Prepared by R.R. Donnelley Financial -- Form S-4
 
As filed with the Securities and Exchange Commission on August 2, 2002
 
Registration No. 333-            

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
FORM S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
 

 
Advanced Medical Optics, Inc.*
(Exact name of registrant as specified in its charter)
 
Delaware
 
3851
 
33-0986820
(State or other jurisdiction of
incorporation or organization)
 
(Primary Standard Industrial
Classification Code Number)
 
(I.R.S. Employer
Identification Number)
 
1700 E. St. Andrew Place
Santa Ana, California 92799-5162
(714) 247-8200
(Address, including zip code, and telephone number, including area code, of each of the co-registrants’ principal executive offices)
 
* See Additional Registrant below.
 

 
Aimee S. Weisner
Corporate Vice President, General Counsel and Secretary
1700 E. St. Andrew Place
Santa Ana, California 92799-5162
(714) 247-8200
(Name, address, including zip code, and telephone number, including area code, of agent for service)
 

 
Copies to:
Lawrence B. Cohn
Christopher D. Ivey
Stradling Yocca Carlson & Rauth
660 Newport Center Drive, Suite 1600
Newport Beach, California 92660
(949) 725-4000
 

 
Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.
 
If any of the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.    ¨
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨
 

 
CALCULATION OF REGISTRATION FEE

Title of Each Class of
Securities to be Registered
  
Amount to be Registered
    
Proposed
Maximum
Offering Price per Exchange Note
  
Proposed
Maximum Aggregate Offering Price(1)
    
Amount Of Registration
Fee(1)









9 1/4% Senior Subordinated Notes Due 2010(2)
  
$200,000,000
    
100.0%
  
$200,000,000
    
$18,400









Guarantee of the 9 1/4% Senior Subordinated Notes due 2010(3)
  
N/A
    
N/A
  
N/A
    
N/A

(1)
The registration fee has been calculated pursuant to Rule 457 under the Securities Act. The Proposed Maximum Aggregate Offering Price is estimated solely for the purpose of calculating the registration fee.
(2)
The 9 1/4% Senior Subordinated Notes due 2010 will be the obligations of Advanced Medical Optics, Inc.
(3)
AMO Holdings, LLC is a guarantor on an unconditional basis of the obligations of Advanced Medical Optics, Inc. under the 9 1/4% Senior Subordinated Notes due 2010. Pursuant to Rule 457(n), no additional registration fee is being paid in respect of the guarantee. The guarantee is not traded separately.
 

 
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
 
Additional Registrant
 
Exact name of registrant as specified in its charter; address, including zip code, and telephone number, including area code, of principal executive office

    
State or other jurisdiction of incorporation or organization

    
Primary Standard Industrial Classification Code Number

    
I.R.S. Employer Identification Number

AMO Holdings, LLC
c/o Advanced Medical Optics, Inc.
1700 E. St. Andrew Place Santa Ana, California 92799-5162 Telephone (714) 247-8200
    
Delaware
    
3851
    
46-0469779
 


 
Subject to completion, dated August 2, 2002
 
PROSPECTUS
 
LOGO
 
$200,000,000
 
Advanced Medical Optics, Inc.
 
OFFER TO EXCHANGE
 
$200,000,000 principal amount of its 9 1/4% Senior Subordinated Notes due 2010,
which have been registered under the Securities Act of 1933, as amended,
for any and all of its outstanding 9 1/4% Senior Subordinated Notes due 2010.
 

 
We are offering to exchange all of our outstanding 9 1/4% senior subordinated notes due 2010, which we refer to as the old notes, for our registered 9 1/4% senior subordinated notes due 2010, which we refer to as the exchange notes. We refer to the old notes and the exchange notes collectively as the notes. The terms of the exchange notes are identical to the terms of the old notes except that the exchange notes have been registered under the Securities Act of 1933 (the “Securities Act”) and, therefore, are freely transferable.
 
Please consider the following:
 
 
Our offer to exchange the old notes for the exchange notes will be open until 5:00 p.m., New York City time, on         , 2002, unless we extend the offer.
 
 
You should carefully review the procedures for tendering the old notes beginning on page 85 of this prospectus.
 
 
If you fail to tender your old notes, you will continue to hold unregistered securities and your ability to transfer them could be adversely affected.
 
 
No public market currently exists for the exchange notes. We do not intend to list the exchange notes on any securities exchange and, therefore, no active public market is anticipated.
 
Information about the notes:
 
 
The notes will mature on July 15, 2010.
 
 
We will pay interest on the notes semi-annually on January 15 and July 15 of each year, commencing January 15, 2003 at the rate of 9 1/4% per year.
 
 
We may redeem the notes on or after July 15, 2006.
 
 
In addition, on or before July 15, 2005, we may redeem up to 35% of the notes with the net proceeds of certain public equity offerings if at least 65% of the originally issued aggregate principal amount of notes remains outstanding.
 
 
Upon the occurrence of certain change of control events, each holder of notes may require us to purchase all or a portion of its notes.
 
 
The notes are unsecured obligations and are subordinated to our senior indebtedness and the subsidiary guarantees are subordinated to our subsidiaries senior indebtedness.
 

 
Participating in the exchange offer involves risks. See “Risk Factors” beginning on page 13.
 

 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined that this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
The date of this prospectus is         , 2002.
 

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the SEC is effective. This prospectus is not an offer to sell and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.


TABLE OF CONTENTS
 
    
Page

  
i
  
i
  
i
  
i
  
1
  
12
  
13
  
28
  
29
  
30
  
31
  
36
  
53
  
70
  
76
  
84
  
85
  
86
  
93
  
94
  
129
  
130
  
130
  
135
  
135
  
F-1
 


CAUTIONARY NOTE REGARDING
FORWARD-LOOKING STATEMENTS
 
This prospectus, including the sections entitled “Prospectus Summary” and “Business,” contains forward-looking statements. These statements relate to future events or our future financial performance, and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” or the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the risks outlined in “Risk Factors” and elsewhere in this prospectus. These factors may cause our actual results to differ materially from any forward-looking statement.
 
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of this prospectus.
 
MARKET AND INDUSTRY DATA AND FORECASTS
 
This prospectus includes market share and industry data and forecasts that we obtained from internal company surveys, market research, consultant surveys, publicly available information and industry publications and surveys. Industry surveys, publications, consultant surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but there can be no assurance as to the accuracy and completeness of such information. We have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions relied upon therein. Similarly, internal company surveys, industry forecasts and market research, which we believe to be reliable based upon management’s knowledge of the industry, have not been verified by any independent sources. Forecasts are particularly likely to be inaccurate, especially over long periods of time. In addition, we do not know what assumptions regarding general economic growth were used in preparing the forecasts we cite. Except where otherwise noted, references to North America include only the continental United States and Canada, and statements as to our position relative to our competitors or as to market share refer to the most recent available data.
 
TRADEMARKS AND TRADE NAMES
 
We own or have rights to trademarks or tradenames that we use in conjunction with the sale of our products, including, without limitation, each of the following: Advanced Medical Optics, Allervisc®, Amadeus, AMO®, Array®, Blink-n-Clean®, C1ariFlex®, ComfortPLUS, Complete®, Consept F®, Consept 1 Step®, Diplomax®, Injector Ring, OptiEdge, Oxysept 1 Step®, PhacoFlex II® SI30NB®, SI40NB®, and SI55NB®, Prestige®, Sensar®, Sovereign®, The Unfolder®, Total Care®, UltraCare®, Ultrazyme®, Verisyse, Vitrax®, and Whitestar.
 
WHERE YOU CAN FIND MORE INFORMATION
 
We have filed with the Securities and Exchange Commission (“SEC”) a registration statement on Form S-4 to register the exchange notes offered by this prospectus. This prospectus does not contain all the information contained in the registration statement, including its exhibits and schedules. You should refer to the registration

i


statement including the exhibits and schedules, for further information about us and the exchange notes. Statements we make in this prospectus about certain contracts or other documents are not necessarily complete. When we make such statements, we refer you to the copies of the contracts or documents that are filed as exhibits to the registration statement because those statements are qualified in all respects by reference to those exhibits. The registration statement, including exhibits and schedules, is on file at the offices of the SEC and may be inspected without charge.
 
We also file annual, quarterly, special reports and other information with the SEC. You may read and copy any document we file with the SEC at the SEC’s public reference room at the following address:
 
Public Reference Room
450 Fifth Street, N.W.
Room 1024
Washington, D.C. 20549
 
Please call the SEC at 1-800-SEC-0330 for further information on the operations of the public reference rooms. Our SEC filings are also available at the SEC’s web site at http://www.sec.gov.
 
You can obtain a copy of any of our filings, at no cost, by writing to or telephoning us at the following address:
 
Advanced Medical Optics, Inc.
1700 E. St. Andrew Place
Santa Ana, California 92799-5162
Attention: General Counsel
(714) 247-8200.
 
To ensure timely delivery, please make your request as soon as practicable and, in any event, no later than five business days prior to the expiration of the exchange offer.
 

ii


PROSPECTUS SUMMARY
 
This summary highlights important information about our business and about this exchange offer. It does not include all information you should consider before participating in the exchange offer. Please review this prospectus in its entirety, including the risk factors and our financial statements and the related notes, before you decide to participate in the exchange offer. Unless otherwise noted, all references to “Advanced Medical Optics,” “AMO,” “we,” “our” or “us” and similar terms in this prospectus refer to Advanced Medical Optics, Inc., together with its subsidiaries.
 
Data contained in this prospectus relating to the size and our share of the “global” markets for our products are based on our market research and data compiled from a variety of independent sources in each of the ten largest geographic markets for our products, as measured by net sales of our products. We believe that these geographic markets together account for approximately 80% of the total worldwide market for these products. We define the ophthalmic surgical products market to include the development, manufacture and marketing of intraocular lenses, phacoemulsification systems, viscoelastics, microkeratomes and surgical packs containing items used in cataract surgery.
 
Company Overview
 
We are a global leader in the development, manufacture and marketing of medical devices for the eye and contact lens care products. Our market research indicates that we are the second largest global manufacturer and marketer of ophthalmic surgical products and contact lens care products, in each case as measured by net sales in 2001 in the markets in which we compete. Through a significant commitment to internal research and development and alliances and partnerships, we have demonstrated success in the introduction of new and innovative products. We believe we are the technology leader in our markets and that our brands are among the most trusted and recognized in our industry. We have a strong global sales and distribution network, with approximately 300 sales representatives operating in approximately 20 countries and marketing products in approximately 60 countries.
 
Demand for ophthalmic products is driven by a variety of factors, including an aging population, advances in medical technology, improved therapies and economic growth in emerging markets. Many ophthalmic conditions, such as cataracts (an irreversible progressive condition in which clouding of the eye’s natural lens eventually leads to blindness) and presbyopia (the progressive loss of flexibility of the eye’s natural lens), are strongly correlated with age. Cataracts are currently the leading cause of vision loss among adults age 55 and older. We estimate that, in 2001, approximately 2.4 million cataract procedures were performed in the United States, and more than 5.0 million were performed worldwide, making cataract extraction the most commonly performed surgical procedure in the United States and most other developed nations. The treatment of cataracts is the largest segment of the global ophthalmic surgical products market, generating revenues of approximately $1.5 billion in 2001.
 
The worldwide market for contact lenses was approximately $3.5 billion in 2001. The global contact lens care products market, which includes disinfecting and cleaning solutions for contact lenses and lens rewetting products, generated revenues of approximately $1.2 billion in 2001.
 
The following table sets forth the total size and our share of the global markets for certain of our products in 2001:
 
Market Segment

  
Estimated Market Size
(in millions)

  
Estimated AMO Share

  
AMO Market Position

Ophthalmic surgical products:
                
Intraocular lenses
  
$
595
  
25%
  
#2
Phacoemulsification systems
  
$
287
  
16%
  
#2
Contact lens care products:
                
Contact lens care products
  
$
1,200
  
21%
  
#2
Contact lens care products (excluding the U.S.)
  
$
845
  
25%
  
#1

1


 
Ophthalmic Surgical Products
 
Our ophthalmic surgical products business develops, manufactures and markets medical devices for the cataract and refractive surgery markets, with a technology-driven focus on the higher margin segments of these markets. We believe we are the second largest company in the global cataract surgery products market and have made a strong entry into the refractive surgery market with the introduction of the AMADEUS microkeratome.
 
Cataract Market
 
The largest segment of the ophthalmic surgical market is the treatment of cataracts. Most patients affected by cataracts can be treated through a minimally invasive surgical procedure in which the patient’s natural lens, which has become clouded, is broken up, removed and replaced with an artificial intraocular lens (“IOL”), which is implanted in the lens capsule to restore sight. We pioneered small incision cataract surgery with the development of the foldable IOL, and developed the first and only multifocal IOL that has been approved by the Food and Drug Administration.
 
Within the cataract surgery market we focus on three major segments:
 
Foldable intraocular lenses. As compared to non-foldable lenses, foldable IOLs allow for smaller surgical incisions, which has been associated with less induced astigmatism, rapid stabilization of the wound, and faster visual rehabilitation. We offer surgeons a choice of high quality, innovative monofocal silicone, monofocal acrylic and multifocal silicone IOLs, together with various systems of implementation devices. According to our market research, sales of foldable IOLs have grown faster than any other segment within the cataract surgery products market since 1998, growing from less than 50% to greater than 85% of the global IOL market in 2001, and generated revenues of approximately $517 million in 2001. We believe that in 2001, we experienced the highest sales growth in the global foldable IOL market, with a growth rate of 8%, and had the second leading share of the market, estimated at approximately 28%. Our ARRAY multifocal silicone IOL has been granted “new technology intraocular lens,” or “NTIOL,” status by the U.S. Centers for Medicare and Medicaid Services, resulting in higher reimbursement rates for its use.
 
Phacoemulsification systems. Phacoemulsification is a method of cataract extraction that is used to break a clouded natural lens into small fragments for removal prior to its replacement with an IOL. We estimate that phacoemulsification is used in approximately 90% of cataract surgery procedures in the United States. We believe that we currently market the largest family of phacoemulsification systems, which offer advanced technology for control and safety. Based on our market research, the global market for phacoemulsification systems generated approximately $287 million in revenues in 2001. We estimate that we had the second largest share of the global phacoemulsification systems market in 2001, estimated at approximately 16%, with a majority of our sales being derived from consumables and related equipment.
 
Related surgical accessories. In addition to our IOLs and phacoemulsification systems, we also offer ancillary products related to the cataract surgery market. These include insertion systems, viscoelastics, custom surgical packs, and capsular tension rings.
 
Refractive Market
 
We believe that the second largest segment of the ophthalmic surgical market is the market for the minimally invasive surgical treatment of refractive disorders, namely myopia (near-sightedness), hyperopia (far-sightedness), and astigmatism. We believe our existing IOL technologies and global sales and distribution network provide us with significant opportunities in the refractive market.
 
Laser assisted in-situ keratomileusis (commonly referred to as “LASIK”) and insertion of IOLs are two procedures used to treat refractive disorders. The LASIK procedure involves the use of an automated cutting device, called a microkeratome, to create a corneal flap so that a laser can be used to reshape the cornea to

2


achieve vision correction. We entered the LASIK market in May 2000 with the AMADEUS microkeratome. Insertion of IOLs can also be used to treat refractive disorders. Our ARRAY multifocal silicone IOL currently is the only IOL approved to treat presbyopia in Europe. We also market the Verisyse IOL in Europe to treat myopia, hyperopia and astigmatism.
 
Contact Lens Care Products
 
We offer a comprehensive line of contact lens care products, including single-bottle multi-purpose cleaning and disinfecting solutions, daily cleaners, enzymatic cleaners and lens rewetting drops. Based on our market research, the global market for contact lens care products generated sales of approximately $1.2 billion in 2001. We believe that we were the second leading manufacturer and marketer of contact lens care products in 2001, with a global market share of approximately 21%. In Asia, which we believe is one of the fastest-growing contact lens care markets, net sales of our contact lens care products grew by 20% in 2001.
 
Single-Bottle Solutions. In response to the increasing popularity of more frequent lens replacement and consumer interest in more convenient lens care regimens, the contact lens care market continues to evolve towards greater use of single-bottle multi-purpose solutions. According to our market research, the global sales for multi-purpose solutions grew at a rate of approximately 14% in 2001 to approximately $395 million. We market our COMPLETE brand multi-purpose solution, a convenient, single-bottle chemical disinfecting system for soft contact lenses, on a worldwide basis. We believe that COMPLETE is currently the only multi-purpose solution that incorporates an ocular lubricant, which contributes to its Food and Drug Administration-approved “unique comfort” claim. We believe our COMPLETE product is the fastest growing multi-purpose solution in the world, growing at a rate of approximately 30% in 2001, with rapid market share growth in Japan. We have also recently introduced our in-eye lens cleaner, COMPLETE BLINK-N-CLEAN.
 
Hydrogen Peroxide-Based Solutions. We also offer contact lens care products that use hydrogen peroxide-based disinfection systems. Our leading hydrogen peroxide system products are our OXYSEPT 1 STEP, ULTRACARE and CONSEPT 1 STEP hydrogen peroxide neutralizer/disinfection systems.
 
Our Competitive Strengths
 
We believe that the following competitive strengths differentiate us from other companies in the ophthalmic industry:
 
Proven track record, trusted and recognized brands and a 40-year commitment to eye care. For over 40 years, we have developed, manufactured and marketed innovative and high quality eye care products. We have engaged in extensive marketing efforts to promote our reputation for high quality products and to establish and maintain close relationships with eye care professionals around the world. We believe that in the ophthalmic surgical products market, surgeons tend to remain with the IOL brands and phacoemulsification systems to which they have become accustomed. Similarly, we believe that contact lens wearers tend to remain loyal to the brand of solution and other contact lens care products provided to them with their contact lenses by their eye care professional.
 
Leading market positions across product lines. We have leading positions in our market segments. Our market research indicates that in the markets in which we compete, we held the second largest share of the global ophthalmic surgical products markets and the second largest share of the global market for contact lens care products in 2001. In addition, excluding the U.S., we believe we were the leading global manufacturer and marketer of contact lens care products in 2001. We also are a leader in the contact lens care business in Asia, which we believe is one of the fastest growing markets for contact lens care products.
 
Strong strategic position to take advantage of stability in the ophthalmic surgery industry. We believe that our key product segment, cataract surgical products, benefits from the demographic drivers of increased life

3


expectancies and worldwide economic growth. According to industry sources, the number of cataract surgery procedures performed in the U.S. has grown at a compound annual growth rate of approximately 4% over the last ten years. We believe that our market leadership positions us to take advantage of the stability of this market and to capitalize on opportunities for growth.
 
Global sales and distribution network. We have an experienced and extensive global sales and distribution network, comprising approximately 300 sales representatives operating in approximately 20 countries and marketing products in approximately 60 countries. In response to the different healthcare systems throughout the world, our sales and marketing strategy and organizational structure differ by region, with each region given relative autonomy in determining its own tactical marketing strategies. We also use third party distributors for the distribution of our products in smaller international markets.
 
Opportunistic strategic alliances. We have entered into partnerships and alliances seeking to leverage our sales force, distribution infrastructure and research and development efforts without the need to invest significant capital. For example, through our co-marketing agreement with VISX Incorporated, the global leader in sales of excimer laser systems used in LASIK procedures, VISX promotes the use of our microkeratomes to users of VISX’s excimer lasers. In addition, our partnership with Ophtec B.V. to manufacture our own brand of IOLs for refractive disorders creates a significant opportunity for us to strengthen our leadership position in the refractive surgery market. We also partner with Allegiance Healthcare Corporation, a leading supplier of healthcare products to hospitals, laboratories and other healthcare related entities, to provide custom surgical packs to Allegiance’s U.S., Canadian and European customers.
 
Experienced management team. We have a strong and experienced management team led by Jim Mazzo, who, prior to joining us, was with Allergan for 22 years. Our senior management team has an average of 14 years of experience in the healthcare products industry both with us and with other major participants in the industry. The long and diverse experience of our senior management provides a competitive advantage through their knowledge of the industry, familiarity with our customers and understanding of the development, manufacturing and sale of our products.
 
Our Strategies
 
We seek to strengthen our global leadership position in growing, high margin segments of the vision correction market by capitalizing on our strong positions in the ophthalmic surgical and contact lens care products markets. We believe that executing our strategy will enable us to capture increasing market share and achieve profitable growth in our revenues. As part of our strategy we intend to:
 
Continue to strengthen our global portfolio of brands by being the technology leader in our markets. We believe that technology and new product offerings drive our industry. We intend to introduce improved and more technologically advanced products to gain market share and establish ourselves as a leader across all product lines.
 
Focus research and development efforts on next-generation technologies and devices that are safe, effective and address large unmet needs. We believe that our long-term success will be driven by the continued introduction of new and innovative products in the ophthalmic surgical and contact lens care products markets. We intend to take advantage of our newly focused business through an increased commitment to ophthalmic research and development designed to extend existing product lines and develop next-generation technologies.
 
Build on our strong market position by increasing investment in attractive market segments and selected geographies. We intend to expand our presence in attractive, growing market segments, such as applying our IOL technologies in the refractive surgery market. We believe that our existing expertise in the ophthalmic industry, and specifically in the cataract surgical products segment, together with our strong brands and extensive

4


sales and marketing network, will enable us to more rapidly enter other ophthalmic products segments, as evidenced by the rapid market-share growth of the AMADEUS microkeratome. We also intend to continue our focus on geographic regions with strong growth prospects, such as Asia.
 
Leverage our global presence and extensive distribution network to introduce new product and service offerings. Our global sales, marketing, and support network enables us to understand variations in local regulatory and marketing environments. We plan to utilize our global scope and local expertise to facilitate the introduction of new products and more efficiently reach new customers.
 
Proactively pursue strategic alliances to maximize the potential of our brands and more efficiently build leading positions within the industry. We plan to supplement our internal research and development activities and existing product offerings with a commitment to identifying, obtaining and marketing new technologies through alliances and partnerships. We intend to explore new potential alliances that would better enable us to leverage our sales force, gain access to promising technologies and broaden our product offerings without the need for substantial capital investments.
 
Separation from Allergan
 
Allergan, Inc. spun-off our company to its stockholders by way of a pro rata distribution of all of our shares of common stock. The distribution of our common stock was made to Allergan’s stockholders of record on June 14, 2002 and was completed on June 29, 2002. As a result of our spin-off from Allergan, we are now an independent public company and Allergan has no continuing stock ownership in us. Prior to the spin-off, Allergan operated two distinct businesses: the specialty pharmaceuticals business and the optical medical device business. The optical medical device business, which is now owned and operated by us, consists of the ophthalmic surgical products business and the contact lens care products business.
 
The primary corporate purpose for the spin-off was to enhance the success of both the specialty pharmaceuticals business and the optical medical device business by resolving the conflicts that had evolved, and were exacerbated, by the operation of both businesses within a single affiliated group of corporations. Recognizing each business’s own substantially different financial, investment and operating characteristics, human resource demands, return on invested capital profiles, capital requirements and growth opportunities, we expect that the separation of the optical medical device business from the specialty pharmaceuticals business will enable us to adopt strategies and pursue objectives that are appropriate to our business.
 
In connection with our spin-off from Allergan, we entered into a senior credit facility, consisting of a $100.0 million term loan, which was fully drawn at the time of the spin-off, and a $35.0 million revolving credit facility, approximately $17.0 million of which has been reserved to support letters of credit issued on our behalf. We will not receive any cash proceeds from the issuance of the exchange notes. We used a portion of the initial borrowings under our senior credit facility and the proceeds we received from the offering of the old notes as set forth in the following table (in millions):
 
Sources

        
Uses

   
Senior credit facility
 
$100.0
    
Repaid indebtedness borrowed from
     
Old notes (1)
 
197.2
    
Allergan(2)
 
$
90.4
          
Distribution to Allergan(3)
 
 
56.3
          
Repaid non-U.S. liabilities(4)
 
 
111.4
          
Working capital
 
 
29.0
          
Fees and expenses
 
 
10.1
   
    
 

Total
 
$297.2
    
Total
 
$
297.2
   
    
 


(1)
Net of $2.8 million of original issue discount.
(2)
Reflects indebtedness that we borrowed from Allergan to purchase various assets in connection with the spin-off. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Separation from Allergan.”

5


(3)
Reflects a distribution in exchange for various assets contributed to us in connection with the spin-off. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Separation from Allergan.”
(4)
Reflects indebtedness that we assumed from Allergan and immediately repaid as part of the spin-off. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Separation from Allergan.”
 
Our spin-off from Allergan, the entering into our senior credit facility, the sale of the old notes and the use of proceeds from our initial borrowings under the senior credit facility and the sale of the old notes are referred to in this prospectus as the “Transactions.”
 
We are a Delaware corporation initially incorporated in October 2001. Our executive offices are located at 1700 E. St. Andrew Place, P.O. Box 25162, Santa Ana, California 92799-5162, and our phone number is (714) 247-8200.

6


Summary of the Terms of the Exchange Offer
 
The Exchange Offer
$1,000 principal amount of exchange notes will be issued in exchange for each $1,000 principal amount of old notes validly tendered. As of the date of this prospectus, there is $200.0 million aggregate principal amount of old notes outstanding.
 
 
The form and terms of the exchange notes are identical to those of the old notes, except that the exchange notes will be registered under the Securities Act.
 
Resale
Based upon interpretations by the staff of the SEC set forth in no-action letters issued to unrelated third parties, we believe that exchange notes may be offered for resale, resold or otherwise transferred to you without compliance with the registration and prospectus delivery requirements of the Securities Act, unless you:
 
 
are an “affiliate” of ours within the meaning of Rule 405 under the Securities Act;
 
 
are a broker-dealer who purchased the old notes directly from us for resale under Rule 144A or any other available exemption under the Securities Act of 1933;
 
 
acquired the exchange notes other than in the ordinary course of your business; or
 
 
have an arrangement with any person to engage in the distribution of exchange notes.
 
 
However, we have not submitted a no-action letter and there can be no assurance that the SEC will make a similar determination with respect to the exchange offer. Furthermore, in order to participate in the exchange offer, you must make the representations set forth in the letter of transmittal that we are sending you with this prospectus.
 
Expiration Date
The exchange offer will expire at 5:00 p.m., New York City time, on                      , 2002, unless extended by us in our sole discretion, in which case the “expiration date” shall mean the latest date and time to which the exchange offer is extended.
 
Conditions to the Exchange Offer
The exchange offer is subject to certain customary conditions, some of which may be waived by us. See “The Exchange Offer—Conditions to the Exchange Offer.”
 
Procedures for Tendering Old Notes
If you wish to accept the exchange offer, you must complete, sign and date the letter of transmittal, or a copy of the letter of transmittal, in accordance with the instructions contained in this prospectus and in the letter of transmittal, and mail or otherwise deliver the letter of transmittal, or the copy, together with the old notes and any other required documentation, to the exchange agent at the address set forth in this prospectus. If you are a person holding the old notes through The Depository Trust Company and wish to accept the exchange offer, you must do so through The Depository Trust Company’s Automated Tender Offer Program, by which you will agree to be bound by the letter of transmittal. By executing or agreeing to be bound by the letter of transmittal, you will be making a number of important representations to us as described under “The Exchange Offer—Procedures for Tendering Old Notes.”

7


 
 
We will accept for exchange any and all old notes that are properly tendered in the exchange offer prior to the expiration date. The exchange notes issued in the exchange offer will be delivered promptly following the expiration date. See “The Exchange Offer—Terms of the Exchange Offer.”
 
Special Procedures for Beneficial Owners
If you are the beneficial owner of old notes registered in the name of a broker, dealer, commercial bank, trust company or other nominee and wish to tender your old notes in the exchange offer, you should contact the person in whose name your notes are registered and promptly instruct the person to tender on your behalf. See “The Exchange Offer—Procedures for Tendering Old Notes.”
 
Guaranteed Delivery Procedures
If you wish to tender your old notes and time will not permit your required documents to reach the exchange agent by the expiration date, or the procedure for book-entry transfer cannot be completed on time, you may tender your notes according to the guaranteed delivery procedures. See “The Exchange Offer—Guaranteed Delivery Procedures.”
 
Withdrawal Rights
The tender of the old notes pursuant to the exchange offer may be withdrawn at any time prior to the expiration date.
 
Acceptance of Old Notes and Delivery of Exchange Notes
Subject to customary conditions, we will accept old notes which are properly tendered in the exchange offer and not withdrawn prior to the expiration date. The exchange notes will be delivered as promptly as practicable following the expiration date.
 
Consequence of Failure to Exchange
Old notes that are not tendered, or that are tendered but not accepted, will be subject to their existing transfer restrictions. We will have no further obligation to provide for registration under the Securities Act of such old notes.
 
Registration Rights Agreement
We sold the old notes in a private placement in reliance on Section 4(2) of the Securities Act. On June 20, 2002, we entered into a registration rights agreement with the initial purchasers of the old notes requiring us to make this exchange offer. The registration rights agreement also requires us to:
 
 
cause the registration statement filed with respect to the exchange offer to be declared effective within 150 days of the issue date of the old notes; and
 
 
consummate the exchange offer within 195 days of the issue date of the old notes.
 
 
See “The Exchange Offer—Purpose and Effect.” If we do not do so, liquidated damages will be payable on the old notes.
 
Certain U.S. Federal Income Tax Considerations
The exchange of old notes for exchange notes by tendering holders will not be a taxable exchange for federal income tax purposes, and such holders will not recognize any taxable gain or loss or any interest income for federal income tax purposes as a result of such exchange. See “Certain United States Federal Income Tax Considerations.”

8


 
Exchange Agent
The Bank of New York is serving as exchange agent in connection with the exchange offer.
 
Use of Proceeds
We will not receive any proceeds from the exchange offer.
 
Fees and Expenses
We will pay all expenses incident to the consummation of the exchange offer.
 
Summary of the Terms of the Exchange Notes
 
Issuer
Advanced Medical Optics, Inc.
 
Securities Offered
$200,000,000 aggregate principal amount of 9 1/4% Senior Subordinated Notes due 2010.
 
Interest
The exchange notes will bear interest at an annual rate of 9 1/4%. Interest is payable on January 15 and July 15 of each year.
 
Maturity Date
July 15, 2010
 
Optional Redemption
We may redeem the exchange notes, in whole or in part, on or after July 15, 2006 at the redemption prices set forth in this prospectus.
 
Guarantees
The exchange notes are guaranteed on a senior subordinated basis by all of our present and future domestic restricted subsidiaries (other than any such subsidiary that is a subsidiary of any of our foreign subsidiaries). The guarantees are unsecured senior subordinated obligations and are subordinated to all of such subsidiaries’ existing and future senior indebtedness, including guarantees of our senior credit facility.
 
Ranking
The exchange notes and the guarantees are our and the guarantors’ unsecured senior subordinated obligations, are subordinated to all of our and the guarantors’ existing senior indebtedness and will be subordinated to all of our and the guarantors’ future senior indebtedness. The notes and the guarantees will rank equally with all of our and the guarantors’ future senior subordinated indebtedness and will rank equally with or senior to all of our and the guarantors’ future subordinated obligations. The term “senior indebtedness” is defined in the “Description of the Exchange Notes—Certain Definitions” section of this prospectus.
 
 
As of June 28, 2002, we and the guarantors had:
 
 
$100.0 million of senior indebtedness outstanding, and
 
 
$35.0 million of additional borrowings available under our senior revolving credit facility.
 
 
Currently, approximately $17.0 million of our senior revolving credit facility has been reserved to support letters of credit issued on our behalf.
 
 
In addition, the notes are effectively subordinated to all indebtedness and other liabilities of our subsidiaries that are not guarantors. As of March 29, 2002, on a pro forma basis after giving effect to the Transactions, our non-guarantor subsidiaries would have had approximately $33.5 million of liabilities.

9


 
Equity Offering Optional Redemption
Before July 15, 2005, we may redeem up to 35% of the exchange notes with the net proceeds of certain public equity offerings at a redemption price of 109.25% of the principal amount thereof, plus accrued and unpaid interest, if at least 65% of the originally issued aggregate principal amount of the exchange notes remains outstanding. See “Description of the Exchange Notes—Optional Redemption.”
 
Change in control
Upon certain change of control events, each holder of exchange notes may require us to repurchase all or a portion of its notes at a purchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest thereon to the date of purchase. See “Description of the Exchange Notes—Offer to Purchase upon Change of Control.”
 
Covenants
The indenture governing the exchange notes contains covenants that, among other things, limit our ability and the ability of certain of our subsidiaries to:
 
 
incur additional indebtedness,
 
 
create liens,
 
 
make investments,
 
 
enter into transactions with affiliates,
 
 
sell assets,
 
 
declare or pay dividends or other distributions to stockholders, and
 
 
consolidate, merge or transfer all or substantially all of our assets and the assets of our subsidiaries on a consolidated basis.
 
 
These covenants are subject to important exceptions and qualifications, which are described under the heading “Description of the Exchange Notes” in this prospectus.
 
Use of proceeds
We will not receive any cash proceeds from the issuance of the exchange notes.
 
Risk Factors
See “Risk Factors” for a discussion of factors you should carefully consider before deciding to invest in the notes.

10


 
Summary Historical Financial Information
 
The following table sets forth certain summary historical financial information for each of the years in the three-year period ended December 31, 2001, for the three months ended March 30, 2001 and as of and for the three months ended March 29, 2002. The summary historical financial information for each of the years in the three-year period ended December 31, 2001 has been derived from our audited combined financial statements, which are included elsewhere in this prospectus. The summary historical financial information for the three months ended March 30, 2001 and as of and for the three months ended March 29, 2002 has been derived from our unaudited condensed combined financial statements, which are included elsewhere in this prospectus, and, in our opinion, is presented on a basis consistent with the information from our audited combined financial statements. Our historical financial information may not be indicative of the results of operations or financial position that we would have obtained if we had been an independent company during the periods presented or of our future performance as an independent company. See “Risk Factors—Risks Relating to the Transactions.”
 
The summary historical financial information should be read together with “Selected Historical Financial Information,” “Unaudited Pro Forma Combined Financial Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our combined financial statements, including the related notes, included elsewhere in this prospectus.
 
