Bausch & Lomb 1999 Annual Report

The purchase price for the acquisitions was allocated to
tangible assets and intangible assets, including goodwill and
identifiable intangible assets, less liabilities assumed, and in the
case of Storz and Chiron Vision, to IPR&D. As required under
generally accepted accounting principles, IPR&D was immediately
expensed, resulting in a non-cash charge to earnings, since
the underlying R&D projects had not reached technological
feasibility and the assets to be used in such projects had no alternative
future use.
The useful lives of goodwill was determined based upon an
evaluation of pertinent factors, including:
• Individual aspects of each acquisition and the associated
useful lives
• Consideration to legal, regulatory and contractual provisions
which could limit the maximum useful life
• Management’s professional judgement and in some instances,
the expert opinions of independent appraisers
After considering these factors as they related to the Chiron
Vision and Storz acquisitions, it was determined that the associated
goodwill related explicitly to the perceived earnings potential
of these businesses, and furthermore, that the future periods to
benefit from these potential earnings were integrally associated
with the acquired customer bases. Therefore, the asset lives
assigned to goodwill were the same as the lives assigned to the
customer base component of other intangible assets, which was
40 and 20 years, respectively, for Chiron Vision and Storz.
The asset lives of the other intangible assets acquired in the
Chiron Vision and Storz acquisitions were determined by independent
appraisers, and agreed to by management, using generally
accepted actuarial methodologies needed to estimate useful lives
from observed historical data. In estimating the useful life of the
Storz customer relationships referred to in the above table, the
appraisers evaluated relationships that Storz had fostered since its
formation (and the formation of companies it had acquired) and
calculated the useful life by observing the pattern of historical
customer attrition. Based on this attrition pattern, customers were
sorted into “vintage groups” that identified the length of tenure
with Storz, analyzed for survival rates and translated into loss rates
for each vintage. The annual survivor rates were then extrapolated
to determine the future rate of customer loss and from this data a
useful life of 40 years was calculated. The same statistical technique
was used to determine the life of customer relationships for Chiron
Vision, which was estimated to be 20 years.
For the other categories of other intangible assets – tradenames,
workforce and technology/patents – specific facts and
circumstances were analyzed by the appraisers to determine
appropriate asset lives.
See the future 26
Bausch & Lomb
There were a combined 11 product development projects for
Chiron Vision and Storz included in the $41.0 pre-tax charge to
IPR&D. The projects were unique from other pre-existing core
technology and pertained primarily to the development of new
ophthalmic pharmaceutical drugs, new or redesigned intraocular
lenses and products that support eye surgery procedures. The
value allocated to IPR&D was determined using an income
approach. Such methodology involved estimating the fair value of
the purchased IPR&D using the present value of the estimated
after-tax cash flows expected to be generated as a result of these
projects and using risk-adjusted discount rates and revenue forecasts
as appropriate. These estimates were consistent with
historical pricing, margins and expense levels for similar products.
Revenues were estimated based on relevant market size and
growth factors, expected industry trends, individual product sales
cycles and other factors. Estimated operating expenses, income
taxes, and charges for use of contributory assets were deducted
from estimated revenues to determine estimated after-tax cash
flows for each project. Estimated operating expenses included
cost of goods sold and selling, administrative and general
expenses. The discount rates used to value the IPR&D projects
ranged from 15% to 22%. These rates were based on the company’s
weighted average cost of capital, as well as other factors, including
the useful life of each project, the anticipated profitability of each
project and the uncertainty regarding the successful completion of
each project. The value of IPR&D was also impacted by the stage
of completion of each project, which ranged from 17% to 95%.
Management is primarily responsible for estimating the fair
value of assets and liabilities obtained through acquisitions and
has conducted due diligence in determining fair values.
Management made estimates and assumptions at the time of
each acquisition that affect the reported amounts of assets, liabilities
and expenses, including IPR&D, resulting from such
acquisitions. Actual results could differ from those amounts.
During 1999, two of the product development projects representing
40% of the $41.0 pre-tax charge were discontinued. Costs
and expected revenues related to the remaining projects have not
varied materially from original projections.
Accrual for Exit Activities As part of the integration of Chiron
Vision and Storz, 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: