-----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, U5okAFnSXPs1EIaTrnLaD27bdcgsMQ5XK2WHn/iLtVXRkRHAyqm65RB/1ZMVb/3u J23UtSZCzHHqN89IpQMyFg== 0000010427-99-000018.txt : 19990326 0000010427-99-000018.hdr.sgml : 19990326 ACCESSION NUMBER: 0000010427-99-000018 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19981226 FILED AS OF DATE: 19990325 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: 10-K SEC ACT: SEC FILE NUMBER: 001-04105 FILM NUMBER: 99572568 BUSINESS ADDRESS: STREET 1: BAUSCH & LOMB INCORPORATED STREET 2: ONE BAUSCH & LOMB PLACE CITY: ROCHESTER STATE: NY ZIP: 14604-2701 BUSINESS PHONE: 7163386000 MAIL ADDRESS: STREET 1: ONE BAUSCH & LAMB PLACE STREET 2: P O BOX 54 CITY: ROCHESTER STATE: NY ZIP: 14604-2701 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _____________________ FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 _____________________ For the fiscal year ended Commission file number December 26, 1998 1-4105 BAUSCH & LOMB INCORPORATED (Exact name of registrant as specified in its charter) NEW YORK 16-0345235 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) ONE BAUSCH & LOMB PLACE, ROCHESTER, NEW YORK 14604-2701 (Address of principal executive offices) (Zip Code) Registrant's telephone no., including area code: (716) 338-6000 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: Title of each class Name of each exchange on which registered Common Stock, $0.40 par value New York Stock Exchange $200,000,000 6.75% Notes, Due New York Stock Exchange 2004 Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value (based on the consolidated tape closing price on February 23, 1999) of the voting stock held by non-affiliates of the registrant was $3,393,433,140. For the sole purpose of making this calculation, the term "non-affiliate" has been interpreted to exclude directors and officers. Such interpretation is not intended to be, and should not be construed to be, an admission by Bausch & Lomb Incorporated or such directors or officers that such directors and officers are "affiliates" of Bausch & Lomb Incorporated, as that term is defined under the Securities Act of 1933. The number of shares of Voting Stock of the registrant, outstanding as of February 23, 1999, was 56,827,357, consisting of 56,171,809 shares of Common Stock and 655,548 shares of Class B stock, which are identical with respect to dividend and liquidation rights, and vote together as a single class for all purposes. DOCUMENTS INCORPORATED BY REFERENCE Parts I and The Bausch & Lomb 1998 Annual Report to II Shareholders for fiscal year ended December 26, 1998 ("Annual Report"). With the exception of the pages of the Annual Report specifically incorporated by reference herein, the Annual Report is not deemed to be filed as a part of this Report on Form 10-K. Part III Bausch & Lomb Incorporated Proxy Statement, dated March 23, 1999 ("Proxy Statement"). With the exception of the pages of the Proxy Statement specifically incorporated by reference herein, the Proxy Statement is not deemed to be filed as part of this Report on Form 10-K. TABLE OF CONTENTS PART I PAGE Item 1. Business 2 Item 2. Properties 5 Item 3. Legal Proceedings 7 Item 4. Submission of Matters to a Vote of Security 7 Holders PART II Item 5. Market for Bausch & Lomb Incorporated's Common Stock and Related Shareholder Matters 8 Item 6. Selected Financial Data 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 8 Item 8. Financial Statements and Supplementary Data 9 Item 9. Changes In and Disagreements With Accountants on Accounting And Financial Disclosure 9 PART III Item 10. Directors and Executive Officers of Bausch & Lomb Incorporated 10 Item 11. Executive Compensation 11 Item 12. Security Ownership of Certain Beneficial Owners and Management 11 Item 13. Certain Relationships and Related Transactions 11 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 12 Signatures 13 Schedules S-1 Exhibit E-1 Index Exhibits (Attached to this Report on Form 10-K) PART I ITEM 1. BUSINESS (a) GENERAL DEVELOPMENT OF BUSINESS Bausch & Lomb Incorporated is a world leader in the development, manufacture and marketing of healthcare products for the eye. Bausch & Lomb was incorporated in the State of New York in 1908 to carry on a business which was established in 1853. Its principal executive offices are located in Rochester, New York. Unless the context indicates otherwise, the terms "Bausch & Lomb" and "company" as used herein refer to Bausch & Lomb Incorporated and its consolidated subsidiaries. Highlights of the general development of the business of Bausch & Lomb during 1998 are discussed below. During the year ending December 26, 1998, the company successfully integrated the newly acquired surgical businesses into its existing product lines and furthered its transition toward becoming a technology-based healthcare company for the eye. Reported revenues for 1998 were $2,363 million, an increase of $447 million or 23% from 1997. Net earnings for 1998 amounted to $25 million, or $0.45 per diluted share, compared to $49 million, or $0.89 per diluted share, reported in 1997. Significant operational matters affecting 1998 included restructuring charges, disposition of a non-core business, and goodwill impairment and purchased in-process research and development (R&D) charges. As described in the 1997 Annual Report on Form 10-K, the company acquired Chiron Vision Corporation for $298 million and the Storz Instrument Company for $370 million in the first quarter of 1998. The purchase price was allocated to net assets acquired and to purchased in-process research and development. In accordance with applicable accounting rules, purchased in-process R&D is required to be expensed and, accordingly a pre-tax charge of $41 million was recorded in the first quarter of 1998. A pre-tax restructuring charge of $11 million was recorded in 1998 related to the restructuring program begun in 1997. In early 1997, the company's board of directors approved plans to further restructure all business segments as well as certain corporate administrative functions. This restructuring effort is expected to significantly reduce the company's fixed cost structure and realign the organization to meet its strategic objectives. Restructuring charges concluded during the second quarter of 1998. In May 1998, the company sold its skin care business to The Andrew Jergens Company for $135 million in cash plus the assumption of certain liabilities. The company recorded a pre- tax gain of $56 million on the transaction. This business marketed the Curel and Soft Sense brands of skin care products. During the third quarter of 1998, the company sold $300 of putable/callable long-term notes with varying maturities and interest rates, and $200 million of 30-year debentures. The proceeds were used to reduce short-term debt. In November 1998, the company announced that as a result of its strategic planning process, an investment-banking firm had been hired to help assess strategic alternatives for the sunglass business. Alternatives to be considered include joint ventures, sale, spin-off, or other business combinations. The business consists of well-known sunglass brands including Ray-Ban, Killer Loop, Arnette and Revo. In the fourth quarter of 1998, the company recorded an impairment charge of $85 million or $1.51 per diluted share, with no associated tax benefit, related to the goodwill acquired as part of the company's Miracle Ear hearing aid business. During 1998, the company began to reassess the strategic value of the business to its total portfolio. Additionally, during the second half of the year, profitability of the business began to decline. In the fourth quarter, the company's senior management publicly announced that it would be focusing on healthcare products for the eye and no longer had the goal of becoming a diversified healthcare company, leading to the decision to divest the business. The combination of these factors, and their impact on projected future cash flows of the business, led to the conclusion that the goodwill had become impaired. (b) FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS Information concerning sales, operating earnings and assets attributable to each of Bausch & Lomb's operating segments is set forth on pages 26-30 and 48-50 of the Annual Report and is incorporated herein by reference. (c) NARRATIVE DESCRIPTION OF BUSINESS Operating Segments Bausch & Lomb's operations are classified into four segments: vision care, pharmaceuticals/surgical, eyewear and healthcare. Below is a description of each segment and information to the extent that it is material to an understanding of the company's business taken as a whole. Additional information can be found on pages 3 and 7-23 of the Annual Report and is incorporated herein by reference. Vision Care - The vision care segment includes contact lenses and lens care products, with lenses comprising approximately 45% and lens care products representing approximately 55% of segment revenues. Vision care products are marketed to licensed eye care professionals, pharmaceutical retailers and mass merchandisers by the company's own sales force and distributors. Pharmaceuticals/Surgical - The pharmaceuticals/surgical segment manufactures and sells generic and proprietary prescription pharmaceuticals with a strategic emphasis in the ophthalmic field and over-the-counter (OTC) ophthalmic medications, and products and equipment for cataract, refractive, and other ophthalmic surgery. Surgical products accounted for approximately 60% of this segment's revenues in 1998 and were entirely incremental to 1997 results. Pharmaceuticals products accounted for approximately 40% of 1998 segment revenues. These products are marketed by the company's sales force and distributed through wholesalers, independent pharmacies, drug stores, food stores, mass merchandisers and hospitals. Eyewear - The eyewear segment includes premium-priced sunglasses and vision accessories. Eyewear products are distributed worldwide through the company's direct sales force, as well as through distributors, wholesalers and manufacturers' representatives. These products are marketed through optical stores, sunglass specialty stores, department stores, catalog showrooms, mass merchandisers and sporting goods stores. Healthcare - Included in this segment are businesses which provide purpose-bred laboratory animals pathogen-free eggs, biomedical products and services and hearing aids. Biomedical products are sold through the company's own sales force to the scientific research community. Hearing aids are distributed primarily through the Miracle-Ear franchise system and company- owned stores. Suppliers and Customers Materials and components in all four of the company's industry segments are purchased from a wide variety of suppliers and the loss of any one supplier would not adversely affect the company's business to a significant extent. No material part of the company's business taken as a whole is dependent upon a single or a few customers. However, in the eyewear segment approximately 12% of segment sales are attributable to Sunglass Hut International and in the vision care segment approximately 9% of segment sales are attributable to Wal- Mart. Patents, Trademarks and Licenses While in the aggregate the company's patents are of material importance to its businesses taken as a whole, no single patent or patent license or group of patent licenses relating to any particular product or process is material to any industry segment. The company actively pursues technology development and acquisition as a means to enhance its competitive position in its business segments. In the vision care segment, Bausch & Lomb has developed significant consumer and eye care professional recognition of products sold under the Bausch & Lomb, ReNu, ReNu MultiPlus, Sensitive Eyes, SeeQuence, Medalist, Boston, Optima FW and SofLens66 trademarks. Bausch & Lomb , Dr. Mann Pharma, Storz Millennium, Technolas, Hydroview and Vitrasert are trademarks receiving substantial consumer recognition in the pharmaceuticals/surgical segment. Ray-Ban, Revo, Wayfarer, Arnette and Killer Loop are trademarks receiving substantial consumer recognition in the eyewear segment. In the healthcare segment, Miracle-Ear, Mirage and Charles River are trademarks receiving significant consumer and industry professional recognition. Seasonality and Working Capital Some seasonality exists for sunglasses in the eyewear segment. The accumulation of inventories of such products in advance of expected shipments reflects the seasonal nature of the products. In general, the working capital practices followed in each of the company's segments are typical of those businesses. Competition Each industry is highly competitive in both U.S. and non-U.S. markets. In all of its segments, Bausch & Lomb competes on the basis of product performance, quality, technology, price, service, warranty and reliability. In the eyewear segment, the company also competes on the basis of style. Research and Development Research and development constitutes an important part of Bausch & Lomb's activities. In 1998, the company's research and development expenditures totaled $92 million, as compared to $67 million in 1997 and $75 million in 1996. Environment Although Bausch & Lomb is unable to predict what legislation or regulations may be adopted or enacted in the future with respect to environmental protection and waste disposal, existing legislation and regulations have had no material adverse effect on its capital expenditures, earnings or competitive position. Capital expenditures for property, plant and equipment for environmental control facilities were not material during 1998 and are not anticipated to be material for 1999 or 2000. Year 2000 Software Compliance Information regarding the identification and resolution of year 2000 data processing issues is set forth on pages 35-36 of the Annual Report and such information is incorporated herein by reference. Number of Employees Bausch & Lomb employed approximately 15,000 persons as of December 26, 1998. (d) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS Information as to sales and long-lived assets attributable to U.S. and non-U.S. geographic regions is set forth on pages 31-32 and page 50 of the Annual Report and is incorporated herein by reference. ITEM 2. PROPERTIES The principal manufacturing, distribution and production facilities and other important physical properties of Bausch & Lomb at March 1, 1999 are listed below and are grouped under the principal operating segment to which they relate. Certain properties relate to more than one segment. Except where otherwise indicated by footnote, all properties shown are held in fee and are not subject to major encumbrances. Eyewear Manufacturing Plants Distribution Centers San Antonio, TX San Clemente, CA (2) Guangzhou, China (2) San Antonio, TX New Territories, Hong Kong (2) North Ryde, Australia (2) Bhiwadi, India Guangzhou, China (2) Waterford, Ireland (2) Mississauga, Ontario Canada (2) Pederobba, Italy New Territories, Hong Kong (2) Nuevo Laredo, Mexico (2) Hoofddorp, Netherlands (2) Healthcare Production Facilities Hollister, CA (2) Maribyrnong, Australia (2) Lebanon, CT Melbourne, Australia (2) Preston, CT Woodend, Australia (2) Storrs, CT Brussels, Belgium Voluntown, CT St. Constant, Canada Summerland Key, FL Prague, Czech Republic (2) Colbert, GA (2) Margate, England Eureka, IL West Sussex, England Roanoke, IL Lyon, France Windham, ME St. Aubin-les-Elbeuf, France Southbridge, MA (2) St. Germain, France West Brookfield, MA (2) Extertal, Germany Wilmington, MA Kisslegg, Germany Portage, MI Sulzfeld, Germany O'Fallon, MO Budapest, Hungary (2) Raleigh, NC Calco, Italy Pittsfield, NH Atsugi, Japan Newfield (Lakeview), NJ Hino, Japan Stone Ridge (Kingston), NY Tskuba, Japan (2) Troy, NY (2) Tuhuacan, Mexico Malvern, PA (2) Someren, Netherlands Charleston, SC (2) Barcelona, Spain (2) Houston, TX Uppsala, Sweden (2) Manufacturing Plants Distribution Centers Golden Valley, MN (1) Preston, CT (2) Kitchener, Ontario, Canada (2) Wilmington, MA (2) Golden Valley, MN (1) Pharmaceuticals/Surgical Manufacturing Plants Distribution Centers Claremont, CA (2) Tampa, FL Irvine, CA (2) Earth City, MO (2) Clearwater, FL Artarmon, Australia (2) Tampa, FL Heidelberg, Germany (2) St. Louis, MO Bracknell, United Kingdom (2) Lyon, France (2) Berlin, Germany Munich, Germany (2) Vision Care Manufacturing Plants Distribution Centers Sarasota, FL (1) Rochester, NY (Optics Center) (1) (2) Wilmington, MA (2) Greenville, SC (20 Rochester, NY Lynchburg, VA (2) (Optics Center) (1) (2) North Ryde, Australia (2) Greenville, SC New Territories, Hong Kong (2) Porto Alegre, Brazil Hoofddrop, Netherlands (2) Beijing, China Mississauga, Ontario Canada (2) Bhiwadi, India Livingston, Scotland (2) Waterford, Ireland (2) Milan, Italy Livingston, Scotland (2) Umsong-Gun (Seoul), South Korea Barcelona, Spain Madrid, Spain Hastings, United Kingdom Corporate Facilities Rochester, NY One Bausch & Lomb Place (1) (2) Optics Center (1) (2) 1295 Scottsville Road (2) (1) This facility is financed under a tax-exempt financing arrangement (2) This facility is leased Bausch & Lomb considers that its facilities are suitable and adequate for the operations involved. All facilities are being productively utilized. ITEM 3. LEGAL PROCEEDINGS 1. The company has stipulated to certification by a New York State Supreme Court of a nationwide class of purchasers of Sensitive Eyes Rewetting Drops, Boston Rewetting Drops, ReNu Rewetting Drops and Bausch & Lomb Eye Wash between May 1, 1989 and June 30, 1995. This action arose out of matters commenced in 1994 and 1995 alleging that the company misled consumers in its marketing and sale of those products. On April 21, 1998, the court dismissed all of the plaintiffs' claims. The plaintiffs have appealed this ruling. 2. In several actions, the company is defending its long- standing policy of selling contact lenses only to licensed professionals against claims that it was adopted in conspiracy with others to eliminate alternate channels of trade from the disposable contact lens market. These matters include (i) a consolidated action in the United States District Court for the Middle District of Florida filed in June 1994 by the Florida Attorney General, and now includes claims by the attorneys general for 21 other states, and (ii) individual actions pending in California and Tennessee state courts. The company defends its policy as a lawfully adopted means of ensuring effective distribution of its products and safeguarding consumers' health. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS Inapplicable. PART II ITEM 5. MARKET FOR BAUSCH & LOMB INCORPORATED'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS The sections entitled "Dividends" and "Quarterly Stock Prices" and table entitled "Selected Financial Data" on pages 34, 37 and 62, respectively, of the Annual Report and the section entitled "Outstanding Shares" on page 1 of the Proxy Statement are incorporated herein by reference. The company's common stock is traded on the New York Stock Exchange. ITEM 6. SELECTED FINANCIAL DATA The table entitled "Selected Financial Data" on page 62 of the Annual Report is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The section entitled "Financial Review" on pages 25-36 of the Annual Report is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company, as a result of its global operating and financing activities, is exposed to changes in interest rates and foreign currency exchange rates that may adversely affect its results of operations and financial position. In seeking to minimize the risks and/or costs associated with such activities, the company manages exposures to changes in interest rates and foreign currency exchange rates primarily through its use of derivatives. The company does not utilize financial instruments for trading or other speculative purposes, nor does it utilize leveraged financial instruments. The company uses foreign currency forward contracts to hedge foreign currency transactions and equity investments in non-U.S. subsidiaries. Of the outstanding contracts for both 1998 and 1997, the foreign currencies purchased were primarily Irish pounds, Singapore and Hong Kong dollars, and with respect to 1997, Swiss Francs. The foreign currencies sold for the same periods were primarily German marks, Netherlands guilders and Singapore dollars. The magnitude and nature of such hedging activities are explained further in Note 14, "Financial Instruments", on pages 57-58 of the Annual Report. A sensitivity analysis to measure the potential impact that a change in foreign currency exchange rates would have, net of hedging activity, on the company's net income indicates that, based on its year-end positions, if the U.S. dollar weakened against all foreign currencies by 10%, the company would incur an after tax loss of less than $1 million. The company enters into interest rate swap and cap agreements to effectively limit exposure to interest rate movements within the parameters of its interest rate hedging policy. This policy requires that interest rate exposure from floating-rate assets be offset by a substantially similar amount of floating-rate liabilities. Interest rate derivatives are used to readjust this natural hedge position whenever it becomes unbalanced beyond policy limits. For foreign currency denominated borrowing and investing transactions, cross-currency interest rate swap contracts are used, which, in addition to exchanging cash flows derived from rates, exchange currencies at both inception and termination of the contract. A sensitivity analysis to measure the potential impact that a change in interest rates would have, net of hedging activity, on the company's net income indicates that a one percentage point increase in interest rates would increase the company's net interest expense by $1.3 million. Counterparties to the financial instruments discussed above expose the company to credit risks to the extent of non- performance. The credit ratings of the counterparties, which consist of a diversified group of major financial institutions, are regularly monitored and thus credit loss arising from counterparty non-performance is not anticipated. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements, including the notes thereto, together with the sections entitled "Report of Independent Accountants" and "Quarterly Results" on pages 38-60, 61 and 37 of the Annual Report, respectively, are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Inapplicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF BAUSCH & LOMB INCORPORATED Information with respect to directors is included in the Proxy Statement on pages 3-7 and such information is incorporated herein by reference. Set forth below are the names, ages (as of March 1, 1999), positions and offices held by, and a brief account of the business experience during the past five years of, each executive officer. Name and Age Position William M. Chairman and Chief Executive Officer since Carpenter (46) January 1999; Chief Executive Officer (1997- 1998); President and Chief Operating Officer (1995-1996); Executive Vice President, Global Business Manager, Eyewear (1995- 1996); President and Chief Executive Officer, Reckitt & Coleman, Inc. (1994- 1995); President and Chief Operating Officer, Reckitt and Coleman, Inc. (1992- 1994). Carl E. Sassano President and Chief Operating Officer since (49) January 1999; Executive Vice President and President - Vision Care (1997-1998); Senior Vice President and Global Business Manager, Vision Care (1996); Global Business Manager, Contact Lens Products (1994-1996); Senior Vice President and President, Contact Lens Division (1994-1996); Senior Vice President and President, Polymer Technology Corporation, a subsidiary of the company (1992-1994). Dwain L. Hahs (46) Executive Vice President and President - Eyewear since April 1997; Senior Vice President, International Operations (1996- 1997); Vice President and President Europe, Middle East and Africa Division (1994-1996). Daryl M. Dickson Senior Vice President, Human Resources since (47) November 1996; Vice President Human Resources (Foods group), Quaker Oats Company (1993-1996). Hakan S. Edstrom Senior Vice President, (48) Surgical/Pharmaceutical since January 1999; Vice President and President, Bausch & Lomb Surgical (December 1997-December 1998); President Hoefer Pharmacia Biotech, Inc. (1997); Senior Vice President, Corporate Ophthalmic Business Development, Pharmacia & Upjohn, Inc. (1996-1997); President and Chief Executive Officer, Pharmacia Ophthalmics Inc. (1989-1996). James C. Foster Senior Vice President since 1994 and (48) President and Chief Executive Officer of Charles River Laboratories, Inc., a subsidiary of the company, since 1991; Vice President (1991-1994). Stephen C. Senior Vice President and Chief Financial McCluski (46) Officer since 1995; Vice President and Controller (1994); President, Outlook Eyewear Company (1992-1994). Thomas M. Senior Vice President and Chief Technical Riedhammer (50) Officer since January 1999; Senior Vice President and President, Worldwide Pharmaceuticals (1998); Senior Vice President and President, Worldwide Pharmaceutical, Surgical, and Hearing Care Products (1994-1998); Vice President (1993- 1994); President, Worldwide Pharmaceuticals (1994). Robert B. Stiles Senior Vice President and General Counsel (49) since June 1997; Staff Vice President and Assistant General Counsel (1994-1997); Assistant General Counsel (1991-1994). Robert D. Vice President and Chief Information Officer Colangelo (39) since November 1997; Vice President and Controller, Global Vision Care (1996-1997); Vice President and Controller, Contact Lens Division (1995-1996); General Manager, Venezuela and Colombia (1992-1995). Jurij Z. Kushner Vice President, Controller since 1995; Vice (48) President, Operations, Personal Products Division (1994-1995); Vice President and Controller, Personal Products Division (1992- 1994). All officers serve on a year-to-year basis through the day of the annual meeting of shareholders of the company, and there is no arrangement or understanding among any of the officers of the company and any other persons pursuant to which such officer was selected as an officer. ITEM 11. EXECUTIVE COMPENSATION The portions of the "Executive Compensation" section entitled "Report of the Committee on Management", "Compensation Tables" and "Defined Benefit Retirement Plans", the second and third paragraphs of the section entitled "Board of Directors", the graph entitled "Comparison of Five-Year Cumulative Total Shareholder Return" and the second paragraph of the section entitled "Related Transactions, Employment Contracts and Termination of Employment and Change in Control Arrangements" included in the Proxy Statement on pages 10-14, 15-17, 18-20, 2, 18 and 20 respectively, are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The section entitled "Security Ownership of Certain Beneficial Owners and Directors and Executive Officers" in the Proxy Statement on page 8-10 is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The first paragraph of the section entitled "Related Transactions, Employment Contracts and Termination of Employment and Change in Control Arrangements" on page 20 of the Proxy Statement is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K The following documents or the portions thereof indicated are filed as a part of this report. (a) INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES COVERED BY REPORTS OF INDEPENDENT ACCOUNTANTS. 1. Data incorporated by reference in Page in Item 8 from the Annual Report Annual Report Report of Independent Accountants 61 Balance Sheet at December 26, 1998 and 39 December 27, 1997 For the years ended December 26, 1998, December 27, 1997 and December 28, 1996 Statement of Income 38 Statement of Cash Flows 40 Statement of Changes in Shareholder's Equity 41 Notes to Financial Statements 42-60 2. Filed herewith Report of Independent Accountants on Financial Statement Schedules Exhibit 23 For the years ended December 26, 1998, December 27, 1997 and December 28, 1996: SCHEDULE II-Valuation and Qualifying Accounts Page S-1 All other schedules have been omitted because the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements or the notes thereto. (b) REPORTS ON FORM 8-K Inapplicable. (c) ITEM 601 EXHIBITS Those exhibits required to be filed by Item 601 of Regulation S-K are listed in the Exhibit Index immediately preceding the exhibits filed herewith and such listing is incorporated herein by reference. Each of Exhibits (10)-a through (10)-v is a management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 14(c) of this report. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BAUSCH & LOMB INCORPORATED Date March 24, 1999 By:/s/ William M. Carpenter William M. Carpenter Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Principal Executive Officer Date: March 24, 1999 By:/s/ William M. Carpenter William M. Carpenter Chairman and Chief Executive Officer Principal Financial Officer Date: March 24, 1999 By:/s/ Stephen C. McCluski Stephen C. McCluski Senior Vice President and Chief Financial Officer Controller Date: March 24, 1999 By:/s/ Jurij Z. Kushner Jurij Z. Kushner, Vice President and Controller Directors Franklin E. Agnew William M. Carpenter Domenico De Sole Jonathan S. Linen Ruth R. McMullin John R. Purcell Linda Johnson Rice Alvin W. Trivelpiece William H. Waltrip Kenneth L. Wolfe Date: March 24, 1999 By:/s/ Robert B. Stiles Robert B. Stiles Attorney-in-Fact Bausch & Lomb Incorporated SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Reserves for Doubtful Accounts December 26, December 27, December 28, 1998 1997 1996 (Dollar amounts in thousands) Balance at beginning of year $ 14,015 $ 13,278 $ 11,232 Activity for the year: Provision charged to income 8,568 4,310 8,556 (Reductions)/additions resulting from (divestiture)/ acquisition activity 9,868 68 (399) Accounts written off (5,787) (5,179) (6,899) Recoveries on accounts previously written off 144 1,538 788 Balance at end of year $ 26,808 $ 14,015 $ 13,278
