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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
   FORM 10-Q (Mark One) x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 24, 2004 or o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 For the transition period from      to       . COMMISSION FILE NUMBER 001-31257 ADVANCED MEDICAL OPTICS, INC.  Delaware
    
    33-0986820(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)1700 E. St. Andrew Place
    
    92705Santa Ana, California
    
    (Zip Code)(Address of principal executive offices)
 Registrants telephone number, including area code 714/247-8200 Indicate by a 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
o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes
x   No
o As of October 27, 2004, there were 36,712,987 shares of common stock outstanding.




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ADVANCED MEDICAL OPTICS, INC.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 24, 2004 INDEX PagePART I  -  FINANCIAL INFORMATIONITEM 1  -  FINANCIAL STATEMENTS(A)
Unaudited Condensed Consolidated Statements of Operations -
Three Months and Nine Months Ended September 24, 2004 and September 26, 2003
    
    
    3(B)
Unaudited Condensed Consolidated Balance Sheets -
September 24, 2004 and December 31, 2003
    
    
    4(C)
Unaudited Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 24, 2004 and September 26, 2003
    
    
    5(D) Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6-17ITEM 2  -  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 24, 2004
    
    
    18-25CERTAIN FACTORS AND TRENDS AFFECTING AMO AND ITS BUSINESSES
    
    
    25-28ITEM 3  -  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    29-30ITEM 4  -  CONTROLS AND PROCEDURES
    
    
    31PART II  -  OTHER INFORMATIONITEM 2  -  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    31-32ITEM 6  -  EXHIBITS
    
    
    32Signature
    
    
    33Exhibit Index
    
    
    34EXHIBIT 10.1EXHIBIT 10.2EXHIBIT 10.3EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  2




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PART I  FINANCIAL INFORMATION 
 Item 1. Financial Statements Advanced Medical Optics, Inc. 
  (In thousands, except per share data) Three Months Ended
    
    Nine Months EndedSeptember 24,
    
    September 26,
    
    September 24,
    
    September 26,2004
    
    2003
    
    2004
    
    2003Net sales
    
    $
    198,366
    
    
    $
    151,152
    
    
    $
    517,414
    
    
    $
    434,464Cost of sales
    
    
    88,894
    
    
    
    57,045
    
    
    
    212,577
    
    
    
    163,763Gross profit
    
    
    109,472
    
    
    
    94,107
    
    
    
    304,837
    
    
    
    270,701Selling, general and administrative
    
    
    88,533
    
    
    
    67,600
    
    
    
    236,620
    
    
    
    205,106Research and development
    
    
    11,830
    
    
    
    9,256
    
    
    
    31,043
    
    
    
    26,996In-process research and development
    
    
    28,100
    
    
    
    
    
    
    
    28,100
    
    
    
    Operating income (loss)
    
    
    (18,991
    )
    
    
    17,251
    
    
    
    9,074
    
    
    
    38,599Non-operating expense (income):Interest expense
    
    
    8,377
    
    
    
    5,888
    
    
    
    19,327
    
    
    
    20,442Unrealized gain on derivative instruments
    
    
    (304
    )
    
    
    (341
    )
    
    
    (830
    )
    
    
    (59
    )Other, net
    
    
    4,708
    
    
    
    17,896
    
    
    
    127,977
    
    
    
    17,16112,781
    
    
    
    23,443
    
    
    
    146,474
    
    
    
    37,544Earnings (loss) before income taxes
    
    
    (31,772
    )
    
    
    (6,192
    )
    
    
    (137,400
    )
    
    
    1,055Provision (benefit) for income taxes
    
    
    (64
    )
    
    
    (2,528
    )
    
    
    2,103
    
    
    
    443Net earnings (loss)
    
    $
    (31,708
    )
    
    $
    (3,664
    )
    
    $
    (139,503
    )
    
    $
    612Net earnings (loss) per share :Basic
    
    $
    (0.89
    )
    
    $
    (0.13
    )
    
    $
    (4.36
    )
    
    $
    0.02Diluted
    
    $
    (0.89
    )
    
    $
    (0.13
    )
    
    $
    (4.36
    )
    
    $
    0.02Weighted average number of shares outstanding:Basic
    
    
    35,711
    
    
    
    29,110
    
    
    
    31,977
    
    
    
    28,962Diluted
    
    
    35,711
    
    
    
    29,110
    
    
    
    31,977
    
    
    
    29,274
 See accompanying notes to unaudited condensed consolidated financial
statements. 3




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Advanced Medical Optics, Inc. 
 
 September 24,
    
    December 31,2004
    
    2003ASSETSCurrent assetsCash and equivalents
    
    $
    34,098
    
    
    $
    46,104Trade receivables, net
    
    
    180,919
    
    
    
    130,423Inventories
    
    
    90,665
    
    
    
    41,596Other current assets
    
    
    35,922
    
    
    
    34,369Total current assets
    
    
    341,604
    
    
    
    252,492Property, plant and equipment, net
    
    
    108,556
    
    
    
    68,136Other assets
    
    
    36,146
    
    
    
    34,635Intangibles, net
    
    
    134,157
    
    
    
    369Goodwill
    
    
    360,798
    
    
    
    105,713Total assets
    
    $
    981,261
    
    
    $
    461,345LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesCurrent portion of long-term debt
    
    $
    2,050
    
    
    $
    2,328Accounts payable
    
    
    71,863
    
    
    
    35,605Accrued compensation
    
    
    29,526
    
    
    
    24,507Other accrued expenses
    
    
    64,314
    
    
    
    52,861Total current liabilities
    
    
    167,753
    
    
    
    115,301Long-term debt, net of current portion
    
    
    566,392
    
    
    
    233,611Other liabilities
    
    
    53,535
    
    
    
    19,241Stockholders equity:Preferred stock, $.01 par value; authorized 5,000,000 shares; none issued
    
    
    
    
    
    
    Common stock, $.01 par value; authorized 120,000,000 shares; issued 36,602,060 and
29,378,599 shares
    
    
    366
    
    
    
    294Additional paid-in capital
    
    
    300,173
    
    
    
    54,064Retained earnings (accumulated deficit)
    
    
    (114,522
    )
    
    
    24,981Accumulated other comprehensive income
    
    
    7,587
    
    
    
    13,868Less treasury stock, at cost (1,379 and 997 shares)
    
    
    (23
    )
    
    
    (15
    )Total stockholders equity
    
    
    193,581
    
    
    
    93,192Total liabilities and stockholders equity
    
    $
    981,261
    
    
    $
    461,345
 See accompanying notes to unaudited condensed consolidated financial
statements. 4




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Advanced Medical Optics, Inc. 
 
 Nine Months EndedSeptember 24,
    
    September 26,2004
    
    2003Cash flows provided by operating activities:Net earnings (loss)
    
    $
    (139,503
    )
    
    $
    612Non cash items included in net earnings (loss):Amortization and write-off of original issue discount and debt issuance costs
    
    
    9,860
    
    
    
    9,140Amortization and write-off of net realized gain on interest rate swaps
    
    
    (3,466
    )
    
    
    (2,498
    )Depreciation and amortization
    
    
    14,970
    
    
    
    11,618In-process research and development
    
    
    28,100Loss on exchange of convertible senior subordinated notes
    
    
    110,729
    
    
    
    Loss on investments and assets
    
    
    748
    
    
    
    639Unrealized gain on derivative instruments
    
    
    (830
    )
    
    
    (59
    )Expense of compensation plan
    
    
    152
    
    
    
    64Changes in assets and liabilities, net of effect of acquisition:Trade receivables, net
    
    
    (52,279
    )
    
    
    (5,477
    )Inventories
    
    
    3,055
    
    
    
    3,538Other current assets
    
    
    (1,715
    )
    
    
    4,533Accounts payable
    
    
    36,400
    
    
    
    533Accrued expenses and other liabilities
    
    
    3,625
    
    
    
    (5,725
    )Other non-current assets
    
    
    (1,885
    )
    
    
    (5,491
    )Net cash provided by operating activities
    
    
    7,961
    
    
    
    11,427Cash flows from investing activities:Acquisition of business, net of cash acquired
    
    
    (456,709
    )
    
    
    Additions to property, plant and equipment
    
    
    (9,018
    )
    
    
    (6,157
    )Proceeds from the sale of property, plant and equipment
    
    
    35
    
    
    
    264Additions to capitalized internal-use software
    
    
    (739
    )
    
    
    (172
    )Additions to demonstration and bundled equipment
    
    
    (5,104
    )
    
    
    (5,363
    )Net cash used in investing activities
    
    
    (471,535
    )
    
    
    (11,428
    )Cash flows from financing activities:Proceeds from issuance of convertible senior subordinated notes
    
    
    350,000
    
    
    
    140,000Borrowings under term loans
    
    
    250,000
    
    
    
    22,376Repayment of long-term debt
    
    
    (138,236
    )
    
    
    (205,000
    )Financing related costs
    
    
    (16,553
    )
    
    
    (7,316
    )Proceeds from the issuance of common stock
    
    
    5,087
    
    
    
    2,898Net proceeds from settlement of interest rate swaps
    
    
    
    
    
    
    582Purchase of treasury stock
    
    
    (8
    )
    
    
    (120
    )Net cash provided by (used in) financing activities
    
    
    450,290
    
    
    
    (46,580
    )Effect of exchange rates on cash and equivalents
    
    
    1,278
    
    
    
    1,212Net decrease in cash and equivalents
    
    
    (12,006
    )
    
    
    (45,369
    )Cash and equivalents at beginning of period
    
    
    46,104
    
    
    
    80,578Cash and equivalents at end of period
    
    $
    34,098
    
    
    $
    35,209Supplemental non-cash financing activityExchange of convertible notes into common stock
    
    $
    126,558
    
    
    $
    
 See accompanying notes to unaudited condensed consolidated financial
statements. 5




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Advanced Medical Optics, Inc. 
  Note 1: Basis of Presentation In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments necessary (consisting only of
normal recurring accruals) to present fairly the financial information
contained therein. These statements do not include all disclosures required by
accounting principles generally accepted in the United States of America for
annual financial statements and should be read in conjunction with the audited
consolidated financial statements of the Company for the year ended December
31, 2003. The results of operations for the three and nine months ended
September 24, 2004 are not necessarily indicative of the results to be expected
for the year ending December 31, 2004. All material intercompany balances have been eliminated. Certain reclassifications of prior year amounts have been made to conform with
current year presentation. Stock-Based Compensation The Company measures stock-based compensation for option grants to employees
and members of the board of directors using the intrinsic value method.
Restricted stock awards are valued based on the market price of a share of
nonrestricted stock on the grant date. No compensation expense has been
recognized for stock-based incentive compensation plans other than for
restricted stock awards. Had compensation expense for the Companys stock
options and employee stock purchase plans been recognized based upon the fair
value for awards granted, the Companys net earnings (loss) would have been
decreased (increased) to the following pro forma amounts (in thousands, except
per share data): Three Months Ended
    
    Nine Months EndedSeptember 24, 2004
    
    September 26, 2003
    
    September 24, 2004
    
    September 26, 2003Net earnings (loss):As reported
    
    $
    (31,708
    )
    
    $
    (3,664
    )
    
    $
    (139,503
    )
    
    $
    612Stock-based compensation
expense included in reported
net earnings (loss), net of
tax
    
    
    43
    
    
    
    23
    
    
    
    99
    
    
    
    38Stock-based compensation
expense determined under
fair value based method, net
of tax
    
    
    (2,419
    )
    
    
    (1,122
    )
    
    
    (4,720
    )
    
    
    (3,720
    )Pro forma
    
    $
    (34,084
    )
    
    $
    (4,763
    )
    
    $
    (144,124
    )
    
    $
    (3,070
    )Earnings (loss) per share:As reported:Basic
    
    $
    (0.89
    )
    
    $
    (0.13
    )
    