 
    
For the Year Ended December 31,

    
Three Months Ended

    
1999

    
2000

    
2001

    
March 30, 2001

    
March 29, 2002

    
(in thousands)
Statement of Operations Data:
                                          
Net sales
  
$
577,644
 
  
$
570,573
 
  
$
543,095
 
  
$
120,811
 
  
$
113,997
Cost of sales
  
 
236,002
 
  
 
231,426
 
  
 
212,090
 
  
 
50,335
 
  
 
44,276
    


  


  


  


  

Gross margin
  
 
341,642
 
  
 
339,147
 
  
 
331,005
 
  
 
70,476
 
  
 
69,721
Selling, general and administrative
  
 
255,666
 
  
 
241,047
 
  
 
222,885
 
  
 
62,118
 
  
 
54,170
Research and development
  
 
27,765
 
  
 
29,878
 
  
 
28,990
 
  
 
7,264
 
  
 
6,984
Restructuring charge reversal
  
 
(6,527
)
  
 
(2,237
)
  
 
—  
 
  
 
—  
 
  
 
—  
    


  


  


  


  

Operating income
  
 
64,738
 
  
 
70,459
 
  
 
79,130
 
  
 
1,094
 
  
 
8,567
Interest expense
  
 
6,500
 
  
 
3,625
 
  
 
3,302
 
  
 
824
 
  
 
681
Loss/(gain) on investments, net
  
 
—  
 
  
 
(231
)
  
 
793
 
  
 
—  
 
  
 
—  
Unrealized loss/(gain) on derivative     instruments
  
 
—  
 
  
 
—  
 
  
 
(1,294
)
  
 
(1,321
)
  
 
213
Other, net
  
 
441
 
  
 
(1,135
)
  
 
385
 
  
 
(90
)
  
 
51
    


  


  


  


  

Earnings before income taxes
  
 
57,797
 
  
 
68,200
 
  
 
75,944
 
  
 
1,681
 
  
 
7,622
Provision for income taxes
  
 
13,347
 
  
 
19,020
 
  
 
20,594
 
  
 
467
 
  
 
2,896
    


  


  


  


  

Earnings before cumulative effect of change     in accounting principle
  
 
44,450
 
  
 
49,180
 
  
 
55,350
 
  
 
1,214
 
  
 
4,726
Cumulative effect of change in accounting     principle, net of $160 of tax
  
 
—  
 
  
 
—  
 
  
 
(391
)
  
 
(391
)
  
 
—  
    


  


  


  


  

Net earnings
  
$
44,450
 
  
$
49,180
 
  
$
54,959
 
  
$
823
 
  
$
4,726
    


  


  


  


  

Other Data and Ratios:
                                          
Net cash provided by operating activities
  
$
59,229
 
  
$
93,647
 
  
$
75,812
 
  
$
5,065
 
  
$
18,674
EBITDA(1)
  
 
92,821
 
  
 
100,476
 
  
 
101,615
 
  
 
6,529
 
  
 
11,922
Capital expenditures, net(2)
  
 
18,458
 
  
 
11,038
 
  
 
14,461
 
  
 
3,156
 
  
 
2,154
Ratio of earnings to fixed charges(3)
  
 
6.9x
 
  
 
10.3x
 
  
 
12.4x
 
  
 
2.0x
 
  
 
5.9x
 

11


 
      
As of March 29, 2002

      
(in thousands)
Balance Sheet Data:
        
Cash and equivalents
    
$
4,836
Total current assets
    
 
184,150
Total assets
    
 
348,830
Total current liabilities
    
 
70,374
Total debt (including current portion)
    
 
94,023

(1)
EBITDA is defined as operating income plus depreciation and amortization expense and amortization of prepaid royalties. EBITDA is presented because it is a widely accepted financial indicator; however, EBITDA may not be comparable to other companies’ calculations of EBITDA or similarly titled items. You should not consider EBITDA as an alternative to net earnings as a measure of operating results in accordance with accounting principles generally accepted in the United States of America or as an alternative to cash flows as a measure of liquidity.
(2)
Capital expenditures, net is defined as cash paid for additions to property, plant and equipment, capitalized internal use software and demonstration and bundled equipment, net of proceeds from the sale of property, plant and equipment.
(3)
We have computed the ratio of earnings to fixed charges by dividing earnings before income taxes and fixed charges by fixed charges. Fixed charges consist of interest expense and a portion of rent expense deemed representative of the interest factor.
 
SUBSEQUENT EVENTS
 
On July 24, 2002, we announced our operating results for the quarter ended June 28, 2002, the period immediately prior to our spin-off from Allergan. Net sales were $137.7 million and net earnings were $6.6 million in the quarter ended June 28, 2002. Prior to the spin-off, Allergan did not account for our business separately and the financial information for the second quarter includes revenue and expenses directly attributable to our operations and allocations of certain Allergan expenses attributable to us. Our historical financial information may not be indicative of our results of operations that we would have obtained if we had been an independent company or of future performance as an independent company.

12


RISK FACTORS
 
You should carefully consider the following factors and other information in this prospectus before deciding to participate in the exchange offer. These risks and uncertainties are not the only ones we face. Others that we do not know about now, or that we do not now think are important, may also impair our business. The risks described in this section and elsewhere in this prospectus could cause our actual results to differ materially from those anticipated in forward-looking statements contained in this prospectus.
 
Risks Relating to the Notes
 
We have a significant amount of debt, which we might not be able to service and which contains covenants that limit our activities.
 
As a result of our issuance of the notes and entering into the senior credit facility, we have substantial indebtedness. As of June 28, 2002, we had $300.0 million of indebtedness, and had $35.0 million of additional borrowings available under our senior revolving credit facility. Currently, approximately $17.0 million of our senior revolving credit facility has been reserved to support letters of credit issued on our behalf. This level of indebtedness could have significant consequences, including:
 
 
limiting cash flow available for working capital, capital expenditures, acquisitions and other corporate purposes because a significant portion of our cash flow from operations must be dedicated to servicing our debt;
 
 
limiting our ability to obtain additional financing in the future for working capital or other purposes; and
 
 
limiting our flexibility to react to competitive or other changes in our industry and to economic conditions generally.
 
Our ability to repay or refinance our indebtedness will depend upon our future operating performance, which will be affected by general economic, financial, competitive, legislative, regulatory and other factors beyond our control.
 
The indenture relating to the notes and the senior credit facility contain, and future debt instruments to which we may become subject may contain, debt covenants that limit our ability to engage in activities that could otherwise benefit our company, including restrictions on our ability to:
 
 
incur additional indebtedness,
 
 
create liens,
 
 
make investments,
 
 
enter into transactions with affiliates,
 
 
sell assets,
 
 
declare or pay dividends or other distributions to stockholders, and
 
 
consolidate, merge or transfer all or substantially all of our assets and the assets of our subsidiaries on a consolidated basis.
 
Our senior credit facility also requires us to maintain specific leverage and interest coverage ratios. Our ability to comply with these covenants is dependent on our future performance, which will be subject to many factors, some of which are beyond our control, including prevailing economic conditions.
 
A failure to comply with these covenants could result in a default under our indebtedness, which could permit the holders to accelerate such indebtedness. If any of our indebtedness is accelerated, we may not have sufficient funds available to repay such indebtedness.

13


 
Your right to receive payment on the notes is junior to the right of the holders of our and the guarantors’ senior indebtedness and effectively junior to all liabilities of our subsidiaries that are not guarantors.
 
The notes and the guarantees of the notes are unsecured senior subordinated obligations of us and the guarantors, respectively, and are subordinated to all of our and the guarantors’ existing and future senior indebtedness, including indebtedness and guarantees of indebtedness under the senior credit facility and all of our and the guarantors’ future indebtedness, other than any future indebtedness that expressly provides that it ranks equally with, or is subordinated in right of payment to, the notes or the guarantees of the notes, as the case may be. As a result, upon any distribution to creditors in a bankruptcy, liquidation, reorganization or similar proceeding relating to us, any guarantor, or our or its property, the holders of senior indebtedness will be entitled to be paid in full in cash before any payment may be made with respect to the notes or the guarantors’ guarantee of the notes, as the case may be. In addition, all payments on the notes and the guarantees of the notes will be blocked in the event of a payment default on senior indebtedness and may be blocked for up to 179 of 360 consecutive days in the event of certain non-payment defaults on designated senior indebtedness.
 
In the event that we are declared bankrupt, become insolvent or are liquidated, reorganized or involved in similar proceedings, the indenture governing the notes requires that amounts otherwise payable to holders of the notes be paid to holders of senior indebtedness instead until all senior indebtedness is repaid in full in cash. In any of these cases, our assets may not be sufficient to pay all of our creditors, in which case holders of the notes will receive less, proportionally, than holders of our senior indebtedness.
 
As of June 28, 2002, we and the subsidiary guarantors had $100.0 million of senior indebtedness outstanding, excluding $35.0 million of additional borrowings available under the senior revolving credit facility. Currently, approximately $17.0 million of our senior revolving credit facility has been reserved to support letters of credit issued on our behalf. We and the subsidiary guarantors are permitted to incur substantial additional indebtedness, all of which could be senior indebtedness, in the future.
 
The notes also effectively rank junior to all indebtedness and other liabilities of our subsidiaries that are not guarantors. Upon any distribution to the creditors of any of our non-guarantor subsidiaries in a bankruptcy, liquidation, reorganization or similar proceeding relating to it or its property, the holders of all of its indebtedness and other liabilities will be entitled to be repaid in full before the subsidiary will be able to distribute any assets to us to satisfy our obligations, including our obligations under the notes. In addition, the ability of our non-guarantor subsidiaries to pay dividends or make other payments to us may be restricted by the terms of their indebtedness and other liabilities. As of March 29, 2002, after giving pro forma effect to the Transactions, our non-guarantor subsidiaries would have had approximately $33.5 million of liabilities outstanding. Our subsidiaries are permitted to incur substantial additional indebtedness and other liabilities in the future. In addition, they may become subject to certain contractual or other restrictions, including negative covenants contained in debt instruments of such subsidiaries, on their ability to make distributions or loans to us, which in turn could adversely affect our ability to make payments on the notes. See “Description of the Exchange Notes—Certain Covenants—Limitation on Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries.” We cannot assure you that our subsidiaries will have the ability to make distributions or loans to us.
 
Only our domestic subsidiaries that also guarantee our obligations under the senior credit facility will be required to guarantee the notes. However, more than half of our operations are comprised of the operations of our subsidiaries that are not guarantors, and we may have to rely on dividends and other payments from our foreign subsidiaries to generate the funds necessary to meet our obligations. We do not presently have detailed historical financial information concerning our non-U.S. subsidiaries. For the year ended December 31, 2001 and the three months ended March 29, 2002, after giving pro forma effect to the Transactions, we and the guarantors would have generated approximately 30.8% and 30.6%, respectively, of our total combined net sales, and our subsidiaries that are not guarantors would have generated approximately 69.2% and 69.4%, respectively, of our total combined net sales. In general, our and the guarantors’ operations comprise our U.S. operations, and the operations of our subsidiaries that are not guarantors comprise our non-U.S. operations. For more information

14


about our operating results and financial position by geographic segment, see Note 12 of Notes to Combined Financial Statements and Note 8 of Notes to Unaudited Condensed Combined Financial Statements included elsewhere in this prospectus.
 
The notes are not secured by any of our assets and our assets may be insufficient to repay the notes.
 
The notes are not secured by any of our assets. However, the indebtedness we incur under the senior credit facility is secured by substantially all of our assets. In addition, future indebtedness that we incur may be secured by our assets. If we become insolvent or are liquidated, or if payment of any secured indebtedness is accelerated, the holders of the secured indebtedness will be entitled to exercise the remedies available to secured lenders under applicable law, including the ability to foreclose on and sell the assets securing such indebtedness in order to satisfy such indebtedness. In any such case, any remaining assets may be insufficient to repay the notes.
 
We may be unable to purchase the notes following a change of control.
 
Upon certain change of control events, each holder of notes may require us to repurchase all or a portion of its notes at a purchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. However, such change of control events will constitute a default under the senior credit facility. Moreover, the senior credit facility will restrict, and future indebtedness we incur may restrict, our ability to repurchase the notes, including following a change of control. As a result, following a change of control, we would not be able to repurchase notes unless we repaid all indebtedness outstanding under the senior credit facility and other indebtedness that contained similar provisions, or obtained a waiver from the holders of such indebtedness to permit us to repurchase the notes. If we repaid all such indebtedness, we may not have sufficient funds remaining to purchase the notes. In addition, if we fail to repay all such indebtedness or obtain a waiver, the subordination provisions applicable to the notes would restrict our ability to purchase the notes.
 
Federal and state statutes allow courts, under specific circumstances, to void guarantees and require noteholders to return payments received from guarantors.
 
Under the federal bankruptcy law and comparable provisions of state fraudulent transfer laws, a guarantee could be voided, or claims in respect of a guarantee could be subordinated to all other debts of that guarantor if, among other things, the guarantor, at the time it incurred the indebtedness evidenced by its guarantee:
 
 
received less than reasonably equivalent value or fair consideration for the incurrence of such guarantee;
 
 
was insolvent or rendered insolvent by reason of such incurrence;
 
 
was engaged in a business or transaction for which the guarantor’s remaining assets constituted unreasonably small capital; or
 
 
intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they mature.
 
In addition, any payment by that guarantor pursuant to its guarantee could be voided and required to be returned to the guarantor, or to a fund for the benefit of the creditors of us or the guarantor.
 
The measures of insolvency for purposes of these fraudulent transfer laws will vary depending upon the law applied in any proceeding to determine whether a fraudulent transfer has occurred. Generally, however, a guarantor would be considered insolvent if:
 
 
the sum of its debts, including contingent liabilities, were greater than the fair saleable value of all of its assets;
 
 
the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or

15


 
 
it could not pay its debts as they become due.
 
On the basis of historical financial information, recent operating history and other factors, we believe that each guarantor, after giving effect to its guarantee of the notes, will not be insolvent, will not have unreasonably small capital for the business in which it is engaged and will not have incurred debts beyond its ability to pay such debts as they mature. We cannot assure you, however, as to what standard a court would apply in making these determinations or that a court would agree with our conclusions in this regard.
 
Risks Relating to Exchange Offer
 
There currently is no public market for the exchange notes and we cannot assure you that you will be able to resell your exchange notes.
 
The exchange notes will constitute a new issue of securities for which there is no established trading market. Although we have been advised by the initial purchasers that, following completion of the exchange offer, they intend to make a market in the exchange notes, they are not obligated to do so and any market-making activities with respect to the exchange notes may be discontinued at any time without notice.
 
If a market for the exchange notes develops, any such market may cease at any time. In addition, if a public trading market for the exchange notes develops, future trading prices of the exchange notes will depend on many factors, including, among other things:
 
 
prevailing interest rates;
 
 
the market for similar securities;
 
 
our financial condition and results of operations; and
 
 
other factors beyond our control, including general economic conditions.
 
We do not intend to list the exchange notes on any national securities exchange or seek approval for quotation through any automated quotation system. Accordingly, we cannot assure you that an active public or other market will develop for the exchange notes, or of the liquidity of any trading market for the exchange notes following the exchange offer.
 
If a trading market does not develop or develops but is not maintained, holders of the exchange notes may experience difficulty in reselling the exchange notes or may be unable to sell them at all.
 
Your old notes will not be accepted for exchange if you fail to follow the exchange offer procedures and, as a result, your old notes will continue to be subject to existing transfer restrictions and you may not be able to sell your old notes.
 
We will not accept your old notes for exchange if you do not follow the exchange offer procedures. We will issue exchange notes as part of this exchange offer only after a timely receipt of your old notes, a properly
completed and duly executed letter of transmittal or computer generated message from DTC and all other required documents. Therefore, if you want to tender your old notes, please allow sufficient time to ensure timely delivery. If we do not receive your old notes, letter of transmittal and other required documents by the expiration date of the exchange offer, we will not accept your old notes for exchange. We are under no duty to give notification of defects or irregularities with respect to the tenders of old notes for exchange. If there are defects or irregularities with respect to your tender of old notes, we intend not to accept your old notes for exchange.
 
If you do not exchange your old notes, your old notes will continue to be subject to the existing transfer restrictions and you may not be able to sell your old notes.
 
We did not register the old notes, nor do we intend to do so following the exchange offer. Old notes that are not tendered will therefore continue to be subject to the existing transfer restrictions and may be transferred only

16


in limited circumstances under the securities laws. If you do not exchange your old notes, you will lose your right to have such old notes registered under the federal securities laws. As a result, if you hold old notes after the exchange offer, you may not be able to sell your old notes.
 
Risks Relating to the Transactions
 
Our historical financial information may not be representative of what our historical results as an independent company would have been and, therefore, may not be indicative of our future results.
 
The historical combined financial information included in this prospectus does not reflect what our results of operations, financial position and cash flows would have been had we been an independent company during the periods presented or what our results of operations, financial position and cash flows will be in the future. We were not operated as a separate company, subsidiary, division or segment by Allergan during the historical periods presented and our historical combined financial statements reflect allocations for services provided to us by Allergan. These allocations will differ from the costs we will incur for these services as an independent company. Additionally, our historical combined financial statements do not reflect fundamental changes that we expect to occur in the future as a result of our separation from Allergan, including changes in our capital structure. Our historical effective tax rate may not be indicative of our future effective tax rate due to changes in the mix of our earnings in the various countries where we operate. Therefore, our historical combined financial statements will not be indicative of our future performance as an independent company.
 
We have not made adjustments to our historical financial information to reflect changes that will occur in our cost structure, financing and operations as a result of our separation from Allergan. These changes include potentially increased costs associated with reduced economies of scale. For example, our separation from Allergan may result in dislocations to our organization and personnel structure, and will also result in the duplication of some administrative and managerial personnel and other expenses required for the operation of independent companies. Our historical financial information does not reflect any increased costs associated with being a publicly traded, independent company.
 
We have no history operating as an independent company upon which you can evaluate us.
 
We do not have an operating history as a stand-alone entity. Prior to the separation, the optical medical device business was operated by Allergan as a part of its broader corporate organization rather than as a stand-alone company. As a result of the separation, our ability to satisfy our obligations and maintain profitability will be solely dependent upon the future performance of the businesses we own and operate, and we will not be able to rely upon the capital resources and cash flows of those business lines remaining with Allergan. Historically, Allergan performed all corporate functions for us, including the following:
 
 
information and technology services;
 
 
legal functions;
 
 
public and investor relations;
 
 
treasury administration;
 
 
employee compensation and benefits administration;
 
 
insurance administration;
 
 
accounting functions;
 
 
internal audits;
 
 
corporate income tax administration;
 
 
telecommunications;
 
 
facilities services; and
 
 
complete operational support in many of the countries in which we conduct our business.

17


 
Allergan currently has no obligation to provide these functions to us other than the transition services that will be provided to us by Allergan pursuant to the transitional services agreement with Allergan, as described in “Arrangements with Allergan.” If we do not have in place our own systems and business functions, or if we do not have agreements with other providers of these services once our transitional services agreement with Allergan expires, we may not be able to operate our business effectively and our profitability may decline. In addition, if Allergan does not perform the transitional services they have agreed to provide us at the same level as when we were part of Allergan, these services may not be sufficient to meet our needs and we may not be able to operate our business effectively after the separation. We are in the process of creating our own, or engaging third parties to provide, systems and business functions to replace many of the systems and business functions Allergan currently provides us. We may not be successful in implementing these systems and business functions or in transitioning data from Allergan’s systems to ours. In addition, we may incur costs for these functions that are higher than the amounts allocated to us in our historical combined financial statements.
 
Our ability to engage in acquisitions and other strategic transactions using our stock is subject to limitations because of the federal income tax requirements for a tax-free distribution.
 
For the distribution of our stock by Allergan to qualify as tax-free to Allergan, there must not be a change in ownership of 50% or more in either the voting power or value of either our stock or Allergan’s stock that is considered to be part of a plan or a series of related transactions related to Allergan’s distribution of our stock to its stockholders. For this purpose, a change in ownership may include the issuance of our common stock or Allergan’s common stock in acquisitions and other similar strategic transactions. If there are direct or indirect acquisitions of our stock or Allergan’s stock by one or more persons during the four-year period beginning two years prior to and ending two years after the distribution, each acquisition will be presumed to be part of a plan or a series of related transactions related to Allergan’s distribution of our stock and the distribution will be taxable to Allergan unless the presumption is rebutted successfully.
 
Our tax sharing agreement and contribution and distribution agreement with Allergan limit our ability to use our stock for acquisitions and other similar strategic transactions. Under the tax sharing agreement, we may be required to indemnify Allergan against any corporate level tax on the amount by which the fair market value of our common stock distributed in the distribution exceeds Allergan’s basis in such stock.
 
We are required to meet various requirements, including obtaining the approval of Allergan, before engaging in specified transactions that involve the acquisition of our stock or the issuance of our stock. See “Arrangements with Allergan—Tax Sharing Agreement” and “—Contribution and Distribution Agreement.” Many of our competitors are not subject to similar restrictions and may issue their stock to complete acquisitions, expand their product offerings and speed the development of new technology. Therefore, these competitors may have a competitive advantage over us.
 
In addition, while our ability to issue additional equity or engage in transactions involving a change in ownership of our stock may be constrained, we are responsible for our own financing following the distribution. We may determine that it is desirable to incur debt or issue equity in order to fund our working capital, capital expenditure and research and development requirements, as well as to make other investments. If we are unable to engage in such financing transactions within the tax constraints discussed above or to complete such debt or equity financing, on terms acceptable to us, our business will be harmed.
 
We may be required to satisfy certain indemnification obligations to Allergan, or may not be able to collect on indemnification rights from Allergan.
 
Under the terms of the contribution and distribution agreement, we and Allergan have each agreed to indemnify each other from and after the distribution with respect to the indebtedness, liabilities and obligations that will be retained by our respective companies. These indemnification obligations could be significant and we cannot presently determine the amount of indemnification obligations for which we could be liable or for which

18


we will seek payment from Allergan. See “Arrangements with Allergan—Contribution and Distribution Agreement.” Our ability to satisfy these indemnities if we are called upon to do so will depend upon our future financial strength. Similarly, Allergan’s ability to satisfy any such obligations to us will depend on Allergan’s future financial performance. We cannot assure you that we will have the ability to satisfy any substantial indemnification obligations to Allergan. We also cannot assure you that if Allergan is required to indemnify us for any substantial obligations, Allergan will have the ability to satisfy those obligations.
 
We may be responsible for federal income tax liabilities that relate to the distribution of our common stock by Allergan.
 
Allergan conditioned the distribution on the receipt of a satisfactory ruling from the Internal Revenue Service to the effect that the distribution will qualify as a tax-free transaction such that none of the Allergan stockholders, Allergan or we will recognize any income, gain or loss as a result of such transactions. Allergan  has received such a satisfactory ruling from the Internal Revenue Service. Allergan and we have made representations and agreed to restrictions on future actions to provide further assurances that the distribution  will qualify as tax-free to Allergan and its stockholders. See “Arrangements with Allergan—Tax Sharing Agreement” and “—Contribution and Distribution Agreement.”
 
If any of the material facts, representations and warranties on which the satisfactory ruling from the Internal Revenue Service is based are not true and correct and the Internal Revenue Service challenged the tax-free nature of the distribution, it is possible that the distribution could be held to be a taxable distribution by Allergan of our common stock to Allergan stockholders.
 
If Allergan or we fail to operate under these limitations, or if any of these matters were challenged on audit, and Allergan’s distribution of our common stock were ultimately determined not to qualify as tax free under Section 355 of the Internal Revenue Code, then in general, a corporate level tax would be payable by the consolidated group of which Allergan is the common parent based upon the difference between the fair market value of our common stock and Allergan’s basis in our common stock distributed to the Allergan stockholders. Under the consolidated return rules, each member of the consolidated group (including us) would be severally liable for such tax liability. We have agreed to indemnify Allergan if our actions or the actions of any of our affiliates result in the tax liability described above. Allergan has agreed to indemnify us for any losses we may incur in the event that Allergan or any of its affiliates take any action which adversely impacts the tax-free nature of the distribution. If we were required to pay any of the taxes described above, the payment would have a material adverse effect on our financial position.
 
Many of our executive officers and some of our directors may have potential conflicts of interest because of their ownership of Allergan common stock and other ties to Allergan.
 
Many of our executive officers and some of our directors have a portion of their personal financial portfolios in Allergan common stock or vested options to purchase Allergan common stock or are employees or former employees of Allergan. Our directors and executive officers beneficially own in aggregate less than one percent of the outstanding Allergan common stock. In addition, we share two directors with Allergan, including David E.I. Pyott, Allergan’s Chairman of the Board, President and Chief Executive Officer. See “Management.” Ownership of Allergan common stock by our directors and officers or the employment by Allergan of any of our directors could create, or appear to create, potential conflicts of interest for these directors and officers when faced with decisions that could have different implications for Allergan and us. See “Ownership of Our Stock.”
 
Risks Relating to Our Industry
 
We face intense competition and our failure to compete effectively could have a material adverse effect on our profitability and results of operations.
 
The markets for our ophthalmic surgical device and contact lens care products are intensely competitive and are subject to rapid and significant technological change. We have numerous competitors in the United States

19


and abroad, including, among others, large companies such as Alcon, Inc., a subsidiary of Nestle S.A.; Bausch & Lomb and its acquired businesses, Chiron Vision and Storz Ophthalmics; CIBA Vision Corporation, a unit of Novartis; Pharmacia Ophthalmics; Staar Surgical; and Moria. 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 companies that are larger and more diversified than we are. Among other things, these companies can spread their research and development costs over much broader revenue bases than we can and can influence customer and distributor buying decisions. Our inability to produce and develop products that compete effectively against our competitors’ products could result in a material reduction in sales.
 
Compliance with the extensive government regulations to which we are subject is expensive and time consuming, and, if we fail to comply, we may be subject to fines, injunctions and penalties that could harm our business.
 
Our products and operations are subject to extensive regulation in the United States by the Food and Drug Administration. Additionally, in many foreign countries in which we market our products, we are subject to regulations applicable to our devices and products similar to those of the Food and Drug Administration. U.S. and foreign regulations govern, among other things, product development, product testing, product labeling, manufacturing practices, product storage, premarket clearance or approval, advertising and promotion, sales and distribution and post-market surveillance. Changes in existing regulatory requirements or adoption of new requirements could hurt our business, financial condition and results of operations.
 
Numerous regulatory requirements apply to our marketed products, including the Food and Drug Administration’s Quality System Regulations, which require that our manufacturing operations follow elaborate design, testing, control, documentation and quality assurance procedures during the manufacturing process. We are also subject to Food and Drug Administration regulations covering labeling, adverse event reporting, the Food and Drug Administration’s general prohibition against promoting products for unapproved or “off-label” uses and various federal and state laws pertaining to healthcare fraud and abuse, including anti-kickback laws and physician self-referral laws. As a medical device manufacturer, our manufacturing facilities are subject to periodic unannounced inspections by various governmental agencies to determine compliance with extensive regulatory requirements. Although we believe we are in material compliance with all such applicable requirements, we cannot be certain that an inspection would determine that we are in full compliance. Our failure to comply with U.S. or foreign regulations could lead to warning letters, non-approvals, suspension of existing approvals, civil penalties and criminal fines, product seizures and recalls, operating restrictions (including suspension or reduction in manufacturing and production), injunctions, and criminal prosecutions. The imposition of any one or more of these penalties could have a material adverse effect on our production, product sales and profitability. See “Business—Government Regulation and Other Matters.”
 
Product sales, introductions or modifications may be delayed or canceled as a result of U.S. or foreign regulatory processes, which could cause our sales to decline.
 
In order for us to market our Class I or Class II (“low” or “medium risk”, respectively) medical devices in the United States, we generally must first obtain clearance from the United States Food and Drug Administration, pursuant to Section 510(k), or approval pursuant to Section 515, of the Federal Food, Drug, and Cosmetic Act. Clearance under Section 510(k) requires demonstration that a new device is substantially equivalent in intended use and safety and effectiveness to a legally marketed “predicate device”. If we modify our products after they receive clearance under Section 510(k), the Food and Drug Administration may require us to submit a separate 510(k) or premarket approval application for the modified product before we are permitted to market the products in the United States. In addition, for our existing or any future Class III (“high risk”) devices, we are required to obtain Food and Drug Administration approval prior to commercial distribution by submitting a premarket approval application. Approval under Section 515, through submission of a premarket approval application, or PMA,

20


requires demonstration of a reasonable assurance of safety and effectiveness using valid scientific data. If we modify our Class III devices or their manufacturing sites or processes following PMA approval, we may be required to submit a supplemental or new PMA and obtain prior approval before marketing the modified products. While the burden of determining if a modified product requires a new 501(k), PMA supplement or new PMA is left to us, if the Food and Drug Administration disagrees with our assessment, it could be deemed a failure to comply and we could become subject to warning letters, future non-approvals, suspension of existing approvals, civil penalties and criminal fines, product seizures and recalls, operating restrictions, injunctions, and criminal prosecutions. The imposition of any one or more of these penalties could have a material adverse effect on our production, product sales and profitability.
 
The Food and Drug Administration may not act favorably or quickly in its review of our 510(k) or premarket approval application submissions, or we may encounter significant difficulties and costs in our efforts to obtain Food and Drug Administration clearance or approval, all of which could delay or preclude sale of new products in the United States. Furthermore, the Food and Drug Administration may request additional data, require us to conduct further testing, or compile more data, including clinical data, in support of a 510(k) or PMA submission. The Food and Drug Administration may also, instead of accepting a 510(k) submission, require us to submit a premarket approval application, which is typically a much more complex application than a 510(k). To support a premarket approval application, the Food and Drug Administration would likely require that we conduct one or more clinical studies to demonstrate that the device is safe and effective, rather than substantially equivalent to another legally marketed “predicate device”. We may not be able to meet the requirements to obtain 510(k) clearance or approval of a premarket approval application, or the Food and Drug Administration may not grant any necessary clearances or approvals. In addition, the Food and Drug Administration may place significant limitations upon the intended use of our products as a condition to a 510(k) clearance or approval of a premarket approval application. Product applications can also be denied or withdrawn due to failure to comply with regulatory requirements or the occurrence of unforeseen problems following approval. Failure to obtain Food and Drug Administration clearance or approvals of new products we develop on a timely basis, any limitations imposed by the Food and Drug Administration on new product use or the costs of obtaining Food and Drug Administration clearance or approvals could have a material adverse effect on our business, financial condition and results of operations.
 
In order to conduct a clinical investigation involving human subjects for the purpose of demonstrating the safety and effectiveness of a device, a company must, among other things, apply for and obtain Institutional Review Board approval of the proposed investigation. In addition, if the clinical study involves a “significant risk” (as defined by the Food and Drug Administration) to human health, the sponsor of the investigation must also submit and obtain Food and Drug Administration approval of an investigational device exemption application. We may not be able to obtain Food and Drug Administration and/or Institutional Review Board approval to undertake clinical trials in the U.S. for any new devices we intend to market in the United States in the future. If we obtain such approvals, we may not be able to comply with the investigational device exemption and other regulations governing clinical investigations or the data from any such trials may not support clearance or approval of the investigational device. Failure to obtain such approvals or to comply with such regulations could have a material adverse effect on our business, financial condition and results of operations. Particular emphasis is also being placed on more sophisticated and faster procedures for reporting of adverse events to the competent authorities. In many countries the national health or social security organizations require our products to be qualified before they can be marketed with the benefit of reimbursement eligibility. Failure to receive, or delays in the receipt of, relevant foreign qualifications also could have a material adverse effect on our business, financial condition and results of operations.
 
The European Union regulatory regime for medical devices became mandatory in June 1998. It requires that medical devices may only be placed on the market if they do not compromise safety and health when properly installed, maintained and used in accordance with their intended purpose. National laws conforming to this European Union legislation regulate our surgical and contact lens care products under the medical devices regulatory system, rather than under the national requirements under which they were formerly regulated, which

21


were often highly variable. The European Union medical device laws require us to declare that our products conform to the designated essential requirements, only after which our products may be placed on the market bearing a “CE” marking. The manufacturers’ quality systems for products in all but the lowest risk classification are also subject to certification and audit by an independent notified body.
 
In Japan, the regulatory process for our products is equally complex. Pre-marketing approval and clinical studies are required, as is governmental pricing approval for medical devices. Clinical studies are subject to a stringent “Good Clinical Practices” standard. Approval time frames from the responsible Japanese Ministry vary from simple notifications to review periods of one or more years, depending on the complexity and risk level of the device. In addition, importation into Japan of medical products is subject to “Good Import Practices” regulations. As with any highly regulated market, significant changes in the regulatory environment could adversely affect future sales.
 
In many of the other foreign countries in which we market our products, we are subject to regulations affecting, among other things:
 
 
product standards;
 
 
packaging requirements;
 
 
labeling requirements;
 
 
quality system requirements;
 
 
import restrictions;
 
 
tariff regulations;
 
 
duties; and
 
 
tax requirements.
 
If we or our subcontractors fail to comply with applicable manufacturing regulations, our business could be harmed.
 
We, our key subcontractors and any third party manufacturers that manufacture our products that are sold in the United States are required to demonstrate and maintain compliance with the Food and Drug Administration’s Quality System Regulation. The Quality System Regulation sets forth the Food and Drug Administration’s requirements for good manufacturing practices of medical devices and includes requirements for, among other things, the manufacturing, packaging, labeling and distribution of such products. The Food and Drug Administration enforces the Quality System Regulation through inspections. We cannot assure you that our key subcontractors or third party manufacturers are or will continue to be in compliance, or that they will not encounter any manufacturing difficulties. We also cannot assure you that we, any of our key subcontractors or any of our third party manufacturers will be able to maintain compliance with regulatory requirements. The failure of a subcontractor or third party manufacturer to be compliant with the Quality System Regulation may disrupt our ability to supply products sufficient to meet U.S. demand until a new subcontractor or third party manufacturer has been identified and evaluated. Furthermore, we cannot assure you that if we find it necessary to seek out new subcontractors or third party manufacturers to satisfy our business requirements, that we will be able to locate new subcontractors or third party manufacturers who are in compliance with regulatory requirements. Our failure to do so will have a material adverse effect on our ability to produce our products and on our profitability.
 
Health care 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 limit the growth of health care costs, including price regulation and competitive pricing, are continuing in many countries where we do business, including the United States and

22


Europe. As a result of these changes, the marketplace has placed increased emphasis on the delivery of more cost-effective medical therapies. As a result of the trend towards managed healthcare in the United States, third party payors are increasingly limiting both coverage for, and the level of reimbursement of, new and existing medical procedures and treatments. Various federal and state programs, including Medicare and Medicaid, provide reimbursement primarily at predetermined fixed rates. These programs are subject to statutory and regulatory changes, administrative rulings, interpretations of policy and governmental funding restrictions, all of which may have the effect of decreasing program payments, increasing costs or requiring us to modify the way in which we operate our business. In response to rising Medicare and Medicaid costs, several legislative proposals in the United States have been advanced and implemented that restrict payment increases to hospitals and other providers through reimbursement systems that are based on predetermined payment rates or other methodologies limiting payment increases. We are not able to predict whether these changes will take effect or whether other changes will be made in the rates prescribed by these governmental programs. For example, reimbursement rates for cataract surgery by Medicare have declined in recent years. These governmental rate changes could have a material and adverse effect on us, including our prospects for future sales of our products.
 
In keeping with the increased emphasis on cost-effectiveness in health care delivery, the current trend among hospitals and other customers of medical device manufacturers is to consolidate into larger purchasing groups to enhance purchasing power. The medical device industry has also experienced some consolidation, partly in order to offer a broader range of products to large purchasers. As a result, transactions with customers are larger, more complex and tend to involve more long-term contracts than in the past. The enhanced purchasing power of these larger customers may also increase the pressure on product pricing, although we are unable to estimate the potential impact at this time.
 
These ongoing cost-containment pressures from managed care and hospital buying groups in the United States and government organizations in Europe and the Asia Pacific region have generated over the past decade industry-wide net declines in base prices for our ophthalmic surgical products. Base prices, however, generally have stabilized in more recent years in the United States and some of these other regions. Although we believe we are well-positioned to respond to changes resulting from this worldwide trend toward cost containment, proposed legislation or changes in the marketplace could have an adverse impact on future operating results.
 
We could experience losses due to product liability claims or product recalls or corrections.
 
We have in the past been, and continue to be, subject to product liability claims. Upon our separation from Allergan, we generally assumed the defense of any litigation involving claims related to our business and will indemnify Allergan for all related losses, costs and expenses. As part of our risk management policy, we have obtained third party product liability insurance coverage. Furthermore, product liability claims against us may exceed the coverage limits of our insurance policies or cause us to record a self-insured loss. Even if any product liability loss is covered by an insurance policy, these policies have substantial retentions or deductibles that provide that we will not receive insurance proceeds until the losses incurred exceed the amount of those retentions or deductibles. To the extent that any losses are below these retentions or deductibles, we will be responsible for paying these losses. A product liability claim in excess of applicable insurance could have a material adverse effect on our business, financial position and results of operations.
 
Our contact lens care business competes in a market that is gradually declining on a net global basis which could materially impact our operating results if we cannot timely generate new sources of revenue.
 
We believe that revenue growth of the contact lens care market in international markets is offset by a larger decline in the U.S. market, resulting in a net global decline of approximately one percent in 2001 as compared to 2000. We anticipate that this trend will continue or possibly worsen in the near future. Our contact lens care business is impacted by trends in the contact lens care market such as technological and medical advances in surgical techniques for the correction of vision impairment. Less expensive one-bottle chemical disinfection

23


systems have gained popularity among soft contact lens wearers instead of peroxide based lens care products, which historically have been our strongest family of lens care products. Also, the growing use and acceptance of daily and extended wear contact lenses and laser correction procedures, along with the other factors above, could have the effect of continuing to reduce demand for lens care products generally. Currently, approximately 49% of our net sales are generated from sales of contact lens care products. We cannot assure you that we have established appropriate or sufficient marketing and sales plans to mitigate the effect of these trends upon our contact lens care business. If we cannot timely generate new sources of revenue to offset any decline in revenues from these trends, our operating results will materially suffer.
 
Risks Relating to Our Business
 
If we do not introduce new commercially successful products in a timely manner, our products may become obsolete over time, customers may not buy our products and our revenue and profitability may decline.
 
Demand for our products may change in ways we may not anticipate because of:
 
 
evolving customer needs;
 
 
the introduction of new products and technologies;
 
 
evolving surgical practices; and
 
 
evolving industry standards.
 
Without the timely introduction of new commercially successful products and enhancements, our products may become obsolete over time, in which case our revenue and operating results would suffer. The success of our new product offerings will depend on several factors, including our ability to:
 
 
properly identify and anticipate customer needs;
 
 
commercialize new products in a timely manner;
 
 
manufacture and deliver products in sufficient volumes on time;
 
 
differentiate our offerings from competitors’ offerings;
 
 
achieve positive clinical outcomes for new products;
 
 
satisfy the increased demands by healthcare payors, providers and patients for lower-cost procedures;
 
 
innovate and develop new materials, product designs and surgical techniques; and
 
 
provide adequate medical and/or consumer education relating to new products and attract key surgeons to advocate these new products.
 
Moreover, innovations generally will require a substantial investment in research and development before we can determine the commercial viability of these innovations and we may not have the financial resources necessary to fund these innovations. In addition, even if we are able to successfully develop enhancements or new generations of our products, these enhancements or new generations of products may not produce revenue in excess of the costs of development and they may be quickly rendered obsolete by changing customer preferences or the introduction by our competitors of products embodying new technologies or features.
 
If we fail to maintain our relationships with healthcare providers, customers may not buy our products and our revenue and profitability may decline.
 
We market our products to numerous health care providers, including eye care professionals, 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

24


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.
 
We conduct a significant amount of our sales and operations outside of the United States, which subjects us to additional business risks, such as business interruption and increased costs, and may cause our profitability to decline.
 
Because we manufacture and sell our products in a number of foreign countries, our business is subject to risks associated with doing business internationally. In particular, our two manufacturing sites are located outside the continental United States, in Añasco, Puerto Rico and Hangzhou, China, and in 2001, we derived approximately $376 million, or 69%, of our net sales, from sales of our products outside of the United States. In addition, in 2001, we derived approximately 25.3% of our net sales in Japan. We intend to continue to pursue growth opportunities in sales internationally, which could expose us to greater risks associated with international sales and operations. Our international operations are, and will continue to be, subject to a number of risks and potential costs, including:
 
 
unexpected changes in foreign regulatory requirements;
 
 
differing local product preferences and product requirements;
 
 
fluctuations in foreign currency exchange rates;
 
 
political and economic instability;
 
 
changes in foreign medical reimbursement and coverage policies and programs;
 
 
diminished protection of intellectual property in some countries outside of 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. In addition, we are particularly susceptible to the occurrence of any of these risks in Japan due to our high concentration of sales in Japan.
 
As we expand our international operations, we may encounter new risks. For example, as we focus on building our international sales and distribution networks in new geographic regions, we must continue to develop relationships with qualified local distributors and trading companies. If we are not successful in developing these relationships, we may not be able to grow sales in these geographic regions. These or other similar risks could adversely affect our revenue and profitability.
 
We are subject to risks arising from currency exchange rate fluctuations, which could increase our costs and may cause our profitability to decline.
 
Since a significant portion of our international sales and manufacturing costs are denominated in local currencies and not in U.S. dollars, our reported sales and earnings are subject to fluctuations in foreign exchange rates. Significant increases in the value of the United States dollar relative to foreign currencies, including the Japanese Yen or the Euro, could have a material adverse effect on our results of operations. Currency risk

25


management for our business has historically been managed by Allergan’s treasury operations. As part of this strategy, Allergan has used financial instruments to reduce its exposure to adverse movements in currency exchange rates. As an independent company, we have implemented a hedging policy that attempts to manage currency exchange rate risks to an acceptable level based on management’s judgment of the appropriate trade-off between risk, opportunity and cost; however, this hedging policy may not successfully eliminate the effects of currency exchange rate fluctuations.
 
If we are unable to protect our intellectual property rights, our business and prospects may be harmed.
 
Our ability to compete effectively is dependent upon the proprietary nature of the designs, processes, technologies and materials owned by, used by or licensed to us. Although we attempt to protect our proprietary property, technologies and processes through a combination of patent law, trade secrets and non-disclosure agreements, these may be insufficient. For example, in the case of patents, it is possible that existing patents granted to us or our licensors will be invalidated. Patents currently or prospectively applied for by us or our licensors may not be granted. Even if patents are granted, this does not assure that they will provide significant commercial benefits. Moreover, it is possible that competing companies may circumvent our patents or our licensors’ patents by developing products that closely emulate but do not infringe these patents. This would allow our competitors to market products that compete with our products without obtaining a license from us. In addition to patented or potentially patentable designs, technologies, processes and materials, we also rely on proprietary designs, technologies, processes and procedures to protect against improper disclosure of these trade secrets. It is possible, however, that competitors could independently develop the same or superior designs, technologies, processes and know-how. It is also possible that our trade secrets could be improperly disclosed in spite of our protective procedures.
 
We believe that the international market for our products is as important as the domestic market, and therefore we seek patent protection for our products or those of our licensors in foreign countries where we feel such protection is needed. Because of the differences in foreign patent and other laws concerning proprietary rights, our products may not receive the same degree of protection in foreign countries as they would in the United States.
 
We may be subject to intellectual property litigation and infringement claims, which could cause us to incur significant expenses or prevent us from selling our products.
 
There is a substantial amount of litigation over patent and other intellectual property rights in the eye care industry, and in the ophthalmic surgical device and contact lens care markets particularly. The fact that we have patents issued to us for our products does not mean that we will always be able to successfully defend our patents and proprietary rights against challenges or claims of infringement by our competitors. A successful claim of patent or other intellectual property infringement against us could adversely affect our growth and profitability, in some cases materially. We cannot assure you that others will not claim that our proprietary or licensed products are infringing their intellectual property rights or that we do not in fact infringe those intellectual property rights. From time to time, we receive notices from third parties of potential infringement and receive claims of potential infringement. We may be unaware of intellectual property rights of others that may cover some of our technology. If someone claims that our products infringed their intellectual property rights, any resulting litigation could be costly and time consuming and would divert the attention of management and key personnel from other business issues. The complexity of the technology involved and the uncertainty of intellectual property litigation increase these risks. Claims of intellectual property infringement also might require us to enter into costly royalty or license agreements. However, we may be unable to obtain royalty or license agreements on terms acceptable to us or at all. We also may be subject to significant damages or an injunction preventing us from manufacturing, selling or using some or some aspect of our products in the event of a successful claim of patent or other intellectual property infringement. Any of these adverse consequences could have a material adverse effect on our business and profitability.

26


 
If we experience an interruption of our manufacturing operations, our business, financial condition and operating results would be materially harmed.
 
We rely on third parties to manufacture a significant portion of our products, and we manufacture the remainder. As a result, 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, destruction of or damage to any facility, regulatory action, or other reasons, could materially harm our business, financial condition and operating results.
 
Our manufacturing capacity may not be adequate to meet the demands of our business.
 
We manufacture our products or contract with third parties to manufacture our products. Our products are manufactured in quantities sufficient to satisfy our current level of product sales. If we experience increases in sales, we will need to correspondingly increase our production, potentially beyond our present manufacturing capacity. Additionally, in three years our manufacturing agreement with Allergan will terminate and we will be required to increase our manufacturing capacities or to contract with additional parties to manufacture our contact lens care products. The process to transfer manufacturing of our products to new facilities is lengthy and requires regulatory approval. We cannot assure you that we can successfully increase our capacity on a profitable basis, complete the regulatory approval process in a timely manner, or contract with additional parties on terms acceptance to us, if at all. Any prolonged disruption in the operation of our manufacturing facilities or those of our third party manufacturers could materially harm our business. Furthermore, we cannot assure you that if we choose to scale-up our manufacturing operations, we will be able to maintain compliance with Food and Drug Administration or other regulatory standards.
 
If we fail to retain the independent agents and distributors upon whom we rely heavily to market our products, customers may not buy our products and our revenue and profitability may decline.
 
Our marketing success in the United States and abroad depends largely upon our agents’ and distributors’ sales and service expertise and relationships with the customers in the marketplace. Many of these agents have developed strong ties to existing and potential customers because of their detailed knowledge of products and instruments and commonly provide operating room personnel with implant and instrument product training as well as product support in the operating room. A significant loss of these agents could have a material adverse effect on our business. As part of the reorganization of Allergan resulting in our formation, we will need to obtain new distributors in several markets in which we are unable to deploy our own sales force. Any new distributors we obtain will likely be unfamiliar with our products. We cannot assure you that we will be able to obtain new distributors in a timely manner or on terms that are acceptable to us. Our inability to find new distributors in a timely manner and the unfamiliarity of any new distributors with our products could result in lost sales in these countries.
 
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 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

27


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. In addition, as an independent company, separate from Allergan, we may find it more difficult to attract personnel. We may have to increase our salaries and benefits, which would increase our expenses and reduce our profitability.
 
USE OF PROCEEDS
 
The exchange offer satisfies certain of our obligations under the registration rights agreement. We will not receive any cash proceeds from the exchange offer. In consideration for issuing the exchange notes, we will receive, in exchange, an equal number of old notes in like principal amount. The form and terms of the exchange notes will be identical in all material respects to the old notes.
 
We received approximately $190.7 million in net proceeds from the sale of the old notes, after deducting discounts, fees and certain other expenses associated with the sale of old notes. In connection with our spin-off from Allergan, we also entered into a senior credit facility, consisting of a $100.0 million term loan, which was fully drawn at the time of the spin-off, and a $35.0 revolving credit facility, approximately $17.0 million of which has been reserved to support letters of credit issued on our behalf. We used a portion of the net proceeds from the old notes and initial borrowings under our senior credit facility for the following purposes:
 
 
to repay $90.4 million of indebtedness borrowed from Allergan in June 2002 to purchase various assets needed as a result of our spin-off from Allergan;
 
 
to distribute $56.3 million to Allergan in exchange for various assets contributed to us by Allergan in connection with the spin-off; and
 
 
to repay approximately $111.4 million of indebtedness that we assumed from Allergan in connection with the spin-off.

28


 
CAPITALIZATION
 
The following table sets forth our capitalization as of March 29, 2002 on an historical basis, and as adjusted to give effect to the Transactions. This table should be read in conjunction with “Selected Historical Financial Information,” “Unaudited Pro Forma Combined Financial Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our combined financial statements, including the related notes, included elsewhere in this prospectus.
 
    
As of March 29, 2002

    
Actual

  
As Adjusted

    
(in thousands)
Long-term debt, including current portion (1):
             
Non-U.S. debt assumed in the Transactions
  
$
94,023
  
$
—  
Senior credit facility (2)
  
 
—  
  
 
100,000
9¼% Senior Subordinated Notes due 2010 (3)
  
 
—  
  
 
197,194
    

  

Total long-term debt, including current portion
  
 
94,023
  
 
297,194
Total stockholders’ equity
  
 
199,871
  
 
35,432
    

  

Total capitalization
  
$
293,894
  
$
332,626
    

  


(1)
Long-term debt as of March 29, 2002 does not reflect $90.4 million of indebtedness that we borrowed from Allergan to purchase various assets and immediately repaid in connection with the Transactions. The non-U.S. debt assumed as of June 26, 2002 increased to $111.4 million due to additional borrowings under existing credit facilities and exchange rate fluctuations between the Japanese Yen and the U.S. dollar. Our equity as of June 26, 2002 has decreased from March 29, 2002 by a corresponding amount, and is reflected in the “As Adjusted” equity balance above. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Separation from Allergan.”
 
(2)
The senior credit facility includes a $100.0 million term loan, all of which was drawn at the time of our spin-off from Allergan, and a $35.0 million revolving credit facility. Currently, approximately $17.0 million of our senior revolving credit facility has been reserved to support letters of credit issued on our behalf. See “Description of the Senior Credit Facility.”
 
(3)
Net of $2.8 million of original issue discount.

29


 
SELECTED HISTORICAL FINANCIAL INFORMATION
 
The following table sets forth our selected historical financial information as of and for each of the years in the five-year period ended December 31, 2001, for the three months ended March 30, 2001 and as of and for the three months ended March 29, 2002, which has been derived from our (i) unaudited combined financial statements as of and for the years ended December 31, 1997 and 1998 and as of December 31, 1999, which are not included in this prospectus, (ii) audited combined financial statements for the year ended December 31, 1999 and as of and for the years ended December 31, 2000 and 2001, which are included elsewhere in this prospectus, and (iii) unaudited condensed combined financial statements for the three months ended March 30, 2001 and as of and for the three months ended March 29, 2002, which are included elsewhere in this prospectus. In our opinion, the information derived from our unaudited combined financial statements is presented on a basis consistent with the information in our audited combined financial statements. The historical financial information presented may not be indicative of the results of operations or financial position that would have been obtained if we had been an independent company during the periods presented or of our future performance as an independent company. See “Risk Factors—Risks Relating to the Transactions.” The selected financial information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the unaudited pro forma combined financial statements and the corresponding notes, the combined financial statements and the corresponding notes and the unaudited condensed combined financial statements and the corresponding notes included elsewhere in this prospectus.
 
    
For the Year Ended December 31,

    
Three
Months Ended March 30,
2001

    
Three
Months Ended March 29,
2002

    
1997

  
1998

    
1999

    
2000

    
2001

       
    
(in thousands)
Statement of Operations:
                                                          
Net sales
  
$
555,712
  
$
545,715
 
  
$
577,644
 
  
$
570,573
 
  
$
543,095
 
  
$
120,811
 
  
$
113,997
Cost of sales.
  
 
242,910
  
 
236,481
 
  
 
236,002
 
  
 
231,426
 
  
 
212,090
 
  
 
50,335
 
  
 
44,276
    

  


  


  


  


  


  

Gross margin
  
 
312,802
  
 
309,234
 
  
 
341,642
 
  
 
339,147
 
  
 
331,005
 
  
 
70,476
 
  
 
69,721
    

  


  


  


  


  


  

Selling, general and administrative
  
 
213,975
  
 
226,246
 
  
 
255,666
 
  
 
241,047
 
  
 
222,885
 
  
 
62,118
 
  
 
54,170
Research and development
  
 
31,963
  
 
27,674
 
  
 
27,765
 
  
 
29,878
 
  
 
28,990
 
  
 
7,264
 
  
 
6,984
Restructuring/impairment charge (reversal)
  
 
522
  
 
50,997
 
  
 
(6,527
)
  
 
(2,237
)
  
 
—  
 
  
 
—  
 
  
 
—  
    

  


  


  


  


  


  

Operating income
  
 
66,342
  
 
4,317
 
  
 
64,738
 
  
 
70,459
 
  
 
79,130
 
  
 
1,094
 
  
 
8,567
Interest expense
  
 
3,154
  
 
6,092
 
  
 
6,500
 
  
 
3,625
 
  
 
3,302
 
  
 
824
 
  
 
681
Loss/(gain) on investments, net
  
 
—  
  
 
—  
 
  
 
—  
 
  
 
(231
)
  
 
793
 
  
 
—  
 
  
 
—  
Unrealized loss/(gain) on derivative instruments
  
 
—  
  
 
—  
 
  
 
—  
 
  
 
—  
 
  
 
(1,294
)
  
 
(1,321
)
  
 
213
Other, net
  
 
1,058
  
 
3,254
 
  
 
441
 
  
 
(1,135
)
  
 
385
 
  
 
(90
)
  
 
51
    

  


  


  


  


  


  

Earnings (loss) before income taxes
  
 
62,130
  
 
(5,029
)
  
 
57,797
 
  
 
68,200
 
  
 
75,944
 
  
 
1,681
 
  
 
7,622
Provision (benefit) for income taxes
  
 
17,993
  
 
(1,454
)
  
 
13,347
 
  
 
19,020
 
  
 
20,594
 
  
 
467
 
  
 
2,896
    

  


  


  


  


  


  

Earnings (loss) before cumulative effect of change in accounting principle
  
 
44,137
  
 
(3,575
)
  
 
44,450
 
  
 
49,180
 
  
 
55,350
 
  
 
1,214
 
  
 
4,726
Cumulative effect of change in accounting principle, net of $160 of tax
  
 
—  
  
 
—  
 
  
 
—  
 
  
 
—  
 
  
 
(391
)
  
 
(391
)
  
 
—  
    

  


  


  


  


  


  

Net earnings (loss)
  
$
44,137
  
$
(3,575
)
  
$
44,450
 
  
$
49,180
 
  
$
54,959
 
  
$
823
 
  
$
4,726
    

  


  


  


  


  


  

Ratio of earnings to fixed charges (1)
  
 
11.3x
  
 
—  
 
  
 
6.9x
 
  
 
10.3x
 
  
 
12.4x
 
  
 
2.0x
 
  
 
5.9x
 
    
As of December 31,

  
As of March 29, 2002

    
1997

  
1998

  
1999

  
2000

  
2001

  
    
(in thousands)
Balance Sheet Data:
                                         
Cash and equivalents
  
$
2,384
  
$
1,524
  
$
2,250
  
$
12,641
  
$
6,957
  
$
4,836
Current assets
  
 
225,267
  
 
212,692
  
 
234,538
  
 
228,942
  
 
210,552
  
 
184,150
Total assets
  
 
432,356
  
 
420,566
  
 
436,532
  
 
404,655
  
 
377,466
  
 
348,830
Current liabilities
  
 
62,707
  
 
74,533
  
 
113,177
  
 
87,165
  
 
85,551
  
 
70,374
Long term debt, net of current portion
  
 
78,742
  
 
86,987
  
 
83,232
  
 
100,364
  
 
75,809
  
 
75,189

(1)
We have computed the ratio of earnings to fixed charges by dividing earnings before income taxes and fixed charges by fixed charges. Fixed charges consist of interest expense and a portion of rent expense deemed representative of the interest factor. For the year ended December 31, 1998, earnings were insufficient to cover fixed charges by $5.0 million.

30


 
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
 
The following unaudited pro forma combined financial statements for the year ended December 31, 2001, and as of and for the three months ended March 29, 2002 have been derived from our audited combined financial statements for the year ended December 31, 2001 and our unaudited condensed combined financial statements as of and for the three months ended March 29, 2002, respectively, and give pro forma effect to the Transactions as if they had been consummated as of January 1, 2001, in the case of the unaudited pro forma combined statements of earnings, and as of March 29, 2002, in the case of the unaudited pro forma combined balance sheet. The unaudited pro forma combined financial statements have been derived from the combined financial statements included elsewhere in this prospectus and do not purport to represent what our financial position and results of operations actually would have been had the Transactions occurred on the dates indicated or to project our financial performance for any future period. Allergan did not account for us as, and we were not operated as, a separate, stand-alone entity, subsidiary, division or segment for the periods presented. The unaudited pro forma combined financial statements should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our combined financial statements, including the related notes, included elsewhere in this prospectus.
 
Unaudited Pro Forma Combined Statement of Earnings
 
    
For the Year Ended December 31, 2001

 
    
Historical

    
Pro Forma Adjustments

    
Pro Forma

 
    
(in thousands)
 
Net sales
  
$
543,095
 
  
$
—  
 
  
$
543,095
 
Cost of sales
  
 
212,090
 
  
 
6,800
(a)
  
 
218,890
 
    


  


  


Gross margin
  
 
331,005
 
  
 
(6,800
)
  
 
324,205
 
    


  


  


Selling, general and administrative
  
 
222,885
 
  
 
—  
(b)
  
 
222,885
 
Research and development
  
 
28,990
 
  
 
—  
(b)
  
 
28,990
 
    


  


  


Operating income
  
 
79,130
 
  
 
(6,800
)
  
 
72,330
 
Interest expense
  
 
3,302
 
  
 
18,793
(c)
  
 
22,095
 
Loss on investments, net
  
 
793
 
  
 
—  
 
  
 
793
 
Unrealized gain on derivative instruments
  
 
(1,294
)
  
 
—  
 
  
 
(1,294
)
Other, net
  
 
385
 
  
 
—  
 
  
 
385
 
    


  


  


Earnings before income taxes
  
 
75,944
 
  
 
(25,593
)
  
 
50,351
 
Provision for income taxes
  
 
20,594
 
  
 
(3,223
)(d)
  
 
17,371
 
    


  


  


Earnings before cumulative effect of change in accounting principle
  
 
55,350
 
  
 
(22,370
)
  
 
32,980
 
Cumulative effect of change in accounting principle, net of $160 of tax
  
 
(391
)
  
 
—  
 
  
 
(391
)
    


  


  


Net earnings
  
$
54,959
 
  
$
(22,370
)
  
$
32,589
 
    


  


  


Share Information:
      
Weighted average shares outstanding (e):
      
Basic
  
 
28,724
    

Diluted
  
 
28,978
    

Net earnings per share (e):
      
Basic
  
$
1.13
    

Diluted
  
$
1.12
    

 
See accompanying notes to unaudited pro forma combined financial statements.

31


Unaudited Pro Forma Combined Statement of Earnings
 
    
For the Three Months Ended March 29, 2002

    
Historical

  
Pro Forma Adjustments

    
Pro Forma

    
(in thousands)
Net sales
  
$
113,997
  
$
—  
 
  
$
113,997
Cost of sales
  
 
44,276
  
 
1,700
(a)
  
 
45,976
    

  


  

Gross margin
  
 
69,721
  
 
(1,700
)
  
 
68,021
    

  


  

Selling, general and administrative
  
 
54,170
  
 
—  
(b)
  
 
54,170
Research and development
  
 
6,984
  
 
—  
(b)
  
 
6,984
    

  


  

Operating income
  
 
8,567
  
 
(1,700
)
  
 
6,867
Interest expense
  
 
681
  
 
4,843
(c)
  
 
5,524
Unrealized gain on derivative instruments
  
 
213
  
 
—  
 
  
 
213
Other, net
  
 
51
  
 
—  
 
  
 
51
    

  


  

Earnings before income taxes
  
 
7,622
  
 
(6,543
)
  
 
1,079
Provision for income taxes
  
 
2,896
  
 
(2,370
)(d)
  
 
526
    

  


  

Net earnings
  
$
4,726
  
$
(4,173
)
  
$
553
    

  


  

 
Share Information:
      
Weighted average shares outstanding (e):
      
Basic
  
 
28,724
    

Diluted
  
 
28,978
    

Net earnings per share (e):
      
Basic
  
$
0.02
    

Diluted
  
$
0.02
    

 
 
See accompanying notes to unaudited pro forma combined financial statements.

32


 
Unaudited Pro Forma Combined Balance Sheet
 
    
As of March 29, 2002

 
    
Historical

    
Pro Forma Adjustments

    
Pro Forma

 
    
(in thousands)
 
Current assets
                          
Cash and equivalents
  
$
4,836
 
  
$
29,000
(f)
  
$
33,836
 
Trade receivables, net
  
 
94,861
 
  
 
—    
 
  
 
94,861
 
Inventories
  
 
67,131
 
  
 
—    
 
  
 
67,131
 
Other current assets
  
 
17,322
 
  
 
—    
 
  
 
17,322
 
    


  


  


Total current assets
  
 
184,150
 
  
 
29,000
 
  
 
213,150
 
Property, plant and equipment, net
  
 
27,209
 
  
 
—    
 
  
 
27,209
 
Other assets
  
 
36,481
 
  
 
10,075
(f)
  
 
46,556
 
Goodwill
  
 
100,066
 
  
 
—    
 
  
 
100,066
 
Intangibles, net
  
 
924
 
  
 
—    
 
  
 
924
 
    


  


  


Total assets
  
$
348,830
 
  
$
39,075
 
  
$
387,905
 
    


  


  


Current liabilities
                          
Current portion of long-term debt
  
$
18,834
 
  
$
(18,334
)(f)
  
$
500
 
Accounts payable
  
 
19,473
 
  
 
—    
 
  
 
19,473
 
Accrued compensation
  
 
14,957
 
  
 
—    
 
  
 
14,957
 
Other accrued expenses
  
 
17,110
 
  
 
—    
 
  
 
17,110
 
    


  


  


Total current liabilities
  
 
70,374
 
  
 
(18,334
)
  
 
52,040
 
Long–term debt, net of current portion
  
 
75,189
 
  
 
(75,189
)(f)
  
 
296,694
 
             
 
296,694
(f)
        
Other liabilities
  
 
3,396
 
  
 
—    
 
  
 
3,396
 
Stockholders’ equity
                          
Allergan, Inc. net investment
  
 
202,101
 
  
 
(90,400
)(g)
  
 
—    
 
             
 
(56,300
)(g)
  
 
—    
 
             
 
(55,401
)(f),(h)
        
Preferred stock
  
 
—    
 
  
 
—    
 
  
 
—    
 
Common stock and additional paid-in capital
  
 
—    
 
  
 
38,005
(h)
  
 
38,005
 
Accumulated other comprehensive loss
  
 
(2,230
)
  
 
—    
 
  
 
(2,230
)
    


  


  


Total stockholders’ equity
  
 
199,871
 
  
 
(164,096
)
  
 
35,775
 
    


  


  


Total liabilities and stockholders’ equity
  
$
348,830
 
  
$
39,075
 
  
$
387,905
 
    


  


  


 
 
 
See accompanying notes to unaudited pro forma combined financial statements.

33


NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
 
These unaudited pro forma combined financial statements reflect all adjustments that, in the opinion of management, are necessary to present fairly the pro forma results of operations and financial position. The pro forma adjustments to the accompanying historical financial information for the year ended December 31, 2001 and as of and for the three months ended March 29, 2002 are described below:
 
 
(a)
Reflects estimated incremental costs resulting from an agreed to mark-up on costs for certain products to be manufactured and supplied by Allergan to us for a period of up to three years pursuant to a new manufacturing and supply agreement.
 
 
(b)
The pro forma adjustments exclude estimated incremental costs associated with being an independent public company and the loss of certain synergies and benefits of economies of scale that existed while we were part of Allergan. Currently, we estimate these incremental pre-tax costs to be approximately $22.1 million of additional selling, general and administrative expenses, net of goodwill amortization of $9.0 million, and $0.8 million of research and development costs for the year ended December 31, 2001 and approximately $6.9 million of additional selling, general and administrative expenses, net of duplicate operating expenses of $1.8 million, and $0.2 million of research and development costs for the three months ended March 29, 2002. The incremental selling, general and administrative expenses include costs associated with corporate administrative services such as accounting, tax, treasury, information systems, risk management, insurance, legal, stockholder relations and human resources. We estimated these costs utilizing Allergan’s historical headcount and cost analysis and estimates obtained from third party consultants. The effect on pro forma net earnings for the year ended December 31, 2001 and the three months ended March 29, 2002 from the estimated incremental pre-tax costs of $22.9 million and $7.1 million, respectively, would be a reduction in pro forma net earnings of $14.8 million, or $0.51 per pro forma diluted share, and $4.6 million or $0.16 per pro forma diluted share, respectively. The following table summarizes the estimated effect on pro forma net earnings (loss) resulting from the incremental costs described above (in thousands, except per share amounts):
 
      
For the Three Months Ended March 29, 2002

      
For the Year Ended December 31, 2001

 
Pro forma net earnings, as reported
    
$
553
 
    
$
32,589
 
Effect of $7,115 incremental costs, net of $2,514 taxes
    
 
(4,601
)
    
 
—  
 
Effect of $22,858 incremental costs, net of $8,077 taxes
    
 
—  
 
    
 
(14,781
)
      


    


Adjusted net earnings (loss)
    
$
(4,048
)
    
$
17,808
 
      


    


Pro forma diluted net earnings per share, as reported
    
$
0.02
 
    
$
1.12
 
Effect of incremental costs on pro forma diluted net earnings per share
    
 
(0.16
)
    
 
(0.51
)
      


    


Adjusted diluted net earnings (loss) per share
    
$
(0.14
)
    
$
0.61
 
      


    


 
 
(c)
Reflects the increase in estimated annual interest expense to $20.7 million and the annual amortization of estimated capitalizable debt origination fees and expenses of $1.4 million. Interest expense was estimated based on the incurrence of $197.2 million of fixed rate senior subordinated notes, net of $2.8 million of original issue discount, and a $100.0 million variable rate term loan under the senior credit facility, using an estimated weighted-average interest rate of 6.89%, including the benefit of interest rate swaps entered into to hedge portions of the senior subordinated notes and borrowings under the senior credit facility, on the aggregate principal amount. If interest rates were to increase or decrease by 0.125% for the year, annual interest expense would increase or decrease by approximately $250,000. Amortization of estimated capitalizable debt origination fees and expenses was calculated using the terms of the respective debt.

34


 
 
(d)
Reflects the estimated tax impact at statutory rates for pro forma adjustments described in notes (a) and (c) and the estimated impact of different tax rates which will be applicable to us based upon our organization structure as a result of the distribution. In 2001, our historical provision for income taxes benefited from the change in the valuation allowance on deferred tax assets which reduced our provision for income taxes. For purposes of the pro forma adjustment for the year ended December 31, 2001, we have excluded approximately $6.6 million of this tax benefit since it will not be available to us in the future. Had we recognized this tax benefit, the 2001 pro forma effective income tax rate for the year ended December 31, 2001, would have been 21.3%, which is substantially less than the pro forma effective income tax rate shown of 34.5%. We believe our future effective income tax rate may vary significantly depending on our mix of domestic and international taxable income or loss and the various tax and treasury strategies that we implement, including a determination of our policy regarding the repatriation of future accumulated foreign earnings.
 
 
(e)
Pro forma basic and diluted net earnings per share is computed as if the shares of our common stock were issued and outstanding for the periods presented. Diluted net earnings per share assumes the dilutive effect of approximately 254,000 shares resulting from the assumed exercise of approximately 1.4 million stock options with a weighted average exercise price of $7.76 per share converted from Allergan stock options on June 29, 2002. Additional options to purchase 1.2 million shares of our common stock at a weighted average exercise price of $13.69 per share are excluded from the computation of diluted net earnings per share since the effect would be antidilutive. See footnote (h) below regarding the assumption used to determine the anticipated common shares outstanding.
 
 
(f)
Reflects the incurrence of $297.2 million of debt comprised of $197.2 million in senior subordinated notes, net of $2.8 million of original issue discount, and a $100.0 million term loan under the senior credit facility, and the related capitalization of approximately $10.1 million of debt origination fees and expenses that will be amortized over the terms of the respective debt agreements. We have used the net debt proceeds to repay approximately $111.4 million of non-U.S. debt that we assumed from Allergan as part of the restructuring based on the carrying value at June 26, 2002, the date of repayment, compared to the carrying value at March 29, 2002 of $94.0 million. The $17.4 million difference between the $111.4 million carrying amount at June 26, 2002 and the $94.0 million carrying amount at March 29, 2002 has been reflected as an adjustment to the Allergan, Inc. net investment. We also transferred approximately $146.7 million to Allergan in the form of repayment of approximately $90.4 million that we borrowed from subsidiaries of Allergan to purchase various assets from Allergan in connection with its restructuring and our formation and to pay a distribution to Allergan of approximately $56.3 million in exchange for various assets contributed to us. In addition, we entered into a revolving line of credit of $35.0 million that will provide funds for our capital expenditures and additional working capital, if needed. Currently, approximately $17.0 million of our senior revolving credit facility has been reserved to support letters of credit issued on our behalf. Estimated maturities of long-term debt due after one year are: $1 million each year between 2003 and 2006; $48 million in 2007 and $248 million after 2007. The term loan includes an excess cash flow recapture requirement that may increase the required principal payments above contractual minimum amounts for the period 2002 to 2005 based on a formula determined as part of the debt negotiations.
 
 
(g)
The Allergan, Inc. net investment account represents the cumulative investments in, distributions from, and earnings of our company which were contributed at the time of the spin-off. The adjustment reflects the amounts we transferred to Allergan as described in note (f).
 
 
(h)
Reflects a distribution of approximately 28.7 million shares of common stock, par value $0.01 per share, at a distribution ratio of one share of our stock for every 4.5 shares of Allergan common stock outstanding as of June 14, 2002, excluding treasury shares, and the elimination of Allergan’s net investment in us and the related reclassification to our various stockholders’ equity accounts due to the distribution of all of our shares to Allergan stockholders.

35


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS OF OPERATIONS
 
You should read the following discussion together with “Unaudited Pro Forma Combined Financial Statements” and our combined financial statements, including the related notes, included elsewhere in this prospectus. This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains forward-looking statements. Please see “Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements.
 
Overview
 
We are a global leader in the development, manufacture and marketing of medical devices for the eye and contact lens care products. Our market research indicates that we are the second largest global manufacturer and marketer of ophthalmic surgical products and contact lens care products, in each case as measured by net sales in the markets in which we compete in 2001. Through a significant commitment to internal research and development and alliances and partnerships, we have demonstrated success in the introduction of new and innovative products. We believe we are the technology leader in our markets and that our brands are among the most trusted and recognized in our industry.
 
We have operations in approximately 20 countries and sell our products in approximately 60 countries. As part of Allergan, we had organized our operations into four regions: North America, Latin America, Asia Pacific and Europe. Operations for the Europe Region included sales to customers in Africa and the Middle East, and operations in the Asia Pacific Region included sales to customers in Australia and New Zealand. Since the distribution, we have organized our operations into three regions:
 
 
North and South America;
 
 
Japan; and
 
 
Europe, Africa and Asia Pacific (excluding Japan, but including Australia and New Zealand).
 
Separation from Allergan
 
Allergan spun-off its existing optical medical device business by contributing all of the assets related to the two business lines that comprise the optical medical device business to us and distributing all of our outstanding shares of stock to its stockholders. We had no material assets, liabilities or activities as a separate corporate entity until Allergan’s contribution to us of the optical medical device business. The contribution of assets and distribution to Allergan stockholders was completed on June 29, 2002. As a result of the distribution, we are an independent public company and Allergan no longer maintains any stock ownership in us.
 
Currently, we anticipate incurring incremental annual pre-tax costs of approximately $58 million associated with being an independent public company. Our management believes that these costs are a reasonable estimate of the incremental costs we will incur as an independent public company; however, we cannot assure you that actual costs will not exceed this estimate by a material amount. Estimated incremental annual costs include approximately:
 
 
$7 million for cost of sales;
 
 
$31 million for selling, general and administrative expenses including accounting, legal, human resources and other costs;
 
 
$1 million for research and development costs; and
 
 
$19 million for interest expense, including the estimated annual amortization of capitalizable debt origination fees. This estimate is based on the incurrence of $300.0 million of debt at a weighted average interest rate of 6.89%, including the benefit of interest rate swaps.

36


 
Allergan did not account for our business on the basis of separate legal entities, subsidiaries, divisions or segments. The accompanying combined financial statements include those assets, liabilities, revenues and expenses directly attributable to our operations and allocations of certain Allergan corporate assets, liabilities and expenses. These amounts have been allocated on a basis that is considered by management to reflect most fairly or reasonably the utilization of the services provided to us or the benefit obtained by us. We believe the methods used to allocate these amounts to us are reasonable and consistent with previous periods. All material intercompany balances have been eliminated. The financial information included herein does not necessarily reflect what the financial position and results of our operations would have been had we operated as a stand-alone public entity during the periods covered, and may not be indicative of our future operations or financial position. Additional expenses that we expect to incur as a result of being an independent public company are more fully described in the Notes to the Unaudited Pro Forma Combined Financial Statements.
 
As part of Allergan, we historically participated in various Allergan administered functions including shared services surrounding selling, general and administrative expenses, retirement and other post-retirement benefit plans, income taxes and cash management. Additionally, Allergan has manufactured certain of our products. Shared services include finance, human resources, information systems and legal services. Our allocated portion of the expenses for these services are included in selling, general and administrative expense in our combined statements of earnings. For the three months ended March 29, 2002, and the three months ended March 30, 2001, these allocated expenses were $8.2 million and $8.6 million, respectively. For the years ended December 31, 2001, 2000 and 1999, these allocated expenses were $34.0 million, $40.8 million and $46.6 million, respectively.
 
The Allergan retirement plans and other post-retirement benefit plans, which primarily provide medical benefits, historically have covered all Allergan employees. We have included in our combined financial statements allocations for expenses attributable to our employees participating in these plans. We have also included in our combined financial statements assets and liabilities associated with foreign plans to the extent that these plans were transferred to us.
 
Our income historically has been included in consolidated income tax returns filed by Allergan and most of the related income taxes have been paid by Allergan. Allergan has managed its tax position for the benefit of its entire portfolio of businesses. Allergan’s tax strategies are not necessarily reflective of the tax strategies that we would have followed or will follow as a stand-alone company. Our income tax expense has been recorded as if we filed tax returns separate from Allergan.
 
Cash and equivalents consist of cash in banks and repurchase agreements with financial institutions with original maturities of 90 days or less. We historically have participated in a centralized cash management program administered by Allergan. Cash and equivalents include only those amounts that will be considered part of our operations upon the distribution.
 
Prior to the distribution, we entered into several agreements with Allergan in connection with, among other things, transitional services, employee matters, manufacturing and tax sharing. Under the transitional services agreement, Allergan will provide us, on an interim basis, transitional services such as facilities subleases, research and development services, retail channel support and general and administrative services. In addition, the transitional services agreement will provide that we will provide certain limited transitional services to Allergan on an interim basis. Such services include facilities subleases, retail channel support, and certain general and administrative services.
 
The transitional services agreement sets forth charges generally intended to allow Allergan to fully recover the allocated costs of providing the services, plus all out-of-pocket costs and expenses, except that we will pay to Allergan a commission related to our products that are sold by them during the transition period. We will recover costs from Allergan in a similar manner for services provided by us. Access to research and development facilities will be provided to us for up to three years following the distribution. With limited exceptions, we do

37


not expect that the other transitional services will extend beyond June 2003. We cannot assure you that the costs we incur under the transitional services agreement will be equal to or less than the costs of providing these services internally.
 
Under the manufacturing agreement, Allergan will manufacture certain contact lens care products and VITRAX for a period of up to three years from the date of the distribution. We plan to purchase these products from Allergan at a price equal to Allergan’s fully allocated costs plus 10%. If we are unable to either build or obtain regulatory approval for new facilities or locate and obtain regulatory approval for third party manufacturers to produce our products at the end of this three-year period, our business may be harmed.
 
The tax sharing agreement governs Allergan’s and our respective rights, responsibilities and obligations after the distribution with respect to taxes for any tax period ending before, on or after the distribution. Generally, Allergan is liable for all pre-distribution taxes attributable to its business, and we will indemnify Allergan for all pre-distribution taxes attributable to our business for the current taxable year. In addition, the tax sharing agreement provides that Allergan will generally be liable for taxes that are incurred as a result of restructuring activities undertaken to effectuate the distribution.
 
We and Allergan have made representations to each other and to the Internal Revenue Service in connection with the private letter ruling that Allergan has received regarding the tax-free nature of the distribution of our common stock by Allergan to its stockholders. If either we or Allergan breach our representations to each other or to the Internal Revenue Service, or if we or Allergan take or fail to take, as the case may be, actions that result in the distribution failing to meet the requirements of a tax-free distribution pursuant to Section 355 of the Internal Revenue Code, the party in breach will indemnify the other party for any and all resulting taxes.
 
Revenue Recognition
 
We recognize revenue from product sales when the goods are shipped and title and risk of loss transfer to the customer (i.e., F.O.B. shipping point), with the exception of intraocular lenses, which are distributed on a consignment basis and recognized as revenue upon implantation in a patient. We generally permit returns of product from any product line by any class of customer if the product is returned in a timely manner, in good condition, and through the normal channels of distribution. Return policies in certain international markets can be more stringent and are based on the terms of contractual agreements with customers. Allowances for returns are provided for based upon an analysis of our historical patterns of returns matched against the sales from which they originated. Historically, product returns have been within the amounts reserved.
 
Results of Operations
 
Comparing Three Months Ended March 29, 2002 and March 30, 2001
 
Net Sales. The following table compares net sales by product line for the three month periods ended March 29, 2002 and March 30, 2001:
 
    
Three Months Ended

 
    
March 29, 2002

    
March 30, 2001

 
    
(in thousands)
 
Ophthalmic surgical
  
$
57,412
 
  
$
56,693
 
Contact lens care
  
 
56,585
 
  
 
64,118
 
    


  


Total net sales
  
$
113,997
 
  
$
120,811
 
    


  


U.S.
  
 
30.6
%
  
 
32.8
%
International (excluding U.S.)
  
 
69.4
%
  
 
67.2
%
 
Net sales decreased $6.8 million, or 5.6%, to $114.0 million in the three months ended March 29, 2002 from $120.8 million in the three months ended March 30, 2001. Foreign currency fluctuations in the three months

38


ended March 29, 2002 decreased sales by $5.8 million, or 4.8%, as compared to average rates in effect in the three months ended March 30, 2001. At constant currency rates, sales decreased by $1.0 million, or 0.8%, in the three months ended March 29, 2002 compared to the three months ended March 30, 2001. The total decrease in net sales in the three months ended March 29, 2002 compared to the three months ended March 30, 2001 was primarily the result of a decrease in sales of contact lens care products, partially offset by an increase in sales of our ophthalmic surgical products.
 
Global sales of our contact lens care products decreased by $7.5 million, or 11.7% in the three months ended March 29, 2002 as compared to the three months ended March 30, 2001. Sales of our contact lens care products in the United States decreased $5.6 million, or 32.2%, in the three months ended March 29, 2002 compared to the three months ended March 30, 2001, primarily due to a decrease in sales of private label cold-chemical one-bottle disinfection systems. International sales of our contact lens care products decreased $1.9 million, or 4.1%, in the three months ended March 29, 2002 compared to the three months ended March 30, 2001 primarily as a result of the weakening of foreign currencies, primarily the Japanese yen and euro, versus the dollar, which accounted for $3.5 million of the decrease in international sales. At constant currency rates, international contact lens care sales in the three months ended March 29, 2002 increased $1.6 million, or 3.4%, primarily attributable to an increase in sales of peroxide-based disinfection and ancillary products. We expect that our global sales of contact lens care products will continue to contract as customers continue to increase their use of lower priced one-bottle cold-chemical disinfection systems and decrease their use of peroxide-based disinfection systems. As our mix of products shifts towards one-bottle disinfection systems, we expect that this trend will have a diminishing impact on our sales.
 
Global sales of our ophthalmic surgical products increased by $0.7 million, or 1.3% in the three months ended March 29, 2002 compared to the three months ended March 30, 2001. In the United States, sales of our ophthalmic surgical products increased $0.9 million, or 4.1%, in the three months ended March 29, 2002 compared to the three months ended March 30, 2001, while internationally, sales of our ophthalmic surgical products decreased $0.2 million or 0.6% over the same period. Sales in the United States increased primarily due to an increase in sales of phacoemulsification equipment. International sales of our ophthalmic surgical products in the three months ended March 29, 2002 were negatively affected primarily by the weakening of the Japanese yen and the euro versus the dollar, which resulted in a $2.3 million, or 6.7%, unfavorable currency impact. At constant currency rates, international sales of our ophthalmic surgical products increased $2.1 million, or 6.1%. This increase was primarily attributable to sales increases in the SENSAR acrylic intraocular lens, offset in part by sales decreases in PMMA intraocular lenses, silicone intraocular lenses and phacoemulsification equipment. We believe that global sales of ophthalmic surgical products will continue to grow as sales for higher margin foldable introacular lenses, most notably the SENSAR acrylic lens, continue to improve.
 
Gross Margin. Our gross margin increased as a percent of net sales by 2.9 percentage points from 58.3% in the three months ended March 30, 2001 to 61.2% in the three months ended March 29, 2002. The increase in gross margin as a percent of net sales in the three months ended March 29, 2002 as compared to the three months ended March 30, 2001 was primarily the result of manufacturing efficiencies and a change in product sales mix to higher margin surgical products. Gross margin in dollars declined by $0.8 million to $69.7 million in the three months ended March 29, 2002 compared to $70.5 million in the three months ended March 30, 2001, due to the decrease in net sales, partially offset by the 2.9 percentage point increase in gross margin percentage.
 
Selling, general and administrative. Selling, general and administrative expenses were $54.2 million or 47.5% of net sales in the three months ended March 29, 2002 compared to $62.1 million or 51.4% of net sales in the three months ended March 30, 2001. The decrease in both selling, general and administrative expense in dollars and as a percent of net sales was primarily a result of lower selling expenses resulting from both lower combined net sales as well as cost improvements. These cost improvements were realized as a result of a restructuring of our European sales force that was completed in 2001, a reduction in goodwill amortization of $2.2 million and favorable currency translation due to the weakening of foreign currencies versus the U.S. dollar in the countries in which we operate. Beginning in 2002, we no longer amortize goodwill as required in accordance with SFAS No. 142.

39


 
Research and development. Research and development expenses decreased by 3.9% to $7.0 million in the three months ended March 29, 2002 compared to $7.3 million in the three months ended March 30, 2001. The decrease of $0.3 million was a result of a decrease in spending for research efforts in the ophthalmic surgical business, partially offset by a small increase in research and development spending for the contact lens care business.
 
Operating income. Operating income was $8.6 million or 7.5% of net sales in the three months ended March 29, 2002, an increase of $7.5 million from $1.1 million, or 0.9% of net sales in the three months ended March 30, 2001. The increase in operating income in the three months ended March 29, 2002 was primarily the result of the lower selling, general and administrative expenses, partially offset by a decrease in gross margin.
 
Non-operating income and expense. Non-operating expense was $0.9 million in the three months ended March 29, 2002 compared to income of $0.6 million in the three months ended March 30, 2001. We recorded an unrealized loss on derivative instruments of $0.2 million in the three months ended March 29, 2002 compared to an unrealized gain of $1.3 million in the three months ended March 30, 2001. We record as “unrealized loss/ (gain) on derivative instruments” the mark to market adjustments on the outstanding foreign currency options which we enter into, as part of Allergan’s overall risk management strategy, to reduce the volatility of expected earnings in currencies other than U.S. dollar. Interest expense declined slightly to $0.7 million in the three months ended March 29, 2002 compared to interest expense of $0.8 million in the three months ended March 30, 2001 due primarily to a small decline in outstanding long-term debt balances in the three months ended March 29, 2002 compared to the three months ended March 30, 2001.
 
Income taxes. The effective tax rate for the three months ended March 29, 2002 was 38.0%, an increase of 10.2 percentage points as compared to the effective tax rate of 27.8% for the three months ended March 30, 2001. The annual effective tax rate in 2001 included the recognition of certain tax benefits associated with the utilization of a net operating loss carryforward and the realization of other deferred tax assets in Japan for which we previously had established a valuation allowance. In 2001, we determined, based solely on our judgment, that realization of the deferred tax assets had become “more likely than not” and accordingly, we reversed the valuation allowance previously established. We do not anticipate that our future provision for income taxes will include tax benefits similar to those we recognized in 2001. Following the distribution, we believe our future effective income tax rate may vary depending on our mix of domestic and international taxable income or loss and the various tax and treasury strategies that we implement, including a determination of our policy regarding repatriation of future accumulated foreign earnings.
 
Net earnings. Net earnings for the three months ended March 29, 2002 were $4.7 million compared to $0.8 million in the three months ended March 30, 2001. The $3.9 million increase in net earnings for the three months ended March 29, 2002 is primarily the result of the $7.5 million increase in operating income partially offset by the increase in non-operating expense and the increase in the provision for income taxes. Net earnings for the three months ended March 30, 2001 included a $0.4 million after-tax loss related to the adoption of SFAS No. 133—“Accounting for Derivative Instruments and Hedging Activities.”
 
Comparing Fiscal Years Ended December 31, 2001, 2000 and 1999
 
Net sales. The following table sets forth, for the periods indicated, net sales by major product line.
 
    
Year Ended December 31,

 
    
2001

    
2000

    
1999

 
    
(in thousands)
 
Ophthalmic surgical
  
$
253,143
 
  
$
248,773
 
  
$
221,619
 
Contact lens care
  
 
289,952
 
  
 
321,800
 
  
 
356,025
 
    


  


  


Total net sales
  
$
543,095
 
  
$
570,573
 
  
$
577,644
 
    


  


  


U.S.
  
 
30.8
%
  
 
31.3
%
  
 
29.7
%
International (excluding U.S.)
  
 
69.2
%
  
 
68.7
%
  
 
70.3
%

40


 
Net sales for 2001 decreased by $27.5 million, or 5%, to $543.1 million in 2001 from $570.6 million in 2000. Foreign currency fluctuations in 2001 decreased sales by $28.2 million, or 5%, as compared to average rates in effect in 2000. At constant currency rates, sales increased by $0.7 million in 2001 compared to 2000. At constant currency rates, the increase in net sales in 2001 compared to 2000 was the result of an increase in sales of our ophthalmic surgical products, offset by a decrease in sales of our contact lens care products.
 
Global sales of our contact lens care products decreased by $31.8 million, or 10%, from 2000 to 2001. Sales of our contact lens care products in the United States decreased $10.0 million, or 13%, between 2000 and 2001, primarily due to a decrease in sales of private-label cold-chemical one-bottle disinfection systems, peroxide-based disinfection systems, and ancillary products. International sales of our contact lens care products decreased $21.8 million, or 9%, between 2000 and 2001 primarily as a result of the weakening Japanese yen and euro versus the dollar, which represented $17.1 million of the decrease in international sales. At constant currency rates, international contact lens care sales decreased $4.7 million, or 2%, primarily attributable to the decrease in sales of peroxide-based disinfection and ancillary products partially offset by an increase in sales of our one-bottle cold-chemical disinfection system, COMPLETE. We expect that our global sales of contact lens care products will continue to contract as customers continue to increase their use of lower priced one-bottle cold-chemical disinfection systems and decrease their use of peroxide-based disinfection systems. As our mix of products shifts towards one-bottle disinfection systems, we expect that this trend will have a diminishing impact on our sales.
 
Global sales of our ophthalmic surgical products increased by $4.3 million, or 2%, from 2000 to 2001. In the United States, sales of our ophthalmic surgical products decreased $1.5 million, or 1%, while internationally, sales of our ophthalmic surgical products increased $5.8 million or 4% over the same period. International sales of our ophthalmic surgical products in 2001 were negatively impacted primarily by the weakening of the Japanese yen and the euro versus the dollar, representing an $11.1 million, or 8%, unfavorable currency impact. At constant currency rates, international sales of our ophthalmic surgical products increased $16.9 million, or 12%. This increase was primarily attributable to sales increases in the SENSAR acrylic intraocular lens and AMADEUS microkeratome, offset in part by sales decreases in PMMA intraocular lenses, silicone intraocular lenses and phacoemulsification equipment. We believe that global sales of ophthalmic surgical products will continue to grow as sales for higher margin foldable intraocular lenses, most notably the SENSAR acrylic lens, continue to improve.
 
Net sales for 2000 decreased by $7.1 million, or 1%, to $570.6 million in 2000 from $577.6 million in 1999. Foreign currency fluctuations in 2000 decreased sales by $18.0 million, or 3%, as compared to average rates in effect in 1999. At constant currency rates, net sales in 2000 increased by $10.9 million, or 2%, from our net sales in 1999. The decrease in net sales in 2000 compared to 1999 was primarily the result of a decrease in sales of our contact lens care products, substantially offset by an increase in sales of our ophthalmic surgical products.
 
Sales of our contact lens care products decreased by $34.3 million, or 10%, to $321.8 million in 2000 from $356.0 million in 1999. Sales of our contact lens care products in the United States decreased $3.8 million, or 5%, between 1999 and 2000. International sales of our contact lens care products decreased $30.5 million, or 11%. International sales of our contact lens care products were negatively affected by the weakening of the euro versus the dollar, slightly offset by the strengthening of the Japanese yen versus the dollar, representing, in aggregate, $10.2 million, or 4%, unfavorable currency impact. At constant currency rates, international sales of our contact lens care products decreased $20.3 million, or 7%, which was primarily attributable to a decrease in sales of peroxide-based disinfection and ancillary products as consumers increased their use of lower priced one-bottle cold-chemical disinfection systems.
 
Global sales of our ophthalmic surgical products increased by $27.2 million, or 12%, in 2000 compared to 1999. In the United States, sales of our ophthalmic surgical devices increased $10.8 million, or 11%, primarily as a result of strong sales of the SENSAR acrylic intraocular lens in 2000. International sales of our ophthalmic surgical products increased 13% between 1999 and 2000 and were negatively impacted by the weakening of the  

41


euro versus the dollar slightly offset by the strengthening of the Japanese yen versus the dollar, representing a net $7.8 million, or 6%, unfavorable currency impact. At constant currency rates, international sales of our ophthalmic surgical products increased $24.2 million, or 19%, which was primarily the result of strong sales of the SENSAR acrylic intraocular lens, silicone intraocular lenses, and phacoemulsification equipment, partially offset by a decrease in sales of PMMA intraocular lenses in 2000.
 
The following table sets forth, for the periods indicated, net sales by geographic region:
 
    
Year Ended December 31,

    
2001

  
2000

  
1999

    
(in thousands)
United States
  
$
167,280
  
$
178,764
  
$
171,753
Europe
  
 
161,496
  
 
173,085
  
 
203,559
Asia Pacific
  
 
184,161
  
 
185,681
  
 
171,541
Other
  
 
30,158
  
 
33,043
  
 
29,655
    

  

  

Segments total
  
 
543,095
  
 
570,573
  
 
576,508
Manufacturing operations
  
 
—  
  
 
—  
  
 
1,136
    

  

  

Total net sales
  
$
543,095
  
$
570,573
  
$
577,644
    

  

  

 
When we were a part of Allergan, we operated in regions or geographic operating segments. The U.S. information is presented separately as it is our headquarters country, and U.S. sales represented 30.8%, 31.3% and 29.7% of total net sales in 2001, 2000, and 1999, respectively. Additionally, sales in Japan represented 25.3%, 24.2% and 22.1% of total net sales in 2001, 2000 and 1999, respectively. No other country, or any single customer, generated over 10% of total net sales in any of these years.
 
Net sales in the United States decreased $11.5 million in 2001 as compared to 2000. Net sales in Europe decreased $6.0 million at constant currency rates, and decreased an additional $5.6 million attributable to the weakening of the euro versus the dollar in 2001 as compared to 2000. Net sales in Asia Pacific increased $18.4 million at constant currency rates, but were offset by a $19.9 million decrease from the weakening of the Japanese yen versus the dollar in 2001 as compared to 2000. Net sales in the Other geographic segment for 2001 decreased by $0.2 million as compared to 2000 at constant currency rates, compounded by an additional $2.7 million decrease primarily resulting from the weakening of the Brazilian real versus the dollar. The currency weakness of $28.2 million in 2001 affected both the contact lens care and ophthalmic surgical businesses.
 
Net sales in the United States increased $7.0 million in 2000 as compared to 1999. Net sales in Europe decreased $8.0 million at constant currency rates in 2000 as compared to 1999, and were additionally impacted by a $22.5 million decrease resulting from a weakening of the euro versus the dollar. Net sales in Asia Pacific for 2000 increased $9.3 million at constant currency rates and were favorably impacted by a $4.8 million increase from the strengthening of the Japanese yen versus the dollar. Net sales in the Other geographic segment for 2000 increased by $3.7 million at constant currency rates as compared to 1999. Currency weakness of $18.0 million in 2000 affected both the contact lens care and ophthalmic surgical businesses.
 
For additional information relating to our geographic operating segments, including operating income or loss and total assets, see Note 12 of Notes to Combined Financial Statements included elsewhere in this prospectus.

42


 
Income and expenses. The following table sets forth certain statement of earnings items as a percentage of net sales:
 
    
Year Ended December 31,

 
    
2001

    
2000

    
1999

 
Net sales
  
100.0
%
  
100.0
%
  
100.0
%
Cost of sales
  
39.1
 
  
40.6
 
  
40.9
 
    

  

  

Gross margin
  
60.9
 
  
59.4
 
  
59.1
 
Other operating costs and expenses:
                    
Selling, general and administrative
  
41.0
 
  
42.2
 
  
44.2
 
Research and development
  
5.3
 
  
5.2
 
  
4.8
 
Restructuring charge reversal
  
—  
 
  
(0.4
)
  
(1.1
)
    

  

  

Operating income
  
14.6
 
  
12.4
 
  
11.2
 
Loss on investments, net
  
(0.1
)
  
—  
 
  
—  
 
Unrealized gain on derivative instruments
  
0.2
 
  
—  
 
  
—  
 
Other non-operating expense, net
  
(0.7
)
  
(0.4
)
  
(1.2
)
    

  

  

Earnings before income taxes
  
14.0
%
  
12.0
%
  
10.0
%
    

  

  

Net earnings
  
10.1
%
  
8.6
%
  
7.7
%
    

  

  

 
Gross margin. Our gross margin increased as a percent of net sales by 1.5 percentage points from 59.4% in 2000 to 60.9% in 2001, and by 0.3 percentage points from 59.1% in 1999 to 59.4% in 2000. The increase in gross margin as a percent of net sales in 2001 as compared to 2000 was primarily the result of higher gross margins achieved on sales of contact lens care products, partially offset by a change in product sales mix to lower margin surgical products. The increase in gross margin as a percent of net sales in 2000 as compared to 1999 was attributable to a combination of changes. For both the contact lens care and ophthalmic surgical businesses, gross margins increased as a result of increasing margins in the Asia Pacific region, which were somewhat offset by lower gross margins in the Europe region. Gross margins further increased as a result of a change in geographic region sales mix, specifically for the ophthalmic surgical business from lower margin non-Asia Pacific geographic regions to the higher margin Asia Pacific geographic region.
 
Selling, general and administrative. Selling, general and administrative expenses decreased as a percent of net sales by 1.2 percentage points to 41.0% in 2001 from 42.2% in 2000. This decrease was the result of a dollar and percentage of sales decrease in promotion related expenses including samples and in general and administrative expenses. Selling, general and administrative expenses decreased as a percent of net sales by 2.0 percentage points to 42.2% in 2000 from 44.2% in 1999. The percentage decrease in 2000 was the result of a dollar and percentage of sales decrease in promotion and related expenses including samples and administrative expenses somewhat offset by an increase in selling expense for the ophthalmic surgical business in dollars and percentage of sales.
 
Research and development. Research and development expenses decreased by 3% in 2001 to $29.0 million compared to $29.9 million in 2000. Research and development spending decreased in 2001 as a result of a decrease in research efforts in the contact lens care business somewhat offset by increased research and development in the ophthalmic surgical business. Research and development expenses increased by 8% in 2000 to $29.9 million compared to $27.8 million in 1999. Research and development spending increased in 2000 as a result of expanded research efforts in both the contact lens care and ophthalmic surgical businesses.
 
Special charges. In 1998, we recorded a $24.4 million restructuring and a $26.6 million impairment of asset charge to streamline operations and reduce costs through reductions in global general and administrative staff and the closure of manufacturing facilities in connection with the outsourcing and consolidation of such manufacturing operations. In addition, operations in many countries were transferred to distributors, and business

43


activities were concentrated into regional shared service centers. We began restructuring activities in 1998 and completed them in 2000. In 1999, we determined that various restructuring activities were completed for less cost than estimated in the original 1998 restructuring plan, primarily as a result of lower than anticipated severance costs. As a result, we recorded a $1.5 million reduction in the restructuring charge in 1999.
 
In 1996, we recorded a $42.3 million restructuring charge to streamline operations and reduce costs through management restructuring and facilities consolidation. We began restructuring activities in 1996 and completed them in Europe in 1999. In 1999, we determined that severance costs of positions eliminated would be $5.0 million less than accrued in 1996. As a result, we recorded a $5.0 million reduction in the restructuring charge in 1999. In 2000, we completed all activities related to the 1996 restructuring plan and eliminated the remaining accrual of $2.2 million.
 
Operating income. Operating income was $79.1 million or 14.6% of net sales in 2001, an increase of $8.7 million, or 12.3%, from $70.5 million, or 12.4% of net sales in 2000. These increases were the result of an $18.2 million decrease in selling, general and administrative expenses and a decrease in research and development expenses of $0.9 million, partially offset by a decrease in the restructuring charge reversal of $2.2 million and a decrease in gross margin of $8.1 million that resulted primarily from the $27.5 million decrease in sales from 2000 to 2001.
 
Operating income was $70.5 million or 12.4% of net sales in 2000, an increase of $5.7 million or 8.8%, from $64.7 million or 11.2% of net sales in 1999. These increases were the result of the decrease in selling, general and administrative expenses of $14.6 million partially offset by an increase in research and development expenses of $2.1 million, a decrease in the restructuring charge reversal of $4.3 million, and a decrease in gross margin of $2.5 million primarily driven by the $7.1 million decrease in sales from 1999 to 2000.
 
The following table presents operating income (loss) by geographic region:
 
    
Operating Income (Loss)

 
    
2001

    
2000

    
1999

 
    
(in thousands)
 
United States
  
$
35,292
 
  
$
27,074
 
  
$
21,081
 
Europe
  
 
41,582
 
  
 
47,108
 
  
 
65,814
 
Asia Pacific
  
 
52,358
 
  
 
45,567
 
  
 
27,997
 
Other
  
 
(1,142
)
  
 
(1,381
)
  
 
(2,817
)
    


  


  


Segments total
  
 
128,090
 
  
 
118,368
 
  
 
112,075
 
Manufacturing operations
  
 
3,631
 
  
 
7,609
 
  
 
6,339
 
Research and development
  
 
(28,990
)
  
 
(29,878
)
  
 
(27,765
)
Restructuring charge reversal
  
 
—  
 
  
 
2,237
 
  
 
6,527
 
Elimination of inter-company profit
  
 
(34,528
)
  
 
(36,335
)
  
 
(40,851
)
General corporate
  
 
10,927
 
  
 
8,458
 
  
 
8,413
 
    


  


  


Operating income
  
$
79,130
 
  
$
70,459
 
  
$
64,738
 
    


  


  


 
Operating income attributable to each geographic region is based upon management’s assignment of costs to such regions which includes the manufacturing standard cost of goods produced by our manufacturing operations (or the cost to acquire goods from third parties), freight, duty and local distribution costs, and royalties. Operating income for all operating segments and manufacturing operations also includes a charge for corporate services and asset utilization which permits us to better measure segment performance by including a cost of capital in the determination of operating income for each segment.
 
Income from manufacturing operations is not assigned to geographic regions because most manufacturing operations produce products for more than one region. Research and development costs are also corporate costs.

44


For the years ended December 31, 2000 and 1999, corporate costs also included the reduction of costs related to the reversal of special charges for restructuring.
 
Operating income in the United States increased by $8.2 million, or 30%, from $27.1 million in 2000 to $35.3 million in 2001. This increase primarily resulted from a reduction in promotion, selling and marketing expenses combined with the impact of a higher gross margin percentage. This was somewhat offset by the 6% decline in net sales in the United States. Operating income in the Europe segment decreased by $5.5 million, or 12%, in 2001 compared to 2000. This decrease primarily resulted from the 7% decrease in Europe net sales combined with an increase in selling, general and administrative expenses as a percentage of sales in 2001 versus 2000. Operating income in the Asia Pacific segment increased by $6.8 million, or 15% in 2001 compared to 2000. This increase primarily resulted from the impact of a higher gross margin percentage combined with a decrease in promotion, selling and marketing expenses.
 
Operating income in the United States increased by $6.0 million, or 28%, from $21.1 million in 1999 to $27.1 million in 2000. This increase primarily resulted from a decrease in selling, general and administrative expenses combined with the impact of a 4% increase in United States sales. Operating income in the Europe segment decreased by $18.7 million, or 28%, in 2000 compared to 1999. This decrease primarily resulted from the 15% decrease in Europe sales combined with a decrease in gross margin percentage, somewhat offset by a decrease in selling, general and administrative expenses. Operating income in the Asia Pacific segment increased by $17.6 million, or 63%, in 2000 compared to 1999. This increase primarily resulted from the 8% increase in Asia Pacific sales combined with the impact of a higher gross margin percentage and the leveraging of selling, general and administrative expenses as a percentage of sales in 2000. The operating loss in the Other geographic segment decreased by $1.4 million in 2000 compared to 1999 primarily as a result of the 11% increase in sales combined with an increase in gross margin percentage.
 
Income taxes. Our effective tax rate in 2001 was 27.1%, down from the 27.9% effective tax rate in 2000. The decrease in 2001 was primarily attributable to the changes in the valuation allowance on deferred tax assets that were realized in 2001, partially offset by a shift in the mix of earnings from lower tax rate jurisdictions in Ireland and Puerto Rico to higher tax rate jurisdictions, primarily in the United States and Japan.
 
As a result of an improvement in profitability in Japan in 2001, we were able to utilize $2.7 million of our net operating loss carryforward benefit to offset taxes currently payable and realize the benefits associated with $6.3 million of deferred tax assets in Japan, for which we previously had established a valuation allowance. Previously, management did not believe that realization of these benefits was “more likely than not,” and had provided a $9.0 million valuation allowance for these deferred tax assets in prior years. In 2001, we determined, based solely on our judgment, that realization of the deferred tax assets of $6.3 million had become “more likely than not” and, accordingly, we reversed the valuation allowance previously established. As a result of the realization of these deferred tax assets, our valuation allowance on deferred tax assets and our income tax expense were reduced, and our net earnings were increased, by approximately $9.0 million in 2001. We do not anticipate that our future provision for income taxes will include tax benefits similar to those recognized in 2001.
 
The effective tax rate in 2000 was 27.9%, up from the 23.1% effective tax rate in 1999. The increase in 2000 was primarily attributable to the decrease in earnings in the lower tax rate jurisdictions of Ireland and Puerto Rico and the reduction in foreign tax credits allocable to foreign earnings and dividends, partially offset by lower taxes on unremitted earnings of foreign subsidiaries. Additionally, we experienced an increase in earnings in higher tax rate jurisdictions, mainly in the United States and Japan, partially offset by the realization of deferred tax assets that were previously offset by a valuation allowance.
 
We believe our future effective income tax rate will be higher than our historical effective tax rate depending on our mix of domestic and international taxable income or loss and the various tax and treasury strategies that we implement, including a determination of our policy regarding the repatriation of future accumulated foreign earnings. We expect our effective tax rate to be between 37.0% and 39.0% in 2002.

45


 
Net earnings. Net earnings were $55.0 million in 2001 compared to $49.2 million in 2000. The $5.8 million increase in 2001 net earnings is primarily the result of the $8.7 million increase in operating income, and the $1.3 million unrealized gain on derivative instruments, substantially offset by the increase in all other non-operating expenses of $2.2 million, the $1.6 million increase in income tax expense and the $0.4 million after-tax effect of the adoption of SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities.” The increase in non-operating expense is primarily the result of investment losses of $0.8 million in 2001 associated with the permanent impairment of certain equity investments compared to the $0.2 million gain on investments in 2000, and a $0.5 million decrease in realized gains from foreign currency transactions in 2001 compared to 2000 reported as other, net. The $1.6 million increase in income tax expense is net of approximately $9.0 million of realized tax benefits associated with our recognition of deferred tax assets in Japan for which we previously had established a valuation allowance. We do not anticipate that our future net earnings will reflect tax benefits similar to those recognized in 2001.
 
Net earnings were $49.2 million in 2000 compared to $44.5 million in 1999. The $4.7 million increase in net earnings in 2000 is primarily the result of the $5.7 million increase in operating income and a decrease in non-operating expense of $4.7 million, offset by an increase in income tax expense of $5.7 million. The decrease in non-operating expense includes a $2.9 million decrease in allocated interest expense and a decrease in other, net of $1.6 million resulting from foreign currency transaction gains of $0.8 million in 2000 compared to $0.7 million of foreign currency transaction losses in 1999.
 
Seasonality. Traditionally, we have realized a seasonal trend in our sales and net earnings, with the smallest portion of our ophthalmic surgical sales being realized in the first quarter and with sales gradually increasing from the second to fourth quarter. This seasonality is primarily attributable to higher sales of our ophthalmic surgical products in the fourth quarter. We believe sales of our ophthalmic surgical products are comparatively higher in the fourth quarter because hospitals, ambulatory surgical centers and other customers increase spending as they reach their year-end and are able to spend the remainder of their annual budgeted amounts. We believe that this above average expenditure rate in the fourth quarter results in lower subsequent first quarter expenditures as these customers deplete stockpiled inventory and conserve their budgeted expense amounts for that year.
 
Liquidity and Capital Resources
 
Management assesses our liquidity by our ability to generate cash to fund operations. Significant factors in the management of liquidity are: funds generated by operations; levels of accounts receivable, inventories, accounts payable and capital expenditures; adequate lines of credit; and financial flexibility to attract long-term capital on satisfactory terms.
 
Historically, we have generated cash from operations in excess of working capital requirements, and we expect to do so in the future. The net cash provided by operating activities was $18.7 million in the three months ended March 29, 2002 compared to $5.1 million in the three months ended March 30, 2001. Operating cash flow increased in the three months ended March 29, 2002 compared to the three months ended March 30, 2001 primarily as a result of the increase in net earnings, improved management of trade receivables and a decrease in other assets, partially offset by a decrease in accounts payable. Net cash provided by operating activities was $75.8 million in 2001 compared to $93.6 million in 2000 and $59.2 million in 1999. Operating cash flow decreased in 2001 compared to 2000 primarily as a result of an increase in other assets and a reduction in accounts payable, partially offset by the increase in net earnings and improved management of trade receivables. Operating cash flow increased in 2000 compared to 1999 primarily as a result of the increase in net earnings, a reduction in inventories, an increase in accrued expenses and stronger trade receivables management, partially offset by the change in other assets.
 
Net cash used in investing activities was $2.2 million, $3.2 million, $14.5 million, $11.0 million and $18.5 million in the three months ended March 29, 2002, in the three months ended March 30, 2001 and in 2001, 2000

46


and 1999, respectively. Expenditures for property, plant and equipment totaled $0.5 million, $1.1 million, $5.9 million, $6.6 million and $4.6 million in the three months ended March 29, 2002, in the three months ended March 30, 2001 and in 2001, 2000 and 1999, respectively. These expenditures included expansion of manufacturing facilities and a variety of other projects designed to improve productivity. We expect to invest approximately $10 million to $15 million in property, plant and equipment in 2002. Expenditures for demonstration (demo) and bundled equipment, primarily phacoemulsification and microkeratome surgical equipment, were $1.1 million, $1.5 million, $6.4 million, $4.1 million and $5.5 million in the three months ended March 29, 2002, in the three months ended March 30, 2001 and in 2001, 2000 and 1999, respectively. We maintain demo and bundled equipment to facilitate future sales of similar equipment and related products to our customers. We expect to invest approximately $4 million to $5 million in demo and bundled equipment in 2002. Expenditures for capitalized internal-use software were $0.6 million, $0.5 million, $3.1 million, $0.5 million and $8.6 million in the three months ended March 29, 2002, in the three months ended March 30, 2001 and in 2001, 2000 and 1999, respectively. We capitalize internal-use software costs after technical feasibility has been established. We expect to invest approximately $5 million to $7 million in capitalized software in 2002.
 
Net cash used in financing activities was $18.3 million in the three months ended March 29, 2002, as compared to $4.1 million in the three months ended March 30, 2001, in each case composed primarily of distributions to Allergan, net of advances. Net cash used in financing activities was $66.2 million in 2001, composed primarily of $58.6 million in distributions to Allergan, net of advances, and $7.6 million in net repayments of debt. Net cash used in financing activities was $71.7 million in 2000, composed primarily of $76.7 million in distributions to Allergan, net of advances, partially offset by $5.0 million in net debt borrowings. Net cash used in financing activities was $40.2 million in 1999, composed primarily of $54.8 million in distributions to Allergan, net of advances, partially offset by $14.5 million in net debt borrowings. Net transfers to Allergan have ceased as a result of the spin-off.
 
As of March 29, 2002, our unaudited condensed combined financial statements reflect certain long-term credit facilities outstanding attributable to our operations. Borrowings under the credit facilities are subject to certain customary financial and operating covenants on a consolidated Allergan, Inc. basis. At March 29, 2002, $94.0 million in borrowings were outstanding, of which $18.8 million was reported as current and $75.2 million was reported as long-term. As of June 26, 2002, this amount increased to $111.4 million due to additional borrowings under existing credit facilities and exchange rate fluctuations between the Japanese Yen and the U.S. dollar. As of the distribution date, we replaced these credit facilities with new third party credit facilities.
 
As of the distribution date, we incurred $300.0 million of debt with an estimated weighted average interest rate of 6.89%, including the benefit of interest rate swaps, resulting in incremental annual interest expense of approximately $18.8 million. As a result, we expect a significant decrease in our cash flows from operations. We used approximately $258.1 million of these credit facilities to repay all of our existing borrowings, purchase various assets from Allergan and repay a portion of Allergan’s debt assumed by us in connection with the spin-off. On June 21, 2002, we also entered into a new $35.0 million revolving credit facility to fund future capital expenditures and working capital, if needed. Currently, approximately $17.0 million of the senior revolving credit facility has been reserved to support letters of credit issued on our behalf.
 
Historically, a majority of our international and domestic cash accounts were linked to Allergan’s centralized cash management system. Accordingly, a majority of cash generated from operations has been transferred to Allergan. The net effect of these cash transfers has been reflected in the Allergan, Inc. net investment account as shown in the equity section of our combined balance sheets. All of the cash and equivalents reported in our combined balance sheets are held outside the United States, and we plan to use these funds in our international operations.
 
Our cash position includes amounts denominated in foreign currencies, and the repatriation of those cash balances from some of our non-U.S. subsidiaries could result in additional tax costs. However, those cash balances are generally available without legal restriction to fund ordinary business operations.

47


 
We believe that the net cash provided by our operating activities, supplemented as necessary with borrowings available under our new revolving line of credit and existing cash and equivalents, will provide sufficient resources to meet our working capital requirements, debt service and other cash needs over the next year.
 
We are dependent, in part, upon the reimbursement policies of government and private health insurance companies. Government and private sector initiatives to limit the growth of health care costs, including price regulation and competitive pricing, are continuing in many countries where we do business. As a result of these changes, the marketplace has placed increased emphasis on the delivery of more cost-effective medical therapies. While we have been unaware of significant price resistance resulting from the trend toward cost containment, changes in reimbursement policies and other reimbursement methodologies and payment levels could have an adverse effect on our pricing flexibility.
 
Additionally, the current trend among hospitals and other customers of medical device manufacturers is to consolidate into larger purchasing groups to enhance purchasing power. The enhanced purchasing power of these larger customers may also increase the pressure on product pricing, although we are unable to estimate the potential impact at this time.
 
Inflation. Although at reduced levels in recent years, inflation continues to apply upward pressure on the cost of goods and services used by us. The competitive and regulatory environments in many markets substantially limit our ability to fully recover these higher costs through increased selling prices. We continually seek to mitigate the adverse effects of inflation through cost containment and improved productivity and manufacturing processes.
 
Foreign currency fluctuations. Approximately 69% of our revenues in the three months ended March 29, 2002 and in 2001 were derived from operations outside the United States, and a significant portion of our cost structure is denominated in currencies other than the U.S. dollar. Therefore, we are subject to fluctuations in sales and earnings reported in U.S. dollars as a result of changing currency exchange rates.
 
The impact of foreign currency fluctuations on sales was as follows: a $5.8 million decrease in the three months ended March 29, 2002, a $6.7 million decrease in the three months ended March 30, 2001, a $28.2 million decrease in 2001, a $18.0 million decrease in 2000 and a $5.4 million increase in 1999. The sales decreases in the three months ended March 29, 2002, in the three months ended March 30, 2001 and for 2001 were due primarily to a weakening of the Japanese yen and European currencies. The 2000 sales decrease included decreases related to European currencies partially offset by an increase related to the Japanese yen. The 1999 sales increase included increases related to the Japanese yen, partially offset by decreases related to the Brazilian real and the European currencies.
 
Quantitative and Qualitative Market Risk Factors
 
In the normal course of business, our operations are exposed to risks associated with fluctuations in interest rates and foreign currency exchange rates. For all periods presented, we were considered in Allergan’s overall risk management strategy. As part of this strategy, Allergan managed its risks based on management’s judgment of the appropriate trade-off between risk, opportunity and costs. With respect to our risks, Allergan primarily utilized interest rate swap agreements and foreign currency option and forward contracts to economically hedge or reduce these exposures. As a stand-alone company, we routinely monitor our risks associated with fluctuations in currency exchange rates and interest rates. We address these risks through controlled risk management, including the use of derivative financial instruments to economically hedge or reduce these exposures. We do not expect to enter into financial instruments for trading or speculative purposes.
 
To ensure the adequacy and effectiveness of our interest rate and foreign exchange hedge positions, we continually monitor, from an accounting and economic perspective, our interest rate swap positions and foreign

48


exchange forward and option positions both on a stand-alone basis and in conjunction with our underlying interest rate and foreign currency exposures.
 
However, given the inherent limitations of forecasting and the anticipatory nature of the exposures intended to be hedged, there can be no assurance that such programs will offset more than a portion of the adverse financial impact resulting from unfavorable movements in either interest or foreign exchange rates. In addition, the timing of the accounting for recognition of gains and losses related to mark-to-market instruments for any given period may not coincide with the timing of gains and losses related to the underlying economic exposures and, therefore, may adversely affect our operating results and financial position. Our allocated portion of the gains and losses realized from the foreign currency forward and option contracts are recorded in other, net in our combined statements of earnings. The allocation of such gains and losses is based on our net sales compared to total Allergan net sales.
 
In June 1998, Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS No. 133), was issued, effective for all fiscal years beginning after June 15, 2000, or January 1, 2001 for us. SFAS No. 133 establishes accounting and reporting standards for all derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of position and measure those instruments at fair value. SFAS No. 133 requires that changes in the derivative’s fair value be recognized in earnings unless specific hedge accounting criteria are met. Accounting for qualifying hedges allows a derivative’s gains and losses to offset related results on the hedged item in the income statement, and requires that an entity must formally document, designate and assess the effectiveness of derivatives instruments that receive hedge accounting. Historically, we used three types of derivative instruments: interest rate swap agreements, foreign currency option contracts and foreign currency forward contracts. We adopted SFAS No. 133 on January 1, 2001 effective with Allergan’s adoption of the new accounting standard. Upon adoption of SFAS No. 133, we did not designate foreign currency option and foreign currency forward contracts as accounting hedges. Accordingly, we received an allocation of Allergan’s net-of-tax cumulative effect loss that resulted from adoption of SFAS No. 133 based on our percentage of net sales compared to total Allergan net sales.
 
Interest rate risk. Our interest expense has been more sensitive to fluctuations in the general level of Japan interest rates than to changes in rates in other markets. Changes in Japan interest rates have affected our interest expense on our debt as well as costs associated with foreign currency contracts.
 
Our exposure to market risk for changes in interest rates results from our debt obligations and related derivative financial instruments. During 2001, we held interest rate swap agreements to reduce the impact of interest rate changes on our floating rate long-term debt. These derivative financial instruments allowed us to hold long-term borrowings at floating rates and then swap them into fixed rates that are anticipated to be lower than those available if fixed-rate borrowings were made directly.
 
These swaps effectively converted our floating rate debt to fixed rates and qualified for hedge accounting treatment. Since these interest rate swap agreements qualified as cash flow hedges under SFAS No. 133, changes in fair value of these swap agreements were recorded in other comprehensive income to the extent that such changes were effective and as long as the cash flow hedge requirements were met. Periodic interest payments and receipts on both the debt and swap agreement were recorded as components of interest expense in the accompanying combined statements of earnings. At March 29, 2002, there were no interest rate swap agreements outstanding. Since March 29, 2002, we have entered into various interest rate swap agreements which effectively convert our interest rate on $150.0 million of the senior subordinated notes from a fixed rate to a floating rate and convert the interest rate on $50.0 million of our $100.0 million term credit facility from a floating rate to a fixed rate.
 
At March 29, 2002, we had $37.7 million of variable rate debt outstanding. If the interest rates on the variable rate debt were to increase or decrease by 1% for the year, annual interest expense would increase or decrease by approximately $377,000.

49


 
The tables below presents information about our cash equivalents and our debt obligations for the years ended December 31, 2001 and 2000:
 
December 31, 2001
 
    
Maturing in

         
Fair Market Value

    
2002

    
2003

    
2004

  
2005

    
2006

    
Thereafter

  
Total

    
    
(in thousands, except interest rates)
ASSETS
                                                                 
Cash Equivalents:
                                                                 
Repurchase Agreements
  
$
6,725
 
  
$
—  
 
  
$
—  
  
$
—  
 
  
$
—  
    
$
  
$
6,725
 
  
$
6,725
Weighted Average Interest Rate
  
 
1.59
%
  
 
—  
 
  
 
—  
  
 
—  
 
  
 
—  
    
 
  
 
1.59
%
      
LIABILITIES
                                                                 
Debt Obligations:
                                                                 
Fixed Rate (JPY)
  
$
—  
 
  
$
18,988
 
  
$
  
$
37,830
 
  
$
—  
    
$
  
$
56,818
 
  
$
59,063
Weighted Average Interest Rate
  
 
—  
 
  
 
3.55
%
  
 
  
 
1.85
%
  
 
—  
    
 
  
 
2.42
%
      
Variable Rate (JPY)
  
 
18,988
 
  
 
18,991
 
  
 
  
 
—  
 
  
 
—  
    
 
  
 
37,979
 
  
 
37,979
Weighted Average Interest Rate
  
 
0.75
%
  
 
0.58
%
  
 
  
 
—  
 
  
 
—  
    
 
  
 
0.66
%
      
Total Debt Obligations
  
$
18,988
 
  
$
37,979
 
  
$
  
$
37,830
 
  
$
—  
    
$
  
$
94,797
 
  
$
97,042
Weighted Average Interest Rate
  
 
0.75
%
  
 
2.06
%
  
 
  
 
1.85
%
  
 
—  
    
 
  
 
1.71
%
      
 
December 31, 2000
 
    
Maturing in

         
Fair Market Value

 
    
2001

    
2002

    
2003

    
2004

  
2005

      
Thereafter

  
Total

    
    
(in thousands, except interest rates)
 
LIABILITIES
                                                                     
Debt Obligations:
                                                                     
Fixed Rate (JPY)
  
$
—  
 
  
$
—  
 
  
$
21,863
 
  
$
  
$
43,521
 
    
$
  
$
65,384
 
  
$
67,387
 
Weighted Average Interest Rate
  
 
—  
 
  
 
—  
 
  
 
3.55
%
  
 
  
 
1.85
%
    
 
  
 
2.42
%
        
Variable Rate (JPY)
  
 
17,490
 
  
 
13,118
 
  
 
21,862
 
  
 
  
 
—  
 
    
 
  
 
52,470
 
  
 
52,470
 
Weighted Average Interest Rate
  
 
1.20
%
  
 
1.23
%
  
 
1.10
%
  
 
  
 
—  
 
    
 
  
 
1.17
%
        
Total Debt Obligations
  
$
17,490
 
  
$
13,118
 
  
$
43,725
 
  
$
  
$
43,521
 
    
$
  
$
117,854
 
  
$
119,857
 
Weighted Average Interest Rate
  
 
1.20
%
  
 
1.23
%
  
 
2.33
%
  
 
  
 
1.85
%
    
 
  
 
1.86
%
        
INTEREST RATE DERIVATIVES
                                                                     
Interest Rate Swaps:
                                                                     
Variable to Fixed
  
$
39,400
 
  
$
—  
 
  
$
—  
 
  
$
  
$
—  
 
    
$
  
$
39,400
 
  
$
(100
)
Average Pay Rate
  
 
0.86
%
  
 
—  
 
  
 
—  
 
  
 
  
 
—  
 
    
 
  
 
0.86
%
        
Average Receive Rate
  
 
0.55
%
  
 
—  
 
  
 
—  
 
  
 
  
 
—  
 
    
 
  
 
0.55
%
        
 
Foreign currency risk. Overall, we are a net recipient of currencies other than the U.S. dollar and, as such, we benefit from a weaker dollar and are adversely affected by a stronger dollar relative to major currencies worldwide. Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, may negatively affect our consolidated sales and gross margins as expressed in U.S. dollars.
 
From time to time Allergan, with respect to our currency risks, has entered into foreign currency option and foreign currency forward contracts to reduce earnings and cash flow volatility associated with foreign exchange rate changes to allow our management to focus its attention on its core business issues and challenges. As a stand-alone company, we may enter into various contracts which change in value as foreign exchange rates change to economically offset the effect of changes in the value of foreign currency assets and liabilities, commitments and anticipated foreign currency denominated sales and operating expenses. Our policy is to enter into foreign currency option and foreign currency forward contracts in amounts between minimum and maximum anticipated foreign exchange exposures, generally for periods not to exceed one year.
 
New Accounting Standards
 
In July 2001, Statement of Financial Accounting Standards No. 141, “Business Combinations” (SFAS No. 141), was issued. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method combinations completed after June 30,

50


2001. SFAS No. 141 also requires that we evaluate our existing intangible assets and goodwill that were acquired in prior business combinations, and to make any necessary reclassifications in order to conform with the new criteria in SFAS No. 141 for recognition of intangibles apart from goodwill.
 
Additionally, in July 2001 Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142), was issued and is effective for all fiscal years beginning after December 15, 2001 (January 1, 2002 for us). SFAS No. 142 establishes accounting and reporting standards for intangible assets. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives be evaluated annually for impairment rather than amortized. Upon adoption of SFAS No. 142, we will also be required to test goodwill and intangible assets with indefinite useful lives for impairment within the first interim period with any impairment loss being recognized as a cumulative effect of a change in accounting principle.
 
In connection with the transitional goodwill impairment evaluation, SFAS No. 142 requires us to perform an assessment of whether there is an indication that goodwill and intangible assets with indefinite useful lives are impaired as of the date of adoption. To accomplish this, we must identify our reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. We have up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit’s carrying amount. To the extent a reporting unit’s carrying amount exceeds its fair value, an indication exists that the reporting unit’s goodwill may be impaired.
 
We adopted the provisions of SFAS No. 141 on June 30, 2001 and SFAS No. 142 on January 1, 2002 effective with Allergan’s adoption of the new accounting standards. Allergan’s adoption of SFAS No. 142 did not result in a negative impact on Allergan’s consolidated financial statements. During the quarter ended September 30, 2002, we will complete a separate assessment of goodwill and intangibles on a stand-alone basis. We do not expect that this separate assessment will have a negative effect on our combined financial statements. As of March 29, 2002, we had unamortized goodwill in the amount of $100.1 million. Amortization expense related to goodwill was $9.0 million, $9.3 million, $9.2 million, $0 and $2.2 million for the years ended December 31, 2001, 2000 and 1999 and the three months ended March 29, 2002 and March 30, 2001, respectively.
 
In October 2001, Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS No. 144), was issued. SFAS No. 144 supersedes Statement No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” and the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations—Reporting the effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” for the disposal of a segment of a business. SFAS No. 144 retains the requirement in Opinion No. 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale. We adopted the provisions of SFAS No. 144 in the quarter ended March 29, 2002. The adoption of SFAS No. 144 did not have a material impact on our combined financial statements.
 
In April 2002, Statement of Financial Accounting Standards No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (SFAS No. 145) was issued. SFAS No. 145 rescinds SFAS No. 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. Upon adoption of SFAS No. 145, we will be required to apply the criteria in APB Opinion No. 30,“ Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” (Opinion No. 30), in determining the classification of gains and losses resulting from the extinguishment of debt. SFAS No. 145 is effective for annual years beginning after May 15, 2002, with earlier adoption encouraged. We have elected to early-adopt SFAS No. 145 during the second fiscal quarter ended June 28, 2002. The adoption of SFAS 145 is not expected to have a material effect on our combined financial statements.

51


In July 2002, SFAS No. 146 , “Accounting for Costs Associated with Exit or Disposal Activities” (SFAS No. 146) was issued. SFAS No. 146 requires companies to recognize 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. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. SFAS No. 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002, with earlier adoption encouraged. As the provisions of SFAS No. 146 are required to be applied prospectively after the adoption date, we cannot determine the potential effects that adoption of SFAS No. 146 will have on our combined financial statements.

52


BUSINESS
 
Overview
 
We are a global leader in the development, manufacture and marketing of medical devices for the eye and contact lens care products. Our market research indicates that we are the second largest global manufacturer and marketer of ophthalmic surgical products and contact lens care products, in each case as measured by net sales in the markets in which we compete in 2001. Through a significant commitment to internal research and development and alliances and partnerships, we have demonstrated success in the introduction of new and innovative products. We believe we are the technology leader in our markets and that our brands are among the most trusted and recognized in our industry. We have a strong global sales and distribution network, with approximately 300 sales representatives operating in approximately 20 countries and marketing products in approximately 60 countries.
 
Our Competitive Strengths
 
We believe that the following competitive strengths differentiate us from other companies in the ophthalmic industry:
 
Proven track record, trusted and recognized brands and a 40-year commitment to eye care. For over 40 years, we have developed, manufactured and marketed innovative and high quality eye care products. We have engaged in extensive marketing efforts to promote our reputation for high quality products and to establish and maintain close relationships with eye care professionals around the world. We believe that in the ophthalmic surgical products market, surgeons tend to remain with the IOL brands and phacoemulsification systems to which they have become accustomed. Similarly, we believe that contact lens wearers tend to remain loyal to the brand of solution and other contact lens care products provided to them with their contact lenses by their eye care professional.
 
Leading market positions across product lines. We have leading positions in our market segments. Our market research indicates that in the markets in which we compete, we held the second largest share of the global ophthalmic surgical products markets and the second largest share of the global market for contact lens care products in 2001. In addition, excluding the U.S., we believe we were the leading global manufacturer and marketer of contact lens care products in 2001. We also are a leader in the contact lens care business in Asia, which we believe is one of the fastest growing markets for contact lens care products.
 
Strong strategic position to take advantage of stability in the ophthalmic surgery industry. We believe that our key product segment, cataract surgical products, benefit from the demographic drivers of increased life expectancies and worldwide economic growth. According to industry sources, the number of cataract surgery procedures performed in the U.S. has grown at a compound annual growth rate of approximately 4% over the last ten years. We believe that our market leadership positions us to take advantage of the stability of this market and to capitalize on opportunities for growth.
 
Global sales and distribution network. We have an experienced and extensive global sales and distribution network, comprising approximately 300 sales representatives operating in approximately 20 countries and marketing products in approximately 60 countries. In response to the different healthcare systems throughout the world, our sales and marketing strategy and organizational structure differ by region, with each region given relative autonomy in determining its own tactical marketing strategies. We also use third party distributors for the distribution of our products in smaller international markets.
 
Opportunistic strategic alliances. We have entered into partnerships and alliances seeking to leverage our sales force, distribution infrastructure and research and development efforts without the need to invest significant capital. For example, through our co-marketing agreement with VISX Incorporated, the global leader in sales of excimer laser systems used in LASIK procedures, VISX promotes the use of our microkeratomes to users of

53


VISX’s excimer lasers. In addition, our partnership with Ophtec B.V. to manufacture our own brand of IOLs for refractive disorders creates a significant opportunity for us to strengthen our leadership position in the refractive surgery market. We also partner with Allegiance Healthcare Corporation, a leading supplier of healthcare products to hospitals, laboratories and other healthcare related entities, to provide custom surgical packs to Allegiance’s U.S., Canadian and European customers.
 
Experienced management team. We have a strong and experienced management team led by Jim Mazzo, who, prior to joining us, was with Allergan for 22 years. Our senior management team has an average of 14 years of experience in the healthcare products industry both with us and with other major participants in the industry. The long and diverse experience of our senior management provides a competitive advantage through their knowledge of the industry, familiarity with our customers and understanding of the development, manufacturing and sale of our products.
 
Our Strategies
 
We seek to strengthen our global leadership position in growing, high margin segments of the vision correction market by capitalizing on our strong positions in the ophthalmic surgical and contact lens care products markets. We believe that executing our strategy will enable us to capture increasing market share and achieve profitable growth in our revenues. As part of our strategy we intend to:
 
Continue to strengthen our global portfolio of brands by being the technology leader in our markets. We believe that technology and new product offerings drive our industry. We intend to introduce improved and more technologically advanced products to gain market share and establish ourselves as a leader across all product lines.
 
Focus research and development efforts on next-generation technologies and devices that are safe, effective and address large unmet needs. We believe that our long-term success will be driven by the continued introduction of new and innovative products in the ophthalmic surgical and contact lens care products markets. We intend to take advantage of our newly focused business through an increased commitment to ophthalmic research and development designed to extend existing product lines and develop next-generation technologies.
 
Build on our strong market position by increasing investment in attractive market segments and selected geographies. We intend to expand our presence in attractive, growing market segments, such as applying our IOL technologies in the refractive surgery market. We believe that our existing expertise in the ophthalmic industry, and specifically in the cataract surgical products segment, together with our strong brands and extensive sales and marketing network will enable us to more rapidly enter other ophthalmic products segments, as evidenced by the rapid market-share growth of the AMADEUS microkeratome. We also intend to continue our focus on geographic regions with strong growth prospects, such as Asia.
 
Leverage our global presence and extensive distribution network to introduce new product and service offerings. Our global sales, marketing, and support network enables us to understand variations in local regulatory and marketing environments. We plan to utilize our global scope and local expertise to facilitate the introduction of new products and more efficiently reach new customers.
 
Proactively pursue strategic alliances to maximize the potential of our brands and more efficiently build leading positions within the industry. We plan to supplement our internal research and development activities and existing product offerings with a commitment to identifying, obtaining and marketing new technologies through alliances and partnerships. We intend to explore new potential alliances that would better enable us to leverage our sales force, gain access to promising technologies and broaden our product offerings without the need for substantial capital investments.

54


 
Industry
 
Vision and Vision Impairment. The eye functions much like a camera, incorporating a lens system consisting of the cornea and the lens, which work together to focus light, and the iris, which functions like a shutter, regulating the amount of light that passes through the cornea. The lens is located behind the iris and is housed in the capsular bag. The cornea and lens focus the light that passes through the iris onto the retina, which acts like camera film and records the image. The retina contains light-sensitive receptors that transmit the image through the optic nerve to the brain. Nearly all light that reaches the retina passes through the central portion of the cornea, called the optic zone. Vision impairment results from the inability of the optical system to focus images on the retina correctly.
 
Common vision impairment problems include cataracts, myopia, hyperopia, astigmatism and presbyopia. Cataracts are an irreversible progressive ophthalmic condition in which the eye’s natural lens loses its usual transparency and becomes clouded and opaque. This clouding obstructs the passage of light to the retina and can eventually lead to blindness. Myopia, hyperopia, astigmatism and presbyopia are generally referred to as refractive disorders. Refractive disorders occur when the lens system is unable to focus images on the retina properly. For example, with myopia, light rays focus in front of the retina because the curvature of the cornea is too steep. A person with myopia, which is also referred to as nearsightedness, is able to see nearby objects clearly, but cannot focus on distant objects. The opposite is true for a person with hyperopia, which is also referred to as far-sightedness. With hyperopia, light rays focus behind the retina because the curvature of the cornea is too flat. A person with hyperopia can see distant objects clearly but cannot focus on nearby objects. Astigmatism results when the otherwise uniform curvature of the cornea is somehow disrupted or becomes uneven. The lack of uniform curvature makes it difficult for a person to focus on any object. Presbyopia is the progressive loss of flexibility of the lens and its ability to accommodate, or change shape to focus on near or far objects. Presbyopia is caused by aging of the eye’s lens and the muscles that control the shape of the lens.
 
Ophthalmic Surgical Products Market
 
The ophthalmic surgical products market consists of products designed to correct impaired vision through minimally invasive surgical procedures. We believe there are several factors that may drive growth in this area:
 
 
As the human eye ages, the prevalence of cataracts and the need for vision correction generally increases. Therefore, as the population ages, we expect that the patient base for our products will increase.
 
 
We believe that an aging population, limitations of existing technologies, introduction of new technologies and broader market acceptance present an opportunity for growth of the market for elective procedures to correct refractive errors.
 
 
The ophthalmic surgery market is technology driven. Because acceptance of new technology is influenced by physicians’ willingness to change, relationships with physicians are critical.
 
 
As emerging international markets become more technologically advanced and greater financial resources for healthcare become available, we perceive an opportunity for expansion into previously underserved regions.
 
Cataract Treatment. The largest segment of the ophthalmic surgical products market is the treatment of cataracts. Cataracts are most prevalent in the population over the age of 60 and occur in varying degrees. In many countries of the world, cataracts are a primary cause of blindness and go largely untreated. According to the World Health Organization, cataracts accounted for 43% of all blindness worldwide in 1997 even though effective surgical treatment exists. Most patients affected by cataracts can be treated through a minimally invasive surgical procedure in which the patient’s natural lens, which has become clouded, is removed and replaced with an artificial, or intraocular, lens. During cataract surgery, patients are often treated using a process known as phacoemulsification. Phacoemulsification is a method of cataract extraction that uses ultrasound waves to break the natural lens into small fragments that can be removed from the eye through a hollow needle. Viscoelastics are also used during cataract surgery to protect the inner lining of the cornea, called the corneal endothelium, provide lubrication and maintain pressure in the capsular bag, allowing the eye to maintain its shape.

55


 
According to the American Academy of Ophthalmology and other industry sources, cataract extraction followed by intraocular lens implantation is the most common surgical procedure performed in the United States and most other developed nations. We estimate that in 2001 approximately 2.4 million cataract procedures were performed in the United States, and over 5 million cataract procedures were performed worldwide, making cataract extraction the most commonly performed surgical procedure in the United States and most other developed nations. According to industry sources, the number of cataract surgery procedures performed has grown at a compound annual growth rate of approximately 4% over the last ten years. We estimate that phacoemulsification is used in approximately 90% of cataract procedures in the United States. We estimate that the global phacoemulsification market generated revenues of approximately $290 million in 2001.
 
