-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PYdURgejV9c4Fm9MPbu93wjDBsn7evwAj1KBWt2g6vE/OUXnfi2+bdfTVjd//INM fq/EHjZc2TOikqV6B43V9g== 0000010427-98-000008.txt : 19980317 0000010427-98-000008.hdr.sgml : 19980317 ACCESSION NUMBER: 0000010427-98-000008 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19971229 ITEM INFORMATION: FILED AS OF DATE: 19980313 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BAUSCH & LOMB INC CENTRAL INDEX KEY: 0000010427 STANDARD INDUSTRIAL CLASSIFICATION: OPHTHALMIC GOODS [3851] IRS NUMBER: 160345235 STATE OF INCORPORATION: NY FISCAL YEAR END: 1228 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 001-04105 FILM NUMBER: 98564919 BUSINESS ADDRESS: STREET 1: BAUSCH & LOMB INCORPORATED STREET 2: ONE BAUSCH & LOMB PLACE CITY: ROCHESTER STATE: NY ZIP: 14604-2701 BUSINESS PHONE: 7163388444 MAIL ADDRESS: STREET 1: ONE BAUSCH & LAMB PLACE STREET 2: P O BOX 54 CITY: ROCHESTER STATE: NY ZIP: 14604-2701 8-K/A 1 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 8-K/A AMENDMENT #1 TO CURRENT REPORT Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 Date of Report (Date of earliest event reported):December 29, 1997 BAUSCH & LOMB INCORPORATED (Exact name of registrant as specified in its charter) New York 1-4105 16-0345235 (State or other jurisdiction (Commission (I.R.S. Employer of incorporation) File Number) Identification No.) One Bausch & Lomb Place, Rochester NY 14604-2701 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (716) 338-6000 Inapplicable (Former name or former address, if changed since last report). The undersigned registrant hereby amends the following item of its Current Report on Form 8-K dated December 29, 1997, and filed on January 13, 1998, as set forth in the pages attached hereto: ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (a) Financial Statements (i) Chiron Vision Corporation Independent Auditors' Report Consolidated Balance Sheet as of December 31, 1996 Consolidated Statement of Operations for the year ended December 31, 1996 Consolidated Statement of Cash Flows for the year ended December 31, 1996 Notes to Consolidated Financial Statements Unaudited Consolidated Condensed Balance Sheet as of September 28, 1997 Unaudited Consolidated Condensed Statement of Operations for the nine months ended September 28, 1997 Unaudited Consolidated Condensed Statement of Cash Flows for the nine months ended September 28, 1997 (ii) Storz Ophthalmics, Inc., Storz Instrument Company, Storz Instrument GmbH, Cyanamid Chirurgie S.A.S. and Certain Affiliates (the "Storz Group") Report of Independent Public Accountants Combined Balance Sheet as of December 31, 1996 Combined Statement of Income and Changes in Parent Company's Investment and Advances for the year ended December 31, 1996 Combined Statement of Cash Flows for the year ended December 31, 1996 Notes to Combined Financial Statements Unaudited Combined Condensed Balance Sheet as of September 30, 1997 Unaudited Combined Condensed Statement of Income for the nine months ended September 30, 1997 Unaudited Combined Condensed Statement of Cash Flows for the nine months ended September 30, 1997 (b) Pro Forma Financial Information Unaudited Pro Forma Consolidated Statement of Earnings for the year ended December 28, 1996 Unaudited Pro Forma Consolidated Statement of Earnings for the nine months ended September 27, 1997 Unaudited Pro Forma Consolidated Balance Sheet as of September 27, 1997 Unaudited Notes to Unaudited Pro Forma Consolidated Financial Statements CHIRON VISION CORPORATION (A Wholly Owned Subsidiary of Chiron Corporation) AND SUBSIDIARIES Consolidated Financial Statements December 31, 1996 (With Independent Auditors' Report Thereon) Independent Auditors' Report Board of Directors Chiron Vision Corporation: We have audited the accompanying consolidated balance sheet of Chiron Vision Corporation, a wholly owned subsidiary of Chiron Corporation (the Company), and subsidiaries as of December 31, 1996 and the related consolidated statements of operations and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Chiron Vision Corporation and subsidiaries as of December 31, 1996 and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP Orange County, California May 2, 1997 CHIRON VISION CORPORATION (A Wholly Owned Subsidiary of Chiron Corporation) AND SUBSIDIARIES Consolidated Balance Sheet December 31, 1996 (In thousands) Assets Current assets: Cash $ 5,453 Accounts receivable, net of allowance of $5,949 48,268 Inventories, net 43,577 Other 10,437 --------- Total current assets 107,735 Property, equipment and leasehold improvements: Land and buildings 25,812 Laboratory, production and office equipment 31,230 Leasehold improvements 4,747 Construction in progress 8,092 --------- 69,881 Less accumulated depreciation and amortization (21,780) --------- Net property, equipment and leasehold improvements 48,101 Intangible assets, net of accumulated amortization of 22,642 73,763 Notes receivable from related parties (note 2) 741 Other assets 2,836 --------- Total assets $ 233,176 ========= Liabilities and Business Equity Current liabilities: Current portion of long-term liabilities (note 6) $ 1,486 Accounts payable 10,761 Accrued compensation and related expenses (note 9) 7,438 Accrued royalties 2,201 Income taxes payable (note 8) 3,562 Other 18,838 --------- Total current liabilities 44,286 Long-term liabilities, less current portion (note 6) 6,432 --------- Total liabilities 50,718 Commitments and contingencies (note 7) Business equity (note 11) 182,458 --------- Total liabilities and business equity $ 233,176 ========= See accompanying notes to consolidated financial statements. CHIRON VISION CORPORATION (A Wholly Owned Subsidiary of Chiron Corporation) AND SUBSIDIARIES Consolidated Statement of Operations Year ended December 31, 1996 (In thousands) Net product sales $ 211,004 Cost of sales 98,877 --------- Gross profit 112,127 --------- Expenses: Research and development 16,608 Selling, general and administrative 86,899 Other operating expenses 8,501 -------- Total expenses 112,008 -------- Income from operations 119 Other income 399 -------- Income before income taxes 518 Provision for income taxes (note 8) 3,114 -------- Net loss $ (2,596) ======== See accompanying notes to consolidated financial statments. CHIRON VISION CORPORATION (A Wholly Owned Subsidiary of Chiron Corporation) AND SUBSIDIARIES Consolidated Statement of Cash Flows Year ended December 31, 1996 (In thousands) Cash flows from operating activities: Net loss $ (2,596) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 16,189 Gain on sale of fixed assets (18) Changes in: Accounts receivable (125) Inventories 53 Other current assets 3,297 Accounts payable (3,175) Accrued royalties 935 Accrued compensation and expenses (2,820) Income taxes payable 3,382 Other current liabilities (504) ---------- Net cash provided by operating activities 14,618 ---------- Cash flows from investing activities: Capital expenditures (12,544) Increase in intangible assets (4,078) Increase in other assets (602) ---------- Net cash used in investing activities (17,224) ---------- Cash flows from financing activities: Repayment of long-term liabilities (3,822) Proceeds from net capital contribution from Chiron Corporation 6,841 --------- Net cash provided by financing activities 3,019 --------- Net increase in cash 413 Cash at beginning of the year 5,040 --------- Cash at end of the year $ 5,453 ========= Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 275 Income taxes $ 58 See accompanying notes to consolidated financial statements. CHIRON VISION CORPORATION (A Wholly Owned Subsidiary of Chiron Corporation) AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996 (1) The Company and Summary of Significant Accounting Policies The Company Chiron Vision Corporation (Vision or the Business) is headquartered in Claremont, California and is Chiron Corporation's wholly owned ophthalmic surgical products subsidiary. The Business' principal operations consist of the research, development, manufacturing, marketing and distribution of ophthalmic products for the surgical correction of vision. Vision manufactures products in plants located in Irvine and Claremont, California; Lyon, France and Munich, Germany. Vision markets products in the U.S., Europe and other geographic regions worldwide. Vision operates in three areas of the ophthalmic surgery market: cataract, refractive and retinal. Vision's cataract business includes both hard and foldable intraocular lenses and delivery devices for cataract replacement surgeries, phacoemulsification instruments for small incision cataract surgeries and viscoelastics used in various ophthalmic surgeries. Vision's refractive business specializes in developing instruments and techniques to correct vision with products including corneal shapers and excimer lasers. The retinal business products include an implant for drug deliveries, Vitrasert TM, which received approval from the Food and Drug Administration (FDA) in March 1996. Chiron Vision is co-marketing the Vitrasert TM implant worldwide with Hoffman-La Roche, Inc., which manufactures the drug ganciclovir (marketed with the Vitrasert TM implant). Additionally, the retinal business markets both silicone oil and perflurocarbons used in retinal surgery. Vision also has an ongoing program dedicated to the development and approval of new products in the ophthalmic surgical markets it serves. Basis of Presentation The accompanying consolidated balance sheet does not include Chiron Corporation's corporate assets or liabilities not specifically identifiable to Vision. The Business' consolidated financial statements include all of the direct operating expenses of Vision and allocations of certain shared administrative services costs from Chiron Corporation. Vision's management believes that these allocations are based on assumptions that are reasonable in the circumstances. However, these allocations