EXHIBIT INDEX S-K Document Item 601 No (3)-a Certificate of Incorporation of Bausch & Lomb Incorporated (filed as Exhibit (3)-a to the company's Annual Report on Form 10-K for the fiscal year ended December 29, 1985, File No. 1-4105, and incorporated herein by reference). (3)-b Certificate of Amendment of Bausch & Lomb Incorporated (filed as Exhibit (3)-b to the company's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-4105, and incorporated herein by reference). (3)-c Certificate of Amendment of Bausch & Lomb Incorporated (filed as Exhibit (3)-c to the company's Annual Report on Form 10-K for the fiscal year ended December 26, 1992, File No. 1-4105, and incorporated herein by reference). (3)-d By-Laws of Bausch & Lomb Incorporated, as amended, effective October 26, 1998 (filed as Exhibit (3)-a to the company's Form 10-Q for the quarter ended September 26, 1998, File No. 1-4105, and incorporated herein by reference). (4)-a See Exhibit (3)-a. (4)-b See Exhibit (3)-b. (4)-c See Exhibit (3)-c. (4)-d Form of Indenture, dated as of September 1, 1991, between the company and Citibank, N.A., as Trustee, with respect to the company's Medium-Term Notes (filed as Exhibit 4-(a) to the company's Registration Statement on Form S-3, File No. 33-42858, and incorporated herein by reference). (4)-e Supplemental Indenture No. 1, dated May 13, 1998, between the Company and Citibank N.A. (filed as Exhibit 3.1 to the Company's Current Report on Form 8-K, dated July 24, 1998, File No. 1-4105, and incorporated herein by reference). (4)-f Supplemental Indenture No. 2, dated as of July 29, 1998, between the Company and Citibank N.A. (filed as Exhibit 3.2 to the Company's Current Report on Form 8-K, dated July 24, 1998, File No. 1-4105, and incorporated herein by reference). (10)-a Change of Control Employment Agreement with certain executive officers of the company (filed as Exhibit (10)-a to the company's Annual Report on Form 10-K for the fiscal year ended December 29, 1990, File No. 1-4105, and incorporated herein by reference). (10)-b Change of Control Employment Agreement with certain executive officers of the company (filed as Exhibit (10)-b to the company's Annual Report on Form 10-K for the fiscal year ended December 28, 1996, No. 1-4105, and incorporated herein by reference). (10)-c Amended and restated Supplemental Retirement Income Plan II (filed as Exhibit (10)-f to the company's Annual Report on Form 10-K for the fiscal year ended December 29, 1990, File No. 1-4105, and incorporated herein by reference). (10)-d Supplemental Retirement Income Plan III (filed as Exhibit (10)-g to the company's Annual Report on Form 10-K for the fiscal year ended December 26, 1992, File No. 1-4105, and incorporated herein by reference). (10)-e The 1982 Stock Incentive Plan (filed as Exhibit III-F to the company's Annual Report on Form 10-K for the fiscal year ended December 26, 1982, File No. 1-4105, and incorporated herein by reference). (10)-f Amendment to the 1982 Stock Incentive Plan (filed as Exhibit (10)-I to the company's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-4105, and incorporated herein by reference). (10)-g Amendment to the 1982 Stock Incentive Plan (filed as Exhibit (10)-k to the company's Annual Report on Form 10-K for the fiscal year ended December 29, 1990, File No. 1-4105, and incorporated herein by reference). (10)-h The 1987 Stock Incentive Plan (filed as Exhibit I.B to the company's Registration Statement on Form S-8, File No. 33- 15439, and incorporated herein by reference). (10)-i Amendment to the 1987 Stock Incentive Plan (filed as Exhibit (10)-n to the company's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, File No. 1-4105, and incorporated herein by reference). (10)-j Amendment to the 1987 Stock Incentive Plan (filed as Exhibit (10)-n to the company's Annual Report on Form 10-K for the fiscal year ended December 29, 1990, File No. 1-4105, and incorporated herein by reference). (10)-k Amended and restated 1990 Stock Incentive Plan (filed as Exhibit (10)-y to the company's Annual Report on form 10-K for the fiscal year ended December 28, 1996, File No. 1- 4105, and incorporated herein by reference). (10)-l Amended and restated Director Deferred Compensation Plan (filed as Exhibit (10)-bb to the company's Annual Report on Form 10-K for the fiscal year ended December 28, 1996, File No. 1-4105, and incorporated herein by reference). (10)-m Amended and restated Executive Deferred Compensation Plan (filed as Exhibit (10)-cc to the company's Annual Report on Form 10-K for the fiscal year ended December 28, 1996, File No. 1-4105, and incorporated herein by reference). (10)-n Retirement Benefit Restoration Plan (filed as Exhibit (10)-t to the company's Annual Report on Form 10-K for the fiscal year ended December 28, 1991, File No. 1-4105, and incorporated herein by reference). (10)-o Annual Retainer Stock Plan for Non-Employee Directors (filed as Exhibit (10)-dd to the company's Annual Report on Form 10- K for the fiscal year ended December 28, 1996, File No. 1- 4105, and incorporated herein by reference). (10)-p Amended and restated Charles River Laboratories, Inc. Executive Life Insurance / Supplemental Retirement Income Plan (filed as Exhibit (10)-t to the company's Annual Report on Form 10-K for the fiscal year ended December 27, 1997, File No. 1-4105, and incorporated herein by reference). (10)-q Agreement with William H. Waltrip (filed as Exhibit (10)-u to the company's Annual Report on Form 10-K for the fiscal year ended December 27, 1997, File No. 1-4105, and incorporated herein by reference). (10)-r Corporate Officer Separation Plan (filed as Exhibit (10)-v to the company's Annual Report on Form 10-K for the fiscal year ended December 27, 1997, File No. 1-4105, and incorporated herein by reference). (10)-s EVA Management Incentive Compensation Plan (filed as Exhibit (10)-w to the company's Annual Report on Form 10-K for the fiscal year ended December 27, 1997, File No. 1-4105, and incorporated herein by reference). (10)-t 1998 Amendment to the Bausch & Lomb Incorporated 1990 Stock Incentive Plan (filed as Exhibit (10)-a to the company's Form 10-Q for the quarter ended June 27, 1998, File No. 1- 4105, and incorporated herein by reference). (10)-u Management Incentive Compensation Plan (filed as Exhibit (10)-b to the company's Form 10-Q for the quarter ended June 27, 1998, File No. 1-4105, and incorporated herein by reference). (10)-v LTI Deferred Compensation Plan, as amended, effective December 8, 1998 (filed herewith). (11) Statement Regarding Computation of Per Share Earnings (filed herewith). (12) Statement Regarding Computation of Ratio of Earnings to Fixed Charges (filed herewith). (13) The Bausch & Lomb 1998 Annual Report to Shareholders for the fiscal year ended December 26, 1998 (filed herewith). With the exception of the pages of the Annual Report specifically incorporated by reference herein, the Annual Report is not deemed to be filed as a part of this Report on Form 10-K. (21) Subsidiaries (filed herewith). (23) Report of Independent Accountants on Financial Statement Schedules and Consent of Independent Accountants (filed herewith). (24) Power of attorney with respect to the signatures of directors in this Report on Form 10-K (filed herewith). (27) Financial Data Schedule (filed herewith). EX-10.V 2 As approved by the Committee on Management Of the Board of Directors As of April 1, 1998 As amended as of December 8, 1998 LTI DEFERRED COMPENSATION PLAN 1. Introduction This LTI Deferred Compensation Plan (the "Plan") provides the opportunity for participants in the Bausch & Lomb Incorporated (the "Company") Long Term Incentive Plan (the "LTI Plan") to defer their awards under the LTI Plan. 2. Effective Date The effective date of this Plan is April 1, 1998 (the "Effective Date"). It covers eligible compensation earned after the Effective Date and deferred hereunder. 3. Eligibility Commencing on the Effective Date, the Plan is available to all participants in the LTI Plan who (1) are in the active employ of the Company on the date they make a deferral election and (2) are with a select group of management or highly compensated employees as provided for in Title I of ERISA. Individuals who are not current participants in the LTI Plan will become eligible to participate in this Plan upon receipt of their first grant under the LTI Plan. 4. Amount of Deferral An eligible employee may become a participant in the Plan by electing to defer any grant or award under the LTI Plan. Deferrals must be as to an entire grant, and partial deferrals of individual grants are not permitted. 5. Time of Deferral Election a) A participant's election to defer compensation must be made by written notice to the Plan Administrator on behalf of the Company before the compensation is earned. Without limiting the generality of the foregoing, subparagraphs 5(b) and 5(c) and 5(d) identify particular instances as to when effective elections may be made. b) For any grants in the first calendar quarter of 1998 which have a performance cycle ending before January 1, 1999, deferral elections may be made at any time after the Effective Date of this Plan but not later than April 30, 1998. c) For any person newly eligible to participate in this Plan, as set forth in paragraph 3 hereof, an initial deferral election may be made at any time within 30 days of being newly eligible. d) For any LTI Plan grants with a performance cycle of greater than one year, deferral elections may be made at any time prior to the end of the Bausch & Lomb fiscal year next preceding the final Bausch & Lomb fiscal year of the performance cycle. 6. Deferral Election a) To defer compensation under the Plan, a participant must give written notice to the Plan Administrator. This notice must include (1) identification, by Cycle End Date (as defined in the LTI Plan), of the grant to be deferred; (2) the payment commencement date (i.e. retirement or date certain); (3) the method of payment desired (i.e. annual installments, lump sum) and, if annual, the number of years of installment payments; and (4) the designation of payment to the participant's estate or beneficiary in the event of the participant's death. The Company will provide notice forms for deferral elections (see Exhibit), which shall include identification of payment methods and installments as may be approved in advance by the Plan Administrator. b) If a participant names someone other than his or her spouse as a beneficiary in the event of participant's death, a spousal consent form must be signed by that participant's spouse and returned to the Company. c) For all compensation deferred after the Effective Date of this Plan, a participant may elect only two payment options, each consisting of a payment commencement date and a method of payment. d) If a participant elects to receive his or her deferred compensation in installments, the installment payments will be calculated in the following manner: the participant's account balance at the payment commencement date will be multiplied by a fraction, the numerator of which is 1, and the denominator of which is the number of remaining installment periods. e) Retirement, for purposes of the Plan, shall mean the date on which the participant is both (i) at least age 55 and (ii) no longer employed by the Company. 7. Deferred Compensation Investment Account a) An investment account will be established for each participant ("Investment Account") to record all deferrals a participant makes under this Plan plus all earnings on these deferrals. b) All deferrals will be deferred and, subject to subparagraphs (g) and (h) below, held in shares of Company Stock. c) Prior to the vesting of any grants, deferred shares will be held by the Plan as Class B shares of the Company. d) Upon vesting of any grants, shares previously held as Class B shares will be converted, on a one-to-one basis, to regular shares of Company Common stock and invested in a rabbi trust (the "Trust") established for this purpose. e) If any grant does not vest, all shares theretofore held by the Company as Class B stock shall be forfeited and the participant's Investment Account shall be adjusted to reflect such forfeiture. f) Dividends on deferred shares, whether vested or not, will be paid into the Trust and invested in regular shares of Company common stock. g) All investments in Investment Accounts under the Plan are hypothetical to the participant, regardless of whether or not the Plan holds Class B or Common shares, or other assets. At the time of each deferral of an LTI Plan award into the Plan, a participant will be credited with an imputed number of shares for the Investment Account. Participants will have no right to vote these imputed shares. Thereafter, the value of a participant's Investment Account will fluctuate in accordance with the actual performance of the Investment Account. Dividends on the imputed shares also will be credited to the participant's Investment Account. Distributions and forfeitures will be deducted from the Investment Account. h) All vested deferred amounts shall remain invested in Company Common stock. 8. Payment of Deferred Compensation a) A participant's right to payment of deferred compensation under the Plan is a contractual obligation of the Company to the participant, and his or her right to such monies or assets shall be an unsecured claim against the general assets of the Company. However, the Company has established the Trust as an irrevocable rabbi trust for participants for the purpose of holding, after vesting of awards, assets used to pay deferred compensation required to be paid by this Plan. The Company shall make periodic contributions to the Trust as may be required to fund amounts payable under the Plan. The Trust provides a participant with assurance that deferred monies or assets will be paid to the participant in accordance with the Plan, except in the event of the Company's bankruptcy or insolvency. Notwithstanding the establishment of the Trust, the Company remains ultimately responsible to pay deferred compensation to each participant. This obligation shall be met from the general assets of the Company if the Trust has insufficient funds to pay benefits. b) Payments of deferred compensation to a participant shall be pursuant to the participant's deferral election notice given pursuant to Section 6 hereof. Except as provided in Subsections (c) and (d) below, a participant may not change the payment commencement date or method of payment for monies or assets already in his or her Investment Account. However, a participant may choose a different payment commencement date and/or method of payout for future deferrals subject to Section 6 above. c) If, in the discretion of the Plan Administrator, a participant has a need for funds due to a financial emergency beyond the control of the participant, a payment may be made to the participant from the vested funds in his or her account under the Trust at a date earlier than the payment commencement date chosen by the participant at the time of deferral. A distribution based upon financial hardship may not exceed the amount required to meet the immediate financial need created by the hardship less the amount reasonably available to the participant from other sources. Notwithstanding the foregoing, a participant may not obtain a distribution based on financial hardship which would create liability of the participant to the Company under Section 16. As used herein, the term "Section 16" shall mean Section 16 of the Securities Exchange Act of 1934. A participant requesting a hardship distribution must supply the Plan Administrator with a statement indicating the nature of the need creating the financial hardship, the fact that all other available resources are insufficient to meet the need, and any other information that the Plan Administrator deems necessary to evaluate whether a financial hardship exists. d) A participant may make an early withdrawal of vested funds or assets held in the participant's Account under the Trust at anytime, subject to the following penalties: Forfeiture of 10% of the amount of the early withdrawal; and Suspension of eligibility to make further deferral elections for a period of five years. Notwithstanding the foregoing, a participant may not obtain a distribution under this Subsection which would create liability of the participant to the Company under Section 16. e) In the event of a participant's death before he or she has received all of the deferred compensation payments to which he or she is entitled, payments will be made, according to the participant's deferral election pursuant to Section 6 hereof, to the participant's estate or beneficiary either (a) continuing in the same manner as designated with respect to payments to the participant while living or (b) in a single lump sum payment the value of which is determined as of the date immediately following the participant's death and paid on the first January 15 or July 15 following such valuation date (or as soon as reasonably possible thereafter). f) All payments made to participants under the Plan shall be subject to all taxes required to be withheld under applicable laws and regulations of any governmental authorities. g) Upon termination of a participant as an employee of the Company, the first day of February next following the date of termination will be deemed to be the payment commencement date for account balances of less than $3,500 (or such higher amount as may be determined by the Plan Administrator) and such payment will be made to the participant in a lump sum. h) Upon a Change of Control (as defined below) notwithstanding a participant's payment commencement date with respect to any compensation deferred hereunder or method of payout with respect to any compensation deferred hereunder, all amounts in a participant's deferred compensation account (including earnings credited thereto) shall be due and payable to the participant in a cash lump sum payment within 15 days following the Change of Control; provided, however that amounts which shall be due and payable in accordance with this subparagraph 8(h) shall be paid, at the election of the participant, in a manner so as not to create liability of the participant to the Company under Section 16. i) Notwithstanding any other provisions to the contrary herein, all amounts invested in Company Common Stock shall be paid to the participant upon distribution in Company Common Stock or, at the sole option of the Company, in cash, based upon the market value of Company Common Stock at the time of distribution. j) For purposes of this Plan, Change of Control shall mean: A) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d- 3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the election of directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion privilege unless the security being so converted was itself acquired directly from the Company), (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a reorganization, merger or consolidation, if, following such reorganization, merger or consolidation, the conditions described in clauses (i), (ii) and (iii) of subsection (i) (C) of this Section 8 are satisfied; or B) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or C) Approval by the shareholders of the Company of a reorganization, merger, binding share exchange or consolidation, in each case, unless, following such reorganization, merger, binding share exchange or consolidation, (i) more than 60% of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger, binding share exchange or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger, binding share exchange or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger, binding share exchange or consolidation, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no person (excluding the Company, any employee benefit plan (or related trust) of the Company or such corporation resulting from such reorganization, merger, binding share exchange or consolidation and any Person beneficially owning, immediately prior to such reorganization, merger, binding share exchange or consolidation, directly or indirectly, 20% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger, binding share exchange or consolidation or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (iii) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger, binding share exchange or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger, binding share exchange or consolidation; or D) Approval by the shareholders of the Company of (i) a complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation, with respect to which following such sale or other disposition, (1) more than 60% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (2) no Person (excluding the Company and any employee benefit plan (or related trust) of the Company or such corporation and any Person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, 20% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (3) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Company. 9. Administration The Treasurer of the Company, as the designee of the Committee on Management of the Board of Directors, shall be the Plan Administrator and has the authority to control and manage the operation and administration of the Plan. The Investment Committee shall be the Investment Committee of Bausch & Lomb Incorporated. 10. Assignability No right to receive payments under the Plan is transferable or assignable by a participant except by will or by the laws of descent and distribution. 11. Business Days In the event any date specified falls on a Saturday, Sunday, or holiday, such date will be deemed to refer to the next business day thereafter. 12. Amendment The Plan may at any time or from time to time be amended, modified, or terminated by the Board of Directors or the Committee on Management of the Board of Directors of the Company. No such amendments, modification, or termination will, without the consent of the participant, adversely affect the participant's accruals in his or her deferred compensation account. BAUSCH & LOMB INCORPORATED By:______________________________ Date:____________________________ EX-11 3 Exhibit 11 Statement Regarding Computation of Per Share Earnings (Share Amounts in Thousands Except Per Share Data) Twelve Months Ended December 26, December 27, 1998 1997 Net Earnings (in millions) (a) $ 25.2 $ 49.4 Actual outstanding Common and Class B shares at beginning of period 55,209 55,404 Sum of weighted average activity of:(1) Common and Class B shares issued for stock options (2) repurchases of Common and Class B stock and (3) cancellation of outstanding oustanding stock options 615 (21) Weighted Basic Shares (b) 55,824 55,383 Effect of assumed exercise of Common stock equivalents 543 271 Weighted diluted Shares (c) 56,367 55,654 Basic earnings per share (a/b) $ 0.45 $ 0.89 Diluted earnings per share (a/c) (a/c) 0.45 0.89
EX-12 4 Bausch & Lomb Incorporated Exhibit 12 Statement Regarding Computation of Ratio of Earnings to Fixed Charges (Dollar Amounts In Millions) December 26, December 27, 1998 1997 Earnings before provision of income taxes and minority interests $130.4 $118.0 Fixed charges 102.6 57.9 Capitalized interest, net of current period amortization 0.3 0.3 Total earnings as adjusted $233.3 $176.2 Fixed charges: Interest (including interest expense and capitalized interest) $100.7 $56.1 Portion of rents representative of the interest factor 1.9 1.8 Total fixed charges $102.6 $57.9 Ratio of earnings to fixed charges 2.27<1> 3.04<2> 1 Excluding the effects of restructuring charges, impairment of goodwill and purchased in-process research & development expense and a gain from the sale of the skin care product line recorded in 1998 the ratio of earnings to fixed charges at December 26, 1998 would have been 3.07. 2 Excluding the effects of the restructuring charges recorded in 1997 the ratio of earnings to fixed charges at December 27, 1997 would have been 4.28.
EX-13 5 [front cover] Bausch & Lomb [ 1998 Annual Report ] [photos: Javon and Janice Baker, Richard Kratz, M.D., Kristian Hohla, Ph.D., with various products: Renu, SoFlex, Moisture Eyes, Ocuvite, Alrex, Opcon-A, SoftLens, Boston Simplicity, Boston Advance, Pure Vision, Optima FW and others] ----------- VISIONARIES ----------- [logo: BAUSCH & LOMB] [Inside front cover flap page 1] [ At A Glance ] - ------- REVENUE - ------- ($ in millions) Comparable Basis* [bar charts] Vision Care 1996 869.1 1997 908.9 1998 960.8 Pharmaceuticals/ Surgical 1996 189.0 1997 190.6 1998 626.3 Eyewear 1996 504.9 1997 475.4 1998 456.0 Healthcare 1996 249.1 1997 276.6 1998 300.5 - -------- EARNINGS - -------- ($ in millions) Comparable Basis* Vision Care 1996 190.7 1997 209.4 1998 206.9 Pharmaceuticals/ Surgical 1996 28.6 1997 36.5 1998 92.1 Eyewear 1996 (0.9) 1997 (12.3) 1998 6.0 Healthcare 1996 36.9 1997 38.3 1998 37.9 [end bar charts] - -------------------------------------------------------------------------------- *Comparable basis excludes certain items as described on pages 25 - 27. - ----------------- TABLE OF CONTENTS - ----------------- Financial Highlights 1 Letter to Shareholders 2 Strategic Discussion 9 Financial Review 25 Financial Statements and Notes 38 Reports of Management, Audit Committee and Independent Accountants 61 Selected Financial Data 62 Directors and Officers 63 Bausch & Lomb Locations 64 Glossary 66 [Inside front cover flap page 2] [ At A Glance ] - ------------ KEY PRODUCTS - ------------ - -------------------------------------------------------------------------------- Vision Care ReNu: The ReNu line is the global market leader in the growing chemical disinfectant segment for soft lens care. PureVision: Bausch & Lomb's new soft contact lens with a high degree of oxygen permeability. PureVision is approved for seven-day continuous wear in the U.S. and 30-day continuous wear in Europe. SofLens: Bausch & Lomb offers a variety of products under the SofLens name. SofLens66 and our new SofLens66 cast-molded toric contact lenses compete in the two-week disposable category, while SofLens one day competes in the growing one day disposable segment. Medalist: Medalist, which competes in the two-week disposable lens category, is the leading contact lens in the growing Japanese market. Boston: The Boston line of lenses and lens care products has a commanding lead in the global rigid gas permeable (RGP) category. Boston lenses account for 50% of the U.S. RGP lens market, while Boston solutions boast a greater than 75% market share for RGP lens care products in the U.S. - -------------------------------------------------------------------------------- Pharmaceuticals/Surgical Technolas 217: Advanced scanning excimer laser used in refractive procedures. Currently the best selling laser outside the U.S.; awaiting FDA approval in the U.S. Hansatome: Advanced, pivotal action microkeratome for superior positioned hinge. Bausch & Lomb Surgical's Hansatome is the most popular microkeratome in the market today. Millennium: Advanced microsurgical system with both anterior segment and posterior segment functionality. The Millennium system's modular design allows surgeons to keep pace with innovations in ophthalmic surgery. AMVISC/AMVISC Plus: Viscoelastic products indicated for both anterior and posterior segment procedures, including extraction of cataracts, insertion of intraocular lenses (IOLs), corneal transplantation surgery, glaucoma filtering surgery and surgical procedures to reattach the retina. Chiroflex (IOL), Passport, Soflex (IOL), MPORT: One and three-piece minimally invasive, small incision IOLs and delivery devices for cataract replacement surgery. Vitrasert: Posterior chamber implant which offers sustained therapeutic drug delivery for several months. It delivers the drug ganciclovir directly to the site of infection and is used to treat CMV retinitis in patients with AIDS. Hydroview: Hydrogel foldable IOL which is currently marketed outside the U.S.; awaiting FDA approval in the U.S. Prescription Lotemax: Site-specific ophthalmic steroid, designed for effective treatment of ocular inflammation with improved safety profile. Key ingredient is loteprednol etabonate 0.5%. Alrex: Lower concentration of loteprednol etabonate (0.2%), designed specifically for use in seasonal ocular allergy. OptiPranolol: Non-selective beta blocker used in the treatment of ocular hypertension. OTC Moisture Eyes: Bausch & Lomb has a full line of over-the-counter (OTC) dry-eye products under the Moisture Eyes name, ranging from single-dose artificial tears to preservative-free lubricating ointments. Ocuvite: The number one recommended vitamin/mineral supplement by eye care professionals, contains certain antioxidants, which are believed to maintain the health of retinal tissue. Opcon-A: A leading OTC eye drop indicated for relief of allergic conjunctivitis. ================================================================================ - -------------------- NEW PRODUCT PIPELINE* - -------------------- Vision Care Continuous Wear Program: Various next generation continuous wear contact lenses. Line extensions include higher oxygen permeability, advanced biocompatibility and toric and RGP lenses. No-Rub Disinfecting Solution: Disinfects soft contact lenses with no rubbing or rinsing. Designed for lenses worn for one month or less. Rapid Disinfecting Solution: Soft lens multi-purpose solution combined with 10-minute lens disinfection. Rewetting Drops: Rewetting/lubricating drop designed especially for use with PureVision lenses. Liquid Enzyme Cleaner for Soft Lenses: ReNu one-step enzyme in a convenient liquid form. - -------------------------------------------------------------------------------- Pharmaceuticals/Surgical Topolink: Software technology which provides customized laser ablation based upon individual corneal topography. Catarex: Minimally invasive new surgical technology for removal of cataracts. Perfluorocarbon II: Intraocular gas used to flatten the retina while healing occurs following surgical correction of detached retina. Phakic IOL (next generation): Comprehensive platform technology which allows for additive as well as subtractive refractive correction. Prescription Loteprednol Etabonate Combination: Loteprednol etabonate/anti-infective combination, being evaluated for treatment of inflammatory and infectious conditions of the eye. Next Generation Anti-Infective: Iodine-based anti-infective, designed as a "universal anti-infective" to treat all causes of ocular infections (bacterial, viral and fungal). Drug Delivery Program: Bausch & Lomb has a number of collaborative ventures to develop technology for more effectively delivering drugs to the diseased site in the eye. Examples include sustained release eye drops and surgical implants. Cidofovir: Topical anti-viral agent, designed to treat Herpetic Eye Disease (HSV) and Epidemic Keratoconjunctivitis (EKC) "pink eye". Currently, there are no effective treatments for EKC. OTC Long Lasting Dry Eye Drop: Relieves dry eye symptoms for up to four hours with one application. Current products last for up to one hour. Next Generation Allergy Drop: Superior symptom relief for allergic conjunctivitis. Relieves dryness. Ocuvite Line Extension: Ocuvite product line extension with added nutritional supplement. - -------------------------------------------------------------------------------- *Includes projects in various phases of development. [Inside front cover flap page 3] [pie chart] Global Vision Care Market Lens Care 41% Lenses 59% [end pie chart] Growth Rates - ------------ Total 7 - 9% Lens 12 - 14% Lens Care Flat Global Market $4.4 Billion - -------------------------------------------------------------------------------- [pie chart] Global Ophthalmic Surgery Market Cataract 71% Refractive 16% Retinal 13% [end pie chart] Global Growth Rates - ------------------- Cataract 5% Refractive 25 - 30% Retinal 5% Global Market $1.6 Billion - -------------------------------------------------------------------------------- Ophthalmic Pharmaceuticals Major Markets [pie chart] U.S. 32% All Others 29% Japan 20% France 6% Germany 6% Italy 4% Brazil 3% [end pie chart] Global Market $3.4 Billion - -------------------------------------------------------------------------------- [photos: Family of vision care products, Family of surgical products, Passport II one-piece IOL inserter, Millennium microsurgical system, Technolas 217 excimer laser, Family of pharmaceutical products] - -------------------- FINANCIAL HIGHLIGHTS - -------------------- For The Years Ended December 28, 1996, December 27, 1997 and December 26, 1998 Dollar Amounts In Millions - Except Per Share Data
---------------------------------------------------------------------------- Percentage Change 1996 1997 1998 from 1997 ---------------------------------------------------------------------------- Business Results Net sales - reported $1,926.8 $1,915.7 $2,362.8 23% Net sales - comparable basis 1,812.1 1,851.5 2,343.6 27% Operating earnings - reported 190.8 148.0 123.7 (16%) Operating earnings - comparable basis 207.7 226.4 290.3 28% Net earnings 83.1 49.4 25.2 (49%) Per share: Basic earnings 1.48 0.89 0.45 (49%) Diluted earnings 1.47 0.89 0.45 (49%) Dividends declared 1.04 1.04 1.04 - Shareholders' equity at year end 15.92 14.82 14.93 1% Capital expenditures 130.3 126.1 201.5 Working capital 18.5 202.9 774.4 Average Common shares outstanding (000s): Basic 56,299 55,383 55,824 Diluted 56,510 55,654 56,367 Return on average shareholders' equity 9.2% 5.9% 3.1% Return on invested capital 7.2% 5.0% 3.8% High/low stock price $44-1/2 - $32-1/2 $47-7/8 - $32-1/2 $59-3/8 - $37-3/4 ----------------------------------------------------------------------------