According to industry sources, the global cataract surgery market, which includes sales of intraocular lenses, phacoemulsification equipment, viscoelastics and other related products, was approximately $1.6 billion to $2.2 billion in 2000 and is projected to grow at approximately 3% a year through 2005. Based on our internal estimates, the top ten geographic markets within the cataract surgery market comprise approximately $1.5 billion. We expect that less developed nations will begin to improve the level of their eye care and begin treating an even greater percentage of cataract patients. As a result, we project that the number of cataract surgeries performed each year on a worldwide basis will continue to increase steadily, creating expanded market opportunities for ophthalmic surgical products. According to our market research, foldable intraocular lenses have grown faster than any other segment within the cataract surgery products market since 1998, growing from less than 50% to greater than 80% of the global intraocular lens market. According to our market research, the global market for foldable intraocular lenses was approximately $517 million in 2001.
 
Refractive Vision Correction. We believe that the second largest segment of the ophthalmic surgical market is the market for the minimally invasive surgical treatment of refractive disorders, namely, myopia, hyperopia and astigmatism. Industry data indicates that in the United States approximately 150 million people suffer from some type of refractive disorder. We believe that outside of the United States an even greater number of people are affected, with industry analysts indicating that vision correction is generally necessary throughout the population at ages over 40. The current global refractive surgery market is estimated to be $700 million and is projected to grow approximately 11% from 2001 to 2005 based on an industry estimate of the total laser vision correction market. Based on our internal estimates, the top ten geographic markets within the refractive surgery market comprise approximately $418 million.
 
The most common surgical technique for treating these disorders is laser assisted in-situ keratomileusis, or LASIK. The LASIK procedure involves the use of an automated cutting device, called a microkeratome, to cut a thin corneal flap, which is then pulled back to expose the underlying tissue. A laser is then used to remove corneal tissue from the eye to achieve vision correction. The corneal flap is then placed back on the tissue where it adheres back onto the eye. While LASIK has proven to be effective for low to mild myopia, the procedure is not capable of correcting high myopia or presbyopia refractive disorders. We perceive these limitations of LASIK to be opportunities for our future business.
 
We estimate that in 2001, approximately 1.4 million laser procedures were performed to correct vision problems in the United States. One analyst projects that this market will grow in the United States to nearly 1.9 million procedures per year by the end of 2003. We anticipate that we will benefit from this growth as we continue to penetrate the market for refractive surgical products with our microkeratome products.
 
Contact Lens Care Market
 
The market for contact lens care products increased significantly in the 1970’s when the first soft contact lenses were marketed in the United States. As the use of contact lenses has become increasingly popular, the demand for disinfecting solutions, daily cleaners, enzymatic cleaners and lens rewetting drops has increased as well.

56


 
We believe any future growth of the contact lens care market will continue to be dependent upon the underlying dynamics in the contact lens industry. We estimate that the contact lens industry was approximately $3.5 billion in 2001 and believe this market is growing between 5% and 8% annually on a global basis. The low penetration of contact lenses in vision corrected populations, 20% in the United States, 12% in Japan and 8% in Europe, broader acceptance among younger wearers and males, and continued improvement in lens and lens care technologies, suggests significant opportunity for sustained growth in the number of contact lens wearers. According to an industry source, the worldwide contact lens care market, which includes cleaning and disinfecting solutions, enzymatic cleaners and lens rewetting drops, was approximately $1.6 billion in 2001. Based on our internal estimates, sales within the top ten geographic markets within the contact lens care market comprise approximately $1.2 billion. In response to increasing popularity in more frequent replacement lenses and consumer interest in more convenient lens care regimens, the contact lens care market continues to evolve towards greater use of one-bottle, multipurpose solutions. According to our internal estimates, the worldwide sales of multi-purpose solutions grew in 2001 by approximately 14% to $395 million.
 
Our Products
 
Ophthalmic Surgical Product Line
 
Our ophthalmic surgical products business develops, manufactures and markets medical devices for the cataract and refractive surgery markets, with a technology-driven focus on the high margin segments of these markets. We pioneered small incision cataract surgery with the development of the foldable intraocular lens, and developed the first multifocal intraocular lens that has been approved by the Food and Drug Administration.
 
We focus on three major segments of the cataract surgery market:
 
 
foldable intraocular lenses implanted in the lens capsule to restore sight;
 
 
phacoemulsification machines used to break-up the cloudy human lens prior to its replacement with an intraocular lens; and
 
 
related surgical accessories such as implantation systems, viscoelastics and disposables.
 
We believe that we are the second largest company in the global cataract surgery market and we have made a strong entry into the refractive surgery market with the introduction of the AMADEUS microkeratome.
 
Intraocular Lenses. We offer surgeons a choice of high quality, innovative monofocal silicone, monofocal acrylic and multifocal silicone intraocular lenses, or IOLs, together with various systems of implementation devices. We believe that we hold the number two position in worldwide sales of IOLs, with an approximate 25% market share. Within this market, we offer a line of foldable IOLs for use in minimally invasive cataract surgical procedures. The foldable nature of our IOLs allows them to be implanted by the surgeon into the eye through an incision as small as 2.8mm. Small incision surgery has been associated with less induced astigmatism, rapid stabilization of the wound, and faster visual rehabilitation. Once inserted, our lenses unfold naturally into the capsular bag that previously held the natural lens. We estimate that sales of foldable IOLs are growing faster than any other segment within the cataract surgery market. We believe that in 2001, our foldable IOLs experienced the highest sales growth rate within this segment, with a growth rate of 8%, and had the second leading share of the market, estimated at approximately 28%. In Europe, in particular, we believe that we have captured the number one position in sales of foldable IOLs with an approximate 34% market share and received the first CE mark approval for treatment of presbyopia with a multifocal IOL. Globally, we believe that we are the market leader in the silicone foldable IOL market with approximately 60% market share of sales in 2001. Sales of all models of our IOLs represented approximately 32%, 29% and 26% of our total sales in 2001, 2000 and 1999, respectively.
 
Foldable IOLs marketed by us for small incision cataract surgery include:
 
 
PHACOFLEX: According to our internal estimates, our PHACOFLEX family of lenses were the number one line of mono-focal silicone IOLs in 2001, as measured by global sales. Products in this line include

57


our PHACOFLEX II SI30NB, PHACOFLEX II SI40NB and PHACOFLEX II SI55NB. The PHACOFLEX II series of monofocal lenses are manufactured from a proprietary second-generation silicone material. Our PHACOFLEX lenses can be inserted through incisions as small as 2.8mm, depending on the specific model, using our patented insertion system, THE UNFOLDER. The PHACOFLEX II SI30NB was the first IOL to receive approval from the Food and Drug Administration to claim lower posterior capsular opacification, or PCO, values than those of polymethylmethacrylate, or PMMA, lenses. The goal of reducing the incidence of PCO is to reduce the likelihood that the patient may require an additional procedure to address a secondary cloudy area behind the intraocular lens that can occur in some patients following cataract surgery.
 
 
CLARIFLEX: CLARIFLEX is our third-generation silicone monofocal IOL and was first introduced in February 2002. Our CLARIFLEX lens has a unique OPTIEDGE design that has been shown to reduce internal reflections and glare. The CLARIFLEX lenses can be inserted through an unenlarged incision using our patented insertion system, THE UNFOLDER.
 
 
SENSAR: SENSAR is our line of acrylic monofocal IOLs, which were first introduced in Europe in 1998 as CE marked products, and received approval from the Food and Drug Administration for marketing in the United States in February 2000. The lenses were developed from a proprietary second-generation acrylic material and are designed to minimize many of the unwanted side effects of other acrylic lenses, such as vacuoles and optical aberrations. Unlike many older, first-generation hydrophobic acrylic IOLs, SENSAR does not require warming before insertion, does not develop vacuoles over time and can be passed through incisions of 3.2mm or smaller using THE UNFOLDER insertion system. In 2001, we launched a new generation SENSAR lens, the SENSAR with OPTIEDGE, in the United States, Japan and Europe. SENSAR with patented OPTIEDGE has a square edge on the posterior side of the lens where it comes into contact with the lens capsule and a round anterior surface. This design is intended to reduce post-surgical PCO, the need for subsequent laser procedures, and the potential for unwanted glare and reflections following implantation.
 
 
ARRAY: Using a series of optical zones, the ARRAY multifocal silicone IOL corrects a patient’s range of sight from myopic to hyperopic, significantly reducing that patient’s dependence on eyeglasses. The ARRAY provides distance vision comparable, and near vision superior, to that of monofocal IOLs. The ARRAY can also be inserted using THE UNFOLDER insertion system. We believe that the ARRAY is the first, and currently the only, multifocal IOL marketed in the United States. Through the presentation of clinical data demonstrating ARRAY’s specific advantages over existing lenses, ARRAY has been granted “new technology intraocular lens,” or “NTIOL,” status by the Centers for Medicare and Medicaid Services, resulting in a higher reimbursement rate to offset the higher cost of this technology. The ARRAY was recently approved in Europe for the treatment of presbyopia following refractive lensectomy, a procedure involving the removal of the natural lens.
 
We recently entered into a marketing agreement with Ophtec BV under which we will seek to develop our own brand of phakic IOL based on Ophtec’s Artisan lens technology. Phakic IOLs are used in refractive surgery for the correction of hyperopia, myopia and astigmatism. The Artisan lens is currently marketed by Ophtec in Europe and is undergoing late-stage clinical trials in the United States. Once regulatory approval is received, we will market and distribute our brand of this lens globally, with exclusive marketing and distribution rights in the United States, Mexico, Canada and Japan.
 
Phacoemulsification Systems. We offer a line of phacoemulsification systems for use during cataract surgery. Phacoemulsification systems use ultrasound to break up the cataract and remove it from the lens capsule during small incision cataract surgery. These machines utilize disposable or reusable packs that are necessary to operate the equipment. We estimate that, based on sales in 2001, we had the second largest share of the phacoemulsification systems market, approximately 16%, with a majority of our sales being derived from consumables and related equipment. We believe that we currently market the largest family of phacoemulsification systems in the marketplace, including the SOVEREIGN, DIPLOMAX and PRESTIGE systems, which offer advanced technology for increased control and safety.

58


 
 
SOVEREIGN: SOVEREIGN is our premier phacoemulsification system. SOVEREIGN is an integrated system that combines proprietary advanced fluidics, sophisticated microprocessor controls and multiple programmable power modulations. The SOVEREIGN is designed to reduce procedure times and provide the ophthalmologist with increased control. We recently launched a new software technology, WHITESTAR, at the American Academy of Ophthalmology for the SOVEREIGN system. When combined with the SOVEREIGN system, the WHITESTAR technology is designed to further reduce procedure times and provide clearer corneas the first day following surgery.
 
 
DIPLOMAX: DIPLOMAX is our more affordable, portable phacoemulsification system. This system provides more basic options as compared to the SOVEREIGN system, while still providing the surgeon with the necessary control during the procedure.
 
 
PRESTIGE: The PRESTIGE is our first generation phacoemulsification system and is currently positioned primarily for markets outside the United States.
 
Sales of our phacoemulsification products accounted for approximately 10.3%, 10.8% and 9.6% of our total sales in 2001, 2000 and 1999, respectively.
 
Other Cataract-Related Products. In addition to our intraocular lenses and phacoemulsification equipment, we also provide several ancillary products related to the cataract surgery market, including:
 
 
Insertion Systems: As a companion to our foldable intraocular lenses, we market insertion systems for each of our foldable lens models, referred to as THE UNFOLDER implantation systems. These systems assist the surgeon in achieving controlled release of the intraocular lens into the capsular bag through an incision in the eye.
 
 
Viscoelastics: Viscoelastics are used during cataract surgery to maintain the anterior chamber of the eye and protect the corneal endothelium. Our products in this category include VITRAX, ALLERVISC and ALLERVISC Plus. We also distribute several viscoelastics produced by other companies on a regional basis.
 
 
Custom Surgical Packs: We have partnered with Allegiance Healthcare Corporation, a leading supplier of healthcare products to hospitals, laboratories and other healthcare-related entities, to provide custom surgical packs to Allegiance’s U.S., Canadian and European customers. These surgical packs typically consist of all of the items, except the intraocular lens, that a surgeon needs to use in a single cataract surgery.
 
 
Capsular Tension Rings: We market and distribute capsular tension rings in Europe that are manufactured by Corneal. Capsular tension rings are inserted into the capsular bag during cataract surgery and function to stabilize the capsular bag during placement of the intraocular lenses. Our product, the INJECTOR RING, is a single use device that provides a pre-loaded insertion instrument with the capsular tension ring.
 
Ophthalmic Refractive Surgical Products. In May 2000, we entered into the LASIK market with the AMADEUS microkeratome, which is designed and manufactured by SIS, Surgical Instrument Systems. The microkeratome is a precision manufactured instrument specifically designed for use by LASIK surgeons. The microkeratome contains a single-use blade that is used to create a precise corneal flap of preselected thickness and diameter during the LASIK procedure. The AMADEUS microkeratome has a unique and simple-to-use computer monitoring unit, allows for one-handed operation and contains a vacuum system and integrated blade-loading system. These features are designed to provide safety, simplicity and predictability to refractive surgeons. The AMADEUS distinguishes itself from other microkeratomes in that it is fully assembled and ready to use once suction is established on the patient’s eye. Another advantage of the AMADEUS microkeratome is that the cutting of the corneal flap occurs entirely within the protected space of the suction ring. We believe that this design allows the surgeon to avoid potential interferences and better ensure a consistently smooth, quality pass in creating the corneal flap. This design also avoids the on-eye assembly characteristic of many microkeratomes that can sometimes compromise suction on the eye.

59


 
We have a co-marketing agreement in the United States with VISX Incorporated, which is the leader in sales of excimer laser systems for vision correction. Under this agreement VISX promotes only our microkeratomes to users of its excimer lasers, and we promote only the VISX excimer lasers to users of our microkeratomes. Under this agreement, VISX and we focus on direct promotions to ophthalmologists, web site promotion and referrals. Outside the United States, we collaborate with VISX in markets where it is mutually beneficial to both companies. This agreement does not prevent VISX or us from engaging in other arrangements for the marketing of our or their products.
 
Contact Lens Care Product Line
 
We began marketing contact lens care products in 1960 and believe that our products currently comprise approximately 21% of the market for contact lens care products. We believe that we are the number one contact lens care product provider in the worldwide market, excluding the United States, and the number two contact lens care product provider in the overall worldwide market, in each case as measured by 2001 sales. In Asia, which we believe to be one of the fastest growing markets for contact lens care products, our market-leading contact lens care business grew by 20% in 2001, as measured by sales. We offer an entire suite of contact lens care products that addresses a broad range of contact lens types. Our product offering includes single-bottle multi-purpose cleaning and disinfecting solutions to destroy harmful microorganisms in and on the surface of contact lenses; daily cleaners to remove undesirable film and deposits from contact lenses; enzymatic cleaners to remove protein deposits from contact lenses; and lens rewetting drops to provide added wearing comfort. Our leading worldwide brands include COMPLETE, COMPLETE BLINK-N-CLEAN, CONSEPT F, CONSEPT 1 STEP, OXYSEPT 1 STEP, ULTRACARE, ULTRAZYME and TOTAL CARE.
 
One Bottle Solutions. We market our COMPLETE brand multi-purpose solution, a convenient, one bottle chemical disinfecting system for soft contact lenses, on a worldwide basis. We believe that COMPLETE is currently the only multi-purpose solution that contains an ocular lubricant, which contributes to its Food and Drug Administration-approved “unique comfort” claim. In 2001, we obtained marketing approval in the United States, Canada and Europe, as well as in a number of other countries, for “no rub” cleaning and disinfecting of frequent replacement soft contact lenses. In 2002, we obtained an additional marketing approval in the United States, Canada and Europe for the “no rub” claim with conventional soft contact lenses. Importantly, our clinical studies show that the comfort and performance of the product with the new “no rub” claim was found to be as good as products that require a rubbing step. The worldwide multi-purpose solution market grew last year at a rate of approximately 14%; however, our market research indicates that our COMPLETE brand remained the fastest growing multi-purpose solution in the world, growing in-market at a rate of approximately 30%, with rapid market share growth in Japan.
 
We are leveraging our COMPLETE lens care technology to address new emerging segments. One of these new segments is a convenient in-eye lens cleaner that allows contact lens wearers the ability to comfortably wear their lenses for a longer duration of time. To address this segment, we have recently introduced COMPLETE BLINK-N-CLEAN lens drops that conveniently dissolve away material that causes irritation and discomfort through a unique blend of gentle-to-the-eye cleaning agents in a tear-like formula.
 
Hydrogen Peroxide-Based Solutions. We also offer products that use hydrogen peroxide-based disinfection systems. Our leading hydrogen peroxide system products are the OXYSEPT 1 STEP/ ULTRACARE/CONSEPT 1 STEP hydrogen peroxide neutralizer/ disinfection systems, with a color indicator that turns the solution pink to indicate the disinfectant tablet has dissolved. Peroxide based disinfection systems have historically been our strongest family of lens care products. However, some soft contact lens wearers prefer one bottle systems to the more traditional peroxide-based lens care products because they are more convenient. Therefore, we intend to leverage our brand recognition in peroxide-based disinfection systems to continue to increase the market for our COMPLETE brand products.
 
We acquired the CONSEPT F system in 1995 as part of our acquisition of Pilkington Barnes Hind. The CONSEPT F system was the first non-heat disinfection system for soft contact lenses approved for use in Japan. In April 2001, regulatory authorities in Japan also approved CONSEPT 1 STEP contact lens care system.

60


 
Research and Development
 
Our long-term success is contingent on the introduction of new and innovative products in both the ophthalmic surgical and contact lens care businesses. Since 1999, we have invested an aggregate of approximately $93.6 million in research and development and plan to further increase our investment going forward. Our research and development strategy is to develop products for vision correction that are safe, effective, proprietary and address large unmet needs. As we implement this strategy, we will seek to develop new products with measurable outcome benefits to customers, patients, clinicians and healthcare payors and providers.
 
Research and development activities for our ophthalmic surgical business are focused on expanding our product portfolio for both cataract and refractive surgery. Within cataract surgery, we have focused on three areas of opportunity to provide superior outcomes:
 
 
Smaller incision surgery: small incision surgery has been associated with less induced astigmatism, rapid stabilization of the wound and faster visual rehabilitation.
 
 
Restoring accommodation following cataract surgery: following cataract surgery, the eye may lose its ability to accommodate, or shift its field of focus. As a result, the eye will attain a fixed point of focus.
 
 
Reducing PCO following cataract surgery: PCO is a clouding of the residual portion of the natural crystalline lens that occurs in some patients following cataract surgery. Currently, treatment of moderate to severe PCO typically requires a laser procedure.
 
Current projects include expansion of our multifocal ARRAY intraocular lens product offering by adding an OPTIEDGE SENSAR version as well as by adding an OPTIEDGE to the existing silicone ARRAY offering. Other projects include developing easier to use insertion systems for our foldable SENSAR and CLARIFLEX intraocular lenses, and a new, more compact phacoemulsification system with advanced features.
 
In addition to cataract surgery products, we are leveraging our expertise in intraocular lens implant technology to the areas of the surgical correction of vision. These areas represent large unmet needs that are not addressed by current surgical procedures. Products that are currently under development include refractive implants for correction of moderate to high myopia, moderate to high hyperopia and presbyopia.
 
Our research and development efforts in the contact lens care business are aimed at developing proprietary systems that are effective and more convenient for customers to use, which we believe will result in a longer, more comfortable lens wear and higher rate of compliance with recommended lens care procedures. Our efforts include seeking formulations that provide prolonged lubrication, improved protection against dryness and enhanced cleaning without irritation. Our research and development efforts have resulted in the continued development of our flagship COMPLETE brand multi-purpose solution, with further advancements currently in development.
 
We plan to supplement our research and development activities with a commitment to identifying and obtaining new technologies through in-licensing, technological collaborations and joint ventures, including the establishment of research relationships with academic institutions and individual researchers. We recently announced a partnership with Ophtec, a Netherlands-based company with a presence in the cataract and refractive surgery markets. This agreement introduces us to a new market, by enabling us to introduce a new phakic intraocular lens based on the Artisan lens technology developed by Ophtec. Phakic intraocular lenses are used in refractive surgery for the correction of hyperopia, myopia and astigmatism. Once regulatory approval is received we plan to market our brand of this intraocular lens globally, with exclusive marketing and distribution rights in the United States, Mexico, Canada and Japan. The Artisan lens is currently marketed in Europe and is in late stage clinical trials in the United States.

61


 
We spent approximately $29 million in 2001, $30 million in 2000 and $28 million in 1999 on research and development. Expenditures on research and development represented approximately 5% of our net sales in each of the years ending 2001, 2000 and 1999. We currently have approximately 150 employees dedicated to research and development.
 
We believe that the continuing introduction of new products supplied by our research and development efforts and in-licensing opportunities is critical to our success. There are, however, inherent uncertainties associated with the research and development efforts and the regulatory process and we cannot assure you that any of our research projects will result in new products that we can commercialize.
 
Customers, Sales and Distribution
 
Customers. Our primary customers for our ophthalmic surgical products include surgeons who perform cataract surgeries, hospitals and ambulatory surgery centers. The primary customers for our contact lens care products include optometrists, opticians, ophthalmologists and retailers that sell directly to consumers. These retailers include mass merchandisers such as Wal-Mart, drug store chains, such as Walgreens, hospitals, commercial optical chains and food stores. During 2001, no customer accounted for over 10% of our net sales.
 
Sales and Marketing. Our sales efforts and promotional activities with respect to our ophthalmic surgical products are primarily aimed at eye care professionals such as ophthalmologists who use our products. Similarly, our sales and promotional efforts in lens care are primarily directed toward the practitioner, i.e., the optometrists, opticians and ophthalmologists. In addition, we advertise in professional journals and have an extensive direct mail program of descriptive product literature and scientific information that we provide to specialists in the ophthalmic field. We have also developed training modules and seminars to update physicians regarding evolving technology.
 
We have utilized direct-to-consumer advertising of our contact lens care products and our ARRAY multifocal silicone intraocular lens.
 
Recognizing the importance of our sales force’s expertise, we invest significant time and expense in providing training in such areas as product features and benefits. Training for our ophthalmic surgical products sales force focuses on providing sales personnel with technical knowledge regarding the scope and characteristics of the products they are selling and developing skills in presenting and demonstrating those products. In addition to providing product knowledge for communication to eye care practitioners, our contact lens care products sales force focuses on developing the necessary skills to sell to buyers for mass merchandisers and large drug store chains. This sales force also seeks to develop relationships with eye care professionals who may purchase our products and recommend them to their patients.
 
Prior to the distribution, each of our products was marketed under its brand name and the Allergan name. Following the distribution, we continue to market each of our products under its brand name, however, products produced after the distribution will, following a transition period, bear our name instead of the Allergan name.
 
We have developed strong global brands through our extensive marketing efforts. In response to the different healthcare systems throughout the world, our sales and marketing strategy and organizational structure differ by region, with each region given relative autonomy in determining its own tactical marketing strategies. Our approximately 300 sales representatives and surgery support personnel strive for prompt product processing and delivery by coordinating between the customer and our sales, operations and shipping departments.
 
We also use third party distributors for the distribution of our products in smaller international markets. No individual agent or distributor accounted for more than 10% of our net revenues for the year ended December 31, 2001.

62


 
Historically, Allergan has sold its Refresh brand product line in the United States and Canada as a non-prescription product. Since distribution of this product is similar to the distribution channel for our contact lens care products in the past, Allergan’s sales force has serviced our products. We have agreed that for a period of up to 12 months following our separation from Allergan, Allergan will provide transitional retail sales services for our contact lens care products in the United States and Canada. In addition, during the same period, we will provide transitional retail services for Allergan’s Refresh brand products in the United Kingdom and Australia.
 
Manufacturing
 
We manufacture contact lens care products at our facility in Hangzhou, China, and we manufacture surgical products at our facility in Añasco, Puerto Rico. In addition, as part of our separation from Allergan, we entered into an agreement with Allergan under which Allergan will manufacture contact lens care products for us at Allergan’s facilities in Waco, Texas, Westport, Ireland, and Guarulhos, Brazil. Under this agreement, we expect that Allergan will also manufacture our ophthalmic surgical product, VITRAX, at its Westport, Ireland facility. The manufacturing agreement will terminate on June 29, 2005. We believe that the term of the manufacturing agreement will be sufficient for us to either replace Allergan with a third party manufacturer or develop our own manufacturing capability in all of these regions.
 
The following table sets forth the locations where our products will be manufactured:
 
Facility

 
Products Manufactured

  
Ownership of Facility

Añasco, Puerto Rico
 
Intraocular lenses
  
Advanced Medical Optics
Hangzhou, China
 
Contact lens care products
  
Advanced Medical Optics
Waco, Texas
 
Contact lens care products
  
Allergan
Westport, Ireland
 
Contact lens care products and VITRAX
  
Allergan
Guarulhos, Brazil
 
Contact lens care products
  
Allergan
 
We have historically, and plan to continue to, outsource the manufacture of our phacoemulsification equipment to third parties. Each of our PRESTIGE, DIPLOMAX and SOVEREIGN systems are manufactured by Zeiss Humphrey under a manufacturing and supply agreement, and each system is unique and has its own individual characteristics. The manufacturing and supply agreement terminates in May 2003, but will automatically renew for a one year period unless either party notifies the other of its intent not to renew the agreement nine months prior to the scheduled termination. Pricing under the agreement was fixed during the first year and may be changed once during each subsequent year as a result of changes in volume or in material cost. The markup and overhead amounts under the agreement will remain constant during the term of the agreement. If Zeiss Humphrey were to cease manufacturing any of these systems for any reason, we cannot assure you that we would be able to replace it on terms favorable to us, or at all.
 
Raw Materials
 
We use a diverse and broad range of raw materials in the design, development and manufacture of our products. While we do produce some of our materials on-site at our manufacturing facilities, we purchase most of the materials and components used in manufacturing our products from external suppliers. In addition, we purchase some supplies from single sources for reasons of quality assurance, sole source availability, cost effectiveness or constraints resulting from regulatory requirements. Three of our chemicals are sole sourced. However, we work closely with our suppliers to assure continuity of supply while maintaining high quality and reliability. Alternative supplier options are generally considered and identified, although we do not typically pursue regulatory qualification of alternative sources due to the strength of our existing supplier relationships and the time and expense associated with the regulatory process. Although a change in suppliers could require

63


significant effort or investment by us in circumstances where the items supplied are integral to the performance of our products or incorporate unique technology, we do not believe that the loss of any existing supply contract would have a material adverse effect on us.
 
Government Regulation and Other Matters
 
United States. Our products and operations are subject to extensive and rigorous regulation by the U.S. Food and Drug Administration. The Food and Drug Administration regulates the research, testing, manufacturing, safety, labeling, storage, recordkeeping, promotion, distribution and production of medical devices in the United States to ensure that medical products distributed domestically are safe and effective for their intended uses.
 
Under the Federal Food, Drug, and Cosmetic Act, medical devices are classified into one of three classes—Class I, Class II or Class III—depending on the degree of risk associated with each medical device and the extent of control needed to ensure safety and effectiveness. Our current products are Class I, II and III medical devices.
 
Class I devices are those for which safety and effectiveness can be assured by adherence to a set of guidelines, which include compliance with the applicable portions of the Food and Drug Administration’s Quality System Regulation, facility registration and product listing, reporting of adverse medical events, and appropriate, truthful and non-misleading labeling, advertising, and promotional materials, referred to as the general controls. Some Class I, also called Class I reserved, devices also require premarket clearance by the Food and Drug Administration through the 510(k) premarket notification process described below.
 
Class II devices are those which are subject to the general controls and most require premarket demonstration of adherence to certain performance standards or other special controls (as specified by the Food and Drug Administration) and clearance by the Food and Drug Administration. Premarket review and clearance by the Food and Drug Administration for these devices is accomplished through the 510(k) premarket notification procedure. For most Class II devices, the manufacturer must submit to the Food and Drug Administration a premarket notification submission, demonstrating that the device is “substantially equivalent” to either:
 
 
a device that was legally marketed prior to May 28, 1976, the date upon which the Medical Device Amendments of 1976 were enacted; or
 
 
to another commercially available, similar device which was subsequently cleared through the 510(k) process.
 
If the Food and Drug Administration agrees that the device is substantially equivalent, it will grant clearance to commercially market the device. By regulation, the Food and Drug Administration is required to clear a 510(k) within 90 days of submission of the application. As a practical matter, clearance often takes longer. The Food and Drug Administration may require further information, including clinical data, to make a determination regarding substantial equivalence. If the Food and Drug Administration determines that the device, or its intended use, is not “substantially equivalent”, the Food and Drug Administration will place the device, or the particular use of the device, into Class III, and the device sponsor must then fulfill much more rigorous premarketing requirements.
 
A Class III product is a product which has a new intended use or uses advanced technology that is not substantially equivalent to a use or technology with respect to a legally marketed device, or for which there is not sufficient information to establish performance standards or special controls to assure the device’s safety and effectiveness. The safety and effectiveness of Class III devices cannot be assured solely by the general controls and the other requirements described above. These devices almost always require formal clinical studies to demonstrate safety and effectiveness.

64


 
Approval of a premarket approval application from the Food and Drug Administration is required before marketing of a Class III product can proceed. The premarket approval application process is much more demanding than the 510(k) premarket notification process. A premarket approval application, which is intended to demonstrate that the device is safe and effective, must be supported by extensive data, including data from preclinical studies and human clinical trials and existing research material, and must contain a full description of the device and its components, a full description of the methods, facilities, and controls used for manufacturing, and proposed labeling. Following receipt of a premarket approval application, once the Food and Drug Administration determines that the application is sufficiently complete to permit a substantive review, the Food and Drug Administration will accept the application for review. The Food and Drug Administration, by statute and by regulation, has 180 days to review a filed premarket approval application, although the review of an application more often occurs over a significantly longer period of time, up to several years. In approving a premarket approval application or clearing a 510(k) application, the Food and Drug Administration may also require some form of postmarket surveillance, whereby the manufacturer follows certain patient groups for a number of years and makes periodic reports to the Food and Drug Administration on the clinical status of those patients when necessary to protect the public health or to provide additional safety and effectiveness data for the device.
 
When Food and Drug Administration approval of a Class I, Class II or Class III device requires human clinical trials, and if the clinical trial presents a “significant risk” (as defined by the Food and Drug Administration) to human health, the device sponsor is required to file an investigational device exemption, or IDE, application with the Food and Drug Administration and obtain investigational device exemption approval prior to commencing the human clinical trial. If the clinical trial is considered a “nonsignificant” risk, investigational device exemption submission to Food and Drug Administration is not required. Instead, only approval from the Institutional Review Board overseeing the clinical trial is required, although the study is still subject to other provisions of the IDE regulation. Human clinical studies are generally required in connection with approval of Class III devices and to a much lesser extent for Class I and II devices.
 
Continuing Food and Drug Administration Regulation. After the Food and Drug Administration permits a device to enter commercial distribution, numerous regulatory requirements apply. These include:
 
 
the registration and listing regulation, which requires manufacturers to register all manufacturing facilities and list all medical devices placed into commercial distribution;
 
 
the Quality System Regulation, which requires manufacturers to follow elaborate design, testing, control, documentation and other quality assurance procedures during the manufacturing process;
 
 
labeling regulations;
 
 
the Food and Drug Administration’s general prohibition against promoting products for unapproved or “off-label” uses; and
 
 
the Medical Device Reporting regulation, which requires that manufacturers report to the Food and Drug Administration if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to reoccur.
 
Failure to comply with the applicable U.S. medical device regulatory requirements could result in, among other things, warning letters, fines, injunctions, civil penalties, repairs, replacements, refunds, recalls or seizures of products, total or partial suspension of production, the Food and Drug Administration’s refusal to grant future premarket clearances or approvals, withdrawals or suspensions of current product applications, and criminal prosecution.
 
Governmental Reimbursement. In the United States, a significant percentage of the patients who receive our intraocular lenses are covered by the federal Medicare program. When a cataract extraction with intraocular lens

65


implantation is performed in an ambulatory surgery center, Medicare provides the ambulatory surgery center with a fixed facility fee that includes a recommended $150 allowance to cover the cost of the intraocular lens. After the Centers for Medicare and Medicaid Services, or CMS (formerly the Health Care Financing Administration), awarded “new technology intraocular lens” status to our ARRAY multifocal intraocular lens in 2000, the reimbursement rate for our ARRAY multifocal intraocular lenses implanted in ambulatory surgery centers increased to $200 until May 2005. When the procedure is performed in a hospital outpatient department, the hospital’s reimbursement is determined using a complex formula that blends the hospital’s costs with the $150 allowance paid to ambulatory surgery centers for intraocular lenses that are not “new technology intraocular lenses.” For the ARRAY multifocal intraocular lens, Medicare reimburses the hospital based on the actual acquisition cost of the intraocular lens by the hospital based on “pass-through” status. Pass-through payment algorithms are currently under review at CMS and may be subject to cut-backs due to Medicare budget constraints.
 
If implemented, price controls could materially and adversely affect our revenues and financial condition. We cannot predict the likelihood or pace of any significant legislative action in these areas, nor can we predict whether or in what form health care legislation being formulated by various governments will be passed. Medicare reimbursement rates are subject to change at any time. We also cannot predict with precision what effect such governmental measures would have if they were ultimately enacted into law. However, in general, we believe that legislative activity will likely continue, and the adoption of measures can have some impact on our business.
 
International Regulation. Internationally, the regulation of medical devices is also complex. In Europe, our products are subject to extensive regulatory requirements. The regulatory regime in the European Union for medical devices became mandatory in June 1998. It requires that medical devices may only be placed on the market if they do not compromise safety and health when properly installed, maintained and used in accordance with their intended purpose. National laws conforming to the European Union’s legislation regulate our intraocular lenses and contact lens care products under the medical devices regulatory system, rather than the more variable national requirements under which they were formerly regulated. The European Union medical device laws require manufacturers to declare that their products conform to the essential regulatory requirements after which the products may be placed on the market bearing the CE marking. The manufacturers’ quality systems for products in all but the lowest risk classification are also subject to certification and audit by an independent notified body. In Europe, particular emphasis is being placed on more sophisticated and faster procedures for the reporting of adverse events to the competent authorities.
 
