
Earnings
Per Share, Basic
|
$
|
0.45
|
$
|
0.44
|
$
|
0.78
|
$
|
0.62
|
$
|
0.81
|
$
|
0.89
|
$
|
0.97
|
$
|
0.99
|
|||||||||
|
Earnings
Per Share, Diluted 1
|
$
|
0.43
|
$
|
0.42
|
$
|
0.76
|
$
|
0.59
|
$
|
0.79
|
$
|
0.86
|
$
|
0.94
|
$
|
0.95
|
|||||||||
|
1
|
Includes
the diluted effect from the Company's application of EITF Issue 04-8,
The
Effect of Contingently Convertible Debt on Diluted Earnings Per Share
(see
Note
4 — Earnings Per Share).
Diluted shares were retroactively restated for periods ended prior
to
December 25, 2004 with no change to previously reported EPS. Diluted
shares outstanding for the first, second and third quarters of 2004
were
restated to 54,566; 54,569 and 54,628 from 54,499; 54,431 and 54,460,
respectively. Diluted shares outstanding for the 2003 third quarter
and
year to date periods were restated to 53,423 and 53,519 from 53,379
and
53,491, respectively.
|
Quarterly
Stock Prices The
Company's Common stock is listed on the NYSE and is traded under the symbol
BOL.
There were approximately 7,400 and 7,700 Common shareholders of record at
year-end 2005 and 2004, respectively. The following table shows the price range
of the Common stock for each quarter for the past two years:
|
2005
|
2004
|
||||||||||||
|
Price
Per Share
|
Price
Per Share
|
||||||||||||
|
High
|
Low
|
High
|
Low
|
||||||||||
|
First
|
$
|
75.85
|
$
|
61.82
|
$
|
61.64
|
$
|
50.70
|
|||||
|
Second
|
79.75
|
70.80
|
66.67
|
57.63
|
|||||||||
|
Third
|
87.89
|
74.50
|
69.00
|
57.42
|
|||||||||
|
Fourth
|
84.30
|
66.17
|
67.95
|
57.17
|
|||||||||
PAGE
113
The
following tables present the impact of the restatement adjustments described
in
Note
2 — Restatement
on the
Company’s previously reported net earnings and diluted earnings per share for
the first and second quarters of 2005 and for each quarter of 2004 (dollar
amounts in millions, except per share data):
|
Quarters
Ended
|
|||||||||||||||||||
|
Jun
25,
2005
|
Mar
26,
2005
|
Dec
25,
2004
|
Sep
25,
2004
|
Jun
26,
2004
|
Mar
27,
2004
|
||||||||||||||
|
Net
Income, as Previously Reported
|
$
|
45.0
|
$
|
34.5
|
$
|
51.4
|
$
|
43.3
|
$
|
41.4
|
$
|
23.5
|
|||||||
|
Brazil
Matters
|
(0.9
|
)
|
(0.7
|
)
|
(0.6
|
)
|
(0.6
|
)
|
(0.3
|
)
|
(0.3
|
)
|
|||||||
|
Asia
and Other Revenue Recognition Matters
|
(1.5
|
)
|
(0.6
|
)
|
(0.3
|
)
|
(0.7
|
)
|
(1.8
|
)
|
1.5
|
||||||||
|
Tax
Matters
|
(4.2
|
)
|
2.6
|
(0.8
|
)
|
3.1
|
(6.4
|
)
|
2.0
|
||||||||||
|
Deferred
Compensation Plan
|
(1.7
|
)
|
(2.0
|
)
|
0.2
|
(0.2
|
)
|
(0.6
|
)
|
(1.3
|
)
|
||||||||
|
Other
Items
|
0.6
|
(0.5
|
)
|
2.0
|
1.8
|
0.1
|
(2.5
|
)
|
|||||||||||
|
Net
Income as Restated
|
$
|
37.3
|
$
|
33.3
|
$
|
51.9
|
$
|
46.7
|
$
|
32.4
|
$
|
22.8
|
|||||||
|
Quarters
Ended
|
|||||||||||||||||||
|
Jun
25,
2005
|
Mar
26,
2005
|
Dec
25,
2004
|
Sep
25,
2004
|
Jun
26,
2004
|
Mar
27,
2004
|
||||||||||||||
|
Diluted
Earnings Per Share, as Previously Reported
|
$
|
0.81
|
$
|
0.63
|
$
|
0.94
|
$
|
0.79
|
$
|
0.76
|
$
|
0.43
|
|||||||
|
Brazil
Matters
|
(0.02
|
)
|
(0.01
|
)
|
(0.01
|
)
|
(0.01
|
)
|
(0.01
|
)
|
(0.01
|
)
|
|||||||
|
Asia
and Other Revenue Recognition Matters
|
(0.03
|
)
|
(0.01
|
)
|
-
|
(0.01
|
)
|
(0.03
|
)
|
0.03
|
|||||||||
|
Tax
Matters
|
(0.07
|
)
|
0.05
|
(0.02
|
)
|
0.06
|
(0.12
|
)
|
0.04
|
||||||||||
|
Deferred
Compensation Plan
|
(0.03
|
)
|
(0.04
|
)
|
-
|
-
|
(0.01
|
)
|
(0.02
|
)
|
|||||||||
|
Other
Items
|
0.01
|
(0.01
|
)
|
0.04
|
0.03
|
-
|
(0.05
|
)
|
|||||||||||
|
Diluted
Earnings Per Share, as Restated
|
$
|
0.67
|
$
|
0.60
|
$
|
0.95
|
$
|
0.86
|
$
|
0.59
|
$
|
0.42
|
|||||||
PAGE
114
Selected
Financial Data
Dollar
Amounts in Millions - Except Per Share Data
|
2002
|
2001
|
|||||||||||||||||||||
|
2005
|
2004
(Restated)
2
|
2003
(Restated)
2
|
(As
Reported)
|
(Restated)
2
|
(As
Reported)
|
(Restated)
2
|
||||||||||||||||
|
Results
for the Year
|
||||||||||||||||||||||
|
Net
Sales 1
|
$
|
2,353.8
|
$
|
2,233.5
|
$
|
2,018.5
|
$
|
1,816.7
|
$
|
1,810.5
|
$
|
1,665.5
|
$
|
1,660.4
|
||||||||
|
Income
from Continuing Operations
|
19.2
|
153.9
|
106.9
|
72.5
|
20.8
|
42.0
|
45.9
|
|||||||||||||||
|
Net
Income
|
19.2
|
153.9
|
106.0
|
72.5
|
20.8
|
21.2
|
15.7
|
|||||||||||||||
|
Continuing
Operations - Basic earnings per share
|
0.36
|
2.94
|
2.04
|
1.35
|
0.39
|
0.78
|
0.86
|
|||||||||||||||
|
Net
Income - Basic earnings per share
|
0.36
|
2.94
|
2.02
|
1.35
|
0.39
|
0.39
|
0.29
|
|||||||||||||||
|
Continuing
Operations - Diluted earnings per share
|
0.35
|
2.83
|
2.00
|
1.34
|
0.39
|
0.78
|
0.85
|
|||||||||||||||
|
Net
Income - Diluted earnings per share
|
0.35
|
2.83
|
1.98
|
1.34
|
0.39
|
0.39
|
0.29
|
|||||||||||||||
|
Dividends
per share
|
0.52
|
0.52
|
0.52
|
0.65
|
0.65
|
1.04
|
1.04
|
|||||||||||||||
|
1
|
Expenses
totaling $46.4 originally reported as selling, administrative and
general
expenses in 2001 have been reclassified to a reduction of net sales
to
reflect the adoption of EITF 01-9.
|
|
2
|
See
Note
2 — Restatement
for further information regarding the restatement of the Company's
consolidated financial statements and
information.
|
PAGE
115
|
2003
|
2002
|
2001
|
|||||||||||||||||||||||
|
2005
|
2004
(Restated)
1
|
(As
Reported)
|
(Restated)
1
|
(As
Reported)
|
(Restated)
1
|
(As
Reported)
|
(Restated)
1
|
||||||||||||||||||
|
Year
End Position
|
|||||||||||||||||||||||||
|
Working
capital
|
$
|
617.7
|
$
|
528.0
|
$
|
545.0
|
$
|
528.9
|
$
|
455.7
|
$
|
457.5
|
$
|
693.7
|
$
|
673.1
|
|||||||||
|
Total
assets
|
3,416.4
|
3,045.8
|
3,006.4
|
3,038.14
|
2,773.4
|
2,767.1
|
2,993.5
|
2,872.05
|
|||||||||||||||||
|
Short-term
debt
|
161.4
|
103.4
|
195.0
|
197.2
|
187.9
|
189.4
|
123.3
|
123.3
|
|||||||||||||||||
|
Long-term
debt
|
831.2
|
543.3
|
652.0
|
652.0
|
656.2
|
656.2
|
703.2
|
703.2
|
|||||||||||||||||
|
Retained
earnings
|
1,471.6
|
1,480.4
|
1,396.9
|
1,354.12
|
1,298.9
|
1,275.62
|
1,261.4
|
1,289.82
|
|||||||||||||||||
|
Shareholders'
equity
|
1,283.9
|
1,362.8
|
1,203.4
|
1,160.82
|
1,017.8
|
1,005.32
|
975.0
|
1,017.33
|
|||||||||||||||||
|
Other
Ratios and Statistics
|
|||||||||||||||||||||||||
|
Return
on average shareholders' equity
|
1.4
|
%
|
12.6
|
%
|
11.9
|
%
|
10.5
|
%
|
7.4
|
%
|
2.1
|
%
|
2.1
|
%
|
1.5
|
%
|
|||||||||
|
Return
on invested capital
|
3.5
|
%
|
9.9
|
%
|
8.5
|
%
|
8.6
|
%
|
6.0
|
%
|
4.1
|
%
|
3.1
|
%
|
2.8
|
%
|
|||||||||
|
Effective
income tax rate for continuing operations before minority
interest
|
89.9
|
%
|
34.4
|
%
|
34.0
|
%
|
37.3
|
%
|
34.5
|
%
|
69.8
|
%
|
33.8
|
%
|
41.5
|
%
|
|||||||||
|
Current
ratio
|
1.6
|
1.6
|
1.6
|
1.6
|
1.5
|
1.5
|
2.0
|
1.9
|
|||||||||||||||||
|
Capital
expenditures
|
$
|
116.0
|
$
|
118.9
|
$
|
91.5
|
$
|
91.5
|
$
|
91.9
|
$
|
91.9
|
$
|
96.4
|
$
|
96.4
|
|||||||||
|
1
|
See
Note
2 — Restatement
for further information regarding the restatement of the Company's
consolidated financial statements and
information.
|
|
2
|
See
the Statements
of Changes in Shareholders' Equity
for information regarding the impact of restatement adjustments on
the
Company's retained earnings and components of total shareholders'
equity.
|
|
3
|
The
$42.3 increase in shareholders' equity primarily reflects the cumulative
impact of restatement adjustments on net earnings (see the following
table) and the cumulative impact of restatement adjustments associated
with the Company's comprehensive review of its accounting for income
taxes
partially offset by the impact of restatement adjustments associated
with
the deferred compensation matter.
|
|
4
|
The
$31.7 increase in total assets primarily reflects the impact of
restatement adjustments associated with the Company's comprehensive
review
of its accounting for income taxes which increased deferred income
tax
assets by $76.6, partially offset by a $53.8 decrease in goodwill
reflecting adjustments also associated with this comprehensive review,
specifically related to a 1998
acquisition.
|
|
5
|
The
$121.5 decrease in total assets reflects the impact of restatement
adjustments associated with the Company's comprehensive review of
its
accounting for income taxes.
|
PAGE
116
The
following tables present the impact of the restatement adjustments described
in
Note
2 — Restatement
on the
Company’s previously reported net earnings and diluted earnings per share for
fiscal years 2001, 2002, 2003 and 2004 as well as the impact of restatement
adjustments on the Company's previously reported pre-2001 cumulative net
earnings (dollar amounts in millions, except per share data):
|
Years
Ended
|
|||||||||||||
|
Dec
25, 2004
|
Dec
27, 2003
|
Dec
28, 2002
|
Dec
29, 2001
|
||||||||||
|
Retained
Earnings, as Previously Reported
|
$
|
1,528.9
|
$
|
1,396.9
|
$
|
1,298.9
|
$
|
1,261.4
|
|||||
|
Cumulative
Retained Earnings Restatement Adjustments
|
(42.8
|
)
|
(23.3
|
)
|
28.4
|
33.9
|
1 | ||||||
|
Net
Income, as Previously Reported
|
$
|
159.6
|
$
|
125.5
|
$
|
72.5
|
$
|
21.2
|
|||||
|
Brazil
Matters
|
(1.8
|
)
|
(7.5
|
)
|
(8.3
|
)
|
(6.0
|
)
|
|||||
|
Asia
and Other Revenue Recognition Matters
|
(1.3
|
)
|
(2.1
|
)
|
(0.8
|
)
|
(0.4
|
)
|
|||||
|
Tax
Matters
|
(2.1
|
)
|
0.7
|
(40.0
|
)
|
1.6
|
|||||||
|
Deferred
Compensation Plan
|
(1.9
|
)
|
(2.3
|
)
|
0.2
|
0.3
|
|||||||
|
Other
Items
|
1.4
|
(8.4
|
)
|
(2.8
|
)
|
(1.0
|
)
|
||||||
|
Net
Income, as Restated
|
$
|
153.9
|
$
|
106.0
|
$
|
20.8
|
$
|
15.7
|
|||||
|
Total
Net Income Restatement Adjustments
|
(5.7
|
)
|
(19.5
|
)
|
(51.7
|
)
|
(5.5
|
)
|
|||||
|
Retained
Earnings, as Restated
|
$
|
1,480.4
|
$
|
1,354.1
|
$
|
1,275.6
|
$
|
1,289.8
|
|||||
1 The
increase reflects the following restatement adjustments recorded in periods
prior to 2001: $39.3 associated with the Company's comprehensive review of
its
accounting for income taxes; $1.2 related to the deferred compensation plan
matter; and $0.4 related to other matters. These increases were partially offset
by a $4.4 decrease related to Asia and other revenue recognition matters and
a
$2.6 decrease related to the Brazil matters.
|
Years
Ended
|
|||||||||||||
|
Dec
25, 2004
|
Dec
27, 2003
|
Dec
28, 2002
|
Dec
29, 2001
|
||||||||||
|
Diluted
Earnings Per Share, as Previously Reported
|
$
|
2.93
|
$
|
2.34
|
$
|
1.34
|
$
|
0.39
|
|||||
|
Brazil
Matters
|
(0.03
|
)
|
(0.14
|
)
|
(0.15
|
)
|
(0.11
|
)
|
|||||
|
Asia
and Other Revenue Recognition Matters
|
(0.02
|
)
|
(0.04
|
)
|
(0.01
|
)
|
(0.01
|
)
|
|||||
|
Tax
Matters
|
(0.04
|
)
|
0.01
|
(0.74
|
)
|
0.03
|
|||||||
|
Deferred
Compensation Plan
|
(0.04
|
)
|
(0.04
|
)
|
-
|
0.01
|
|||||||
|
Other
Items
|
0.03
|
(0.16
|
)
|
(0.05
|
)
|
(0.02
|
)
|
||||||
|
Diluted
Earnings Per Share, as Restated
|
$
|
2.83
|
$
|
1.98
|
$
|
0.39
|
$
|
0.29
|
|||||
23.
Subsequent
Event
Market
Withdrawal of MoistureLoc
Lens Care Solution
On May
15, 2006, the Company announced a voluntary recall of its MoistureLoc lens
care
solution. The decision was made following months of investigation into an
increase in fungal infections among contact lens wearers in the United States
and certain Asian markets. The Company’s decision to recall the product
represents a subsequent event occurring prior to its filing this Form 10-K,
but
related to product manufactured and sold in 2005. In accordance with GAAP,
the
Company has recorded certain items associated with the recall in its 2005
financial results. The adjustments were recorded as third-quarter events,
because that is the earliest reporting period for which the Company has not
filed quarterly financial results on Form 10-Q.