Bausch & Lomb is emerging as the preeminent technology-based healthcare company for the eye, with the innovative products and the capabilities that will allow us to define the nature of competition in the categories in which we compete. We have the people, the products and the momentum to realize our vision - to be Number One in the Eyes of the World. Visionaries Bausch & Lomb 1998 Annual Report 1 - --------------------- MUCH MORE THAN SEEING - --------------------- Dear fellow shareholders: Bausch & Lomb is emerging from a period of strategic restructuring that has left the company stronger and more vital than ever. I am proud of what we have accomplished and am tremendously excited about our future. Bausch & Lomb is now the preeminent healthcare company for the eye, with the most comprehensive line of eye care products in the world. We have the benefit of core businesses with track records of solid growth and profitability, as well as our emerging businesses - refractive surgery and pharmaceuticals - with the potential for accelerated growth. As we look ahead, we have in the pipeline technologically superior new products that will allow us to leverage our powerful brand equity and strengthen our position as the leader in eye care. Three years ago, when we began restructuring the company to accomplish our vision of being Number One in the Eyes of the World, our first priority was to establish a sound foundation, both strategically and financially. We realigned our portfolio and business strategy to focus on eye care, and established an appropriate cost structure that would allow for improved profitability while also reallocating resources to support the introduction of innovative new products that will fuel our growth. We also established EVA as the key measure of our performance to focus our efforts on maximizing our return on every dollar invested in our business. We made progress on all fronts in 1998 - we sold our skin care business, made strategic acquisitions, hit key milestones of our restructuring programs, accelerated growth and significantly improved our ongoing earnings, a key driver in our 1998 EVA improvement. 1998 also marked a turning point for our sunglass business. Late in the year, we announced that we had retained investment bankers to help us evaluate strategic alternatives for this business. Our decision did not stem from a lack of confidence in the business, which posted dramatic improvement in its performance in 1998,reversing four years of market share erosion and two years of operating losses to return to profitability. We recognized, however, that our sunglass business operates under market dynamics that, increasingly, are diverging from those driving our other three [bar chart] Bausch & Lomb Comparable Basis Earnings ($ in millions) 1996 207.7 1997 226.4 1998 290.3 [end bar chart] 2 Visionaries Bausch & Lomb 1998 Annual Report [ VISION ] - ---- NAME Bausch & Lomb Chairman and Chief Executive Officer, William M. Carpenter - ---- - ------ VISION To Be Number One in the Eyes of the World - ------ Innovators. Pioneers. Dreamers. No matter what they are called, no matter what their field of endeavor, these seekers, these visionaries possess a passion for improvement, for finding a better way. It is this passion that impels them - and Bausch & Lomb - to see opportunities and to seize opportunities that improve our lives and transform our view of the future. Clearly, ours is a vision company. And a company with a clear vision - to be Number One in the Eyes of the World. Being Number One is about more than size - - it's about leading the way in all that we do. On the following pages, you will be introduced to some of the extraordinary people who help us explore new possibilities and show us new ways to look at the world. Building on our heritage of advancing technology to make viable the dreams of these visionary pioneers, Bausch & Lomb continues always to seek the innovative, to look beyond the horizon, to change the way the world sees. [photos: members of Board of Directors, various Bausch & Lomb products] [caption: Board of Directors, from left to right: Jonathan S. Linen, John R. Purcell, William M. Carpenter, Linda Johnson Rice, Alvin W. Trivelpiece, Ph.D. Ruth R. McMullin, Franklin E. Agnew, Domenico De Sole, William H. Waltrip, Kenneth L. Wolfe] strategic eye care businesses. The sunglass business is fashion-oriented and a "pure" consumer business that has little in common with our more professionally oriented eye care lines. With the sunglass business demonstrating progress in its recovery and a solid plan in place for 1999, the time is right to look at alternatives that will maximize its value for the Bausch & Lomb shareholder. We will also continue to evaluate strategic alternatives for our Miracle-Ear hearing aid business during 1999, as well as begin to assess our longer-term plans for Charles River Laboratories. Although these businesses are valuable assets for the Bausch & Lomb shareholder, clearly neither one supports our strategic focus on healthcare for the eye. We are committed to accelerate the growth of our core eye care businesses through new products, and our efforts to speed the pace of innovation are clearly bearing fruit. In our vision care business, new products, including our SofLens one day daily disposable lens, helped fuel strong contact lens revenue growth in 1998. And, in its first full year on the market, ReNu MultiPlus solution drove revenue and market share gains for the more mature lens care business. We exited the year with the introduction of two more new contact lens products: SofLens66 toric, a superior disposable lens for people with astigmatism, and PureVision, a truly breakthrough lens designed to be worn continuously for up to 30 days at a time. Global Vision Care New Product Submissions [bar chart] 1996 217 1997 230 1998 284 [end bar chart] 4 Visionaries Bausch & Lomb 1998 Annual Report ---------------- IT'S ABOUT IDEAS ---------------- Our pharmaceuticals business demonstrated that we can increase our investment in new product development while improving our profitability. In 1998, we introduced Lotemax ocular anti-inflammatory drops and Alrex ocular allergy drops, innovative products that have been very well received by practitioners. Products like these allow us to leverage the low-cost leadership that has made us successful in generics across a growing portfolio of higher margin proprietary pharmaceuticals. Our goal is to continue to allocate more of our operating expenses to R&D to support the exciting pharmaceuticals in our pipeline, and to capitalize on the tremendous opportunities we see for the drug delivery technologies we have in development. In the beginning of 1998, we entered a new field of eye care, ophthalmic surgery, by finalizing the acquisitions of Chiron Vision Corporation and Storz Instrument Company. By forging together these former competitors, we successfully created Bausch & Lomb Surgical, a global leader in the field of ophthalmic surgery. The integration of the acquisitions has progressed even faster than we had anticipated and enhanced our financial performance in 1998. We expect this business to be highly accretive in 1999 as further integration benefits are realized and growth accelerates Global Refractive Surgery Procedures [bar chart 1998 750,000 2001E 1,500,000 E = estimate [end bar chart] Visionaries Bausch & Lomb 1998 Annual Report 5 from new cataract surgery products and the explosive expansion of our refractive surgery business. As we go forward, even greater opportunity lies in capitalizing on the tremendous synergies that exist across our eye care businesses of vision care, pharmaceuticals and ophthalmic surgery. Together, they give us the broadest and most innovative line of eye care products in the world, with unsurpassed global reach. Importantly, they also share common distribution channels, manufacturing platforms and core technical competencies. Through these three businesses, we are afforded product line leverage, customer leverage, geographic leverage and technology leverage for unprecedented competitive advantage. To capitalize on these opportunities, Bausch & Lomb is evolving from a holding company with separate global businesses related to eye care, to an integrated operating company that can extract the tremendous potential of our three core businesses. We are aligning the organization to focus on our future. At the beginning of 1999, Carl E. Sassano became President and Chief Operating Officer, charged with implementing our strategy to take advantage of the common elements across our businesses, while also ensuring the continued progress of the vision care business. Hakan S. Edstrom was named Senior Vice President and President, Surgical/Pharmaceutical, with operating responsibility for the two businesses that have the most immediate opportunities for cross-business leverage. Thomas M. Riedhammer, Ph. D. was appointed Senior Vice President and Chief Technical Officer, with responsibility to leverage our capabilities in R&D and manufacturing. Finally, I took over the reins as chairman of the board, succeeding William H. Waltrip, who remains a highly valued member of our board of directors. On behalf of the board and all of us at Bausch & Lomb, I wish to express our sincere thanks to Mr. Waltrip for his counsel during this critical period in Bausch & Lomb's history. We have emerged as the preeminent technology-based healthcare company for the eye, with the innovative products and the capabilities that will allow us to define the nature of competition in the categories in which we compete. We have the people, the products and the momentum to realize our vision - to be Number One in the Eyes of the World. Our thanks to all who are helping us make this transformation happen - the people of Bausch & Lomb around the world whose efforts have delivered these gratifying results - and to you, our owners, for your continued confidence in our ability to fulfill this exciting vision. /s/ William M. Carpenter William M. Carpenter Chairman and Chief Executive Officer [grid showing product use within various medical sectors] Customer Overlap | Vision Care | Pharmaceuticals | Surgical | | | - ---------------------+-----------------+--------------------+--------------- Optometrists | X | X | - ---------------------+-----------------+--------------------+--------------- Ophthalmologists | X | X | X - ---------------------+-----------------+--------------------+--------------- Retail Optical | X | X | - ---------------------+-----------------+--------------------+--------------- Hospitals | | X | X - ---------------------+-----------------+--------------------+--------------- Managed Care | X | X | X - ---------------------+-----------------+--------------------+--------------- [photo: William M. Carpenter, Carl E. Sassano] William M. Carpenter, Chairman and CEO Carl E. Sassano, President and COO 6 Visionaries Bausch & Lomb 1998 Annual Report [ VISIONaries ] Beyond 20/20 The magic sense - the sense of sight. Who is the steward for this magnificent sense? It is Bausch & Lomb. We are building on a shared heritage of technology to move beyond eye care to eye performance, enabling people around the world to do more and be more than they ever imagined. We are leveraging our resources and working together to be the best. Bausch & Lomb. Helping people see the wonders of the world. [ VISIONary ] - ---- NAME Otto Wichterle, Ph.D. - ---- - ------ VISION Changing the way we look - ------ This visionary Czech chemist imagined extraordinary possibilities for a soft, water-based plastic that he developed. He believed that properly shaped, it could be inserted into the eye to correct vision more comfortably than the bulky hard lenses that were understandably in limited use. Undeterred by those who refused to see and fund the opportunity, Dr. Wichterle improvised a lens-making machine using a record player and an erector set, and labored for years to prove his critics wrong. Seeing the potential of Dr. Wichterle's prototype lens and seizing the opportunity to change the way the world sees, Bausch & Lomb acquired the rights to the process in 1966. With persistence, vision and skill, we developed the technology that made possible the revolutionary introduction of the world's first soft contact lens in 1972. Today there are more than 50 million soft contact lens wearers around the world, a testament to the pioneering work of Dr. Wichterle and Bausch & Lomb. Honoring the past, we dedicated the 1998 Bausch & Lomb European Symposium on Contact Lenses in Prague to the memory of Dr. Wichterle, who died in September. Preparing for the future, Bausch & Lomb established the Otto Wichterle Scholarship for Innovative Research in Contact Lenses to nurture the next generation of visionaries whose work, like Dr. Wichterle's, will change the way the future looks. -------------------- MORE THAN TAKING AIM -------------------- Bausch & Lomb began 1998 with challenging goals: successfully integrate the two largest acquisitions in our history; execute strategic restructuring programs; maintain the strong performance of our core vision care and pharmaceuticals businesses and return our premium sunglass business to profitability. We achieved our goals, and began 1999 with a clear vision for our future. New Surgical Business. One of the highlights of 1998 was the progress made to integrate our acquisitions of Chiron Vision Corporation and Storz Instrument Company to form Bausch & Lomb Surgical. Through these acquisitions, Bausch & Lomb gained an exceptionally strong product line for cataract surgery, the most common surgical procedure performed by ophthalmologists today. Our access to the surgical suite opens an important channel of distribution for our pharmaceutical products, and provides tremendous advantage to build on the leading position we acquired in refractive surgery, the fastest growing segment of ophthalmic surgery. In its first year, Bausch & Lomb Surgical delivered operating profits in excess of the incremental cost of financing the acquisitions. With the full-year benefit of administrative consolidations and the opportunities yet to be realized from manufacturing consolidations, the surgical business is expected to expand its operating margin and significantly enhance our financial results in 1999 and beyond. Restructuring Progress. 1998 was also notable for the progress we made in the strategic restructuring program we began two years earlier. Our objective was to slash overhead to improve profitability and free resources to support new product development. Our cost saving projects are on track. [photo caption: A year ago, Dorothy Winch's view of the world was threatened by cataracts, a condition that affects as many as half of those over the age of 60. Her sight was restored by surgery in which her clouded natural lens was replaced by an intraocular lens, or IOL. Bausch & Lomb has a leading position in products used for cataract surgery, and a growing line of pharmaceuticals, such as Lotemax ocular anti-inflammatory drops, that help speed the recovery of patients following cataract surgery.] [photo: Dorothy Winch] Visionaries Bausch & Lomb 1998 Annual Report 9 Although we took the last of the restructuring charges associated with the program during 1998, some of the projects are continuing, and will deliver additional cost savings through the end of the year 2000. Core Business Growth. Through our vision care business, Bausch & Lomb is the leader in products for the contact lens wearer, with the most complete line of contact lenses and lens care products of any manufacturer. The business benefited from a number of new products in 1998, including ReNu MultiPlus solution, the first multi-purpose lens care product to eliminate the need for enzyme cleaning. Introduced in the second half of 1997, ReNu MultiPlus solution has helped Bausch & Lomb strengthen our share leadership in the growing chemical segment of the lens care market. Bausch & Lomb benefited in 1998 from market expansion of SofLens one day contact lenses in Europe. The acceptance of this low-cost daily disposable lens was even better than we had anticipated, leading us to defer the launch of the product in the U.S. until 1999 in order to focus on the fast-growing European market. In our pharmaceuticals business, Bausch & Lomb has a broad line of over-the-counter (OTC) eye care products, a complete line of generic ophthalmic prescription pharmaceuticals in the U.S. and the leading share of branded ophthalmics in Germany. In 1998, Bausch & Lomb introduced Lotemax and Alrex, innovative site-specific ophthalmic steroids developed in collaboration with Pharmos Corporation. Proprietary products such as these allow us to leverage our leading position in generics and our low-cost manufacturing capabilities for faster market penetration and higher profitability. Alternatives Sought for Sunglasses. Two years of intensive restructuring efforts began delivering substantially improved results for our sunglass business. After two years of operating losses, this business turned profitable in 1998 and is poised for continued improvement in 1999. Recognizing that the business has evolved to have less and less in common with our other, professionally oriented eye care lines, in late 1998 we announced our intention to evaluate strategic alternatives for the sunglass business. [photo caption: Optometrist William Lapple has been prescribing Bausch & Lomb contact lenses and lens care products for more than 15 years. "Bausch & Lomb's comprehensive product line meets a broad range of my patients' needs," says Dr. Lapple, who has shown his confidence in Bausch & Lomb by conducting clinical studies of our new products in his practice. Most recently, Dr. Lapple contributed his clinical expertise to test Bausch & Lomb's new SofLens66 toric, an innovative disposable lens for patients with astigmatism.] [photo: William Lapple] 10 Visionaries Bausch & Lomb 1998 Annual Report - ------------------ IT'S ABOUT SEIZING - ------------------ - ------------- OPPORTUNITIES - ------------- Future Vision. With our core businesses on sound footing, the new surgical business being successfully integrated, and a process underway to maximize the value of our sunglass business, Bausch & Lomb has moved beyond restructuring, and is emerging as the preeminent technology-based healthcare company for the eye. Our vision care, surgical and pharmaceuticals businesses have remarkably strong competitive positions in today's most attractive eye care categories. They give us the broadest line of eye care products of any company in the world, with a global reach that is unsurpassed among eye care competitors. The future of Bausch & Lomb lies in more fully leveraging these eye care businesses in order to seize the tremendous opportunities for synergy among them. These core businesses share common distribution channels, allowing us to leverage the breadth of our product line with our customers to gain competitive advantage. They also share common elements in their engineering and manufacturing platforms, and the technical competencies of the businesses are highly complementary. We are seizing the opportunities to have our experts in each technical field apply their skills to benefit development efforts across our product lines, and to ensure that every dollar invested in research and manufacturing is used to the best advantage. As we enter 1999, we are aligning the organization to capitalize on these opportunities. We will ensure that Bausch & Lomb continues to lead the way in eye care with the people, the products, the marketing strategies and the technologies that will allow us to thrive in the dynamic markets of the next millennium. [photo caption: As a polymer scientist for Bausch & Lomb Surgical, Shiao Chang, Ph.D. is one of the leading experts in the development of innovative materials for IOLs and other products for cataract surgery. Dr. Chang is excited about the unique opportunity to collaborate with other Bausch & Lomb scientists skilled in developing contact lens materials. Dr. Chang believes that their exchange of ideas will lead to the development of a new generation of biocompatible materials for both surgical and contact lens products.] [photo: Shiao Chang, Ph.D.] Visionaries Bausch & Lomb 1998 Annual Report 11 [many pictures of members of the PureVision Team] [ VISIONary ] - ---- NAME PureVision Team - ---- - ------ VISION Expanding the way we see - ------ Imagine what it would be like to have perfect vision 24 hours a day. You simply open your eyes and the world is in focus. For more than half of the world's population, it's just a dream. Imagining a soft contact lens so healthy, so breathable, so comfortable that it could stay on the eye continuously for up to a month, a team of Bausch & Lomb employees saw the potential and seized the opportunity to make the dream come true. The challenge was enormous. They needed to invent a lens material that would allow sufficient oxygen to pass through it when the eyes were closed - vital for eye health - and they needed a material that would stay wet - critical for comfort and handling. With Bausch & Lomb's unwavering support over a decade of discovery, they created what some said could never be done - a novel blend of silicone and hydrogel that finally makes possible healthy and comfortable continuous soft lens wear. Their true vision was transformed into the revolutionary PureVision lens, designed for up to 30-day continuous wear. Consumers have long clamored for the comfort and convenience of continuous wear contacts. It took our expertise in developing innovative manufacturing technology to take the invention from the lab bench to dispensers' shelves. [many pictures of members of the PureVision Team] The next step, getting PureVision lenses on the eyes of consumers, required careful, convincing clinical studies to calm prescribers' concerns about extended overnight wear. The results, the ophthalmic counterpart of a grand slam home run, show that the corneal swelling associated with wearing the PureVision lens overnight is equivalent to sleeping with no lens at all. And consumers prefer it two-to-one over the leading soft lens for comfort, handling, visual quality and overall satisfaction. As the PureVision lens is being introduced around the world, the team once again has fixed its sights firmly on a bold vision for the future: imagining a contact lens that can be worn safely for up to one year and finding a way to make it real. [photo caption: PureVision Team-left page (L to R) - Tom Ireland, Ron Borden, Wendy Nooitgedagt, Douglas Robinson, Dave Seelye, Christine Skolnick, Joe McGee, Jim Erickson, Madhu Ayyagari, Graham Biddle, Kevin DeRyke, Bill Appleton, Kim Tolley, George Grobe, Chris Van Zandt, Ruthia Wong, John Shannon, Pattie Glover, Dominic Ruscio, Kamal Sarbadhikari, Gary Aron, Joe Salamone, Michael Moorehead, Mike Dobner, Ed Vaquero, Wendy Bieber, Sanjay Palit, Tim Comstock, Mike Hochheiser, Ian Cox, Ila Riddle [bullet] PureVision Team-right page (L to R) - Paul Valint, Dean Burrows, Kathleen Murphy, Kym Karutz, Ullrika Sjoberg, Carlos Palencia, Linda Mosack, Judith Chapman, Glenn Davies, Dennis O'Brien, Tom Crescuillo, Don Siegel, Lynne Scheurich, James Barton, Gary Friends, Brian Levy, Keith Peck, Mike Santalucia, Yu-Chin Lai, Erik Indra, Kevin Zacher, Bryan Reed, Tom Peter, Sue Gilliam, Marc Robboy, John Monaco, Colum Honan, Ray Murray, Joe Dowling, Gabriel Kennedy, Jay Kunzler] [pictures of people from all parts of the world] --------------------- IT'S ABOUT KEEPING UP --------------------- -------------- WITH THE WORLD -------------- The multi-billion dollar categories in which Bausch & Lomb competes are experiencing solid growth, benefiting in large part from favorable demographic trends. The aging of the population in developed markets is driving increased demand for eye care products that address the unique needs of the elderly, such as products for cataract surgery. Second in growth only to the maturing "baby boomers" is the population of young adults - prime candidates for contact lenses and refractive surgery. In emerging markets, rapid population growth is helping fuel an explosion in demand for eye care. A key factor in the development of these markets is consumers' increasing access to vision care, a function both of the improving purchasing power of consumers and the expanding pool of professionals with the requisite training and tools. The breadth of Bausch & Lomb's product portfolio and global infrastructure are tremendous assets in our ability to build our business in developing countries. Our line of ophthalmic surgical products, for example, includes entry-level equipment for cataract surgery that permits doctors in emerging markets to equip new surgical clinics affordably. In China, Bausch & Lomb has enjoyed extraordinary success building the base of consumers wearing contact lenses by offering traditional lenses for annual replacement and ReNu multi-purpose lens care solution, a lens-wear regimen affordable to consumers in that country. We also have the critical mass in these regions to train practitioners to prescribe our products - building both the market and professional loyalty to Bausch & Lomb. [photo: Brian Levy, O.D.] [photo caption: According to Brian Levy, O.D., Bausch & Lomb Vision Care's Vice President, Clinical Research, there is a tremendous unmet need for eye care in markets like China, where trained eye care professionals are in short supply. Dr. Levy is a leader in Bausch & Lomb's efforts to do something about the problem. Dr. Levy helped establish a Bausch & Lomb supported program in China to train a new breed of primary eye care practitioner who can diagnose and treat refractive errors, dispense contact lenses, perform refractive and cataract surgery and treat most common ocular diseases.] Visionaries Bausch & Lomb 1998 Annual Report 15 [ VISIONary ] [photo: Jack Barefield, Jim Anderson, Lynn Detlor] - ---- NAME Premier Purchasing Partners, Ltd. - ---- - ------ VISION Transforming the way we care - ------ Each year, more than 300,000 people suffering from vision-stealing cataracts will have their sight restored by skilled surgeons using state-of-the-art technology at the member hospitals and healthcare facilities of Premier Inc., one of the largest alliances of health systems in the United States. Putting the most effective therapies in the hands of those who heal, while keeping quality care within the financial reach of patients and providers, is the creative challenge for Lynn Detlor, CEO of Premier Purchasing Partners, Ltd., the buying group for the Premier alliance. Premier Purchasing Partners is achieving its vision by partnering with the world's largest eye care company, Bausch & Lomb, to provide its 1,700 member facilities with Bausch & Lomb's complete line of leading-edge products for cataract surgery and with training for Premier's medical staff. Bausch & Lomb, in turn, is seizing the extraordinary opportunity to leverage a comprehensive portfolio of products - unmatched in the ophthalmic industry - within the growing managed care environment, which is influencing the future of medical care. Like Bausch & Lomb Surgical's Jack Barefield and Jim Anderson, our sales teams across the company are creating innovative, cost-effective ways to make sure that our products and services get to the people whose lives - and eyes - depend on them. [photo caption; Pictured: (L to R) - Jack Barefield, Jim Anderson, Lynn Detlor] ----------------- MORE THAN GROWING ----------------- --------------- WITH THE MARKET --------------- [photo: Nancy Harrison] [photo caption: As a contact lens wearer who also suffers from the dry eye symptoms of Graves' disease, Nancy Harrison trusts Bausch & Lomb to answer all her eye care needs. Bausch & Lomb is the name consumers know best for the most innovative and highest quality eye care products. Consumers benefit from the broad availability of Bausch & Lomb products, including contact lenses, lens care products, OTC eye drops and prescription medications. Nancy, for example, can pick up her ReNu multi-purpose solution and Moisture Eyes eye drops with one stop at her favorite store.] With our comprehensive product line, strong competitive position and global reach, Bausch & Lomb is uniquely positioned to capitalize on the growing interest among its customers for "one-stop-shopping". Driven by the need to contain costs, customers in every channel of trade are recognizing the efficiency of consolidating their business with vendors who can supply all their needs. The trend mirrors what is occurring within the consumer base. Consolidation is becoming the norm among retailers, managed care organizations and professional practices both to gain economies of scale and to provide one-stop-shopping to their patients and customers. Bausch & Lomb is at the forefront of responding to these trends. Our complete line of eye care products is allowing us to become the vendor of choice for large volume purchasers. For example, Bausch & Lomb can supply not only the eye drops and lens care products mass merchandisers want for OTC sales, but also the contact lenses that will be dispensed in the merchandisers' in-store optical shops. We can provide ophthalmology practice groups with everything from the pharmaceuticals to the contact lenses to the cataract and refractive surgery products that their specialists need. And, in doing so, we can leverage the margin from our broad array of products to offer great value, without competing on the basis of price alone for a single offering. Visionaries Bausch & Lomb 1998 Annual Report 17 [photo: Richard Kratz, M.D.] [ VISIONary ] - ---- NAME Richard Kratz, M.D. - ---- - ------ VISION Revolutionizing the way we operate - ------ Driven by a desire to help people see, Dr. Richard Kratz, a retired ophthalmic surgeon, also is a remarkable innovator, pioneering dramatic techniques to remove the cataracts that cloud people's eyes and limit the quality of their lives. Twenty-five years ago he began training ophthalmic surgeons around the world in the then-new surgical procedure called phacoemulsification, a process that has since become the gold standard in cataract removal. The clouded natural lens is carefully broken up with the aid of ultrasound waves and removed through a small incision, making way for the insertion of an artificial lens that restores sight. Like Bausch & Lomb - a global leader in the manufacture of cataract surgery equipment and products - Dr. Kratz continues to seek a better way, a quicker, less-invasive way, to treat cataracts. He is consulting with Optex Ophthalmologics, Inc., a Bausch & Lomb partner, in the development of Catarex, breakthrough technology that could transform cataract surgery. Simpler and faster, the Catarex system removes the cataract using a vortex created by a tiny rotating impeller, leaving intact more of the lens' surrounding capsule. Preparing now for clinical trials, Bausch & Lomb expects the introduction of Catarex to seize an opportunity to transform the way we treat a condition whose incidence will rise dramatically as the world grows older. ----------------------- IT'S ABOUT CHANGING THE ----------------------- --------------------- NATURE OF COMPETITION --------------------- Lasting success in today's dynamic eye care market requires more than scale, and more than simply a full product line of parity products. Bausch & Lomb's success has been driven by the truly innovative products that have made a difference in eye care professionals' practices and in consumers' lives. To ensure our future, we have been aggressively managing our overhead costs to fund the promising ideas that will develop into the exciting new products of tomorrow. The pace of innovation has quickened dramatically in Bausch & Lomb's vision care business, evidenced by the growing number of regulatory submissions to register products around the world - 217 in 1996, 230 in 1997 and a remarkable 284 in 1998. In 1999, Bausch & Lomb will benefit from two more new products. The SofLens66 toric lens, introduced late in 1998, is for people with astigmatism, a market that is both underpenetrated and growing fast. Our innovative low-cost manufacturing process allows us to price SofLens66 toric lenses so that consumers can afford to replace their lenses every two weeks. In clinical trials, practitioners loved the lens for its easy fit, and consumers preferred it two-to-one to the leading, more expensive, disposable toric. The potential for Bausch & Lomb's PureVision lens is even more exciting. Based on frame-breaking technology (see pages 12-13), the PureVision lens gives Bausch & Lomb the opportunity to fundamentally alter the contact lens market by giving consumers what they have long wanted - healthy continuous wear. In early 1999, the lens received approval in the U.S. to be worn continuously for up to seven days; studies are underway to gain U.S. approval for 30-day wear by 2001. [photo: Thomas Tooma, M.D.] [photo caption: Thomas Tooma, M.D., is an ophthalmic surgeon who performs over 100 LASIK procedures each week. He uses a Bausch & Lomb laser and Bausch & Lomb's microkeratomes in his busy practice. Dr. Tooma is looking forward to adding Bausch & Lomb's most advanced laser, the Technolas 217, to his practice when it receives regulatory clearance in the U.S. The Technolas 217 laser has a spot-scanning beam for more accurate results and is ergonomically designed to improve a surgeon's efficiency. Dr. Tooma feels he can invest in Bausch & Lomb's technology with confidence, knowing that the company will lead the way in innovative upgrades that will keep the Technolas platform state-of-the-art.] Visionaries Bausch & Lomb 1998 Annual Report 19 [ VISIONary ] - ---- NAME Kristian Hohla, Ph.D. - ---- - ------ VISION Shaping the vision of tomorrow - ------ At the core of the quest for visual perfection, where matter and energy intersect, you will find Munich physicist Kristian Hohla, a laser pioneer whose work on the corneal frontier has made him a legend in refractive eye surgery. Dissatisfied with the inherent limitations of common external vision correction - spectacles and contact lenses - Dr. Hohla dreamed of solving vision problems at their source: the eye's misshapen surface. Using precise beams of energy to delicately reshape the cornea, he invented the world's most technologically advanced excimer laser, with spot-scanning capabilities. Bausch & Lomb, recognizing the potential of this concept, acquired Dr. Hohla's company, Technolas when it purchased the ophthalmic surgery business of Chiron Vision early in 1998. With the Technolas laser and the exquisitely precise Hansatome microkeratome as the centerpieces, Bausch & Lomb is the only company in the world to offer eye surgeons the complete package of advanced instrumentation needed for LASIK, the fastest-growing refractive procedure. Dr. Hohla knows that eyes are like snowflakes, with no two alike. He is creating innovative computer software, which, when used with the Technolas 217 laser and unique diagnostic tools, will transform measurements from inside a patient's eye into a customized laser prescription. The result - truly personalized visual perfection, beyond 20/20 to the ultimate in sight. Already the market leader outside the United States, the Technolas 217 laser is awaiting final regulatory clearance for marketing in the U.S. Bausch & Lomb, aiming to introduce it in the U.S. this year, is looking forward to reshaping the vision of the future. ----------------------- IT'S ABOUT TAKING IT TO ----------------------- -------------- THE NEXT LEVEL -------------- PureVision contact lenses were launched on a limited basis for seven-day wear in Europe late in 1998, but Bausch & Lomb expects to expand to a full scale European roll-out based on a 30-day wearing schedule by mid-1999. In our surgical business, we have had tremendous success in the cataract market with our Millennium line of phacoemulsification equipment, used by ophthalmic surgeons to remove the clouded natural lens during a cataract procedure. The unique modularity of this system allows customers to purchase upgrades to expand the system's capabilities. Bausch & Lomb is also broadening our offerings of foldable IOLs with the Hydroview, a lens that has been well received in Europe, and is awaiting FDA approval for the U.S. market. On the horizon is the Catarex system (see page 18), breakthrough technology that will allow surgeons to perform cataract surgery more easily, more safely and more efficiently. In refractive surgery, Bausch & Lomb is the undisputed leader in innovative products for LASIK, the preferred refractive procedure. LASIK combines the use of a precise cutting tool, called a microkeratome, with a laser to reshape the cornea. With the patented Hansatome, Bausch & Lomb commands a share of over 80% of the microkeratomes used in LASIK procedures today. Our Technolas 217 laser is the leader in laser placements outside the United States, and is expected to be introduced in the U.S. for LASIK by the end of 1999, pending FDA approval. In development is Topolink, a unique software system in clinical testing that will allow doctors to customize LASIK for each patient in a way that no other competitor in refractive surgery can match (see page 20). In our pharmaceuticals business, our goal is to leverage our leading position in generic ophthalmic pharmaceuticals and our access to ophthalmic surgeons, with a growing line of proprietary offerings developed through collaborative ventures. We're seeing the fruits of that strategy with our Lotemax series of anti-inflammatory [photo: 3 kids making faces at the camera] [photo caption: What if we could prevent the changes in the eye that occur in childhood that cause severe myopia, or nearsightedness? Bausch & Lomb is studying that possibility. We are conducting clinical studies to determine whether the use of rigid gas permeable lenses before adolescence slows the progression of myopia. Although the full results of the studies will not be known until the latter part of 1999, early anecdotal and experimental data look promising.] Visionaries Bausch & Lomb 1998 Annual Report 21 [photo: Javon and Janice