are not necessarily indicative of the costs and expenses that would have resulted if the Business had been operated as a separate entity. Chiron Corporation will continue to support and fund the operational shortfalls of Chiron Vision Corporation until such time as this subsidiary is sold or becomes profitable. All material transactions between the Business and other Chiron Corporation operations have been identified in the consolidated financial statements as transactions between related parties. Principles of Consolidation The consolidated financial statements include the financial statements of Chiron Vision Corporation and its wholly owned and majority-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation, except for those balances due to Chiron Corporation and non-Vision affiliates. Fiscal Year The 1996 fiscal year ended on December 29, 1996 and was 52 weeks long. For presentation purposes, dates used in the consolidated financial statements and notes refer to the calendar month-end. Foreign subsidiaries report to Vision on a one month lag, therefore, the fiscal 1996 year-end for foreign subsidiaries was on November 30, 1996. Revenue Recognition Net product sales are generally recognized when products are shipped. Vision has established programs which enable customers to retain lens products on consignment. Sales of these products are recognized upon implantation of the lens by a customer, until which time the inventory held by the customer remains Vision's inventory. Inventories Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Inventories consist of the following at December 31, 1996 (in thousands): Finished goods $ 26,313 Work in process 5,871 Raw materials 11,393 -------- Total inventories $ 43,577 ======== Property, Equipment and Leasehold Improvements Property and equipment are recorded at cost and depreciated over their estimated useful lives using the straight-line method. The estimated useful lives of buildings and building improvements range from 20 to 30 years. Leasehold improvements are amortized over the shorter of their useful lives or the term of the lease. The estimated useful lives of equipment range from 3 to 10 years. Long-Lived Assets, Including Intangible Assets In accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Business reviews, as circumstances dictate, the carrying amount of its intangible assets and manufacturing facilities. The purpose of these reviews is to determine whether the carrying amounts are recoverable. Recoverability is determined by comparing the projected undiscounted net cash flows arising from the long-lived assets against their respective carrying amounts. The amount of impairment, if any, is measured based on the excess of the carrying value over the fair value. Management believes that no impairment of the carrying value of long-lived assets, including intangible assets, has occurred. Goodwill, which represents the excess of purchase price over the fair value of net assets acquired, is amortized on a straight-line basis over the expected periods to be benefited, generally 8 to 15 years. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved. Other intangible assets consist of purchased technology, patents, exclusive license agreements and start-up organization costs. The cost of these intangibles is amortized using the straight-line method over the estimated useful lives of the respective assets, which range from 5 to 15 years. Net intangibles consist of the following at December 31, 1996 (in thousands): Purchased technology $ 28,124 Goodwill 34,638 Other 11,001 -------- Total $ 73,763 ======== Stock-Based Compensation In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation," which defines a fair value method of accounting for stock-based awards. As permitted by SFAS 123, Vision elected to continue to follow the existing accounting requirements for stock options and other stock-based awards contained in Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." However, Vision has provided in note 9 the required pro forma disclosures pursuant to SFAS 123. Foreign Currency Translation Local foreign currencies are generally considered to be the functional currency of the Business' foreign subsidiaries. Accordingly, the assets and liabilities of subsidiaries denominated in foreign currencies are translated at the exchange rates in effect at the balance sheet date. The revenues and expenses of such subsidiaries are translated at the average exchange rates for the period of operation. Adjustments resulting from such translation are included in "Cumulative foreign currency translation adjustment," as a component of business equity. Net realized transaction gains amounted to $351,000 in 1996 and are included in other income in the accompanying consolidated statement of operations. Income Taxes The Company accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Use of Estimates in Preparation of Consolidated Financial Statements Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities, the disclosure of contingent assets and liabilities and the amounts of revenues and expenses to prepare these consolidated financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (2) Related Party Transactions Vision has quality assurance and warranty service arrangements with certain Chiron Corporation subsidiaries. Included in cost of sales is approximately $84,000 which Vision paid related to these arrangements. Vision acquired a 30% equity interest in Control Delivery Systems (CDS, the inventor of the Vitrasert TM Implant technology) in December 1992. The investment in CDS has been offset with Vision's share of CDS' net losses and as a result is carried at zero value in the consolidated balance sheet at December 31, 1996. Vision also entered into an agreement with CDS at that time securing all rights to Vitrasert TM and the related technology, and Vision has rights of first refusal for all new CDS products under this agreement. Vision makes royalty payments to CDS for third-party Chiron Vision sales of the Vitrasert TM product at an average rate of 5% to 6% of net sales. During 1996, Vision paid $690,000 to CDS for royalties. At December 31, 1996, two loans to two officers of the Business were outstanding as follows: (a) a $540,000 secured loan, including interest, to the Managing Director of a foreign subsidiary which bears interest at 8% and is due March 31, 2000; the loan is collateralized by the Managing Director's minority interest in the foreign subsidiary; and (b) an unsecured note receivable with a balance of $101,000, including interest, which was advanced to an officer of the Business. The note bears interest at an annual rate of 9%. Interest and principal are due on June 30, 1999. An additional $95,000 was advanced to this officer during 1995, which was to be amortized over a three-year employment term. Due to his resignation in January 1997, the net balance of approximately $76,000 was forgiven concurrent with his resignation. (3) Business Combination and Restructuring On March 31, 1995, Vision acquired the ophthalmic surgical product division of IOLAB from Johnson & Johnson for approximately $95.0 million. The acquisition was accounted for under the purchase method of accounting, and accordingly, IOLAB's financial results have been included in Vision's consolidated results of operations from the date of purchase. The purchase price of the acquired assets and assumed liabilities was allocated based upon their estimated fair values on the acquisition date. The fair value of the net liabilities assumed, including in-process technology, was estimated based, in part, on independent valuations of the acquired net assets. In connection with the acquisition, net liabilities were assumed as follows (in thousands): Fair value of assets acquired $ 108,768 Cash paid (95,000) Acquisition costs (1,013) --------- Net liabilities assumed $ 12,755 ========= The amount allocated to purchased in-process technology of $10.3 million was charged against earnings in the first quarter of 1995. Other purchased intangible assets of approximately $46.5 million consisting of base technology, goodwill, trade name and a customer list are being amortized over their estimated useful lives of 10 to 15 years using the straight-line method. Also, the company recorded additional charges for IOLAB restructuring and integration-related expenses totaling $16.9 million in 1995. Of the $16.9 million recorded as a result of the acquisition of IOLAB, approximately $6.7 million related to write-downs of previously capitalized facility and inventory costs. The remaining $10.2 million consisted of $5.5 million of employee termination costs and $4.7 million of lease termination and other costs. Vision has consolidated its European intraocular lens manufacturing operations into its facility in Lyon, France, and the North American manufacturing operations into its facility in Claremont, California. The related work force reduction of 130 employees was the result of increased manufacturing efficiencies as plants were closed, a concentration of research and development efforts and an elimination of overlap in sales and marketing and general and administrative areas. At December 31, 1996, the accrual for restructuring and reorganization costs totaled $3.5 million and consisted primarily of $2.5 million of lease termination costs, which includes future noncancelable operating lease costs and the write-down of leasehold improvements and certain equipment. The liability for lease termination costs will be settled over the lives of the related lease terms which expire through 2012. The current status of the accrued restructuring charge which is included in other current liabilities, inventories and long-term liabilities in the accompanying consolidated balance sheet is summarized below (in thousands): Amount Amount to Amount of utilized be total through utilized restructuring December in future charge 31, 1996 periods ------------- -------- ---------- Employee-related costs $ 5,506 (5,506) - Facility and lease termination costs 6,242 (3,730) 2,512 Duplicate and excess inventory 3,476 (2,888) 588 Other 1,724 (1,369) 355 -------- ------- ----- $ 16,948 (13,493) 3,455 ======== ======= ===== (4) Collaborations and Joint Business Arrangements In June 1995, Vision entered into a co-marketing agreement with Hoffman-La Roche Inc., the manufacturer and marketer of the ganciclovir drug, to market the Vitrasert TM Implant to deliver ganciclovir for the treatment of CMV retinitis in patients with Acquired Immune Deficiency Syndrome (AIDS). Vision received FDA approval to begin marketing the Vitrasert TM product in March 1996. Vision makes payments to Hoffman-La Roche Inc. at a rate of approximately 50% of its defined net profits from Vitrasert TM sales. During 1996, Vision paid $5.1 million to Hoffman-La Roche Inc. (5) Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," requires that fair values be disclosed for the Business' financial instruments. The carrying amount of cash, accounts receivable, other current assets, accounts payable, other liabilities and obligations under long-term liabilities are considered to be representative of their respective fair values because of the short-term nature of these financial instruments. The carrying amount of the long-term liabilities are reasonable estimates of fair value as the loans bear interest based on market rates currently available for debt with similar terms. (6) Long-term Liabilities Long-term liabilities consist of the following at December 31, 1996 (in thousands): Note payable $ 247 Rent abatement 1,509 Excess rent 5,581 Capital lease obligations 258 Other long-term debt 323 ------- 7,918 Less current portion 1,486 ------- $ 6,432 ======= Note Payable The note payable to a bank bears interest at 8.79% and is unsecured. Principal is due October 31, 1999. Interest is paid monthly. Rent Abatement As part of the 1995 restructuring discussed in note 3 above, Vision terminated leases for facilities in Rapid City, South Dakota; Huntington, West Virginia and London, England. In accordance with Emerging Issues Task Force Issue 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)," Vision accrued the future noncancelable operating lease costs associated with these facilities. Excess Rent As part of the purchase of a business in France, Vision assumed a noncancelable, operating lease contract with terms in excess of market for which it accrued the future minimum lease costs in excess of the fair market rent at the date of the business combination. Capital Lease Obligations Capital lease obligations consist primarily of leases for various machinery and equipment used in operations throughout the world. At December 31, 1996, the gross amount of machinery and equipment held under noncancelable capital leases totaled $2.2 million and accumulated depreciation totaled $1.9 million. Future payments under capital lease obligations (including interest of approximately $47,000) are as follows (in thousands): 1997 - $63; 1998 - $115; 1999 - $63; and 2000 - $64. (7) Commitments and Contingencies Operating Leases Vision leases laboratory, office and manufacturing facilities, land and equipment under noncancelable operating leases which expire at various times through 2012. Rent expense under these leases was approximately $4.7 million in 1996, excluding lease costs associated with the IOLAB rent abatement and the excess rent accruals as discussed in note 6. Additionally, in February 1997, the Business entered into a new five-year operating lease agreement to continue renting the Irvine, California facility that is currently used for lens and retinal manufacturing. Future minimum lease payments under all operating leases, including leases involving the rent abatement and excess rent discussed in note 6, are as follows (in millions): 1997 - $5.7; 1998 - $4.8; 1999 - $4.5; 2000 - $4.3; 2001 - $3.9 and $4.7 thereafter. Worldwide Enterprise Data Processing System Vision is in the process of implementing an enterprise-wide data processing system. The system, when complete, is expected to fully integrate on-line customer ordering through manufacturing, distribution and customer billing for all three business units. Vision spent $9.9 million on system implementation costs during 1996 of which $7.6 million was capitalized for software and hardware costs. Vision has commitments to purchase $1.5 million in additional computer hardware and software and has $1 million of outstanding contract commitments for systems implementation consulting as of December 31, 1996. Purchase Commitments The Business has entered into unconditional, long-term purchase commitments to obtain certain raw materials used in the manufacturing of perflurocarbons. Under these contracts, the Business is required to take-or-pay for a minimum amount of goods at a value no less than $3.5 million. (8) Income Taxes For financial reporting purposes, income (loss) before income taxes includes the following components for the year ended December 31, 1996 (in thousands): United States $ ( 2,225) Foreign 2,743 --------- $ 518 ========= Significant components of the provision for income taxes are as follows: Current: Federal $ - State 50 Foreign 3,064 ---------- $ 3,114 ========== The reconciliation of the provision for income taxes, computed by applying the statutory U.S. income tax rate of 35%, to the amount of income before income taxes is as follows: Computed "expected" tax provision $ 182 State taxes 50 Foreign tax at different effective rate 157 Goodwill amortization 927 Current losses not providing benefit 1,798 ------- Provision for income taxes $ 3,114 ======= Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and the tax effects of net operating losses and credit carryforwards. Significant components of the Business' deferred income tax assets and liabilities are as follows: Deferred income tax assets: Inventory and other reserves $ 5,899 Property and equipment 6,376 Foreign net operating loss carryforwards 12,383 --------- 24,658 Less valuation allowance 23,648 --------- Net deferred income tax assets 1,010 Miscellaneous deferred income tax liabilities 1,010 --------- Net deferred income taxes $ - ========= The tax provision has been prepared as if the Business filed separate tax returns on a stand alone basis and includes a carryforward for utilization of prior operating losses of $1.7 million. However, since the Business has actually been included in the consolidated tax filings of Chiron Corporation, its prior losses have been utilized in the Chiron Corporation consolidated tax return. As such, should the Business actually file separate tax returns in the future, no net operating losses would be available. The Business' tax provision is not necessarily reflective of Chiron Corporation's consolidated Federal tax return. (9) Chiron Corporation Stock-Based Compensation Plans and Retirement Savings Plan Employees of Vision participate in certain Chiron Corporation stock-based compensation plans, which are described below. Vision applies APB 25 and related Interpretations in accounting for its employees' participation in these plans. Accordingly, no compensation expense will be recognized by Vision under the plans in which its employees participate other than for performance- based awards granted to Vision employees. Fixed Stock Option Plan The Chiron Corporation fixed stock option plan provides for the grant to Vision employees of either nonqualified or incentive stock options. Incentive options are to be granted at not less than the fair market value of common stock at the date of grant and nonqualified options at not less than 85% of such fair market value. Options are exercisable based on vesting terms determined by Chiron Corporation's Board of Directors (generally four years) and option terms cannot exceed ten years. A summary of participation by Vision employees in Chiron Corporation's fixed stock option plan is as follows: Weighted- average exercise Shares price --------- ---------- Outstanding options at January 1, 1996 3,017,933 $ 15.93 Granted 906,359 22.65 Exercised (279,597) 13.86 Forfeited (268,504) 18.32 --------- ------- Outstanding options at December 31, 1996 3,376,191 $ 17.71 ========= ======= Options exercisable at December 31, 1996 1,358,885 $ 15.83 ========= ======= Weighted-average grant date fair value of options granted during 1996 $ 8.26 ======= The weighted-average grant date fair value of 1996 option grants was estimated on the date of grant using the Black-Scholes option- pricing model with the following weighted-average assumptions: expected volatility of 35%; a risk-free interest rate of 6.2%; an expected life of four years; and a dividend yield of 0%. Employee Stock Purchase Plan Vision employees in the U.S. may participate in the Chiron Corporation stock purchase plan through payroll deductions. At the end of each quarter, funds deducted from participating Vision employees' salaries are used to purchase common stock at 85% of the lower of market value at the quarterly purchase date or the employees' eligibility date for participation. Purchases by Vision employees under the Chiron Corporation stock purchase plan were for an aggregate of 254,300 shares in 1996. Under SFAS 123, pro forma compensation cost is recognized by Vision for the fair value of participating Vision employees' purchase rights, which was estimated using the Black-Scholes model with the following assumptions for 1996: expected volatility of 35%; a risk-free interest rate of 5.7%; an expected life of one year; and a dividend yield of 0%. The weighted-average fair value of the purchase rights granted to Vision employees was $4.78 per share in 1996. Performance-Based Stock Plan In 1996, the stockholders of Chiron Corporation approved an amendment to the Chiron Corporation fixed stock option plan, allowing certain executives to receive performance units. Performance units are