    $
    (4.36
    )
    
    $
    0.02Diluted
    
    $
    (0.89
    )
    
    $
    (0.13
    )
    
    $
    (4.36
    )
    
    $
    0.02Pro forma  Basic and Diluted
    
    $
    (0.95
    )
    
    $
    (0.16
    )
    
    $
    (4.51
    )
    
    $
    (0.11
    )
 These pro forma effects are not indicative of future amounts. The Company
expects to grant additional awards in the future. Acquired In-Process Research and Development Costs to acquire in-process research and development (IPR&D) projects and
technologies which have no alternative future use and which have not reached
technological feasibility at the date of acquisition are expensed as incurred
(see Note 2, Acquisition of Pfizer Inc. Surgical Ophthalmic Business). 6




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Advanced Medical Optics, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued) Recently Adopted and Issued Accounting Standards In March 2004, the Emerging Issues Task Force finalized its consensus on EITF
Issue 03-6, Participating Securities and the Two-Class Method Under FASB
Statement No. 128, Earnings Per Share (EITF 03-6). EITF 03-6 clarifies what
constitutes a participating security and requires the use of the two-class
method for computing basic earnings per share when participating convertible
securities exist. EITF 03-6 is effective for fiscal periods beginning after
March 31, 2004. Adoption of EITF 03-6 did not have an effect on our
consolidated financial statements. In September 2004, the Emerging Issues Task Force finalized its consensus on
EITF Issue No. 04-8, The Effect of Contingently Convertible Debt on Diluted
Earnings Per Share (EITF 04-8). EITF 04-8 addresses when the dilutive effect
of contingently convertible debt with a market price trigger should be included
in diluted earnings per share (EPS). Under EITF 04-8, the market price
contingency should be ignored and these securities should be treated as
non-contingent, convertible securities and always included in the diluted EPS
computation. EITF 04-8 requires these securities be included in diluted EPS
using either the if-converted method or the net share settlement method,
depending on the conversion terms of the security. EITF 04-8 is effective for
all periods ending after December 15, 2004 and is to be applied by
retrospectively restating previously reported EPS. The Company expects to
irrevocably elect to cash settle the principal amount of the Notes
(as defined in Note 4) and thus,
the dilutive effect of the Notes would be calculated under the net share
settlement method. Adoption of EITF 04-8 would not have an impact on reported
EPS for the three and nine months ended September 24, 2004 or the three months
ended September 26, 2003 as we reported a loss for all such periods. Adoption
of EITF 04-8 would not have an impact on reported EPS for the nine months ended
September 26, 2003 or the year ended December 31, 2003, as the impact of the
Existing Notes (as defined in Note 4) is antidilutive. Note 2: Acquisition of Pfizer Inc. Surgical Ophthalmic Business On June 26, 2004, pursuant to a stock and asset purchase agreement dated as of
April 21, 2004, the Company completed the purchase of Pfizer Inc.s surgical
ophthalmic business for $450 million in cash (Acquisition). Pfizers surgical
ophthalmic business manufactured and marketed surgical devices for the eyes.
The Company acquired ophthalmic surgical products and certain manufacturing and
research and development facilities located in Uppsala, Sweden, Groningen,
Netherlands and Bangalore, India. The products acquired include the Healon®
line of viscoelastic products used in ocular surgery, the CeeOn®and Tecnis®
intraocular lenses and the Baerveldt®glaucoma shunt. The primary reason for the Acquisition is to strengthen the Companys position
in the global ophthalmic surgical industry by expanding its product portfolio
and its manufacturing and research and development expertise. The Acquisition has been accounted for as a purchase business combination.
Under the purchase method of accounting, the assets acquired and liabilities
assumed are recorded at the date of acquisition at their respective fair
values. The results of operations of the Acquisition have been included in the
accompanying unaudited condensed consolidated statements of operations from the
date of acquisition. The total estimated cost of the Acquisition is as follows
(in thousands): Cash consideration to Pfizer Inc.
    
    $
    450,000Direct costs
    
    
    7,399Cash acquired
    
    
    (690
    )Total purchase price
    
    $
    456,709
 The above purchase price has been preliminarily allocated based on an estimate
of the fair values of assets acquired and liabilities assumed. The final
valuation of net assets is expected to be completed as soon as possible, but no
later than one year from the acquisition date in accordance with generally
accepted accounting principles. 7




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Advanced Medical Optics, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued) The purchase price has been allocated based on managements estimates as
follows (in thousands): Inventories
    
    $
    52,411Other current assets
    
    
    350Property, plant and equipment
    
    
    39,066Intangible assets
    
    
    135,900In-process research and development
    
    
    28,100Goodwill
    
    
    258,812Current liabilities
    
    
    (14,601
    )Non-current liabilities
    
    
    (655
    )Non-current deferred tax liability
    
    
    (42,674
    )Net assets acquired
    
    $
    456,709
 Of the $135.9 million of acquired intangible assets, $121.0 million was
assigned to developed technology rights that have a weighted-average useful
life of approximately 12.7 years and $14.9 million was assigned to a trademark
with a useful life of approximately 13.5 years. Approximately $11.6 million of
the goodwill is expected to be deductible for tax purposes. A history of
operating margins and profitability, a strong scientific employee base and a
strong presence in the viscoelastic market were among the factors that
contributed to a purchase price resulting in the recognition of goodwill. In-process research and development Approximately $28.1 million of the purchase price represents the estimated fair
value of projects that, as of the acquisition date, had not reached
technological feasibility and had no alternative future use. Accordingly, this
amount was immediately expensed in the unaudited condensed consolidated
statements of operations for the three and nine months ended September 24,
2004. The estimated fair value assigned to IPR&D is comprised of the following
projects (in thousands): Value of IPR&D AcquiredTecnis® Monofocal
    
    $
    1,600Tecnis® Multifocal
    
    
    26,500Total
    
    $
    28,100
 The estimated fair value of these projects was determined based on a discounted
cash flow model. For each project, the estimated after-tax cash flows were
probability weighted to take into account the stage of completion and the risks
surrounding the successful development and commercialization. These cash flows
were then discounted to a present value using a discount rate of 14.5%. In
addition, solely for the purposes of estimating the fair value of these IPR&D
projects, the following assumptions were made:  
    
    Revenue that is reasonably likely to result from the approved and
unapproved, potential uses of identifiable intangible assets that
includes the estimated number of units to be sold, estimated selling
prices, estimated market penetration and estimated market share and
year-over-year growth rates over the product cycles;  
    
    Regulatory approval for the Tecnis® monofocal lens in Japan is
expected in 2005, based on results of current trials. Management also
estimates that the Tecnis® multifocal lens will receive its PMA in the
U.S. from the FDA in 2007, with approval in Japan in 2008. The time
frame and clinical roadmaps for the devices are based on managements
estimates;  
    
    Remaining developmental R&D and sustaining engineering expenses once
commercialized were also estimated by management according to internal
planning estimates;  
    
    Cost of goods sold was assumed to be similar to the current
commercialized versions of Tecnis® lenses and includes a direct
distribution cost burden; and 8




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Advanced Medical Optics, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)  
    
    Margins for the promotion, marketing, and sales expenses were assumed
at the same level as those for commercialized IOL and viscoelastic
franchises and include assumed increases in staffing required to
realize estimated worldwide sales expectations. The major risks and uncertainties associated with the timely and successful
completion of these projects consist of the ability to confirm the safety and
efficacy of the technology based on the data from clinical trials and obtaining
necessary regulatory approvals. In addition, no assurance can be given that the
underlying assumptions used to forecast the cash flows or the timely and
successful completion of such projects will materialize, as estimated. For
these reasons, among others, actual results may vary significantly from the
estimated results. The following unaudited pro forma information assumes the Acquisition occurred
on January 1, 2003. These unaudited pro forma results have been prepared for
informational purposes only and do not purport to represent what the results of

operations would have been had the Acquisition occurred as of the date
indicated, nor of future results of operations. The unaudited pro forma
results for the nine months ended September 24, 2004 and for the three and nine
months ended September 26, 2003 are as follows (in thousands, except per share
data): Nine Months Ended
    
    Three Months Ended
    
    Nine Months EndedSeptember 24, 2004
    
    September 26, 2003
    
    September 26, 2003Net sales
    
    $
    592,291
    
    
    $
    183,572
    
    
    $
    547,942Net earnings (loss)
    
    
    31,493
    (1)
    
    
    (5,070
    )  (2)
    
    
    8,169
    (3)Earnings (loss) per share:Basic (4)
    
    $
    0.81
    
    
    $
    (0.14
    )
    
    $
    0.23Diluted (5)
    
    $
    0.77
    
    
    $
    (0.14
    )
    
    $
    0.23
  (1)
    
    The unaudited pro forma information for the nine months ended September
24, 2004 excludes the following non-recurring charges: incremental cost
of sales of $14.1 million from the sale of acquired inventory adjusted to
fair value; a $28.1 million in-process research and development charge; a
charge of $5.2 million for the write-off of debt issuance costs, one-time
commitment fee and original issue discount, net of the recognition of
realized gains on interest rate swaps; and early debt extinguishment costs
of $126.2 million. The unaudited pro forma information also reflects a
$2.3 million decrease in depreciation and amortization related to the
estimated fair value of property, plant and equipment and identifiable
intangible assets and a $9.7 million increase in interest expense
resulting from the recapitalization to fund the Acquisition.  (2)
    
    The unaudited pro forma information for the three months ended September
26, 2003 reflects a net $0.6 million decrease in depreciation and
amortization related to the estimated fair value of property, plant and
equipment and identifiable intangible assets and a $2.4 million increase
in interest expense resulting from the recapitalization to fund the
Acquisition.  (3)
    
    The unaudited pro form information for the nine months ended September
26, 2003 reflects a $1.8 million increase in depreciation and amortization
related to the estimated fair value of property, plant and equipment and
identifiable intangible assets and a $9.5 million increase in interest
expense resulting from the recapitalization to fund the Acquisition.  (4)
    
    The weighted average number of shares outstanding used for computation of
basic earnings (loss) per share for each of the periods presented include
an additional 6.8 million shares exchanged for approximately $126.6
million aggregate principal amount of 31⁄2% convertible senior
subordinated notes (see Note 4).  (5)
    
    The weighted average number of shares outstanding used for computation of
diluted earnings per share for the nine months ended September 24, 2004
includes the aggregate dilutive effect of approximately 2.2 million shares
for stock options and the remaining 31⁄2% convertible senior
subordinated notes. The weighted average number of shares outstanding
used for computation of diluted earnings per share for the nine months
ended September 26, 2003 includes the dilutive effect of approximately 0.3
million shares for stock options. 9




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Advanced Medical Optics, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued) Note 3: Composition of Certain Financial Statement Captions The components of inventories were as follows: September 24,
    
    December 31,(In thousands)
    
    2004
    
    2003Finished goods, including inventory on consignment with customers of $9,420 and
$6,696 in 2004 and 2003, respectively
    
    $
    73,814
    
    
    $
    37,255Work in process
    
    
    5,268
    
    
    
    1,056Raw materials
    
    
    11,583
    
    
    
    3,285$
    90,665
    
    
    $
    41,596
 The components of amortizable intangibles and goodwill were as follows: Intangibles September 24, 2004
    
    December 31, 2003Gross
    
    Accumulated
    
    Gross
    
    Accumulated(In thousands)
    
    Amount
    
    Amortization
    
    Amount
    
    AmortizationAmortized Intangible Assets:Technology Rights
    
    $
    121,000
    
    
    $
    (2,388
    )
    
    $
    
    
    
    $
    Trade Name
    
    
    14,900
    
    
    
    (276
    )
    
    
    
    
    
    
    Licensing
    
    
    4,590
    
    
    
    (3,950
    )
    
    
    3,940
    
    
    
    (3,940
    )Trademarks
    
    
    572
    
    
    