Baker] [ VISIONary ] - ---- NAME Javon Baker - ---- - ------ VISION Seeing a future of unlimited opportunity - ------ Look into the eyes of a child and there you will see a world of endless possibilities. Looking into the eyes of her four-month-old son, Janice Baker saw a world of trouble. Javon's eyes were infected. He needed immediate treatment. Javon's pediatrician promptly wrote a prescription for a proven antibiotic from a trusted manufacturer - Bausch & Lomb's erythromycin ointment. Janice Baker confidently used it to heal her baby's eyes. She knows it well. She is a quality control inspector at Bausch & Lomb's state-of-the-art pharmaceutical manufacturing facility in Tampa, Florida, where the ointment is made. The trust and confidence with which doctors prescribe and patients use our products reflect Bausch & Lomb's exceptionally high standards for pharmaceutical manufacturing. This reputation for quality has made us the leading producer of generic ophthalmic pharmaceuticals in the United States. Our comprehensive line of generic therapies for the eye ranges from antibiotics like the one little Javon needed, to treatments for glaucoma, a sight-robbing disease prevalent in older people. Seeing ample opportunities for growth, Bausch & Lomb is expanding into innovative proprietary ophthalmics. On the cusp of a new century, with our distinguished 147-year heritage of helping people see, look and feel better, we are looking at the future, and just like peering into the eyes of a child, we see a world of unlimited possibilities. [photo caption: Pictured: Javon and Janice Baker] ophthalmics. In the pipeline for introduction past the year 2000 are, among others, a next generation, universal iodine-based anti-infective and a once-a-day glaucoma treatment which uses a unique drug delivery system. ------------------------- IT'S ABOUT OUR VISION FOR ------------------------- ---------- THE FUTURE ---------- We also see tremendous opportunities for more effectively delivering pharmaceuticals to the eye. Eye drops and ointments require frequent dosing - a challenge for many patients - and do not reach the back of the eye, the site of many devastating diseases. Systemic medications, on the other hand, expose the entire body to powerful and potentially toxic drugs. Bausch & Lomb and our development partners are working on strategies for delivering sight-saving drugs over a sustained period to the diseased site in the eye. One promising opportunity is Surodex, a unique, biodegradable drug delivery technology licensed from Oculex Pharmaceuticals, Inc., that is in phase III development. Designed to treat post-surgical inflammation, Surodex is implanted during cataract surgery. Tiny, coated beads of dexamethasone dissolve slowly and deliver a sustained dose of medication over a period of seven days, eliminating the need for frequent dosing of eye drops following surgery. This and other technologies have the potential to more effectively deliver other drugs that are currently administered systemically, to help the millions of people who suffer from sight-threatening diseases such as age-related macular degeneration and diabetic-related conditions, for which treatment options are woefully limited. Whether it's finding revolutionary ways to enhance visual performance or new strategies for treating the age-old scourge of blindness, Bausch & Lomb is firmly committed to developing the new frontiers of eye care, with the technology and innovation that will make a difference in people's lives. [pie charts] Global Ophthalmic Pharmaceutical Market 1998 $3.4 Billion Glaucoma 37% Allergy 18% Anti-Infective 20% Anti-Inflammatory 15% Other 9% Back of the Eye 1% 2004 (estimate) $4.5 Billion Glaucoma 28% Allergy 14% Anti-Infective 15% Anti-Inflammatory 11% Other 7% Back of the Eye 25% [end of pie charts] Visionaries Bausch & Lomb 1998 Annual Report 23 [ VISIONaries ] -------------------- IT'S ABOUT TAKING IT -------------------- Beyond 9/8 The future of Bausch & Lomb lies in finding ways to enhance eye performance that are innovative and competitively superior, and in delivering those products and services to customers in ways that can only be accomplished through global presence and scale. A key measure of our success is Economic Value Added (EVA), a financial measure that focuses on maximizing the return Bausch & Lomb earns on every dollar used in running our company. We will drive continued improvement in EVA by investing in new products that will give us profitable growth and long-term competitive advantage; by relentless efforts to find new ways to leverage our capabilities to lower our costs; and by always being mindful that every asset of our company must yield a fair return for our owners. Financial Review Dollar Amounts In Millions - Except Per Share Data This financial review, which should be read in conjunction with the accompanying financial statements, contains management's discussion and analysis of the company's results of operations, liquidity and 1999 outlook. References within this financial review to earnings per share refer to diluted earnings per share. Significant Events To facilitate an analysis of the company's operating results, certain significant events in each of the past three years should be considered. Acquisitions On December 29, 1997, the company acquired all of the issued and outstanding shares of Chiron Vision Corporation (Chiron Vision) from Chiron Corporation. On December 31, 1997, the company also completed its acquisition of certain stock and assets of Storz Instrument Company, Storz Ophthalmics, Inc. and Cyanamid Chirurgie S.A.S. (collectively, Storz) from American Home Products Corporation. The acquisitions were accounted for under the purchase method of accounting; accordingly, operating results of Chiron Vision and Storz have been included in the company's results from the dates of acquisition. In connection with the acquisitions, the purchase price was allocated to net assets acquired and to purchased in-process research and development (R&D). Purchased in-process R&D includes the value of products in the development stage not considered to have reached technological feasibility at the time of acquisition. In accordance with applicable accounting rules, a pre-tax charge of $41 was recorded during the first quarter of 1998. This amount was $25 or $0.44 per share after taxes. The calculation of the in-process R&D charge is more fully described in Note 2 - Business Combinations. The company expects to continue supporting R&D efforts associated with the charge and believes it has a reasonable chance to successfully complete the R&D programs. However, there is risk associated with the projects and the company cannot be assured that either technological or commercial success will be attained. If none of these R&D projects are successfully developed, the sales and profitability of the company may be adversely affected in future periods. The failure of any individual project in process would not materially impact the company's financial position or results of operations. Total estimated costs to complete the projects range from less than $0.1 to $13 with anticipated completion dates ranging from 1999 through 2002. The projections used in calculating the charge were based on a variety of estimates and judgments. Actual results may vary materially due to a number of significant risks, including those discussed in "Other Matters" following. In addition to the purchased in-process R&D charge, purchase accounting rules required that acquired inventory be written up to fair value, an increase of $32 over the value of the inventory reflected at its manufactured cost. This write-up resulted in higher cost of goods sold since the inventory was sold during the first half of the year. Impairment Charge In the fourth quarter of 1998, the company recorded an impairment charge of $85 or $1.51 per share, with no associated tax benefit, related to the goodwill acquired as part of the company's Miracle-Ear hearing aid business. During 1998, the company began to reassess the strategic value of the business to its total portfolio. Additionally, during the second half of the year, profitability of the business began to decline. In the fourth quarter, the company's senior management publicly announced that it would be focusing on healthcare products for the eye and no longer had the goal of becoming a diversified healthcare company, leading to the decision to divest the business. The combination of these factors, and their impact on projected future cash flows of the business, led to the conclusion that the goodwill had become impaired. Other Charges In fiscal 1997, one-time charges of $11 were incurred to exit certain Ray-Ban product lines and to write off an equity investment in a start-up eyewear technology company. Throughout the remainder of this Financial Review, the term "other significant charges" will be used to refer to the purchased in-process R&D, inventory write-up, goodwill impairment charge and the 1997 other charges. Visionaries Bausch & Lomb 1998 Annual Report 25 Restructuring Charges Consolidated reported operating earnings include restructuring charges however, for management reporting purposes such charges are not allocated to business segments. In 1997 and 1996, the company's board of directors approved plans to restructure portions of each of the company's business segments and certain corporate administrative functions. These plans are described more fully in Note 5 - Restructuring Charges, and represent the company's efforts to enhance its competitive position and to reduce the annual impact of general and administrative, logistics and distribution costs by streamlining functions and closing certain facilities. In connection with these plans, pre-tax restructuring charges of $11 were recorded in 1998. The after-tax impact of these charges was $8 or $0.13 per share. In 1997, pre-tax restructuring charges were $72. The after-tax impact of these charges was $46 or $0.83 per share. In 1996, pre-tax restructuring charges were $15. The after-tax impact of these charges was $11 or $0.19 per share. Results Of Operations During 1998 the company adopted Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures About Segments of an Enterprise and Related Information. Amounts in this financial review have been restated as necessary for comparability purposes based on the requirements of this standard. Bausch & Lomb's operating results are reported in four business segments: vision care, pharmaceuticals/surgical, eyewear and healthcare. The vision care segment includes contact lenses and lens care products. The pharmaceuticals/surgical segment includes prescription ophthalmics, over-the-counter (OTC) medications and products and equipment for cataract, refractive and other ophthalmic surgery. The eyewear segment includes sunglasses, vision accessories and the divested thin film coating business. The healthcare segment includes biomedical products and services, hearing aids and the divested oral care, dental implant and skin care businesses. The following table summarizes the proportion of reported revenues and earnings derived from each business segment. Segment earnings are presented as viewed by management for decision-making purposes, and exclude the other significant charges and restructuring charges as defined above.
| Revenues | Segment Earnings+ | +-------------------------+--------------------------+ | 1998 1997 1996 | 1998 1997 1996 | +-------------------------+--------------------------+ Vision care | 41% 47% 45% | 60% 76% 75% | Pharmaceuticals/Surgical | 26% 10% 10% | 26% 13% 11% | Eyewear | 19% 26% 27% | 2% (6%) - % | Healthcare | 14% 17% 18% | 12% 17% 14% | +-------------------------+--------------------------+
Net Sales Total reported net sales for 1998 increased $447 or 23% from 1997. On a constant dollar basis (that is, excluding the effect of foreign currency exchange rate changes), business revenues increased 26% compared with the prior-year period. The results include $410 in 1998 revenues generated by the acquired surgical and pharmaceuticals businesses described more fully in Note 2 - - Business Combinations. Revenue gains in the company's core business segments of vision care and pharmaceuticals/surgical were partially offset by shortfalls in the eyewear segment. Healthcare segment revenues declined as a result of the second quarter 1998 divestiture of the skin care business. Total reported revenues in 1997 decreased $11 or 1% from 1996, while constant dollar revenues increased 3%. A decrease in sales due to the divestiture of the oral care and dental implant businesses in late 1996, as well as declines in sales of sunglasses, was partially offset by strong sales of contact lenses. Operating Earnings Total reported 1998 operating earnings of $124 decreased $24 or 16% from 1997. Incremental results from acquired surgical and pharmaceuticals businesses, improved results in the eyewear segment and ongoing pharmaceuticals product lines and lower restructuring charges, were more than offset by the other significant charges described above. Operating earnings in 1997 decreased $43 or 22% due to an increase in restructuring charges and operating losses in the eyewear segment, partially offset by growth in the company's other segments. 26 Visionaries Bausch & Lomb 1998 Annual Report Comparability Unless specified as "reported," amounts in the remainder of this "Results Of Operations" section have been prepared using "comparable basis" results, which is consistent with the method management uses to view the company's results for decision-making purposes, and thus excludes amounts related to the other significant charges, restructuring and to the following items. Divestitures The company sold its skin care business during the second quarter of 1998. As a result, a non-recurring gain of $56 ($33 or $0.59 per share after taxes) was recorded. This business was reported in the healthcare segment and contributed sales of $19, $48 and $45 and operating earnings of $3, $7 and $6 in 1998, 1997 and 1996, respectively. In December 1997, the company divested the Thin Film Technology Division, which was reported in the eyewear segment. This business contributed revenues of $17 and $20 in 1997 and 1996, respectively. The business had an operating loss of $3 in 1997 and broke even in 1996. There was no material gain or loss to the company on the divestiture. During 1996, the company divested two of its non-core businesses whose results were reported in the healthcare segment. The dental implant business, which was sold in November 1996, and the Oral Care Division, which was divested in September 1996, contributed combined revenues of $50 and combined operating losses of $8 in that year. The company recorded an after-tax gain of $2, or $0.04 per share on the divestitures. Litigation As described in Note 16 - Litigation, the company agreed to settle a matter in litigation that resulted in a 1997 pre-tax charge of $21. The after-tax impact of this charge was $13 or $0.24 per share. The company's assessment of the probable future impact of certain other legal matters led it to record a pre-tax litigation provision of $16 in 1996. On an after-tax basis, such charges amounted to $10 or $0.18 per share. Revenues And Earnings By Business Segment A summary of sales and earnings by segment, as well as a presentation of total company operating earnings, follows:
| 1998 | 1997 | 1996 | +----------------------------+-------------------------------+-----------------------------+ | As Comparable | As Comparable | As Comparable| | Reported Basis | Reported Basis | Reported Basis | +----------------------------+-------------------------------+-----------------------------+ Net Sales | | | | Vision care | $ 960.8 $ 960.8 | $ 908.9 $ 908.9 | $ 869.1 $ 869.1 | Pharmaceuticals/Surgical | 626.3 626.3 | 190.6 190.6 | 189.0 189.0 | Eyewear | 456.0 456.0 | 492.1 475.4 | 525.1 504.9 | Healthcare | 319.7 300.5 | 324.1 276.6 | 343.6 249.1 | |----------------------------|-------------------------------|-----------------------------| | $ 2,362.8 $ 2,343.6 | $ 1,915.7 $ 1,851.5 | $ 1,926.8 $ 1,812.1 | +============================+===============================+=============================+ Operating Earnings | | | | Vision care | $ 206.9 $ 206.9 | $ 209.4 $ 209.4 | $ 190.7 $ 190.7 | Pharmaceuticals/Surgical | 92.1 92.1 | 36.5 36.5 | 28.6 28.6 | Eyewear | 6.0 6.0 | (15.5) (12.3) | (0.6) (0.9)| Healthcare | 40.7 37.9 | 45.8 38.3 | 34.8 36.9 | +----------------------------+-------------------------------+-----------------------------+ | $ 345.7 $ 342.9 | $ 276.2 $ 271.9 | $ 253.5 $ 255.3 | Corporate administration | (52.6) (52.6) | (45.5) (45.5) | (47.6) (47.6)| +-----------+----+-----------+-------------+----+------------+-------------+---+-----------+ | $ 293.1 | |$ 290.3 | $ 230.7 | |$ 226.4 | $ 205.9 | | $ 207.7 | Restructuring charges | (11.3)| |===========| (71.7) | |============| (15.1) | |===========| Other significant charges | (158.1)| | (11.0) | | - | |---------- | | --------- | |-------------| | $ 123.7 | | $ 148.0 | | $ 190.8 | |========== | |=============| |=============|
Visionaries Bausch & Lomb 1998 Annual Report 27 Comparable basis revenues have increased at compound annual rates of 9.9% and 8.4% for the most recent three- and five-year periods, respectively. Revenues in 1998 increased $492 or 27% from 1997 and improved 29% on a constant dollar basis, reflecting the impact of the acquired businesses. Excluding these incremental revenues, total company revenues increased $83 or 4% (6% in constant dollars). In 1997, revenues increased $39 or 2% and improved 6% on a constant dollar basis. Vision Care Segment Results 1998 Versus 1997 The vision care segment includes the contact lens and lens care businesses, with lenses comprising approximately 45% and lens care products representing approximately 55% of revenues. An increase in revenues of 6% was driven by a 9% improvement in contact lens sales combined with a 3% improvement in lens care revenues. On a constant dollar basis, segment revenues increased 8%. Contact lens revenue gains, 11% in constant dollars, were driven by continued strong growth in planned replacement and disposable lenses (collectively, PRD), including SofLens one day disposable lenses in Europe, where sales more than doubled from the prior-year period, and Medalist lenses in Japan, where the brand is now the market leader. PRD sales in the U.S. grew modestly but were offset by declining sales of rigid gas permeable and traditional lenses. Despite difficult comparisons to 1997, which benefited from the initial sell-in of ReNu MultiPlus, a premium-priced multipurpose solution, revenues from lens care products were up 5% in constant dollars, driven primarily by results in Europe. Segment earnings declined $2 or 1%, and operating margins declined to 22% in 1998 from 23% in 1997, primarily the result of currency changes. 1997 Versus 1996 Revenues in this segment improved 5%, led by strong gains in sales of contact lenses. On a constant dollar basis, segment revenues increased 8%. Constant dollar contact lens revenues increased 13%. Strong sales of Medalist lenses in Japan, increased shipments of SofLens66 lenses in the U.S. and Europe, and expansion of SofLens one day lenses in Europe contributed to the growth. The increase was partially offset by a decline in traditional lenses, as the expected shift to PRD lenses continued, and by a moderate decrease in rigid gas permeable lenses, most notably in Europe. Lens care products revenues increased 4% on a constant dollar basis benefiting from the initial sell-in of ReNu MultiPlus solution in the U.S. and Europe and increased revenues from other lens care products outside the U.S. Segment earnings improved 10%, and operating margins improved to 23% in 1997 from 22% in 1996. The positive results reflect the impact of higher sales and the continuing effects of cost reduction efforts. Pharmaceuticals / Surgical Segment Results 1998 Versus 1997 Segment revenues increased $436, reflecting the additions of the Chiron Vision and Storz surgical and pharmaceuticals product lines as well as the pharmaceuticals product lines of Dr. Winzer Pharma in Germany (the acquired product lines). Surgical products accounted for approximately 60% of revenues in 1998 and were entirely incremental to 1997 results. Pharmaceuticals products accounted for approximately 40% of 1998 segment revenues. Pharmaceuticals revenues increased 27% over 1997 or 28% on a constant dollar basis. Excluding the impact of the acquired product lines, pharmaceuticals revenues increased 9% or 10% in constant dollars. In the U.S., pharmaceuticals revenues increased 29% due to acquired product lines, the introductions of Lotemax and Alrex ophthalmic steroids, increased revenues from Trimethoprim, the generic equivalent to Polytrim, and increased generic otic pharmaceuticals sales. Also contributing to this increase was the general eye care business, where sales of Opcon-A drove increases in revenues from 1997. Competitive pressures, including price declines on certain generic products, partially offset these sales increases. Non-U.S. pharmaceuticals revenues improved 24% over the prior year, reflecting the acquired product lines, new product introductions and more stable market conditions in Germany. Segment earnings more than doubled from 1997, primarily reflecting the impact of the acquired product lines. For pharmaceuticals, price and volume increases for many U.S. generic products were offset by unfavorable manufacturing variances and higher allowances associated with the competitive nature of the generic industry, as well as increased spending for marketing, advertising and R&D. For the pharmaceuticals product line, R&D increased to 8.9% of sales from 7.4% of sales in 1997, reflecting spending to support development of proprietary products. R&D was 6.5% of total segment sales, compared with 7.4% in 1997. 28 Visionaries Bausch & Lomb 1998 Annual Report 1997 Versus 1996 Segment revenues increased 1% over the prior year as strong U.S. sales were partially offset by a decline in revenues for the company's Dr. Mann subsidiary in Germany. On a constant dollar basis, sales increased 7%. Contributing to a double-digit increase in the U.S. was the successful launch of Trimethoprim, which attained a greater than 95% market share for the generic product. Muro, a hypertonic ophthalmic solution and ointment, experienced solid sales for the year. The success of Minoxidil, a generic version of Rogaine, continued in 1997 as did the sales of a variety of generic pharmaceutical products introduced prior to 1994. The U.S. general eye care business benefited from the continued strength of Opcon-A and Moisture Eyes PM. Revenues also benefited from the launch of Bausch & Lomb Computer Eye Drops, as well as the relaunch of several other key eye care products. Constant dollar revenues for prescription pharmaceuticals in Europe were up 10% from the prior year reflecting a normalization of sales in the second half of 1997. In 1996, uncertainty surrounding the German government's proposed cutback on prescription reimbursements negatively impacted sales. European OTC pharmaceuticals experienced a 13% constant dollar decline in revenue versus 1996, attributable to pharmacy inventory reductions in Germany due to poor economic conditions. Segment earnings improved 28% in 1997. This improvement was driven by price and volume increases for many U.S. generic products partially offset by unfavorable manufacturing variances and higher allowances associated with the competitive nature of the generic pharmaceuticals industry. Eyewear Segment Results 1998 Versus 1997 Segment results are primarily driven by sales of sunglass products, which account for over 97% of this segment's portfolio. As a result of the company's objective to concentrate on healthcare products for the eye, as well as the sunglass business's performance over the last several years, the company has announced that it is exploring various strategic alternatives for this product line. Segment revenues decreased 4% from 1997, or 2% on a constant dollar basis. Sunglass revenues in the U.S. decreased 8%, partially due to lower sales to Sunglass Hut International (SHI), the region's largest customer. Much of the shortfall occurred in the fourth quarter, resulting in part from a disruption of normal business caused by the aforementioned announcement. Outside the U.S., revenues for the year declined 1%. Revenue increases in Europe were offset by results in the Asia-Pacific and Latin America regions, as difficult economic situations led to sales shortfalls. The segment reported operating income of $6 in 1998 as compared to a loss of $12 in 1997. Cost savings realized from recent restructuring actions, lower marketing and advertising costs for sunglass products and a shift in sales mix toward higher margin products drove this improvement. 1997 Versus 1996 Segment revenues declined 6% compared with 1996. On a constant dollar basis, segment revenues declined 3%, reflecting sunglass results. Sunglass sales in the U.S. declined 5%, due in part to lower sales to SHI. In addition, increased competition for Ray-Ban and Revo products and a loss in market share for Ray-Ban products contributed to the shortfall. Offsetting this trend were favorable sales of new sunglass styles, including the early launch of the 1998 Ray-Ban collection. Outside the U.S., constant dollar sales of sunglasses were slightly below prior year, primarily due to sluggish retail markets in the Asia-Pacific region. The segment operating loss increased in 1997. The impact of the sales shortfall, higher manufacturing costs due to decreased production volumes, higher marketing and advertising costs for sunglass products and higher amortization expense associated with the first quarter acquisition of the Killer Loop eyewear business were partially offset by cost savings realized from restructuring actions. Visionaries Bausch & Lomb 1998 Annual Report 29 Healthcare Segment Results 1998 Versus 1997 Healthcare revenues include sales of biomedical products and services and hearing aids. Segment revenues increased 9%, with year-over-year growth in each product line. On a constant dollar basis, sales improved 11%. Biomedical results rose 11% on a constant dollar basis driven primarily by increases in purpose-bred animals in the U.S. and Europe as well as by growth in the biotechnology and services business. Hearing aid revenues advanced 15% reflecting an increase in the number of company-owned retail outlets. Segment earnings were even with 1997 as biomedical margins remained strong while the margin impact of increased revenues in the hearing aid business was offset by higher operating expenses, primarily selling and marketing. Although increased company-owned retail outlets has resulted in higher hearing aid revenues in 1998, the business's profitability has not met management's expectations. 1997 Versus 1996 Revenues increased 11% over 1996 with gains in all product lines. Revenues were up 16% over the prior year on a constant dollar basis. Revenues in the biomedical business increased 13% on a constant dollar basis reflecting increases in purpose-bred animals due to product line extensions and price increases, and strong growth in sales of biotechnology products and services. Hearing aid revenues advanced 23% over 1996 aided by an increase in company-owned retail outlets and sales of new products. Segment earnings increased 4% on the strength of higher sales, with the hearing aid business profitable for the first time since the company acquired it in 1993. Operating Costs And Expenses The reported ratio of cost of products sold to sales was 46.3% in 1998, versus 46.2% and 45.3% for the years ended 1997 and 1996, respectively. On a comparable basis, this ratio was 45.0% in 1998, 45.7% in 1997 and 45.1% in 1996. Eyewear margins were favorable to the prior year due to lower manufacturing costs resulting from recent restructuring actions. These results were more than offset by lower vision care margins, due to product mix, and pharmaceuticals product margins, which continued to reflect the lower generic product selling prices. The unfavorable trend in 1997 reflected higher manufacturing variances for eyewear, resulting from reduced volumes, and lower margins in vision care and pharmaceuticals, due to downward pressure on generic pharmaceuticals selling prices. Comparable basis selling, administrative and general expenses, including corporate administration, were 38.7% of sales in 1998 compared with 38.5% in 1997 and 39.7% in 1996. The year-over-year unfavorable ratio in 1998 reflected planned increases in marketing and advertising, higher selling costs as well as the incremental expenses associated with the integration of Chiron Vision and Storz. The year-over-year favorable ratio in 1997 reflected decreases in marketing and advertising, lower general administration costs and reduced spending in the pharmaceuticals/surgical segment as well as lower selling expenses due mainly to consolidation of certain responsibilities in the vision care segment. R&D expenses totaled $91 in 1998, an increase of $26 or 40% over 1997. In 1996, these costs were $69. This represented 3.9% of sales in 1998 versus 3.5% and 3.8% in 1997 and 1996, respectively. As expected, R&D in 1998 increased to support the company's goal of consistently bringing new products to market. For the year, these increases were primarily in the pharmaceuticals/surgical segment. The 1997 decrease in expense was due in large part to favorable project spending as efforts were made to consolidate R&D functions in the vision care segment. 30 Visionaries Bausch & Lomb 1998 Annual Report Revenues And Earnings By Geographic Region A summary of sales and earnings by geographic region follows:
| 1998 | 1997 | 1996 | +------------------------------+-------------------------------+-----------------------------+ | As Comparable | As Comparable | As Comparable| | Reported Basis | Reported Basis | Reported Basis | +------------------------------+-------------------------------+-----------------------------+ Net Sales | | | | U.S. |$ 1,236.8 $ 1,217.6 | $ 1,000.3 $ 936.1 | $ 1,020.9 $ 912.9 | Non-U.S. | 1,126.0 1,126.0 | 915.4 915.4 | 905.9 899.2 | +------------------------------+-------------------------------+-----------------------------+ |$ 2,362.8 $ 2,343.6 | $ 1,915.7 $ 1,851.5 | $ 1,926.8 $ 1,812.1 | +==============================+===============================+=============================+ Operating Earnings | | | | U.S. |$ 126.2 $ 123.4 | $ 130.4 $ 126.1 | $ 88.3 $ 90.1 | Non-U.S. | 166.9 166.9 | 100.3 100.3 | 117.6 117.6 | +------------------------------+-------------------------------+-----------------------------+ |$ 293.1 $ 290.3 | $ 230.7 $ 226.4 | $ 205.9 $ 207.7 | +==============================+===============================+=============================+