stock awards for which vesting is contingent upon the attainment of certain pre-established performance goals over a specified period, as established by the Compensation Committee of Chiron Corporation's Board of Directors. Currently, the performance units are based on total stockholder return over a three year period as measured against certain published benchmark indices that are representative of Chiron Corporation's peer group. In 1996, performance units on 5,200 shares of common stock were awarded to Vision executives. None of these units were exercisable at December 31, 1996. In order for there to be a payout, Chiron Corporation's stockholder return must be within 15% of the 3-year rolling weighted-average of the benchmark indices. In accordance with APB 25, compensation expense related to these awards is based on the extent to which the performance criteria are met. Through December 31, 1996, no expense was recognized by Vision in the accompanying consolidated financial statements for the performance units granted to Vision executives. Pursuant to SFAS 123, the weighted-average fair value of the performance units awarded to Vision executives was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: expected volatility of 35%; a risk-free interest rate of 6.0%; an expected life of three years; and a dividend yield of 0%. The weighted-average fair value of the performance units awarded to Vision executives was $7.57 per unit in 1996. Had compensation cost for Vision employees' participation in the stock-based compensation plans described above been determined based upon the fair value method prescribed under SFAS 123, Vision's net loss for the year ended December 31, 1996 would have been as follows (in thousands): Net loss: As reported $ (2,596) Pro forma (6,795) ======== Pro forma net loss for the year ended December 31, 1996 includes compensation cost, determined based upon the fair value method prescribed under SFAS 123 and net of 1996 tax effects, attributable to grants to Vision employees during 1995 under the Chiron Corporation fixed stock option plan. The weighted-average grant date fair value of these 1995 option grants of $5.98 per share was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: expected volatility of 35%; a risk-free interest rate of 6.2%; an expected life of four years; and a dividend yield of 0%. Because awards to participating Vision employees under Chiron Corporation's stock-based compensation plans generally vest over several years and Vision employees' participation in these plans is expected to continue, the effects of determining compensation cost or providing pro forma disclosures pursuant to SFAS 123 for the year ended December 31, 1996 are not likely to be representative of the effects on Vision's reported net income for future years. Retirement Savings Plan Substantially all full-time U.S. employees of Vision are eligible to participate in Chiron Corporation's defined-contribution savings plan, qualified under Section 401(k) of the Internal Revenue Code. Participating Vision employees may defer a portion of their pretax earnings up to the Internal Revenue Service annual contribution limit. Vision matches its employees' contributions according to a specified formula determined by Chiron Corporation's Board of Directors. Vision's matching contributions totaled $866,000 in 1996. (10) Legal Proceedings Vision is party to various claims, investigations and legal proceedings arising out of the normal course of its business. These claims, investigations and legal proceedings relate to intellectual property rights, contractual rights and obligations, claims of product liability and other issues. While there can be no assurance that an adverse determination of any such matters would not have a material adverse impact in any future period, management does not believe, based upon information known to it, that the final resolution of these matters will have a material adverse effect upon the Business' consolidated financial position, results of operations or cash flows. (11) Business Equity Business Equity represents Chiron Corporation's ownership interest in the recorded net assets of Chiron Vision. All cash transactions and intercompany transactions with Chiron Corporation are reflected in this amount. A summary of the activity is as follows: Beginning balance, January 1996 $ 178,213 Net loss (2,596) Translation adjustments (3,595) Net intercompany activity 10,436 --------- Ending balance, December 1996 $ 182,458 ========= Unaudited condensed consolidated financial statements of Chiron Vision Corporation ("Chiron Vision") for the nine months ended September 28, 1997 are presented on the following pages. These financial statements have been prepared by Chiron Vision in accordance with its usual accounting policies and are based in part on approximations and should be read in conjunction with the audited financial statements of Chiron Vision for the year ended December 31, 1996. In the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial statements in accordance with generally accepted accounting principles have been included. All such adjustments were of a normal recurring nature. CHIRON VISION CORPORATION (A Wholly Owned Subsidiary of Chiron Corporation) AND SUBSIDIARIES Consolidated Condensed Balance Sheet (Unaudited) September 28, 1997 (In thousands) Assets Current assets: Cash $ 10,769 Accounts receivable, net of allowance of $5,501 41,545 Inventories, net 37,601 Other 7,159 --------- Total current assets 97,074 Property, equipment and leasehold improvements, net of accumulated depreciation and amortization of $25,305 49,013 Intangible assets, net of accumulated amortization of $26,763 68,183 Notes receivable from related parties 570 Other assets 1,938 ---------- Total assets $ 216,778 ========== Liabilities and Business Equity Current liabilities: Current portion of long-term liabilities $ 1,306 Accounts payable 7,202 Accrued compensation and related expenses 7,338 Accrued royalties 3,763 Income taxes payable 2,083 Other 15,363 --------- Total current liabilities 37,055 Long-term liabilities, less current portion 288 Other long-term liabilities 21,392 --------- Total liabilities 58,735 Business equity 158,043 ---------- Total liabilities and business equity $ 216,778 ========== CHIRON VISION CORPORATION (A Wholly Owned Subsidiary of Chiron Corporation) AND SUBSIDIARIES Consolidated Condensed Statement of Operations (Unaudited) Nine months ended September 28, 1997 (In thousands) Net product sales $ 150,692 Cost of sales 72,722 --------- Gross profit 77,970 --------- Expenses: Research and development 9,899 Selling, general and administrative 58,856 Other operating expenses 6,475 --------- Total expenses 75,230 --------- Income from operations 2,740 Other expense (3,900) --------- Income before income taxes (1,160) Provision for income taxes 288 --------- Net loss $ (1,448) ========= CHIRON VISION CORPORATION (A Wholly Owned Subsidiary of Chiron Corporation) AND SUBSIDIARIES Consolidated Condensed Statement of Cash Flows (Unaudited) Nine months ended September 28, 1997 (In thousands) Cash flows from operating activities: Net loss $ (1,448) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 12,073 Gain on sale of fixed assets (50) Changes in: Accounts receivable 6,723 Inventories 5,976 Other current assets 3,278 Accounts payable (3,559) Accrued royalties 1,562 Accrued compensation and related expenses (100) Income taxes payable (1,479) Other current liabilities (3,475) -------- Net cash provided by operating activities 19,501 -------- Cash flows from investing activities: Capital expenditures (6,387) Increase in intangible assets (968) Decrease in other assets 1,069 -------- Net cash used in investing activities (6,286) -------- Cash flows from financing activities: Repayment of long-term liabilities (1,932) Repayment to Chiron Corporation (5,967) -------- Net cash used in financing activities (7,899) -------- Net increase in cash 5,316 Cash at beginning of the year 5,453 --------- Cash at September 28, 1997 $ 10,769 ========= Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 89 Income taxes $ 278 The Storz Group Combined Financial Statements as of December 31, 1996 Together With Report of Independent Public Accountants REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Storz Instrument Company: We have audited the accompanying combined balance sheet of the Storz Group, as defined (see Note 1), as of December 31, 1996 and the related combined statement of income and changes in parent company's investment and advances, and cash flows for the year then ended. These financial statements are the responsibility of the Storz Group's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the statements referred to above present fairly, in all material respects, the financial position of the Storz Group, as defined (see Note 1), as of December 31, 1996 and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Roseland, New Jersey January 30, 1998 THE STORZ GROUP (as defined, Note 1) COMBINED BALANCE SHEET AS OF DECEMBER 31, 1996 (in thousands of U.S. dollars) ASSETS CURRENT ASSETS: Cash $ 2,565 Accounts receivable and current portion of customer finance receivables, net of unearned income of $401 and allowance for doubtful accounts of $5,389 32,561 Inventories, net 27,857 Other current assets 601 -------- Total current assets 63,584 NONCURRENT CUSTOMER FINANCE RECEIVABLES, net of current portion, less unearned income of $216 and allowance for doubtful accounts of $520 1,133 PROPERTY, PLANT AND EQUIPMENT, net 34,807 GOODWILL, net 222,002 OTHER ASSETS 5,758 -------- $327,284 ======== LIABILITIES AND PARENT COMPANY'S INVESTMENT AND ADVANCES CURRENT LIABILITIES: Accounts payable $ 6,409 Accrued expenses 20,704 Current portion of Other Noncurrent Liabilities 32 -------- Total current liabilities 27,145 -------- OTHER NONCURRENT LIABILITIES 1,985 COMMITMENTS AND CONTINGENCIES PARENT COMPANY'S INVESTMENT