    (291
    )
    
    
    572
    
    
    
    (203
    )$
    141,062
    
    
    $
    (6,905
    )
    
    $
    4,512
    
    
    $
    (4,143
    )
 The technology rights and trade name were acquired in the Acquisition (see Note
2). Amortization expense of intangible assets for the three and nine months ended
September 24, 2004 was $2.7 million and $2.8 million, respectively.
Amortization expense of intangible assets for the three and nine months ended
September 26, 2003 was immaterial. Amortization expense is expected to be
approximately $5.3 million in 2004, $10.7 million in 2005, 2006 and 2007 and
$10.5 million in 2008. Goodwill (In thousands)
    
    September 24, 2004
    
    December 31, 2003Goodwill:United
States
    
    $
    12,783
    
    
    $
    12,783Japan
    
    
    27,007
    
    
    
    28,144Manufacturing operations
    
    
    321,008
    
    
    
    64,786$
    360,798
    
    
    $
    105,713
 The change in goodwill is due to goodwill acquired in the Acquisition (see Note
2) and foreign currency fluctuations. Note 4: Debt and Interest Rate Swap Agreements On June 22, 2004, the Company issued $350.0 million of 21⁄2% convertible
senior subordinated notes due July 15, 2024 (Notes). Interest on the Notes is
payable on January 15 and July 15 of each year, commencing on January 15, 2005.
The Notes are convertible into 19.9045 shares of AMOs common stock for each
$1,000 principal amount of Notes (conversion price of approximately $50.24 per
share), subject to adjustment. The Notes may be converted, at the option of
the holders, on or prior to the final maturity date under certain
circumstances, including: 10




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Advanced Medical Optics, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)  
    
    during any fiscal quarter commencing after September 24, 2004, if the
closing sale price per share of AMOs common stock exceeds 130% of the
conversion price for at least 20 trading days in the 30 consecutive
trading day period ending on the last trading day of the preceding
fiscal quarter;  
    
    during the five business days after any five consecutive trading day
period in which the trading price of the Notes for each day was less
than 95% of the conversion value of the Notes; provided that holders may
not convert their Notes in reliance on this provision after July 15,
2019, if on any trading day during such trading period the closing sale
price per share of AMOs common stock was between 100% and 130% of the
then current conversion price;  
    
    upon the occurrence of specified ratings events with respect to the
Notes. This conversion feature represents an embedded derivative.
However, based on the de minimis value associated with this feature, no
value has been assigned at issuance and at September 24, 2004;  
    
    if the Notes have been called for redemption;  
    
    if a fundamental change occurs; or  
    
    upon the occurrence of specified corporate events. Upon conversion, the Company has the right to deliver, in lieu of shares of
common stock, cash or a combination of cash and shares of common stock. Under
the indenture for the Notes, the Company may irrevocably elect to satisfy in
cash the conversion obligation with respect to the principal amount of the
Notes and expects to make such election prior to December 31, 2004. The Company may redeem some or all of the Notes for cash, on or after January
20, 2010, for a price equal to 100% of the principal amount plus accrued and
unpaid interest, including contingent interest, if any, to but excluding the
redemption date. The Notes contain put options, which may require the Company to repurchase all
or a portion of the Notes on January 15, 2010, July 15, 2014, and July 15, 2019
at a repurchase price of 100% of the principal amount plus accrued and unpaid
interest, including contingent interest, if any, to but excluding the
repurchase date. The Company may choose to pay the repurchase price in cash,
shares of common stock or a combination of cash and shares of common stock. Beginning with the six-month interest period commencing January 15, 2010,
holders of the Notes will receive contingent interest payments during any
six-month interest period if the trading price of the Notes for each of the
five trading days ending on the second trading day immediately preceding the
first day of the applicable six-month interest period equals or exceeds 120% of
the principal amount of the Notes. The contingent interest payable will equal
0.25% of the average trading price of $1,000 principal amount of Notes during
the five trading days immediately preceding the first day of the applicable
six-month interest period. This contingent interest payment feature represents
an embedded derivative. However, based on the de minimis value associated with
this feature, no value has been assigned at issuance and at September 24, 2004. On or prior to January 15, 2010, upon the occurrence of a fundamental change,
under certain circumstances, the Company will pay a make whole premium on Notes
converted in connection with, or tendered for repurchase upon, the fundamental
change. The make whole premium will be payable, in the same form of
consideration into which the Companys common stock has been exchanged or
converted, on the repurchase date for the Notes after the fundamental change,
both for Notes tendered for repurchase and for Notes converted in connection
with the fundamental change. The amount of the make whole premium, if any,
will be based on the Companys stock price on the effective date of the
fundamental change. This make whole premium feature represents an embedded
derivative. However, based on the de minimis value associated with this
feature, no value has been assigned at issuance and at September 24, 2004. On June 25, 2004, the Company amended and restated its senior credit facility
to provide a $250.0 million term loan and a $100.0 million revolving credit
facility. The amended and restated senior credit facility matures on June 25,
2009. At September 24, 2004, the Company did not have any borrowings
outstanding under the revolving credit facility. Approximately $9.7 million of
the revolving credit facility has been reserved to support letters of credit
issued on the Companys behalf. In June 2004, the Company recorded a charge
for and paid a $0.5 million fee to the senior credit facility lenders for their
commitment to provide financing for the Acquisition in the event certain other
financing transactions were not completed in a timely manner. 11




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Advanced Medical Optics, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued) The term loan bears interest at current market rates plus a 2.25% margin (3.96%
per annum at September 24, 2004). Borrowings under the revolving credit
facility, if any, bear interest at current market rates plus a margin based
upon the Companys ratio of debt to EBITDA as defined. The incremental
interest margin on borrowings under the revolving credit facility decreases as
the Companys ratio of debt to EBITDA decreases to specified levels. Under the
senior credit facility, certain transactions may trigger mandatory prepayment
of borrowings, if any. Such transactions may include equity or debt offerings,
certain asset sales and extraordinary receipts. The Company pays a quarterly
fee (2.25% per annum at September 24, 2004) on the average balance of
outstanding letters of credit and a quarterly commitment fee (0.50% per annum
at September 24, 2004) on the average unused portion of the revolving credit
facility. The senior credit facility provides that the Company will maintain certain
financial and operating covenants which include, among other provisions,
maintaining specific leverage and coverage ratios. Certain covenants under the
senior credit facility and the indentures relating to the 31⁄2% convertible
senior subordinated notes due April 15, 2023 (Existing Notes) and the Notes may
limit the incurrence of additional indebtedness. The senior credit facility
prohibits dividend payments. The Company was in compliance with these
covenants at September 24, 2004. The proceeds from the term loan and a portion of the net proceeds from the
Notes aggregating $450.0 million were used to fund the Acquisition. In
addition, approximately $80.8 million of the net proceeds from the Notes were
used to consummate the June 2004 tender offer to purchase the remaining $70.0
million aggregate outstanding principal amount of the 91⁄4% senior
subordinated notes due 2010 (Senior Subordinated Notes) and pay the related
premium and consent fees. As a result of the purchase of the Senior
Subordinated Notes, the Company recorded a charge of approximately $10.8
million for the premium and consent fees paid and a net gain of $0.7 million
for the write-off of capitalized debt related costs and recognition of the
realized gain on interest rate swaps in the quarter ended June 25, 2004. On June 2, 2004, the Companys Japan subsidiary repaid its ¥2.5 billion,
approximately $22.4 million, term loan facility. As a result of the prepayment
of the term loan, a charge of $0.7 million for the write-off of capitalized
debt related costs was recorded in the quarter ended June 25, 2004. In the quarter ended June 25, 2004, the Company exchanged approximately 5.8
million shares of common stock and approximately $4.6 million in cash for
approximately $108.6 million in aggregate principal amount of Existing Notes in
privately negotiated transactions with a limited number of holders (Private
Exchanges). The Private Exchanges resulted in an aggregate increase of $216.4
million to common stock and additional paid-in capital. Because the Existing
Notes were not convertible into equity at the time of the Private Exchanges, a
non-cash charge of approximately $107.2 million and a cash charge of
approximately $4.6 million were recorded. The Company also recorded a charge
of approximately $3.2 million for the write-off of the pro-rata portion of
capitalized debt related costs. In the current quarter, the Company exchanged approximately 1.0 million shares
of common stock for approximately $18.0 million in aggregate principal amount
of Existing Notes. These exchanges resulted in an aggregate increase of $21.7
million to common stock and additional paid-in capital. A non-cash charge of
$3.5 million representing the fair value of shares issued as a premium was
recorded. During the quarter, the Company also repaid $45.0 million of the
term loan. As a result of the exchanges and the partial repayment of the term
loan, the Company recorded a charge of $1.5 million for the write-off of the
pro-rata portion of capitalized debt related costs. At September 24, 2004, an aggregate principal amount of $350.0 million of
Notes, an aggregate principal amount of $13.4 million of Existing Notes and a
balance of $205.0 million on the term loan were outstanding. The aggregate maturities of total long-term debt as of September 24, 2004 are
as follows: $1.0 million in 2004; $2.0 million in 2005, $2.1 million in 2006
and 2007; $99.4 million in 2008; and $461.8 million after 2008. In 2003 and 2002, the Company realized the value of certain interest rate swaps
qualifying as fair value hedges. The unamortized gain was recorded as an
adjustment to the carrying amount of the Senior Subordinated Notes as a premium
and was being amortized over the remaining life of the Senior Subordinated
Notes. As a result of the June 2004 purchase of the Senior Subordinated Notes,
the remaining unamortized gain on the interest rate swaps was fully recognized. 12




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Advanced Medical Optics, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued) In July 2004, the Company entered into an interest rate swap agreement which
effectively converts the interest rate on $125.0 million of term loan
borrowings from a floating rate to a fixed rate. This interest rate swap
matures in July 2006 and qualifies as a cash flow hedge. Changes in fair value
of the interest rate swap agreement are recorded in other comprehensive income
to the extent such changes are effective and as long as the cash flow hedge
requirements are met. At September 24, 2004, the fair value of $(1.0) million
of the interest rate swap is recorded in Other liabilities in the
accompanying unaudited condensed consolidated balance sheet. Note 5: Arrangements with Allergan Prior to the June 29, 2002 spin-off from Allergan, Inc. (Allergan), the Company
entered into several agreements with Allergan in connection with, among other
things, transitional services, employee matters, manufacturing and tax sharing.
These agreements generally require the Company to indefinitely indemnify
Allergan from liabilities related to the business contributed to AMO. The
transitional services agreement sets forth charges generally intended to allow
Allergan to fully recover the allocated costs of providing certain services,
plus all out-of-pocket expenses, except that AMO paid to Allergan a commission
related to AMO products that were sold by Allergan during the transition
period. The Company recovered costs from Allergan in a similar manner for
services provided by AMO. All transitional services with the exception of
limited facility leases terminated in June 2003. Under the manufacturing agreement, Allergan manufactures certain eye care
products and VITRAX® viscoelastics for a period of up to three years from the
date of the spin-off. The Company purchases these products from Allergan at a
price equal to Allergans fully allocated costs plus 10%. During the three
months ended September 24, 2004 and September 26, 2003 and during the nine
months ended September 24, 2004 and September 26, 2003, the Company purchased
$23.8 million and $21.3 million, respectively, and $67.3 million and $58.1
million, respectively, of product from Allergan. On an annual basis, a pricing
true up calculation is to be performed during the first calendar quarter.
This true up calculation is based upon the actual volume of products shipped
by Allergan to AMO during the preceding year versus the forecasted volume
submitted by AMO that was used to calculate the invoiced prices. During the
year, the Company periodically reviews the volume of purchases and accrues for
estimated shortfalls, if any. The following table summarizes the charges from Allergan for the
above-mentioned services (in thousands): Three Months Ended
    