1998 Versus 1997 Sales in markets outside the U.S. increased 23% in 1998 compared to 1997. Non-U.S. sales represented 48% of consolidated revenues in 1998, 49% in 1997 and 50% in 1996. Non-U.S. sales from the acquired surgical businesses and increased revenues for vision care products, primarily contact lenses, offset declines in the eyewear segment. Currency exchange rates had a negative impact of 5% on non-U.S. sales. European region revenues advanced 39% versus 1997, with minimal impact from currency, due in large part to incremental pharmaceuticals/surgical sales and growth in vision care and sunglass sales. Sales in the Asia-Pacific region, including Japan, increased 7% over the prior year, and advanced 15% in constant dollars, due in large part to incremental surgical sales and to the strong growth of PRD lenses throughout most of the region. Revenues in Japan were up 4% versus 1997, or 11% in constant dollars, due primarily to the continued success of Medalist contact lenses. Revenues in the Canada and Latin America region increased 7% over the prior year due mainly to incremental surgical sales and sales of vision care products. Latin America eyewear sales declined as economic conditions deteriorated in the region. U.S. sales increased 30% from 1997, due primarily to incremental surgical sales. Increased vision care and healthcare sales were offset by shortfalls in the eyewear segment. Operating earnings in markets outside the U.S. in 1998 increased 66% from 1997, and represented 58% of total operating earnings in 1998 versus 44% and 57% in 1997 and 1996, respectively. Incremental surgical results and the Dr. Winzer acquisition in Germany, combined with improved results in Japan due to Medalist lenses and to sunglass products, were partially offset by changes in currency rates. In the U.S., 1998 operating earnings decreased 2% versus the prior year. These results reflected higher R&D and administrative expenses, operating losses for hearing aid products, as well as incremental amortization expense associated with recent acquisitions, which were only partially offset by improvements in the vision care and eyewear segments. Administrative expenses increased primarily due to initial costs associated with streamlining the company's backroom financial operations. 1997 Versus 1996 Sales outside the U.S. increased 2% in 1997 over 1996. European revenues were flat with the prior year, but in constant dollars revenues rose 9% led by sales growth for PRD lenses and lens care products, which benefited from the introduction of ReNu MultiPlus solution, offset by lower pharmaceuticals results. Sales in the Asia-Pacific region, including Japan, improved 6%. On a constant dollar basis, sales in the region increased 14% due to growth in vision care products. Sunglass sales throughout the region were lower due to country-specific economic issues and competitive pressures. In the Canada and Latin America region, sales fell 5% from 1996. Lower lens care products and eyewear sales in Canada offset increased demand for sunglasses in Latin America and PRD lenses throughout the region. Visionaries Bausch & Lomb 1998 Annual Report 31 U.S. revenues in 1997 increased 3% from the prior year. Growth in PRD lenses, U.S. generic pharmaceuticals and healthcare products offset lower sunglass sales. Operating earnings in markets outside the U.S. in 1997 decreased 15% from 1996. The drop in earnings for 1997 was due mainly to difficulty in the eyewear segment, where margins were impacted by changes in sales mix toward lower margin new products from the more profitable traditional products and adverse currency impacts. A change in sales mix for vision care products away from higher margin lens care products towards contact lenses, as well as adverse currency, were also factors. In the U.S., 1997 operating earnings increased 40% versus 1996. Margins were slightly lower than prior year however, total profitability was maintained through savings in operating expenditures, especially marketing, advertising and R&D. Other Income And Expense Interest and investment income was $45 in 1998, $40 in 1997 and $43 in 1996. The increase in 1998 over 1997 was primarily attributable to a gain on the sale of a long-term investment associated with the divestiture of the dental implant business. The decrease in 1997 from 1996 was due to lower investment levels in 1997 and interest income recorded in 1996 on an income tax refund, partially offset by higher interest rates. Interest expense was $101 in 1998, $56 in 1997 and $52 in 1996. The 1998 increase over 1997 was primarily due to additional debt associated with the surgical acquisitions. The 1997 increase over 1996 was mainly due to higher debt levels and higher interest rates. The company pursues an essentially neutral strategy with respect to interest rate movements. Its policy is to maintain, within reasonable parameters, a balance between floating-rate investments, which are predominately held outside the U.S., and floating-rate debt, which represents primarily U.S. obligations. To the extent this natural hedge position becomes unbalanced, the company may enter into interest rate swap agreements or undertake long-term fixed-rate borrowings, the proceeds from which may be used to repay short-term debt. As a result of this practice, the company's exposure to the normal rise and fall of U.S. interest rates is mitigated. The company does not speculate in foreign currency. It may, however, selectively execute foreign currency transactions to protect the translated earnings and cash flows of certain foreign units. Such foreign currency transactions may not be accorded hedge accounting treatment under U.S. accounting rules. In addition, the company hedges identified transaction exposures on an after-tax basis to minimize the impact of exchange rate movements on operating results and selectively hedges exposures arising in countries with hyperinflationary economies. Transaction gains of $8 and translation losses of $2 resulted in net foreign currency gains of $6 in 1998. In 1997, net foreign currency gains of $7 reflected transaction gains of $9 offset by translation losses of $2. In 1996, net gains were $2 and were comprised of $3 transaction gains and $1 translation losses. Income Taxes The company's reported tax rate was 60.9% in 1998 as compared with 38.7% in 1997 and 37.7% in 1996. The 1998 rate reflected the goodwill impairment charge for which there is no associated tax benefit. All years reflected the impact of restructuring, litigation charges and net gain on divestitures while 1998 also reflected the charge for in-process R&D. Excluding these items, the ongoing tax rates were 36.2%, 37.4% and 37.6% for 1998, 1997 and 1996, respectively. The decrease in rates reflected geographic shifts in earnings. Net Earnings And Earnings Per Share Reported net earnings of $25 or $0.45 per share in 1998 decreased $24 or $0.44 per share from 1997. These results reflected the goodwill impairment charge, purchased in-process R&D and restructuring charges discussed previously, offset by the incremental results from the acquired businesses and increased operating earnings from the eyewear segment and pharmaceuticals product line. Amounts declined significantly in 1997 from the 1996 reported amounts of $83 or $1.47 per share, due primarily to the impact of restructuring charges recorded in 1997. 32 Visionaries Bausch & Lomb 1998 Annual Report Liquidity And Financial Resources The company evaluates its liquidity from several perspectives, including its ability to generate earnings, positive cash flows and free cash flow, its financial position, its access to financial markets and the adequacy of working capital levels. The company has a stated goal to maximize free cash flow, which is defined as cash generated before the payment of dividends, the borrowing or repayment of debt, stock repurchases and the acquisition or divestiture of businesses. The following section is presented on an "as reported" basis. Cash Flows From Operating Activities Cash provided by operating activities totaled $146 in 1998, a decrease of $69 from 1997. Contributing to this unfavorability were increases in accounts receivable, interest on incremental debt associated with the surgical acquisitions and the settlement of litigation commenced in a prior year. In 1997, operating activities generated $216 in cash flow, a significant increase from 1996. This favorability was driven primarily by the timing of income tax payments and refunds and by the lowering of inventory levels. Free cash flow for 1998 was negative $74, versus positive $68 for 1997. The decrease was primarily attributable to the operating factors cited above, as well as to an increase in capital expenditures. Cash Flows From Investing Activities Cash used in investing activities was $797 in 1998. Cash outflows for acquisitions were $719, primarily for the purchase of the surgical businesses, while capital expenditures totaled $202, a significant portion of which supported expanded contact lens manufacturing capacity. Cash of $135 was realized in 1998 upon the divestiture of the skin care business. In 1997, cash used in investing activities was $175. Capital expenditures were $126 and included spending for expanded contact lens manufacturing capacity. Cash paid for acquisitions was $49, primarily for the purchase of Killer Loop S.p.A., a manufacturer of sunglasses based in Italy. Divestitures reflected the sale of the Thin Film Technology Division. Cash Flows From Financing Activities In 1998, $593 was provided by financing activities. Net new borrowings totaling $605 were used primarily to support the surgical acquisitions. In July 1998, the board of directors authorized the repurchase of up to 250,000 Common shares, none of which had been repurchased prior to year end. Cash used in financing activities during 1997 was $13. The primary inflow was $214 from long-term debt proceeds, primarily issuances under the company's medium-term note program. This inflow was more than offset by dividend payments, repayment of long-term debt, net repayments of short-term debt and the repurchase of 500,000 Common shares. Financial Position The company's total debt, consisting of short- and long-term borrowings, was $1,473 in 1998, $855 in 1997 and $718 in 1996. The increase in debt in 1998 was due primarily to the surgical acquisitions, while the increase in long-term debt in 1997 was due in part to $75 associated with the adoption of new accounting rules that required the company to classify proceeds from its trade receivable securitization agreement as debt. The ratio of total debt to capital stood at 63.5%, 51.1% and 44.9% at year end 1998, 1997 and 1996, respectively. Cash and cash equivalents totaled $129 in 1998, $184 in 1997 and $168 in 1996. Access To Financial Markets Bausch & Lomb's reputation, financial position and ability to generate positive cash flows provide access to financing in markets around the world. The company maintains revolving credit agreements, both 364-day and long-term, totaling $700. The interest rate under these agreements is based on LIBOR or, at the company's option, the higher of several other common indices. No debt was outstanding under these agreements at year end 1998 and 1997. In addition, the company maintains other lines of credit on which it may draw to meet its financing requirements. Visionaries Bausch & Lomb 1998 Annual Report 33 The company's commercial paper is rated A-2 and P-2 by Standard & Poor's and Moody's Investors Service, respectively. Its long-term debt is rated BBB by Standard & Poor's and Baa2 by Moody's Investors Service. The company believes its existing credit facilities and access to financial markets provide adequate liquidity to meet obligations, fund capital expenditures and invest in potential growth opportunities. Working Capital Working capital was $774 at year end 1998 as compared to $203 and $19 at year end 1997 and 1996, respectively. The current ratio was 2.0, 1.2 and 1.0 at year end 1998, 1997 and 1996, respectively. Dividends The dividend on Common stock, declared and paid quarterly, totaled $1.04 per share for each of the years ended 1998, 1997 and 1996. Return On Equity And Capital Return on average shareholders' equity was 3.1% in 1998, compared with 5.9% in 1997 and 9.2% in 1996. The decrease in 1998 was mainly due to the goodwill impairment and purchased in-process R&D charges described previously. The decrease in 1997 was the result of the unfavorable impact of restructuring, the other significant charges defined previously and lower earnings in the eyewear segment, partially offset by higher earnings in the other segments. Return on average capital employed was 3.7% in 1998, 5.0% in 1997 and 7.2% in 1996. The decrease in 1998 was due primarily to the matters discussed above, as well as to the debt increase associated with the surgical acquisitions. The 1997 decrease was largely due to increased restructuring charges and debt levels. Outlook In 1999, management believes that Bausch & Lomb will continue to progress toward its goal of becoming the preeminent technology-based healthcare company for the eye. The company expects high single-digit consolidated revenue growth in 1999, driven by new product introductions in the vision care and pharmaceuticals/surgical segments. Operating margins are expected to increase approximately one percentage point over 1998 results. These projections include results for the sunglass business, for which management continues to explore strategic alternatives. They also presume that foreign exchange rates remain fairly consistent with current levels. Since the company operates globally, the businesses are subject to fluctuations in currencies, which can have a material effect on non-U.S. sales and the results of consolidated operations. In the vision care segment, revenue growth in 1999 is expected to be in the high single digits. Over the next three years, the combination of a growing market and differentiated new products should further drive revenue growth. In the lens care portion of the business, the company's strategy will continue to be to gain market share from the conversion of consumers from older disinfectant systems and to capitalize on growth potential in emerging markets. In the contact lens business, double-digit growth will continue to be driven by new products. The SofLens one day lens will be introduced in the U.S. in the first half of 1999, and the SofLens66 toric lens, introduced in the fourth quarter in the U.S., will be launched globally throughout 1999. The PureVision lens, the first silicone-hydrogel soft contact lens designed for up to one-month continuous wear, will be launched in early 1999 outside the U.S. for one-month wear, and in the U.S. for seven-day wear. The combination of higher margins on most newer products and the company's ongoing efforts to reduce manufacturing costs is expected to result in margins above 20%. In the pharmaceuticals/surgical segment, revenue growth is expected to be over 10%. The company remains committed to expanding its line of proprietary ophthalmic drugs through collaborative ventures, continuing to aggressively launch new generics as products come off patent and to penetrate markets outside its current base. In the surgical product line, the company's broad portfolio of cataract products will enable generation of incremental growth in the near term. Pending Food and Drug Administration approval, the company expects to introduce the Hydroview foldable intraocular lens (IOL) in the U.S. This product, which provides surgeons with an alternative to other foldable IOLs, has been very successful in Europe. In the refractive surgery market, underlying market growth trends as well as the expected U.S. regulatory approval for the company's line of excimer lasers in the second half of 1999, should benefit the company. New products in the pharmaceuticals business include product line extensions for Ocuvite vitamins plus additional generic and proprietary formulas. Operating margins for the segment are expected 34 Visionaries Bausch & Lomb 1998 Annual Report to be over 15% as the company benefits from the integration of the former Chiron Vision and Storz businesses. Growth in this business segment is contingent upon obtaining regulatory approvals in markets around the world and is therefore subject to risks of changing regulatory environments. In addition, the pharmaceuticals business anticipates shifting its current, mostly generic, product portfolio toward more higher margin proprietary products. The eyewear segment is expected to post modest revenue growth and improved profitability with a goal of achieving an operating margin approaching 10%. Improved margins will result from savings associated with recent restructuring programs, improved mix toward higher-margin products and more focused spending by operating channel and brand. In 1999 the company will continue to manage the healthcare segment in a manner designed to maximize its return to shareholders. Revenues for the biomedical business, the primary driver of this segment, are expected to grow at a rate approaching 10%, with commensurate increases in operating earnings. Capital spending in 1999 is expected to be in the range of $175-$200, with cumulative spending over the next three years approaching $500. More than half of the cumulative spending will be in the vision care segment, where capacity expansion will be needed to support accelerated new product introductions. In addition, a significant portion will be spent on system upgrades, including global financial and human resources systems being implemented as part of recent restructuring initiatives. In the pharmaceuticals/surgical segment, R&D and operations facilities will be expanded to accommodate the company's growing business needs. The company's goal is to generate $400 to $500 of free cash flow over the next three years. Other Matters Environment The company believes it is in compliance in all material respects with applicable environmental laws and regulations. The company is presently involved in remediation efforts at certain locations, some of which are company owned. At all such locations, the company believes such efforts will not have a materially adverse effect on its results of operations or financial position. Risks Associated With Year 2000 Date Issues The company has been addressing the potential risks associated with the year 2000 date issue. It has established a formal program to assess and renovate internal information technology (IT) and non-information technology (non-IT) operations that are at risk, and further, to evaluate the year 2000 readiness of key third-party suppliers and recipients of products, services, materials or data. Year 2000 issues are being addressed through a combination of software replacement, system upgrades and, in limited instances, source code modifications (collectively, "renovation"). Ongoing reengineering projects have had the incidental benefit of remediating several major year 2000 issues. The assessment phase of IT systems is substantially complete. The renovation phase is on schedule and the company plans to have all key IT systems tested and compliant in the second and third quarters of 1999. Other IT systems should be tested and compliant during the first three quarters of 1999, depending on the project. For non-IT systems, the company has engaged a leading production systems integration firm specializing in year 2000 assessment and remediation of manufacturing, distribution and R&D facilities. The assessment phase is ongoing and substantially complete, and it should be fully completed during the second quarter 1999. Based on information available at this time, the company plans to have all key non-IT systems tested and compliant during the third or fourth quarter of 1999, depending on the project. The company has been assessing the readiness of key suppliers and customers since early 1998. To further facilitate this assessment, the company will interact with each major supplier or recipient of data, materials, products or services, including face-to-face interviews with many of those considered to be critical to the company. This assessment is scheduled for completion early in the fourth quarter of 1999. Anticipated costs, comprised of both period expenses and capital expenditures, of identifying and remediating year 2000 issues in the above-described areas are expected to be in the range of $65-$75, of which approximately $27 has been incurred to date. Of the total anticipated costs, approximately 50% is expected to be capitalized as part of system upgrades and replacements. Management believes that its year 2000 program will substantially reduce the risk of a material adverse impact on future financial results caused by the year 2000 issue. Potential risks of a failure to Visionaries Bausch & Lomb 1998 Annual Report 35 address a year 2000 issue (whether IT, non-IT or external) that could have a materially detrimental impact to the company include the inability to manufacture or ship products, the inability to receive and fill orders, and problems with customers or suppliers, including the loss of electrical power or the failure of a key customer or supplier to purchase products or provide anticipated goods and services. At this stage, no overall contingency plan has been developed. Contingency plans deemed necessary for critical systems, customers and suppliers are expected to be completed in the second and third quarters of 1999. The estimated costs of remediation and the expected completion dates described above are based on information available at this time and may be updated as additional information and assessment phase results become available. Readers are referred to the section appearing below which addresses forward-looking statements made by the company. The Euro On January 1, 1999, 11 of the 15 member countries of the European Union began operating with a new currency, the euro, which was established by irrevocably fixing the value of legacy currencies against this new common currency. The euro may be used in business transactions along with legacy currencies until 2002, at which time it will become the sole currency of the participating countries. The company has processes in place to address the issues raised by this currency conversion, including the impact on information technology and other systems, currency risk, financial instruments, taxation and competitive implications. The company expects no material impact to its financial position or its results of operations arising from the euro conversion. Information Concerning Forward-Looking Statements When used in this discussion, the words "anticipate," "should," "expect," "estimate," "project" and similar expressions are intended to identify forward-looking statements. The forward-looking statements contained in this report are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements involve predictions of future company performance, and are thus dependent on a number of factors affecting the company's performance. Where possible, specific factors that may impact performance materially have been identified in connection with specific forward-looking statements. Additional risks and uncertainties include, without limitation, the impact of competition, seasonality and general economic conditions in the global sunglass, vision care and ophthalmic surgical and pharmaceuticals markets, where the company's businesses compete, changes in global and localized economic and political conditions (for example, the company does business in Asia and Brazil, where, recently, economies and associated currency risks have been volatile), customer concentration (the company's five largest customers accounted, in the aggregate, for approximately 10% of total sales during 1998), changing trends in consumer preferences and tastes, legal proceedings initiated by or against the company, changes in government regulation of the company's products and operations, changes in private and regulatory schemes providing for the reimbursement of patient medical expenses, difficulties or delays in the development, production, testing, regulatory approval, marketing of products, the effect of changes within the company's organization, and such other factors as are described in greater detail in the company's filings with the Securities and Exchange Commission, including its 1998 Annual Report on Form 10-K. 36 Visionaries Bausch & Lomb 1998 Annual Report Quarterly Results The following table presents reported net sales, gross profit (net sales less cost of products sold), net earnings and net earnings per share for each quarter during the past two years:
|-------------------|--------------------|----------------------|----------------------------------| | | | | Net Earnings Per Share | | Net | Gross | Net | ------------------------- | | Sales | Profit | Earnings | Basic Diluted | |-------------------|--------------------|----------------------|----------------------------------| 1998 | | | | | First | $ 553.1 | $ 277.0 | $ (23.2)(1,2) | $ (0.42) $(0.42)(1,2)| Second | 635.1 | 336.8 | 55.3 (1,3) | 0.99 0.98 (1,3)| Third | 575.6 | 317.4 | 36.2 | 0.65 0.64 | Fourth | 599.0 | 338.5 | (43.1)(4) | (0.77) (0.77) (4) | |-------------------|--------------------|----------------------| | | $ 2,362.8 | $ 1,269.7 | $ 25.2 | $ 0.45 $ 0.45 | |===================|====================|======================|==================================| 1997 | | | | | First | $ 451.2 | $ 224.0 | $ 3.3 (5) | $ 0.06 $ 0.06 (5) | Second | 523.2 | 291.7 | 20.3 (5) | 0.37 0.36 (5) | Third | 468.3 | 255.2 | 18.5 (5) | 0.33 0.33 (5) | Fourth | 473.0 | 260.1 | 7.3 (5,6) | 0.13 0.13 (5,6)| |-------------------|--------------------|----------------------| | | $ 1,915.7 | $ 1,031.0 | $ 49.4 | $ 0.89 $ 0.89 | |===================|====================|======================|==================================|
(1) Includes the after-tax effect of restructuring charges of $2.4 ($0.04 per share) and $5.1 ($0.09 per share) for the first and second quarters of 1998, respectively. (2) Includes the after-tax write-off of purchased in-process R&D of $24.6 ($0.44 per share). (3) Includes the after-tax gain on sale of the skin care business of $33.0 ($0.58 per share). (4) Includes the goodwill impairment charge of $85.0 ($1.51 per share). (5) Includes the after-tax effect of restructuring charges of $7.7 ($0.14 per share), $18.3 ($0.33 per share), $11.0 ($0.20 per share) and $9.4 ($0.17 per share) for the first, second, third and fourth quarters of 1997, respectively. (6) Includes the after-tax effect of a litigation provision of $13.2 ($0.24 per share). - -------------------------------------------------------------------------------- Quarterly Stock Prices The company's Common stock is listed on the New York Stock Exchange and is traded under the symbol BOL. There were approximately 7,200 and 7,800 Common shareholders of record at year end 1998 and 1997, respectively. The following table shows the price range of the Common stock for each quarter for the past two years:
| 1998 Price Per Share | 1997 Price Per Share | - -------------|----------------------------|-----------------------------| | High Low | High Low | - -------------|----------------------------|-----------------------------| First | $46-1/4 $37-3/4 | $40-1/4 $32-1/2 | Second | 52-11/16 45-1/4 | 47-7/8 36-3/8 | Third | 52-3/4 38-11/16 | 47-7/8 38-5/16 | Fourth | 59-3/8 38-1/16 | 43-5/8 37 |
Visionaries Bausch & Lomb 1998 Annual Report 37 Statement Of Income For The Years Ended December 26, 1998, December 27, 1997 and December 28, 1996 Dollar Amounts In Millions - Except Per Share Data
|----------------------|----------------------|---------------------| | 1998 | 1997 | 1996 | - --------------------------------------------------------|----------------------|----------------------|---------------------| Net Sales | $ 2,362.8 | $1,915.7 | $ 1,926.8 | Costs And Expenses | | | | Cost of products sold | 1,093.1 | 884.7 | 872.3 | Selling, administrative and general | 917.0 | 743.8 | 773.1 | Research and development | 91.7 | 67.5 | 75.5 | Goodwill impairment charge | 85.0 | - | - | Purchased in-process research and development | 41.0 | - | - | Restructuring charges | 11.3 | 71.7 | 15.1 | |----------------------|----------------------|---------------------| | 2,239.1 | 1,767.7 | 1,736.0 | |----------------------|----------------------|---------------------| Operating Earnings | 123.7 | 148.0 | 190.8 | Other Expense (Income) | | | | Interest and investment income | (45.1) | (40.4) | (42.8) | Interest expense | 100.8 | 56.0 | 51.7 | Gain from foreign currency, net | (6.4) | (6.6) | (1.6) | Gain on divestitures | (56.0) | - | (1.5) | Litigation provision | - | 21.0 | 16.1 | |----------------------|----------------------|---------------------| | (6.7) | 30.0 | 21.9 | |----------------------|----------------------|---------------------| Earnings Before Income Taxes And Minority Interest | 130.4 | 118.0 | 168.9 | Provision for income taxes | 79.4 | 45.6 | 63.7 | |----------------------|----------------------|---------------------| Earnings Before Minority Interest | 51.0 | 72.4 | 105.2 | Minority interest | 25.8 | 23.0 | 22.1 | |----------------------|----------------------|---------------------| Net Earnings | $ 25.2 | $ 49.4 | $ 83.1 | |======================|======================|=====================| Basic Earnings Per Share | $ 0.45 | $ 0.89 | $ 1.48 | Average Shares Outstanding - Basic (000s) | 55,824 | 55,383 | 56,299 | Diluted Earnings Per Share | $ 0.45 | $ 0.89 | $ 1.47 | Average Shares Outstanding - Diluted (000s) | 56,367 | 55,654 | 56,510 | |======================|======================|=====================|
See Notes To Financial Statements 38 Visionaries Bausch & Lomb 1998 Annual Report Balance Sheet December 26, 1998 and December 27, 1997 Dollar Amounts In Millions - Except Per Share Data
|------------------|------------------| | 1998 | 1997 | - ------------------------------------------------------------------------------|------------------|------------------| Assets | | | Cash and cash equivalents | $ 129.2 | $ 183.7 | Other investments, short-term | 300.0 | - | Trade receivables, less allowances of $26.8 and $14.0, respectively | 526.3 | 374.8 | Inventories, net | 440.7 | 324.3 | Deferred taxes, net | 68.4 | 66.0 | Other current assets | 122.2 | 141.4 | |------------------|------------------| Total Current Assets | 1,586.8 | 1,090.2 | Property, Plant And Equipment, net | 725.0 | 580.2 | Goodwill And Other Intangibles, less accumulated | | | amortization of $137.3 and $116.6, respectively | 758.9 | 406.9 | Other Investments, long-term | 249.2 | 546.4 | Other Assets | 171.8 | 149.2 | |------------------|------------------| Total Assets | $ 3,491.7 | $2,772.9 | |==================|==================| Liabilities And Shareholders' Equity | | | Notes payable | $ 160.4 | $ 339.4 | Current portion of long-term debt | 31.1 | 4.4 | Accounts payable | 92.6 | 72.0 | Accrued compensation | 110.3 | 73.6 | Accrued liabilities | 366.2 | 365.9 | Federal, state and foreign income taxes payable | 51.8 | 32.0 | |------------------|------------------| Total Current Liabilities | 812.4 | 887.3 | Long-Term Debt, less current portion | 1,281.3 | 510.8 | Other Long-Term Liabilities | 106.6 | 119.4 | Minority Interest | 446.4 | 437.0 | |------------------|------------------| Total Liabilities | 2,646.7 | 1,954.5 | |------------------|------------------| Common Stock, par value $0.40 per share, 200 million shares authorized, | | | 60,198,322 shares issued in both 1998 and 1997 | 24.1 | 24.1 | Class B Stock, par value $0.08 per share, 15 million shares authorized, | | | 955,791 shares issued (856,905 shares in 1997) | 0.1 | 0.1 | Capital In Excess Of Par Value | 84.2 | 76.8 | Common And Class B Stock In Treasury, at cost, 4,625,026 shares | | | (5,846,286 shares in 1997) | (178.9) | (223.1) | Retained Earnings | 883.5 | 916.5 | Accumulated Other Comprehensive Income | 41.0 | 29.1 | Other Shareholders' Equity | (9.0) | (5.1) | |------------------|------------------| Total Shareholders' Equity | 845.0 | 818.4 | |------------------|------------------| Total Liabilities And Shareholders' Equity | $ 3,491.7 | $2,772.9 | |==================|==================|
See Notes To Financial Statements Visionaries Bausch & Lomb 1998 Annual Report 39 Statement Of Cash Flows For The Years Ended December 26, 1998, December 27, 1997 and December 28, 1996 Dollar Amounts In Millions
| 1998 | 1997 | 1996 | - ----------------------------------------------------------------------|---------------|---------------|----------------| Cash Flows From Operating Activities | | | | Net Earnings $ 25.2 $ 49.4 $ 83.1 Adjustments to reconcile net earnings to net cash | | | | provided by operating activities: | | | | Depreciation | 117.3 | 90.8 | 92.6 | Amortization | 46.5 | 21.2 | 20.7 | Goodwill impairment charge | 85.0 | - | - | Purchased in-process research and development, | | | | net of taxes | 24.6 | - | - | Deferred income taxes | 11.9 | 18.7 | 23.2 | Gain on divestitures, net of taxes | (32.8) | - | (2.2) | Stock compensation expense | 10.6 | 3.3 | 1.3 | Restructuring charges, net of taxes | 7.6 | 46.4 | 10.9 | Provision for litigation expense, net of taxes | - | 13.2 | 10.0 | Loss on retirement of fixed assets | 14.6 | 8.3 | 2.9 | Changes In Assets And Liabilities: | | | | Trade receivables | (64.0) | (32.9) | (22.4) | Inventories | (19.7) | (1.0) | (45.1) | Other current assets | 17.0 | (31.3) | (23.9) | Accounts payable and accrued liabilities | (98.3) | (11.7) | (13.6) | Income taxes | 4.0 | 51.0 | (40.8) | Other long-term liabilities | (3.3) | (9.9) | (7.4) | |---------------|---------------|----------------| Net Cash Provided By Operating Activities | 146.2 | 215.5 | 89.3 | |---------------|---------------|----------------| Cash Flows From Investing Activities | | | | Capital expenditures | (201.5) | (126.1) | (130.3) | Net cash paid for acquisition of businesses | (718.9) | (48.6) | (85.7) | Net cash received from divestitures | 135.0 | 9.3 | 77.7 | Other | (12.0) | (9.2) | (4.2) | |---------------|---------------|----------------| Net Cash Used In Investing Activities | (797.4) | (174.6) | (142.5) | |---------------|---------------|----------------| Cash Flows From Financing Activities | | | | Repurchases of Common and Class B shares | (1.8) | (21.8) | (67.8) | Exercise of stock options | 47.7 | 14.8 | 5.2 | Net (repayments) proceeds from notes payable | (183.5) | (72.7) | 111.4 | Proceeds from issuance of long-term debt | 801.4 | 213.5 | 135.2 | Repayment of long-term debt | (12.7) | (89.3) | (96.4) | Payment of dividends | (58.1) | (57.1) | (58.9) | |---------------|---------------|----------------| Net Cash Provided By (Used In) Financing Activities | 593.0 | (12.6) | 28.7 | |---------------|---------------|----------------| Effect Of Exchange Rate Changes On Cash And Cash Equivalents | 3.7 | (12.4) | (2.3) | |---------------|---------------|----------------| Net Change In Cash And Cash Equivalents | (54.5) | 15.9 | (26.8) | Cash And Cash Equivalents, Beginning Of Year | 183.7 | 167.8 | 194.6 | |---------------|---------------|----------------| Cash And Cash Equivalents, End Of Year | $ 129.2 | $ 183.7 | $ 167.8 | |===============|===============|================| Supplemental Cash Flow Disclosures | | | | Cash paid for interest | $ 85.6 | $ 56.2 | $ 48.6 | |---------------|---------------|----------------| Net cash payments for (refunds of) income taxes | 55.8 | (6.4) | 85.7 | |===============|===============|================|
See Notes To Financial Statements 40 Visionaries Bausch & Lomb 1998 Annual Report Statement Of Changes In Shareholders' Equity For The Years Ended December 26, 1998, December 27, 1997 and December 28, 1996 Dollar Amounts In Millions
