| ADVANCED MEDICAL OPTICS INC Item 1A Risk Factors You should carefully consider the following risks and other information |
| These risks and uncertainties are not the only ones we face |
| Others that we do not know about now, or that we do not now think are important, may also impair our business |
| The risks described in this section could cause our actual results to differ materially from those anticipated |
| Risks Relating to Our Business We may not successfully make or integrate acquisitions or enter into strategic alliances |
| As part of our business strategy, we intend to pursue selected acquisitions and strategic alliances and partnerships |
| We compete with other ophthalmic surgical products and eye care companies, among others, for these opportunities and we cannot assure you that we will be able to effect strategic alliances, partnerships or acquisitions on commercially reasonable terms or at all |
| Even if we do enter into these transactions, we may experience: • delays in realizing the benefits we anticipate, or we may not realize the benefits we anticipate at all; • difficulties in integrating any acquired companies and products into our existing business; • attrition of key personnel from acquired businesses; • costs or charges; • difficulties or delays in obtaining regulatory approvals; • higher costs of integration than we anticipated; or • unforeseen operating difficulties that require significant financial and managerial resources that would otherwise be available for the ongoing development or expansion of our existing operations |
| Consummating these transactions could also result in the incurrence of additional debt and related interest expense, as well as unforeseen contingent liabilities, all of which could have a material adverse effect on our business, financial condition and results of operations |
| We may also issue additional equity in connection with these transactions, which would dilute our existing stockholders |
| 14 ______________________________________________________________________ We conduct a significant amount of our sales and operations outside of the United States, which subjects us to additional business risks that may cause our profitability to decline |
| Because we manufacture and sell a significant portion of our products in a number of foreign countries, our business is subject to risks associated with doing business internationally |
| In particular, our products are sold in over 60 countries, and our manufacturing facilities are located outside the continental United States, in Anasco, Puerto Rico; Madrid, Spain; and Hangzhou, China |
| In connection with the acquisition of Pfizer’s ophthalmic surgical business, we acquired Pfizer’s ophthalmic surgical products and certain manufacturing and research and development facilities located in Uppsala, Sweden and Groningen, Netherlands |
| In 2005, on an historical basis, we derived approximately dlra618dtta2 million, or 67prca, of our net sales, from sales of our products outside of the United States, including 19prca of our net sales in Japan |
| We intend to continue to pursue growth opportunities in sales internationally, which could expose us to greater risks associated with international sales and operations |
| Our international operations are, and will continue to be, subject to a number of risks and potential costs, including: • unexpected changes in foreign regulatory requirements; • differing local product preferences and product requirements; • fluctuations in foreign currency exchange rates; • political and economic instability; • changes in foreign medical reimbursement and coverage policies and programs; • diminished protection of intellectual property in some countries outside of the United States; • trade protection measures and import or export licensing requirements; • difficulty in staffing and managing foreign operations; • differing labor regulations; and • potentially negative consequences from changes in tax laws |
| Any of these factors may, individually or as a group, have a material adverse effect on our business and results of operations |
| In addition, we are particularly susceptible to the occurrence of any of these risks in Japan, due to our high concentration of sales in Japan |
| As we expand our existing international operations, we may encounter new risks |
| For example, as we focus on building our international sales and distribution networks in new geographic regions, we must continue to develop relationships with qualified local distributors and trading companies |
| If we are not successful in developing these relationships, we may not be able to grow sales in these geographic regions |
| These or other similar risks could adversely affect our revenue and profitability |
| We are exposed to foreign currency risks from our international operations that could adversely affect our financial results |
| A significant portion of our sales and operating costs are, and from time to time, a portion of our indebtedness may be, denominated in foreign currencies |
| We are therefore exposed to fluctuations in the exchange rates between the US dollar and the currencies in which our foreign operations receive revenues and pay expenses, including debt service |
| Our consolidated financial results are denominated in US dollars and therefore, during times of a strengthening US dollar, our reported international sales and earnings will be reduced because the local currency will translate into fewer US dollars |
| In addition, the assets and liabilities of our non-US subsidiaries are translated into US dollars at the exchange rates in effect at the balance sheet date |
| Revenues and expenses are translated into US dollars at the weighted average exchange rate for the period |
| Translation adjustments arising from the use of differing exchange rates from period to period are included in “Accumulated other comprehensive income (loss)” in “Stockholders’ equity |
| ” Gains and losses resulting from foreign currency fluctuations and remeasurements relating to foreign operations deemed to be operating in US dollar functional currency are included in “Other, net” in our consolidated statements of operations |
| Accordingly, changes in currency exchange rates will cause our net earnings and stockholders’ equity to fluctuate |
| 15 ______________________________________________________________________ If we do not introduce new commercially successful products in a timely manner, our products may become obsolete over time, customers may not buy our products and our revenue and profitability may decline |
| Demand for our products may change in ways we may not anticipate because of: • evolving customer needs; • the introduction of new products and technologies; • evolving surgical practices; and • evolving industry standards |
| Without the timely introduction of new commercially successful products and enhancements, our products may become obsolete over time, in which case our sales and operating results would suffer |
| The success of our new product offerings will depend on several factors, including our ability to: • properly identify and anticipate customer needs; • commercialize new products in a cost-effective and timely manner; • manufacture and deliver products in sufficient volumes on time; • obtain regulatory approval for such new products; • differentiate our offerings from competitors’ offerings; • achieve positive clinical outcomes; • satisfy the increased demands by health care payors, providers and patients for lower-cost procedures; • innovate and develop new materials, product designs and surgical techniques; and • provide adequate medical and/or consumer education relating to new products and attract key surgeons to advocate these new products |
| Moreover, innovations generally will require a substantial investment in research and development before we can determine the commercial viability of these innovations and we may not have the financial resources necessary to fund these innovations |
| In addition, even if we are able to successfully develop enhancements or new generations of our products, these enhancements or new generations of products may not produce revenue in excess of the costs of development and they may be quickly rendered obsolete by changing customer preferences or the introduction by our competitors of products embodying new technologies or features |
| We are implementing a product rationalization and repositioning plan, which will require significant financial and personnel resources and may not be successful |
| On October 31, 2005, our Board of Directors approved a product rationalization and repositioning plan covering the discontinuation of non-strategic cataract surgical and eye care products and the elimination or redeployment of resources that support these product lines |
| The plan includes organizational changes and potential reductions in force in manufacturing, sales and marketing associated with these product lines, as well as organizational changes in research and development and other corporate functions designed to align the organization with our strategy and strategic business unit organization |
| The plan further calls for increasing our investment in key growth opportunities, specifically our refractive implant product line and international laser vision correction business, and accelerating the implementation of productivity initiatives |
| We expect that implementation of the product rationalization and repositioning plan will result in significant pre-tax charges, a substantial portion of which are expected to be cash expenditures |
| In addition, because we are in the preliminary stages of effectuating the plan and are subject to laws and regulations of several foreign jurisdictions that will require consultations and negotiations with works councils, labor organizations and local authorities the effects of which we can not yet fully evaluate, the final costs of the plan may vary significantly from our initial estimates |
| Implementation of the plan also will require substantial 16 ______________________________________________________________________ personnel resources and may result in diversion of management’s attention away from other business activities that could be beneficial to our operations |
| We may not be able to successfully execute the plan as, and in the time frame, anticipated |
| In addition, lost sales of discontinued products may not be sufficiently offset by sales from promoted or new products, which could decrease our revenues, margins, profits and cash flows |
| We rely on certain suppliers and manufacturers for raw materials and other products and are vulnerable to fluctuations in the availability and price of such products and services |
| We purchase certain raw materials and other products from third-party suppliers and vendors, sometimes from limited sources |
| Our suppliers and vendors may not provide the raw materials or other products needed by us in the quantities requested, in a timely manner, or at a price we are willing to pay |
| In the event any of our third-party suppliers or vendors were to become unable or unwilling to continue to provide important raw materials and third-party products in the required volumes and quality levels or in a timely manner, we would be required to identify and obtain acceptable replacement supply sources |
| We may not be able to obtain alternative suppliers and vendors on a timely basis, or at all, which could result in lost sales because of our inability to manufacture products containing such raw materials or deliver products we sell from certain suppliers |
| In addition, we also rely on certain manufacturers for some of our products |
| We have historically outsourced the manufacture of our phacoemulsification equipment to third parties |
| If we were unable to renew our third-party manufacturing agreements, or if the manufacturers were to cease manufacturing any of these products for us for any reason, we may not be able to find alternative manufacturers on terms favorable to us, in a timely manner, or at all |
| If any of these events should occur, our business, financial condition and results of operations could be materially adversely affected |
| We face intense competition, and our failure to compete effectively could have a material adverse effect on our profitability and results of operations |
| We face intense competition in the markets for our ophthalmic surgical and eye care products and these markets are subject to rapid and significant technological change |
| We have numerous competitors in the United States and abroad, including, among others, large companies such as Alcon, Inc, a publicly traded subsidiary of Nestle SA; Bausch & Lomb; CIBA Vision Corporation, a unit of Novartis; Moria; Intralase; Eyeonics; Hoya, Santen, Corneal, CooperVision; and Vistakon, a Johnson and Johnson company |
| Many of our competitors have substantially more resources and a greater marketing scale than we do |