PAGE
117
The
charges associated with the withdrawal reduced 2005 third-quarter earnings
before taxes by $39.0 and net income by $25.0, or $0.45 per share (based on
local statutory tax rates). Full-year 2005 earnings before taxes were reduced
by
$39.0 and full-year 2005 net income was reduced by $27.5, or $0.49 per share
(based on local statutory tax rates). Of the pre-tax amount, $17.1 related
to
estimated customer returns and consumer rebates and was recorded as a reduction
to net sales; $14.1 related to costs associated with returned product and the
disposal and write-off of inventory, which was recorded as cost of products
sold; and $7.9 related to costs associated with the notification to customers
and consumers required in market withdrawal instances, which was recorded as
selling, administrative and general expense. Charges include $1.7 for settled,
unlitigated claims, however, the Company has not recorded any provisions for
potential legal actions related to
MoistureLoc because
it is not yet able to estimate the magnitude of such charges, if any (see
further discussion in Note
21 —
Other
Matters).
The
Company anticipates its decision to withdraw the product will negatively impact
future financial performance. The Company recorded additional amounts for sales
returns provisions and coupon redemptions in 2006, and performance was hampered
by the impact from lost MoistureLoc
revenues; lower revenues for other lens care products, reflecting market share
losses caused by trade and consumer uncertainty; and the negative collateral
effect on the Company’s non-lens care product categories, primarily in Asia;
combined with higher expenses associated with the recall and legal expenses
associated with product liability lawsuits, and increased marketing expense
to
support brand rebuilding activities. The Company incurred additional charges,
primarily in Europe, associated with the MoistureLoc
recall
for product manufactured and sold in 2006. These charges approximated $26.7
on a
pre-tax basis, of which approximately $19.1 is associated with sales returns
and
other reductions to reported net sales.
The
Company considered the voluntary recall of MoistureLoc
an event
that would more likely than not reduce the fair value of a reporting unit.
Therefore, in accordance with SFAS 142, the Company reviewed and updated the
financial information and assumptions used in calculating reporting unit fair
values in its 2005 annual impairment test (see Note
1 — Significant Accounting Policies
for a
discussion of the Company's annual impairment test) for purposes of assessing
whether the withdrawal was likely to reduce any of the reporting unit fair
values to below its carrying amount. The Company updated the financial
information and made changes to assumptions (used in calculating the indications
of value under the income and market approaches) to reflect the anticipated
impact of the withdrawal on reporting unit operating results. The revised
reporting unit fair values were compared to the carrying amounts from the 2005
annual impairment test. The revised fair values of each of the reporting units
exceeded its carrying amount by a substantial margin. The Company therefore
concluded that the probability of the voluntary recall reducing the fair value
of any reporting unit below its carrying amount was remote and, as such, an
impairment test was not required. In addition, a separate analysis was performed
surrounding the valuation of the Company's acquisition of Freda (see
Note
3 — Acquisition
for
further discussion), which was not completely integrated as of December 31,
2005. The Company determined that the fair value of Freda exceeded its carrying
value. The Company will continue to monitor and assess the impact from the
recall as it relates to the fair value of any of its reporting
units.
Item
9. Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
Not
Applicable.
Item
9A. Controls
and Procedures
Evaluation
of Disclosure Controls and Procedures As
of the
end of the period covered by this report, the Company carried out an evaluation,
under the supervision and with the participation of the Company's Chairman
and
Chief Executive Officer along with the Company's Senior Vice President and
Chief
Financial Officer, of the effectiveness of the Company's disclosure controls
and
procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended (the Exchange Act). Based on such evaluation
and the identification of the material weaknesses in internal control over
financial reporting described below, as well as our inability to file this
Annual Report on Form 10-K within the statutory time period, the Company's
Chairman and Chief Executive Officer and the Company's Senior Vice President
and
Chief Financial Officer have concluded that, as of December 31, 2005, the
Company's disclosure controls and procedures were not
effective.
PAGE
118
As
previously reported in news releases dated October 26 and December 22, 2005,
the
Audit Committee of the Company's Board of Directors commenced in September
2005,
an independent investigation into allegations of misconduct by the management
of
the Company's Brazilian subsidiary, BL Industria Otica, Ltda. (BLIO), which
had
been reported to the Company's senior management by a BLIO employee pursuant
to
the Company's established compliance program. In addition, as reported in the
December 22 release, in late November 2005, following employee reports regarding
possibly improper sales practices in the Company's Korean subsidiary (Bausch
& Lomb Korea Co. Ltd. [BL Korea]), the Audit Committee commenced an
independent investigation into revenue recognition and sales practices in the
Korean subsidiary. In light of the investigations of the Company's Brazil and
Korea subsidiaries, the Company undertook expanded year-end procedures at
substantially all locations focused on, among other things, revenue recognition
practices. In addition, following the discovery of evidence in the course of
the
Korea investigation, the Audit Committee commenced the investigation of the
timing and appropriateness of reserve entries on a company-wide basis. In
addition, as previously reported, in 2005 the Company undertook a comprehensive
review of its accounting for income taxes. As a result of this review, the
Company determined adjustments to prior period financial statements were
necessary related to: differences between the tax and financial reporting basis
of the Company's assets and liabilities pertaining to its deferred income tax
assets and liabilities; the provision for income taxes and income taxes payable;
and tax implications of certain non-routine transactions, including certain
acquisitions.
As
described in detail in Note
2 — Restatement
to the
consolidated financial statements, the Brazil, Korea and reserve entry
investigations as well as the Company's expanded procedures and the
comprehensive review of accounting for income taxes resulted in the
identification of certain matters that required that adjustments including
audit
adjustments be made to prior period financial statements and to the 2005 third
quarter interim and the 2005 annual financial statements. Such matters and
the
related adjustments were considered in connection with management's assessment
of internal control over financial reporting that is set forth
below.
Management’s
Report on Internal Control Over Financial Reporting Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Rule 13a-15(f) under the
Exchange Act. Internal control over financial reporting is a process, under
the
supervision of the Company's Chief Executive Officer and Chief Financial
Officer, designed to provide reasonable assurance regarding the reliability
of
financial reporting and the preparation of the Company's financial statements
for external reporting purposes in accordance with accounting principles
generally accepted in the United States of America (U.S. GAAP).
A
company's internal control over financial reporting includes those policies
and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and disposition of the
assets of the Company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with U.S. GAAP, and that receipts and expenditures of the Company
are
being made only in accordance with authorizations of management and directors
of
the Company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the Company's
assets that could have a material adverse effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. It should be noted that any system of internal
control, however well designed and operated, can provide only reasonable, and
not absolute, assurance that the objectives of the system will be met. Also,
projections of any evaluation of effectiveness to future periods are subject
to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
Management
conducted an assessment of the effectiveness of the Company’s internal control
over financial reporting as of December 31, 2005 based on the criteria
established in Internal
Control - Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Management excluded Freda from its assessment of internal control over financial
reporting as of December 31, 2005 because Freda was acquired by the Company
in a
purchase business combination during the fourth quarter of 2005. Freda
represented one percent of the Company's net sales for the year ended December
31, 2005 and eight percent of the Company's total assets at December 31,
2005.
PAGE
119
A
material weakness is a control deficiency, or a combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of annual or interim financial statements will not be prevented
or
detected. In connection with the assessment described above, management has
identified the following material weaknesses as of December 31,
2005:
(1)
Control
Environment
The
Company did not maintain an effective control environment because of the
following: (a) the Company did not adequately and consistently reinforce the
importance of adherence to controls and the Company's code of conduct, which
contributed to certain of the restatement items that occurred across a broad
range of the Company's operational and functional areas; (b) the Company failed
to institute all elements of an effective program to help prevent and detect
fraud by Company employees; (c) the Company did not establish and maintain
effective corporate and regional management oversight and monitoring of
operations to detect subsidiaries' managements’ override of established
financial controls and accounting policies, execution of improper transactions
and accounting entries to impact revenue and earnings, and reporting of these
transactions to the appropriate finance personnel or the Company’s independent
registered public accounting firm; and (d) the Company did not maintain a
sufficient complement of personnel with an appropriate level of knowledge,
experience and training in the application of GAAP, including revenue
recognition and accounting for income taxes, and in internal controls over
financial reporting commensurate with its financial reporting requirements.
This
material weakness contributed to the additional material weaknesses discussed
in
items 2-4 below.
(2)
Controls
Over the Financial Reporting and Close Process
The
Company did not maintain effective controls to provide reasonable assurance
of
the completeness and accuracy of certain financial statement accounts in certain
subsidiaries. Specifically, the Company did not maintain effective controls
to
ensure that account reconciliations and journal entries were supported by
appropriate analysis and documentation in connection with the financial
reporting and close process. This material weakness resulted in the restatement
of the Company's 2004 and 2003 annual consolidated financial statements and
all
quarterly periods of 2004, and the first two quarters of 2005, as well as
adjustments, including audit adjustments to the 2005 third quarter interim
and
the 2005 annual consolidated financial statements. In addition, the Company
restated beginning shareholders' equity for the impact of the restatement for
periods prior to 2003.
(3)
Controls
Over Revenue Recognition and Sales Practices
The
Company did not maintain effective controls over certain subsidiaries’
relationships with their key distributors, particularly in the Company’s Korea,
Japan and India subsidiaries, and did not maintain effective controls over
the
installation of refractive laser surgery equipment in multiple locations where
the Company does business, to ensure that revenue associated with such
distributor and laser sales was recognized in accordance with GAAP.
Specifically, the Company did not maintain effective controls to provide
reasonable assurance that customer arrangements were adequately reviewed by
the
appropriate persons at such subsidiaries to identify and provide reasonable
assurance regarding the proper application of the appropriate method of revenue
recognition in accordance with GAAP. In addition, the Company did not maintain
effective controls to prevent subsidiary management from overriding established
financial controls or making errors in the application of policies concerning
the accuracy and valuation of accounts receivable and the maintenance of
distributor inventory at established threshold levels, as well as regarding
administration of credit limits, extensions of credit terms, price discounting,
sales returns and exchanges, transfer of the risk of ownership, and sales order
entry and control. This material weakness resulted in the restatement of the
Company's 2004 and 2003 annual consolidated financial statements and all
quarterly periods of 2004, and the first two quarters of 2005, as well as
adjustments, including audit adjustments to the 2005 third quarter interim
and
the 2005 annual consolidated financial statements. In addition, the Company
restated beginning shareholders' equity for the impact of the restatement for
periods prior to 2003.
PAGE
120
(4)
Controls
Over Tax Accounting The
Company did not maintain effective controls over the determination and reporting
of its income tax payable, deferred income tax assets and liabilities, the
related valuation allowances and income tax expense. Specifically, effective
controls were not designed and in place to: (i) ensure management maintained
the
appropriate level of personnel resources with adequate experience and expertise
in the area of U.S. GAAP accounting for income taxes; (ii) ensure roles and
responsibilities with respect to accounting for income taxes were clearly
defined; (iii) identify and evaluate in a timely manner the tax implications
of
certain non-routine transactions, including transactions related to
acquisitions; (iv) provide reasonable assurance as to the completeness and
accuracy of the provision for income taxes and income taxes payable including
tax reserves and return to provision adjustments; and (v) reconcile differences
between the tax and financial reporting basis of its assets and liabilities
with
its deferred income tax assets and liabilities. In addition, the Company did
not
maintain effective controls over indirect taxes, including VAT and certain
import related taxes related to its Brazilian subsidiary. This material weakness
resulted in the restatement of the Company's 2004 and 2003 annual consolidated
financial statements and all quarterly periods of 2004, and the first two
quarters of 2005, as well as adjustments, including audit adjustments to the
2005 third quarter interim and the 2005 annual consolidated financial
statements. In addition, the Company restated beginning shareholders' equity
for
the impact of the restatement for periods prior to 2003.
(5)
Controls
Over Deferred Compensation Plan
The
Company did not maintain effective controls to ensure that the Company’s
Deferred Compensation Plan document was amended to accurately reflect the Plan’s
intended design. This inaccurate amendment of the plan resulted in the Company
not properly marking to market stock awards issued under the Company’s Long-Term
Incentive Plan that were deferred under the Deferred Compensation Plan which
impacted the completeness and accuracy of selling, administrative and general
expense and accrued liabilities. This material weakness resulted in the
restatement of the Company's 2004 and 2003 annual consolidated financial
statements and all quarterly periods of 2004, and the first two quarters of
2005, as well as adjustments, including audit adjustments to the 2005 third
quarter interim and the 2005 annual consolidated financial statements. In
addition, the Company restated beginning shareholders' equity for the impact
of
the restatement for periods prior to 2003.
Additionally,
each of these material weaknesses above could result in a material misstatement
to the Company's interim or annual consolidated financial statements and
disclosures which would not be prevented or detected.
As
a
result of these material weaknesses described above, management has concluded
that, as of December 31, 2005, the Company's internal control over financial
reporting was not effective based on the criteria in Internal
Control-Integrated Framework
issued
by the COSO.
Management’s
assessment of the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2005 has been audited by PricewaterhouseCoopers
LLP, an independent registered public accounting firm, as stated in their
report, which is included under the Report
of Independent Registered Public Accounting Firm in
this
Annual Report on Form 10-K.
Remediation
of Material Weaknesses in Internal Control Over Financial
Reporting
The
Company has engaged in, and is continuing to engage in, substantial efforts
to
address the material weaknesses in its internal control over financial
reporting. Several material weaknesses were remediated in 2006 and the Company
is working to remediate the others as soon as practicable. Specific actions
which have been or will be taken are outlined below:
PAGE
121
From
a
control environment and organizational perspective:
| · |
Several
individuals in management positions at its Brazilian and Korean operations
have either left the Company or have been terminated. In addition,
the
Senior Vice President - Asia has been
replaced.
|
| · |
The
Company has strengthened its management and financial ranks including
the
appointment of a Vice President, Compliance reporting directly to
the
Chief Executive Officer and the Audit Committee of the Board; and
a Vice
President, Financial Compliance reporting to the Corporate
Controller.
|
| · |
The
Company further enhanced its whistleblower program related to the
communication, investigation and resolution of whistleblower
activities.
|
| · |
The
Company plans to further expand and strengthen its internal audit
organization by hiring additional experienced audit
staff.
|
| · |
The
Company has continued and expanded executive management's ongoing
communications regarding the importance of adherence to internal
controls
and company policies.
|
| · |
The
Company has strengthened its tax department by hiring additional
senior
tax staff with expertise in accounting for income
taxes.
|
| · |
The
Company realigned the global finance organization in its operating
segments to have a direct reporting relationship to the Corporate
Controller, rather than to management within the operating
segments.
|
| · |
The
Company has modified the performance management objectives and individual
bonus metrics for the global finance organization to be more heavily
weighted to internal controls and financial reporting and close
metrics.
|
| · |
The
Company has begun an initiative to provide additional training to
finance,
accounting and tax professionals regarding new and evolving areas in U.S.
GAAP accounting. In addition, the Company is undertaking a review
to
ensure that the finance, accounting and tax functions are staffed
in
accordance with the required competencies, and has begun the process
of
making personnel changes where
necessary.
|
| · |
The
Company is developing a formal training program for certain non-finance
employees on revenue recognition and integrity of financial reporting
and
controls.
|
| · |
The
Company has reinforced the certification process to emphasize senior
managers' accountability for maintaining an ethical
environment.
|
In
addition to strengthening its control environment and organizational
capabilities:
| · |
The
Company, with the assistance of outside consultants other than its
independent registered public accountants, undertook a project to
perform
a comprehensive review of its accounting for income taxes including
deferred tax assets and liabilities, taxes payable and tax reserves.
Further, the Company will initiate processes to improve proper tracking
of
deferred tax assets and
liabilities.
|
| · |
The
Company has augmented the quarterly financial reporting and close
process,
including by implementing an expanded Quarterly Close Checklist which
is
completed by each Operating Segment Controller and reviewed by the
Corporate Controller to focus on the specific areas identified in
the
material weaknesses.
|
| · |
The
Company has enhanced key control activities related to revenue recognition
on laser installations and, sales to distributor/wholesalers,
documentation and approval of terms of sales, including standard
and
extended credit terms and, analysis of sales returns and
exchanges.
|
| · |
The
Company is in the process of enhancing policies and procedures designed
to
detect and prevent fraud including strengthening key region and
entity-wide monitoring activities.
|
| · |
The
Company implemented a process requiring all subsidiaries outside
of the
United States to use one global professional tax advisor to review
local
income tax returns prior to filing and to provide services relating
to tax
assessments and positions.
|
| · |
The
Company has clarified responsibilities of the Regional Tax Directors
to
include review of VAT, customs and other indirect
taxes.
|
| · |
The
Company will require formal review and approval of all new or amended
employee benefit plans by Corporate Technical
Accounting.
|
PAGE
122
The
above
actions are being considered in the Company's evaluation of its internal control
over financial reporting for the year ended December 30, 2006. While the Company
has not completed its 2006 internal control evaluation, it is expected that
the
Company will report one or more material weaknesses in internal control over
financial reporting for 2006 when it files its Annual Report on Form 10-K for
the year ended December 30, 2006.