- ------------------------------------------|----------|------------|----------|----------|----------|----------------|--------------| | | | | | | Accumulated | | | | Common |Capital In| | | Other | Other | | | and Class B| Excess | Treasury | Retained | Comprehensive | Shareholders'| | Total | Stock(1,2)| of Par | Stock | Earnings | Income | Equity | - ------------------------------------------|----------|------------|----------|----------|----------|----------------|--------------| Balance At December 30, 1995 |$ 929.3 | $ 24.2 | $ 107.8 |$ (178.7) | $ 900.1 | $ 85.1 | $ (9.2) | Components of comprehensive income: | | | | | | | | Net earnings | 83.1 | - | - | - | 83.1 | - | - | Currency translation adjustments | 4.9 | - | - | - | - | 4.9 | - | Unrealized holding loss | (11.8) | - | - | - | - | (11.8) | - | |----------| | | | | | | Total comprehensive income | 76.2 | | | | | | | |----------| | | | | | | Net shares canceled under employee | | | | | | | | plans (118,169 shares) | (13.6) | - | (11.7) | - | - | - | (1.9) | Treasury shares issued under employee| | | | | | | | plans (428,579 shares) | 15.5 | - | - | 15.5 | - | - | - | Treasury shares repurchased | | | | | | | | (1,846,929 shares) | (67.3) | - | - | (67.3) | - | - | - | Amortization of unearned compensation| 0.3 | - | - | - | - | - | 0.3 | Dividends (3) | (58.5) | - | - | - | (58.5)| - | - | |----------|------------|----------|----------|----------|----------------|--------------| Balance At December 28, 1996 | 881.9 | 24.2 | 96.1 | (230.5) | 924.7 | 78.2 | (10.8) | Components of comprehensive income: | | | | | | | | Net earnings | 49.4 | - | - | - | 49.4 | - | - | Currency translation adjustments | (60.9) | - | - | - | - | (60.9) | - | Unrealized holding gain | 11.8 | - | - | - | - | 11.8 | - | |----------| | | | | | | Total comprehensive income | 0.3 | | | | | | | |----------| | | | | | | Net shares (canceled) issued under | | | | | | | | employee plans (293,504 shares) | (16.2) | - | (19.3) | - | - | - | 3.1 | Treasury shares issued under employee| | | | | | | | plans (620,621 shares) | 29.2 | - | - | 29.2 | - | - | - | Treasury shares repurchased | | | | | | | | (521,925 shares) | (21.8) | - | - | (21.8) | - | - | - | Amortization of unearned compensation| 2.6 | - | - | - | - | - | 2.6 | Dividends (3) | (57.6) | - | - | - | (57.6)| - | - | |----------|------------|----------|----------|----------|----------------|--------------| Balance At December 27, 1997 | 818.4 | 24.2 | 76.8 | (223.1) | 916.5 | 29.1 | (5.1) | Components of comprehensive income: | | | | | | | | Net earnings | 25.2 | - | - | - | 25.2 | - | - | Currency translation adjustments | 11.9 | - | - | - | - | 11.9 | - | |----------| | | | | | | Total comprehensive income | 37.1 | | | | | | | |----------| | | | | | | Net shares (canceled) issued under | | | | | | | | employee plans (98,886 shares) | (0.6) | - | 7.4 | - | - | - | (8.0) | Treasury shares issued under employee| | | | | | | | plans (1,255,044 shares) | 46.0 | - | - | 46.0 | - | - | - | Treasury shares repurchased | | | | | | | | (33,784 shares) | (1.8) | - | - | (1.8) | - | - | - | Amortization of unearned compensation| 4.1 | - | - | - | - | - | 4.1 | Dividends (3) | (58.2) | - | - | - | (58.2)| - | - | |----------|------------|----------|----------|----------|----------------|--------------| Balance At December 26, 1998 |$ 845.0 | $ 24.2 | $ 84.2 |$ (178.9) | $ 883.5 | $ 41.0 | $ (9.0) | |==========|============|==========|==========|==========|================|==============|
(1) There are also 10 thousand shares of $100 par value 4% cumulative preferred stock authorized, none of which has been issued. (2) There are also 25 million shares of $1 par value Class A preferred stock authorized, none of which has been issued. (3) Cash dividends of $1.04 per share were declared on Common and Class B stock in each of the years 1996, 1997 and 1998. See Notes To Financial Statements Visionaries Bausch & Lomb 1998 Annual Report 41 Notes to Financial Statements Dollar Amounts In Millions - Except Per Share Data 1. Accounting Policies Principles Of Consolidation The financial statements include all majority-owned U.S. and non-U.S. subsidiaries. Intercompany accounts, transactions and profits are eliminated. The fiscal year is the 52- or 53-week period ending the last Saturday in December. Certain amounts in the prior years' financial statements have been reclassified to conform with the current year's presentation. Use Of Estimates The financial statements have been prepared in conformity with generally accepted accounting principles and, as such, include amounts based on informed estimates and judgments of management with consideration given to materiality. For example, estimates are used in determining valuation allowances for uncollectible trade receivables, obsolete inventory and deferred income taxes. Actual results could differ from those estimates. Cash And Cash Equivalents Cash equivalents include time deposits and highly liquid investments with original maturities of three months or less. Inventories Inventories are valued at the lower of cost or market, generally using the first-in, first-out (FIFO) method. However, cost is determined by using the last-in, first-out (LIFO) method for certain U.S. inventories. Property, Plant And Equipment Property, plant and equipment, including improvements that significantly add to productive capacity or extend useful life, are recorded at cost, while maintenance and repairs are expensed as incurred. Depreciation is calculated for financial reporting purposes using the straight-line method based on the estimated useful lives of the assets as follows: buildings, 30 to 40 years; machinery and equipment, two to 10 years; and leasehold improvements, the lease periods. Goodwill Goodwill is amortized on a straight-line basis over periods ranging from eight to 40 years. The company evaluates goodwill for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In completing this evaluation, the company compares its best estimate of undiscounted future cash flows, excluding interest costs, with the carrying value of goodwill. If undiscounted cash flows do not exceed the recorded value of goodwill, an impairment is recognized to reduce the carrying value based on the expected discounted cash flows of the business unit. Expected cash flows are discounted at a rate commensurate with the risk involved. Revenue Recognition Revenues are generally recognized when products are shipped. The company has established programs which, under specified conditions, enable customers to return product. The company establishes liabilities for estimated returns and allowances at the time of shipment. In addition, accruals for customer discounts and rebates are recorded when revenues are recognized. Advertising Expense External costs incurred in producing media advertising are expensed the first time the advertising takes place. Promotional or advertising costs associated with customer support programs are accrued when the related revenues are recognized. At December 26, 1998 and December 27, 1997, $6.5 and $7.2 of deferred advertising costs representing primarily production and design costs for advertising to be run in the subsequent fiscal year, were reported as other current assets. Advertising expenses of $253.2, $235.0 and $241.8 were included in selling, administrative and general expenses for 1998, 1997 and 1996, respectively. Start-Up Costs It has been the company's policy to capitalize one-time, incremental out-of-pocket expenses incurred during the start-up phase of major internal projects and amortize them over future periods. During 1998, the Accounting Standards Executive Committee issued Statement of Position (SOP) 98-5, Reporting on the Costs of Start-up Activities. This SOP requires that companies expense all start-up costs as incurred. The company will adopt the SOP in the first quarter of 1999, and its impact will not be material to consolidated financial results. Comprehensive Income The company adopted Statement of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income, at the beginning of 1998. As it relates to the company, comprehensive income is defined as net earnings plus the sum of currency translation adjustments and unrealized holding gains/losses on securities (collectively "other comprehensive income"), and is presented in the Statement of Changes in Shareholders' 42 Visionaries Bausch & Lomb 1998 Annual Report Equity. Changes in currency translation adjustments are reported net of income tax (benefit) expense of $(5.9), $15.8 and $12.8 for the years ending 1998, 1997 and 1996, respectively. Changes in unrealized holding gains/losses are reported net of income tax (benefit) expense of $(11.8) in 1997 and $11.8 in 1996. Investments In Debt And Equity Securities Certain of the company's other investments are classified as available-for-sale under the terms of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, and accordingly, any unrealized holding gains and losses, net of taxes, are excluded from income and recognized as a component of accumulated other comprehensive income until realized. The accumulated balance of unrealized holding losses, net of taxes, was $11.8 at December 28, 1996. Fair value of the investments is determined based on market prices, or by reference to discounted cash flows and investment risk. Currency Translation Adjustments Assets and liabilities of certain non-U.S. subsidiaries are translated at current exchange rates, and related revenues and expenses are translated at average exchange rates in effect during the period. Resulting translation adjustments are recognized as a component of accumulated other comprehensive income. The accumulated balances of currency translation adjustments, net of taxes, were $41.0, $29.1 and $90.0 at the end of 1998, 1997 and 1996, respectively. Financial results of non-U.S. subsidiaries in countries with highly inflationary economies are translated using a combination of current and historical exchange rates and any translation adjustments are included in net earnings, along with all transaction gains and losses for the period. Derivative Financial Instruments The company enters into foreign currency and interest rate derivative contracts for the purpose of minimizing risk and protecting earnings. The company uses principally foreign currency forward contracts to hedge foreign exchange exposures. The portfolio of contracts is adjusted at least monthly to reflect changes in exposure positions as they become known. When possible and practical, the company matches the maturity of the hedging instrument to that of the underlying exposure. Net settlements are generally made at contract maturity based on rates agreed to at contract inception. Gains and losses on hedges of transaction exposures are included in income in the period in which exchange rates change. Gains and losses related to hedges of foreign currency firm commitments are deferred and recognized in the basis of the transaction when completed, while those on forward contracts hedging non-U.S. equity investments are offset against the currency component in accumulated other comprehensive income. The receivable or payable with the counterparty to the derivative contract is reported as either other current assets or accrued liabilities. Deferred gains and losses totaled less than $0.5 at December 26, 1998 and December 27, 1997 and are expected to be recognized within one year. The company enters into interest rate swap and cap agreements to effectively limit exposures to interest rate movements within the parameters of its interest rate hedging policy. This policy requires that interest rate exposures from floating-rate assets be offset by a substantially similar amount of floating-rate liabilities. Interest rate derivatives are used to readjust this natural hedge position whenever it becomes unbalanced beyond policy limits. Net payments or receipts on these agreements are accrued as other current assets and accrued liabilities and recorded as adjustments to interest expense or interest income. Interest rate instruments are entered into for periods no longer than the life of the underlying transactions being hedged or, in the case of floating-rate to fixed-rate swaps, for periods no longer than the underlying floating-rate exposure is expected to remain outstanding. Interest rate derivatives are normally held to maturity, but may be terminated early, particularly if the underlying exposure is similarly extinguished. Gains and losses on prematurely terminated interest rate derivatives are recognized over the remaining life, if any, of the underlying exposure as an adjustment to interest income or interest expense. The company amortizes premium income or expense incurred from entering into derivative instruments over the life of each agreement as non-operating income and expense. New Accounting Guidance In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which the company is required to adopt effective no later than the first quarter of 2000. SFAS No. 133 will require the company to record all derivatives on the balance sheet at fair value. Changes in derivative fair values will either be recognized in earnings as offsets to the changes in fair value of related hedged assets, liabilities and firm commitments or for forecasted transactions, deferred Visionaries Bausch & Lomb 1998 Annual Report 43 and recorded as a component of accumulated other comprehensive income until the hedged transactions occur and are recognized in earnings. The ineffective portion of a hedging derivative's change in fair value will be immediately recognized in earnings. The impact of SFAS No. 133 on the company's financial statements will depend on a variety of factors, including the future level of forecasted and actual foreign currency transactions, the extent of the company's hedging activities, the types of hedging instruments used and the effectiveness of such instruments. The company is currently evaluating the impact of adopting SFAS No. 133 to its financial statements. 2. Business Combinations On December 29, 1997, the company acquired all of the issued and outstanding shares of Chiron Vision Corporation (Chiron Vision) from Chiron Corporation for $298.1 in cash. Chiron Vision researches, develops and manufactures innovative products that improve results of cataract and refractive surgery and the treatment of progressive eye diseases. On December 31, 1997, the company completed its acquisition of certain stock and assets of Storz Instrument Company, Storz Ophthalmics, Inc. and Cyanamid Chirurgie S. A. S. (collectively, Storz) from American Home Products Corporation, for $369.7 in cash. Storz is a leading manufacturer of high-quality ophthalmic surgical instruments, surgical and diagnostic equipment, intraocular lens implants and ophthalmic pharmaceuticals. The acquisitions were accounted for under the purchase method of accounting; accordingly, operating results of Chiron Vision and Storz have been included in the pharmaceuticals/surgical segment's results from the date of acquisition. The acquisitions were originally financed through short-term borrowings however, $500.0 was converted to long-term debt during 1998. Allocation of Purchase Price The company used professional appraisal consultants to assist in assessing and allocating the purchase price among assets acquired and liabilities assumed based on fair values at the acquisition date. This valuation was performed separately for Chiron Vision and Storz and did not consider any synergies of the combined entities. For certain of the assets, the fair value was determined by discounting future cash flows at an interest rate commensurate with each company's inherent risk, which ranged from 12% for Storz to 13% for Chiron Vision. The allocation of purchase price was as follows: |----------| Identifiable intangible assets |$ 268.5 | Goodwill | 211.6 | Working capital | 96.1 | Property, plant and equipment | 68.4 | Purchased in-process research and development | 41.0 | Accrual for exit activities | (28.1) | All other, net | 10.3 | |----------| |$ 667.8 | |==========|
Intangible Assets Identifiable intangible assets consisted of customer relationships, trademarks, workforce in place, technology, patents and regulatory approvals. They will be amortized on the straight-line basis over their estimated lives, which range from eight to 40 years. Goodwill represents the excess of purchase price over the fair values of the assets acquired and liabilities assumed, and is being amortized over 20 years for Chiron Vision and 40 years for Storz. Purchased In-Process Research and Development Purchased in-process research and development (R&D) represents the estimated fair value of incomplete projects at the date of acquisition based on cash flows discounted on a risk-adjusted basis. At the date of acquisition, the development of these projects had not yet reached technological feasibility and the R&D in progress had no alternative future uses. Accordingly, these costs were expensed in the first quarter of 1998. 44 Visionaries Bausch & Lomb 1998 Annual Report The discount rate used to value the in-process R&D projects ranged from 15% to 22%. These rates were higher than the rates used to value assets described above due to the inherent uncertainties surrounding the successful development of the purchased in-process R&D, and the uncertainty of technological advances. The value of the in-process R&D projects was adjusted to reflect the relative value and contribution of the acquired R&D. In doing so, consideration was given to each project's stage of completion. The company believes the assumptions used in the valuation were reasonable at the time of the business combination. No assurance can be given, however, that the underlying assumptions used to estimate project sales, development costs or profitability or the events associated with such projects will transpire as estimated. For these reasons, actual results may vary from the projected results. There were 11 projects included in the purchased in-process R&D charge. The projects were unique from the other preexisting acquired core technology and fell into one of two categories. These categories were targeted at either (1) developing new pharmaceutical drugs related to the prevention or treatment of eye-related diseases or (2) developing new technologies to assist in the correction of vision. The projects in the first category were at stages of completion between 17% and 54%. Those in the second category were at stages of completion between 10% and 95%. Stage of completion was determined by reviewing total project costs incurred through the acquisition date as compared to total anticipated project costs. Accrual for Exit Activities As part of the integration of the businesses, management developed a formal plan that included the shutdown of duplicate facilities in the U.S., Europe and Asia, the elimination of duplicate product lines and the consolidation of certain administrative functions. The exit activities were committed to by management and formally communicated to employees shortly after the acquisitions were consummated. The major components of the accrual were as follows: |----------| Employee severance and relocation | $ 21.7 | Facilities closure costs | 5.5 | Contract terminations | 0.9 | |----------| | $ 28.1 | |==========|
The accrual for severance and relocation related to approximately 600 employees in production, R&D, selling and administration. As of December 26, 1998 approximately 100 of these employees had been terminated. The facilities closure costs primarily represent leasehold termination payments and fixed asset writedowns relating to duplicate facilities. The closures and consolidations in the U.S. are expected to be started or substantially completed in 1999. Closures and consolidations outside the U.S. are expected to commence in 1999 and be substantially complete in 2000. As of December 26, 1998 approximately $20 of the exit costs originally accrued remained on the balance sheet. Pro Forma Financial Information The following selected, unaudited pro forma data is presented to provide a summary of the combined results of the company, Chiron Vision and Storz as if the acquisitions had occurred as of the beginning of 1997, after giving effect to certain adjustments for amortization of goodwill, increased interest expense on the acquisition debt and related income tax effects. The pro forma data is for informational purposes only and does not necessarily reflect the results of operations had the companies operated as one during this period. No effect has been given for synergies, if any, that may be realized through the acquisitions.
(Unaudited) | 1997 | - --------------------------------------------------|-----------| Net sales | $2,334.1 | Operating earnings | 182.0 | Net earnings | 41.7 | Earnings per share - basic | 0.75 | Earnings per share - diluted | 0.75 | |===========|
Visionaries Bausch & Lomb 1998 Annual Report 45 3. Goodwill Impairment Charge Consistent with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and Assets to be Disposed Of, the company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In the fourth quarter of 1998, the company recorded a charge of $85.0, with no associated tax benefit, or $1.51 per share, related to the goodwill associated with the 1993 acquisition of the Miracle-Ear hearing aid business. This business is reported in the company's healthcare segment. During 1998, the company began to reassess the strategic value of this business in relation to its total portfolio. Additionally, during the second half of the year, profitability of the business began to decline. In the fourth quarter, the company's senior management publicly announced that it would be focusing on healthcare products for the eye and no longer had the goal of becoming a diversified healthcare company, leading to the decision to divest the business. The combination of these factors, and their impact on projected future cash flows of the business, led to the conclusion that the goodwill had become impaired. In computing the impairment charge, projected cash flows were discounted to present values using a rate of 13.1%, which was commensurate with the risk involved. The resulting discounted projected future cash flows were compared to the carrying value of the business and resulted in a charge to income. 4. Earnings Per Share Basic earnings per share is computed based on the weighted average number of Common and Class B shares outstanding during a period. Diluted earnings per share reflects the assumed conversion of dilutive stock options. In computing the per share effect of assumed conversion, funds which would have been received from the exercise of options were considered to have been used to purchase common shares at average market prices for the period, and the resulting net additional common shares are included in the calculation of average common shares outstanding. The table below summarizes the amounts used to calculate basic and dilutive earnings per share:
| 1998 | 1997 | 1996 | - -------------------------------------|---------------------------|----------------------------|--------------------------| | Average | Average | Average | | Outstanding | Outstanding | Outstanding | | Net Shares Per | Net Shares Per | Net Shares Per | | Earnings (000s) Share | Earnings (000s) Share | Earnings (000s) Share| |---------------------------|----------------------------|--------------------------| Basic Earnings Per Share | $ 25.2 55,824 $ 0.45 | $ 49.4 55,383 $ 0.89 | $ 83.1 56,299 $1.48| Effect of Dilutive Stock Options | - 543 | - 271 | - 211 | |----------------- |----------------- |----------------- | Diluted Earnings Per Share | $ 25.2 56,367 $ 0.45 | $ 49.4 55,654 $ 0.89 | $ 83.1 56,510 $1.47| |===========================|============================|==========================|
Antidilutive outstanding stock options were excluded from the calculation of average shares outstanding. Options excluded, in thousands, totaled 1,709 in 1998, 3,431 in 1997 and 2,981 in 1996. 46 Visionaries Bausch & Lomb 1998 Annual Report 5. Restructuring Charges 1997 Program In April 1997, the company's board of directors approved plans to restructure portions of each of the company's four business segments, as well as certain corporate administration functions. As a result, pre-tax restructuring charges of $74.2 were recorded in 1997 with an additional $11.3 recorded in the first half of 1998. The major components of the charges are summarized in the table below:
|--------------|------------|-------------------|-------------|-------------------|------------| | | | Pharmaceuticals/ | | Corporate | | | Vision Care | Eyewear | Surgical | Healthcare | Administration | Total | - --------------------------|--------------|------------|-------------------|-------------|-------------------|------------| Employee separations | $ 19.1 | $ 23.5 | $ 3.8 | $ 3.2 | $ 3.7 | $ 53.3 | Asset writedowns | 3.3 | 7.1 | - | 1.8 | 0.3 | 12.5 | Other | 0.9 | 10.8 | 1.2 | 0.9 | 5.9 | 19.7 | |--------------|------------|-------------------|-------------|-------------------|------------| | $ 23.3 | $ 41.4 | $ 5.0 | $ 5.9 | $ 9.9 | $ 85.5 | |==============|============|===================|=============|===================|============|
The goal of the restructuring effort was to significantly reduce the company's fixed cost structure and realign the organization to meet its strategic objectives through the closure, relocation and consolidation of manufacturing, distribution, sales and administrative operations, and workforce reductions. The employee separations of $53.3 related to severance and relocation costs for approximately 2,100 employees in operations and activities being exited, primarily manufacturing, logistics and administrative functions. Asset writedowns related primarily to the closing of facilities and losses resulting from equipment dispositions. Other charges included losses under lease and other commitments. 1995/1996 Program In June 1996 and December 1995, the company's board of directors approved plans to restructure portions of the vision care, eyewear and healthcare operations and certain corporate administration functions. Accordingly, pre-tax restructuring charges of $41.8 were recorded, the major components of which are set forth in the table below:
|------------------|------------------|------------------|-------------------|------------------| | | | | Corporate | | | Vision Care | Eyewear | Healthcare | Administration | Total | - --------------------------------|------------------|------------------|------------------|-------------------|------------------| Employee separations | $ 4.5 | $ 14.3 | $ 2.1 | $ 3.5 | $ 24.4 | Asset writedowns | 4.1 | 4.4 | 2.2 | 1.0 | 11.7 | Other | 3.1 | 2.1 | 0.5 | - | 5.7 | |------------------|------------------|------------------|-------------------|------------------| | $ 11.7 | $ 20.8 | $ 4.8 | $ 4.5 | $ 41.8 | |==================|==================|==================|===================|==================|
The charges provided for costs associated with streamlining operations, including the closure of certain manufacturing facilities, the reorganization of European and Asian logistics and warehousing, and consolidation of administrative functions. During 1997, the actions relating to these programs were completed and remaining reserves of $2.5 were reversed, resulting in net reported restructuring expense of $71.7 in 1997. Visionaries Bausch & Lomb 1998 Annual Report 47 The following table sets forth the activity in the restructuring reserves through December 26, 1998:
|---------------|------------|-------------------|--------------|------------------|-----------| | | | Pharmaceuticals/ | | Corporate | | | Vision Care | Eyewear | Surgical | Healthcare | Administration | Total | - ----------------------------------|---------------|------------|-------------------|--------------|------------------|-----------| Restructuring provisions: | | | | | | | 1995/1996 programs, | | | | | | | net of reversals | $ 10.1 | $ 18.8 | $ - | $ 4.8 | $ 5.6 | $ 39.3 | 1997 program | 23.3 | 41.4 | 5.0 | 5.9 | 9.9 | 85.5 | Less charges against | | | | | | | 1995/1996 reserve: | | | | | | | Non-cash items | 4.1 | 4.4 | - | 2.2 | 1.0 | 11.7 | Cash payments | 6.0 | 14.4 | - | 2.6 | 4.6 | 27.6 | Less charges against | | | | | | | 1997 reserve: | | | | | | | Non-cash items | 3.3 | 7.1 | - | 1.8 | 0.3 | 12.5 | Cash payments | 14.7 | 33.1 | 3.6 | 2.6 | 9.0 | 63.0 | |---------------|------------|-------------------|--------------|------------------|-----------| Balance at December 26, 1998 | $ 5.3 | $ 1.2 | $ 1.4 | $ 1.5 | $ 0.6 | $ 10.0 | |===============|============|===================|==============|==================|===========|
Reserves remaining at December 26, 1998 primarily represented liabilities for continuing severance payments and are considered to be adequate. These severance liabilities related to approximately 300 employees, primarily in administrative functions. 6. Business Segment And Geographic Information In 1998, the company adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 superseded SFAS No. 14, Financial Reporting for Segments of a Business Enterprise, replacing the "industry segment" approach with the "management" approach. The adoption of SFAS No. 131 did not affect results of operations or financial position but did affect the disclosure of segment information. As a result, prior years' segment information has been restated. The company is organized by product line for management reporting with operating earnings being the primary measure of segment profitability. Certain distribution and general and administrative expenses, including some centralized services provided by corporate functions, are allocated based on segment sales. No items below operating earnings are allocated to segments. Restructuring charges and charges related to certain significant events, although related to specific product lines, are also excluded from management basis results. The accounting policies used to generate segment results are the same as the company's overall accounting policies. The company's product line segments are vision care, pharmaceuticals/surgical, eyewear and healthcare. The vision care segment includes contact lenses and lens care products. The pharmaceuticals/surgical segment includes prescription ophthalmics, over-the-counter medications, and cataract, refractive and other ophthalmic surgery products. The eyewear segment includes sunglasses, vision accessories and the optical thin film coating business, which was divested in 1997. The healthcare segment includes biomedical products and services, hearing aids, the skin care business, which was divested in 1998, and the oral care and dental implants businesses, which were divested in 1996. Segment assets represent operating assets of U.S. commercial entities, global manufacturing locations and inventories of non-U.S. commercial entities. Other operating assets of non-U.S. commercial entities are reported as "amounts not allocated." 48 Visionaries Bausch & Lomb 1998 Annual Report Business Segment The following table presents sales and other financial information by business segment for the years 1998, 1997 and 1996. The company does not have material intersegment sales.
|-----------------|------------------|---------------------|------------------|------------------| | | Operating | Depreciation and | Capital | | | Net Sales | Earnings | Amortization | Expenditures | Assets | - -------------------------------|-----------------|------------------|---------------------|------------------|------------------| 1998 | | | | | | Vision care | $ 960.8 | $ 206.9 | $ 62.8 | $ 112.7 | $ 553.2 | Pharmaceuticals/Surgical | 626.3 | 92.1 | 52.2 | 31.7 | 958.5 | Eyewear | 456.0 | 6.0 | 27.1 | 21.5 | 382.0 | Healthcare | 319.7 | 40.7 | 19.0 | 16.9 | 278.0 | |-----------------|------------------|---------------------|------------------|------------------| | 2,362.8 | 345.7 | 161.1 | 182.8 | 2,171.7 | Corporate administration | - | (52.6) | 2.7 | 18.7 | 448.8 | Restructuring(1) | - | (11.3) | - | - | - | Other significant event(2) | - | (158.1) | - | - | - | Amounts not allocated | - | - | - | - | 871.2 | |-----------------|------------------|---------------------|------------------|------------------| | $ 2,362.8 | $ 123.7 | $ 163.8 | $ 201.5 | $ 3,491.7 | |=================|==================|=====================|==================|==================| 1997 | | | | | | Vision care | $ 908.9 | $ 209.4 | $ 48.8 | $ 73.4 | $ 461.5 | Pharmaceuticals/Surgical | 190.6 | 36.5 | 10.9 | 10.0 | 192.5 | Eyewear | 492.1 | (15.5) | 31.2 | 20.7 | 400.5 | Healthcare | 324.1 | 45.8 | 18.9 | 20.4 | 418.5 | |-----------------|------------------|---------------------|------------------|------------------| | 1,915.7 | 276.2 | 109.8 | 124.5 | 1,473.0 | Corporate administration | - | (45.5) | 2.2 | 1.6 | 456.0 | Restructuring(3) | - | (71.7) | - | - | - | Other significant events(4) | - | (11.0) | - | - | - | Amounts not allocated | - | - | - | - | 843.9 | |-----------------|------------------|---------------------|------------------|------------------| | $ 1,915.7 | $ 148.0 | $ 112.0 | $ 126.1 | $ 2,772.9 | |=================|==================|=====================|==================|==================| 1996 | | | | | | Vision care | $ 869.1 | $ 190.7 | $ 42.5 | $ 61.9 | $ 441.9 | Pharmaceuticals/Surgical | 189.0 | 28.6 | 12.2 | 14.2 | 198.8 | Eyewear | 525.1 | (0.6) | 28.3 | 28.6 | 388.9 | Healthcare | 343.6 | 34.8 | 24.5 | 21.5 | 418.1 | |-----------------|------------------|---------------------|------------------|------------------| | 1,926.8 | 253.5 | 107.5 | 126.2 | 1,447.7 | Corporate administration | - | (47.6) | 5.8 | 4.1 | 371.6 | Restructuring(5) | - | (15.1) | - | - | - | Amounts not allocated | - | - | - | - | 784.1 | |-----------------|------------------|---------------------|------------------|------------------| | $ 1,926.8 | $ 190.8 | $ 113.3 | $ 130.3 | $ 2,603.4 | |=================|==================|=====================|==================|==================|
(1) Restructuring charges were recorded as follows: vision care, $2.3; eyewear, $6.6 and corporate administration, $2.4. (2) Other significant events consisted of an $85.0 goodwill impairment charge within the healthcare segment, a charge of $41.0 for purchased in-process R&D, and a purchase accounting inventory adjustment of $32.1 related to the surgical acquisitions. (3) Restructuring charges were recorded as follows: vision care, $19.3; pharmaceuticals/surgical, $5.1; eyewear, $32.8; healthcare, $5.9 and corporate administration, $8.6. (4) Other significant events consisted of a $9.0 write-off of discontinued sunglass inventory and a $2.0 write-off of an equity investment in a start-up eyewear technology venture. (5) Restructuring charges were recorded as follows: vision care, $8.6; eyewear, $5.0 and corporate administration, $1.5. Visionaries Bausch & Lomb 1998 Annual Report 49 Geographic Region The following table presents sales and long-lived assets by geography for the years 1998, 1997 and 1996. Sales to unaffiliated customers represent net sales originating in entities physically located in the identified geographic area. Long-lived assets include property, plant and equipment, goodwill and intangibles, other investments and other assets.