| We may not be able to sustain our current levels of profitability and growth as competitive pressures, including pricing pressure from competitors, increase |
| In addition, if we are unable to develop and produce or market our products to effectively compete against our competitors, our operating results will materially suffer |
| We also compete against a large number of providers of alternative vision correction solutions, some of which may have greater financial resources than us |
| New or different methods of vision correction are continually being introduced |
| Any of these competitive pressures could result in decreased demand for our products |
| Because of our leading market position in the laser vision correction business, all of our competitors target our market share in order to grow their own revenues |
| We can give no assurance that we will be able to maintain or grow our existing market share and it may, in fact, be required to incur considerable expenditures in order to maintain or increase that market share |
| Should our procedure market share decline, it could have a material adverse effect on our business, financial position, and results of operations |
| Trends in the contact lens care market may negatively impact our eye care business |
| Our eye care business is impacted by trends in the contact lens care market such as more simplified disinfection systems and technological and medical advances in surgical techniques for the correction of vision impairment |
| Less expensive one-bottle chemical disinfection systems have gained popularity among soft contact lens wearers instead of peroxide-based lens care products |
| Also, the growing use and acceptance of daily and extended wear contact lenses and laser correction procedures, along with the other factors above, could have the effect of continuing to reduce demand for lens care products generally |
| Our marketing and sales plans may not be appropriate or sufficient to mitigate the effect of these trends on our eye care business and, as a result, our eye care business may suffer |
| If we are unable to protect our intellectual property rights, our business and prospects may be harmed |
| Our ability to compete effectively is dependent upon our ability to protect and preserve the proprietary aspects of the designs, processes, technologies and materials owned by, used by or licensed to us |
| We have numerous US patents and corresponding foreign patents that are expected to expire by their own terms at various dates and have additional patent applications pending that may not result in issued patents |
| Our failure to secure these patents may limit our ability to protect the intellectual property rights that these applications were intended to cover |
| Although we have attempted to protect our proprietary property, technologies and processes both in the United States and in foreign countries through a combination of patent law, trade 17 ______________________________________________________________________ secrets and non-disclosure agreements, these may be insufficient |
| Competitors may be able to design around our patents to compete effectively with our products |
| We also may not be able to prevent third parties from using our technology without our authorization, breaching any non-disclosure agreements with us, or independently developing technology that is similar to ours |
| The use of our technology or similar technology by others could reduce or eliminate any competitive advantage we have developed, cause us to lose sales or otherwise harm our business |
| If it became necessary for us to resort to litigation to protect these rights, any proceedings could be costly and we may not prevail |
| Further, we may not be able to obtain patents or other protections on our future innovations |
| In addition, because of the differences in foreign patent and other laws concerning proprietary rights, our products may not receive the same degree of protection in foreign countries as they would in the United States |
| We cannot assure you that: • pending patent applications will result in issued patents; • patents issued to or licensed by us will not be challenged by third parties; or • our patents will be found to be valid or sufficiently broad to protect our technology or provide us with a competitive advantage |
| We may be subject to intellectual property litigation and infringement claims, which could cause us to incur significant expenses or prevent us from selling our products |
| There is a substantial amount of litigation over patent and other intellectual property rights in the eye care industry and in the ophthalmic surgical products and contact lens care markets particularly |
| The fact that we have patents issued to us for our products does not mean that we will always be able to successfully defend our patents and proprietary rights against challenges or claims of infringement by our competitors |
| A successful claim of patent or other intellectual property infringement or misappropriation against us could adversely affect our growth and profitability, in some cases materially |
| We cannot assure you that our products do not and will not infringe issued patents or other intellectual property rights of third parties |
| From time to time, in the ordinary course of business, we receive notices from third parties alleging infringement or misappropriation of the patent, trademark and other intellectual property rights of third parties by us or our consumers in connection with the use of our products |
| We may be unaware of intellectual property rights of others that may cover some of our technology |
| If someone claims that our products infringe their intellectual property rights, whether or not such claims are meritorious, any resulting litigation could be costly and time consuming and would divert the attention of our management and personnel from other business issues |
| The complexity of the technology involved and the uncertainty of intellectual property litigation increase these risks |
| Claims of intellectual property infringement also might require us to enter into costly royalty or license agreements (if available on acceptable terms or at all) |
| We also may be subject to significant damages or an injunction preventing us from manufacturing, selling or using some or some aspect of our products |
| We may also need to redesign some of our products or processes to avoid future infringement liability |
| Any of these adverse consequences could have a material adverse effect on our business and profitability |