Changes
in Internal Control Over Financial Reporting During
the fourth quarter of 2005, the Company continued to implement its global
enterprise reporting system at its commercial and global operations businesses
including the Company's U.S. Vision Care operation. In addition, the Company
also changed to a new third-party payroll processor for its employees based
in
the United Kingdom. The Company also realigned the finance organization to
have
a direct reporting relationship to the Corporate Controller. As described above,
there were changes in the Company's internal control over financial reporting
that occurred during the Company's last fiscal quarter that materially affected,
or are reasonably likely to materially affect, the Company's internal control
over financial reporting. The Company is continuing to implement the global
enterprise reporting system, and in that process, expects that there will be
future material changes in internal controls as a result of this
implementation.
Item
9B. Other
Information
Not
applicable.
PAGE
123
Part
III
Item
10. Directors
and Executive Officers of Bausch & Lomb Incorporated
The
Company's Board of Directors is comprised of the following members (information
current as of December 1, 2006):
|
ALAN
M. BENNETT
|
Director
since 2004
Age:
55
|
|
|
Mr.
Bennett has served since 2001 as senior vice president and chief
financial
officer of Aetna Inc., a leading provider of health, dental, group
life,
disability and long-term care benefits. He joined Aetna in 1995 as
chief
financial officer for Aetna Business Resources. He was named vice
president and director of internal audit of Aetna Inc. in 1997 and
in 1998
was named vice president and controller. From 1981 to 1995, Mr. Bennett
held several executive positions with Pirelli Armstrong Tire Corporation.
From 1972 to 1981, he was an audit manager at Ernst & Young. Mr.
Bennett is a Director of Halliburton and a member of the American
Institute of Certified Public Accountants.
|
||
|
DOMENICO
DE SOLE
|
Director
since 1996
Age:
62
|
|
|
Mr.
De Sole has served since April 2005 as chairman of Tom Ford International,
a fashion company which produces fragrances, sunglasses and a signature
ready-to-wear men's line. He served from 1995 to 2004 as president
and
chief executive officer of Gucci Group N.V., a multibrand luxury
goods
company. He joined that company in 1984 as president and chief executive
officer of Gucci America, Inc. and in 1994 was named chief operating
officer of Gucci Group N.V. Mr. De Sole is a director of Delta Airlines,
Inc., GAP Inc. and Telecom Italia and Ermenegildo Zegna. He is a
member of
the Harvard Law School Advisory Board.
|
||
|
PAUL
A. FRIEDMAN, M.D.
|
Director
since 2004
Age:
63
|
|
|
Dr.
Friedman has served since 2001 as president and chief executive officer
of
Incyte Corporation, a biotechnology company. From 1998 until 2001,
he
served as president of DuPont Pharmaceuticals Research Laboratories.
From
1994 until 1998, he served as president, Research and Development,
of
DuPont Merck Pharmaceutical Company. From 1991 to 1994, he was senior
vice
president of Research at Merck Sharp & Dohme Research Laboratories and
from 1985 to 1991 he held several executive positions there. From
1974 to
1985, Dr. Friedman was associate professor of Medicine and Pharmacology
at
Harvard Medical School. Dr. Friedman is a diplomat of the American
Board
of Internal Medicine and a member of the American Society of Pharmacology
and Experimental Therapeutics, the American Society of Clinical
Investigation, and the American Society of Biological
Chemistry.
|
||
|
JONATHAN
S. LINEN
|
Director
since 1996
Age:
63
|
|
|
Mr.
Linen has served since January 2006 as advisor to the chairman of
American
Express Company, a diversified worldwide travel and financial services
company. From 1993 to 2006, he served as vice chairman. He joined
that
company in 1969 and held various executive positions before being
appointed president and chief executive officer of Shearson Lehman
Brothers in 1989. In 1992, he was named president and chief operating
officer of American Express Travel Related Services Company, Inc.
Mr.
Linen is chairman of the board of the International Golf Association,
a
trustee of the U.S. Council for International Business and a member
of The
Council on Foreign Relations. Mr. Linen presides on the policy committee
of The Travel Business Roundtable and is vice chairman of the executive
committee of the World Travel & Tourism Council. He serves as a member
of the boards of Yum! Brands, Inc., Intercontinental Hotels, World
Monuments Fund, the U.S. Travel & Tourism Promotion Advisory Board,
and is an executive committee member of NYC & Company. Mr. Linen is a
past chairman and now honorary member of the board of trustees of
the
National Urban League.
|
||
PAGE
124
|
RUTH
R. McMULLIN
|
Director
since 1987
Age:
64
|
|
|
Mrs.
McMullin is the chairperson of trustees of the Eagle-Picher Trust.
She was
a member of the faculty of the Yale School of Management as a Management
Fellow from 1994 to 1995. From 1992 to 1994, she was president and
chief
executive officer of the Harvard Business School Publishing Corporation.
From 1990 to 1992, Mrs. McMullin was a consultant to private industry
and
from 1991 to 1992, she was also acting chief executive officer of
UNR
Industries, Inc. and a member of that company's chairman's committee.
From
1989 to 1990, she was president and chief executive officer of John
Wiley
& Sons, Inc., a publishing company. Mrs. McMullin joined that company
as executive vice president and chief operating officer in 1987.
She is a
director of The Mighty Eighth Foundation, Inc., and The Mighty Eighth
Air
Force Heritage Center, Inc.
|
||
|
LINDA
JOHNSON RICE
|
Director
since 1990
Age:
48
|
|
|
Mrs.
Rice has served since 2002 as president and chief executive officer
of
Johnson Publishing Company, Inc., a multi-media company. She joined
that
company in 1980, became vice president in 1985 and president and
chief
operating officer in 1987. In addition to management of the company,
she
oversees the editorial content of Ebony
and Jet
magazines. She is also president of Fashion Fair Cosmetics, a division
of
Johnson Publishing. Mrs. Rice is a director of Kimberly-Clark Corporation,
Omnicom Group, Inc., and Money Gram International, Inc.
|
||
|
WILLIAM
H. WALTRIP
|
Director
since 1985
Age:
69
|
|
|
Mr.
Waltrip served from 1993 to 2003 as chairman of the board of Technology
Solutions Company, a systems integration company, and from 1993 until
1995
he was chief executive officer of that company. Mr. Waltrip has served
twice as Bausch & Lomb's interim chief executive officer, once in 1996
and once in 2001. He also served as the Company's chairman from 1996
to
1998 and again in 2001. From 1991 to 1993, he was chairman and chief
executive officer of Biggers Brothers, Inc., a food service distribution
company and was a consultant to private industry from 1988 to 1991.
From
1985 to 1988, he served as president and chief operating officer
of IU
International Corporation, a transportation, environmental and
distribution company. Earlier, he had been president, chief executive
officer and a director of Purolator Courier Corporation. He is a
director
of Theravance, Inc., Charles River Laboratories International, Inc.
and
Thomas & Betts Corporation.
|
||
|
BARRY
W. WILSON
|
Director
since 2003
Age:
62
|
|
|
Mr.
Wilson has served since 1997 as senior vice president and a member
of the
Executive Committee of Medtronic, Inc., a medical technology company.
In
2006, he was appointed senior vice president, International Affairs
and
President Greater China, having had responsibility as president of
Medtronic International since 2001. Mr. Wilson joined Medtronic as
president of Europe, Middle East and Africa in 1995. From 1980 to
1993, he
held various executive positions with Bristol-Myers Squibb, including
president of Europe. Prior to that, he held executive positions with
Pfizer, Inc. in nine different countries. Mr. Wilson was chairman
of
Eucomed, the European medical device industry association from 2000
to
2004 and now serves as its honorary chairman.
|
||
|
KENNETH
L. WOLFE
|
Director
since 1989
Age:
67
|
|
|
Mr.
Wolfe served as chairman and chief executive officer of Hershey Foods
Corporation, a food products manufacturing firm, from 1994 until
his
retirement in 2001. He joined that firm in 1967 and held various
executive
positions before being appointed vice president and chief financial
officer in 1981. In 1984, Mr. Wolfe was named senior vice president.
From
1985 until 1993, he was president and chief operating officer. Mr.
Wolfe
is a director of Adelphia Communications Corporation and Revlon,
Inc. and
is a trustee of Fidelity Funds.
|
||
PAGE
125
|
RONALD
L. ZARRELLA
|
Director
since 2001
Age:
57
|
|
|
Mr.
Zarrella has served since 2001 as chairman and chief executive officer
of
Bausch & Lomb Incorporated. He was previously with General Motors
Corporation, where he was executive vice president and president
of
General Motors North America from 1998 to 2001. From 1994 to 1998,
Mr.
Zarrella was vice president and group executive in charge of General
Motors' North American Vehicle Sales, Service and Marketing Group.
From
1985 to 1994, Mr. Zarrella held several executive positions at Bausch
& Lomb, including serving as its president, chief operating officer
and a member of its Board of Directors. Mr. Zarrella is a director
of
Avaya, Inc. He is a trustee of Rochester Institute of Technology,
the
International Agency for the Prevention of Blindness, and the Committee
for Economic Development. Mr. Zarrella is a member of the board of
the
University of Rochester Medical Center, FIRST (For Inspiration and
Recognition of Science and Technology), and the National Italian
American
Foundation.
|
||
The
Board
of Directors of the Company met nine times in 2005. Each of the directors
attended 75% or more of the aggregate number of regularly scheduled and special
Board and committee meetings held during the year, except for Linda Johnson
Rice, who attended 71% of the meetings due to a serious family illness. Pursuant
to a policy adopted by the Nominating and Governance Committee of the Board,
directors are strongly encouraged to attend annual meetings of shareholders.
Each of the directors attended the 2005 annual meeting.
Directors
who are not employees of the Company received an annual retainer of $52,000
in
2005. No additional fees are paid for attending meetings. The Company does
not
pay an annual retainer or fees to directors who are employees of the Company.
The Chair of the Audit Committee was paid an additional $10,000 fee and members
of the Audit Committee were each paid an additional $5,000 fee. The Chairs
of
the Compensation Committee and Nominating and Governance Committee were each
paid an additional $7,500 fee.
The
Company's Annual Retainer Stock Plan for Non-Employee Directors includes
director stock ownership guidelines. The guidelines provide that directors
who
own shares of Company stock or share equivalents with an aggregate market value
of $260,000 or more have the option to receive their annual retainer in Company
stock or cash or a combination of both. New Directors have five years to meet
the guidelines. Directors who have not met the guidelines receive at least
one-half of the annual retainer in Company stock. All of the current
non-employee directors, except for Mr. Alan M. Bennett and Dr. Paul A. Friedman,
who were both elected to the Board of Directors for the first time in 2004,
have
met the stock ownership guidelines.
Under
the
Company's 2003 Long-Term Incentive Plan, non-employee directors annually receive
non-qualified options to purchase shares of Common stock of the Company that
vest in one year. The number of options is determined by a fixed formula set
forth in the Plan, and the exercise price of all such options is determined
by
the fair market value of the Company's Common stock on the date of grant. For
fiscal year 2005, each non-employee director was granted 1,956 options to
purchase Common shares at a price of $83.550 per share.
From
1993
through 1996, the Company had a Charitable Contribution Plan in place for
non-employee directors of the Company. The Plan was frozen in 1996. Under this
plan, following the death of a participating director, the Company will make
up
to $250,000 in charitable contributions to bona fide tax-exempt organizations
meeting the requirements of Section 501(c)(3) of the Internal Revenue Code
selected by the participant. The plan covers the following retired directors:
Franklin E. Agnew, William Balderston III, Bradford Boss, Daniel E. Gill, Jay
T.
Holmes, Thomas C. McDermott, John R. Purcell, and Alvin W. Trivelpiece; and
current directors: Ruth R. McMullin, Linda Johnson Rice, William H. Waltrip
and
Kenneth L. Wolfe. The Company funds its obligations to make these contributions
through insurance policies on the lives of the participating directors. As
such,
because the Company receives payment of the benefit, makes the required
contribution and receives the charitable deductions, no director receives a
financial or tax benefit under the Plan. The aggregate premiums paid on these
policies in 2005 were $62,257.50.
PAGE
126
As
appointed by the Board of Directors, William H. Waltrip serves as lead director
of the Board of Directors. Mr. Waltrip received an annual retainer of $25,000
for his services as lead director for the 2005-2006 term of office, in addition
to his annual retainer as a director and annual fee as chair of the Nominating
and Governance Committee. His responsibilities include acting as chairman of
executive sessions of the non-employee directors, acting as principal liaison
between the non-employee directors and the chairman of the board and performing
other duties designated by the Board to assist in the fulfillment of its
responsibilities.
Executive
Sessions
Executive sessions of the independent directors are held at the end of each
Board of Directors meeting. The Board has selected William H. Waltrip, the
Board's lead director, to preside at all executive sessions of the independent
directors.
Communications
by Shareholders and Interested Parties Shareholders
and interested parties may communicate with the Board or any individual director
by sending such communications to the attention of the secretary of the Company,
who will forward all such communications to the Board. Communications intended
for the non-employee directors as a group should be sent to the secretary,
addressed to the attention of the lead director of the Board.
Corporate
Governance Principles, Board Matters and Code of Ethics The
Company is committed to sound corporate governance principles. The Company's
Corporate Governance Guidelines, Code of Business Conduct and Ethics, and Code
of Ethics for CEO and Senior Financial Officers are available on the Company's
web site at
http://www.bausch.com/en_US/corporate/corpcomm/general/governance.aspx. Printed
copies of these documents can be obtained by contacting the secretary of the
Company.
At
the
2005 annual meeting, shareholders approved amendments to the Company’s
Certificate of Incorporation and By-laws that eliminated the Company's
classified Board and reinstated the annual election of directors. Under the
amendments, once a director's three-year term expired under the classified
board
structure, if elected, he or she would serve annual terms that expired at the
subsequent annual meeting. At the anticipated 2007 annual meeting of
shareholders, all director positions will be elected for annual terms under
the
Company's de-classified board structure.
Board
Independence The
Board
of Directors has determined that each of the directors, other than Mr. Zarrella,
has no material relationship with the Company and is independent within the
meaning of the SEC and NYSE director independence standards, as currently in
effect.
Committees
of the Board The
Board
of Directors has established four standing committees to assist it in carrying
out its responsibilities: the Executive Committee, the Audit Committee, the
Compensation Committee, and the Nominating and Governance Committee. The Board
of Directors may establish additional committees, such as the Evaluation
Committee as discussed in Item
3. Legal Proceedings
and in
Item
8. Financial Statements and Supplementary Data
under
Note
21 — Legal Matters
of this
Annual Report on Form 10-K.
The
membership and the function of each of the committees are described below.
Each
of the committees operates under its own written charter adopted by the Board
of
Directors. All of the committee charters are available on the Company's web
site
at
http://www.bausch.com/en_us/corporate/ir/general/board_members.aspx. Printed
copies of the committee charters can be obtained by contacting the secretary
of
the Company.
|
Executive
Committee
Number
of Members:
Members:
|
Four
directors
Ronald
L. Zarrella (Chair), Jonathan S. Linen, William H. Waltrip and Kenneth
L.