    Nine Months EndedSeptember 24, 2004
    
    September 26, 2003
    
    September 24, 2004
    
    September 26, 2003Selling, general and
administrative
expenses, net of $511,
$249, $646 and $800
charged to Allergan
    
    $
    (82
    )
    
    $
    205
    
    
    $
    (395
    )
    
    $
    2,067Research and development
    
    
    31
    
    
    
    98
    
    
    
    185
    
    
    
    367Manufacturing true up
payment (receipt)
    
    
    
    
    
    
    
    
    
    
    233
    
    
    
    (629
    )
 Note 6: Income Taxes Income taxes are provided using an estimated annual effective tax rate, which
includes, in addition to foreign income taxes, U.S. federal income taxes and
foreign withholding taxes on the undistributed earnings of non-U.S.
subsidiaries. No income tax benefit has been recognized for the non-cash charge of
approximately $110.7 million and the cash charge of approximately $4.6 million
related to the exchanges of the Existing Notes nor for the $28.1 million
inprocess research and development charge. Note 7: Earnings (Loss) Per Share Basic earnings (loss) per share are calculated by dividing net earnings (loss)
by the weighted average number of common shares outstanding during the period.
Diluted earnings (loss) per share are calculated by adjusting weighted average
outstanding shares, assuming the conversion of all potentially dilutive stock
options and awards. 13




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Advanced Medical Optics, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued) The following represents a reconciliation from basic earnings (loss) per share
to diluted earnings (loss) per share (in thousands, except per share data): Three Months Ended
    
    Nine Months EndedSeptember 24, 2004
    
    September 26, 2003
    
    September 24, 2004
    
    September 26, 2003Net earnings (loss)
    
    $
    (31,708
    )
    
    $
    (3,664
    )
    
    $
    (139,503
    )
    
    $
    612Basic shares outstanding
    
    
    35,711
    
    
    
    29,110
    
    
    
    31,977
    
    
    
    28,962Dilutive effect of stock options and awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    312Diluted shares outstanding
    
    
    35,711
    
    
    
    29,110
    
    
    
    31,977
    
    
    
    29,274Basic earnings (loss) per share
    
    $
    (0.89
    )
    
    $
    (0.13
    )
    
    $
    (4.36
    )
    
    $
    0.02Diluted earnings (loss) per share
    
    $
    (0.89
    )
    
    $
    (0.13
    )
    
    $
    (4.36
    )
    
    $
    0.02
 The effect of approximately 7.0 million shares related to the assumed
conversion of the Notes has been excluded from the computation of diluted
earnings per share for both 2004 periods presented because none of the
conditions that would permit conversion have been satisfied during the periods.
The three and nine month periods ended September 24, 2004 exclude the
aggregate dilutive effect of 3.7 million shares and 4.3 million shares,
respectively, for stock options and the Existing Notes as the effect would be
antidilutive. The three-month period ended September 26, 2003 excludes the
dilutive effect of 1.3 million shares for stock options as the effect would be
antidilutive. Note 8: Other Comprehensive Income The following table summarizes components of comprehensive income (loss) (in
thousands): Three Months EndedSeptember 24, 2004
    
    September 26, 2003Tax
    
    
    
    
    
    
    
    
    
    TaxBefore-tax
    
    (expense)
    
    Net-of-tax
    
    Before-tax
    
    (expense)
    
    Net-of-taxamount
    
    or benefit
    
    amount
    
    amount
    
    or benefit
    
    amountUnrealized loss on derivative
    
    $
    (1,020
    )
    
    $
    357
    
    
    $
    (663
    )
    
    $
    
    
    
    $
    
    
    
    $
    Foreign currency translation adjustments
    
    
    (7,331
    )
    
    
    2,584
    
    
    
    (4,747
    )
    
    
    2,215
    
    
    
    (984
    )
    
    
    1,231Net earnings (loss)
    
    
    
    
    
    
    
    
    
    
    (31,708
    )
    
    
    
    
    
    
    
    
    
    
    (3,664
    )Total comprehensive income (loss)
    
    
    
    
    
    
    
    
    
    $
    (37,118
    )
    
    
    
    
    
    
    
    
    
    $
    (2,433
    )
 Nine Months EndedSeptember 24, 2004
    
    September 26, 2003Tax
    
    
    
    
    
    
    
    
    
    TaxBefore-tax
    
    (expense)
    
    Net-of-tax
    
    Before-tax
    
    (expense)
    
    Net-of-taxamount
    
    or benefit
    
    amount
    
    amount
    
    or benefit
    
    amountUnrealized loss on derivative
    
    $
    (1,020
    )
    
    $
    357
    
    
    $
    (663
    )
    
    $
    4,252
    
    
    $
    (1,745
    )
    
    $
    2,507Reclassification adjustment for realized loss on
derivatives included in net earnings
    
    
    

    
    
    
    
    
    
    
    
    
    
    
    (2,263
    )
    
    
    928
    
    
    
    (1,335
    )Foreign currency translation adjustments
    
    
    (8,644
    )
    
    
    3,026
    
    
    
    (5,618
    )
    
    
    7,457
    
    
    
    (3,133
    )
    
    
    4,324Net earnings (loss)
    
    
    
    
    
    
    
    
    
    
    (139,503
    )
    
    
    
    
    
    
    
    
    
    
    612Total comprehensive income (loss)
    
    
    
    
    
    
    
    
    
    $
    (145,784
    )
    
    
    
    
    
    
    
    
    
    $
    6,108
 14




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##### Table of Contents



Advanced Medical Optics, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued) Note 9: Business Segment Information Effective January 1, 2004, the Company organized its operations into four
geographic operating segments or regions: the Americas (North and South
America), Europe/Africa/Middle East, Japan and Asia Pacific (excluding Japan,
but including Australia and New Zealand). Previously, Europe/Africa/Middle
East and Asia Pacific were combined into one geographic region. Prior period
property, plant and equipment, net sales and operating income (loss) have been
reclassified to reflect the four operating segments. The United States information is presented separately as it is the Companys
headquarters country, and U.S. sales represented 25.4% and 26.2% of total net
sales for the three months ended September 24, 2004 and September 26, 2003,
respectively, and 25.3% and 25.9% of total net sales for the nine months ended
September 24, 2004 and September 26, 2003, respectively. Additionally, sales in
Japan represented 27.5% and 28.1% of total net sales for the three months ended
September 24, 2004 and September 26, 2003, respectively, and 26.1% and 27.4% of
total net sales for the nine months ended September 24, 2004 and September 26,
2003, respectively. No other country, or single customer, generates over 10%
of total net sales. Operating income attributable to each operating segment is based upon the
management assignment of costs to such regions, which includes the
manufacturing standard cost of goods produced by the Companys manufacturing
operations (or the cost to acquire goods from third parties), freight, duty and
local distribution costs, and royalties. Income from manufacturing operations is not assigned to geographic regions
because most manufacturing operations produce products for more than one
region. Research and development costs are corporate costs. Geographic Operating Segments Property, Plant and Equipment(In thousands)
    
    September 24, 2004
    
    December 31, 2003United States
    
    $
    14,141
    
    
    $
    13,732Europe/Africa/Middle East
    
    
    2,916
    
    
    
    3,457Japan
    
    
    1,754
    
    
    
    1,930Asia Pacific
    
    
    411
    
    
    
    652Americas, excluding United States
    
    
    69
    
    
    
    96Segments total
    
    
    19,291
    
    
    
    19,867Manufacturing operations
    
    
    89,265
    
    
    
    48,269Total
    
    $
    108,556
    
    
    $
    68,136
 Net Sales
    
    Operating Income (Loss)Three Months EndedSeptember 24,
    
    September 26,
    
    September 24,
    
    September 26,(In thousands)
    
    2004
    
    2003
    
    2004
    
    2003United States
    
    $
    50,386
    
    
    $
    39,613
    
    
    $
    17,624
    
    
    $
    9,257Europe/Africa/Middle East
    
    
    66,131
    
    
    
    49,731
    
    
    
    19,333
    
    
    
    11,021Japan
    
    
    54,552
    
    
    
    42,498
    
    
    
    25,372
    
    
    
    15,060Asia Pacific
    
    
    18,971
    
    
    
    12,720
    
    
    
    3,481
    
    
    
    1,030Americas, excluding United States
    
    
    8,326
    
    
    
    6,590
    
    
    
    1,491
    
    
    
    1,119Segments total
    
    
    198,366
    
    
    
    151,152
    
    
    
    67,301
    
    
    
    37,487Manufacturing operations
    
    
    
    
    
    
    
    
    
    
    9,110
    
    
    
    6,951Research and
development, including IPR&D
    
    
    
    
    
    
    
    
    
    
    (39,930
    )
    
    
    (9,256
    )Elimination of inter-company profit
    
    
    
    
    
    
    
    
    
    
    (16,846
    )
    
    
    (8,195
    )General corporate
    
    
    
    
    
    
    
    
    
    
    (38,626
    )
    
    
    (9,736
    )Total
    
    $
    198,366
    
    
    $
    151,152
    
    
    $
    (18,991
    )
    
    $
    17,251
 15




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##### Table of Contents



Advanced Medical Optics, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued) Net Sales
    
    Operating Income (Loss)Nine Months EndedSeptember 24,
    
    September 26,
    
    September 24,
    
    September 26,(In thousands)
    
    2004
    
    2003
    
    2004
    
    2003United States
    
    $
    130,850
    
    
    $
    112,561
    
    
    $
    40,764
    
    
    $
    25,509Europe/Africa/Middle East
    
    
    181,334
    
    
    
    151,482
    
    
    
    52,320
    
    
    
    33,205Japan
    
    
    134,871
    
    
    
    119,095
    
    
    
    53,581
    
    
    
    37,342Asia Pacific
    
    
    48,231
    
    
    
    32,708
    
    
    
    8,494
    
    
    
    1,104Americas, excluding United States
    
    
    22,128
    
    
    
    18,618
    
    
    
    3,480
    
    
    
    2,023Segments total
    
    
    517,414
    
    
    
    434,464
    
    
    
    158,639
    
    
    
    99,183Manufacturing operations
    
    
    
    
    
    
    
    
    
    
    10,366
    
    
    
    22,145Research and
development, including IPR&D
    
    
    
    
    
    
    
    
    
    
    (59,143
    )
    
    
    (26,996
    )Elimination of inter-company profit
    
    
    
    
    
    
    
    
    
    
    (26,883
    )
    
    
    (26,869
    )General corporate
    
    
    
    
    
    
    
    
    
    
    (73,905
    )
    
    
    (28,864
    )Total
    
    $
    517,414
    
    
    $
    434,464
    
    
    $
    9,074
    
    
    $
    38,599
 In each geographic segment, the Company markets products in two product lines:
Ophthalmic Surgical and Eye Care. The Ophthalmic Surgical product line markets
intraocular lenses, phacoemulsification equipment, viscoelastics,
glaucoma shunts and other
products related to cataract and refractive surgery. The Eye Care product line
markets cleaning, storage and disinfection products for the consumer contact
lens market. The Company provides global marketing strategy teams to ensure
development and execution of a consistent marketing strategy for products in
all geographic operating segments. There are no transfers between product
lines. Net Sales by Product Line Three Months Ended
    
    Nine Months EndedSeptember 24,
    
    September 26,
    
    September 24,
    
    September 26,(In thousands)
    
    2004
    
    2003
    
    2004
    
    2003Ophthalmic Surgical
    
    $
    113,496
    
    
    $
    74,157
    
    
    $
    278,431
    
    
    $
    219,982Eye Care
    
    
    84,870
    
    
    
    76,995
    
    
    
    238,983
    
    
    