| Our manufacturing capacity may not be adequate to meet the demands of our business |
| If our sales increase substantially, we may need to increase our production capacity |
| Any prolonged disruption in the operation of our manufacturing facilities or those of our third-party manufacturers could materially harm our business |
| We cannot assure you that if we choose to scale-up our manufacturing operations, we will be able to obtain regulatory approvals in a timely fashion, which could affect our ability to meet product demand or result in additional costs |
| We could experience losses due to product liability claims, product recalls or corrections |
| We have in the past been, and continue to be, subject to product liability claims |
| In connection with our spin-off from Allergan, we assumed the defense of any litigation involving claims related to our business and agreed to indemnify Allergan for all related losses, costs and expenses |
| As part of our risk management policy, we have obtained third-party product liability insurance coverage |
| Product liability claims against us may exceed the coverage limits of our insurance policies or cause us to record a self-insured loss |
| A product liability claim in excess of applicable insurance could have a material adverse effect on our business, financial condition and results of operations |
| Even if any product liability loss is covered by an insurance policy, these policies have substantial retentions or deductibles that provide that we will not receive insurance proceeds until the losses incurred exceed the amount of those retentions or deductibles |
| To the extent that any losses are below these retentions or deductibles, we will be responsible for paying these losses |
| The payment of retentions or deductibles for a significant amount of claims could have a material adverse effect on our business, financial condition and results of operations |
| 18 ______________________________________________________________________ In addition, we are subject to medical device reporting regulations that require us to report to the FDA or similar governmental authorities in other countries if our products cause or contribute to a death or serious injury or malfunction in a way that would be reasonably likely to contribute to death or serious injury if the malfunction were to recur |
| The FDA and similar governmental authorities in other countries have the authority to require the recall of our products in the event of material deficiencies or defects in design or manufacturing |
| A government mandated or voluntary recall by us could occur as a result of manufacturing errors or design defects, including defects in labeling |
| We have undertaken voluntary recalls of our products in the past |
| Any product liability claim or recall would divert managerial and financial resources and could harm our reputation with customers |
| We cannot assure you that we will not have product liability claims or recalls in the future or that such claims or recalls would not have a material adverse effect on our business |
| If we fail to maintain our relationships with health care providers, customers may not buy our products and our revenue and profitability may decline |
| We market our products to numerous health care providers, including eye care professionals, hospitals, ambulatory surgical centers, corporate optometry chains and group purchasing organizations |
| We have developed and strive to maintain close relationships with members of each of these groups who assist in product research and development and advise us on how to satisfy the full range of surgeon and patient needs |
| We rely on these groups to recommend our products to their patients and to other members of their organizations |
| The failure of our existing products and any new products we may introduce to retain the support of these various groups could have a material adverse effect on our business, financial condition and results of operations |
| We generally do not have long-term contracts with our customers |
| We generally do not enter into long-term contracts with our customers |
| As a result, we are exposed to volatility in the market for our products and loss of our customers |
| As a result, we may not be able to maintain our level of profitability |
| If we are unable to market our products on terms we find acceptable, our financial condition and results of operations could suffer materially |
| Our business is subject to extensive government regulation |
| Our products and operations are subject to extensive regulation in the United States by the FDA and various other federal and state regulatory agencies, including with respect to regulatory clearance or approval of our products, clinical and pre-clinical testing, product marketing, sales and distributions, adverse event reporting, prohibitions on fraud and abuse, submission of false claims, kickbacks and rebates, and relationships with physicians and other referral sources |
| Additionally, in many foreign countries in which we market our products, we are subject to similar regulations |
| Before a new medical device or new use of, or claim for, or modification to an existing product can be marketed in the United States, a company must first apply for and receive either 510(k) clearance, premarket approval or a premarket approval supplement from the FDA, unless an exemption applies |
| Either process can be expensive, lengthy and unpredictable |
| Also, the identification or increased frequency of safety or efficacy concerns could result in product recall or withdrawal or revocation of our FDA clearance or premarket approval |
| Compliance with these regulations is expensive and time-consuming |
| We, our subcontractors, and third party manufacturers are subject to periodic and unannounced inspections by FDA and governmental authorities to assess compliance |
| If we fail to comply, the FDA and state or other regulatory agencies have broad enforcement powers, including any of the following sanctions: • warning letters, fines, injunctions, consent decrees, civil penalties and exclusion from participation in federal and state health care programs; • repair, replacement, recall or seizure of our products; • operating restrictions, partial suspension or total shutdown of production; • refusing our requests for 510(k) clearance or premarket approval of new products, new intended uses or modifications to existing products; • withdrawing 510(k) clearance or premarket approvals that have already been granted; and • criminal prosecution and penalties |