Wolfe
|
|
|
Number
of Meetings in 2005:
|
None
|
|
|
Functions:
|
-
|
Holds
meetings, as necessary, between regular Board of Directors meetings
to
take action necessary for the Company to operate
efficiently
|
|
-
|
Possesses
all of the authority of the full Board of Directors, except as limited
by
law and the By-laws of the
Company
|
PAGE
127
|
Audit
Committee
Number
of Members:
Members:
|
Four
independent directors
Kenneth
L. Wolfe (Chair), Alan M. Bennett, Domenico De Sole and Barry W.
Wilson
|
|
|
Number
of Meetings in 2005:
|
Seventeen
|
|
|
Functions:
|
-
|
Reviews
and evaluates the qualifications and performance of the independent
accountants
|
|
-
|
Appoints
and/or replaces the independent accountants
|
|
|
-
|
Responsible
for compensating and overseeing the work of the independent
accountants
|
|
|
-
|
Preapproves
all audit services and permitted nonaudit services to be performed
for the
Company by its independent accountants
|
|
|
-
|
Reviews
and discusses with management and the independent accountants the
quarterly interim and annual audited financial statements and related
Management's Discussion & Analysis
|
|
|
-
|
Provides
for direct communication among the Board of Directors, the independent
accountants and the internal auditors, including review of the disclosures
and letter provided by the independent accountants pursuant to
Independence Standards Board Standard No. 1
|
|
|
-
|
Discusses
with management and the independent accountants significant financial
reporting and internal control issues
|
|
|
-
|
Discusses
with the independent accountants the matters required to be discussed
by
Statement on Auditing Standards No. 61
|
|
|
-
|
Meets
with the independent accountants prior to the audit to discuss the
planning and staffing of the audit
|
|
|
-
|
Oversees
the Company's internal audit function
|
|
|
-
|
Reviews
the receipt, retention and disposition of complaints received by
the
Company regarding accounting, internal accounting controls or auditing
matters
|
|
|
-
|
Discusses
with the Company's general counsel legal matters that may have a
material
impact on the financial statements or the Company's compliance
policies
|
|
|
-
|
Retains
independent legal, accounting or other advisors, as
necessary
|
|
|
-
|
Presents
the annual Report of the Audit Committee for the Company’s Proxy
Statement
|
|
|
-
|
Reviews
its own performance annually
|
|
|
Compensation
Committee
Number
of Members:
Members:
|
Four
independent directors
Jonathan
S. Linen (Chair), Ruth R. McMullin, William H. Waltrip and Barry
W.
Wilson
|
|
|
Number
of Meetings in 2005:
|
Four
|
|
|
Functions:
|
-
|
Recommends
to the Board of Directors remuneration of the chief executive officer
and
determines remuneration of other officers of the Company elected
by the
Board of Directors
|
|
-
|
Conducts
evaluation of the chief executive officer for submission to the Board
of
Directors
|
|
|
-
|
Grants
options under and otherwise administers the Company's stock incentive
plans and approves and administers any other compensation plan in
which
officers of the Company participate
|
|
|
-
|
Reviews
succession planning for the CEO and senior executives, and reports
on such
matters to the Board of Directors
|
|
|
-
|
Retains
compensation consultants and obtains advice from internal or external
advisors, as necessary
|
|
|
-
|
Presents
the annual Compensation Committee Report on Executive Compensation
for the
Company's Proxy Statement
|
|
|
-
|
Reviews
its own performance annually
|
PAGE
128
|
Nominating
and Governance Committee
Number
of Members:
Members:
|
Four
independent directors
William
H. Waltrip (Chair), Paul A. Friedman, Jonathan S. Linen and Linda
Johnson
Rice
|
|
|
Number
of Meetings in 2005:
|
Five
|
|
|
Functions:
|
-
|
Seeks
and evaluates individuals qualified to become board members for
recommendation to the Board of Directors
|
|
-
|
Reviews
the qualifications of any director candidate proposed by a shareholder
in
accordance with the Company's By-laws
|
|
|
-
|
Reviews
and makes recommendations to the Board of Directors with respect
to the
compensation and benefits of directors
|
|
|
-
|
Reviews
the adequacy of the Company's Corporate Governance Guidelines and
recommends any proposed changes to the Board of Directors for
approval
|
|
|
-
|
Retains
any search firm to be used to identify director candidates and obtains
advice from internal or external advisors, as necessary
|
|
|
-
|
Reviews
its own performance annually
|
As
set
forth in the Nominating and Governance Committee Charter, the Committee has
responsibility for identifying individuals qualified to become directors and
to
make appropriate director nominee recommendations to the Board of Directors.
The
Committee periodically assesses the composition and performance of the Board
of
Directors and determines when it is appropriate to identify new director
nominees. The Committee will then actively search for individuals qualified
to
become directors. The selection criteria for director nominees is detailed
in a
committee resolution entitled: "Criteria for Selecting Director Nominees to
the
Board of Directors." Under this selection criterion, each nominee should have
a
background which demonstrates an understanding of the business and financial
affairs and the complexities of a global business organization. Nominees are
typically active as a current chief executive officer, chief operating officer
or other senior executive or director of a significant business enterprise
or
other business institution, public or private. Other characteristics of director
nominee candidates include interest in the Company, time and energy to devote
to
the Company, sound business judgment and independence.
The
Committee
uses a third party search firm to identify director candidates and also seeks
names of potential nominees from other directors, executive officers and
other
contacts. The Committee will consider director candidates proposed by
shareholders, provided that the recommendation includes sufficient information
concerning the potential nominee, and is submitted in a timely manner, so
as to
permit appropriate review by the Committee. The Committee will use the same
process for evaluating a shareholder director candidate as it uses for any
other
potential nominee. For a description of certain bylaw procedures permitting
shareholders to directly nominate directors, see below in this section of
Item
10. Directors and Executive Officers of Bausch & Lomb
Incorporated.
The
qualifications of director candidates are reviewed by the Committee to determine
which candidates should be contacted. If a third party search firm is involved,
the search firm will make the initial contact with potential candidates to
assess their qualifications and motivation. A member of the Committee will
make
the initial contact if a search firm is not involved. Reference checks are
also
conducted. Following this initial screening process, the Committee meets with
each of the candidates and determines which candidate will be recommended to
the
Board of Directors. During this process, the chief executive officer also meets
with the candidates and provides input to the Committee. The Company's By-laws
are available at the Company's web site at
http://www.bausch.com/en_us/corporate/corpcomm/general/governance.aspx.
The
members of the Audit Committee of the Board of Directors are Kenneth L. Wolfe
(Chair), Alan M. Bennett, Domenico De Sole and Barry W. Wilson. The Board of
Directors has reviewed the qualifications of each member of the Audit Committee
and has determined that each member of the Audit Committee is "independent"
under the current listing standards of the NYSE applicable to Audit Committee
members. None of the Audit Committee members has a relationship with the Company
other than being a director and shareholder of the Company. In addition, there
is no Audit Committee member who is employed as an executive of another firm
where any of the Company's executives serves on that other firm's compensation
committee. No member of the Audit Committee is an immediate family member of
an
individual who is an executive officer of the Company or any of its affiliates.
The Audit Committee members do not serve on more than two audit committees
of
other public companies.
PAGE
129
Each
member of the Audit Committee is financially literate, as assessed by the
Company's Board of Directors in its business judgment. In addition, the Board
of
Directors has determined that Kenneth L. Wolfe qualifies as an "audit committee
financial expert," as defined by applicable SEC rules, and Mr. Wolfe is
"independent" under the current listing standards of the NYSE applicable
to
Audit Committee members.
In
2005,
the Audit Committee met 17 times and they met 36 times in 2006. The Board
of
Directors has adopted a written Charter setting forth the authority and
responsibilities of the Audit Committee. A copy of the Charter is available
at
the Company's web site at
http://www.bausch.com/en_us/corporate/ir/general/board_members.aspx. Consistent
with its Charter, the Audit Committee took the actions identified in the
description of the Committee's functions contained in this Item
10. Directors and Executive Officers of Bausch & Lomb
Incorporated.
In
addition, the Audit Committee recommended for Board approval, based on the
full
scope of its activities, that (i) the audited financial statements be
incorporated in the Company's annual report on Form 10-K for the year ended
December 31, 2005, and (ii) its appointment of PricewaterhouseCoopers LLP
as the
Company's independent accountants for 2006 be
ratified.
A
shareholder wishing to nominate a
candidate for election to the Board at the 2007 Annual Meeting of Shareholders
is required to give written notice addressed to the secretary, Bausch & Lomb
Incorporated, One Bausch & Lomb Place, Rochester, New York 14604-2701 of his
or her intention to make such a nomination. The notice of nomination must be
received by the Company’s secretary at the address above during the period
commencing on March 15, 2007 and ending at the close of business on the
10th day following the date on which public announcement of the date
of the 2007 Annual Meeting is first made.
The
notice of nomination is required to contain certain information about both
the
nominee and the shareholder making the nomination as set forth in the Company’s
By-laws. A nomination which does not comply with the above requirements will
not
be considered.
If
the
shareholder intends to present the proposal at the Company’s 2007 Annual Meeting
of Shareholders and have it included in the Company’s proxy materials for that
meeting, the proposal must be received by the Company no later than the close
of
business on March 15, 2007, and must comply with the requirements of Rule 14a-8
under the Securities Exchange Act of 1934, as amended. The Company is not
obligated to include any shareholder proposal in its proxy materials for the
2007 Annual Meeting of Shareholders if the proposal is received after the above
date.
If
a shareholder wishes to present the
proposal at the 2007 Annual Meeting of Shareholders but is not seeking to have
it included in the Company’s proxy materials for that meeting, the proposal: (1)
must be received by the Company during the period commencing on March 15, 2007
and ending at the close of business on the 10th day following the
date on which public announcement of the date of the 2007 Annual Meeting is
first made and (2) must be submitted in a manner that is consistent with the
submission requirements provided in the Company’s By-laws.
For
a
listing of our executive officers, refer to Item
4. Submissions of Matters to a Vote of Security Holders
of this
Annual Report on Form 10-K.
Section
16(a) Beneficial Ownership Reporting Compliance The
Company's directors and executive officers are required to file reports with
the
SEC concerning their ownership of Company stock. Based upon a review of filings
with the SEC, we believe that all of our directors and executive officers
complied during fiscal 2005 with the reporting requirements of Section 16(a)
of
the Securities Exchange Act of 1934.
PAGE
130
Item
11. Executive
Compensation
Report
of the Compensation Committee The
Compensation Committee of the Board of Directors is comprised entirely of
independent directors who are also non-employee directors as defined in Rule
16b-3 under the Securities Exchange Act of 1934 and outside directors as defined
in Section 162(m) of the Internal Revenue Code of 1986 (Code). The Compensation
Committee is responsible for reviewing and approving the strategy and principles
of the compensation and benefits programs for Bausch & Lomb executive
officers, including the Chief Executive Officer, to ensure that they are aligned
with the Company’s business strategy and shareholder interests. These
responsibilities include approving adjustments to base salary, establishing
targets and determining payouts for the payment of annual bonuses, granting
and
vesting of long-term incentive compensation, and reviewing leadership
development and succession planning. In 2005, the Compensation Committee met
formally four times and had informal interim discussions. In advance of each
formal meeting, management reviews the agenda with the committee chair and
sends
each committee member a complete briefing book that details each topic to be
considered. The committee chair reports to the Board of Directors on committee
discussions and key actions. The Compensation Committee has retained the
services of a nationally recognized compensation consulting firm that serves
as
an independent advisor in matters related to executive
compensation.
Compensation
Philosophy and Policy The
objective of executive compensation at Bausch & Lomb is to provide
competitive overall compensation and to align components of executive
compensation with the interests of shareholders on both a short-term and
long-term basis. The executive compensation arrangements strive to meet these
objectives through a mix of base salary, annual incentives and long-term
incentives. The overall program ties "at risk" pay components to key drivers
of
long-term Company performance while providing a competitive level of total
compensation structured to attract, motivate and retain high caliber
executives.
To
ensure
that compensation levels are reasonably competitive with market rates, the
Compensation Committee engages an independent consulting firm to conduct an
annual survey of executive compensation in a defined group of companies
comparable to the Company. The surveyed comparable companies are selected based
on: (i) similarity of their product lines to those of Bausch & Lomb; (ii)
comparability to Bausch & Lomb based on size, as measured through annual
revenue, market capitalization and other financial measures of organizational
scope and complexity; and (iii) the competitive market for executive talent.
The
companies in the S&P 500 Healthcare Index used in the Comparison of
Five-Year Cumulative Total Shareholder Return chart in this Item
11. Executive Compensation represents
35% of the surveyed comparable companies. In determining compensation levels
and
mix, the Company also uses information from proxy statements and general
industry survey information of companies that the Company views as being
comparable. In 2005, the target compensation package for the Chief Executive
Officer of the Company, Ronald L. Zarrella, was based on the terms of his
employment agreement that was entered into in 2001.
After
considering the proxy statements and survey data of comparable companies, the
Company's business objectives and compensation philosophy and strategy, the
Compensation Committee determines targeted levels of base compensation,
short-term and long-term incentives, stock option and stock grant award levels
for the officers of the Company. In approving salary and incentive payments
for
individuals other than the Chief Executive Officer, the Compensation Committee
also considers recommendations made by the Chief Executive Officer. The
compensation of individual executive officers can and does vary from the
benchmark compensation based on such factors as individual performance,
potential for future advancement, the value of the executive's position to
the
market, difficulty of replacement, current responsibilities, length of time
in
their current positions, and for recently hired executives, their prior
compensation packages.
Base
Pay Base
pay
levels for each officer take into consideration the individual's current
performance, experience, the scope and complexity of his or her position within
the Company and the external competitive marketplace for similar positions
at
comparable companies. Base pay for officers is reviewed annually, and is
adjusted if necessary based on market comparisons and trends. To ensure
long-term focus, officers are not eligible for automatic annual "merit
increases." The executive officers named in the Summary Compensation Table
appearing in this Item
11. Executive Compensation did
not
receive a base salary adjustment in 2005.
In
2005,
Mr. Zarrella's base pay remained the same as in 2004 and has not changed since
his employment in 2001. Mr. Zarrella's base pay is determined in accordance
with
his employment agreement.
PAGE
131
Annual
Incentive Awards The
Company's Annual Incentive Compensation Plan is designed to reward employees
at
the management level and above annually for their contribution to operating
unit
and corporate objectives. The plan is funded based on combined achievement
of
Company and operating unit performance against targets established by the
Compensation Committee at the beginning of the year within parameters identified
in the plan. To ensure that 2005 incentive compensation was tied to a key
shareholder return indicator, the Compensation Committee measured overall
Company performance against targets established for growth in comparable basis
earnings per share (EPS) and, an additional metric for 2005, sales growth.
Operating unit performance is measured against targets established for sales,
earnings, free cash flow, cost improvement initiatives, and strategic projects.
In accordance with the plan, the Compensation Committee sets performance targets
at various levels so that the aggregate bonus pool funding yields an amount
ranging from 0% to 200% of the bonus targets. The Compensation Committee has
the
authority to modify the Chief Executive Officer’s incentive award and the awards
for all other executive officers based on an overall assessment of the manner
in
which such performance was achieved.
For
2005,
the annual incentive for executive officers without individual operating unit
responsibility was based primarily on Company performance against the EPS and
sales growth targets. For executive officers who managed business units, 25%
of
their annual incentive was based on performance against their operating unit’s
objectives and the remainder was based on Company performance against the EPS
and sales growth targets. The bonus targets for executive officers, excluding
the Chief Executive Officer, ranged from 50% to 75% of base salary. The bonus
target for the Chief Executive Officer was 100% of base salary, with a payout
range from 0% to 150% of target, in accordance with his employment
agreement.
As
previously reported, the Company announced on December 22, 2005 that its
financial statements for certain periods would be restated. In addition, until
recently the Company’s audited financial results for fiscal year 2005 were not
available. While the Company believes that the timing of rewards should be
in
close proximity to actual performance, the Compensation Committee determined
that no bonuses would be paid to any executive officer, including the Chief
Executive Officer, until the restated and audited financial results were known.
Once the restated and audited results were available, the Compensation Committee
used those data to calculate the bonus pool for executive officers. Although
performance measures for 2005 incentives using the restated results calculated
to a higher level of bonus pool funding, the Compensation Committee, in its
discretion and at the recommendation of the Chief Executive Officer, modified
the pool downward to 75% to reflect its assessment of the overall performance
of
the Company. Bonuses for individual executive officers ranged from 56% to 95%
of
target factoring in their operating unit’s performance against their targets.
Furthermore, the Compensation Committee determined that several executive
officers would receive either no bonus or a reduced bonus and that the Chief
Executive Officer and the Chief Financial Officer would not receive a
bonus.