AND ADVANCES 298,154 -------- Total liabilities and parent company's investment and advances $327,284 ======== The accompanying notes to the combined financial statements are an integral part of this balance sheet. THE STORZ GROUP (as defined, Note 1) COMBINED STATEMENT OF INCOME AND CHANGES IN PARENT COMPANY'S INVESTMENT AND ADVANCES FOR THE YEAR ENDED DECEMBER 31, 1996 (in thousands of U.S. dollars) NET SALES $192,595 COST OF GOODS SOLD 80,491 -------- Gross profit 112,104 -------- SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 76,103 RESEARCH AND DEVELOPMENT EXPENSES 14,099 -------- Operating income 21,902 OTHER INCOME (EXPENSES): Amortization of goodwill (5,852) Interest income, net 71 Licensing income, net 500 Other expense, net (151) -------- Income before provision for income taxes 16,470 PROVISION FOR INCOME TAXES 8,235 -------- Net income 8,235 PARENT COMPANY'S INVESTMENT AND ADVANCES, beginning of year 308,943 ADVANCES, WITHDRAWALS AND DIVIDENDS, net (19,024) -------- PARENT COMPANY'S INVESTMENT AND ADVANCES, end of year $298,154 ======== The accompanying notes to the combined financial statements are an integral part of this statement. THE STORZ GROUP (as defined, Note 1) COMBINED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1996 (in thousands of U. S. dollars) OPERATING ACTIVITIES: Net income $ 8,235 Adjustments to reconcile net income to net cash provided from operating activities- Depreciation and amortization 10,853 Loss on sale of fixed assets 147 Changes in working capital- Accounts receivable 6,560 Inventories 4,551 Other current assets (85) Noncurrent finance receivables 571 Other noncurrent assets (2,888) Accounts payable 269 Accrued expenses (2,842) Other noncurrent liabilities (10) -------- Net cash provided from operating activities 25,361 -------- INVESTING ACTIVITIES -- Purchases of plant and equipment, net (3,923) -------- FINANCING ACTIVITIES -- Change in parent company's investment and advances, net (18,458) -------- EFFECT OF EXCHANGE RATES (566) -------- Increase in cash 2,414 CASH, beginning of year 151 -------- CASH, end of year $ 2,565 ======== SUPPLEMENTAL DISCLOSURES: Cash paid for interest $ 150 ======== Cash paid for income taxes $ 439 ======== The accompanying notes to the combined financial statements are an integral part of this statement. THE STORZ GROUP (as defined, Note 1) NOTES TO COMBINED FINANCIAL STATEMENTS (in thousands of U.S. dollars) (1) DESCRIPTION OF BUSINESS: The combined balance sheet reflects, except for certain assets, liabilities and notes receivables of divested businesses, all of the assets and liabilities of four legal entities Storz Ophthalmics, Inc., Storz Instrument Company, Storz Instrument GmbH and Cyanamid Chirurgie S.A.S. combined with inventories, prepaid expenses, specified fixed and other assets and certain accruals of the ophthalmics business of American Home Products Corporation (collectively, the "Storz Group"). The Storz Group develops, manufactures, and markets a wide array of ophthalmic products including surgical equipment, implants, pharmaceuticals and hand held surgical instruments. On October 21, 1997 American Cyanamid Company (ACC) and American Home Products Corporation (AHPC or Parent) entered into an agreement with Bausch & Lomb Incorporated (B&L) for the sale of the Storz Group in the amount of $380,000. Basis of Presentation of the Combined Statements of Income- Excluded from these statements are all revenue and expenses related to the excluded assets and excluded liabilities. Where expenses could not be specifically related to the included products, costs were allocated to these products on the basis of the included products' gross profit as a percent of total gross profit, which management believes is a reasonable allocation methodology. All significant intercompany accounts and transactions have been eliminated in preparing the combined statements. Summary of Significant Accounting Policies- Accounts Receivable- Revenue is recognized when merchandise is shipped and title and risk of loss passes to the customer. At December 31, 1996 the accounts receivable and current portion of customer finance receivables are comprised of the following- Accounts receivable, trade $ 34,879 Current portion of customer finance receivables 3,472 Less - Allowance for doubtful accounts and unearned income (5,790) -------- $ 32,561 ======== Accounts receivable and the allowance for doubtful accounts of the affiliated entities are not separately identifiable from the accounts receivable of other businesses within those affiliated entities. As such, the Storz Group has estimated the amount of accounts receivable, net, included in the accompanying balance sheet based upon the related sales reflected in the accompanying statement of income. The book value of the noncurrent customer finance receivables is considered to approximate their fair market value. Allowance for Doubtful Accounts and Unearned Income- The following summarizes the allowance for doubtful accounts and unearned income and the related activity- Write-offs and offs and Beginning Charged to Reductions, Net Ending Description Balance Expense of Recoveries Balance ----------- --------- ---------- ---------------- ------- Allowance for doubtful accounts and unearned income- Year ended December $ 6,094 $ 1,369 $ 937 $ 6,526 31, 1996 Inventories- Inventories are stated at the lower of cost or market. Inventories valued under the last-in, first-out (LIFO) method amounted to $15,108 at December 31, 1996. Current value exceeded LIFO value by $4,988 at December 31, 1996. The remaining inventories are valued under the first-in, first-out (FIFO) method. The components of inventory at December 31, 1996 are as follows- Raw materials and work-in-process $ 10,892 Finished goods (including consignment) 16,965 -------- $ 27,857 ======== Property, Plant and Equipment- Property, plant and equipment is stated at cost. Normal maintenance and repairs are charged to expense as incurred. Additions and improvements either to provide necessary capacity, improve the efficiency of production, or to modernize facilities are capitalized. Depreciation is calculated on a straight-line basis over the estimated useful lives of the various classes of assets (which range from three to thirty-one years). Land and land improvements $ 6,038 Building and building improvements 21,465 Machinery and equipment 15,217 Furniture and fixtures 12,870 -------- Property, plant and equipment 55,590 Less- Accumulated depreciation (20,783) -------- $ 34,807 ======== Goodwill- During 1994, AHPC acquired substantially all of the outstanding shares of ACC which included the Storz Group. Goodwill represents the excess of cost over the fair value of net assets acquired that relates to the Storz Group. Goodwill is being amortized using the straight-line method over a 40 year period. Goodwill $234,193 Accumulated amortization (12,191) -------- Goodwill, net $222,002 ======== Impairment of Long-Lived Assets- Under Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", the Storz Group is required, among other things, to review its long-lived assets and certain related intangibles for impairment whenever changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. The Storz Group does not believe that any such change has occurred. Research and Development- Research and development costs are charged to expense as incurred. Other Assets- As of December 31, 1996 other assets consists primarily of undeveloped land in Clearwater, FL of $2,432 and approximately $3,000 of demonstration equipment, net of accumulated amortization of $5,840. Noncurrent Customer Finance Receivables- Noncurrent customer finance receivables relate to the sale of ophthalmic device business capital equipment by the Storz Group through financing agreements. Payment terms are generally granted up to a maximum of 36 months with payments made on a monthly basis over the terms of the agreements. These finance receivables carry interest at annual rates ranging from 4% to 10%. Concentration of Risk- Financial instruments subject to credit risk are primarily trade accounts receivable. Due to the large number and diversity of the Storz Group's customer base, concentration of credit risk with respect to trade receivables is limited. Use of Estimates- The preparation of the combined financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the combined financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Accounts Payable and Accrued Expenses- Accounts payable consist of trade payables. Accrued expenses consist primarily of accrued payroll, commissions, warranties, promotional programs, rebates/chargebacks and professional fees. Accounts payable and certain accrued expenses payable to affiliates have been included as part of the Parent Company's investment and advances. Other Noncurrent Liabilities- Other noncurrent liabilities consist primarily of deferred payments owed from Storz Instrument GmbH's 1984 acquisition of Leonard Klein Chirurgische Augeninstrumente, an ophthalmic instrument manufacturing business. Amounts are comprised of two elements: a deferred purchase price and a pension liability. In accordance with the agreement, the deferred purchase price is actuarially determined each year based on payments made the previous year and is adjusted annually, as appropriate, utilizing an interest rate of 6% and an inflation rate equal to 75% of the inflation rate in Germany. Payments will be made to the previous owner and his spouse or survivor until their deaths. The pension liability calculation is actuarially determined utilizing an interest rate of 6% and an inflation rate of 3%. The previous owner will receive an amount annually upon reaching age sixty-five or becoming disabled, whichever comes first. This pension will also be paid to the previous owner and his spouse or survivor until their deaths. In case of death of the previous owner, his spouse is entitled to sixty percent of