| 19 ______________________________________________________________________ Product sales, introductions or modifications may be delayed or canceled as a result of US or foreign regulatory processes, which could cause our sales to decline |
| Failure to obtain regulatory clearance or approvals of new products or product modifications we develop, any limitations imposed by regulatory agencies on new product uses or the costs of obtaining regulatory clearance or approvals could have a material adverse effect on our business, financial condition and results of operations |
| We, our subcontractors, and third-party manufacturers are also subject to similar state requirements and licenses |
| We, our subcontractors, and third-party manufacturers must comply with extensive recordkeeping and reporting requirements and must make available our manufacturing facilities and records for unannounced and periodic inspections by governmental agencies, including FDA, state authorities and comparable agencies in other countries |
| Health care initiatives and other cost-containment pressures could cause us to sell our products at lower prices, resulting in less revenue to us |
| In the United States, a significant percentage of the patients who receive our intraocular lenses are covered by the federal Medicare program |
| Changes in coverage or coding policies or reductions in Medicare reimbursement rates and the implementation of other price controls could adversely affect our revenues and financial condition |
| In addition, changes in existing regulatory requirements or adoption of new requirements could hurt our business, financial condition and results of operations |
| The clinical trial process required to obtain regulatory approvals is costly and uncertain, and could result in delays in new product introductions or even an inability to release a product |
| The clinical trials required to obtain regulatory approvals for our products are complex and expensive and their outcomes are uncertain |
| We incur substantial expense for, and devote significant time to, clinical trials but cannot be certain that the trials will ever result in the commercial sale of a product |
| We may suffer significant setbacks in clinical trials, even after earlier clinical trials showed promising results |
| Any of our products may produce undesirable side effects that could cause us or regulatory authorities to interrupt, delay or halt clinical trials of a product candidate |
| We, the FDA, or another regulatory authority may suspend or terminate clinical trials at any time if they or we believe the trial participants face unacceptable health risks |
| Our business is subject to environmental regulations |
| Our facilities and operations are subject to federal, state and local environmental and occupational health and safety requirements of the United States and foreign countries, including those relating to discharges of substances to the air, water and land, the handling, storage and disposal of wastes and the cleanup of properties affected by pollutants |
| Failure to maintain compliance with these regulations could have a material adverse effect on our business or financial condition |
| The facilities we obtained in connection with the acquisition of Pfizer’s ophthalmic surgical business and in connection with our acquisition of VISX, Incorporated are also subject to such requirements and risks |
| In the future, federal, state or local governments in the United States or foreign countries could enact new or more stringent laws or issue new or more stringent regulations concerning environmental and worker health and safety matters that could affect our operations |
| Also, in the future, contamination may be found to exist at our current or former facilities or off-site locations where we have sent wastes |
| We could be held liable for such newly discovered contamination which could have a material adverse effect on our business or financial condition |
| In addition, changes in environmental and worker health and safety requirements could have a material adverse effect on our business or financial condition |
| If we fail to attract, hire and retain qualified personnel, we may not be able to design, develop, market or sell our products or successfully manage our business |
| Our ability to attract new customers, retain existing customers and pursue our strategic objectives depends on the continued services of our current management, sales, product development and technical personnel and our ability to identify, attract, train and retain similar personnel |
| Competition for top management personnel is intense and we may not be able to recruit and retain the personnel we need |
| The loss of any one of our management personnel, or our inability to identify, attract, retain and integrate additional qualified management personnel, could make it difficult for us to manage our business successfully and pursue our strategic objectives |
| Similarly, competition for skilled sales, product development and technical personnel is intense and we may not be able to recruit and retain the personnel we need |
| The loss of services of a number of key sales, product development and technical personnel, or our inability to hire new personnel with the requisite skills, could restrict our ability to develop new products or enhance existing products in a timely manner, sell products to our customers or manage our business effectively |
| 20 ______________________________________________________________________ We may not be able to hire or retain qualified personnel if we are unable to offer competitive salaries and benefits |
| If our stock does not perform well, we may have to increase our salaries and benefits, which would increase our expenses and reduce our profitability |
| We may be required to satisfy certain indemnification obligations to Allergan, and we may not be able to collect on indemnification rights from Allergan |
| Under the terms of our contribution and distribution agreement with Allergan, we and Allergan have each agreed to indemnify each other from and after our spin-off with respect to the debt, liabilities and obligations retained by our respective companies |
| These indemnification obligations could be significant |
| The ability to satisfy these indemnities, if called upon to do so, will depend upon the future financial strength of each of our respective companies |
| We cannot determine whether we will have to indemnify Allergan for any substantial obligations, and we may not have control over the settlement of certain claims and lawsuits that may require partial indemnification by us |
| We also cannot assure you that, if Allergan is required to indemnify us for any substantial obligations, Allergan will have the ability to satisfy those obligations |
| We may be responsible for federal income tax liabilities that relate to the distribution of our common stock by Allergan |
| Allergan has received a ruling from the Internal Revenue Service to the effect that the spin-off qualified as a tax-free transaction |
| If either us or Allergan breach representations to each other or to the Internal Revenue Service, or if we or Allergan take or fail to take, as the case may be, actions that result in the spin-off failing to meet the requirements of a tax-free spin-off pursuant to Section 355 of the Internal Revenue Code, the party in breach will indemnify the other party for any and all resulting taxes |
| If we were required to pay any of the potential taxes described above, the payment would have a material adverse effect on our financial position |
| Recent changes in the accounting treatment of stock options are expected to have a negative impact on our financial statements and could cause our stock price to decline |
| On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued FASB Statement Nodtta 123(R), Share-Based Payment, or FAS 123(R), which includes proposed rule changes requiring companies to expense the fair value of employee stock options and other forms of stock-based compensation |
| Before 2006, we included the fair value of employee stock options on a pro forma basis in the notes to our annual financial statements in accordance with accounting principles generally accepted in the United States, but did not record a charge for employee stock option expense in the reported financial statements |
| We are required to comply with FAS 123(R) as of January 1, 2006 and, as a result, our reported earnings are expected to decrease |
| If laser vision correction is not broadly accepted by both doctors and patients, our business, financial position and results of operations would be materially and adversely impacted |
| Our business depends upon broad market acceptance of laser vision correction by both doctors and patients in the United States and key international markets |
| Our profitability and growth will be largely dependent on increasing levels of market acceptance and procedure growth, especially with regard to our higher-priced CustomVue™ procedure |
| Potential complications and side effects of laser vision correction include: post-operative discomfort, corneal haze (an increase in the light scattering properties of the cornea) during healing, glare/halos (undesirable visual sensations produced by bright lights), decreases in contrast sensitivity, temporary increases in intraocular pressure in reaction to procedure medication, modest fluctuations in refractive capabilities during healing, modest decrease in best corrected vision (ie, with corrective eyewear), unintended over- or under-corrections, regression of effect, disorders of corneal healing, corneal scars, corneal ulcers, and induced astigmatism (which may result in blurred or double vision and/or shadow images) |
| Some consumers may choose not to undergo laser vision correction because of these complications or more general concerns relating to its safety and efficacy or a resistance to surgery in general |
| Alternatively, some consumers may elect to delay undergoing laser vision correction surgery because they believe improved technology or methods of treatment will be available in the near future |
| Should either the ophthalmic community or the general population turn away from laser vision correction as an alternative to existing methods of treating refractive vision disorders, or if future technologies replaced laser vision correction, these developments could delay or prevent market acceptance of laser vision correction, which could have a material adverse effect on our business, financial position and results of operations |
| The possibility of long-term side effects and adverse publicity regarding laser correction surgery could seriously harm our business |
| Laser vision correction is a relatively new procedure |
| Consequently, there is no long-term follow-up data beyond ten years that might reveal additional complications or unknown side effects |
| Any future reported side effects, other adverse events or 21 ______________________________________________________________________ unfavorable publicity involving patient outcomes resulting from the use of laser vision correction systems manufactured by us or any participant in the laser vision correction market, may have a material adverse effect on our business, financial position, and results of operations |
| General economic conditions could have a negative impact on our business, financial position, and results of operations |
| Because laser vision correction is not subject to reimbursement from third-party payors such as insurance companies or government programs, the cost of laser vision correction is typically borne by individuals directly |
| Accordingly, weak or uncertain economic conditions may cause individuals to be less willing to incur the procedure cost associated with laser vision correction as was evidenced by VISX’s decline in revenues from 2002 compared to 2001 and from 2001 compared to 2000 |
| A decline in economic conditions, especially in the United States, could result in a decline in the number of laser vision correction procedures performed and could have a material adverse effect on our business, financial position, and results of operations |
| While we devote significant resources to research and development, our research and development may not lead to new products that achieve commercial success |
| Our research and development process is expensive, prolonged, and entails considerable uncertainty |
| Because of the complexities and uncertainties associated with ophthalmic research and development, products we are currently developing may not complete the development process or obtain the regulatory approvals required to market such products successfully |
| The products currently in our development pipeline may not be approved by regulatory entities and may not be commercially successful, and our current and planned products could be surpassed by more effective or advanced products |