Long-Term
Incentive Awards Long-term
incentive compensation awarded to officers is designed to ensure that total
direct compensation is market competitive, performance based, and aligned with
the interests of the Company’s shareholders. Under the 2003 Long-Term Incentive
Plan, officers of the Company are eligible to receive awards of stock options
and stock grants, as approved by the Compensation Committee. The Compensation
Committee approved a target long-term incentive award for each officer, which
is
based on market data for comparable companies in combination with an assessment
of each position's scope and complexity. The performance of the Company and
the
individual officer are considered in determining the final award.
In
January 2005, the Compensation Committee awarded stock options within this
framework to officers, including those identified in the Summary Compensation
Table in this Item
11. Executive Compensation.
The
Company granted Mr. Zarrella 125,000 stock options, which vest in three equal
installments over a three-year period. All stock options are exercisable at the
fair market value of the underlying stock as of the date of the grant. In
setting Mr. Zarrella's stock option award level, the Compensation Committee
considered performance against Company objectives, competitive compensation
data
and practices, and progress against longer-term drivers of shareholder
value.
PAGE
132
The
stock
grant component of long-term incentive awards is delivered through programs
that
are developed under the 2003 Long-Term Incentive Plan to ensure alignment with
the strategic direction of the Company. Starting in 2004, long-term incentive
awards were provided to officers under the Long-Term Performance Unit Program.
This award cycle covered 2004-2005. Awards under this program vest based on
attainment of pre-established objectives for return on net assets and average
sales growth over the two-year performance cycle. Awards would have been payable
50% in 2006 and 50% in 2007, however, determination of the amount of any payout
with respect to 2005 was delayed until the Company finalized its 2005 audited
financial statements and the 2006 payout has not yet been made. The entire
payout earned with respect to the 2004-2005 cycle is expected to occur in 2007,
upon review by the Compensation Committee of the 2005 audited financial
statements and its determination of the final awards based on Company
performance against the objectives. Amounts earned under the program will be
paid in cash or, if the officer has not met stock ownership targets, in stock.
The awards, including the Chief Executive Officer's award, were targeted to
comprise 40% of each participant's aggregate long-term compensation for the
period covering 2004 and 2005 (the remaining 60% of the total long-term
incentive compensation is composed of stock options as discussed above). Based
on the Compensation Committee’s determination of the Company’s performance
against the pre-established objectives for the 2004-2005 period, Performance
Unit Program awards granted for the two-year cycle ended December 31, 2005
to
the Company’s executive officers, including Mr. Zarrella, paid out at 83% of the
target award. The value set forth under the Long-Term Incentive Payouts in
the
Summary Compensation Table in this Item
11. Executive Compensation
reflects
the value of the awards as of the settlement date.
Supplemental
Executive Retirement Plan An
additional element of total compensation for the Chief Executive Officer is
the
Supplemental Executive Retirement Plan (SERP) II, under which Mr. Zarrella
was
vested immediately as part of his employment agreement, in consideration of
his
prior service with the Company and in view of similar benefits with his former
employer that were forfeited. This benefit is described further in the “Defined
Benefit Retirement Plans” section of this Item
11. Executive Compensation.
SERP
II, funded by life insurance to minimize the cost to the Company, is designed
to
provide a competitive retirement benefit with annual value, payable for life,
equal up to 60% of average salary and bonus earned over any three full calendar
years during the participant's last ten full years of employment with the
Company preceding retirement. Selected other executive officers participate
in
SERP III, described in the Defined
Benefit Retirement Plans
section
of this Item
11. Executive Compensation.
Contributions made under SERP II and SERP III Plans do not result in taxable
income to the participants until the date at which benefits commence to be
paid.
In 2005, the Compensation Committee decided that SERP III would be frozen as
of
December 31, 2005 and discontinued future contributions under the
Plan.
Long-Term
Equity Equivalent Accumulation Plan On
October 23, 2005, the Compensation Committee approved the Long-Term Equity
Equivalent Accumulation Plan (LEAP) to commence in 2006 as a means to attract
and retain key officers and, through the award and long-term retention of
Company common stock equivalents, to further align the interests of officers
with the interests of the Company’s shareholders. Under LEAP, officers may elect
annually to receive either 5% of their eligible wages in cash or 15% of their
eligible wages in units equivalent to common stock. Cash awards are paid
bi-weekly. Company stock unit awards vest in full five years from the first
day
of the plan year to which the award relates.
Response
to Internal Revenue Code Limits on Deductibility of Certain Compensation
Section
162(m) of the Code limits to $1,000,000 per person the Company's tax deduction
of certain non-performance-based compensation paid in a given year to its most
highly compensated officers. The levels of non-performance-based salary, bonus
and other compensation paid by the Company do not typically exceed this level,
except that Mr. Zarrella's compensation exceeded this amount by $161,131 in
2005. In order to minimize the potential for lost tax deductibility, the
Compensation Committee recommended, and shareholders approved in 1998, plans
and
amendments to certain Company plans that were designed to assure that
performance-based compensation plans currently in place achieve compliance
with
the requirements of Section 162(m) of the Code. The Compensation Committee's
present intention is to use the requirements of Section 162(m) as a guide in
determining elements of compensation paid by the Company. However, the
requirements of Section 162(m) will not limit the Compensation Committee in
making any compensation decisions where the best interest of the Company and
its
shareholders dictate otherwise.
PAGE
133
Conclusion
Each
element of the Chief Executive Officer and other executive officer compensation
packages is reviewed by the Compensation Committee to ensure that base pay
and
incentive opportunities are at competitive levels and to provide incentive
systems reflecting financial performance and an alignment with shareholder
interests. In summary, we believe the total compensation philosophy and
compensation program described herein serve the best interests of the
shareholders.
|
Compensation
Committee
|
|
|
Jonathan
S. Linen, Chair
Ruth
R. McMullin
William
H. Waltrip
Barry
W. Wilson
|
Employment
Agreements, Change of Control Agreements and Severance Arrangements
See
Item
13. Certain Relationships and Related Transactions
of this
Annual Report on Form 10-K for a discussion of these agreements and
arrangements.
For
a
discussion regarding compensation of directors, see Item
10. Directors and Executive Officers of Bausch & Lomb
Incorporated
of this
Annual Report on Form 10-K.
PAGE
134
Compensation
Tables The
individuals named in the following tables include the Company's chief executive
officer and the four other most highly compensated executive officers of the
Company for the fiscal year ended December 31, 2005.
SUMMARY
COMPENSATION TABLE
|
Annual
Compensation
|
Long-Term
Compensation
|
||||||||||||||||||||||||
|
Awards
|
Payouts
|
||||||||||||||||||||||||
|
Name
and Principal Position
|
Year
|
Salary
|
Bonus
|
Other
Annual Compensation 1
|
Restricted
Stock Award(s) 2
|
Securities
Underlying Options/ SARs
|
LTIP
Payouts 3
|
All
Other Compensation 4
|
|||||||||||||||||
|
R.
L. Zarrella
Chairman
and CEO
|
2005
2004
2003
|
$
|
1,100,000
1,142,308
1,100,000
|
$
|
-
1,650,000
1,628,000
|
$
|
94,977
82,078
78,857
|
$
|
-
-
-
|
125,000
117,650
180,000
|
$
|
1,666,000
2,383,049
1,745,178
|
$
|
275,000
124,664
86,600
|
|||||||||||
|
P.
Tyle
Sr.
V.P. Research & Development and Chief Scientific
Officer
|
2005
2004
2003
|
$
|
410,001
181,347
-
|
$
|
295,000
235,706
-
|
$
|
38,673
28,254
-
|
$
|
1,457,800
488,800
-
|
25,000
35,000
-
|
$
|
666,400
-
-
|
$
|
62,994
203,238
-
|
|||||||||||
|
D.
L. Hahs
Sr.
V.P. Global Operations & Engineering
|
2005
2004
2003
|
$
|
405,600
421,200
403,685
|
$
|
280,000
565,145
315,000
|
$
|
50,362
31,795
32,221
|
$
|
842,400
-
-
|
20,000
25,000
30,000
|
$
|
416,500
268,130
130,907
|
$
$
$
|
71,251
19,465
18,432
|
|||||||||||
|
P.
G. Howes
Sr.
V.P. & President - Americas Region
|
2005
2004
2003
|
$
|
400,000
415,385
184,615
|
$
|
150,000
500,020
150,000
|
$
|
34,058
37,748
4,423
|
$
|
-
-
937,750
|
22,000
25,000
100,000
|
$
|
533,120
107,252
-
|
$
|
289,433
26,161
130,813
|
|||||||||||
|
A.
H. Farnsworth 5
Sr.
V.P. & President - Europe, Middle East and Africa
Region
|
2005
2004
2003
|
$
|
310,000
321,923
308,539
|
$
|
200,000
367,717
200,000
|
$
|
361,730
128,029
128,321
|
$
|
-
-
-
|
19,000
22,000
25,000
|
$
|
466,480
312,819
152,707
|
$
|
92,537
23,487
19,364
|
|||||||||||
|
1
|
This
column includes the aggregate incremental cost to the Company of
providing
various perquisites. For Mr. Zarrella, the amount that represents
more
than 25% of the aggregate value of his reportable perquisites in
2005 is
$48,663 for use of the Company’s aircraft. The value of personal aircraft
use is based on incremental direct operating costs. A weighted average
usage per mile cost of fuel, maintenance, landing fees, crew
travel-related expenses, and other miscellaneous variable costs have
been
included. Since the Company’s aircraft are used mainly for business
travel, fixed costs such as pilots’ and other employees’ salaries and
aircraft lease costs are not included. For Mr. Hahs, the amount that
represents more than 25% of the aggregate value of his reportable
perquisites in 2005 is $30,957 for auto
expenses.
|
|
2
|
The
value of grants is equal to the number of shares of restricted stock
multiplied by the closing market price on the date of the grant.
Holders
of restricted stock, including restricted stock granted under the
Company's Cumulative Long-Term Incentive Program, are entitled to
dividend
and voting rights on the shares. At December 31, 2005, the aggregate
number of shares, including restricted stock awarded under the Cumulative
Long-Term Incentive Program, and corresponding value as of such date
of
restricted stock owned by named individuals were as follows: Mr.
Zarrella,
65,561 shares valued at $4,451,592; Dr. Tyle, 28,000 shares valued
at
$1,901,200; Mr. Hahs, 10,000 shares valued at $679,000 and Mr.
Howes, 25,000 shares valued at
$1,697,500.
|
|
3
|
The
amounts shown represent payments of the Company’s cash-denominated
Long-Term Incentive Award Program. Payment may be in cash or shares
provided stock holding guidelines are met. Payments
must be made in shares if the participant’s stock holding requirements are
not met. This payment will be in 2007, upon review by and approval
of the
Compensation Committee and in accordance with audited 2005 financial
results.
|
|
4
|
The
amounts reported in this column, for all officers other than Mr.
Howes,
Dr. Tyle and Mr. Farnsworth consist solely of the Company’s matching
contributions under its 401(k) Plan and 401(k) Excess Plan. Relocation
expenses for Dr. Tyle in 2004 totaled $203,238. In 2005, for Mr.
Howes and
Mr. Farnsworth, relocation expenses totaling $204,500 and $33,137,
respectively, are included. A 2005 tax gross-up of $7,431 is reflected
for
Mr. Howes.
|
|
5
|
Mr.
Farnsworth’s Other Annual Compensation includes expatriate allowances of
$337,044, $105,659 and $100,486 for 2005, 2004 and 2003, respectively.
Mr.
Farnsworth is on expatriate assignment in the UK and receives the
following allowances in accordance with the Company’s Global Service
Policy: goods and services differential, housing/utilities (less
employee
contribution), annual home leave, and tax differential. The tax
differential portion of the allowances in the amounts of $207,317,
$57,064
and $55,624 for 2005, 2004 and 2003, respectively, represents actual
income tax payments made by the Company on behalf of Mr. Farnsworth,
less
amounts withheld for the years stated. These amounts adjust Mr.
Farnsworth’s taxes to amounts he would have paid in the U.S. under the
Company’s Tax Equalization Program.
|
PAGE
135
Options/SAR
Grants in Last Fiscal Year
|
Individual
Grants
|
||||||||||||||||
|
Name
|
Number
of Securities Underlying Options/SARs
Granted
1
|
%
of Total Options/SARs Granted to Employees in Fiscal Year 2
|
Exercise
or Base Price ($/Sh) 3
|
Expiration
Date
|
Grant
Date Present Value 4
|
|||||||||||
|
R.
L. Zarrella
|
125,000
|
12.76
|
%
|
$
|
71.8450
|
Jan.
31, 2015
|
$
|
3,068,750
|
||||||||
|
P.
Tyle
|
25,000
|
2.55
|
%
|
71.8450
|
Jan.
31, 2015
|
613,750
|
||||||||||
|
D.
L. Hahs
|
20,000
|
2.04
|
%
|
71.8450
|
Jan.
31, 2015
|
491,000
|
||||||||||
|
P.
G. Howes
|
22,000
|
2.25
|
%
|
71.8450
|
Jan.
31, 2015
|
540,100
|
||||||||||
|
A.
H. Farnsworth
|
19,000
|
1.94
|
%
|
71.8450
|
Jan.
31, 2015
|
466,450
|
||||||||||
|
1
|
All
of the above stock options were granted to the named executives on
January
31, 2005 and vest annually in one-third
increments.
|
2
Based
on
total number of shares underlying options granted to employees of 979,314
shares.
3
Exercise
price is equal to the fair market value based on the average of the high and
the
low stock price on the date of grant.
|
4
|
The
estimated grant date present value reflected in the above table is
determined using the Black-Scholes model based on all awards issued
on
that date. The ultimate realizable value of the options will depend
on the
future market price of the Company's stock, which cannot be forecast
with
reasonable accuracy. The actual value, if any, an optionee will realize
upon exercise will depend on the excess of the market value of the
Company's common stock over the exercise price on the date the option
is
exercised. The material assumptions and adjustments incorporated
in the
estimated valuation of the options include: (a) an option term of
10
years; (b) an expected life of five years; (c) an interest rate of
4.34%
that represents a U.S. Treasury strip rate for the nearest quarter
end
with a maturity date corresponding to the expected life; (d) volatility
of
35.146% calculated using daily stock prices for the five year period
prior
to the grant date; and (e) dividends at the rate of $.52 per share
representing the annualized dividends paid with respect to a share
of
common stock at the date of grant, and a corresponding dividend yield
of
1.138% calculated using average of the high and the low stock price
over
the expected term.
|
Aggregated
Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR
Values
|
Number
of Securities Underlying Unexercised Options/SARs at
FY-End
|
Value
of Unexercised, In-the-Money Options/SARs at FY-End
|
||||||||||||||||||
|
Name
|
Number
of Shares Acquired on Exercise
|
Value
Realized 1
|
Exercisable
|
Unexercisable
|
Exercisable
2
|
Unexercisable
2
|
|||||||||||||
|
R.
L. Zarrella
|
60,000
|
$
|
2,823,928
|
919,217
|
263,433
|
$
|
29,146,234
|
$
|
3,324,055
|
||||||||||
|
P.
Tyle
|
-
|
-
|
11,667
|
48,333
|
74,494
|
148,981
|
|||||||||||||
|
D.
L. Hahs
|
-
|
-
|
107,334
|
46,666
|
2,425,709
|
602,274
|
|||||||||||||
|
P.
G. Howes
|
-
|
-
|
75,001
|
71,999
|
2,145,936
|
1,240,814
|
|||||||||||||
|
A.
H. Farnsworth
|
4,200
|
139,335
|
117,355
|
41,999
|
2,547,970
|
512,327
|
|||||||||||||
1
Market
value of Company's common stock at exercise, minus the exercise
price.
|
2
|
Fair
market value of Company's common stock at year-end 2005 ($67.69),
minus
the exercise price.
|
Long-Term
Incentive Compensation As
described in more detail in the Report of the Compensation Committee, the
Long-Term Incentive Award Program is a cash-denominated program that uses
two-year end-to-end cycles. Awards under this program vest based on attainment
of pre-established objectives for average return on net assets and average
sales
growth over the two-year performance cycle.
PAGE
136
Long-Term
Incentive Program--Awards in Last Fiscal Year 1
|
Estimated
Future Payments - Non-Stock
|
||||||||||||||||
|
Name
|
Value
|
Performance
Period (Years) 1
|
Threshold
|
Target
|
Maximum
(200%)
|
|||||||||||
|
R.