    214,482Total Net Sales
    
    $
    198,366
    
    
    $
    151,152
    
    
    $
    517,414
    
    
    $
    434,464
 Note 10: Commitments and Contingencies On December 3, 2003, the Company filed a complaint in the U.S. District Court
for the District of Delaware against Alcon, Inc. and Alcon Laboratories, Inc.
for infringement of U.S. Patent Nos. 5,700,240 and 6,059,765. The Company
alleged that Alcons Infiniti and Series 2000 Legacy phacoemulsification
machines infringe the patents. The Company is seeking damages and a permanent
injunction. On January 28, 2004, Alcon Manufacturing, Ltd. filed a complaint against the
Company and Allergan, Inc. in the U.S. District Court for the Northern District
of Texas, Fort Worth Division, for infringement of U.S. Patent Nos. 4,832,685
and 4,935,005. Alcon alleged that the Companys Prestige®and Sovereign®
phacoemulsification systems and replacement cassettes infringe the patents.
Alcon is seeking damages and a permanent injunction. While the amount claimed
may be substantial, the ultimate liability cannot be determined or reasonably
estimated at this time due to the considerable uncertainties that exist. The Company is involved in various litigation and claims arising in the normal
course of business. Management believes that recovery or liability with
respect to any other pending lawsuits or asserted claims will not have a
material adverse effect on the Companys consolidated financial position,
results of operations or cash flows. 16




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Advanced Medical Optics, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements (continued) Note 11: Pension Benefit Plans The Company sponsors defined benefit pension plans in Japan and in certain
European countries. Components of net periodic benefit cost under these plans
were (in thousands): Three Months Ended
    
    Nine Months EndedSeptember 24, 2004
    
    September 26, 2003
    
    September 24, 2004
    
    September 26, 2003Service cost
    
    $
    446
    
    
    $
    345
    
    
    $
    1,348
    
    
    $
    1,035Interest cost
    
    
    115
    
    
    
    92
    
    
    
    346
    
    
    
    275Expected return on plan assets
    
    
    (48
    )
    
    
    (27
    )
    
    
    (147
    )
    
    
    (83
    )Amortization of transition amount
    
    
    1
    
    
    
    
    
    
    
    3
    
    
    
    2Amortization of prior service cost
    
    
    16
    
    
    
    14
    
    
    
    47
    
    
    
    44Recognized net actuarial loss
    
    
    9
    
    
    
    6
    
    
    
    27
    
    
    
    17Net periodic benefit cost
    
    $
    539
    
    
    $
    430
    
    
    $
    1,624
    
    
    $
    1,290
 17




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ADVANCED MEDICAL OPTICS 
  The following discussion and analysis presents the factors that had a material
effect on AMOs cash flows and results of operations during the three and nine
months ended September 24, 2004, and the Companys financial position at that
date. Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risk and
uncertainties. Our actual results may differ significantly from the results
discussed in the forward-looking statements. Factors that might cause such
differences include, but are not limited to, those discussed in the subsection
entitled Certain Factors and Trends Affecting AMO and Its Businesses. The
following discussion should be read in conjunction with the 2003 Form 10-K and
the condensed consolidated financial statements and notes thereto included
elsewhere in this Form 10-Q. OVERVIEW We are a global leader in the development, manufacture and marketing of medical
devices for the eye and contact lens care products. Our products in the
ophthalmic surgical market include intraocular lenses, phacoemulsification
systems, viscoelastics, glaucoma shunts and surgical packs used in cataract
surgery, and microkeratomes used in refractive surgery. Our eye care products
include disinfecting solutions to destroy harmful microorganisms in and on the
surface of contact lenses, daily cleaners to remove undesirable film and
deposits from contact lenses, enzymatic cleaners to remove protein deposits
from contact lenses and lens rewetting drops to provide added wearing comfort. We have operations in approximately 20 countries, sell our products in
approximately 60 countries and have organized our operations into four regions:  
    
    Americas (North and South America);  
    
    Europe, Africa and Middle East;  
    
    Japan; and  
    
    Asia Pacific (excluding Japan, but including Australia and New Zealand). Acquisition of Pfizer Inc. Surgical Ophthalmic Business On June 26, 2004, we completed the acquisition of the Pfizer Inc. surgical
ophthalmic business for $450 million in cash (Acquisition). We acquired
ophthalmic surgical products and certain manufacturing and research and
development facilities located in Uppsala, Sweden, Groningen, Netherlands and
Bangalore, India. The products acquired include the Healon®line of
viscoelastic products used in ocular surgery, the CeeOn®and Tecnis®
intraocular lenses and the Baerveldt®glaucoma shunt. These assets generated
sales of approximately $150 million in 2003. The Acquisition has been accounted for as a purchase business combination.
Under the purchase method of accounting, the assets acquired and liabilities
assumed are recorded at the date of acquisition, at their respective fair
values. Our reported financial position and results of operations after June
26, 2004 reflect these values. The impact of purchase accounting resulted in
significant non-cash charges in the three months ended September 24, 2004,
including an in-process research and development charge of $28.1 million and
incremental cost of sales of $14.1 million from the sale of acquired inventory
adjusted to fair value. During the quarter, we also incurred other
acquisition-related charges totaling approximately $6.9 million as we
integrated the Acquisition and eliminated duplicative functions. Separation from Allergan On June 29, 2002, Allergan, Inc. (Allergan) transferred its optical medical
device business, consisting of the ophthalmic surgical and eye care product
lines, to us in connection with a tax-free spin-off. Prior to the spin-off, we
entered into several agreements with Allergan in connection with, among other
things, transitional services, employee matters, manufacturing and tax sharing. 18




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Advanced Medical Optics, Inc. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 24, 2004 OVERVIEW (continued) Under the manufacturing agreement, Allergan manufactures certain eye care
products and VITRAX® viscoelastics for a period of up to three years from the
date of the spin-off. The Company purchases these products from Allergan at a
price equal to Allergans fully allocated costs plus 10%. During the three
months ended September 24, 2004 and September 26, 2003 and during the nine
months ended September 24, 2004 and September 26, 2003, the Company purchased
$23.8 million and $21.3 million, respectively, and $67.3 million and $58.1
million, respectively, of product from Allergan. On an annual basis, a pricing
true up calculation is to be performed during the first calendar quarter.
This true up calculation is based upon the actual volume of products shipped
by Allergan to AMO during the preceding year versus the forecasted volume
submitted by AMO that was used to calculate the invoiced prices. During the
year, the Company periodically reviews the volume of purchases and accrues for
estimated shortfalls, if any. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Revenue and Accounts Receivable We recognize revenue from product sales when title and risk of loss transfers,
delivery has occurred, the price to the buyer is determinable and
collectibility is reasonably assured, with the exception of intraocular lenses,
which are generally distributed on a consignment basis and recognized as
revenue upon notification of implantation in a patient and fulfillment of the
other revenue recognition criteria. We generally permit returns of product
from a customer if the product is returned in a timely manner, in good
condition, and through the normal channels of distribution. Return policies in
certain international markets can be more stringent and are based on the terms
of contractual agreements with customers. Allowances for returns are provided
for based upon an analysis of our historical patterns of returns matched
against the sales from which they originated. Historically, product returns
have been within the amounts estimated. The allowance for doubtful accounts is determined by analyzing specific
customer accounts and assessing the risk of uncollectibility based on
insolvency, disputes or other collection issues. In addition, we routinely
analyze the different receivable aging categories and establish allowances
based on the length of time receivables are past due. Inventories Inventories are valued at the lower of first-in, first-out cost or market. On
a regular basis, we evaluate inventory balances for excess quantities and
obsolescence by analyzing estimated demand, inventory on hand, sales levels and
other information. Based on these evaluations, inventory balances are reduced,
if necessary. Impairment of Long-Lived Assets On January 1, 2002, we adopted Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets, whereby goodwill is no longer
amortized, but instead is subject to a periodic impairment review. As our
operations are comprised of four reporting units, we review the recoverability
of our goodwill at the end of the second fiscal quarter of each year by
comparing each reporting units fair value to the net book value of its assets.
If the book value of the reporting units assets exceeds its fair value, the
goodwill is written down to its implied fair value. Additionally, we review the carrying amounts of goodwill and other intangibles
whenever events and circumstances indicate that the carrying amount of an asset
may not be recoverable. Impairment indicators include, among other conditions,
cash flow deficits, historic or anticipated declines in revenue or operating
profit and adverse legal or regulatory developments. If it is determined that
such indicators are present and the review indicates that the assets will not
be fully recoverable, based upon undiscounted estimated cash flows over the
remaining amortization periods for other intangibles and fair value for
goodwill, their carrying values are reduced to estimated fair market value.
Estimated fair market value is determined primarily using the anticipated cash
flows discounted at a rate commensurate with the risk involved. For the
purposes of identifying and measuring impairment, long-lived assets are grouped
with other assets and liabilities at the lowest level for which identifiable
cash flows are largely independent of the cash flows of other assets and
liabilities. 19




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Advanced Medical Optics, Inc. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 24, 2004 CRITICAL ACCOUNTING POLICIES AND ESTIMATES (Continued) Deferred Taxes We account for income taxes under the asset and liability method, whereby
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. We evaluate the need to establish a valuation
allowance for deferred tax assets based upon the amount of existing temporary
differences, the period in which they are expected to be recovered and expected
levels of taxable income. A valuation allowance to reduce deferred tax assets
is established when it is more likely than not that some or all of the
deferred tax assets will not be realized. Stock-Based Compensation We measure stock-based compensation for option grants to employees and members
of the board of directors using the intrinsic value method. Acquired In-Process Research and Development Costs to acquire in-process research and development projects and technologies
which have no alternative future use and which have not reached technological
feasibility at the date of acquisition are expensed as incurred. RESULTS OF OPERATIONS Net Sales.The following table compares net sales by product line for the three
months and nine months ended September 24, 2004 and September 26, 2003: Three Months Ended
    
    Nine Months Ended(in thousands)
    
    September 24, 2004
    
    September 26, 2003
    
    September 24, 2004
    
    September 26, 2003Ophthalmic Surgical
    
    $
    113,496
    
    
    $
    74,157
    
    
    $
    278,431
    
    
    $
    219,982Eye Care
    
    
    84,870
    
    
    
    76,995
    
    
    
    238,983
    
    
    
    214,482Total Net Sales
    
    $
    198,366
    
    
    $
    151,152
    
    
    $
    517,414
    
    
    $
    434,464Domestic
    
    
    25.4
    %
    
    
    26.2
    %
    
    
    25.3
    %
    
    
    25.9
    %International
    
    
    74.6
    %
    
    
    73.8
    %
    
    
    74.7
    %
    
    
    74.1
    %
 Net sales increased $47.2 million, or 31.2%, to $198.4 million in the three
months ended September 24, 2004 from $151.2 million in the three months ended
September 26, 2003. Net sales for the nine months ended September 24, 2004
were $517.4 million, a 19.1% increase from the comparable 2003 amount. The
increase in net sales in the three and nine months ended September 24, 2004
compared with the same periods last year was the result of sales of products
acquired in the Acquisition, sales gains of existing products in both product
lines and favorable foreign currency changes. Net sales of acquired products
approximated $32.3 million in the three and nine months ended September 24,
2004. Foreign currency fluctuations, particularly related to the Japanese yen
and the euro, increased sales by $8.9 million, or 5.9%, and $28.6 million, or
6.6%, in the three and nine months ended September 24, 2004, respectively, as
compared to average rates in effect in the prior year periods. Our sales and
earnings may be negatively impacted during times of a strengthening U.S.
dollar. 20




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Advanced Medical Optics, Inc. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 24, 2004 RESULTS OF OPERATIONS (continued) Global sales of our ophthalmic surgical products, including net sales of $32.3
million of acquired products, increased $39.3 million, or 53.0%, and increased
$58.4 million, or 26.6%, in the three and nine months ended September 24, 2004,
respectively, compared with the same periods last year. In the United States,
sales of our ophthalmic surgical products increased $9.8 million, or 35.9%, in
the three months ended September 24, 2004, and increased $13.0 million, or
16.3%, in the nine months ended September 24, 2004 compared with the same
periods last year, primarily due to sales of acquired products, including the
Healon®family of viscoelastics and Tecnis®intraocular lenses, and increased
sales of phacoemulsification equipment. International sales of our ophthalmic
surgical products increased $29.5 million, or 63.0%, and increased $45.4
million, or 32.3%, in the three and nine months ended September 24, 2004,
respectively, compared with the same periods last year, primarily due to sales
of acquired products, including the Healon®family of viscoelastics and the
CeeOn®and Tecnis®intraocular lenses, increases in sales of the SENSAR®
intraocular lenses and phacoemulsification equipment and favorable currency
changes. Foreign currency fluctuations increased ophthalmic surgical sales by
$4.7 million, or 6.3%, and by $14.1 million, or 6.4%, in the three and nine
months ended September 24, 2004, respectively. We believe that global sales of
ophthalmic surgical products will continue to grow due to sales of acquired
products, including the Healon®family of viscoelastics, the CeeOn®and Tecnis®
intraocular lenses and the Baerveldt®glaucoma shunt, and increased sales of
our SOVEREIGN® COMPACTwith WHITESTARphacoemulsification system and the
SENSAR® and the CLARIFLEX®intraocular lenses, both with the OPTIEDGEdesign. Global sales of our eye care products increased $7.9 million, or 10.2%, and
increased $24.5 million, or 11.4%, in the three and nine months ended September
24, 2004, respectively, as compared with the same periods last year. Sales of
our eye care products in the United States increased $1.0 million, or 8.1%, and
increased $5.3 million, or 16.0%, in the three and nine months ended September
24, 2004, respectively, as compared with the same periods last year, primarily
due to an increase in sales of COMPLETE®branded products. International sales
of our eye care products increased $6.9 million, or 10.6%, and increased $19.2
million, or 10.6%, in the three and nine months ended September 24, 2004,
respectively, as compared with the same periods last year, primarily due to an
increase in sales of our COMPLETE®branded and hydrogen peroxide-based products
and favorable currency changes. Foreign currency fluctuations increased eye
care sales by $4.2 million, or 5.5%, and by $14.5 million, or 6.8%, in the
three and nine months ended September 24, 2004, respectively. We believe that
global eye care sales will continue to grow due to increased sales of our
COMPLETE® branded and hydrogen peroxide-based products and continued sales
growth in Europe and Asia Pacific. The market for eye care products is
impacted by trends in the contact lens market, such as advances in surgical
procedures for vision correction and the growth of the market for daily and
extended wear lenses. These trends could reduce demand for lens care products
generally, which we may not be able to completely mitigate. Gross margin.Our gross margin was 55.2% of net sales in the three months
ended September 24, 2004, a decrease of 7.1 percentage points from the
comparable prior year period. Our gross margin was 58.9% of net sales in the
nine months ended September 24, 2004, a decrease of 3.4 percentage points from
the comparable prior year period. The decrease in gross margin as a percent of
net sales in the three and nine months ended September 24, 2004 as compared to
the same periods last year was primarily due to the incremental cost of sales
of $14.1 million from the sale of acquired inventory adjusted to fair value.
As the acquired inventory is sold, we expect our gross margin to return to
historical levels. In addition, pre-production costs incurred at our
manufacturing facility in Madrid, Spain, costs incurred for expansion of our
manufacturing facility in Hangzhou, China, and higher costs of product supplied
by Allergan contributed to the margin decrease, which was partially offset by
sales growth in the higher margin COMPLETE® branded line of eye care products.
During the remainder of 2004, we expect our eye care product gross margin
percentage will continue to be unfavorably impacted by the sale of acquired
inventory adjusted to fair value and higher costs of product supplied by
Allergan. Selling, general and administrative.Selling, general and administrative
expenses were $88.5 million, or 44.6% of net sales, and $236.6 million, or
45.7% of net sales, in the three and nine months ended September 24, 2004,
respectively, compared to $67.6 million, or 44.7% of net sales, and $205.1
million, or 47.2% of net sales, in the three and nine months ended September
26, 2003, respectively. Selling, general and administrative expenses for the
three and nine months ended September 24, 2004 include increased sales and
marketing costs related to the acquired products and also include
acquisition-related charges totaling approximately $6.9 million and
amortization of $2.7 million related to the acquired intangible assets. 21




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Advanced Medical Optics, Inc. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 24, 2004 RESULTS OF OPERATIONS (continued) Research and development.Research and development expenses were $11.8 million,
or 6.0% of net sales, and $31.0 million, or 6.0% of net sales, in the three and
nine months ended September 24, 2004, respectively, compared to $9.3 million,
or 6.1% of net sales, and $27.0 million, or 6.2% of net sales, in the three and
nine months ended September 26, 2003, respectively. The increase in research
and development dollars was primarily the result of increased spending for
research efforts in the ophthalmic surgical business. As a result of our
continued investment in research and development and other business development
activities, we launched our new vitreal retinal system, AMO GEMINI,in Europe,
a capsular tension ring in North America, the ReZoomintraocular lens in
Europe, an advanced formulation of our blinkcontact lens rewetter in the U.S.
and Europe, the VERISYSEphakic intraocular lens for correction of myopia in
the U.S., and expect to bring to market later this year our next generation
microkeratome and enhancements to our phacoemulsification platform. In-process research and development.In the three and nine months ended
September 24, 2004, we recorded a $28.1 million in-process research and
development charge. The charge represents the estimated fair value of projects
that, as of the acquisition date, had not reached technological feasibility and
had no alternative future use. Non-operating expense.Interest expense was $8.4 million and $19.3 million in
the three and nine months ended September 24, 2004, respectively, compared to
$5.9 million and $20.4 million in the three and nine months ended September 26,
2003, respectively. Interest expense increased in the three months ended
September 24, 2004 as compared to the prior year period due to a higher average
debt balance. Interest expense in the three months ended September 24, 2004 includes a
pro-rata write-off of debt issuance costs of $1.5 million as a result of the
exchange of $18.0 million aggregate principal amount of 31⁄2% convertible
senior subordinated notes due April 15, 2023 (Existing Notes) and partial
repayment of the term loan. Interest expense in the nine months ended
September 24, 2004 includes a pro-rata write-off of debt issuance costs and
one-time commitment fee of $7.6 million and write-off of original issue
discount of $0.7 million, partially offset by the recognition of realized gains
on interest rate swaps of $(3.2) million, all associated with the prepayment of
the Japan term loan in June 2004, consummation of the June 2004 tender offer
for $70.0 million aggregate principal amount of 91⁄4% senior subordinated
notes (Senior Subordinated Notes), and the exchange of $126.6 million aggregate
principal amount of the Existing Notes for common stock and cash. Interest expense in the three months ended September 26, 2003 includes a
pro-rata write-off of debt issuance costs and original issue discount of $5.4
million, partially offset by the recognition of realized gains on interest
rates swaps of $(4.2) million resulting from the tender offer and repurchase of
Senior Subordinated Notes. Interest expense in the nine months ended September
26, 2003 includes similar costs of $5.8 million, net of the recognition of
realized gains on interest rate swaps, resulting from the tender offer and
repurchase of Senior Subordinated Notes and prepayment of a term loan. We recorded an unrealized gain on derivative instruments of $0.3 million and
$0.8 million in the three and nine months ended September 24, 2004,
respectively, compared to an unrealized gain of $0.3 million and $0.1 million
in the three and nine months ended September 26, 2003, respectively. We record
as unrealized (gain) loss on derivative instruments the mark to market
adjustments on the outstanding foreign currency options which we enter into as
part of our overall risk management strategy to reduce the volatility of
expected earnings in currencies other than the U.S. dollar. Other non-operating expense for the three and nine months ended September 24,
2004 includes early debt extinguishment costs aggregating $3.5 million and
$126.2 million, respectively, associated with the debt transactions noted
above. Other non-operating expense for the three and nine months ended
September 26, 2003 includes early debt extinguishment costs of $19.4 million
associated with the tender offer and repurchase of Senior Subordinated Notes,
partially offset by foreign exchange gains and interest income. 22




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Advanced Medical Optics, Inc. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 24, 2004 RESULTS OF OPERATIONS (continued) Income taxes.The effective tax rate for the three and nine months ended
September 24, 2004 was zero and 1.5%, respectively, compared to the effective
tax rate of 41.0% for the three and nine months ended September 26, 2003.
Excluding the non-cash charge of approximately $110.7 million and the cash
charge of approximately $4.6 million related to the exchange of the Existing
Notes and the $28.1 million in-process research and development, as no tax
benefit for these charges has been recognized, the 2004 effective tax rate
would have been 35.0%. Management believes that presentation of this adjusted
effective tax rate is useful because it is more representative of ongoing
operations. The lower rate in 2004 reflects continuing implementation of our
long-term tax strategies, the changes in our capital structure and ongoing
improvements in our global supply chain. Income taxes are provided on taxable
income at the statutory rates applicable to such income. We have provided for
U.S. federal income taxes and foreign withholding taxes on the undistributed
earnings of non-U.S. subsidiaries. We believe our future effective income tax rate may vary depending on our mix
of domestic and international taxable income or loss and the various tax and
treasury methodologies that we implement, including our policy regarding
repatriation of future accumulated foreign earnings. LIQUIDITY AND CAPITAL RESOURCES Management assesses our liquidity by our ability to generate cash to fund
operations. Significant factors in the management of liquidity are: funds
generated by operations; levels of accounts receivable, inventories, accounts
payable and capital expenditures; adequate lines of credit; and financial
flexibility to attract long-term capital on satisfactory terms. Historically, we have generated cash from operations in excess of working
capital requirements, and we expect to do so in the future. Net cash provided
by operating activities was $8.0 million in the nine months ended September 24,
2004 compared to net cash provided by operating activities of $11.4 million in
the nine months ended September 26, 2003. Operating cash flow decreased in the
nine months ended September 24, 2004 compared to the nine months ended
September 26, 2003, primarily due to an increase in trade receivables of $52.4
million, partially offset by an increase in accounts payable of $36.4 million.
The increase in trade payables and receivables is primarily due to
acquisition-related activities. Net cash used in investing activities was $471.5 million and $11.4 million in
the nine months ended September 24, 2004 and September 26, 2003, respectively.
The 2004 amount includes the $456.7 million Acquisition purchase price.
Expenditures for property, plant and equipment totaled $9.0 million and $6.2
million in the nine months ended September 24, 2004 and September 26, 2003,
respectively. The 2004 expenditures are primarily comprised of expansion of our
manufacturing facilities in preparation for the transition away from the
Allergan manufacturing agreement, capital expenditures at the acquired
manufacturing facilities and construction of research and development
facilities at our leased headquarters. We expect to incur significant capital
expenditures with respect to the Uppsala, Sweden manufacturing facility during
the next two years in order to separate the facility from existing Pfizer
operations. The 2003 expenditures are primarily comprised of improvements to
our leased headquarters, expansion of manufacturing facilities and a variety of
other projects designed to improve productivity. We expect to invest a total
of approximately $15.0 million to $20.0 million in property, plant and
equipment in 2004. Expenditures for demonstration (demo) and bundled
equipment, primarily phacoemulsification and microkeratome surgical equipment,
were $5.1 million and $5.4 million in the nine months ended September 24, 2004
and September 26, 2003, respectively. We maintain demo and bundled equipment
to facilitate future sales of similar equipment and related products to our
customers. We expect to invest a total of approximately $6.0 million to $8.0
million in demo and bundled equipment in 2004. Expenditures for capitalized
internal-use software were $0.7 million and $0.2 in the nine months ended
September 24, 2004 and September 26, 2003, respectively. We expect to invest a
total of approximately $1.0 million to $3.0 million in capitalized internal-use
software in 2004. Net cash provided by financing activities was $450.3 million in the nine months
ended September 24, 2004, which was primarily comprised of $350.0 million of
proceeds from the issuance of 21⁄2% convertible senior subordinated notes due
2024 (Notes) and a $250.0 term loan, partially offset by repayment of debt of
$138.2 million and financing related costs of $16.6 million. Net cash used for
financing activities was $46.6 million in the nine months ended September 26,
2003, which was primarily comprised of $162.4 million of long-term borrowings,
partially offset by long-term debt repayments of $205.0 million and financing
related costs of $7.3 million. 23