| Any failure by third party financing entities to satisfy their obligations to us would negatively impact our financial condition |
| We have relationships with third party financing entities that purchase our products directly and subsequently lease and/or sell these products to end-user customers, or provide financing directly to customers who purchase products directly from us |
| Should any third party financing entity or entities fail or refuse to pay us in a timely manner or at all, it could negatively affect our cash flows and could have a material adverse effect on our business, financial position and results of operations |
| If any of our employees, consultants or others breach their proprietary information agreements, our competitive position could be harmed |
| We protect our proprietary technology, in part, through proprietary information and inventions agreements with employees, consultants and other parties |
| These agreements with employees and consultants generally contain standard provisions requiring those individuals to assign to us, without additional consideration, inventions conceived or reduced to practice by them while employed or retained by us, subject to customary exceptions |
| If any of our employees, consultants or others breach these agreements our competitors may learn of our trade secrets |
| Risks Relating to Our Indebtedness and Our Common Stock We have a significant amount of debt |
| Our substantial indebtedness could adversely affect our business, financial condition and results of operations and our ability to meet our payment obligations under our debt |
| We have a significant amount of debt and substantial debt service requirements |
| As of December 31, 2005, we had approximately dlra560 million of outstanding debt |
| Approximately dlra18dtta7 million of our revolving credit facility was reserved to support letters of credit issued on our behalf and approximately dlra231dtta3 million, exclusive of letters of credit, was available for future borrowings |
| This level of debt could have significant consequences on our future operations, including: • making it more difficult for us to meet our payment and other obligations under our outstanding debt; • resulting in an event of default if we fail to comply with the financial and other restrictive covenants contained in our debt agreements, which event of default could result in all of our debt becoming immediately due and payable; • reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other general corporate purposes, and limiting our ability to obtain additional financing for these purposes; 22 ______________________________________________________________________ • subjecting us to the risk of increased sensitivity to interest rate increases on our indebtedness with variable interest rates, including borrowings under our senior credit facility; • limiting our flexibility in planning for, or reacting to, and increasing our vulnerability to, changes in our business, the industry in which we operate and the general economy; and • placing us at a competitive disadvantage compared to our competitors that have less debt or are less leveraged |
| Any of the above-listed factors could have an adverse effect on our business, financial condition and results of operations and our ability to meet our payment obligations under the notes and our other debt |
| To service our indebtedness, we will require a significant amount of cash |
| Our ability to generate cash flow depends on many factors beyond our control |
| Our ability to meet our payment and other obligations under our debt depends on our ability to generate significant cash flow in the future |
| This, to some extent, is subject to general economic, financial, competitive, legislative and regulatory factors as well as other factors that are beyond our control |
| We cannot assure holders that our business will generate cash flow from operations, or that future borrowings will be available to us under our senior credit facility or otherwise, in an amount sufficient to enable us to meet our payment obligations under our debt and to fund other liquidity needs |
| We made an irrevocable election to satisfy in cash our conversion obligation with respect to the principal amount of any of our 2dtta50prca convertible senior subordinated notes due 2024 (the “Existing 2dtta50prca Convertible Notes”) converted after December 15, 2004, with any remaining amount of the conversion obligation to be satisfied in shares of our common stock, in each case, calculated as set forth in the indenture governing the Existing 2dtta50prca Convertible Notes |
| In addition, because we made this election, the indenture provides that we must satisfy in cash our obligations to repurchase any Existing 2dtta50prca Convertible Notes that holders put to us on January 15, 2010, July 15, 2014 and July 15, 2019 |
| If the Existing 2dtta50prca Convertible Notes become convertible pursuant to their terms and the holders elect to convert or if holders elect to put their notes to us on the specified repurchase dates, we may not have sufficient cash to satisfy our obligations |
| In addition, our 1dtta375prca convertible senior subordinated notes due 2025 contain similar provisions, we may be unable to repurchase the notes for cash when required by the holders, including following a fundamental change, or to pay the portion of the conversion value upon conversion of any notes by the holders |
| Our repurchase of any such notes may be prohibited by our other debt instruments, which could cause defaults and cross-defaults under our other debt agreements |
| If we are not able to generate sufficient cash flow to service our debt obligations, we may need to refinance or restructure our, sell assets, reduce or delay capital investments, or seek to raise additional capital |
| If we are unable to implement one or more of these alternatives, we may not be able to meet our payment obligations under the notes and our other debt |
| A significant amount of our debt agreements contain covenant restrictions that may limit our ability to operate our business |
| The agreements governing our senior credit facility contain covenant restrictions that limit our ability to operate our business, including restrictions on our ability to: • incur additional debt or issue guarantees; • create liens; • make certain investments; • enter into transactions with our affiliates; • sell certain assets; • redeem capital stock or make other restricted payments; • declare or pay dividends or make other distributions to stockholders; and • consolidate, merge or transfer all or substantially all of our assets and the assets of our subsidiaries on a consolidated basis |