L. Zarrella
|
$
|
2,000,000
|
2
|
$
|
-
|
$
|
2,000,000
|
$
|
4,000,000
|
|||||||
|
P.
Tyle
|
800,000
|
2
|
-
|
800,000
|
1,600,000
|
|||||||||||
|
D.
L. Hahs
|
500,000
|
2
|
-
|
500,000
|
1,000,000
|
|||||||||||
|
P.
G. Howes
|
640,000
|
2
|
-
|
640,000
|
1,280,000
|
|||||||||||
|
A.
H. Farnsworth
|
560,000
|
2
|
-
|
560,000
|
1,120,000
|
|||||||||||
|
1
|
The
program began in 2004 with the cycle covering 2004-2005. Payment
will be
made in 2007 upon review and approval of the Compensation Committee
and in
accordance with audited 2005 financial results. As a result of the
two-year nature of this program, no awards were granted in 2005 except
as
a part of a hiring package for new
officers.
|
Total
Return to Shareholders
Comparison
of Five-Year Cumulative Total Shareholder Return
December
2000 Through December 2005
Assumes
$100 invested on the last day of December 2000 with dividends reinvested
quarterly.
|
Date
|
Bausch
& Lomb Incorporated
|
S&P
Healthcare Index
|
S&P
500
|
S&P
Healthcare Equipment Index
|
|||||||||
|
December
2000
|
$
|
100.00
|
$
|
100.00
|
$
|
100.00
|
$
|
100.00
|
|||||
|
December
2001
|
95.86
|
88.08
|
88.17
|
94.91
|
|||||||||
|
December
2002
|
93.22
|
71.54
|
68.73
|
82.90
|
|||||||||
|
December
2003
|
136.13
|
82.28
|
88.41
|
109.45
|
|||||||||
|
December
2004
|
170.45
|
83.66
|
98.00
|
123.24
|
|||||||||
|
December
2005
|
180.78
|
89.05
|
102.80
|
123.31
|
|||||||||
PAGE
137
Defined
Benefit Retirement Plans The
Retirement Benefits Plan and Retirement Benefit Restoration Plan were frozen
in
2004, ceasing future benefit accruals, resulting in a lower “Estimated Annual
Benefit Payable at Age 63” calculation than reported in prior years. However,
interest continues to accrue in the hypothetical accounts on a monthly basis.
Under the Company's Retirement Benefits Plan, all employees of the Company
and
certain subsidiaries who reached age 21 and had at least one year of service,
prior to December 31, 2004, are participants. The plan is a cash balance
retirement plan, in which benefits can be paid either as a single lump sum
or
converted to a lifetime monthly annuity at time of retirement or separation
from
the Company. In addition, the Company maintains a separate Retirement Benefit
Restoration Plan, which provides eligible employees additional retirement
benefits, which would otherwise be provided under the Retirement Benefits Plan
but were excluded from that plan by specific federal regulatory limitations.
Benefits vest after five years of service as defined in the Retirement Benefits
Plan and the Retirement Benefit Restoration Plan.
Each
of
Messrs. Zarrella, Hahs and Farnsworth is a vested participant under the
Retirement Benefits Plan. Due to his announced departure from the Company,
Mr.
Howes will not be a vested participant of the Retirement Benefits Plan. Messrs.
Hahs and Farnsworth are vested participants in the Retirement Benefit
Restoration Plan. Neither Mr. Zarrella nor Mr. Howes is a participant in the
Retirement Benefit Restoration Plan. Dr. Tyle is not a participant of either
the
Retirement Benefits Plan or the Retirement Benefit Restoration
Plan.
The
estimated annual benefit provided in total by the cash balance interest accrual
described above, expressed in the form of a single life annuity, is as follows:
|
Executive
|
Estimated
Annual Benefit Payable at Age 63
|
|||
|
R.
L. Zarrella
|
$
|
10,411*
|
||
|
P.
Tyle
|
-
|
|||
|
D.
L. Hahs
|
112,128
|
|||
|
P.
G. Howes
|
-
|
|||
|
A.
H. Farnsworth
|
36,223
|
|||
*Estimated
annual benefit payable at age 60.
The
Company maintains two Supplemental Executive Retirement Plans (SERP II and
SERP
III), under which officers may become eligible for retirement benefits in
addition to those provided under the Company's Retirement Benefits Plan. No
officer is eligible to participate in more than one Company SERP, and the
officers named in the Summary Compensation Table of Item
11. Executive Compensation
are
participants in one of the SERPs described below. Participants who vest under
SERP II will receive annual benefits, payable monthly, in an amount equal to
a
percentage of their final average salary and bonus compensation. Final Average
Compensation is the highest average of a participant's compensation for any
three full calendar years during the participant's last ten full calendar years
of employment with the Company. The percentage used is a function of age at
retirement: 32% at age 55, up to 60% at age 60. Effective as of 2005, SERP
III,
a cash balance retirement plan, was frozen, ceasing future benefit accruals,
resulting in a lower “Estimated Annual Benefit Payable at Age 63” calculation
than reported in prior years. Interest continues to accrue in the hypothetical
accounts on a monthly basis. Benefits are paid either as a single lump sum
or
converted to a lifetime monthly annuity at time of retirement or separation
from
the Company. Generally, benefits under both SERP II and SERP III vest upon
the
completion of five years of service. The plans also provide for the payout
of
the net present value of all benefits in the event of a change in control of
the
Company.
Mr.
Zarrella has vested benefits under SERP II. Messrs. Hahs and Farnsworth have
vested benefits under SERP III. Dr. Tyle participates in, but will not have
vested benefits under SERP III until 2009. Due to his announced departure from
the Company, Mr. Howes will not vest under SERP III. Assuming continued
employment to age 60, the estimated annual benefit payable for Mr. Zarrella
under SERP II is $1,613,651. Under SERP III, the benefit payable is stated
as a
cash balance. The annual payments stated below are calculated by applying an
actuarial-based conversion factor against the projected value of the
individual's cash balance account at normal retirement age:
PAGE
138
|
Executive
|
Estimated
Annual Benefit Payable at Age 63 - SERP III
|
|||
|
P.
Tyle
|
$
|
5,981
|
||
|
D.
L. Hahs
|
29,748
|
|||
|
P.
G. Howes
|
-
|
|||
|
A.
H. Farnsworth
|
16,553
|
|||
Beneficial
Owners of More than 5% of the Company's Common Stock
|
Name
and Address of Beneficial Owners
|
Number
of Shares and Nature of Beneficial Ownership
|
Percent
of Outstanding Common Stock
|
|||||
|
Franklin
Mutual Advisors, LLC
51
John F. Kennedy Parkway
Short
Hills, NJ 07078
|
4,439,987
1
|
8.27
|
%
|
||||
|
Lord,
Abbett & Co., LLC
90
Hudson Street
Jersey
City, NJ 07302
|
3,212,290
2
|
5.99
|
%
|
||||
|
1
|
Shares
are as of September 30, 2006 and include 4,439,987 shares with respect
to
which there is sole power to vote; 4,439,987 shares with respect
to which
there is sole power of disposition; and 1,495 shares with respect
to which
there is shared power of
disposition.
|
|
2
|
Shares
are as of September 30, 2006 and include 3,083,590 shares with respect
to
which there is sole power to vote; 3,083,590 shares with respect
to which
there is sole power of disposition; and 128,700 shares with respect
to
which Lord Abbett & Co., LLC provides non-discretionary investment
advice with respect to voting authority and
disposition.
|
PAGE
139
Except
for Class B stock, which is transferable only in accordance with the terms
of
the Company's stock incentive plan under which it was acquired, and except
as
otherwise indicated, sole voting and investment power exists with respect to
all
shares listed as beneficially owned. No individual named below beneficially
owns
more than 1% of the Company's outstanding voting stock, other than Mr. Zarrella,
who owns 2%, and the shares beneficially owned by all directors and executive
officers as a group constitute 5% of the Company's outstanding voting
stock.
|
Name
of Beneficial Owner
|
Amount
and Nature of Beneficial Ownership
|
|||
|
Alan
M. Bennett
|
5,382
1
|
|||
|
Domenico
De Sole
|
22,917
2
|
|||
|
Alan
H. Farnsworth
|
163,203
3
|
|||
|
Paul
A. Friedman
|
3,466
4
|
|||
|
Dwain
L. Hahs
|
178,642
5
|
|||
|
Paul
G. Howes
|
151,242
6
|
|||
|
Jonathan
S. Linen
|
40,447
2
|
|||
|
Ruth
R. McMullin
|
33,926
2
|
|||
|
Linda
Johnson Rice
|
25,864
7
|
|||
|
Praveen
Tyle
|
60,206
8
|
|||
|
William
H. Waltrip
|
46,257
9
|
|||
|
Barry
W. Wilson
|
13,970
10
|
|||
|
Kenneth
L. Wolfe
|
27,867
11
|
|||
|
Ronald
L. Zarrella
|
1,087,964
12
|
|||
|
All
directors and executive officers as a group (27 persons)
|
2,932,425
|
|||
|
1
|
Includes
4,882 shares which may be acquired within 60 days through the exercise
of
stock options.
|
|
2
|
Includes
22,917 shares which may be acquired within 60 days through the exercise
of
stock options.
|
|
3
|
Includes
133,403 shares and 2,925 shares, respectively, which may be acquired
within 60 days through the exercise of stock options and acquired
under
the 401(k) Plan.
|
|
4
|
Includes
1,956 shares which may be acquired within 60 days through the exercise
of
stock options
|
|
5
|
Includes
132,334 shares and 1,596 shares, respectively, which may be acquired
within 60 days through the exercise of stock options and acquired
under
the 401(k) Plan and 10,000 shares of restricted stock subject to
satisfaction of certain vesting
conditions.
|
|
6
|
Includes
124,001 shares and 541 shares, respectively, which may be acquired
within
60 days through the exercise of stock options and acquired under
the
401(k) Plan and 16,667 shares of restricted stock subject to satisfaction
of certain vesting conditions.
|
|
7
|
Includes
19,151 shares which may be acquired within 60 days through the exercise
of
stock options.
|
|
8
|
Includes
31,667 shares and 258 shares, respectively, which may be acquired
within
60 days through the exercise of stock options and acquired under
the
401(k) Plan and 28,000 shares of restricted stock subject to satisfaction
of certain vesting conditions.
|
|
9
|
Includes
40,890 shares which may be acquired within 60 days through the exercise
of
stock options.
|
|
10
|
Includes
8,970 shares which may be acquired within 60 days through the exercise
of
stock options.
|
|
11
|
Includes
20,750 shares which may be acquired within 60 days through the exercise
of
stock options.
|
|
12
|
Includes
1,060,100 shares and 1,335 shares, respectively, which may be acquired
within 60 days through the exercise of stock options and acquired
under
the 401(k) Plan.
|
In
addition to shares beneficially owned by directors and executive officers of
the
Company, as indicated above, such persons may also own Common stock equivalents
under deferred compensation plans of the Company, reflecting further their
economic stake in the value of the Company's Common stock. As of December 1,
2006, the following Common stock equivalents were owned by (i) the Company's
executive officers: Mr. Zarrella, 190,011; Mr. Farnsworth, 10,582; Mr. Hahs,
13,790; Mr. Howes, 1,298; Dr. Tyle, 1,298; (ii) the Company's directors: Mr.
Bennett, 2,666; Mr. De Sole, 7,041; Dr. Friedman, 1,625; Mr. Linen, 1,532;
Mrs.
McMullin, 1,532; Mrs. Rice, 4,989; Mr. Waltrip, 1,532; Mr. Wilson, 4,920; Mr.
Wolfe, 1,532; and (iii) all executive officers and directors of the Company
as a
group, 333,192.
As
of
December 1, 2006, the following Common stock equivalents were owned by the
Company’s executive officers under the Long-Term Equity Equivalent Accumulation
Plan, which will vest on January 1, 2011: Dr. Tyle, 1,063 shares; Mr. Hahs,
1,052 shares; Mr. Howes, 1,037 shares; Mr. Farnsworth, 843 shares; and all
executive officers and directors of the Company as a group, 12,665.
PAGE
140
Item
13. Certain
Relationships and Related Transactions
In
connection with Class B shares purchased under the Company's stock incentive
plans prior to 2002, the Company could loan the participant an amount equal
to
the full amount of the purchase price of those shares, with the shares held
by
the Company as collateral for the loan. The rate of interest on loans to
participants was the lesser of the applicable federal rates announced monthly
by
the Internal Revenue Service pursuant to Section 1274(d) of the Code, or 9%.
To
the extent applicable, the largest aggregate amount of indebtedness outstanding
which exceeded $60,000 at any time in the Company's 2005 fiscal year for
executive officers of the Company was as follows: Mr. Alan H. Farnsworth,
$338,842; Mr. Dwain L. Hahs, $432,973; Mr. Jurij Z. Kushner, $215,411; Mr.
John
M. Loughlin, $175,933; Ms. Angela J. Panzarella, $202,336; and Mr. Robert B.
Stiles, $180,387. As of December 1, 2006, the outstanding amount of such
indebtedness of the Company's executive officers was as follows: Mr. Farnsworth,
$332,099; Mr. Hahs, $155,189; and Ms. Panzarella, $198,310. All loans to
directors were paid in full in 2003.
Mr.
Zarrella and the Company signed a five-year employment agreement, dated November
9, 2001, which has automatically renewed for a one-year term in accordance
with
the agreement and will renew for successive one-year terms, unless otherwise
terminated. The terms of the agreement provide for a base salary of $1.1 million
during the first two employment years and a target bonus of 100% of base pay.
On
November 9, 2001, the Compensation Committee of the Board of Directors awarded
Mr. Zarrella immediately-vested options to purchase 500,000 shares of the
Company's Common stock at an exercise price of $31.91 under the 1990 Stock
Incentive Plan. An additional 500,000 options under this Plan were granted
to
Mr. Zarrella on January 2, 2002 at an exercise price of $37.685. These options
vested in one-third increments over a three-year period. The Company also agreed
to pay Mr. Zarrella an amount up to $5 million in cash and stock to compensate
him for benefits forfeited at his prior employer in accepting employment with
the Company (including annual bonus incentive compensation, long-term incentive
payments, and stock option value). That obligation was satisfied on January
2,
2002, with a cash payment of $2.1 million and a restricted stock grant of 65,561
shares to Mr. Zarrella. The restricted stock grant was made under the 1990
Stock
Incentive Plan and vested in its entirety on the fifth anniversary of Mr.
Zarrella's appointment.
The
agreement also provides for a performance-based long-term incentive plan for
one, two, and three-year award cycles, each of which has a target award of
$1
million paid in Company restricted stock. Although the agreement provided for
target awards of $1 million for subsequent three-year award cycles, for
2004-2005 Mr. Zarrella will be covered by the new cash-denominated program
described in the Report
of the Compensation Committee
in
Item
11. Executive Compensation
of this
Annual Report on Form 10-K. In addition, the agreement provides for Mr.
Zarrella's participation in employee welfare and benefits plans and other
standard senior executive perquisites. This includes participation in SERP
II.
On the effective date of the employment agreement, he was vested in SERP II
at
26% of final average compensation (based on 1999, 2000, and 2001 compensation
with his prior employer). The benefit will increase each year of his employment
up to a maximum of 60% of final average compensation achieved at age 60. If
Mr.
Zarrella is terminated without cause, or if Mr. Zarrella terminates employment
for good reason, both as defined in the agreement, he will be entitled to his
annual base salary and the highest annual bonus, plus medical and other
benefits, for the remaining period of his employment agreement, and he will
vest
immediately in the SERP II benefit which would have been received at the end
of
the employment period under the agreement.
Mr.
Zarrella has also entered into a change of control agreement with the standard
features described below. In the event his employment is terminated following
a
change in the control of the Company, he would be entitled to the greater of
(i)
his remaining benefits under his employment agreement or (ii) benefits under
the
change of control agreement.
Under
a
1996 Incentive Stock Option Agreement and a 1996 Non-Qualified Stock Option
Agreement, Mr. William H. Waltrip, a director, was granted options to purchase
2,539 shares and 97,461 shares of Class B stock, respectively, at a price of
$39.38 per share. The options were granted to Mr. Waltrip in connection with
his
service as interim Chairman and Chief Executive Officer of the Company and
to
provide Mr. Waltrip with the full benefit of any appreciation in the value
of
the Company’s stock during his tenure in that role. Under an agreement with the
Company, dated January 15, 1996, Mr. Waltrip was entitled to receive from the
Company $2.43 per share upon the exercise of each of the options granted to
him.