|-------------|------------------|-----------------| | U.S. | Non-U.S. | Consolidated | - ------------------------------------|-------------|------------------|-----------------| 1998 | | | | Sales to unaffiliated customers |$ 1,236.8 | $ 1,126.0 | $ 2,362.8 | Long-lived assets | 1,073.0 | 831.9 | 1,904.9 | 1997 | | | | Sales to unaffiliated customers |$ 1,000.3 | $ 915.4 | $ 1,915.7 | Long-lived assets | 743.8 | 938.9 | 1,682.7 | 1996 | | | | Sales to unaffiliated customers |$ 1,033.6 | $ 893.2 | $ 1,926.8 | Long-lived assets | 742.2 | 913.6 | 1,655.8 | |=============|==================|=================|
7. Supplemental Balance Sheet Information
|------------------------|------------------------| | December 26, 1998 | December 27, 1997 | - ------------------------------------|------------------------|------------------------| Inventories | | | Raw materials and supplies | $ 84.7 | $ 96.3 | Work in process | 39.1 | 23.4 | Finished products | 319.3 | 218.1 | |------------------------|------------------------| | 443.1 | 337.8 | Less allowance for valuation | | | of certain U.S. inventories | | | at LIFO | 2.4 | 13.5 | |------------------------|------------------------| | $ 440.7 | $ 324.3 | |========================|========================| Inventories valued using LIFO | $ 49.7 | $ 64.6 | |========================|========================|
|-------------------------|-----------------------| | December 26, 1998 | December 27, 1997 | - ------------------------------------|-------------------------|-----------------------| Property, Plant And Equipment | | | Land | $ 25.4 | $ 21.0 | Buildings | 416.0 | 392.2 | Machinery and equipment | 930.2 | 727.0 | Leasehold improvements | 41.1 | 34.9 | |-------------------------|-----------------------| | 1,412.7 | 1,175.1 | Less accumulated depreciation | 687.7 | 594.9 | |-------------------------|-----------------------| | $ 725.0 | $ 580.2 | |=========================|=======================|
50 Visionaries Bausch & Lomb 1998 Annual Report 8. Other Short- And Long-Term Investments The company has invested 219 million Netherlands guilders (NLG), all classified as long-term and approximating $136.0 at the time of the investment, in securities issued by a subsidiary of a triple-A rated financial institution. The issuer's investments are restricted to high quality, short-term investments and government obligations and the issuer reinvests all of its income. At December 26, 1998, the average U.S. dollar rate of return was 5.10% including the effects of a cross-currency swap transaction that effectively hedges the currency risk and converts the NLG income to a U.S. dollar rate of return. Each quarter, the company has the right to call for redemption of the securities at net asset value. In the event this right is not exercised, the triple-A rated financial institution can put the securities it owns to the company in March and June, 2003. Management believes this investment is fully recoverable at par value based on the high quality and stability of the financial institution. However, the investment is subject to equity risk. The company has also invested $425.0 in securities issued by a subsidiary of a double-A rated financial institution. The securities rank senior to all other classes of the issuer's equity and rank junior to the secured and unsecured liabilities of the issuer, including subordinated debt obligations, and are neither payable upon demand nor have a fixed maturity. The securities pay quarterly cumulative dividends at a variable LIBOR-based rate. At December 26, 1998, this rate was 4.76%. The issuer and the company have agreed to redeem these securities at par over a 12-month period commencing January 5, 1999, and as a result, the company has classified $300.0 of this investment as short-term. The company will use the redemption proceeds to finance off-shore operational requirements and invest in short-term money market instruments. 9. Provision For Income Taxes An analysis of the components of earnings before income taxes and minority interest and the related provision for income taxes is presented below:
|--------------------|----------------------|------------------| | 1998 | 1997 | 1996 | - --------------------------------------------------------|--------------------|----------------------|------------------| Earnings before income taxes and minority interest | | | | U.S. | $ (65.1) | $ 1.5 | $ 42.0 | Non-U.S. | 195.5 | 116.5 | 126.9 | |--------------------|----------------------|------------------| | $ 130.4 | $ 118.0 | $ 168.9 | |====================|======================|==================| Provision for income taxes | | | | Federal | | | | Current | $ 23.9 | $ 24.0 | $ (3.2) | Deferred | (3.5) | (12.3) | 13.9 | State | | | | Current | 4.3 | 4.1 | 4.4 | Deferred | (6.8) | (0.5) | 2.0 | Foreign | | | | Current | 44.0 | 36.4 | 48.4 | Deferred | 17.5 | (6.1) | (1.8) | |--------------------|----------------------|------------------| | $ 79.4 | $ 45.6 | $ 63.7 | |====================|======================|==================|
Visionaries Bausch & Lomb 1998 Annual Report 51 Deferred taxes, detailed below, recognize the impact of temporary differences between the amounts of assets and liabilities recorded for financial statement purposes and such amounts measured in accordance with tax laws. Realization of the tax loss and credit carryforwards, which expire between 1999 and 2008, is contingent on future taxable earnings in the appropriate jurisdictions. Valuation allowances have been recorded for these and other asset items, which may not be realized. The decrease in the non-current deferred liability for depreciation and amortization relates to the charge for purchased in-process R&D associated with the surgical acquisitions described in Note 2 - Business Combinations.
|---------------------------------------|------------------------------------| | December 26, 1998 | December 27, 1997 | | Assets | Liabilities | Assets | Liabilities | - --------------------------------------------------|-----------------|---------------------|-----------------|------------------| Current | | | | | Inventories | $ 25.1 | $ - | $ 26.4 | $ - | Restructuring accruals | 4.5 | - | 23.3 | - | Employee benefits and compensation | 22.5 | - | 20.1 | - | Sales and allowance accruals | 17.8 | - | 14.7 | - | Legal/litigation accruals | 2.5 | - | 10.5 | - | Other accruals | 8.9 | 1.0 | 8.2 | - | Unrealized foreign exchange transactions | 1.8 | 2.5 | 1.5 | 14.1 | State and local income taxes | - | 11.9 | - | 10.5 | |-----------------|---------------------|-----------------|------------------| | 83.1 | 15.4 | 104.7 | 24.6 | |=================|=====================|=================|==================| Non-current | | | | | Tax loss and credit carryforwards | 48.7 | - | 49.7 | - | Employee benefits | 30.0 | 0.3 | 32.4 | 0.2 | Unrealized foreign exchange transactions | - | 15.1 | 3.0 | 13.9 | Depreciation and amortization | 7.6 | 21.7 | 0.1 | 53.6 | Other accruals | - | 8.9 | - | 4.2 | Valuation allowance | (39.6) | - | (27.4) | - | |-----------------|---------------------|-----------------|------------------| | 46.7 | 46.0 | 57.8 | 71.9 | |-----------------|---------------------|-----------------|------------------| | $ 129.8 | $ 61.4 | $ 162.5 | $ 96.5 | |=================|=====================|=================|==================|
Reconciliations of the statutory U.S. federal income tax rate to effective tax rates were as follows:
|------------------|----------------------|--------------------| | 1998 | 1997 | 1996 | - ---------------------------------------------------------------|------------------|----------------------|--------------------| Statutory U.S. tax rate | 35.0% | 35.0% | 35.0% | Goodwill impairment charge with no income tax benefit | 22.7 | - | - | Difference between non-U.S. and U.S. tax rates | 3.2 | 1.9 | 2.9 | Goodwill amortization | 1.1 | 1.1 | 1.0 | State income taxes, net of federal tax benefit | 0.7 | 2.0 | 2.5 | Foreign Sales Corporation tax benefit | (1.8) | (2.1) | (1.8) | Other | - | 0.8 | (1.9) | |------------------|----------------------|--------------------| Effective tax rate | 60.9% | 38.7% | 37.7% | |==================|======================|====================|
At December 26, 1998, earnings considered to be permanently reinvested in non-U.S. subsidiaries totaled approximately $885.5. Deferred income taxes have not been provided on these earnings, as the company does not plan to initiate any action that would require the payment of income taxes. It is not practicable to estimate the amount of additional tax that might be payable on these undistributed foreign earnings. 52 Visionaries Bausch & Lomb 1998 Annual Report 10. Debt Short-term debt at December 26, 1998 and December 27, 1997 consisted of $101.9 and $297.0 in U.S. commercial paper and $58.5 and $42.4 in non-U.S. borrowings, respectively. To support its liquidity requirements, the company maintains U.S. revolving credit agreements with 364-day and long-term credit terms totaling $400.0 and $300.0, respectively. The agreements mature in December 1999 and December 2002. No debt was outstanding under these agreements at year end 1998 and 1997. At December 26, 1998, the long-term revolving credit agreement supported $300.0 of unsecured promissory notes which have been classified as long-term debt. Commitment fees on these revolving credit agreements fluctuate according to the long-term debt ratings of the company, and were 0.100% and 0.125% on the short-term and long-term agreements, respectively, as of December 26, 1998. The interest rate applicable to borrowings under the agreements is based on LIBOR or, at the company's option, the higher of several other common indices. The company also maintains unused U.S. bank lines of credit amounting to approximately $32. Compensating balance arrangements for these lines are not material. The company has entered into two seven-year interest rate swap agreements, each in notional amounts of $100.0, which convert $200.0 of U.S. commercial paper into fixed-rate obligations with an effective interest rate of 6.48%. The swaps will terminate on January 1, 2002. Average short-term interest rates, which include the effect of the interest rate swap agreements, were 5.7% and 6.0% for the years ended 1998 and 1997, respectively. The maximum amount of short-term debt at the end of any month was $893.3 in 1998 and $529.4 in 1997. Average short-term, month-end borrowings were $550.1 in 1998 and $476.3 in 1997. The components of long-term debt were:
|-------------------------|---------------------|--------------------| |Interest Rate Percentage | December 26, 1998 | December 27, 1997| - ---------------------------------------------------------|-------------------------|---------------------|--------------------| Fixed-rate notes payable | | | | Notes due in 1999 | 2.21-2.28 | $ 25.8 | $ 23.3 | Notes due in 2001 or 2011(1) | 6.15 | 100.0 | - | Notes due in 2001 or 2026(2) | 6.56 | 100.0 | 100.0 | Notes due in 2003(3) | 5.95 | 85.0 | 85.0 | Notes due in 2003 or 2013(1) | 6.38 | 100.0 | - | Notes due in 2004(4) | 6.75 | 200.0 | 200.0 | Notes due in 2005 or 2025(1) | 6.50 | 100.0 | - | Notes due in 2028(4) | 7.13 | 200.0 | - | All other fixed rate notes | Various | 7.0 | 16.8 | Variable rate and other borrowings | | | | Promissory notes(6) | | 300.0 | - | Securitized trade receivables expiring in 2002 | 4.89(5) | 75.0 | 75.0 | Industrial Development Bonds due in 2015 | 4.05(5) | 8.5 | 8.5 | Other | Various | 11.1 | 6.6 | |-------------------------|---------------------|--------------------| | | 1,312.4 | 515.2 | Less current portion | | 31.1 | 4.4 | |-------------------------|---------------------|--------------------| | | $ 1,281.3 | $ 510.8 | |=========================|=====================|====================|
(1) Notes contain put/call options exercisable in 2001, 2003 and 2005 for the 6.15%, 6.38% and 6.50% notes, respectively. (2) Notes contain an option allowing the holder to put these notes back to the company in 2001; otherwise the notes mature in 2026. (3) An interest rate swap agreement effectively converts these notes to a floating-rate liability. At December 26, 1998, the effective rate on these notes was 5.13%. (4) The company, at its option, may call these notes at any time pursuant to a make-whole redemption provision, which would compensate holders for any changes in market value of the notes upon early extinguishment. (5) Represents 1998 year end rate. (6) At December 26, 1998, a long-term revolving credit agreement supported $300.0 short-term unsecured promissory notes which have been classified as long-term debt. Visionaries Bausch & Lomb 1998 Annual Report 53 Interest rate swap agreements on long-term debt issues resulted in a reduction in the long-term effective interest rate from 6.20% to 6.16% in 1998 and from 5.91% to 5.68% in 1997. Long-term borrowing maturities during the next five years are $31.1 in 1999; $3.3 in 2000; $8.6 in 2001; $76.2 in 2002 and $86.1 in 2003. 11. Operating Leases The company leases land, buildings, machinery and equipment under noncancelable operating leases. Total annual rental expense for 1998, 1997 and 1996 amounted to $34.5, $26.2 and $26.8, respectively. Minimum future rental commitments having noncancelable lease terms in excess of one year aggregated $145.2 as of December 1998 and are payable as follows: 1999, $28.5; 2000, $22.3; 2001, $18.7; 2002, $65.1; 2003, $4.9 and beyond, $5.7. The company leases an office facility under a seven-year operating lease, expiring in 2002, with an associated residual value guarantee in an amount not to exceed $54.6. During 1998, net rental payments on the lease, included above, approximated $3.5. 12. Employee Benefits The company's benefit plans which, in the aggregate, cover substantially all U.S. employees and employees in certain other countries, consist of defined benefit pension plans, defined contribution plans and a participatory defined benefit postretirement plan. The costs associated with defined contribution plans totaled $14.7, $9.7 and $12.0 for 1998, 1997 and 1996, respectively. The remaining discussion in this footnote pertains to the company's defined benefit pension and postretirement plans. The following table provides reconciliations of the changes in benefit obligations, fair value of plan assets and funded status for the two-year period ending December 26, 1998. 54 Visionaries Bausch & Lomb 1998 Annual Report
|-------------------------------------|------------------------------------| | Pension Benefit Plans | Postretirement Benefit Plan | | 1998 | 1997 | 1998 | 1997 | - --------------------------------------------------|------------------|------------------|------------------|-----------------| Reconciliation of benefit obligation | | | | | Obligation at beginning of year | $ 214.0 | $ 196.7 | $ 75.5 | $ 81.4 | Service cost | 9.2 | 8.3 | 1.3 | 1.2 | Interest cost | 16.2 | 14.7 | 4.8 | 4.9 | Participant contributions | (1.6) | (1.4) | - | - | Plan amendments | 0.4 | - | - | - | Acquisitions | 0.8 | - | - | - | Currency translation adjustment | 1.8 | (3.8) | - | - | Curtailments | - | - | - | (1.0) | Benefit payments | (14.6) | (13.9) | (6.3) | (5.7) | Actuarial loss (gain) | 30.9 | 13.4 | (7.2) | (5.3) | |------------------|------------------|------------------|-----------------| Obligation at end of year | $ 257.1 | $ 214.0 | $ 68.1 | $ 75.5 | |==================|==================|==================|=================| Reconciliation of fair value of plan assets | | | | | Fair value of plan assets at beginning of year | $ 201.6 | $ 172.6 | $ 33.9 | $ 23.3 | Actual return on plan assets | 38.4 | 31.1 | 11.7 | 11.3 | Acquisitions | 0.1 | - | - | - | Employer contributions | 8.2 | 16.1 | - | 5.0 | Participant contributions | 1.6 | 1.4 | - | - | Benefit payments | (14.6) | (13.9) | (6.3) | (5.7) | Currency translation adjustment | 1.2 | (5.7) | - | - | |------------------|------------------|------------------|-----------------| Fair value of plan assets at end of year | $ 236.5 | $ 201.6 | $ 39.3 | $ 33.9 | |==================|==================|==================|=================| Reconciliation of funded status to net | | | | | amount recognized on the balance sheet | | | | | Funded status at end of year | $ (20.6) | $ (12.4) | $ (28.8) | $ (41.6) | Unrecognized transition obligation | 3.5 | 4.1 | - | - | Unrecognized prior-service cost | 11.6 | 14.2 | (1.3) | (1.5) | Unrecognized gain | (0.9) | (10.2) | (45.8) | (38.8) | |------------------|------------------|------------------|-----------------| Net amount recognized | $ (6.4) | $ (4.3) | $ (75.9) | $ (81.9) | |==================|==================|==================|=================|
The plan assets shown above for the pension benefit plans include 52,800 shares of the company's Common stock. A defined benefit pension plan which covers certain non-U.S. employees, was acquired in 1998 with the purchase of the surgical businesses as detailed in Note 2 - Business Combinations. The following table provides information related to underfunded pension plans:
|------------------|------------------| | 1998 | 1997 | - ---------------------------------------|------------------|------------------| Projected benefit obligation | $25.0 | $ 19.1 | Accumulated benefit obligation | 20.9 | 16.8 | Fair value of plan assets | 1.8 | 1.4 | |==================|==================|
The company's postretirement benefit plan was underfunded for each of the past two years. Visionaries Bausch & Lomb 1998 Annual Report 55 The following table provides the amounts recognized in the balance sheet as of the end of each year:
|---------------------------------|-------------------------------------| | Pension Benefit Plans | Postretirement Benefit Plan | | 1998 | 1997 | 1998 | 1997 | - -----------------------------------------------|---------------|-----------------|--------------------|----------------| Prepaid benefit cost | $ 13.6 | $ 12.1 | $ - | $ - | Accrued benefit liability | (20.0) | (16.4) | (75.9) | (81.9) | |---------------|-----------------|--------------------|----------------| Net amount recognized | $ (6.4) | $ (4.3) | $ (75.9) | $ (81.9) | |===============|=================|====================|================|
The following table provides the components of net periodic benefit cost for the plans for fiscal years 1998, 1997 and 1996:
|-----------------------------------------|------------------------------------------| | Pension Benefit Plans | Postretirement Benefit Plan | | 1998 | 1997 | 1996 | 1998 | 1997 | 1996 | - ------------------------------------------|-----------|---------------|-------------|--------------|--------------|------------| Service cost | $ 9.2 | $ 8.3 | $ 8.6 | $ 1.3 | $ 1.2 | $ 1.9 | Interest cost | 16.2 | 14.7 | 13.7 | 4.8 | 4.9 | 6.0 | Expected return on plan assets | (18.9) | (16.8) | (14.9) | (3.0) | (2.6) | (1.9) | Amortization of transition obligation | 0.7 | 0.7 | 0.8 | - | - | - | Amortization of prior-service cost | 1.8 | 1.8 | 2.0 | (0.1) | (0.2) | (0.2) | Amortization of net gain | (0.3) | (0.2) | (0.1) | (2.7) | (2.6) | (1.8) | |-----------|---------------|-------------|--------------|--------------|------------| Net periodic benefit cost | 8.7 | 8.5 | 10.1 | 0.3 | 0.7 | 4.0 | Curtailment loss (gain) | - | - | 1.0 | - | (1.0) | (0.9) | |-----------|---------------|-------------|--------------|--------------|------------| Net periodic benefit cost after | | | | | | | curtailments and settlements | $ 8.7 | $ 8.5 | $ 11.1 | $ 0.3 | $ (0.3) | $ 3.1 | |===========|===============|=============|==============|==============|============|
The curtailments resulted from several plant closings that occurred as part of restructuring initiatives. Key assumptions used to measure benefit obligations in the company's benefit plans are shown in the following table:
|--------------------|-------------------| | 1998 | 1997 | - ------------------------------------------|--------------------|-------------------| Weighted Average Assumptions | | | Discount rate | 6.8% | 7.5% | Expected return on plan assets | 8.6% | 8.1% | Rate of compensation increase | 4.3% | 4.8% | |====================|===================|
For amounts pertaining to postretirement benefits, an 8.0% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1998. This rate is assumed to decrease ratably to 5.5% in the year 2000 and remain constant thereafter. To demonstrate the significance of this rate on the expense reported, a one percentage point change in the assumed health care cost trend rate would have the following effect:
|-----------------|-----------------| | 1% Increase | 1% Decrease | - ----------------------------------------------------------------|-----------------|-----------------| Effect on total of service and interest cost components of | | | net periodic postretirement health care benefit cost | $0.6 | $(0.7) | Effect on the health care component of the accumulated | | | postretirement benefit obligation | $6.7 | $(5.6) | |=================|=================|
56 Visionaries Bausch & Lomb 1998 Annual Report 13. Minority Interest Four wholly owned subsidiaries of the company have contributed operating and financial assets to a limited partnership for an aggregate 72% in general and limited partnership interests. The partnership is a separate legal entity from the company whose purpose is to own and manage a portfolio of assets. Those assets include portions of the company's biomedical operations, those used for the manufacture and sale of rigid gas permeable contact lenses and lens care products, cash and cash equivalents, a long-term note guaranteed by the company and certain floating-rate demand notes due from certain of the company's subsidiaries. For financial reporting purposes, the assets, liabilities and earnings of the partnership entities have continued to be included in the company's consolidated financial statements. The outside investor's limited partnership interest in the partnership has been recorded as minority interest totaling $403.2 at both December 26, 1998 and December 27, 1997. 14. Financial Instruments The carrying amount of cash, cash equivalents, current portion of long-term investments and notes payable approximated fair value because maturities are less than one year in duration. The company's remaining financial instruments consisted of the following:
|-----------------------------------|------------------------------------| | December 26, 1998 | December 27, 1997 | | Carrying | Fair | Carrying | Fair | | Value | Value | Value | Value | - ------------------------------------------------------|-----------------|-----------------|-------------------|----------------| Nonderivatives | | | | | Other investments | $ 249.2 | $ 249.2 | $ 546.4 | $ 546.4 | Long-term debt, including current portion | (1,312.4) | (1,302.7) | (515.2) | (516.4) | |=================|=================|===================|================| Derivatives held for purposes other than trading | | | | | Foreign exchange instruments | | | | | Other current assets | $ 7.6 | | $ 45.3 | | Accrued liabilities | (15.7) | | (40.5) | | |-----------------|-----------------|-------------------|----------------| Net foreign exchange instruments | $ (8.1) | $ (8.3) | $ 4.8 | $ 2.4 | |=================|=================|===================|================| Interest rate instruments | | | | | Other current assets | $ 22.1 | | $ 17.5 | | Accrued liabilities | (15.2) | | (12.6) | | |-----------------|-----------------|-------------------|----------------| Net interest rate instruments | $ 6.9 | $ 14.9 | $ 4.9 | $ 20.7 | |=================|=================|===================|================|
Fair value of other investments was determined based on contract terms and an evaluation of expected cash flows and investment risk. Fair value for long-term debt was estimated using either quoted market prices for the same or similar issues or the current rates offered to the company for debt with similar maturities. The fair value for foreign exchange and interest rate instruments was determined using a model that estimates fair value at market rates, or was based upon quoted market prices for similar instruments with similar maturities. The company, as a result of its global operating and financing activities, is exposed to changes in interest rates and foreign currency exchange rates that may adversely affect its results of operations and financial position. In seeking to minimize the risks and/or costs associated with such activities, the company manages exposures to changes in interest rates and foreign currency exchange rates by entering into derivative contracts. The company does not generally use financial instruments for trading or other speculative purposes, nor does it use leveraged financial instruments. Visionaries Bausch & Lomb 1998 Annual Report 57 The company enters into foreign exchange forward contracts primarily to hedge foreign currency transactions and equity investments in non-U.S. subsidiaries. At December 26, 1998 and December 27, 1997, the company hedged aggregate exposures of $1,063.0 and $1,559.0, respectively, by entering into forward exchange contracts requiring the purchase and sale of U.S. and foreign currencies. The company selectively hedges firm commitments that represent both a right and an obligation, mainly for committed purchase orders for foreign-sourced inventory. In general, the forward exchange contracts have varying maturities up to, but not exceeding, two years with cash settlements made at maturity based upon rates agreed to at contract inception. At December 26, 1998 and December 27, 1997, the company deferred gains of less than $0.1 relating to hedged firm commitments. The company's exposure to changes in interest rates results from investing and borrowing activities. The company enters into interest rate swap and cap agreements to effectively limit exposure to interest rate movements within the parameters of its interest rate hedging policy. At December 26, 1998 and December 27, 1997, the company was party to swap contracts that had aggregate notional amounts of $869.5 and $866.3, respectively. At year end 1998 and 1997, the company had an outstanding interest rate cap with a notional amount of NLG 15.5 million that protects the company from exposures to rising NLG interest rates. Counterparties to the financial instruments discussed above expose the company to credit risks to the extent of non-performance. The credit ratings of the counterparties, which consist of a diversified group of major financial institutions, are regularly monitored and thus credit loss arising from counterparty non-performance is not anticipated. 15. Stock Compensation Plans The company sponsors several stock-based compensation plans, all of which are accounted for under the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, no compensation cost has been recognized for the company's fixed stock option plans or its employee stock purchase plan. Had compensation expense for the company's fixed options been determined consistent with SFAS No. 123, Accounting for Stock-Based Compensation, the company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below:
| | Basic Earnings | Diluted Earnings | | Net Earnings | Per Share | Per Share | |--------------------------|-------------------------|---------------------------| | As Reported Pro Forma | As Reported Pro Forma | As Reported Pro Forma | - ----------|--------------------------|-------------------------|---------------------------| 1998 | $ 25.2 $ 16.5 | $ 0.45 $ 0.30 | $ 0.45 $ 0.29 | 1997 | 49.4 43.5 | 0.89 0.79 | 0.89 0.79 | 1996 | 83.1 78.9 | 1.48 1.41 | 1.47 1.40 | |==========================|=========================|===========================|
The total number of shares available for grant in each calendar year, excluding incentive stock options, shall be no greater than 3% of the total number of outstanding shares of common stock as of the first day of each such year. No more than six million shares are available for granting purposes as incentive stock options under the company's current plan. As of December 26, 1998, 2.5 million shares remain available for such grants. 58 Visionaries Bausch & Lomb 1998 Annual Report Stock Options The company issues stock options that vest ratably over three years and expire 10 years from the grant date. Vesting is contingent upon continued employment with the company. For purposes of this disclosure, the fair value of each fixed option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants outstanding in 1998, 1997 and 1996:
|---------------------|--------------------|---------------------| | 1998 | 1997 | 1996 | - ----------------------------------------------|---------------------|--------------------|---------------------| Risk-free interest rate | 4.69% | 5.66% | 6.11% | Dividend yield | 2.48% | 2.54% | 2.42% | Volatility factor | 25.67% | 25.17% | 24.87% | Weighted average expected life (years) | 4 | 5 | 5 | |=====================|====================|=====================|
The weighted average value of options granted was $10.93, $10.59, and $9.34 in 1998, 1997 and 1996, respectively. A summary of the status of the company's fixed stock option plans at year end 1998, 1997 and 1996 is presented below:
| 1998 | 1997 | 1996 | |-------------|----------------|-------------|----------------|------------|----------------| | | Weighted | | Weighted | | Weighted | | Number Of | Average | Number Of | Average | Number Of | Average | | Shares | Exercise Price | Shares | Exercise Price | Shares | Exercise Price | | (000s) | (Per Share) | (000s) | (Per Share) | (000s) | (Per Share) | - --------------------------------------|-------------|----------------|-------------|----------------|------------|----------------| Outstanding at beginning of year | 5,186 | $ 41.00 | 5,030 | $ 39.90 | 4,426 | $ 40.84 | Granted | 1,400 | 50.64 | 1,176 | 42.32 | 1,253 | 35.86 | Exercised | (1,265) | 39.45 | (432) | 30.34 | (204) | 27.40 | Forfeited | (271) | 41.48 | (588) | 41.99 | (445) | 43.60 | |-------------| |-------------| |------------| | Outstanding at year end | 5,050 | $ 43.98 | 5,186 | $ 41.00 | 5,030 | $ 39.90 | |=============|================|=============|================|============|================| Options exercisable at year end | 2,735 | | 3,065 | | 3,029 | |=============| |=============| |============|
The following represents additional information about fixed stock options outstanding at December 26, 1998.