the pension benefit. Other noncurrent liabilities also include a pension liability for the Storz Instrument GmbH defined benefit pension plan (see Note 6). This pension liability is actuarially determined at the end of each year. The components of other noncurrent liabilities at December 31, 1996 are as follows- Present Value of deferred purchase price $ 1,078 Less - Current Portion (32) -------- Present Value of noncurrent deferred purchase price 1,046 Pension liability - previous owner 325 -------- Due to previous owner 1,371 Pension liability - Storz Instrument GmbH employees 570 Other 44 -------- $ 1,985 ======== Parent Company's Investment and Advances- Parent Company's investment and advances includes the stockholder's equity of the Storz Group described in Note 1. The equity of the individual subsidiaries represents the original investment by AHPC, plus accumulated net income and net advances, withdrawals and dividends. Cash receipts are transferred to AHPC by daily cash sweeps and AHPC makes funds available for operating expenses. (2) COMMITMENTS AND CONTINGENCIES: The Storz Group leases certain warehouse space, machinery, office equipment and automobiles under operating leases. Rental expense for the year ended December 31, 1996 of $1,485 is included in cost of goods sold and selling, general and administrative expenses. The future minimum lease payments are as follows- 1997 $ 862 1998 332 1999 252 2000 178 2001 75 The Storz Group is self-insured for losses and liabilities related to health care up to predetermined amounts, above which third party insurance applies. Losses are accrued based on the Storz Group's estimates of aggregate liabilities for incurred and reported claims as well as estimates of aggregate liabilities for incurred but not reported claims. Such estimates are based on the Storz Group's loss experience as well as loss development patterns generally followed in the insurance industry. Storz Instrument Company and Storz Ophthalmics, Inc. have recorded a provision of approximately $3,524 for the year ended December 31, 1996 related to such estimates of losses and liabilities. The reserve as of December 31, 1996 was $1,013. The Storz Group is a participant in the U.S. National Institute of Health's Age Related Eye Disease Study (AREDS). The Storz Group can terminate its participation on 30 days written notice. The annual support to this study is $330 plus a supply of Ocuvite samples. The Storz Group is involved in various legal matters including product liability and intellectual property proceedings which are considered normal to its business. One such litigation involves breast implants which were distributed by the Storz Group device business during the 1960's and 1970's. The manufacturer of the breast implants has indemnified the Storz Group against any liability arising from such lawsuits and has assumed the defense of such lawsuits on behalf of the Storz Group. In the opinion of management, although the outcome of any legal proceeding cannot be predicted with certainty, the ultimate liability in connection with these proceedings will not have a material adverse effect on the combined balance sheet, but could be material to the Storz Group's results of operations in any one accounting period. (3) TRANSLATION OF CURRENCIES: In accordance with Statement of Financial Accounting Standards No. 52, international assets and liabilities are translated into United States dollars at period end exchange rates and international profit and loss account items are translated into United States dollars at monthly average exchange rates. (4) INCOME TAXES: The operations of the Storz Group are included in the consolidated tax returns of AHPC and its subsidiaries except for Storz GmbH which files on a stand alone basis in Germany. The Storz Group has reflected taxes in the accompanying statement of income at the statutory tax rates without regard for temporary differences. Accordingly, the Storz Group has no deferred tax assets or liabilities since those amounts are being paid or received by AHPC. Deferred tax assets and liabilities would reflect temporary differences between assets and liabilities for financial reporting purposes and income tax purposes. Such temporary differences are primarily attributable to depreciation, allowances for doubtful accounts, trade promotion accruals and other accruals and have not been significant. The provision for income taxes consists of- Domestic $ 4,554 Foreign 3,681 -------- $ 8,235 ======== A reconciliation between the Storz Group's effective tax rate and U. S. statutory rate is as follows- U. S. statutory rate 35% Foreign taxes, taxed at higher rates 3 Amortization of other intangibles and purchase price over fair value 12 --- Effective tax rate 50% === (5) RELATED PARTY TRANSACTIONS: The combined statement of income includes the costs of certain administrative and other services provided by AHPC and allocated to the Storz Group. These services include treasury, tax, legal, environmental, safety, public relations, audit and executive management advisory functions. The charge to the Storz Group for corporate administration was $1,685 in 1996. Various insurance coverages are provided to the Storz Group through AHPC consolidated programs. Auto, property, product liability and other insurance charges incurred by AHPC are allocated to the Storz Group based on AHPC's overall cost. The charge for these coverages of $561 in 1996 has been included in the combined statement of income. The costs have been allocated on a basis which management believes is reasonable. (6) INCENTIVE PLANS: AHPC has a Management Incentive Plan that provides for cash and deferred contingent common stock awards to key employees and a stock option program. No awards were made to the Storz Group personnel under the AHPC Management Incentive Plan for 1996. During 1995 and 1996 certain employees of the Storz Group were granted stock options under the AHPC stock option plans. These options had a ten year term and generally vested one year from date of grant. Transactions involving the plans are summarized as follows- Weighted Average Exercise 1996 Price ----- --------- Options shares- Outstanding January 1 395.6 $45.66 Granted 161.7 53.06 Canceled ($45.66-$53.06) (41.6) 47.97 Exercised (37.4) 45.66 ----- ----- Outstanding December 31 ($45.66-$53.06) 478.3 47.96 Exercisable December 31 329.6 45.66 ===== ===== Effective January 1, 1996, AHPC adopted the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." As permitted by the statement, AHPC has elected to continue to account for stock- based compensation using the intrinsic value method under Accounting Principles Board Opinion No. 25. Accordingly, no compensation expense has been recognized for stock options. If compensation expense for the Storz Group's stock options issued in 1995 and 1996 had been determined based on the fair value method of accounting, as defined in SFAS No. 123, the Storz Group's net income would have been reduced to the pro forma amount indicated below- Net income- As reported $ 8,235 Pro forma 6,529 The fair value of issued stock options is estimated on the date of grant using the Black-Scholes option-pricing model incorporating the following assumptions for options granted in 1996: expected volatility (the amount by which the stock price is expected to fluctuate) of 15.0%; expected dividend yield of 4.3%; risk-free interest rate of 6.4% and expected life of four years. The weighted average fair value of options granted during 1996 was $6.82. (7) DEFINED BENEFIT AND DEFINED CONTRIBUTION PLANS: Storz Instrument Company maintained a noncontributory defined benefit plan covering substantially all its union employees who became participants prior to October 2, 1991. In accordance with a plan amendment, an employee could not become a participant on or after October 2, 1991. Credited service, as defined, was frozen as of August 1, 1991. Effective August 15, 1995, the Board of Directors of Storz Instrument Company elected to terminate the Plan, subject to the provisions set forth in ERISA. All pension benefits which were not previously forfeited, were nonforfeitable as of the termination date. The amount of pension benefits to which a participant is entitled is based on credited service through July 31, 1991. In 1996, the Storz Group made all contributions necessary such that the Plan assets are sufficient to provide for all benefit liabilities. The combined statement of income includes $41 of company contributions for the year ended December 31, 1996. In connection with the Plan termination, on October 1, 1996 Storz Instrument Company entered into a contractual agreement with Principal Life Insurance Co. to purchase for $220 a group annuity contract for participants electing annuity payments. In addition, lump sum distributions of approximately $790 were made to participants electing this form of distribution. All remaining assets were used to pay final plan expenses. Storz Instrument Company maintains the following defined contribution plans- Savings and Profit Sharing Plan - This Plan is designed to provide Storz Instrument Company and Storz Ophthalmics Inc.'s nonunion employees with funds for retirement or for their beneficiaries in the event of death. Participants may make annual contributions up to 15% of their compensation, as defined. Storz Instrument Company and Storz Ophthalmics Inc. make matching contributions equal to 25% of each participant's contribution, up to 6% of the participant's compensation, as defined. Employees become eligible to participate in the Plan upon attaining age 21, and following one full year of service, as defined. The combined statement of income includes $276 of company matching contributions for the year ended December 31, 1996. Money Purchase Pension Plan - This Plan is designed to provide Storz Instrument Company and Storz Ophthalmics Inc.'s nonunion employees with funds for retirement or for their beneficiaries