Mr. Waltrip exercised the options under the Incentive Stock Option Agreement
on
March 17, 1999 (2,539 options), and exercised the options under the
Non-Qualified Stock Option Agreement on May 13, 2005 (47,461 options), August
1,
2005 (25,000 options) and November 1, 2005 (25,000 options). In total, pursuant
to the terms of the January 15, 1996 agreement, Mr. Waltrip has received
$243,000 from the Company.
PAGE
141
Dr.
Tyle
is and Mr. Howes 1
was
party to additional individual employment arrangements with the Company: Dr.
Tyle’s arrangement commenced in 2004 and Mr. Howes’ arrangement commenced in
2003. However, Dr. Tyle and Mr. Howes did not become named executive officers
until 2006 and 2005, respectively. Dr. Tyle is and Mr. Howes was eligible to
participate in certain Company management plans that have been previously filed
with the SEC, including the Annual Incentive Compensation Plan and the 2003
Long-Term Incentive Plan. In addition, Dr. Tyle is and Mr. Howes was entitled
to
receive employee benefits made available to other employees and officers of
the
Company and their eligible dependents.
Dr.
Tyle
also received upon commencement of his employment, a stock option award of
35,000 shares granted on July 19, 2004, which vests in three equal installments
over a three-year period, and a restricted stock award of 8,000 shares granted
on July 19, 2004, which vests in three equal installments in three, five and
seven years from the date of grant. Mr.
Howes
received upon commencement of his employment, a stock option award of 100,000
shares granted on July 1, 2003 at a price of $37.18 per share, vesting in three
equal installments over a three-year period and a restricted stock award of
25,000 shares granted on July 1, 2003, vesting in three equal installments
in
three, five and seven years from the date of grant.
Dr.
Tyle’s 2004 employment arrangement modified severance benefits payable to him
under the Company’s Officer Separation Plan. Under the arrangement, if Dr.
Tyle’s employment terminates prior to July 19, 2007, under circumstances which
would otherwise entitle him to severance protection under the Company’s Officer
Separation Plan: (i) unvested portions of his restricted stock and his stock
option award granted under his 2004 employment arrangement vest immediately
upon
the termination date; and (ii) if accelerated vesting is not approved under
the
Company’s 2003 Long-Term Incentive Plan, the Company will pay him, subject to
withholdings, an amount equal to the fair market value of the unvested
restricted stock award and the excess, if any, of the fair market value of
the
unvested stock option award over the option’s exercise price. In addition, if
Dr. Tyle is involuntarily terminated after three years from his hire date under
circumstances providing him with benefits under the Officer Separation Plan,
then remaining unvested portions of Dr. Tyle’s restricted stock grant, if any,
shall immediately vest on such date of termination. In the event of a
termination due to a change of control, Dr. Tyle’s severance arrangement would
be superseded by the change of control agreement described below.
Mr.
Howes’ 2003 employment arrangement also modified his severance benefits under
the Officer Separation Plan. If Mr. Howes’ employment had terminated prior to
July 1, 2006, and under circumstances which would have otherwise entitled him
to
severance protection under the Company’s Officer Separation Plan, excluding a
change of control, the Company would have provided Mr. Howes with a cash payout
equal to the fair market value of the restricted stock granted to him under
his
2003 employment arrangement. If his employment had terminated due to a change
of
control, Mr. Howes’ severance arrangement would have been superseded by the
change of control agreement described below.
The
Company has entered into a change of control agreement, for an indefinite term,
with each individual in the Summary
Compensation Table
in Item
11. Executive Compensation of
this
Annual Report on Form 10-K. Each agreement provides that, in the event of a
change of control (as defined in the agreements) which is followed within three
years, as determined under the agreements, by: (i) a termination of the
officer's employment, (ii) a downgrading of the officer's position, or (iii)
a
voluntary termination under circumstances specified in the agreements, the
officer will be entitled to salary and pro rata bonus then due, and a lump
sum
separation payment equal to three times annual base salary and bonus as
determined under the agreements. Each officer will also be entitled to a
continuation of certain benefits and perquisites for up to three additional
years as determined under the agreements. These benefits and perquisites may
be
reduced by corresponding benefits or perquisites provided by a subsequent
employer during the period in which they are provided.
In
January 2005, the Company established a Charitable Contribution Program for
officers of the Company. Under this program, the Company matches contributions
made by officers on a dollar-for-dollar basis up to $10,000 annually. The match
must be made to no more than two bona fide exempt organizations meeting the
requirements of Section 501(3)(c) of the Internal Revenue Code selected by
the
participant.
1 As
announced in the Company's Current Report on Form 8-K, filed January 5, 2007,
Mr. Howes intends to resign from the Company.
PAGE
142
Item
14. Principal
Accounting Fees and Services
The
Audit
Committee's policy is to pre-approve all audit and permissible non-audit
services provided by the independent accountants. The Audit Committee
pre-approved all such audit and non-audit services provided by the independent
accountants. These services have included audit services, audit-related
services, tax services and other services. Pre-approval is generally provided
for up to one year and any pre-approval is detailed as to the particular service
or category of services and is generally subject to a specific budget. The
independent accountants and management are required to periodically report
to
the Audit Committee regarding the extent of services provided by the independent
accountants in accordance with this pre-approval and the fees for the services
performed to date. The Audit Committee may also pre-approve particular services
on a case-by-case basis.
Audit
Fees In
its
review, the Audit Committee examined a report from PricewaterhouseCoopers LLP
of
the fees billed to the Company for fiscal years 2005 and 2004 of $15,390,000
and
$7,495,000, respectively, for the audit of the Company's annual financial
statements and reviews of quarterly reports on Form 10-Q. The 2005 and 2004
fees
also include an attestation to the Company's assessment and effectiveness of
internal controls over financial reporting.
Audit-Related
Fees PricewaterhouseCoopers
LLP received fees of $821,000 in 2005, including $131,000 for benefit plan
reviews and other audit-related projects totaling $690,000. In 2004, the
audit-related fees totaled $216,000 including $99,000 for benefit plan reviews,
and $117,000 for various other audit-related projects.
Tax
Fees PricewaterhouseCoopers
LLP received no fees for tax-related services in 2005 or 2004.
All
Other Fees PricewaterhouseCoopers
LLP received $17,000 of other fees in 2005 relating primarily to accounting
research software. In 2004, all other fees totaled $47,000 relating primarily
to
accounting research software and participation by the Company in an industry
coalition coordinated by PricewaterhouseCoopers LLP.
Prior
to
approving PricewaterhouseCoopers LLP as the Company's independent accountants
for 2006, the Committee considered whether PricewaterhouseCoopers LLP's
provision of services other than audit services is compatible with maintaining
the accountants' independence.
PAGE
143
Part
III
Item
15. Exhibits,
Financial Statement Schedules
The
following documents or the portions thereof indicated are filed as a part of
this Report.
|
(a)
|
Index
to Financial Statements and Financial Statement Schedules Covered
by
Reports of Independent Auditors.
|
Page
|
|
|
1.
|
Financial
statements filed herewith:
|
||
|
Report
of Independent Registered Public Accounting Firm
|
145
|
||
|
Balance
Sheets at December 31, 2005 and December 25, 2004
|
61
|
||
|
For
the years ended December 31, 2005, December 25, 2004 and December
27,
2003:
|
|||
|
Statements
of Income
|
60
|
||
|
Statements
of Cash Flows
|
62
|
||
|
Statements
of Changes in Shareholders' Equity
|
63
|
||
|
Notes
to Financial Statements
|
65
|
||
|
All
schedules have been omitted because the required information is not
present or not present in amounts sufficient to require submission
of the
schedule, or because the information required is included in the
financial
statements or the notes thereto.
|
|||
|
(b)
|
Item
601 Exhibits
|
|
|
Those
exhibits required to be filed by Item 601 of Regulation S-K are listed
in
the Exhibit Index immediately preceding the exhibits filed herewith
and
such listing is incorporated herein by reference. Each of Exhibits
(10)-a
through (10)-w, (10)-hh through (10)-kk, (10)-nn and (10)-pp is a
management contract or compensatory plan or arrangement required
to be
filed as an exhibit to this Form pursuant to Item 15(c) of this Annual
Report on Form 10-K.
|
PAGE
144
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.
(Registrant)
Bausch
& Lomb Incorporated
By
(Signature and Title) /s/
Ronald L. Zarrella
Ronald
L.
Zarrella
Chairman
and Chief Executive Officer
Date
February
7, 2007
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.
Principal
Executive Officer
By
(Signature and Title) /s/
Ronald L. Zarrella
Ronald
L.
Zarrella
Chairman
and Chief Executive Officer
Date
February
7, 2007
Principal
Financial Officer
By
(Signature and Title) /s/
Stephen C. McCluski
Stephen
C. McCluski
Senior
Vice President and Chief Financial Officer
Date
February
7, 2007
Controller
By
(Signature and Title) /s/
Jurij Z. Kushner
Jurij
Z.
Kushner
Vice
President and Controller
Date
February
7, 2007
Directors
Alan
M.
Bennett
Domenico
De Sole
Paul
A.
Friedman
Jonathan
S. Linen
Ruth
R.
McMullin
Linda
Johnson Rice
William
H. Waltrip
Barry
W.
Wilson
Kenneth
L. Wolfe
Ronald
L.
Zarrella
Date
February
7, 2007
By
(Signature and Title) /s/ Robert B. Stiles
Robert
B.
Stiles
Attorney-in-Fact
PAGE
145
Report
of Independent Registered Public Accounting Firm
To
the Shareholders
and Board of Directors of Bausch & Lomb Incorporated:
We
have
completed integrated audits of Bausch & Lomb Incorporated’s December 31,
2005 and December 25, 2004 consolidated financial statements and of its internal
control over financial reporting as of December 31, 2005, and an audit of its
December 27, 2003 consolidated financial statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Our
opinions, based on our audits, are presented below.
Consolidated
Financial Statements In
our
opinion, the consolidated financial statements listed in the index appearing
under Item 15(a)(1) present fairly, in all material respects, the financial
position of Bausch & Lomb Incorporated and its subsidiaries at December 31,
2005 and December 25, 2004, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2005 in
conformity with accounting principles generally accepted in the United States
of
America. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements
in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). 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 of financial statements includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
As
described in Note
2 — Restatement to
the
consolidated financial statements, the Company restated its 2004 and 2003
consolidated financial statements.
As
described in Note
14 — Employee Benefits to
the
consolidated financial statements, as of July 1, 2004 the Company adopted FSP
FAS 106-2, Accounting
and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003.
As
described in Note
19 — Supplemental Balance Sheet Information to
the
consolidated financial statements, as of December 27, 2003, the Company adopted
Statement of Financial Accounting Standards No. 143, Accounting
for Asset Retirement Obligations.
PAGE
146
Internal
Control Over Financial Reporting Also,
we
have audited management's assessment, included in Management's Report on
Internal Control Over Financial Reporting appearing under Item
9A Controls and Procedures,
that
Bausch & Lomb Incorporated did not maintain effective internal control over
financial reporting as of December 31, 2005, because (1) the Company did not
maintain an effective control environment, (2) the Company did not maintain
effective controls to provide reasonable assurance of the completeness and
accuracy of certain financial statement accounts in certain subsidiaries, (3)
the Company did not maintain effective controls over certain subsidiaries'
relationships with their key distributors nor over the installation of
refractive laser surgery equipment in multiple locations to ensure that revenue
associated with such distributor and laser sales was recognized in accordance
with generally accepted accounting principles (GAAP), (4) the Company did not
maintain effective controls over its accounting for income taxes and indirect
taxes, including VAT and certain import related taxes related to its Brazilian
subsidiary, and (5) the Company did not maintain effective controls to ensure
that the Company's Deferred Compensation Plan document was amended to accurately
reflect the Plan's intended design, based
on
criteria established in Internal
Control - Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness
of
internal control over financial reporting. Our responsibility is to express
opinions on management's assessment and on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We
conducted our audit of internal control over financial reporting in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. An audit of internal control
over financial reporting includes obtaining an understanding of internal control
over financial reporting, evaluating management's assessment, testing and
evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we consider necessary in the circumstances.
We believe that our audit provides a reasonable basis for our
opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with GAAP. A company’s internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance of records that,
in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with GAAP, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management
and
directors of the company; and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the company’s assets that could have a material effect on the financial
statements.
Because
of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because
of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
PAGE
147
A
material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The following material weaknesses have been identified and included
in management's assessment as of December 31, 2005:
(1)
The Company did not maintain an
effective control environment because of the following: (a) the Company did
not
adequately and consistently reinforce the importance of adherence to controls
and the Company's code of conduct, which contributed to certain of the
restatement items that occurred across a broad range of the Company's
operational and functional areas; (b) the Company failed to institute all
elements of an effective program to help prevent and detect fraud by Company
employees; (c) the Company did not establish and maintain effective corporate
and regional management oversight and monitoring of operations to detect
subsidiaries' managements' override of established financial controls and
accounting policies, execution of improper transactions and accounting entries
to impact revenue and earnings, and reporting of these transactions to the
appropriate finance personnel or the Company's independent registered public
accounting firm; and (d) the Company did not maintain a sufficient complement
of
personnel with an appropriate level of knowledge, experience and training in
the
application of GAAP, including revenue recognition and accounting for income
taxes, and in internal control over financial reporting commensurate with its
financial reporting requirements. This material weakness contributed to the
additional material weaknesses discussed in items 2-4 below.
(2)
The
Company did not maintain effective controls to provide reasonable assurance
of
the completeness and accuracy of certain financial statement accounts in certain
subsidiaries. Specifically, the Company did not maintain effective controls
to
ensure that account reconciliations and journal entries were supported by
appropriate analysis and documentation in connection with the financial
reporting and close process. This material weakness resulted in the restatement
of the Company's 2004 and 2003 annual consolidated financial statements and
all
quarterly periods of 2004 and the first two quarters of 2005, as well as
adjustments, including audit adjustments, to the 2005 third quarter interim
and
the 2005 annual consolidated financial statements. In addition, the Company
restated beginning shareholders' equity for the impact of the restatement for
periods prior to 2003.
(3)
The
Company did not maintain effective controls over certain subsidiaries'
relationships with their key distributors, particularly in the Company's Korea,
Japan and India subsidiaries, and did not maintain effective controls over
the
installation of refractive laser surgery equipment in multiple locations where
the Company does business, to ensure that revenue associated with such
distributor and laser sales was recognized in accordance with GAAP.
Specifically, the Company did not maintain effective controls to provide
reasonable assurance that customer arrangements were adequately reviewed by
the
appropriate persons at such subsidiaries to identify and provide reasonable
assurance regarding the proper application of the appropriate method of revenue
recognition in accordance with GAAP. In addition, the Company did not maintain
effective controls to prevent subsidiary management from overriding established
financial controls or making errors in the application of policies concerning
the accuracy and valuation of accounts receivable and the maintenance of
distributor inventory at established threshold levels, as well as regarding
administration of credit limits, extensions of credit terms, price discounting,
sales returns and exchanges, transfer of the risk of ownership, and sales order
entry and control. This material weakness resulted in the restatement of the
Company's 2004 and 2003 annual consolidated financial statements and all
quarterly periods of 2004, and the first two quarters of 2005, as well as
adjustments, including audit adjustments, to the 2005 third quarter interim
and
the 2005 annual consolidated financial statements. In addition, the Company
restated beginning shareholders' equity for the impact of the restatement for
periods prior to 2003.