| Options Outstanding | Options Exercisable | |------------------|------------------|------------------|-------------|---------------| | |Weighted Average | Weighted | | Weighted | Range Of | | Remaining | Average | Number | Average | Exercise Prices | Number |Contractual Life | Exercise Price | Exercisable | Exercise Price| Per Share |Outstanding (000s)| (Years) | (Per Share) | (000s) | (Per Share) | - -------------------------------------|------------------|------------------|------------------|-------------|---------------| $26 to 35 | 823 | 6.3 | $ 34.78 | 617 | $ 34.60 | 36 to 45 | 2,041 | 7.3 | 41.35 | 1,267 | 40.88 | 46 to 55 | 2,186 | 7.5 | 49.90 | 851 | 48.26 | |------------------| | |-------------| | | 5,050 | 7.2 | $ 43.98 | 2,735 | $ 41.76 | |------------------|------------------|------------------|-------------|---------------|
Visionaries Bausch & Lomb 1998 Annual Report 59 Stock Awards The company issues restricted stock awards to directors, officers and other key personnel. These awards have vesting periods up to three years with vesting contingent upon continued employment until applicable vesting dates. Under a separate plan, the company issues restricted stock awards to certain officers based on the attainment of Economic Value Added (EVA) targets. These awards also have vesting periods up to three years. Compensation expense for both plans is recorded based on applicable vesting criteria and, for those awards with performance goals, as such goals are met. In 1998, 1997 and 1996, 259,905, 61,600 and 139,052 such awards were granted at weighted average market values of $46.14, $41.92 and $38.43 per share, respectively. The compensation expense relating to stock awards in 1998, 1997 and 1996 was $10.6, $3.3 and $1.3, respectively. 16. Litigation The company has stipulated to certification by a New York State Supreme Court of a nationwide class of purchasers of Sensitive Eyes Rewetting Drops, Boston Rewetting Drops, ReNu Rewetting Drops and Bausch & Lomb Eye Wash between May 1, 1989 and June 30, 1995. This action arose out of matters commenced in 1994 and 1995 alleging that the company misled consumers in its marketing and sale of those products. On April 21, 1998, the court dismissed all of the plaintiffs' claims. The plaintiffs have appealed this ruling. In several actions, the company is defending its long-standing policy of selling contact lenses only to licensed professionals against claims that it was adopted in conspiracy with others to eliminate alternative channels of trade from the disposable contact lens market. These matters include (i) a consolidated action in the United States District Court for the Middle District of Florida filed in June 1994 by the Florida Attorney General, and now includes claims by the attorneys general for 21 other states, and (ii) individual actions pending in California and Tennessee state courts. The company defends its policy as a lawfully adopted means of ensuring effective distribution of its products and safeguarding consumers' health. 60 Visionaries Bausch & Lomb 1998 Annual Report Report Of Management The preceding financial statements of Bausch & Lomb Incorporated were prepared by the company's management, which is responsible for their reliability and objectivity. The statements have been prepared in conformity with generally accepted accounting principles and, as such, include amounts based on informed estimates and judgments of management with consideration given to materiality. Financial information elsewhere in this annual report is consistent with that in the financial statements. Management is further responsible for maintaining a system of internal controls to provide reasonable assurance that Bausch & Lomb's books and records reflect the transactions of the company; that assets are safeguarded; and that management's established policies and procedures are followed. Management systematically reviews and modifies the system of internal controls to improve its effectiveness. The internal control system is augmented by the communication of accounting and business policies throughout the company; the careful selection, training and development of qualified personnel; the delegation of authority and establishment of responsibilities; and a comprehensive program of internal audit. Independent accountants are engaged to audit the financial statements of the company and issue a report thereon. They have informed management and the audit committee of the board of directors that their audits were conducted in accordance with generally accepted auditing standards, which require a review and evaluation of internal controls to determine the nature, timing and extent of audit testing. The recommendations of the internal auditors and independent accountants are reviewed by management. Control procedures have been implemented or revised as appropriate to respond to these recommendations. In management's opinion, as of December 26, 1998, the internal control system was functioning effectively and accomplished the objectives discussed herein. The audit committee of the board of directors, which held four meetings during 1998, is composed of four outside directors. The chair of the committee is Alvin W. Trivelpiece, Ph.D. The other members are Domenico De Sole, Ruth R. McMullin and Linda Johnson Rice. The audit committee meets with the independent accountants, management and the internal auditors to provide reasonable assurance that management fulfills its responsibilities in the preparation of the financial statements and in the maintenance of an effective system of internal controls. The audit committee reviews the performance and fees of the independent accountants, recommends their appointment and meets with them and the internal auditors, without management present, to discuss the scope and results of their audit work. Both the independent accountants and the internal auditors have full access to the audit committee. To the Shareholders and Board of Directors of Bausch & Lomb Incorporated: In our opinion, the accompanying consolidated financial statements appearing on pages 38 through 60 of this 1998 annual report of Bausch & Lomb Incorporated present fairly, in all material respects, the financial position of Bausch & Lomb Incorporated and its subsidiaries at December 26, 1998 and December 27, 1997, and the results of their operations, cash flows and changes in shareholders' equity for each of the three years in the period ended December 26, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards, which 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, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ William M. Carpenter William M. Carpenter Chairman and Chief Executive Officer /s/ Stephen C. McCluski Stephen C. McCluski Senior Vice President and Chief Financial Officer Report Of The Audit Committee /s/ Alvin W. Trivelpiece Alvin W. Trivelpiece, Ph.D. Chair, Audit Committee Report Of Independent Accountants /s/ PricewaterhouseCoopers LLP Rochester, New York January 26, 1999 Visionaries Bausch & Lomb 1998 Annual Report 61 Selected Financial Data Dollar Amounts In Millions - Except Per Share Data
|-------------|-------------|--------------|--------------|--------------|-----------| | 1998 | 1997 | 1996 | 1995 | 1994 | 1993 | - --------------------------------------------|-------------|-------------|--------------|--------------|--------------|------------| Results For The Year | | | | | | | Net sales | $2,362.8 | $1,915.7 | $1,926.8 | $1,932.9 | $1,892.7 | $1,830.1 | Net earnings | 25.2 | 49.4 | 83.1 | 112.0 | 31.1 | 138.9 | Basic earnings per share | 0.45 | 0.89 | 1.48 | 1.94 | 0.53 | 2.34 | Diluted earnings per share | 0.45 | 0.89 | 1.47 | 1.93 | 0.52 | 2.31 | Dividends per share | 1.04 | 1.04 | 1.04 | 1.01 | 0.955 | 0.88 | |=============|=============|==============|==============|==============|============| Year End Position | | | | | | | Working capital | $ 774.4 | $ 202.9 | $ 18.5 | $ 70.9 | $ 277.4 | $ 669.6 | Total assets | 3,491.7 | 2,772.9 | 2,603.4 | 2,550.1 | 2,457.7 | 2,493.0 | Short-term debt | 191.5 | 343.8 | 482.1 | 383.5 | 300.6 | 244.6 | Long-term debt | 1,281.3 | 510.8 | 236.3 | 191.0 | 289.5 | 321.0 | Shareholders' equity | 845.0 | 818.4 | 881.9 | 929.3 | 914.4 | 909.2 | |=============|=============|==============|==============|==============|============| Other Ratios And Statistics | | | | | | | Return on sales | 1.1% | 2.6% | 4.3% | 5.8% | 1.6% | 7.6% | Return on average shareholders' equity | 3.1% | 5.9% | 9.2% | 11.9% | 3.2% | 15.5% | Return on invested capital | 3.8% | 5.0% | 7.2% | 9.3% | 3.8% | 11.0% | Return on average total assets | 0.7% | 1.8% | 3.1% | 4.5% | 1.2% | 6.8% | Average income tax rate | 60.9% | 38.7% | 37.7% | 36.9% | 52.6% | 33.5% | Current ratio | 2.0 | 1.2 | 1.0 | 1.1 | 1.4 | 1.9 | Total debt to shareholders' equity | 174.3% | 104.4% | 81.5% | 61.8% | 64.5% | 62.2% | Total debt to capital | 63.5% | 51.1% | 44.9% | 38.2% | 39.2% | 38.3% | Capital expenditures | $ 201.5 | $ 126.1 | $ 130.3 | $ 95.5 | $ 84.8 | $ 107.2 | |=============|=============|==============|==============|==============|============|
62 Visionaries Bausch & Lomb 1998 Annual Report Directors William M. Carpenter (1) Chairman and Chief Executive Officer Bausch & Lomb Rochester, New York Director since: 1996 Franklin E. Agnew (1) (3) Business Consultant Pittsburgh, Pennsylvania Director since: 1982 Domenico De Sole (2) President and Chief Executive Officer Gucci Group N.V. London, United Kingdom Director since: 1996 Jonathan S. Linen (3)(4) Vice Chairman American Express Company New York, New York Director since: 1996 Ruth R. McMullin (2) Chairperson, Eagle-Picher Personal Injury Settlement Trust Savannah, Georgia Director since: 1987 John R. Purcell (1) (4) Chairman and Chief Executive Officer Grenadier Associates Ltd. Juno Beach, Florida Director since: 1976 Linda Johnson Rice (2) President and Chief Operating Officer Johnson Publishing Company Inc. Chicago, Illinois Director since: 1990 Alvin W. Trivelpiece, Ph.D. (2) (4) Director Oak Ridge National Laboratory and President Lockheed Martin Energy Research Corporation Oak Ridge, Tennessee Director since: 1989 William H. Waltrip (1) Chairman of the Board Technology Solutions Company Chicago, Illinois Director since: 1985 Kenneth L. Wolfe (1)(3) Chairman of the Board and Chief Executive Officer Hershey Foods Corporation Hershey, Pennsylvania Director since: 1989 Officers William M. Carpenter Chairman and Chief Executive Officer 4 years of service with the company Named to current position: 1/99 Carl E. Sassano President and Chief Operating Officer 26 years of service with the company Named to current position: 1/99 Dwain L. Hahs Executive Vice President - Eyewear 22 years of service with the company Named to current position: 4/97 Senior Vice Presidents Daryl M. Dickson Human Resources 3 years of service with the company Named to current position: 11/96 Hakan S. Edstrom Surgical/Pharmaceutical 2 years of service with the company Named to current position: 1/99 James C. Foster Charles River Laboratories, Inc. 15 years of service with the company Named to current position: 12/94 Stephen C. McCluski Chief Financial Officer 11 years of service with the company Named to current position: 1/95 Thomas M. Riedhammer, Ph.D. Chief Technical Officer 17 years of service with the company Named to current position: 1/99 Robert B. Stiles General Counsel 18 years of service with the company Named to current position: 6/97 Vice Presidents Omar Casal Asia-Pacific - Eyewear 14 years of service with the company Named to current position: 12/97 Robert D. Colangelo Chief Information Officer 10 years of service with the company Named to current position: 11/97 Alan P. Dozier North American Vision Care 14 years of service with the company Named to current position: 2/97 Alan H. Farnsworth Business Development 11 years of service with the company Named to current position: 7/97 James T. Horn Global Product Supply -- Eyewear 7 years of service with the company Named to current position: 5/96 Barbara M. Kelley Corporate Communications 16 years of service with the company Named to current position: 4/93 Jurij Z. Kushner Controller 18 years of service with the company Named to current position: 1/95 Thomas W. Lance Global Operations -- Vision Care 2 years of service with the company Named to current position: 7/97 John M. Loughlin Asia-Pacific -- Vision Care 18 years of service with the company Named to current position: 7/97 Stephen Markwell Europe, Middle East and Africa -- Eyewear 5 years of service with the company Named to current position: 12/97 Read McNamara Latin America 3 years of service with the company Named to current position: 7/97 James F. Milton Japan 28 years of service with the company Named to current position: 12/94 Angela J. Panzarella Investor Relations 10 years of service with the company Named to current position: 7/97 Alan H. Resnick Treasurer 26 years of service with the company Named to current position: 5/86 J. Paul Ruddlesdin Europe, Middle East and Africa -- Vision Care 16 years of service with the company Named to current position: 7/97 David A. Souerwine Strategy 16 years of service with the company Named to current position: 12/98 James J. Ward Reengineering Initiatives 22 years of service with the company Named to current position: 5/97 David G. Whalen North American Eyewear 8 years of service with the company Named to current position: 7/97 Secretary Jean F. Geisel 23 years of service with the company Named to current position: 7/97 Committee Memberships: (1) Executive Committee (2) Audit Committee (3) Committee on Management (4) Committee on Directors Visionaries Bausch & Lomb 1998 Annual Report 63 [background: Western hemisphere] Bausch & Lomb Locations United States Claremont, California Hollister, California Irvine, California San Clemente, California Lebanon, Connecticut Preston, Connecticut Voluntown, Connecticut Clearwater, Florida Miami, Florida Sarasota, Florida Tampa, Florida Colbert, Georgia Eureka, Illinois Roanoke, Illinois Southbridge, Massachusetts Wilmington, Massachusetts Portage, Michigan Golden Valley, Minnesota Earth City, Missouri Manchester, Missouri St. Louis, Missouri Newfield, New Jersey Pearl River, New York Rochester, New York Stone Ridge, New York Raleigh, North Carolina Malvern, Pennsylvania Rio Piedras, Puerto Rico Charleston, South Carolina Greenville, South Carolina Houston, Texas Laredo, Texas San Antonio, Texas Lynchburg, Virginia Canada Kitchener, Ontario Mississauga, Ontario Richmond Hill, Ontario St. Constant, Quebec Latin America Porto Alegre, Brazil Rio de Janeiro, Brazil Mexico City, Mexico Nuevo Laredo, Mexico Caracas, Venezuela 64 Visionaries Bausch & Lomb 1998 Annual Report [background: Eastern hemisphere] Europe, Africa & Middle East Vienna, Austria Brussels, Belgium Le Mesnil St. Denis, France Lyon, France St. Aubin-les-Elbeuf, France St. Germain, France Berlin, Germany Extertal Bosingfeld, Germany Heidelberg, Germany Kisslegg, Germany Munich, Germany Sulzfeld, Germany Athens, Greece Budapest, Hungary Waterford, Ireland Calco, Italy Milan, Italy Pederobba, Italy Heemstede, Netherlands Hoofddorp, Netherlands Lisbon, Portugal Moscow, Russia Livingston, Scotland Transvaal, South Africa Barcelona, Spain Madrid, Spain Stockholm, Sweden Geneva, Switzerland Istanbul, Turkey Berkshire, United Kingdom Crownhill, United Kingdom Hampton/Middlesex, United Kingdom Henfield, United Kingdom Kingston-Upon-Thames, United Kingdom Margate, United Kingdom St. Leonards-on-Sea, United Kingdom Asia-Pacific Artarmon, Australia North Ryde, Australia Beijing, People's Republic of China Guangzhou, People's Republic of China Fanling, Hong Kong Taikoo Shing, Hong Kong Bhiwadi, India New Delhi, India Atsugi City, Japan Hino-cho, Japan New Science City, Japan Tokyo, Japan Selangor, Malaysia Auckland, New Zealand Makati City, Philippines Singapore, Singapore Seoul, South Korea Umsong-gun, South Korea Taipei, Taiwan-ROC Bangkok, Thailand Visionaries Bausch & Lomb 1998 Annual Report 65 Glossary ARMD (Age Related Macular Degeneration): Damage or breakdown of the macula, the small area at the back of the eye that allows us to see fine details clearly. Astigmatism: Irregular curvature of the cornea, the clear covering of the eye. Astigmatism causes light to focus on more than one point on the retina, resulting in blurry or distorted images. Cataract: The clouding of the eye's natural lens, cataracts occur as part of the eye's natural aging process. The lens may require surgical removal if visual loss becomes significant, with lost optical power replaced with an intraocular lens (IOL). Continuous Wear Contact Lens: A contact lens that can be worn day and overnight without removing, for a time period as prescribed by an eye care practitioner. Diabetic Retinopathy: A disease of the blood vessels of the retina which is associated with diabetes. Excimer Laser: Provides an ultraviolet beam of light which is emitted in pulses. Each pulse removes a microscopic amount of tissue from the surface of the cornea. It would take about 200 pulses from an excimer laser to cut a human hair in half. Glaucoma: A disease of the eye marked by increased pressure within the eyeball that can result in damage to the optic nerve and gradual loss of vision. Generic Drug: Nonproprietary. Graves' Disease: A condition caused by an over-active thyroid. Symptoms include: an increased rate of metabolism, rapid weight loss, enlarged thyroid gland, increased heart rate, high blood pressure and dry eyes. Hydrogel: Water absorbing materials which can be described as soft, elastic, water-containing gels. Hyperopia: Also known as farsightedness, hyperopia is caused by an eyeball that is relatively too short, and/or a cornea that is too flat, causing light to focus behind the retina. IOL (Intraocular Lens): An artificial lens that may be surgically implanted to replace the natural lens of the eye following cataract removal. There are numerous styles, including foldable and rigid, and may be made from rigid or soft materials including plastic, silicone, acrylic and hydrogel. LASIK: Refractive surgery procedure where the surgeon uses a microkeratome to create a hinged flap from the surface layer of the cornea. An excimer laser is then used to vaporize a thin layer of the underlying corneal tissue to correct the refractive error. The top flap is then folded back into place. Microkeratome: An instrument used to cut the corneal flap in the most common refractive surgery procedure - LASIK. Microkeratomes usually incorporate a disposable blade that is replaced for each patient. Myopia: Also known as nearsightedness, myopia is caused by an eyeball that is relatively too long, and/or a cornea that is too steep, causing light to focus in front of the retina. Phacoemulsification: A surgical procedure to remove a cataract. An ultrasonic vibration is used to break up the cataract, which is then removed through an irrigation/aspiration process. Commonly called "phaco". PRK (Photorefractive Keratectomy): Surgical procedure to correct vision using a laser beam to reshape the surface of the cornea. Proprietary Drug: One that is protected by secrecy, patent, FDA-granted marketing exclusivity or copyright against free competition related to name, product, composition or manufacturing process. Refractive Surgery: A rapidly developing eye care specialty involving surgery to change the eye structure to correct nearsightedness, farsightedness and astigmatism. Rigid Gas Permeable Lens: A "hard" contact lens which allows oxygen and other gases to be transmitted through it. Toric Contact Lens: Designed to differentially refract light in two principal meridians of the eye to correct astigmatism. 66 Visionaries Bausch & Lomb 1998 Annual Report [inside back cover] Corporate Information Bausch & Lomb on the Internet: Corporate, product, financial and shareholder information, including news releases, financial filings and stock quotes are available at Bausch & Lomb's worldwide web site: www.bausch.com Corporate Headquarters: Bausch & Lomb One Bausch & Lomb Place Rochester, New York 14604 (716) 338-6000 (800) 344-8815 Bausch & Lomb News on Demand: Bausch & Lomb's news releases are available toll-free by calling: (888) 329-1096 Financial Literature: Copies of Bausch & Lomb's annual reports and financial reports filed with the Securities and Exchange Commission are available on our website, by mail (attn: Investor Relations) or by calling: (888) 884-8702 (716) 338-5757 Investor Relations: Security analysts and shareholders seeking information concerning company operations, shareholder programs or dividend policy may contact: Angela J. Panzarella Vice President, Investor Relations (716) 338-6025 apanzarella@bausch.com Media Inquiries: News media representatives and others seeking general information may contact: Holly Houston Director, Media Relations (716) 338-8064 hhouston@bausch.com Transfer Agent: Shareholders seeking information regarding their individual accounts or dividend payments may contact our stock transfer agent: ChaseMellon Shareholder Services P.O. Box 3315 South Hackensack, NJ 07606-1915 (800) 288-9541 www.chasemellon.com Dividend Reinvestment Plan: The plan is available to all shareholders of Bausch & Lomb stock. Under the plan, shareholders may elect to have their cash dividends automatically invested in additional shares of the company's common stock. Shareholders may also elect to make cash contributions of up to $60,000 per year to purchase additional shares. For additional information contact: Mellon Bank, N.A. Investment Services P.O. Box 3338 South Hackensack, NJ 07606-1938 (800) 288-9541 www.chasemellon.com Stock Listing: The common stock of the corporation is traded under the symbol BOL on the New York Stock Exchange. Options on the company's common stock are traded on the American Stock Exchange. Trademarks: The trademarks of Bausch & Lomb and its subsidiary companies referred to in this report are: Alrex ReNu AMVISC ReNu MultiPlus AMVISC Plus Revo Bausch & Lomb Sensitive Eyes Boston SofLens Catarex SofLens66 Charles River Laboratories Soflex Chiroflex Technolas Hansatome Technolas 217 Hydroview Topolink Killer Loop Vitrasert Medalist ---------------------- Millennium EVA is a trademark of Miracle-Ear Stern Stewart & Co. Moisture Eyes Moisture Eyes PM Lotemax is a trademark MPORT of Pharmos Corporation Ocuvite Opcon-A Muro is a trademark of Optima FW Muro Pharmaceuticals OptiPranolol Passport Polytrim is a trademark Passport II of Allergan PureVision Ray-Ban Rogaine is a trademark of Pharmacia & Upjohn Co. Surodex is a trademark of Oculex Pharmaceuticals, Inc.
- -------------------------- Design: Richard Uccello Ted Bertz Graphic Design, Middletown, Connecticut Printing: Daniels Printing, Everett, Massachusetts Executive & Lifestyle Photography: Ted Kawalerski, New York City Product Photography: Paul Horton, Middletown, Connecticut (C)1999 Bausch & Lomb Incorporated All Rights Reserved Worldwide [recycle symbol] Total recycled fiber content of not less than 50% [back cover] --------- SEEING IS --------- --------- BELIEVING --------- Bausch & Lomb One Bausch & Lomb Place Rochester, New York 14604 EX-21 6 Bausch & Lomb Incorporated Exhibit 21 Subsidiaries (as of December 26, 1998) Jurisdiction Under Name Which Organized Adatomed GmbH Germany Bausch & Lomb AG Switzerland Arnette Europe SARL France Arnette Optic Illusions, Inc. California Bausch & Lomb (Australia) Pty. Limited Australia Award plc Scotland Bausch & Lomb (Bermuda) Finance Company, Ltd. Bermuda Bausch & Lomb (Bermuda) Limited Bermuda Bausch & Lomb B.V. Netherlands Bausch & Lomb B.V.B.A. Belgium Bausch & Lomb-Lord (BVI) Incorporated Virgin Islands Bausch & Lomb Canada Inc. Canada Charles River BRF, Inc. Delaware Charles River Laboratories Inc. Delaware Bausch & Lomb China, Inc. Delaware B&L (China) Investment Company Ltd. China 115 Clinton Avenue, Inc. New York Cordelia B.V. Netherlands CR Pharmservices, Inc. Massachusetts Cyanamid Chirurgie S.A.S. France Dahlberg, Inc. Minnesota Bausch & Lomb Dist Ops S.A. Switzerland Bausch & Lomb Domestic Finance Corp. Delaware B&L Domestic Holdings Corp. Delaware Dr. Mann Pharma Germany Bausch & Lomb Espana, S.A. Spain Beijing Bausch & Lomb Eyecare Company, Ltd. China Bausch & Lomb Far East Pte. Singapore Bausch & Lomb Foreign Sales Corporation Barbados Bausch & Lomb Foundation, Inc. New York Bausch & Lomb France S.A. France Bausch & Lomb Fribourg SA Switzerland Bausch & Lomb GmbH Austria Guangzhou Bausch & Lomb China Manufacturing Ltd. Bausch & Lomb Holdings B.V. Netherlands Bausch & Lomb (Hong Kong) Limited Hong Kong Bausch & Lomb-Lord, Co. (Hong Kong) Limited Hong Kong Bausch & Lomb India Limited India BL Industria Otica Ltda. Brazil Bausch & Lomb International, Inc. New York Bausch & Lomb Holdings Corp. Delaware Bausch & Lomb InVision Institute, Inc. Massachusetts Iolab Corporation California Bausch & Lomb Ireland Ireland Bausch & Lomb IOM S.p.A. Italy B.L.J. Company Limited Japan Killer Loop Eyewear S.p.A. Italy Bausch & Lomb Korea, Ltd. South Korea Laboratories Domilens S.A.S. France Bausch & Lomb Lamex, Inc. Delaware Madden & Layman, Ltd. England Bausch & Lomb (Malaysia) Sdn. Bhd. Malaysia Bausch & Lomb Mexico, S.A. de C.V. Mexico Miracle-Ear, Inc. Minnesota Bausch & Lomb (New Zealand) Limited New Zealand Bausch & Lomb Nordic AB Sweden Bausch & Lomb Opticare, Inc. New York Bausch & Lomb Pharmaceuticals, Inc. Delaware Bausch & Lomb (Philippines), Inc. Philippines Polymer Technology Corporation New York P.T. Bausch & Lomb Indonesia (Distributing) Indonesia P.T. Bausch & Lomb Manufacturing Indonesia Bausch & Lomb Puerto Rico, Inc. Delaware Bausch & Lomb Realty Corporation New York Revo, Inc. Delaware Revo Europe Limited England RHC Holdings, Inc. Delaware Segrab, Inc. California Bausch & Lomb Services Corp. New York Sight Pharmaceuticals Incorporated Delaware Sight Savers, Inc. Delaware Bausch & Lomb (Singapore) Pte. Ltd. Singapore Bausch & Lomb South Africa (Pty.) Ltd. South Africa Bausch & Lomb South Asia, Inc. Delaware South Asia Management Company Sdn. Bhd. Malaysia Spafas, Inc. Delaware Bausch & Lomb Surgical (Asia Pacific) Pte Ltd. Singapore Bausch & Lomb Surgical Espana SA Spain Bausch & Lomb Surgical (France) S.A.S. France Bausch & Lomb Surgical GmbH Germany Bausch & Lomb Surgical, Inc. Delaware Bausch & Lomb Surgical Italia Srl Italy Bausch & Lomb Surgical (U.K.) Limited England & Wales Bausch & Lomb Taiwan Limited Taiwan Bausch & Lomb (Thailand) Limited Thailand Technolas GmbH Germany Bausch & Lomb Turkey Turkey Bausch & Lomb U.K. Limited England Bausch & Lomb Venezuela, S.A. Venezuela Wilmington Management Corp. Delaware Wilmington Partners L.P. Massachusetts Windmill Investments N.V. Netherlands Windmill Investors Ltd. Bermuda Windvest I N.V. Netherlands Antilles Bausch & Lomb - Young Han, Inc. South Korea EX-23 7 Exhibit 23 Consent of Independent Accountants We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 2-56066, 2-85158, 33-15439 and 33-35667) and in the Prospectuses constituting part of the Registration Statement on Form S-3 (Nos. 33-51117 and 333-45223) of Bausch & Lomb Incorporated of our report dated January 26, 1999 appearing in the 1998 Annual Report to Shareholders of Bausch & Lomb Incorporated which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our above report on the Financial Statement Schedule. PricewaterhouseCoopers LLP Rochester, New York March 22, 1999 Exhibit 23 Report of Independent Accountants on Financial Statement Schedule To the Board of Directors of Bausch & Lomb Incorporated Our audits of the consolidated financial statements referred to in our report dated January 26, 1999 appearing in the 1998 Annual Report to Shareholders of Bausch & Lomb Incorporated (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in Item 14(a)2 of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP Rochester, New York March 22, 1999 EX-24 8 Exhibit 24 BAUSCH & LOMB POWER OF ATTORNEY The undersigned directors of Bausch & Lomb Incorporated (the "Company"), each hereby constitutes and appoints William M. Carpenter and Robert B. Stiles, or either of them, his or her respective true and lawful attorneys and agents, each with full power and authority to act as such without the other, to sign for and on behalf of the undersigned the Company's Annual Report on Form 10-K for the year ended December 26, 1998, to be filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 and the related rules and regulations thereunder, and any amendment or amendments thereto, the undersigned hereby ratifying and confirming all that said attorneys and agents, or either one of them, shall do or cause to be done by virtue hereof. IN WITNESS WHEREOF, this instrument has been executed by the undersigned as of this 23rd day of February 1999. /s/ Franklin E. Agnew /s/ John R. Purcell /s/ William M. Carpenter /s/ Linda Johnson Rice /s/ Domenico De Sole /s/ Alvin W. Trivelpiece /s/ Jonathan S. Linen /s/ William H. Waltrip /s/ Ruth R. McMullin /s/ Kenneth L. Wolfe EX-27 9
5 12-MOS DEC-26-1998 DEC-26-1998 123009 6240 553147 (26808) 440707 1586763 1412703 (687685) 3491724 812413 1281279 0 0 24148 820884 3491724 2362815 2362815 1093122 1093122 1145989 8568 100758 130397 79360 25185 0 0 0 25185 0.45 0.45 Income Before Taxes and Minority Interest
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