in the event of death. Contributions to the Plan are made by Storz Instrument Company and Storz Ophthalmics Inc. in the amount equal to 7% of each participant's prior calendar year compensation subject to social security taxes, plus 12% of each participant's compensation in excess of the social security limit. Employees do not contribute to the Plan. Employees become eligible to participate in the Plan upon attaining age 21, and following one full year of service, as defined. The combined statement of income includes $1,677 of company contributions for the year ended December 31, 1996. Surgical Instrument Workers 401(k) Savings Plan - This Plan is designed to provide union employees with funds for retirement or for their beneficiaries in the event of death. Participants may make annual contributions up to 15% of their compensation, as defined. Storz Instrument Company made contributions equal to 3.0% of the participant's previous year's compensation, as defined, through March 31, 1995. In accordance with the provisions of the Plan, the employer contributions increased to 3.5% and 4% of the participant's previous year's compensation, as defined, effective April 1, 1995 and 1996, respectively. Employees become eligible to participate in the Plan upon attaining age 21, and following twelve consecutive months of service, as defined. The combined statement of income includes $171 of company contributions for the year ended December 31, 1996. Storz Instrument GmbH maintains a defined benefit pension plan for its employees. Net periodic pension expense of $219 has been recorded in selling, general and administrative expense for the year ended November 30, 1996. Accumulated plan benefits as of November 30, 1996, the date of the latest actuarial valuation, are as follows- Actuarially computed value of benefits- Vested $187 Nonvested 383 ---- $570 ==== This amount is included in other noncurrent liabilities in the accompanying balance sheet. There has been no funding of this plan since its inception. (8) IMPACT OF RECENT ACCOUNTING STANDARDS: In June 1997, SFAS 130, "Reporting Comprehensive Income", was issued to establish standards for reporting and displaying of comprehensive income and its components in a full set of general- purpose financial statements. This statement requires disclosure of the components of comprehensive income including, among other things, foreign currency translation adjustments, minimum pension liability items and unrealized gains and losses on certain investments in debt and equity securities. The statement is effective for fiscal years beginning after December 15, 1997. The Storz Group anticipates compliance with this statement in 1998. (9) TRANSITION AGREEMENTS: On December 31, 1997 AHPC and Bausch & Lomb Incorporated entered into a transition services agreement, whereas, AHPC will provide for a fee, among other services, certain back office and support services, services related to international regulatory affairs, quality assurance and quality control services, warehouse and distribution services for certain periods not exceeding twelve months. Unaudited condensed combined financial statements of Storz Ophthalmics Inc., Storz Instrument Company, Storz Instrument GmbH, Cyanamid Chirurgie S.A.S. and Certain Domestic and International Affiliates ("the Storz Group") for the nine months ended September 30, 1997 are presented on the following pages. These financial statements have been prepared by the Storz Group in accordance with its usual accounting policies and are based in part on approximations and should be read in conjunction with the audited financial statements of the Storz Group for the year ended December 31, 1996. In the opinion of management, all adjustments necessary for a fair presentation of the combined financial statements in accordance with generally accepted accounting principles have been included. All such adjustments were of a normal recurring nature. THE STORZ GROUP Combined Condensed Balance Sheet - September 30, 1997 (Unaudited) (in thousands of U.S. dollars) Assets Current assets: Cash $ 3,983 Accounts receivable and current portion of customer finance receivables, net of unearned income of $224 and allowance for doubtful accounts of $4,936 33,954 Inventories, net 25,463 Other current assets 704 -------- Total current assets 64,104 Non-current customer finance receivables, net of current portion, less unearned income of $162 and allowance for doubtful accounts of $216 1,312 Property, plant and equipment, net 33,177 Goodwill and intangibles, net 217,913 Other assets 5,068 -------- $321,574 ======== Liabilities and Parent Company's Investment and Advances Current liabilities: Accounts payable $ 5,698 Accrued expenses 23,507 Current portion of Other Noncurrent Liabilities 582 --------- Total current liabilities 29,787 --------- Long-term debt, less current portion 1,692 Other non-current liabilities 376 Parent company's investment and advances 289,719 Total liabilities and parent company's -------- investment and advances $321,574 ======== THE STORZ GROUP Combined Condensed Statement of Income For the nine months ended September 30, 1997 (Unaudited) (in thousands of U.S. dollars) Net sales $149,546 Cost of goods sold 59,928 -------- Gross profit 89,618 -------- Selling, general and administrative expenses 57,748 Research and development expenses 9,539 -------- Operating income 22,331 Other income (expenses): Amortization (4,389) Interest expense, net (66) Other expense, net 744 -------- Income before provision for income taxes 18,620 Provision for income taxes 8,351 -------- Net income $ 10,269 ======== THE STORZ GROUP Combined Condensed Statement of Cash Flows (Unaudited) For the nine months ended September 30, 1997 (in thousands of U.S. dollars) OPERATING ACTIVITIES: Net income $ 10,269 Adjustments to reconcile net income to net cash provided from Operating activities - Depreciation and amortization 9,437 Loss on sale of fixed assets (677) Changes in working capital - Accounts receivable (1,393) Inventories 2,394 Other current assets (103) Non-current finance receivables (179) Other non-current assets (760) Accounts payable (161) Accrued expenses 2,803 Other non-current liabilities 83 -------- Net cash provided from operating activities 21,713 -------- INVESTING ACTIVITIES: Purchase of plant and equipment, net (1,291) Other (300) -------- Net cash used in investing activities (1,591) -------- FINANCING ACTIVITIES - Change in parent company's investment and advances, net (18,334) -------- EFFECT OF EXCHANGE RATES (370) -------- Increase in cash 1,418 CASH, beginning of year 2,565 -------- CASH, end of year $ 3,983 ======== SUPPLEMENTAL DISCLOSURES: Cash paid for interest $ 74 Cash paid for income taxes $ 112 PRO FORMA CONSOLIDATED FINANCIAL DATA (UNAUDITED) The following unaudited pro forma consolidated balance sheet and statements of earnings have been prepared to illustrate the effect of the acquisitions by Bausch & Lomb Incorporated ("the company")of Chiron Vision Corporation ("Chiron Vision") and Storz Ophthalmics Inc., Storz Instrument Company, Storz Instrument GmbH, Cyanamid Chirurgie S.A.S. and Certain Domestic and International Affiliates (the "Storz Group") under the purchase method of accounting. The pro forma consolidated balance sheet assumes that the acquisitions were consummated on September 27, 1997. The pro forma consolidated statements of earnings for 1996 and 1997 assume that the acquisitions were consummated on December 31, 1995. The Chiron Vision financial statements utilized in preparing the pro forma consolidated balance sheet and the pro forma consolidated statements of earnings are for the year ended December 31, 1996 and the nine months ended September 28, 1997. The Storz Group financial statements are for the year ended December 31, 1996 and the nine months ended September 30, 1997. The pro forma adjustments, and the assumptions on which they are based, are described in the accompanying Notes to the Pro Forma Financial Statements. The pro forma information is presented for illustrative purposes only and is not necessarily indicative of operating results or financial position that would have occurred if the acquisitions had been consummated as of the dates indicated, nor is it necessarily indicative of future operating results or financial position. No effect has been given in the pro forma statements of earnings for synergies, if any, that may be realized through the acquisitions. For purposes of developing the pro forma balance sheet, Chiron Vision's and the Storz Group's assets and liabilities have been recorded at their estimated fair values based upon a preliminary allocation of purchase price. Adjustments will be made during the allocation period based on a detailed review of the fair value of assets and liabilities acquired. These pro forma combined financial statements should be read in conjunction with the historical consolidated financial statements and the related notes of the company, which were previously reported on the company's 1996 Annual Report to Shareholders on Form 10-K and the company's quarterly report on Form 10-Q for the quarter ended September 27, 1997, and the audited financial statements and related notes of Chiron Vision and the Storz Group for the year ended December 31, 1996 and unaudited financial statements of Chiron Vision and the Storz Group for the nine months ended September 28, 1997 and September 30, 1997, respectively, included in Item 7(a) of this form 8-K/A. BAUSCH & LOMB INCORPORATED, CHIRON VISION CORPORATION AND THE STORZ GROUP PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS FOR THE YEAR ENDED DECEMBER 28, 1996 DOLLAR AMOUNTS IN MILLIONS (UNAUDITED) Historical Information ---------------------------- Bausch Chiron Storz Pro Forma Pro Forma & Lomb Vision Group Adjustments Combined ------ ------ ----- ----------- --------- Net Sales $1,926.8 $211.0 $192.6 $2,330.4 Cost And Expenses Cost of products sold 872.3 98.9 