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Advanced Medical Optics, Inc. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 24, 2004 LIQUIDITY AND CAPITAL RESOURCES (Continued) In June 2004, the following transactions occurred: our Japan subsidiary repaid
its ¥2.5 billion, approximately $22.4 million, term loan facility; we
consummated the offering of $350.0 million of the Notes; we consummated a
tender offer to repurchase the remaining $70.0 million aggregate principal
amount of Senior Subordinated Notes; and we exchanged $108.6 million aggregate
principal amount of Existing Notes for common stock and cash. In addition, in
June 2004 we amended and restated our senior credit facility to provide a
$250.0 million term loan and a $100.0 million revolving credit facility. As of
September 24, 2004, we did not have any borrowings outstanding under the
revolving credit facility. In the three months ended September 24, 2004, we exchanged an additional $18.0
million aggregate principal amount of Existing Notes for approximately 1.0
million shares of common stock and repaid $45.0 million of the term loan. Our cash position includes amounts denominated in foreign currencies, and the
repatriation of those cash balances from some of our non-U.S. subsidiaries will
result in additional tax costs. However, these cash balances are generally
available without legal restriction to fund ordinary business operations. We believe that the expected net cash provided by our operating activities,
supplemented as necessary with borrowings available under our senior credit
facility and existing cash and equivalents, will provide sufficient resources
to meet our working capital requirements, debt service and other cash needs
over the next year. We are partially dependent upon the reimbursement policies of government and
private health insurance companies. Government and private sector initiatives
to limit the growth of health care costs, including price regulation and
competitive pricing, are continuing in many countries where we do business. As
a result of these changes, the marketplace has placed increased emphasis on the
delivery of more cost-effective medical therapies. While we have been unaware
of significant price resistance resulting from the trend toward cost
containment, changes in reimbursement policies and other reimbursement
methodologies and payment levels could have an adverse effect on our pricing
flexibility. Additionally, the current trend among U.S. hospitals and other customers of
medical device manufacturers is to consolidate into larger purchasing groups to
enhance purchasing power. The enhanced purchasing power of these larger
customers may also increase the pressure on product pricing, although we are
unable to estimate the potential impact at this time. Inflation.Although at reduced levels in recent years, inflation may cause
upward pressure on the cost of goods and services used by us. The competitive
and regulatory environments in many markets substantially limit our ability to
fully recover these higher costs through increased selling prices. We
continually seek to mitigate the adverse effects of inflation through cost
containment and improved productivity and manufacturing processes. Foreign currency fluctuations.Approximately 75% of our revenues for the nine
months ended September 24, 2004 were derived from operations outside the United
States, and a significant portion of our cost structure is denominated in
currencies other than the U.S. dollar, primarily the Japanese yen and the euro.
Therefore, we are subject to fluctuations in sales and earnings reported in
U.S. dollars as a result of changing currency exchange rates. The impact of foreign currency fluctuations on sales was an $8.9 million
increase and a $28.6 million increase for the three and nine months ended
September 24, 2004, respectively, and a $7.4 million increase and a $32.5
million increase for the three and nine months ended September 26, 2003,
respectively. . 24




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##### Table of Contents



Advanced Medical Optics, Inc. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 24, 2004 LIQUIDITY AND CAPITAL RESOURCES (Continued) Contractual obligations.The following represents a list of our material
contractual obligations and commitments as of September 24, 2004: Payments Due by Year(In millions)
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    TotalLong-term debt
    
    $
    1.0
    
    
    $
    2.0
    
    
    $
    2.1
    
    
    $
    2.1
    
    
    $
    99.4
    
    
    $
    461.8
    
    
    $
    568.4Lease obligations
    
    
    4.2
    
    
    
    12.4
    
    
    
    7.1
    
    
    
    4.9
    
    
    
    4.2
    
    
    
    25.4
    
    
    
    58.2IT services
    
    
    1.3
    
    
    
    5.4
    
    
    
    5.2
    
    
    
    4.7
    
    
    
    
    
    
    
    
    
    
    
    16.6Other purchase
obligations,
primarily purchases
of inventory and
capital equipment
    
    
    42.2
    
    
    
    3.1
    
    
    
    0.8
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    
    
    
    
    47.1
 
 CERTAIN FACTORS AND TRENDS AFFECTING AMO AND ITS BUSINESSES Certain statements we made in this report and in other reports and statements
released by us constitute forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995, such as comments which
express our opinions about trends and factors which may impact future operating
results. Disclosures that use words such as we believe, anticipate,
expect and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from expectations. Any
such forward-looking statements, whether made in this report or elsewhere,
should be considered in context with the various disclosures made by us about
our businesses including, without limitation, the factors discussed below:  
    
    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
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 shareholders.  
    
    WE HAVE A SIGNIFICANT AMOUNT OF DEBT WHICH CONTAINS COVENANTS THAT MAY
LIMIT OUR ACTIVITIES. This level of debt could limit cash flows
available for working capital, capital expenditures, acquisitions and
other corporate purposes, could limit our ability to obtain additional
financing and could limit our flexibility to react to competitive or
other changes in our industry, and to economic conditions generally.
Our ability to comply with loan covenants and to repay or refinance
our indebtedness will depend upon our future operating performance,
which will be affected by general economic, financial, competitive,
legislative, regulatory and other factors beyond our control. 25




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Advanced Medical Optics, Inc. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 24, 2004 CERTAIN FACTORS AND TRENDS AFFECTING AMO AND ITS BUSINESSES (Continued)  
    
    WE MAY BE REQUIRED TO SATISFY CERTAIN INDEMNIFICATION OBLIGATIONS TO
ALLERGAN, OR MAY NOT BE ABLE TO COLLECT ON INDEMNIFICATION RIGHTS FROM
ALLERGAN. Under the terms of the contribution and distribution
agreement, we and Allergan have each agreed to indemnify each other
from and after the spin-off with respect to the indebtedness,
liabilities and obligations retained by our respective companies.
These indemnification obligations could be significant. The ability to
satisfy these indemnities, if required to do so, will depend upon the
future financial strength of each of our companies. We cannot
determine whether we will have to indemnify Allergan for any
substantial obligations, and we do not have control over or clear
visibility to the settlement of certain claims and lawsuits which
require partial indemnification by us, such as employment-related
claims. We also cannot assure you that if Allergan is obligated 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 we 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.  
    
    WE FACE INTENSE COMPETITION AND OUR FAILURE TO COMPETE EFFECTIVELY
COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR PROFITABILITY AND RESULTS
OF OPERATIONS. The markets for our ophthalmic surgical device and eye
care products are intensely competitive and are subject to rapid and
significant technological change. Many of our competitors have
substantially more resources and a greater marketing scale than we do.
If we are unable to develop and produce or market our products to
effectively compete against our competitors, our operating results
will materially suffer. In addition, alternative vision correction
solutions could reduce demand for our refractive intraocular lenses or
could reduce contact lens use thereby reducing demand for our contact
lens care products.  
    
    OUR BUSINESS IS SUBJECT TO EXTENSIVE GOVERNMENT REGULATION.
Compliance with these regulations is expensive and time-consuming;
and, if we fail to comply, we may be subject to fines, injunctions and
penalties that could harm our business. Failure to obtain regulatory
clearance or approvals of new products we develop, any limitations
imposed by regulatory agencies on the use of new products or the costs
of obtaining regulatory clearance or approvals could have a material
adverse effect on our business, financial condition and results of
operations. In addition, if we or our subcontractors fail to comply
with applicable manufacturing regulations, our business could be
harmed. Health care initiatives and other cost-containment pressures
could cause us to sell our products at lower prices, resulting in less
revenue to us.  
    
    WE COULD EXPERIENCE LOSSES DUE TO PRODUCT LIABILITY CLAIMS OR PRODUCT
RECALLS OR CORRECTIONS. We have in the past been, and continue to be,
subject to recalls and product liability claims. We have assumed the
defense of any litigation involving claims related to our business and
will indemnify Allergan for all related losses, costs and expenses. As
part of our risk management policy, we have obtained third-party
product liability insurance coverage. Product liability claims
against us may exceed the coverage limits of our insurance policies or
cause us to record a self-insured loss. Even if any product liability
loss is covered by an insurance policy, these policies have
substantial retentions or deductibles that provide that we will not
receive insurance proceeds until the losses incurred exceed the amount
of those retentions or deductibles. To the extent that any losses are
below these retentions or deductibles, we will be responsible for
paying these losses. A product liability claim in excess of applicable
insurance could have a material adverse effect on our reputation,
business, financial position and results of operations. 26




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Advanced Medical Optics, Inc. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 24, 2004 CERTAIN FACTORS AND TRENDS
AFFECTING AMO AND ITS BUSINESSES (Continued)  
    
    WE CONDUCT A SIGNIFICANT AMOUNT OF OUR SALES AND OPERATIONS OUTSIDE OF
THE UNITED STATES, WHICH SUBJECTS US TO ADDITIONAL BUSINESS RISKS,
SUCH AS BUSINESS INTERRUPTION, INCREASED COSTS AND CURRENCY EXCHANGE
RATE FLUCTUATIONS, WHICH MAY CAUSE OUR PROFITABILITY TO DECLINE. Our
three manufacturing sites are located outside the continental United
States, in Añasco, Puerto Rico, Madrid, Spain, and Hangzhou, China. As
a result of the Acquisition, we also have manufacturing and R&D
facilities in Groningen, Netherlands, Uppsala, Sweden and Bangalore,
India. In the nine months ended September 2004 and in fiscal year
2003, we derived approximately $386.6 million, or 75% of our net
sales, and $448.0 million, or 74% of our total net sales,
respectively, from sales of our products outside of the United States.
In addition, in the nine months ended September 2004 and in fiscal
year 2003 we derived approximately 26% and 27%, respectively, from our
net sales in Japan. 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 foreign 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.  
    
    IF WE ARE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, OUR
BUSINESS AND PROSPECTS MAY BE HARMED. Our ability to compete
effectively is dependent upon the proprietary nature of the designs,
processes, technologies and materials owned, used by or licensed to
us. Although we attempt to protect our proprietary property,
technologies and processes through a combination of patent law, trade
secrets and non-disclosure agreements, these may be insufficient.  
    
    WE ARE SUBJECT TO INTELLECTUAL PROPERTY LITIGATION AND INFRINGEMENT
CLAIMS, WHICH COULD CAUSE US TO INCUR SIGNIFICANT EXPENSES OR PREVENT
US FROM SELLING OUR PRODUCTS. There is a substantial amount of
litigation over patent and other intellectual property rights in the
eye care industry, and in the ophthalmic surgical device and contact
lens care markets particularly. The fact that we have patents issued
to us for our products does not mean that we will always be able to
successfully defend our patents and proprietary rights against
challenges or claims of infringement by our competitors. If someone
claims that our products infringe their intellectual property rights,
any resulting litigation could be costly and time consuming. Claims
of intellectual property infringement also might require us to enter
into costly royalty or license agreements. We also may be subject to
significant damages or an injunction preventing us from manufacturing,
selling or using our products.
    