In Japan, the regulatory process is equally complex. Premarketing approval and clinical studies are required, as is governmental pricing approval for medical devices. Clinical studies are subject to a stringent “Good Clinical Practices” standard. Approval time frames from the Japanese Ministry, Health, Labor and Welfare (MHLW) vary from simple notifications to review periods of one or more years, depending on the complexity and risk level of the device. In addition, importation into Japan of medical devices is subject to “Good Import Practices” regulations. As with any highly regulated market, significant changes in regulatory environment could adversely affect future sales.
 
In many of the other foreign countries in which we market our products, we are subject to regulations affecting, among other things:
 
 
product standards;
 
 
packaging requirements;
 
 
labeling requirements;
 
 
quality system requirements;
 
 
import restrictions;

66


 
 
tariff regulations;
 
 
duties; and
 
 
tax requirements.
 
Many of the regulations applicable to our devices and products in these countries are similar to those of the Food and Drug Administration. In many countries, the national health or social security organizations require our products to be qualified before they can be marketed with the benefit of reimbursement eligibility. To date, we have not experienced difficulty in complying with these regulations.
 
Fraud and Abuse. We are subject to various federal and state laws pertaining to health care fraud and abuse, including anti-kickback laws and physician self-referral laws. Violations of these laws are punishable by criminal and/or civil sanctions, including, in some instances, imprisonment and exclusion from participation in federal and state health care programs, including Medicare, Medicaid, VA health programs and TRICARE. We believe that our operations are in material compliance with such laws. However, because of the far-reaching nature of these laws, we cannot assure you that we would not be required to alter one or more of our practices to be in compliance with these laws. In addition, we cannot assure you that the occurrence of one or more violations of these laws would not result in a material adverse effect on our financial condition and results of operations.
 
Anti-Kickback Laws. Our operations are subject to federal and state anti-kickback laws. Provisions of the Social Security Act, commonly known as the “Anti-Kickback Law,” prohibit entities, such as our company, from knowingly and willfully offering, paying, soliciting or receiving any form of remuneration in return for, or to induce:
 
 
the referral of persons eligible for benefits under a federal health care program, including Medicare, Medicaid, the VA health programs and TRICARE, or a state health program; or
 
 
the recommendation, arrangement, purchase, lease or order of items or services that are covered, in whole or in part, by a federal health care program or state health programs.
 
The Anti-Kickback Law may be violated when even one purpose, as opposed to a primary or sole purpose, of a payment is to induce referrals or other business. Federal Regulations create a small number of “safe harbors.” Practices which meet all the criteria of an applicable safe harbor will not be deemed to violate the statute; practices that do not satisfy all elements of a safe harbor do not necessarily violate the statute, although such practices may be subject to scrutiny by enforcement agencies.
 
Violation of the Anti-Kickback Law is a felony, punishable by fines up to $25,000 per violation and imprisonment for up to five years. In addition, the Department of Health and Human Services may impose civil penalties and exclude violators from participation in Medicare or state health programs. Many states have adopted similar prohibitions against payments intended to induce referrals to Medicaid and other third party payor patients that vary in scope and may apply regardless of whether a federal health care program is involved.
 
Environmental Matters
 
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 to the air, water and land, the handling, storage and disposal of wastes and the cleanup of properties affected by pollutants. We believe we are currently in material compliance with such requirements and do not currently anticipate any material adverse effect on our business or financial condition as a result of our efforts to comply with such requirements.
 
In the future, federal, state or local governments in the United States or foreign countries could enact new or more stringent laws or issue new or more stringent regulations concerning environmental and worker health and

67


safety matters that could affect our operations. Also, in the future, contamination may be found to exist at our current or former facilities or off-site locations where we have sent wastes. We could be held liable for such newly-discovered contamination which could have a material adverse effect on our business or financial condition. In addition, changes in environmental and worker health and safety requirements could have a material effect on our business or financial condition.
 
Competition
 
The markets for our ophthalmic surgical device and contact lens care products are intensely competitive and are subject to rapid and significant technological change. Companies within the ophthalmic surgical device market compete on technological leadership and innovation, quality and efficacy of products, relationships with eye care professionals and health care providers, breadth and depth of product offering and pricing. Companies within the contact lens care market compete primarily on recommendations from eye care professionals, customer brand loyalty, product quality and pricing. We have numerous competitors in the United States and abroad, including, among others, large companies such as Alcon, Inc., a subsidiary of Nestle S.A.; Bausch & Lomb and its acquired businesses, Chiron Vision and Storz Ophthalmics; CIBA Vision Corporation, a unit of Novartis; Pharmacia Ophthalmics; Staar Surgical and Moria. 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 marketing capabilities than we do. In addition, the medical technology and device industry continues to experience consolidation, resulting in larger, more diversified companies than us. Among other things, these consolidated companies can spread their research and development costs over much broader revenue bases than we can and can influence customer and distributor buying decisions. Our inability to produce and develop products that compete effectively against those of our competitors could result in a material reduction in sales.
 
Patents, Trademarks and Other Intellectual Property
 
Patents and other proprietary rights are important to the success of our business. We also rely upon trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain our competitive position. We protect our proprietary rights through a variety of methods, including confidentiality agreements and proprietary information agreements with vendors, employees, consultants and others who have access to our proprietary information.
 
We own approximately 1,100 issued patents and 430 pending patent applications that relate to aspects of the technology incorporated in many of our products. The scope and duration of our proprietary protection varies throughout the world by jurisdiction and by individual product. In particular, patents for individual products extend for varying periods of time according to the date a patent application is filed, the date a patent is granted and the term of patent protection available in the jurisdiction granting the patent. Our proprietary protection often affords us the opportunity to enhance our position in the marketplace by precluding our competitors from using or otherwise exploiting our technology.
 
We believe trademark protection is particularly important to the maintenance of the recognized brand names under which we market our products. The scope and duration of our trademark protection varies throughout the world, with some countries protecting trademarks only as long as the mark is used, and others requiring registration of the mark and the payment of registration fees. We own or have rights to material trademarks or tradenames that we use in conjunction with the sale of our products, which include, among others, Advanced Medical Optics, Allervisc®, Amadeus, AMO®, Array®, Blink-n-Clean®, ClariFlex®, ComfortPLUS, Complete®, Consept F®, Consept 1 Step®, Diplomax®, Injector Ring, OptiEdge, Oxysept 1 Step®, PhacoFlex II® SI30NB®, SI40NB®, and SI55NB®, Prestige®, Sensar®, Sovereign®, The Unfolder®, Total Care®, UltraCare®, Ultrazyme®, Verisyse, Vitrax® and Whitestar. Generally, our products are marketed under one of these trademarks or tradenames. Prior to the spin-off, each of our products was marketed under its brand name and the Allergan name. Following the distribution, we continue to market each of our products under its brand name however, products produced after the distribution will, following a transition period, bear our name instead of the Allergan name.

68


 
We are also a party to several license agreements relating to various of our products; however, we do not believe the loss of any one license would materially affect our business.
 
We believe that our patents, trademarks and other proprietary rights are important to the development and conduct of our business and the marketing of our products. As a result, we aggressively protect our intellectual property. However, we do not believe that any one of our patents or trademarks is currently of material importance in relation to our overall sales.
 
Properties
 
Our principal executive offices are located in Santa Ana, California, in a facility subleased by us through July 2015. We conduct our global operations in facilities that we own or lease or that we occupy under the terms of our transitional services agreement with Allergan. We lease our primary research facilities, which are located in Irvine, California. Other facilities include administrative facilities in Australia, Canada, France, Germany, Hong Kong, Ireland, Italy, Spain and the United Kingdom; and two facilities in Japan, one used for administration and research and development and the other used for warehousing. We lease all of these facilities. In addition, we operate two manufacturing facilities: one in Añasco, Puerto Rico and one in Hangzhou, China, in each case where we own the facility but lease the land.
 
Under the terms of our transitional services agreement, we may continue to occupy certain Allergan facilities for a period of time, generally up to June 29, 2003, while we seek replacement facilities. We believe that our present facilities, including those Allergan facilities we occupy on a transitional basis, are sufficient for our needs during the term of the transitional services agreement. During the term of the transitional services agreement we plan to seek replacement facilities. We cannot assure you that we will be able to obtain suitable replacement facilities on terms acceptable to us, or at all.
 
Employees
 
We have approximately 2,100 employees worldwide. We believe that we generally have a good relationship with our employees and the unions and European workers councils that represent them.
 
Legal Matters
 
While we are involved from time to time in litigation arising in the ordinary course of business, including product liability claims, we are not currently aware of any actions against us or Allergan relating to the optical medical device business that we believe would materially adversely affect our business, financial condition or results of operations. We may be subject to future litigation and infringement claims, which could cause us to incur significant expenses or prevent us from selling our products. We operate in an industry susceptible to significant product liability claims. Product liability claims may be asserted against us in the future arising out of events not known to us at the present time.
 
We are aware of several lawsuits currently pending against Allergan that relate to the specialty pharmaceutical business. Under the terms of the contribution and distribution agreement, Allergan agreed to assume responsibility for, and to indemnify us against, all current and future litigation relating to its retained businesses and we agreed to assume responsibility for, and to indemnify Allergan against, all current and future litigation related to the optical medical device business. For a more detailed explanation of this indemnification, please see “Arrangements with Allergan—Contribution and Distribution Agreement.”

69


 
ARRANGEMENTS WITH ALLERGAN
 
As a result of the distribution, we and Allergan operate independently of each other as separate public companies. Neither we nor Allergan have any beneficial stock ownership interest in the other. In connection with the distribution, we entered into a contribution and distribution agreement with Allergan that, together with other ancillary agreements with Allergan, have facilitated our separation from Allergan. These agreements continue to govern our relationship with Allergan subsequent to the distribution and provide for the allocation of employee benefits, tax and other liabilities and obligations. The material ancillary agreements include:
 
 
a transitional services agreement;
 
 
a manufacturing agreement;
 
 
an employee matters agreement; and
 
 
a tax sharing agreement.
 
The material agreements summarized below have been filed as exhibits to our registration statement of which this prospectus is a part. The following summaries are qualified in their entirety by reference to the full text of such agreements.
 
Contribution and Distribution Agreement
 
The contribution and distribution agreement governs the principal corporate transactions which were required to effect Allergan’s contribution of the optical medical device business to us, the subsequent distribution of our shares to Allergan’s stockholders and other agreements governing the relationship between Allergan and us.
 
The Contribution. To effect the contribution, Allergan transferred to us all of the assets and liabilities of the optical medical device business. All assets were transferred to us on an “as is,” “where is” basis. Generally, neither we nor Allergan made any representation or warranty as to:
 
 
the assets, business or liabilities transferred or assumed as part of the contribution;
 
 
any consents or approvals required in connection with the transfers;
 
 
the value or freedom from any security interests of any of the assets transferred;
 
 
the absence of any defenses or freedom from counterclaim with respect to any claim of either us or Allergan;
 
 
or the legal sufficiency of any assignment, document or instrument delivered to convey title to any asset transferred.
 
The parties are required to cooperate to effect any transfers contemplated by the contribution and distribution agreement that were not effected prior to the date of the distribution as promptly as practicable, and, pending any of these transfers, to hold any asset not so transferred in trust for the use and benefit of the party entitled to the asset, and to retain any liability not so transferred for the account of the other party by whom such liability is to be assumed.
 
The Distribution. In accordance with the contribution and distribution agreement, on June 29, 2002, Allergan distributed all of its shares of our common stock to its stockholders of record. As a result, we and Allergan became separate public companies and Allergan does not have any beneficial ownership interest in any of our stock.
 
Releases and Indemnification. The contribution and distribution agreement provides for:
 
 
a release from Allergan and its affiliates to us and our affiliates; and

70


 
 
a release from us and our affiliates to Allergan and its affiliates of all liabilities existing or arising from all acts and events occurring before the distribution. The liabilities released or discharged do not include liabilities arising under or assigned by the contribution and distribution agreement or any ancillary agreement.
 
We have agreed to indemnify Allergan, each of its affiliates and each of its and their respective directors, officers and employees, from all liabilities relating to:
 
 
our failure, the failure of any of our affiliates or the failure of any other person to promptly discharge any liabilities or obligations under any contracts associated with the optical medical device business;
 
 
the optical medical device business and the contributed assets or liabilities; and
 
 
any material breach by us or any of our affiliates of the contribution and distribution agreement or any of the other ancillary agreements.
 
Allergan has agreed to indemnify us, each of our affiliates and each of our and their respective directors, officers and employees from all liabilities relating to:
 
 
Allergan’s failure, the failure of any affiliate of Allergan, or the failure of any other person to promptly discharge any liabilities of Allergan or its affiliates, other than liabilities assumed by us in the contribution and distribution agreement;
 
 
the businesses retained by Allergan or any liability of Allergan or its affiliates, other than liabilities associated with the contribution of the optical medical device business; and
 
 
any material breach by Allergan or any of its affiliates of the contribution and distribution agreement or any of the other ancillary agreements.
 
The contribution and distribution agreement also specifies procedures with respect to third-party claims subject to indemnification and related matters.
 
Contingent Liabilities and Contingent Gains. The contribution and distribution agreement provides that we and Allergan will indemnify each other with respect to contingent liabilities relating to our respective businesses or otherwise assigned to each of us, subject to the sharing between us and Allergan of:
 
 
any contingent liabilities that do not primarily relate to any business of Allergan or to our business; and
 
 
specifically identified liabilities, other than taxes, which are dealt with in the tax sharing agreement.
 
Allergan will assume the defense of, and may seek to settle or compromise, any third-party claim that is a shared contingent liability, and those costs and expenses will be included in the amount to be shared by us and Allergan.
 
The contribution and distribution agreement provides that we have the exclusive right to any benefit received with respect to any contingent gain that primarily relates to our business or that is expressly assigned to us and Allergan has the exclusive right to any benefit received with respect to any contingent gain that primarily relates to its business or that is expressly assigned to it.
 
Information and Confidentiality. The contribution and distribution agreement provides that we and Allergan will provide one another with such information relating to our respective businesses as the other party reasonably needs. We and Allergan also agree to hold such information confidential and not to disclose it to any other person or entity, except as provided in the contribution and distribution agreement.
 
Dispute Resolution. The contribution and distribution agreement contains provisions that govern, except as otherwise provided in any ancillary agreement, the resolution of disputes, controversies or claims that may arise

71


between us and Allergan. These provisions contemplate that we and Allergan will attempt to resolve disputes, controversies and claims by escalation of the matter to senior management or other mutually agreed representatives of us and Allergan. If such efforts are not successful, either we or Allergan may submit the dispute, controversy or claim to non-binding mediation, subject to the provisions of the contribution and distribution agreement. If the dispute is not resolved through mediation, the contribution and distribution agreement calls for the submission of the matter to binding arbitration.
 
Non-Competition and Non-Solicitation. The contribution and distribution agreement prohibits us and Allergan from engaging in the other’s lines of business, or from acquiring a joint venture or equity interest in any entity that engages in the other’s line of business prior to June 29, 2005. This prohibition on competition will cease to apply upon the occurrence of certain “change in control” transactions or certain merger transactions involving us or Allergan.
 
The contribution and distribution agreement also prohibits both us and Allergan from soliciting or recruiting the other party’s employees for a period of three years following the distribution date, except as a result of an employee’s response to a general recruitment effort carried out through a public or general solicitation.
 
Expenses. Except as expressly set forth in the contribution and distribution agreement or in any other ancillary agreement, all third party fees and expenses paid or incurred in connection with the distribution were paid by Allergan.
 
Amendments and Waivers. No provisions of the contribution and distribution agreement or any ancillary agreement can be waived, amended or supplemented by any party, unless the waiver, amendment or supplement is given in writing and signed by the authorized representative against whom it is sought to enforce the waiver, amendment or supplement.
 
Further Assurances. In addition to the actions specifically provided for elsewhere in the contribution and distribution agreement, both we and Allergan have agreed to use our reasonable efforts to take all actions reasonably necessary or advisable to consummate and make effective the transactions contemplated by the contribution and distribution agreement and the ancillary agreements.
 
Transitional Services Agreement
 
On June 24, 2002, we entered into a transitional services agreement with Allergan. Under this agreement, Allergan provides to us, on a transitional basis, various services including:
 
 
facilities subleases;
 
 
access to research and development facilities and services;
 
 
general accounting, order entry, accounts receivable, travel, payroll and customer service;
 
 
operational support;
 
 
information technology services;
 
 
legal support services;
 
 
regulatory support services;
 
 
retail channel support; and
 
 
product promotion and distribution services.
 
We also agreed to provide to Allergan in specified foreign countries, on a transitional basis, various services including:
 
 
facilities subleases;

72


 
 
retail channel support;
 
 
general administrative and facilities support services; and
 
 
general accounting, order entry, accounts receivable, payroll and customer services.
 
The agreed upon charges for these services are generally intended to allow the provider of the service to recover fully the allocated costs of providing the services, except that retail channel support will be provided on a commission basis. We believe the terms and conditions of the transitional services agreement are no less favorable to us than those we could have obtained by negotiating at arms-length with an independent third party.
 
In general, the transitional services commenced on the distribution date and expires no later than June 29, 2003. Some of the services relating to research and development and facilities, however, will be provided to us for up to three years following the distribution date. We may terminate the agreement with respect to one or more of those services upon prior written notice.
 
Manufacturing Agreement
 
On June 24, 2002, we and Allergan entered into a manufacturing agreement pursuant to which Allergan will manufacture contact lens care products for us. Under this manufacturing agreement, Allergan will also manufacture our ophthalmic surgical product, VITRAX. The manufacturing agreement terminates on June 29, 2005. However, if we are able to either build and obtain regulatory approval for new facilities or locate and obtain regulatory approval for third-party manufacturers to produce our products in these locations prior to the manufacturing agreement’s termination, we may elect to terminate the manufacturing agreement at such earlier time. We have agreed to pay Allergan for these manufacturing services at a rate that will allow Allergan to recover its fully allocated costs, plus 10%. We believe that the terms and conditions of the manufacturing agreement are no less favorable to us than those we could have obtained by negotiating at arms-length with an independent third party.
 
Employee Matters Agreement
 
On June 24, 2002, we and Allergan entered into an employee matters agreement to allocate liabilities and responsibilities relating to employee compensation, benefits plans and programs and other related matters. Pursuant to the employee matters agreement, as of June 29, 2002, we generally assumed liability for all wages, salaries, welfare benefits, incentive compensation and other employee-related obligations and liabilities for all employees of Allergan (and their beneficiaries and dependents) that became our employees in connection with the distribution, except as specifically provided in the employee matters agreement.
 
After June 29, 2002, our employees generally ceased to be eligible to receive benefits under the Allergan employee benefit plans and transitioned to the benefits offered under our plans. In general, we credited each of our employees with his or her service with Allergan for purposes of determining eligibility to participate, eligibility for benefits, forms of benefits and vesting under our plans.
 
Contingent Liabilities. The employee matters agreement provides that we and Allergan share contingent liabilities (including worker’s compensation claims) that relate to events or circumstances occurring before the distribution relating to current and former Allergan employees and our employees. Allergan assumed the defense of, and may seek to settle or compromise, any third-party claim that is such a shared contingent liability, and those costs and expenses are included in the amount to be shared by us and Allergan.
 
401 (k) Plan and ESOP. We assumed responsibility for all benefits accrued by our employees under the Allergan 401 (k) and employee stock ownership plans before the distribution, and Allergan caused the accounts of our employees under these plans to be transferred to the trustee of our 401 (k) plan.

73


 
Bonus Plans. Allergan maintained bonus plans for our employees during the period in 2002 preceding the distribution and transferred any amounts earned by our employees under Allergan’s bonus plans to us to be paid to those employees at the appropriate time.
 
Executive Deferred Compensation Plan. We assumed responsibility for all benefits accrued by our employees under the Allergan executive deferred compensation plan before the distribution, and Allergan caused the accounts of our employees under the Allergan executive deferred compensation plan to be transferred to the trustee of our executive deferred compensation plan.
 
Defined Benefit Pension Plan and Supplemental Executive Retirement Plans. Allergan retained full responsibility for any benefits accrued by our employees under Allergan’s pension plan and Allergan’s two supplemental executive retirement plans. Our employees are fully vested in their accrued benefits in Allergan’s pension plan and Allergan’s two supplemental executive retirement plans and are also treated as having terminated employment for purposes of entitlement to benefit distributions under the Allergan pension plan and the Allergan supplemental executive retirement plans.
 
Health Benefits. Allergan retained financial and administrative liability for all claims incurred but not reported by our employees (or their covered dependents) under Allergan’s group health plan before the distribution date. Allergan retained the obligation to provide post-retirement health and life benefits to any of our employees that have retired or are eligible to receive these benefits as of the distribution date for so long as Allergan maintains those programs for its employees.
 
Treatment of Allergan Options. The employee matters agreement also addressed the treatment of unvested outstanding options to acquire Allergan stock held by our employees. Unvested options issued under the Allergan, Inc. 1989 Incentive Compensation Plan to Allergan employees who became our employees were cancelled and reissued under our 2002 Incentive Compensation Plan as options to acquire our common stock. The reissued options retained approximately the same economic value as the related cancelled options. The number of shares purchasable under each reissued option granted to our employees was determined by multiplying the number of shares of Allergan common stock that were subject to such employee’s cancelled stock option by a conversion ratio. The conversion ratio was calculated by dividing the closing price of Allergan’s common stock reported on the New York Stock Exchange on the trading day prior to the distribution date, which occurred on a Saturday, by the closing price of our common stock in the “when issued” trading market on that same day. Fractional shares were rounded down to the nearest whole number of shares. The exercise price of these reissued options was determined by dividing the exercise price of the cancelled option by the conversion ratio, rounded up to the nearest whole cent. The aggregate intrinsic value of the options that were converted at the time of the distribution remained approximately the same and the ratio of the relevant exercise price per share to the market value per share was not reduced. To the extent the intrinsic value of the reissued options was less than the intrinsic value of the cancelled options, Allergan did not pay the difference to the option holder in cash. All other terms and conditions of the converted stock options remained substantially the same as those in effect prior to the distribution.
 
Tax Sharing Agreement
 
On June 24, 2002, we entered into a tax sharing agreement with Allergan which governs Allergan’s and our respective rights, responsibilities and obligations after the distribution with respect to taxes for any tax period ending before, on or after the distribution. Allergan generally is responsible for filing any tax and information returns required to be filed for Allergan’s business and our business for all tax periods ending on or before the distribution and for certain tax periods beginning on or before and ending after the date of the distribution. We will prepare and file all tax returns required to be filed by us for all tax periods beginning after the distribution and for certain tax periods beginning on or before and ending after the date of the distribution. Generally, Allergan will be liable for all predistribution taxes attributable to its business, and we generally will indemnify Allergan for all predistribution taxes attributable to our business for the current taxable year. In addition, the tax sharing agreement provides that Allergan is generally liable for taxes that are incurred as a result of restructuring activities undertaken to effectuate the distribution.

74


 
If there are tax adjustments related to us arising after the distribution date, which relate to a tax return filed by Allergan for a pre-distribution period, we generally are not responsible for any increased taxes, but we would also not receive the benefit of any tax refunds. In addition, we and Allergan agree to cooperate in any tax audits, litigation or appeals that involve, directly or indirectly, tax returns filed for predistribution periods and to provide information related to such periods. We have also agreed to indemnify Allergan for any tax liabilities resulting from our failure to pay any amounts due under the terms of the tax sharing agreement or for costs resulting from our negligence, if any, in providing accurate or complete information in the preparation of any tax return.
 
We and Allergan have made representations to each other, and we and Allergan have made representations to the Internal Revenue Service, in connection with the private letter ruling that Allergan has received regarding the tax-free nature of the distribution of our common stock by Allergan to its stockholders. The tax sharing agreement also provides that if either we or Allergan breach either our representations to each other or the representations to the Internal Revenue Service, or if we or Allergan take or fail to take, as the case may be, actions that result in the distribution failing to meet the requirements of a tax-free distribution pursuant to Section 355 of the Internal Revenue Code, the party in breach will indemnify the other party for any and all resulting taxes. In addition, we agreed that we will not enter into any transaction involving acquisitions of our stock or issuances of our stock for which there is any agreement, understanding, arrangement or substantial negotiations during the six month period following the distribution, nor will we enter into any transaction involving acquisitions of our stock or issuances of our stock during the two year period following the distribution which, in the aggregate, equal or exceed 15% of our outstanding stock, without, in either case:
 
 
a ruling from the Internal Revenue Service or an opinion from tax advisors that the proposed transaction will not cause the distribution to fail to meet the requirements of a tax-free distribution under Section 355(e) of the Internal Revenue Code; and
 
 
approval from Allergan of the proposed transaction.

75


MANAGEMENT
 
Our Directors and Executive Officers
 
Our board of directors is comprised of seven directors, divided into three classes. Dr. Link and Messrs. Mussallem and Pyott serve as Class I directors whose terms expire on the date of the 2003 annual meeting of stockholders. Messrs. Chavez and Grant serve as Class II directors whose terms expire on the date of the 2004 annual meeting of stockholders. Messrs. Mazzo and Rollans serve as Class III directors whose terms expire on the date of the 2005 annual meeting of stockholders.
 
The following table sets forth information as to persons who serve as our executive officers or directors as of July 31, 2002.
 
Name

  
Age

  
Position

  
Director Class

William R. Grant
  
77
  
Chairman of the Board
  
II
James V. Mazzo
  
45
  
President, Chief Executive Officer,
and Director
  
III
Max Akedo
  
56
  
President, Japan Region
  
Robert F. Gallagher
  
43
  
Vice President, Controller
  
Holger Heidrich, Ph.D.
  
49
  
Corporate Vice President and
President, Europe, Africa, Asia Pacific Region
  
Richard A. Meier
  
43
  
Corporate Vice President and Chief Financial Officer
  
Peter P. Nolan
  
47
  
Vice President, Operations
  
Jane E. Rady
  
54
  
Corporate Vice President, Strategy
and Technology
  
C. Russell Trenary, III
  
45
  
Corporate Vice President and
President, Americas Region
  
Aimee S. Weisner
  
33
  
Corporate Vice President, General
Counsel and Secretary
  
Christopher G. Chavez
  
46
  
Director
  
II
William J. Link, Ph.D.
  
56
  
Director
  
I
Michael A. Mussallem
  
49
  
Director
  
I
David E.I. Pyott
  
48
  
Director
  
I
James O. Rollans
  
60
  
Director
  
III
 
William R. Grant is the Chairman of the Board of Directors. He is a co-founder of Galen Associates, Inc., a venture capital firm in the health care industry, and has been its Chairman since 1989. Mr. Grant has over 40 years of experience in the investment banking and risk-capital fields, including substantial experience in the health care industry. Mr. Grant has been a Director of Allergan, Inc. since 1989 and currently serves as Chairman of the Allergan Board’s Organization and Compensation Committee and as a member of its Corporate Governance Committee. From 1987 to 1989 he was Chairman of New York Life International Investment, Inc. Mr. Grant is also a Director of Ocular Sciences, Inc., Vasogen Inc., Quest Diagnostics Incorporated and Massey Energy Company, as well as several private companies. He is a member of the General Electric Equity Advisory Board, Trustee of the Center for Blood Research (Harvard), and Trustee Emeritus of the Mary Flagler Cary Charitable Trust.

76


 
James V. Mazzo is our President, Chief Executive Officer and a member of our Board of Directors. Prior to the distribution, Mr. Mazzo served in various positions at Allergan, most recently as Allergan’s Corporate Vice President, and President, Surgical and CLCP Businesses. From April 1998 to January 2002, Mr. Mazzo was Allergan’s Corporate Vice President and President, Europe/Africa/Middle East Region. From January 2001 to January 2002, Mr. Mazzo also assumed the duties of President of Allergan’s Global Surgical Business, and from May 1998 to January 2001, he was the President of Global Lens Care Products for Allergan. From June 1997 to May 1998, he had been Senior Vice President, U.S. Eyecare/Rx Sales and Marketing, and prior to that he served 11 years in a variety of positions at Allergan, including Director, Marketing (Canada), Vice President and Managing Director (Italy) and Senior Vice President Northern Europe. Mr. Mazzo first joined Allergan in 1980.
 
Max Akedo is President and Representative Director of AMO Japan. Mr. Akedo had served as President and Representative Director of Allergan Japan from June 1999 until the spin-off. Prior to joining Allergan Japan, Mr. Akedo was General Manager of Novartis Consumer Health Japan since April 1997 and General Manager of Bristol Myers Squibb Lion KK since 1984.
 
Robert F. Gallagher has been our Vice President, Controller since February 2002. Mr. Gallagher has over 16 years of financial management experience in our industry. He previously served in a variety of positions at Bausch & Lomb and its acquired business, Chiron Vision, since 1995, most recently as Vice President, Finance of Bausch & Lomb’s Global Surgical Products business. From 1985 to 1995, Mr. Gallagher was employed by Allergan in various financial management positions of increasing responsibility, including Vice President, Controller for North East Asia and Controller for Puerto Rico operations.
 
Holger Heidrich, Ph.D. is our Corporate Vice President and President of our Europe, Africa, Asia Pacific region. Prior to joining us, Dr. Heidrich served as Senior Vice President and Head of Surgical Business of Allergan in the Europe/Africa/Middle East region from May 1998 to January 2002. From July 1996 to January 2002, Dr. Heidrich also assumed the duties of Head of Central Europe Area and Managing Director of Allergan Germany/ Austria. From 1990 to 1996, Dr. Heidrich was Director of the Contact Lens Care Division of Allergan in Central Europe. From 1986 to 1989, Dr. Heidrich served as Division Director, Pharmaceutical & Surgical, at Pharm-Allergan GmbH, an Allergan subsidiary. He joined Allergan in 1985 as Marketing & Sales Director for Germany. Prior to joining Allergan, Dr. Heidrich held sales and marketing positions at Montedison Pharmaceutical and Ciba Geigy, and was Assistant Professor in Economics at the University Freiburg in Germany. Dr. Heidrich is a member of the Board of Directors of SIS, Surgical Instrument Systems, a Swiss company.
 
Richard A. Meier has served as our Corporate Vice President and Chief Financial Officer since April 2002. Prior to joining us, Mr. Meier was Executive Vice President and Chief Financial Officer of ICN Pharmaceuticals, Inc. Before joining ICN in 1998, Mr. Meier was a Senior Vice President with the investment banking firm of Schroder & Co. Inc., and from 1994 to 1996, he served as an Analyst at Salomon Smith Barney, Inc.
 
Peter P. Nolan has been our Vice President, Operations since May 2002. Prior to joining us, Mr. Nolan was employed by GN ReSound Corporation since 1994, where from 1998 to 2002 he held the position Senior Vice President, Global Operations. From 1996 to 1998, he was Vice President of Manufacturing, in addition to serving as General Manager of ReSound Ireland Ltd. From 1985 to 1994, Mr. Nolan held a number of management positions with Wang Laboratories Ireland B.V., including General Manager, Manufacturing Manager and Manager, European Software and Manufacturing Distribution Center. Prior to joining Wang Laboratories, Mr. Nolan held various manufacturing and materials management positions with Digital Equipment International B.V., Atari Ltd., Varian Instruments, Ltd., and Westinghouse Electronics Ltd.
 
Jane E. Rady has been our Corporate Vice President, Strategy and Technology since April 2002. Prior to joining us, Ms. Rady was a director and the Chief Executive Officer of Integrated Genomics, Inc. From 1984 to 2000, Ms. Rady was employed by G.D. Searle & Co./Monsanto in various capacities including President and General Manager of Searle’s international joint venture, Lorex Pharmaceuticals Ltd., Vice President of Corporate Licensing & Business Development, and Vice President of Strategic Planning.

77


 
C. Russell Trenary, III has been our Corporate Vice President and President, Americas since April 2002. From 1996 to 2001, Mr. Trenary was the President of Sunrise Technologies International, Inc., and from 1997 to 2001, he held the additional title of Chief Executive Officer. From 1995 to 1996, Mr. Trenary was Senior Vice President, Worldwide Sales and Marketing, of Vidamed, Inc. Mr. Trenary began his career in 1981 with American Hospital Supply Corporation, which was acquired by Allergan in 1986 and which was the basis of Allergan’s entering the ophthalmic surgical products business. While at Allergan from 1987 to 1995, Mr. Trenary held positions of increasing responsibility in the surgical products business, culminating as Senior Vice President and General Manager of AMO Surgical Products, a position he held from 1991 to 1995.
 
Aimee S. Weisner has been Corporate Vice President, General Counsel and Secretary of the Company since January 2002. Ms. Weisner also served as Vice President and Assistant General Counsel of Allergan from January through June 2002 and as an Assistant Secretary of Allergan from November 1998 to April 2002. Prior to January 2002, Ms. Weisner served as Corporate Counsel of Allergan, which she joined in 1998. From 1994 to 1998, Ms. Weisner was an attorney with the law firm of O’Melveny & Myers LLP.
 
Christopher G. Chavez joined Advanced Neuromodulation Systems as President, Chief Executive Officer and Director in April 1998. Prior to joining ANS, Mr. Chavez was Vice President of Worldwide Marketing and Strategic Planning for Eastman Kodak’s Health Imaging Division where the division’s five worldwide profit centers reported to him. From 1981 to 1997, Mr. Chavez was with Johnson & Johnson Medical, Inc., a major division of Johnson & Johnson. While with J&J, he progressed through several positions in finance, strategic planning, domestic and international marketing, new business development and general management. His most recent position was Vice President and General Manager of the Infection Prevention Business Unit, one of four worldwide business units with approximately one-half billion dollars in sales. Mr. Chavez received his MBA from the Harvard Graduate School of Business in 1979. Mr. Chavez currently serves on the board of directors of Medical Device Manufacturers Association, The Dallas/Fort Worth Health Industry Council and The North Texas Visiting Nurse Association.
 