| 23 ______________________________________________________________________ Our senior credit facility requires us to maintain specific leverage, fixed charge coverage and interest coverage ratios |
| Our ability to comply with these covenants is dependent on our future performance, which will be subject to many factors, some of which are beyond our control, including prevailing economic conditions |
| Our failure to comply with these obligations would prevent us from borrowing additional money under the facility and could result in a default under it |
| If a default occurs under any of our senior indebtedness, the relevant lenders could elect to declare the indebtedness, together with accrued interest and other fees, to be immediately due and payable and proceed against substantially all of our assets, which will serve as collateral securing the indebtedness |
| Moreover, if the lenders under a facility or other agreement in default were to accelerate the indebtedness outstanding under that facility, it could result in a default under other indebtedness |
| If all or any part of our indebtedness were to be accelerated, we may not have or be able to obtain sufficient funds to repay it |
| In addition, we may incur other indebtedness in the future that may contain financial or other covenants that are more restrictive than those contained in our current indentures |
| As a result of these covenants, our ability to respond to changes in business and economic conditions and to obtain additional financing, if needed, may be significantly restricted, and we may be prevented from engaging in transactions that might otherwise be beneficial to us |
| In addition, our failure to comply with these covenants could result in a default under our debt, which could permit the holders to accelerate such debt |
| If any of our debt is accelerated, we may not have sufficient funds available to repay such debt |
| Despite our and our subsidiaries’ current levels of indebtedness, we may incur substantially more debt, which could further exacerbate the risks associated with our substantial indebtedness |
| Although certain of our debt agreements contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and the indebtedness incurred in compliance with these restrictions could be substantial |
| Also, these restrictions do not prevent us from incurring obligations that do not constitute “indebtedness” as defined in the relevant agreement |
| If new debt is added to our current debt levels, the related risks that we now face could intensify |
| Our stock price may fluctuate as a result of a variety of factors, many of which are beyond our control |
| These factors include: • quarterly variations in our operating results; • operating results that vary from the expectations of management, securities analysts and investors; • changes in expectations as to our future financial performance; • announcements of innovations, new products, strategic developments, significant contracts, acquisitions and other material events by us or our competitors; • the operating and securities price performance of other companies that investors believe are comparable to us; • future sales of our equity or equity-related securities; • changes in general conditions in our industry and in the economy, the financial markets and the domestic or international political situation; • developments or disputes (including lawsuits) concerning proprietary rights; • departures of key personnel; and • regulatory considerations |
| In addition, in recent years, the stock market in general has experienced extreme price and volume fluctuations |
| This volatility has had a significant effect on the market price of securities issued by many companies for reasons often unrelated to their operating performance |
| These broad market fluctuations may adversely affect our stock price, regardless of our operating results |
| 24 ______________________________________________________________________ Our stockholder rights plan, amended and restated certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it difficult for a third party to acquire our company |
| We have a stockholder rights plan that may have the effect of discouraging unsolicited takeover proposals |
| The rights issued under the stockholder rights plan would cause substantial dilution to a person or group that attempts to acquire us on terms not approved in advance by our board of directors |
| In addition, Delaware corporate law and our amended and restated certificate of incorporation and bylaws contain provisions that could delay, deter or prevent a change in control of our company or our management |
| These provisions could also discourage proxy contests and make it more difficult for our stockholders to elect directors and take other corporate actions without the concurrence of our management or board of directors |
| These provisions: • authorize our board of directors to issue “blank check” preferred stock, which is preferred stock that can be created and issued by our board of directors, without stockholder approval, with rights senior to those of common stock; • provide for a staggered board of directors and three-year terms for directors, so that no more than one-third of our directors could be replaced at any annual meeting; • provide that directors may be removed only for cause; • provide that stockholder action may be taken only at a special or regular meeting and not by written consent; • provide for super-majority voting requirements for some provisions of our charter; and • establish advance notice requirements for submitting nominations for election to the board of directors and for proposing matters that can be acted upon by stockholders at a meeting |
| We are also subject to anti-takeover provisions under Delaware law, which could also delay or prevent a change of control |
| Together, these provisions of our amended and restated certificate of incorporation and bylaws, Delaware law and our stockholder rights plan may discourage transactions that otherwise could provide for the payment of a premium over prevailing market prices of our common stock and, possibly, the notes, and also could limit the price that investors are willing to pay in the future for shares of our common stock and the notes |