    OUR MANUFACTURING CAPACITY MAY NOT BE ADEQUATE TO MEET THE DEMANDS OF
OUR BUSINESS. We manufacture our products or contract with third
parties to manufacture our products. Our products are manufactured in
quantities sufficient to satisfy our current level of product sales.
If we experience increases in sales, we will need to increase our
production beyond our present manufacturing capacity. Additionally, in
June 2005 our manufacturing agreement with Allergan will terminate and
we will be required to increase our manufacturing capacities or to
contract with additional parties to manufacture our products. The
process to transfer manufacturing of our products to new facilities is
lengthy and requires regulatory approval. We cannot assure you that we
can successfully increase our capacity on a profitable basis, complete
the regulatory approval process in a timely manner, or contract with
additional parties on terms acceptable to us, if at all. Until we have
transitioned all products manufactured by Allergan, our supply of eye
care products is largely dependent on Allergan as a sole source
supplier for our European and North American markets. Any prolonged
disruption in the operation of our manufacturing facilities or those
of our third party manufacturers could materially harm our business. 27




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##### Table of Contents



Through the Acquisition, we acquired three manufacturing facilities,
which are located in Groningen, Netherlands, Uppsala, Sweden and
Bangalore, India. We expect to incur significant capital expenditures
with respect to the Uppsala, Sweden manufacturing facility during the
first two years following the Acquisition in order to separate the
facility from existing Pfizer operations. These capital expenditures
may be significantly higher than we expect. Although we have an
agreement with Pfizer to assist us with the separation and related
transition services, there can be no assurance that Pfizer will be
able to provide the necessary services to enable us to transition and
separate the Uppsala facility in the manner and in the time frame we
desire. 28




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##### Table of Contents



Advanced Medical Optics, Inc. 
 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We routinely monitor our risks associated with fluctuations in currency
exchange rates and interest rates. We address these risks through controlled
risk management that may include the use of derivative financial instruments to
economically hedge or reduce these exposures. We do not expect to enter into
financial instruments for trading or speculative purposes. Given the inherent limitations of forecasting and the anticipatory nature of
the exposures intended to be hedged, there can be no assurance that such
programs will offset more than a portion of the adverse financial impact
resulting from unfavorable movements in either interest or foreign exchange
rates. In addition, the timing of the accounting for recognition of gains and
losses related to mark-to-market instruments for any given period may not
coincide with the timing of gains and losses related to the underlying economic
exposures and, therefore, may adversely affect our operating results and
financial position. To ensure the adequacy and effectiveness of our interest rate and foreign
exchange hedge positions, we continually monitor, from an accounting and
economic perspective, our interest rate swap positions and foreign exchange
forward and option positions, when applicable, both on a standalone basis and
in conjunction with our underlying interest rate and foreign currency
exposures. Interest rate risk.Our debt is comprised solely of domestic borrowings and is
comprised of $363.4 million of fixed rate debt and $205.0 million of variable
rate debt. In July 2004, we entered into an interest rate swap agreement, which
effectively converts the interest rate on $125.0 million of term loan
borrowings from a floating rate to a fixed rate. This interest rate swap
matures in July 2006 and qualifies as a cash flow hedge. Changes in fair value
of the interest rate swap agreement are recorded in other comprehensive income
to the extent such changes are effective and as long as the cash flow hedge
requirements are met. At September 24, 2004, the fair value of $(1.0) million
of the interest rate swap is recorded in Other liabilities in the
accompanying unaudited condensed consolidated balance sheet. If interest rates were to increase or decrease by 1.0% for the year, annual
interest expense would increase or decrease by approximately $2.1 million. The table below presents information about our debt obligations as of September
24, 2004: September 24, 2004Maturing in
    
    
    
    
    
    
    
    
    
    
    
    
    
    FairMarket2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    Total
    
    Value(in thousands, except interest rates)LIABILITIESDebt Obligations:Fixed Rate
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    350,000
    
    
    
    350,000
    
    
    
    373,695Weighted Average Interest Rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.50
    %
    
    
    2.50
    %Fixed Rate
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    13,442
    
    
    
    13,442
    
    
    
    27,206Weighted Average Interest Rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3.50
    %
    
    
    3.50
    %Variable Rate
    
    $
    1,025
    
    
    $
    2,050
    
    
    $
    2,050
    
    
    $
    2,050
    
    
    $
    99,425
    
    
    
    98,400
    
    
    
    205,000
    
    
    
    205,000Weighted Average Interest Rate
    
    
    3.96
    %
    
    
    3.96
    %
    
    
    3.96
    %
    
    
    3.96
    %
    
    
    3.96
    %
    
    
    3.96
    %
    
    
    3.96
    %Total Debt Obligations
    
    $
    1,025
    
    
    $
    2,050
    
    
    $
    2,050
    
    
    $
    2,050
    
    
    $
    99,425
    
    
    
    461,842
    
    
    
    568,442
    
    
    
    605,901Weighted Average Interest Rate
    
    
    3.96
    %
    
    
    3.96
    %
    
    
    3.96
    %
    
    
    3.96
    %
    
    
    3.96
    %
    
    
    2.84
    %
    
    
    3.05
    %
 Foreign currency risk.Overall, we are a net recipient of currencies other
than the U.S. dollar and, as such, we benefit from a weaker dollar and are
adversely affected by a stronger dollar relative to major currencies worldwide.
Accordingly, changes in exchange rates, and in particular a strengthening of
the U.S. dollar, may negatively affect our consolidated net sales and gross
profit as expressed in U.S. dollars. 29




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##### Table of Contents



Advanced Medical Optics, Inc. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (continued) We may enter into foreign exchange option and forward contracts to reduce
earnings and cash flow volatility associated with foreign exchange rate changes
to allow management to focus its attention on its core business operations.
Accordingly, we enter into contracts which change in value as foreign exchange
rates change to economically offset the effect of changes in value of foreign
currency assets and liabilities, commitments and anticipated foreign currency
denominated sales and operating expenses. We enter into foreign exchange
option contracts in amounts between minimum and maximum anticipated foreign
exchange exposures, generally for periods not to exceed one year. We use foreign currency option contracts, which provide for the sale of foreign
currencies to offset foreign currency exposures expected to arise in the normal
course of our business. While these instruments are subject to fluctuations in
value, such fluctuations are anticipated to offset changes in the value of the
underlying exposures. The principal currencies subject to this process are the
Japanese yen and the euro. The foreign currency options are entered into to reduce the volatility of
earnings generated in currencies other than the U.S. dollar, primarily earnings
denominated in Japanese yen and the euro. As a result, the changes in the fair
value of foreign currency option contracts are recorded through earnings as
Unrealized (gain) loss on derivative instruments while any realized gains or
losses on expired contracts are recorded through earnings as Other, net in
the accompanying unaudited condensed consolidated statements of operations.
The premium cost of purchased foreign exchange option contracts are recorded in
Other current assets and amortized over the life of the options. At September 24, 2004, the aggregate notional amounts and strike amounts of our
outstanding yen and euro currency option contracts were $33.5 million and
118.20 and $27.3 million and 1.12, respectively. The notional principal amount
provides one measure of the transaction volume outstanding as of the end of the
period, and does not represent the amount of our exposure to market loss. The
fair value of these foreign currency option contracts was $0.3 million at
September 24, 2004. The estimate of fair value is based on applicable and
commonly used prevailing financial market information as of September 24, 2004.
The amounts ultimately realized upon settlement of these financial
instruments, together with the gains and losses on the underlying exposures,
will depend on actual market conditions during the remaining life of the
instruments. NEW ACCOUNTING STANDARDS In September 2004, the Emerging Issues Task Force finalized its consensus on
EITF Issue No. 04-8, The Effect of Contingently Convertible Debt on Diluted
Earnings Per Share (EITF 04-8). EITF 04-8 addresses when the dilutive effect
of contingently convertible debt with a market price trigger should be included
in diluted earnings per share (EPS). Under EITF 04-8, the market price
contingency should be ignored and these securities should be treated as
non-contingent, convertible securities and always included in the diluted EPS
computation. EITF 04-8 requires these securities be included in diluted EPS
using either the if-converted method or the net share settlement method,
depending on the conversion terms of the security. EITF 04-8 is effective for
all periods ending after December 15, 2004 and is to be applied by
retrospectively restating previously reported EPS. We expect to irrevocably
elect to cash settle the principal amount of the Notes and thus, the dilutive
effect of the Notes would be calculated under the net share settlement method.
Adoption of EITF 04-8 would not have an impact on reported EPS for the three
and nine months ended September 24, 2004 or the three months ended September
26, 2003 as we reported a loss for all such periods. Adoption of EITF 04-8
would not have an impact on reported EPS for the nine months ended September
26, 2003 or the year ended December 31, 2003, as the impact of the Existing
Notes is antidilutive. 30




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##### Table of Contents



Advanced Medical Optics, Inc. 
 Item 4. CONTROLS AND PROCEDURES As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our principal
executive officer and principal financial officer, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on this
evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information required to be disclosed in our periodic
reports filed with the SEC. In addition, we evaluated our internal controls
over financial reporting and there have been no changes during the most recent
fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting. 
 PART II  OTHER INFORMATION 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (c) Recent Sales of Unregistered Securities Common Stock During the quarter ended September 24, 2004, AMO issued an aggregate of
973,619 shares of common stock to a limited number of holders of AMOs 31⁄2%
Convertible Senior Subordinated Notes due 2023 (the 31⁄2% convertible
notes) in exchange for approximately $18.0 million aggregate principal amount
of the 31⁄2% convertible notes in privately negotiated transactions. The
issuance of the shares of common stock was made in reliance on Section 3(a)(9)
of the Act. 31




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##### Table of Contents



Advanced Medical Optics, Inc. PART II  OTHER INFORMATION (continued) (d) Purchases of Equity Securities by the Issuer The following sets forth the amount of 31⁄2% convertible notes acquired by
AMO during the quarter ended September 24, 2004: ISSUER PURCHASES OF EQUITY SECURITIES (d) Maximum Number(c) Total Number of
    
    (or ApproximateShares or Units
    
    Dollar Value) ofPurchased as Part
    
    Shares or Units(a) Total Number of
    
    (b) Average Price
    
    of Publicly
    
    that May Yet BeShares or Units
    
    Paid per Share or
    
    Announced Plans or
    
    Purchased Under thePeriod
    
    Purchased
    
    Unit
    
    Programs
    
    Plans or ProgramsJune 26, 2004 
July 30, 2004
    
    $
    2,996,000
    
    
    48.69 shares of
common stock for
each $1,000
principal amount of
notes and accrued
and unpaid interest
thereon
    
    None
    
    NoneJuly 31, 2004 
August 27, 2004
    
    
    None
    
    
    
    
    None
    
    NoneAugust 28, 2004 
September 24, 2004
    
    $
    15,000,000
    
    
    48.69 shares of
common stock for
each $1,000
principal amount of
notes and accrued
and unpaid interest
thereon
    
    None
    
    None
 
 Item 6. Exhibits 10.1
    
    First Amendment to Advanced Medical Optics, Inc. 2002 Employee Stock Purchase Plan.10.2
    
    First Amendment to Advanced Medical Optics, Inc. 2002 International Stock Purchase Plan.10.3
    
    Updated Schedule of Parties to the Employment Agreement31.1
    
    Certification of James V. Mazzo pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Richard A. Meier pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of James V. Mazzo and Richard A. Meier pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 32




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SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. Date: November 1, 2004
    
    ADVANCED MEDICAL OPTICS, INC./s/ RICHARD A. MEIERRichard A. Meier
(Principal Financial Officer)/s/ ROBERT F. GALLAGHERRobert F. Gallagher
(Principal Accounting Officer)
 33




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##### Table of Contents



EXHIBIT INDEX 10.1
    
    First Amendment to Advanced Medical Optics, Inc. 2002 Employee Stock Purchase Plan.10.2
    
    First Amendment to Advanced Medical Optics, Inc. 2002 International Stock Purchase Plan.10.3
    
    Updated Schedule of Parties to the Employment Agreement31.1
    
    Certification of James V. Mazzo pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Richard A. Meier pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of James V. Mazzo and Richard A. Meier pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 34