William J. Link, Ph.D. is Managing Director and a co-founder of Versant Ventures, a venture capital firm located in Newport Beach, California investing in early-stage health care companies. Prior to co-founding Versant Ventures in 1999, Dr. Link was a general partner at Brentwood Venture Capital, where he invested in a number of early-stage companies, including C & C Vision, Endicor, FeRx, Genyx, IntraLase, IntraTherapeutics, Refractec and Theracardia. From 1986 to 1997, Dr. Link was Chairman and Chief Executive Officer of Chiron Vision, a subsidiary of Chiron Corporation founded by Dr. Link, which specialized in ophthalmic surgical products and which was later sold to Bausch and Lomb in late 1997. Prior to Chiron Vision, Dr. Link founded and served as President of American Medical Optics, a division of American Hospital Supply Corporation, which was sold to Allergan in 1986. Before entering the health care industry, Dr. Link was an assistant professor in the Department of Surgery at the Indiana University School of Medicine. Dr. Link earned his bachelor’s, master’s and doctorate degrees in mechanical engineering from Purdue University.
 
Michael A. Mussallem is the Chairman of the Board and Chief Executive Officer of Edwards Lifesciences Corporation, a position he has held since 2000, when Edwards Lifesciences was spun off from Baxter International, Inc. Mr. Mussallem joined Baxter in 1979 and was the Group Vice President of Baxter’s CardioVascular business from 1994 to 2000 and Group Vice President of Baxter’s Biopharmaceutical business from 1998 to 2000. Mr. Mussallem serves on the boards of AdvMed, the California Healthcare Institute, and World Heart Corporation, and is a member of the roundtable of the Keck Graduate Institute.
 
David E.I. Pyott has served as President and Chief Executive Officer of Allergan since January 1998. He has been a Director of Allergan since 1998 and Chairman since 2001. Previously, he was head of the Nutrition Division and a member of the Executive Committee of Novartis AG from 1995 until December 1997. From  1992 to 1995, Mr. Pyott was President and Chief Executive Officer of Sandoz Nutrition Corp., Minneapolis, Minnesota and General Manager of Sandoz Nutrition, Barcelona, Spain from 1990 to 1992. Prior to that,  Mr. Pyott held various positions within the Sandoz Nutrition group from 1980. He is a member of the Directors’

78


Board of the University of California (Irvine) Graduate School of Management and serves on their Executive Committee, Vice-Chair of the Chief Executive Roundtable for University of California (Irvine), is the President of the Pan-American Ophthalmological Foundation and a member of the Board of the Foundation of the American Academy of Ophthalmology. Mr. Pyott is also a member of the Board of the Pharmaceutical Research and Manufacturers of America (PhRMA), the Vice-Chairman of the California Healthcare Institute, and a member of the Board of Directors of Avery-Dennison Corporation, and Edwards Lifesciences Corporation.
 
James O. Rollans is Group Executive of Investor Relations and Corporate Communications for Fluor Corporation, where he is responsible for leading the company’s external affairs, including Investor Relations, Corporate Communications, Community and Government Relations functions. Prior to assuming this role in February 2002, Mr. Rollans served as Group Executive of Business Services (from February 2001). Joining Fluor in 1982, Mr. Rollans’ tenure with the company has included several positions at the senior executive level, including that of Senior Vice President and Chief Administrative Officer from 1994 to 1998; Senior Vice President and Chief Financial Officer from 1998 to 1999 and from 1992 to 1994; and Vice President of Corporate Communications from 1982 to 1992. He also served as the first President and Chief Executive Officer of Fluor Signature Services, the former business services enterprise of Fluor Corporation from 1999 to 2001.  Mr. Rollans is a member of the Fluor Corporation Board of Directors and serves on the boards of Flowserve Corporation, Cupertino Electric Inc., and the Irvine Regional Hospital and Medical Center.
 
Committees of the Board of Directors
 
We are managed under the direction of our board of directors. Our board of directors has established an Audit and Finance Committee, an Organization, Compensation and Corporate Governance Committee and a Science and Technology Committee.
 
Audit and Finance Committee. The Audit and Finance Committee is comprised of Dr. Link and  Messrs. Rollans, Grant and Mussallem. The functions of this committee include:
 
 
meeting with our management periodically to consider the adequacy of our internal controls and the objectivity of our financial reporting;
 
 
recommending to our board of directors the appointment of the independent auditors and reviewing the independence and fees of such independent auditors;
 
 
meeting with the independent auditors and reviewing the scope and significant findings of the audits performed by them, and meeting with internal financial personnel regarding these matters; and
 
 
reviewing our financing plans, the adequacy and sufficiency of our financial and accounting controls, practices and procedures, the activities and recommendations of our auditors and our reporting policies and practices, and reporting recommendations to our full board of directors for approval.
 
Our independent auditors and our internal financial personnel have regular private meetings and unrestricted access with this committee.
 
Organization, Compensation and Corporate Governance Committee. Our Organization, Compensation and Corporate Governance Committee is comprised of Messrs. Mussallem, Chavez, Grant and Rollans. The functions of this committee include:
 
 
reviewing and approving our corporate organizational structure;
 
 
reviewing the performance of corporate officers;
 
 
establishing overall employee compensation policies and recommending to our board major compensation programs;

79


 
 
reviewing and approving the compensation of our corporate officers, including salary and bonus awards;
 
 
administering our various employee benefit and equity incentive programs; and
 
 
evaluating the size and composition of our board of directors, reviewing the performance of existing directors and recommending to our board qualified candidates for election to our board of directors.
 
Science and Technology Committee. Our Science and Technology Committee is comprised of Dr. Link and Messrs. Chavez, Mazzo and Pyott. The functions of this committee include reviewing our research and development programs and projects to evaluate investment allocations, our portfolio of strategic patents and major technology-based transactions.
 
Director Compensation
 
Our non-employee directors receive an annual cash retainer of $24,000 and an additional nominal fee of:
 
 
$1,200 for attending each board meeting,
 
 
$1,000 for each committee member attending a committee meeting, and
 
 
$1,200 for each committee chairperson presiding over a committee meeting.
 
Additionally, our non-employee directors are entitled to participate in our incentive compensation plan, receiving 20,000 options upon initial election and 6,500 options per year thereafter.
 
Our Chairman of the Board receives an annual cash retainer of $150,000 and meeting fees as set forth above. The Chairman, as a non-employee director, also received an initial stock option grant of options to purchase 40,000 shares of our common stock, and will receive options to purchase 13,000 shares annually thereafter.
 
Executive Compensation
 
The Organization, Compensation and Corporate Governance Committee is responsible for administering the compensation program for our executive officers. We were formed in October 2001. We did not have any employees nor pay any salaries in 2001. Although certain of the individuals who will be serving as our executive officers were performing services in connection with our businesses during the last fiscal year, those individuals were employed by Allergan during such period, were not dedicated exclusively to our businesses and, in fact, devoted substantial time and effort to other Allergan businesses or to the Allergan organization in general. Accordingly, no information on the compensation of executive officers during the last fiscal year is included. Our Annual Report on Form 10-K for fiscal year 2002 will contain information on compensation paid to our executive officers in fiscal year 2002.
 
Our executive compensation program is designed to attract, motivate and retain the executive talent needed to optimize stockholder value in a competitive environment. Our executive compensation program is designed to provide:
 
 
levels of base compensation that are competitive with comparable optical medical device companies;
 
 
annual incentive compensation that varies in a consistent manner with the achievement of individual and financial performance objectives; and
 
 
long-term incentive compensation that focuses executive efforts on building stockholder value through meeting longer-term financial and strategic goals.
 
In designing and administering our executive compensation program, we attempt to strike an appropriate balance among these various elements.

80


 
Base Salary. Base salary is determined by an assessment of sustained performance against individual job responsibilities and includes, where appropriate, an analysis of the impact of the executive’s performance on our business results, the executive’s current salary in relation to the salary range designated for the job and the executive’s potential for advancement.
 
Annual Incentives. Payments under our 2002 Bonus Plan are tied to both corporate objectives (establishing a direct link between the executive’s pay and our financial success) and individual objectives. Achievement of corporate objectives determine the funding of the plan and are measured by pre-established financial performance targets. The bonus pool will be funded at 100% if the financial performance target is achieved, and the bonus pool is automatically adjusted if the actual performance surpasses or falls below the financial performance target. Once funded, the bonus pool is allocated to our business units based on each unit’s respective results.
 
Achievement of individual objectives determines the amount of the bonus pool awarded to individual executives and may include factors such as financial targets, identifying and pursuing new business opportunities, obtaining regulatory approvals for new products as well as new indications for existing products, introducing new products into designated markets and identifying and implementing cost reduction measures. This information is considered in an evaluation of overall performance for purposes of determining the actual bonus paid.
 
Long-term Incentives. Our long-term incentives are primarily in the form of stock option awards. However, restricted stock may also be granted on a selected basis to attract, retain and motivate key executives critical to our long-term success. In addition, performance units and performance shares may also be granted in the future to further align executive compensation with our financial success. The objective of these awards is to advance our longer-term interests and those of our stockholders and to complement incentives tied to annual performance. These awards will provide rewards to executives based upon the creation of incremental stockholder value.
 
Stock options will only produce value to executives if the price of our stock appreciates, thereby directly linking the interests of executives with those of stockholders. The number of stock options granted is based on the level of an executive’s position, the executive’s performance in the prior year and the executive’s potential for continued sustained contributions to our success. In order to preserve the linkage between the interests of executives and those of stockholders, the executives are expected to use the shares obtained on the exercise of their stock options, after satisfying the cost of exercise and taxes, to establish a significant level of direct ownership.
 
Employment Agreements
 
We entered into an employment agreement with our President and Chief Executive Officer, Mr. Mazzo on January 18, 2002.
 
Position and Base Salary. Mr. Mazzo’s employment agreement provides that he will serve as our President and Chief Executive Officer and will receive an annual base salary of $450,000, which amount will be reviewed at least annually and may be adjusted from time to time by our board of directors. Mr. Mazzo will also serve as a member of our board of directors. While he will not be paid a fee for his service as a director, we will reimburse him for his reasonable expenses incurred in his service as a director.
 
Term. The term of Mr. Mazzo’s employment agreement is for three years commencing on June 29, 2002 and may be automatically extended for successive one-year terms unless either party to the agreement elects in writing not to extend the term.

81


 
Termination by Us Without Cause or by Mr. Mazzo for Good Reason. In the event that Mr. Mazzo is terminated by us other than for “cause,” or if Mr. Mazzo terminates his employment for “good reason,” Mr. Mazzo will receive severance pay that includes:
 
 
a prorated portion of Mr. Mazzo’s targeted annual bonus;
 
 
an amount representing Mr. Mazzo’s unused accrued vacation time (at his base salary rate) through the date of termination;
 
 
continued medical and other welfare plan coverage for Mr. Mazzo and his eligible dependents for twelve months;
 
 
a severance payment calculated by multiplying Mr. Mazzo’s annual compensation by three. For the purposes of this severance payment calculation, Mr. Mazzo’s annual compensation is defined as the sum of (i) the higher of his then-current base salary or his highest annual salary within the five year period ending at the time of his termination plus (ii) a management bonus increment, which is equal to the higher of 100% of his then-current annual target bonus rate or the average of the two highest of the last five bonuses paid by us to Mr. Mazzo.
 
The employment agreement defines “cause” to include among other things, the conviction of Mr. Mazzo of any felony involving an act of moral turpitude or his material misconduct or refusal to comply with the written instructions of our board of directors. The employment agreement also defines “good reason” to include any material change in Mr. Mazzo’s duties or the material reduction or adverse modification of Mr. Mazzo’s compensation.
 
Change of Control. In the event Mr. Mazzo’s employment is terminated by us without cause, or by him for good reason, 120 days prior to or within two years after a change in control event occurs, the employment agreement provides that all of Mr. Mazzo’s stock options, incentive compensation awards and restricted stock that are outstanding at the time of the termination will immediately become fully exercisable, payable or free from restrictions, respectively. The applicable exercise period for any stock option or other award will continue for the length of the exercise period specified in the grant of the award as determined without regard to Mr. Mazzo’s termination of employment. Mr. Mazzo will also be allowed to continue to participate for three years following his termination in all of our employee benefit plans that were available to him before termination. A change of control is defined in Mr. Mazzo’s employment agreement as any of the following transactions:
 
 
the acquisition by any person or entity of 20% or more of the combined voting power of our company if such acquisition has not been approved in advance, or within 30 days after the acquisition, by a majority of our board of directors;
 
 
the acquisition by any person or entity of 33% or more of the combined voting power of our company, regardless of whether our board of directors has approved the acquisition;
 
 
individuals who comprise our board of directors at the time of the distribution, or individuals subsequently nominated as directors by a majority of those original directors and their successors, cease for any reason to constitute at least a majority of our board of directors;
 
 
our consummation of a merger, consolidation or reorganization, unless holders of our voting securities continue to hold at least 55% of the voting power in the surviving company and no person or entity becomes the owner of 20% or more of the combined voting power of our outstanding securities; or
 
 
the approval by our stockholders of a plan of complete liquidation or an agreement for the sale or transfer of all or substantially all of our assets.
 
Restrictive Covenants. Mr. Mazzo has agreed not to disclose our confidential information to any other person or entity for a period of five years or to solicit any of our employees for a period of two years.

82


 
Repatriation. We have agreed to repatriate Mr. Mazzo and his household from the United Kingdom. As part of his repatriation, we will pay the travel and moving costs associated with moving his household to California, as well as any temporary living expenses incurred while Mr. Mazzo establishes a permanent residence in California. To further assist in his repatriation, we have also agreed to pay Mr. Mazzo a tax-free allowance equal to one month’s salary and to provide him a five-year, interest free relocation loan of up to $500,000.
 
Excise Tax Gross-Up. In the event that any payment or benefits Mr. Mazzo receives pursuant to the employment agreement is deemed to constitute an “excess parachute payment” under Section 280G of the Internal Revenue Code, he is entitled to an excise tax gross-up payment to the full extent of his corresponding excise tax liability.

83


OWNERSHIP OF OUR STOCK
 
The following table sets forth information with respect to the beneficial ownership of our outstanding common stock, as of July 22, 2002, by:
 
 
each person who is known by us to be the beneficial owner of 5% or more of our common stock;
 
 
each of our directors and our Chief Executive Officer; and
 
 
all of our directors and executive officers as a group.
 
Beneficial Owner (1)

    
Shares of Common Stock Beneficially Owned (2)

      
Percent of Class

 
Putnam Investments, LLC
One Post Office Square
Boston, MA 02109
    
2,891,842
(3)
    
10.07
%
FMR Corp.
82 Devonshire Street
Boston, MA 02109
    
2,779,543
(4)
    
9.68
%
William R. Grant
    
7,826
 
    
*
 
David E.I. Pyott
    
10,196
 
    
*
 
James V. Mazzo
    
3,156
 
    
*
 
Christopher G. Chavez
    
 
    
*
 
William J. Link
    
 
    
*
 
Michael A. Mussallem
    
 
    
*
 
James A. Rollans
    
 
    
*
 
All current directors and executive officers (15 persons, including those named above)
    
21,687
 
        

      *Less than 1%
(1)
Unless otherwise indicated, the business address of each stockholder is c/o Advanced Medical Optics, Inc., 1700 E. St. Andrew Place, Santa Ana, California 92799-5162.
(2)
Beneficial ownership is calculated based on 28,723,512 shares of our common stock outstanding as of July 22, 2002. Beneficial ownership is determined in accordance with Securities and Exchange Commission rules. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options held by that person that are exercisable within 60 days of July 22, 2002 are deemed outstanding. Such shares, however, are not deemed outstanding for the purpose of computing the percentage of each other person. To our knowledge, except pursuant to applicable community property laws or as otherwise indicated, each person named in the table has the sole voting and investment power with respect to the shares set forth opposite such person’s name.
(3)
Based on application of the 1-for-4.5 distribution ratio to shares of Allergan common stock as reported in an amended Schedule 13G, dated February 5, 2002, filed with the Securities and Exchange Commission by Putnam Investments, LLC (“PI”), on behalf of itself and the following affiliated entities: Marsh & McLennan Companies, Inc. (“M&MC”), PI’s parent holding company, Putnam Investment Management, LLC (“PIM”) and The Putnam Advisory Company, LLC (“PAC”), both of which are investment advisors and subsidiaries of PI. Based on this filing, M&MC owns no shares of our stock. PIM is deemed to be the owner of 2,375,960 shares, over which it has shared power to dispose or to direct the disposition of all of such shares, but over which it has no voting power. PAC is deemed to be the owner of 515,881 shares, over which it has shared power to dispose or to direct the disposition of all of such shares and shared power to

84


 
vote or to direct the vote of 339,558 of such shares. PI is deemed to be the owner of all of PIM’s and PAC’s shares, has shared power to dispose or to direct the disposition of all of such shares, and has shared power to vote or to direct the vote of 339,558 of such shares. All share references herein refer to shares of our common stock.
(4)
Based on application of the 1-for-4.5 distribution ratio to shares of Allergan common stock as reported in an amended Schedule 13G, dated February 14, 2002, filed with the Securities and Exchange Commission by FMR Corp. (“FMR”) on behalf of itself and affiliated persons and entities. The affiliated persons and entities include Fidelity Management & Research Company (“FMRC”), a wholly-owned subsidiary of FMR, Edward C. Johnson 3d, Chairman of FMR, Fidelity Management Trust Company (“FMTC”), a wholly-owned subsidiary of FMR, Abigail P. Johnson, a Director of FMR, Fidelity International Limited (“FIL”), a former subsidiary of FMRC that currently operates as an entity independent of FMR and FMRC, and Strategic Advisers, Inc., a wholly-owned subsidiary of FMR. Based on such filing, FMRC, as a result of acting as investment advisor to various investment companies, owns 2,482,980 shares, FMTC, as a result of serving as investment manager of institutional accounts, owns 206,362 shares, Ms. Johnson owns 222 shares, FIL owns 89,919 shares and Strategic Advisers owns 59 shares. Both Mr. Johnson and FMR, through its control of FMRC and FMTC, have sole dispositive power over both FMRC’s 2,482,980 shares and FMTC’s 206,362 shares, and sole voting power over 164,096 of FMTC’s shares. Neither FMR nor Mr. Johnson has the sole power to vote or to direct the voting of any of FMRC’s shares; FMRC carries out the voting of shares under written guidelines established by the Fidelity Funds’ Boards of Trustees. Ms. Johnson has sole voting and dispositive power over her 222 shares and FIL has sole voting and dispositive power over its 89,919 shares. All share references herein refer to shares of our common stock.
 
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
Following the distribution, we will have a continuing relationship with Allergan as a result of the agreements we are entering into in connection with the distribution, including the contribution and distribution agreement, the transitional services agreement, the manufacturing agreement, the employee matters agreement and the tax sharing agreement. We believe the charges for services under both the transitional services agreement and the manufacturing agreement will be no less favorable to us than those we could have obtained by negotiating these agreements at arms-length with an independent third party. For a detailed discussion of each of these agreements, please see “Arrangements with Allergan.”
 
Some of our officers and directors own shares of Allergan common stock and vested options to acquire additional shares of Allergan common stock. See “Ownership of Our Stock.” Additionally, some of our directors are former employees of Allergan, and will, in some instances, continue to be employed by or a director of Allergan. Ownership of Allergan common stock, including options to acquire Allergan common stock, or employment by Allergan of some of our directors, could create or appear to create conflicts of interest for such directors and officers when faced with decisions that could have disparate implications for Allergan and us. See “Risk Factors—Risks Relating to the Transactions—Many of our executive officers and some of our directors may have potential conflicts of interest because of their ownership of Allergan common stock and other ties to Allergan” and “Management.”
 
On May 13, 2002, in connection with his relocation from Europe to the United States, Allergan made an interest-free loan in the amount of $500,000 to James V. Mazzo, our President and Chief Executive Officer, to be used to purchase a residence in Orange County, California. Mr. Mazzo repaid the loan from Allergan with proceeds from an interest free loan of an equal amount made by us to Mr. Mazzo in connection with the spin-off. The loan is payable in full upon the earlier of five years or the date Mr. Mazzo ceases to be an employee of ours. As of June 29, 2002, the outstanding balance on the loan was $500,000. See “Management—Employment Agreements.”

85


 
THE EXCHANGE OFFER
 
Purpose and Effect
 
Concurrently with the sale of the old notes on June 20, 2002, we entered into a registration rights agreement with the initial purchasers of the old notes, which requires us to file the registration statement under the Securities Act with respect to the exchange notes and, upon the effectiveness of the registration statement, offer to the holders of the old notes the opportunity to exchange their old notes for a like principal amount of exchange notes. The exchange notes will be issued without a restrictive legend and generally may be reoffered and resold without registration under the Securities Act. The registration rights agreement further provides that we must cause the registration statement to be declared effective by November 17, 2002, and must consummate the exchange offer by January 1, 2003.
 
Except as described below, upon the completion of the exchange offer, our obligations with respect to the registration of the old notes and the exchange notes will terminate. A copy of the registration rights agreement has been filed as an exhibit to the registration statement of which this prospectus is a part, and this summary of the material provisions of the registration rights agreement does not purport to be complete and is qualified in its entirety by reference to the complete registration rights agreement. As a result of the timely filing and the effectiveness of the registration statement, we will not have to pay certain liquidated damages on the old notes provided in the registration rights agreement. Following the completion of the exchange offer, holders of old notes not tendered will not have any further registration rights other than as set forth in the paragraphs below, and the old notes will continue to be subject to certain restrictions on transfer. Additionally, the liquidity of the market for the old notes could be adversely affected upon consummation of the exchange offer.
 
In order to participate in the exchange offer, a holder must represent to us, among other things, that:
 
 
the exchange notes acquired pursuant to the exchange offer are being obtained in the ordinary course of business of the holder;
 
 
the holder is not engaging in and does not intend to engage in a distribution of the exchange notes;
 
 
the holder does not have an arrangement or understanding with any person to participate in the distribution of the exchange notes; and
 
 
the holder is not an “affiliate,” as defined under Rule 405 under the Securities Act, of ours.
 
Under certain circumstances specified in the registration rights agreement, we may be required to file a “shelf” registration statement for a continuous offer in connection with the old notes pursuant to Rule 415 under the Securities Act.
 
We are making the exchange offer in reliance on an interpretation by the SEC’s staff set forth in no-action letters issued to third parties unrelated to us. However, we have not sought our own interpretive letter and we can provide no assurance that the staff would make a similar determination with respect to the exchange offer as it has in interpretive letters to third parties. Based on these interpretations by the staff, we believe that, with the exceptions set forth below, exchange notes issued in the exchange offer may be offered for resale, resold and otherwise transferred by the holder of exchange notes without compliance with the registration and prospectus delivery requirements of the Securities Act, unless the holder:
 
 
is an “affiliate” of ours within the meaning of Rule 405 under the Securities Act;
 
 
is a broker-dealer who purchased old notes directly from us for resale under Rule 144A or any other available exemption under the Securities Act;
 
 
acquired the exchange notes other than in the ordinary course of the holder’s business; or
 
 
the holder has an arrangement with any person to engage in the distribution of the exchange notes.
 
Any holder who tenders in the exchange offer for the purpose of participating in a distribution of the exchange notes or any “affiliate” cannot rely on this interpretation by the SEC’s staff and must comply with the

86


registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction. Each broker-dealer that receives exchange notes for its own account in exchange for old notes, where such old notes were acquired by such broker-dealer as a result of market making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such exchange notes. See “Plan of Distribution.” Broker-dealers who acquired old notes directly from us and not as a result of market making activities or other trading activities may not rely on the staff’s interpretations discussed above or participate in the exchange offer, and must comply with the prospectus delivery requirements of the Securities Act in order to sell the old notes.
 
Terms of the Exchange Offer
 
Upon the terms and subject to the conditions set forth in this prospectus and in the letter of transmittal, we will accept any and all old notes validly tendered and not withdrawn prior to the expiration date. We will issue $1,000 in principal amount of exchange notes in exchange for each $1,000 principal amount of outstanding old notes accepted in the exchange offer. Holders may tender some or all of their old notes pursuant to the exchange offer. However, old notes may be tendered only in integral multiples of $1,000 in principal amount.
 
The exchange notes will evidence the same debt as the old notes and will be issued under the terms of, and entitled to the benefits of, the indenture relating to the old notes.
 
This prospectus, together with the letter of transmittal, is being sent to the registered holder and to others believed to have beneficial interests in the old notes. We intend to conduct the exchange offer in accordance with the applicable requirements of the Exchange Act and the rules and regulations of the SEC promulgated under the Exchange Act.
 
We will be deemed to have accepted validly tendered old notes when, as and if we have given oral or written notice thereof to The Bank of New York, the exchange agent. The exchange agent will act as agent for the tendering holders for the purpose of receiving the exchange notes from us. If any tendered old notes are not accepted for exchange because of an invalid tender, the occurrence of certain other events set forth under the heading “—Conditions to the Exchange Offer” or otherwise, certificates for any such unaccepted old notes will be returned, without expense, to the tendering holder of those old notes as promptly as practicable after the expiration date unless the exchange offer is extended.
 
Expiration Date; Extensions; Amendments
 
The expiration date shall be 5:00 p.m., New York City time, on                  , 2002, unless we, in our sole discretion, extend the exchange offer, in which case the expiration date shall be the latest date and time to which the exchange offer is extended. In order to extend the exchange offer, we will notify the exchange agent and each registered holder of any extension by oral or written notice prior to 9:00 a.m., New York City time, on the next business day after the previously scheduled expiration date. We reserve the right, in our sole discretion:
 
(A) to delay accepting any old notes, to extend the exchange offer or, if any of the conditions set forth under “—Conditions to Exchange Offer” shall not have been satisfied, to terminate the exchange offer, by giving oral or written notice of that delay, extension or termination to the exchange agent, or
 
(B) to amend the terms of the exchange offer in any manner.
 
In the event that we make a fundamental change to the terms of the exchange offer, we will file a post-effective amendment to the registration statement.
 
Procedures for Tendering Old Notes
 
Only a holder of old notes may tender the old notes in the exchange offer. Except as set forth under “—Book-Entry Transfer,” to tender in the exchange offer a holder must complete, sign and date the letter of transmittal, or a copy of the letter of transmittal, have the signatures on the letter of transmittal guaranteed if

87


required by the letter of transmittal and mail or otherwise deliver the letter of transmittal or copy to the exchange agent prior to the expiration date. In addition:
 
 
certificates for the old notes must be received by the exchange agent along with the letter of transmittal prior to the expiration date;
 
 
a timely confirmation of a book-entry transfer, a “book-entry confirmation”, of the old notes, if that procedure is available, into the exchange agent’s account at The Depository Trust Company, also referred to as the “DTC” or the “book-entry transfer facility”, following the procedure for book-entry transfer described below, must be received by the exchange agent prior to the expiration date; or
 
 
you must comply with the guaranteed delivery procedures described below.
 
To be tendered effectively, the letter of transmittal and other required documents must be received by the exchange agent at the address set forth under “—Exchange Agent” prior to the expiration date.
 
Your tender, if not withdrawn prior to the expiration date, will constitute an agreement between you and us in accordance with the terms and subject to the conditions set forth herein and in the letter of transmittal.
 
The method of delivery of old notes and the letter of transmittal and all other required documents to the exchange agent is at your election and risk. Instead of delivery by mail, it is recommended that you use an overnight or hand delivery service. In all cases, sufficient time should be allowed to assure delivery to the exchange agent before the expiration date. No letter of transmittal or old notes should be sent to us. You may request your broker, dealer, commercial bank, trust company or nominee to effect these transactions for you.
 
Any beneficial owner whose old notes are registered in the name of a broker, dealer, commercial bank, trust company, or other nominee and who wishes to tender should contact the registered holder promptly and instruct the registered holder to tender on the beneficial owner’s behalf. If the beneficial owner wishes to tender on its own behalf, the beneficial owner must, prior to completing and executing the letter of transmittal and delivering the owner’s old notes, either make appropriate arrangements to register ownership of the old notes in the beneficial owner’s name or obtain a properly completed bond power from the registered holder. The transfer of registered ownership may take considerable time.
 
Signatures on a letter of transmittal or a notice of withdrawal, as the case may be, must be guaranteed by an “eligible guarantor institution” that is a member of a recognized signature guarantee medallion program within the meaning of Rule 17Ad-15 under the Exchange Act unless old notes tendered pursuant thereto are tendered:
 
 
by a registered holder who has not completed the box entitled “Special Registration Instruction” or “Special Delivery Instructions” on the letter of transmittal; or
 
 
for the account of an eligible guarantor institution.
 
If the letter of transmittal is signed by a person other than the registered holder of any old notes listed in the letter of transmittal, the old notes must be endorsed or accompanied by a properly completed bond power, signed by the registered holder as that registered holder’s name appears on the old notes.
 
If the letter of transmittal or any old notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and evidence satisfactory to us of their authority to so act must be submitted with the letter of transmittal unless waived by us.
 
All questions as to the validity, form, eligibility, including time of receipt, acceptance, and withdrawal of tendered old notes will be determined by us in our sole discretion, which determination will be final and binding. We reserve the absolute right to reject any and all old notes not properly tendered or any old notes our acceptance

88


of which would, in the opinion of our counsel, be unlawful. We also reserve the right to waive any defects, irregularities or conditions of tender as to particular old notes. Our interpretation of the terms and conditions of the exchange offer, including the instructions in the letter of transmittal, will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of old notes must be cured within such time as we shall determine. Although we intend to notify holders of defects or irregularities with respect to tenders of old notes, neither we, the exchange agent, nor any other person shall incur any liability for failure to give that notification. Tenders of old notes will not be deemed to have been made until such defects or irregularities have been cured or waived. Any old notes received by the exchange agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned by the exchange agent to the tendering holders, unless otherwise provided in the letter of transmittal, as soon as practicable following the expiration date, unless the exchange offer is extended.
 
In addition, we reserve the right in our sole discretion to purchase or make offers for any old notes that remain outstanding after the expiration date or, as set forth under “—Conditions to the Exchange Offer,” to terminate the exchange offer and, to the extent permitted by applicable law, purchase old notes in the open market, in privately negotiated transactions, or otherwise. The terms of any such purchases or offers could differ from the terms of the exchange offer.
 
By tendering, you will be representing to us that, among other things:
 
 
the exchange notes acquired in the exchange offer are being obtained in the ordinary course of business of the person receiving such exchange notes, whether or not such person is the registered holder;
 
 
you are not engaging in and do not intend to engage in a distribution of the exchange notes;
 
 
you do not have an arrangement or understanding with any person to participate in the distribution of such exchange notes; and
 
 
you are not an “affiliate,” as defined under Rule 405 of the Securities Act, of ours.
 
In all cases, issuance of exchange notes for old notes that are accepted for exchange in the exchange offer will be made only after timely receipt by the exchange agent of certificates for such old notes or a timely book-entry confirmation of such old notes into the exchange agent’s account at the book-entry transfer facility, a properly completed and duly executed letter of transmittal or, with respect to the DTC and its participants, electronic instructions in which the tendering holder acknowledges its receipt of and agreement to be bound by the letter of transmittal, and all other required documents. If any tendered old notes are not accepted for any reason set forth in the terms and conditions of the exchange offer or if old notes are submitted for a greater principal amount than the holder desires to exchange, such unaccepted or non-exchanged old notes will be returned without expense to the tendering holder or, in the case of old notes tendered by book-entry transfer into the exchange agent’s account at the book-entry transfer facility according to the book-entry transfer procedures described below, those nonexchanged old notes will be credited to an account maintained with that book-entry transfer facility, in each case, as promptly as practicable after the expiration or termination of the exchange offer.
 
Each broker-dealer that receives exchange notes for its own account in exchange for old notes, where those old notes were acquired by such broker-dealer as a result of market making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of those exchange notes. See “Plan of Distribution.”
 
Book-Entry Transfer
 
The exchange agent will make a request to establish an account with respect to the old notes at the book-entry transfer facility for purposes of the exchange offer within two business days after the date of this prospectus, and any financial institution that is a participant in the book-entry transfer facility’s systems may make book-entry delivery of old notes being tendered by causing the book-entry transfer facility to transfer such

89


old notes into the exchange agent’s account at the book-entry transfer facility in accordance with that book-entry transfer facility’s procedures for transfer. However, although delivery of old notes may be effected through book-entry transfer at the book-entry transfer facility, the letter of transmittal or copy of the letter of transmittal, with any required signature guarantees and any other required documents, must, in any case other than as set forth in the following paragraph, be transmitted to and received by the exchange agent at the address set forth under “—Exchange Agent” on or prior to the expiration date or the guaranteed delivery procedures described below must be complied with.
 
The DTC’s automated tender offer program, or ATOP, is the only method of processing exchange offers through the DTC. To accept the exchange offer through ATOP, participants in the DTC must send electronic instructions to the DTC through the DTC’s communication system instead of sending a signed, hard copy letter of transmittal. The DTC is obligated to communicate those electronic instructions to the exchange agent. To tender old notes through ATOP, the electronic instructions sent to the DTC and transmitted by the DTC to the exchange agent must contain the character by which the participant acknowledges its receipt of and agrees to be bound by the letter of transmittal.
 
Guaranteed Delivery Procedures
 
If a registered holder of the old notes desires to tender old notes and the old notes are not immediately available, or time will not permit that holder’s old notes or other required documents to reach the exchange agent prior to the expiration date, or the procedure for book-entry transfer cannot be completed on a timely basis, a tender may be effected if:
 
 
the tender is made through an eligible guarantor institution;
 
 
prior to the expiration date, the exchange agent receives from that eligible guarantor institution a properly completed and duly executed letter of transmittal or a facsimile of duly executed letter of transmittal and notice of guaranteed delivery, substantially in the form provided by us, by telegram, telex, fax transmission, mail or hand delivery, setting forth the name and address of the holder of old notes and the amount of the old notes tendered and stating that the tender is being made by guaranteed delivery and guaranteeing that within three New York Stock Exchange trading days after the date of execution of the notice of guaranteed delivery, the certificates for all physically tendered old notes, in proper form for transfer, or a book-entry confirmation, as the case may be, will be deposited by the eligible guarantor institution with the exchange agent; and
 
 
the certificates for all physically tendered old notes, in proper form for transfer, or a book-entry confirmation, as the case may be, are received by the exchange agent within three New York Stock Exchange trading days after the date of execution of the notice of guaranteed delivery.
 
Withdrawal Rights
 
Tenders of old notes may be withdrawn at any time prior to the expiration date. For a withdrawal of a tender of old notes to be effective, a written or, for The DTC participants, electronic ATOP transmission notice of withdrawal, must be received by the exchange a