PAGE
148
(4)
The
Company did not maintain effective controls over the determination and reporting
of its income tax payable, deferred income tax assets and liabilities, the
related valuation allowances and income tax expense. Specifically, effective
controls were not designed and in place to: (i) ensure management maintained
the
appropriate level of personnel resources with adequate experience and expertise
in the area of U.S. GAAP accounting for income taxes; (ii) ensure roles and
responsibilities with respect to accounting for income taxes were clearly
defined; (iii) identify and evaluate in a timely manner the tax implications
of
certain non-routine transactions, including transactions related to
acquisitions; (iv) provide reasonable assurance as to the completeness and
accuracy of the provision for income taxes and income taxes payable including
tax reserves and return to provision adjustments; and (v) reconcile differences
between the tax and financial reporting basis of its assets and liabilities
with
its deferred income tax assets and liabilities. In addition, the Company did
not
maintain effective controls over indirect taxes, including VAT and certain
import related taxes related to its Brazilian subsidiary. This material weakness
resulted in the restatement of the Company's 2004 and 2003 annual consolidated
financial statements and all quarterly periods of 2004, and the first two
quarters of 2005, as well as adjustments, including audit adjustments, to the
2005 third quarter interim and the 2005 annual consolidated financial
statements. In addition, the Company restated beginning shareholders' equity
for
the impact of the restatement for periods prior to 2003.
(5)
The
Company did not maintain effective controls to ensure that the Company's
Deferred Compensation Plan document was amended to accurately reflect the Plan's
intended design. This inaccurate amendment of the plan resulted in the Company
not properly marking to market stock awards issued under the Company's Long-Term
Incentive Plan that were deferred under the Deferred Compensation Plan which
impacted the completeness and accuracy of selling, administrative and general
expense and accrued liabilities. This material weakness resulted in the
restatement of the Company's 2004 and 2003 annual consolidated financial
statements and all quarterly periods of 2004, and the first two quarters of
2005, as well as adjustments, including audit adjustments, to the 2005 third
quarter interim and the 2005 annual consolidated financial statements. In
addition, the Company restated beginning shareholders' equity for the impact
of
the restatement for periods prior to 2003.
Additionally,
each of these material weaknesses above could result in a material misstatement
to the Company's interim or annual consolidated financial statements and
disclosures which would not be prevented or detected.
These
material weaknesses were considered in determining the nature, timing, and
extent of audit tests applied in our audit of the 2005 consolidated financial
statements, and our opinion regarding the effectiveness of the Company’s
internal control over financial reporting does not affect our opinion on those
consolidated financial statements.
As
described in Management's Report on Internal Control Over Financial Reporting,
management has excluded Freda from its assessment of internal control over
financial reporting as of December 31, 2005 because it was acquired by the
Company in a purchase business combination during the fourth quarter of 2005.
We
have also excluded Freda from our audit of internal control over financial
reporting. Freda is a majority-owned subsidiary whose total assets and total
net
sales represent eight percent and one percent, respectively, of the related
consolidated financial statement amounts as of and for the year ended December
31, 2005.
In
our
opinion, management's assessment that Bausch & Lomb Incorporated did not
maintain effective internal control over financial reporting as of December
31,
2005, is fairly stated, in all material respects, based on criteria established
in Internal
Control - Integrated Framework
issued
by the COSO. Also, in our opinion, because of the effects of the material
weaknesses described above on the achievement of the objectives of the control
criteria, Bausch & Lomb Incorporated has not maintained effective internal
control over financial reporting as of December 31, 2005, based on criteria
established in Internal
Control - Integrated Framework
issued
by the COSO.
/s/
PricewaterhouseCoopers LLP
PricewaterhouseCoopers
LLP
Rochester,
New York
February
7, 2007
PAGE
149
Exhibit
Index
|
S-K
Item
601
No.
|
Document
|
|
(3)-a
|
Restated
Certificate of Incorporation of Bausch & Lomb Incorporated (filed
herewith).
|
|
(3)-b
|
Amended
and Restated By-Laws of Bausch & Lomb Incorporated, effective April
26, 2005 (filed as Exhibit (3)-e to the Company's Form 10-Q for the
quarter ended June 25, 2005, File No. 1-4105, and incorporated herein
by
reference).
|
|
(4)-a
|
See
Exhibit (3)-a.
|
|
(4)-b
|
Form
of Indenture, dated as of September 1, 1991, between the Company
and
Citibank, N.A., as Trustee, with respect to the Company's Medium-Term
Notes (filed as Exhibit (4)-a to the Company's Registration Statement
on
Form S-3, File No. 33-42858 and incorporated herein by
reference).
|
|
(4)-c
|
Supplemental
Indenture No. 1, dated May 13, 1998, between the Company and Citibank,
N.A. (filed as Exhibit 3.1 to the Company's Current Report on Form
8-K,
dated July 24, 1998, File No. 1-4105 and incorporated herein by
reference).
|
|
(4)-d
|
Supplemental
Indenture No. 2, dated as of July 29, 1998, between the Company and
Citibank, N.A. (filed as Exhibit 3.2 to the Company's Current Report
on
Form 8-K, dated July 24, 1998, File No. 1-4105 and incorporated herein
by
reference).
|
|
(4)-e
|
Supplemental
Indenture No. 3, dated November 21, 2002, between the Company and
Citibank, N.A. (filed as Exhibit 4.8 to the Company's Current Report
on
Form 8-K, dated November 18, 2002, File No. 1-4105 and incorporated
herein
by reference).
|
|
(4)-f
|
Supplemental
Indenture No. 4, dated August 1, 2003, between the Company and Citibank,
N.A. (filed as Exhibit 4.1 to the Company's Current Report on Form
8-K,
dated August 6, 2003, File No. 1-4105 and incorporated herein by
reference).
|
|
(4)-g
|
Fifth
Supplemental Indenture, dated August 4, 2003, between the Company
and
Citibank, N.A. (filed as Exhibit 4.2 to the Company's Current Report
on
Form 8-K, filed August 6, 2003, File No. 1-4105, and incorporated
herein
by reference).
|
|
(4)-h
|
Sixth
Supplemental Indenture, dated December 20, 2004, between the Company
and
Citibank, N.A. (filed as Exhibit (4)-j to the Company's Annual Report
on
Form 10-K for the fiscal year ended December 25, 2004, File No. 1-4105
and
incorporated herein by reference).
|
|
(4)-i
|
Supplemental
Indenture No. 7, dated as of June 6, 2006 (filed as Exhibit (4) to
the
Company's Current Report on Form 8-K, filed June 12, 2006 and incorporated
herein by reference).
|
|
(4)-j
|
Supplemental
Indenture No. 8, dated as of November 8, 2006 (filed
herewith).
|
|
(4)-k
|
Amended
and Restated Supplemental Indenture No. 8, effective as of November
8,
2006 (filed herewith).
|
|
(10)-a
|
Change
of Control Employment Agreement with certain executive officers of
the
Company (filed as Exhibit (10)-a to the Company's Annual Report on
Form
10-K for the fiscal year ended December 29, 1990, File No. 1-4105
and
incorporated herein by reference).
|
|
(10)-b
|
Change
of Control Employment Agreement with certain executive officers of
the
Company (filed as Exhibit (10)-b to the Company's Annual Report on
Form
10-K for the fiscal year ended December 28, 1996, File No. 1-4105
and
incorporated herein by reference).
|
PAGE
150
|
(10)-c
|
Amended
and Restated Supplemental Retirement Income Plan II (filed as Exhibit
(10)-f to the Company's Annual Report on Form 10-K for the fiscal
year
ended December 29, 1990, File No. 1-4105 and incorporated herein
by
reference).
|
|
(10)-d
|
Amended
and Restated Supplemental Retirement Income Plan III, dated December
31,
2000 filed as Exhibit (10)-d to the Company's Annual Report on Form
10-K
for the fiscal year ended December 30, 2000, File No. 1-4105 and
incorporated herein by reference).
|
|
(10)-e
|
Annual
Retainer Stock Plan for Non-Employee Directors (filed as Exhibit
(10)-dd
to the Company's Annual Report on Form 10-K for the fiscal year ended
December 28, 1996, File No. 1-4105 and incorporated herein by
reference).
|
|
(10)-f
|
Management
Incentive Compensation Plan (filed as Exhibit (10)-b to the Company's
Form
10-Q for the quarter ended June 27, 1998, File No. 1-4105 and incorporated
herein by reference).
|
|
(10)-g
|
Employment
Agreement dated November 9, 2001 between Bausch & Lomb Incorporated
and Ronald L. Zarrella, Chairman and Chief Executive Officer (filed
as
Exhibit (10)-z to the Company's Annual Report on Form 10-K for the
fiscal
year ended December 29, 2001, File No. 1-4105 and incorporated herein
by
reference).
|
|
(10)-h
|
Amended
and Restated 1990 Stock Incentive Plan (filed as Exhibit (10)-s to
the
Company's Annual Report on Form 10-K for the year ended December
28, 2002,
File No. 1-4105 and incorporated herein by reference).
|
|
(10)-i
|
Amendment
No. 6 to the Bausch & Lomb Incorporated 1990 Stock Incentive Plan
(filed as Exhibit (10)-t to the Company's Annual Report on Form 10-K
for
the year ended December 28, 2002, File No. 1-4105 and incorporated
herein
by reference).
|
|
(10)-j
|
Corporate
Officer Separation Plan (filed as Exhibit (10)-v to the Company's
Annual
Report on Form 10-K for the year ended December 28, 2002, File No.
1-4105
and incorporated herein by reference).
|
|
(10)-k
|
Amended
and Restated 2001 Stock Incentive Plan for Non-Officers, as approved
by
the Committee on Management on January 22, 2001 and amended on July
23,
2001 (filed as Exhibit (10)-w to the Company's Annual Report on Form
10-K
for the year ended December 28, 2002, File No. 1-4105 and incorporated
herein by reference).
|
|
(10)-l
|
Amendment
No. 2 to the Bausch & Lomb Incorporated 2001 Stock Incentive Plan for
Non-Officers, effective January 1, 2003 (filed as Exhibit (10)-x
to the
Company's Annual Report on Form 10-K for the year ended December
28, 2002,
File No. 1-4105 and incorporated herein by reference).
|
|
(10)-m
|
2003
Long-Term Incentive Plan as amended and restated on July 15, 2003
(filed
as Exhibit (10)-b to the Company's Form 10-Q for the quarter ended
June
28, 2003, File No. 1-4105 and incorporated herein by
reference).
|
|
(10)-n
|
Amendment
No. 1 to the Amended and Restated Supplemental Retirement Income
Plan III
(filed as Exhibit (10)-b to the Company's Form 10-Q for the quarter
ended
September 27, 2003, File No. 1-4105 and incorporated herein by
reference).
|
|
(10)-o
|
Stock
Unit Award Agreement pursuant to the 2003 Long-Term Incentive Plan
(filed
as Exhibit (10)-c to the Company's Form 10-Q for the quarter ended
September 27, 2003, File No. 1-4105 and incorporated herein by
reference).
|
|
(10)-p
|
Restricted
Stock Award Agreement pursuant to the 2003 Long-Term Incentive Plan
(filed
as Exhibit (10)-d to the Company's Form 10-Q for the quarter ended
September 27, 2003, File No. 1-4105 and incorporated herein by
reference).
|
|
(10)-q
|
Bausch
& Lomb Incorporated Annual Incentive Compensation Plan, as amended
and
restated on July 25, 2006 (filed herewith).
|
PAGE
151
|
(10)-r
|
Director
Deferred Compensation Plan as amended and restated on December 1,
2003
(filed as Exhibit (10)-w to the Company's Annual Report on Form 10-K
for
the year ended December 27, 2003, File No. 1-4105 and incorporated
herein
by reference).
|
|
(10)-s
|
Restricted
Stock Deferred Compensation Plan, as amended and restated on December
1,
2003 (filed as Exhibit (10)-x to the Company's Annual Report on Form
10-K
for the year ended December 27, 2003, File No. 1-4105 and incorporated
herein by reference).
|
|
(10)-t
|
Executive
Deferred Compensation Plan, as amended and restated on December 1,
2003
(filed as Exhibit (10)-y to the Company's Annual Report on Form 10-K
for
the year ended December 27, 2003, File No. 1-4105 and incorporated
herein
by reference).
|
|
(10)-u
|
Stock
Option Agreement Pursuant to 2003 Long-Term Incentive Plan (filed
as
Exhibit (10)-z to the Company's Annual Report on Form 10-K for the
year
ended December 27, 2003, File No. 1-4105 and incorporated herein
by
reference).
|
|
(10)-v
|
Long-Term
Equity Equivalent Accumulation Plan (filed herewith).
|
|
(10)-w
|
Amendment
No. 2 to the Amended and Restated Supplemental Retirement Income
Plan III
(filed herewith).
|
|
(10)-x
|
Credit
Agreement by and among Bausch & Lomb Incorporated, certain banks,
financial institutions and other institutional lenders and issuers
of
letter of credit, Citigroup Global Markets Inc., Keybank National
Association and Citibank, N.A., dated July 26, 2005 (filed as Exhibit
(10)-b to the Company's Form 10-Q for the quarter ended June 25,
2005,
File No. 1-4105 and incorporated herein by reference).
|
|
(10)-y
|
Credit
Agreement between, among others, Citibank International PLC, as facility
agent, Bausch & Lomb B.V. and Bausch & Lomb Incorporated, dated
November 29, 2005 (filed herewith).
|
|
(10)-z
|
Letter
Waiver (U.S. Credit Agreement), dated November 23, 2005 (filed
herewith).
|
|
(10)-aa
|
Letter
Waiver (U.S. Credit Agreement), dated February 24, 2006 (filed
herewith).
|
|
(10)-bb
|
Letter
Waiver (B.V. Term Loan), dated February 24, 2006 (filed
herewith).
|
|
(10)-cc
|
Letter
Waiver (U.S. Credit Agreement), dated May 17, 2006 (filed
herewith).
|
|
(10)-dd
|
Letter
Waiver (B.V. Term Loan), dated May 17, 2006 (filed
herewith).
|
|
(10)-ee
|
Letter
Waiver (U.S. Credit Agreement), dated August 28, 2006 (filed
herewith).
|
|
(10)-ff
|
Letter
Waiver (B.V. Term Loan), dated August 30, 2006 (filed
herewith).
|
|
(10)-gg
|
Agreement
for the Sale and Purchase of the Entire Issued Capital of Sino Concept
Technology Limited, by and between Sino Biopharmaceutical Limited
and
Bausch & Lomb Incorporated, dated July 2, 2005 (filed
herewith).
|
|
(10)-hh
|
Summary
of employment arrangement for Praveen Tyle, Senior Vice President
and
Chief Scientific Officer (filed herewith).
|
|
(10)-ii
|
Summary
of terms for agreement to authorize Company contribution for certain
participants in the 401(k) Excess Program under the non-qualified
Executive Deferred Compensation Plan (filed herewith).
|
|
(10)-jj
|
Executive
Deferred Compensation Plan for Post-2004 Deferrals, dated November
7, 2006
(filed herewith).
|
PAGE
152
|
(10)-kk
|
Amendment
to Executive Deferred Compensation Plan, dated November 7, 2006 (filed
herewith).
|
|
(10)-ll
|
Letter
Waiver (U.S. Credit Agreement), dated December 13, 2006 (filed
herewith).
|
|
(10)-mm
|
Letter
Waiver (B.V. Term Loan), dated December 13, 2006 (filed
herewith).
|
|
(10)-nn
|
Description
of certain employment terms for Paul G. Howes, Senior Vice President
and
President, Americas Region, dated November 12, 2003 (filed as Exhibit
(10)-w of the Company's Annual Report on Form 10-K for the fiscal
year
ended December 25, 2004, File No. 1-4105 and incorporated herein
by
reference).
|
|
(10)-oo
|
License
Agreement between and among CIBA Vision AG and Bausch & Lomb
Incorporated, dated July 1, 2004 (filed herewith). (Portions of this
exhibit are omitted pursuant to a confidential treatment request
and filed
separately with the SEC.)
|
|
(10)-pp
|
Long
Term Performance Unit Agreement Pursuant to 2003 Long-Term Incentive
Plan
(filed herewith).
|
|
(10)-qq
|
Letter
Waiver (U.S. Credit Agreement), dated January 26, 2007 (filed
herewith).
|
|
(10)-rr
|
Letter
Waiver (B.V. Term Loan), dated January 29, 2007 (filed
herewith).
|
|
(12)
|
Statement
Regarding Computation of Ratio of Earnings to Fixed Charges (filed
herewith).
|
|
(21)
|
Subsidiaries
(filed herewith).
|
|
(24)
|
Power
of Attorney with respect to the signatures of directors in this Annual
Report on Form 10-K (filed herewith).
|
|
(31)-a
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
|
|
(31)-b
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
|
|
(32)-a
|
Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350 (furnished herewith).
|
|
(32)-b
|
Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350 (furnished herewith).
|