80.5 $ 8.9 (f) 1,060.1 0.6 (h) (1.1) (j) Selling, administration and general 773.1 95.4 81.7 (8.9) (f) 949.5 7.0 (g) 1.2 (h) Research and development 75.5 16.6 14.1 0.4 (h) 106.6 Restructuring charges 15.1 15.1 ------- ------ ----- --- ------- 1,736.0 210.9 176.3 8.1 2,131.3 ------- ------ ----- --- ------- Operating Earnings 190.8 0.1 16.3 (8.1) 199.1 Other Expense (Income) Interest and investment income (42.8) (0.1) (42.9) Interest expense 51.7 42.6 (e) 94.3 (Gain) loss from foreign currency, net (1.6) (0.4) (2.0) Gain on divestitures (1.5) (1.5) Litigation provision 16.1 16.1 ------ ------- ----- ---- ------- 21.9 (0.4) (0.1) 42.6 64.0 ------ ------- ----- ---- ------- Earnings Before Income Taxes And Minority Interest 168.9 0.5 16.4 (50.7) 135.1 Provision for income taxes 63.7 3.1 8.2 (24.0) (i) 51.0 ------- ----- ---- ----- ------- Earnings Before Minority interest 105.2 (2.6) 8.2 (26.7) 84.1 Minority Interest 22.1 22.1 ------- ----- ---- ----- ------- Net earnings $ 83.1 $(2.6) $8.2 $(26.7) $62.0 ======= ===== ==== ===== ======= Basic earnings per share $1.48 $1.10 ======= ======= Diluted earnings per share $1.47 $1.10 ======= ======= Average shares outstanding--basic 56,299 56,299 Average shares outstanding--diluted 56,510 56,510 See accompanying Notes to Pro Forma Financial Statements. BAUSCH & LOMB INCORPORATED, CHIRON VISION CORPORATION AND THE STORZ GROUP PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS FOR THE NINE MONTHS ENDED SEPTEMBER 27, 1997 DOLLAR AMOUNTS IN MILLIONS (UNAUDITED) Historical Information -------------------------- Bausch & Chiron Storz Pro Forma Pro Forma Lomb Vision Group Adjustments Combined -------- ------ ----- ----------- -------- Net Sales $1,442.7 $150.7 $149.5 $1,742.9 Cost and Expenses Cost of products sold 671.8 72.7 59.9 $ 6.9 (f) 811.7 0.4 (h) Selling, admininstrative and general 564.0 65.3 61.4 (6.9) (f) 689.9 5.2 (g) 0.9 (h) Research and develop -ment 48.1 9.9 9.5 0.2 (h) 67.7 Restructuring charges 54.9 54.9 ------- ------ ----- ---- ------- 1,338.8 147.9 130.8 6.7 1,624.2 ------- ------ ----- ---- ------- Operating Earnings 103.9 2.8 18.7 (6.7) 118.7 Other Expense (Income) Interest and investment income (30.3) (30.3) Interest expense 41.6 32.6 (e) 74.2 (Gain) loss from foreign currency, net (4.8) 3.9 (0.9) ------ ----- ----- ---- ------ 6.5 3.9 - 32.6 43.0 ------ ----- ----- ---- ------ Earnings Before Income Taxes & Minority Interest 97.4 (1.1) 18.7 (39.3) 75.7 Provision for Income Taxes 39.2 0.3 8.4 (16.9) (i) 31.0 ----- ----- ----- ----- ----- Earnings Before Minority Interest 58.2 (1.4) 10.3 (22.4) 44.7 Minority Interest 16.2 16.2 ----- ----- ----- ----- ----- Net earnings $42.0 $(1.4) $10.3 $(22.4) $28.5 ===== ===== ===== ====== ===== Basic earnings per share $0.76 $0.51 ===== ===== Diluted earnings per share $0.75 $0.51 ===== ===== Average shares outstanding--basic 55,421 55,421 Average shares outstanding--diluted 55,700 55,700 See accompanying Notes to Pro Forma Financial Statements. BAUSCH & LOMB INCORPORATED, CHIRON VISION CORPORATION AND THE STORZ GROUP PRO FORMA CONSOLIDATED BALANCE SHEET SEPTEMBER 27, 1997 DOLLAR AMOUNTS IN MILLIONS (UNAUDITED) Historical Information ---------------------------- Bausch & Chiron Storz Pro Forma Pro Forma Lomb Vision Group Adjustments Combined -------- ------ ----- ----------- --------- Assets Current Assets Cash, cash equivalents and short-term investments $162.2 $10.8 $ 4.0 $ (14.8) (d) $ 162.2 Trade receivables, net 380.0 41.5 34.0 (10.8) (d) 444.7 Inventories, net 311.5 37.6 25.5 29.5 (b) 409.1 5.0 (c) Deferred income taxes, net 52.7 32.0 (b) 84.7 Other current assets 156.3 7.2 0.7 164.2 ------- ------ ------ ------ ------- Total current assets 1,062.7 97.1 64.2 40.9 1,264.9 Property, Plant and Equipment, net 567.6 49.0 33.2 9.1 (b) 633.5 (25.4) (d) Goodwill and Other Intangibles, net 412.1 68.2 217.8 680.0 (a) 877.4 (495.7) (b) (5.0) (c) Other Investments 545.3 545.3 Other Assets 143.7 2.5 6.4 10.0 (b) 162.6 -------- ------ ------ ------ -------- Total Assets $2,731.4 $216.8 $321.6 $213.9 $3,483.7 ======== ====== ====== ====== ======== Liabilities and Shareholders' Equity Current Liabilities Notes payable $ 483.4 $ 0.6 $180.0 (a) $ 664.0 Current portion of long-term debt 86.8 $ 1.3 (0.2) (d) 87.9 Accounts payable 63.3 7.2 5.7 (0.8) (d) 75.4 Accrued compensation 84.6 7.3 3.9 95.8 Accrued liabilities 315.4 19.1 19.6 50.0 (b) 402.4 (1.7) (d) Income taxes payable 10.4 2.1 0.4 (d) 12.9 -------- ------ ------ ------ -------- Total current liabilities 1,043.9 37.0 29.8 227.7 1,338.4 Long-term debt less current portion 315.6 0.3 1.7 500.0 (a) 817.6 Other Long-term liabilities 105.6 21.4 0.4 (17.0) (b) 109.4 (1.0) (d) Minority Interest 435.1 435.1 --------- ------ ------ ------ ------- Total liabilities 1,900.2 58.7 31.9 709.7 2,700.5 Shareholders' Equity 831.2 158.1 289.7 (400.1) (b) 783.2 (48.0) (b) (47.7) (d) Total liabilities and -------- ------ ------ ------ -------- shareholders' equity $2,731.4 $216.8 $321.6 $213.9 $3,483.7 ======== ====== ====== ====== ======== See Accompanying Notes to Pro Forma Financial Statements. BAUSCH & LOMB INCORPORATED, CHIRON VISION CORPORATION AND THE STORZ GROUP NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Pro Forma Balance Sheet Adjustments: (a) Represents consideration for the purchase of Chiron Vision and the Storz Group of $680.0 million. The acquisition was initially financed through short-term commercial paper debt through available credit facilities. However, for purposes of these pro forma statements, it is assumed that the acquisitions will be financed by $500.0 million of long-term borrowings and $180.0 million of short-term borrowings as this is management's intent. The actual amount and timing of the debt issuance(s) are subject to market and business conditions. (b) Represents the elimination of historical equity amounts for net assets acquired, preliminary allocations of the total purchase price to identified tangible and intangible assets and liabilities based on their relative fair values, and resulting goodwill of approximately $190.0 million. Included in this preliminary allocation of purchase price is a pre-tax one-time expense of $80.0 million ($48.0 million after taxes) related to purchased in-process research and development which has been charged directly to shareholders' equity for pro forma purposes and not reflected in the pro forma statements of earnings. Additionally, liabilities assumed include an accrual for approximately $40.0 million for restructuring costs primarily to eliminate duplicate activities of the acquired entities. (c) Represents adjustment to eliminate the LIFO inventory reserve included in the Storz Group's historical financial statements. Inventories will be carried at FIFO cost subsequent to the acquisition in accordance with the accounting policies of the company. (d) Represents an adjustment to eliminate assets and liabilities included in historical financial statements which were not acquired as part of the acquisition agreement. Pro Forma Statement of Earnings Adjustments: (e) Represents additional interest expense associated with the acquisition debt. The interest rate used for the long-term portion of the financing was assumed to be 6.67% for the nine months ended September 27, 1997 and 6.50% for the twelve months ended December 28, 1996. These rates approximate the company's long-term borrowing rate. The interest rate used for the short-term portion of the financing was the historical average commercial paper rate for each period. This rate was 5.67% for the nine months ended September 27, 1997 and 5.50% for the twelve months ended December 28, 1996. (f) Represents an adjustment to reclassify expenses relating to distribution and warehousing functions from selling, administrative and general expenses to cost of goods sold, in conformity with the company's accounting policies. (g) Represents an adjustment to record incremental amortization expense of goodwill and intangible assets based on the preliminary asset valuation. Goodwill is being amortized over periods of twenty-five to forty years on a straight line basis for pro forma purposes. Other intangibles, including customer lists, tradenames and workforce in place, are being amortized on a straight-line basis over periods ranging from five to 30 years for pro forma purposes. (h) Represents an adjustment to record incremental depreciation expense on acquired fixed assets based on the preliminary asset valuation. (i) Represents an adjustment to reflect the net change in the provision for income taxes based upon pro forma results of operations. The pro forma rate used for the nine months ended September 27, 1997 and for the twelve months ended December 28, 1996 was 37.5%, representing the company's effective tax rate for ongoing operating results for each of those periods. (j) Represents an adjustment to eliminate the LIFO inventory adjustment included in the historical Storz Group financial statements. 2. In addition to the expenses reported on the pro forma statement of earnings, the company anticipates that it will incur integration expenses related to the combining of Chiron Vision and the Storz Group to form its new surgical unit. These expenses were not included in the purchase price allocation or determination of goodwill as they do not meet the criteria for accrual as established under EITF Issue #95-3. Such expenses will be incurred in 1998 and 1999 as integration occurs. Additionally, in connection with the preliminary purchase price allocation, inventory values were increased by approximately $29.5 million. This step-up in value will be realized during the first half of 1998 as inventory is sold and result in reduced reported gross profit for that period. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BAUSCH & LOMB INCORPORATED /s/ Stephen C. McCluski Stephen C. McCluski Senior Vice President & Chief Financial Officer Dated: March 13, 1998 -----END PRIVACY-ENHANCED MESSAGE-----