ALC

Business Context and Reporting Period

This Form 6-K filing by Alcon, Inc. (a Swiss corporation) covers the three-month and nine-month periods ended September 30, 2002. The report details the company's financial performance following its Initial Public Offering (IPO) in March 2002, which transitioned Alcon from a wholly-owned subsidiary of Nestlé S.A. to a publicly traded entity. The filing includes unaudited condensed consolidated financial statements and management's discussion and analysis.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Sales increased 10.0% year-over-year for the quarter and 8.8% for the nine-month period. Growth was driven primarily by the pharmaceutical segment, particularly the launch and expansion of TRAVATAN®.
• Profitability: Net earnings surged 75.9% for the quarter and 47.7% for the nine-month period. This was significantly aided by the adoption of FASB Statement 142, which eliminated goodwill amortization, adding $10.6 million to quarterly operating income and $31.9 million to the nine-month operating income.
• Liquidity Shift: Cash and cash equivalents dropped from $1,140.5 million at year-end 2001 to $60.6 million at September 30, 2002. This decrease was due to the redemption of preferred shares ($2,188.0 million) and dividends paid to Nestlé ($1,243.4 million), partially offset by IPO proceeds ($2,407.2 million).
• Debt Structure: Long-term debt decreased significantly from $697.4 million to $83.4 million as IPO proceeds were used to repay borrowings and redeem preferred equity. Short-term borrowings increased to $972.0 million to manage liquidity during the transition.

Guidance, Outlook, and Risks

Management Commentary: Management highlighted strong performance in pharmaceutical products (TRAVATAN®, PATANOL®, CIPRO® HC) and surgical products (IOLs). However, consumer eye care sales declined slightly in the quarter due to market conditions and inventory management by retailers. Refractive surgery sales were impacted by weak consumer confidence in the U.S. economy.

Subsequent Event: On November 5, 2002, Alcon sold Series A and B preferred shares of its U.S. subsidiary (Alcon Holdings, Inc.) to financial investors for 1.997 billion Swiss francs to improve liquidity. This transaction will reduce earnings available to common shareholders due to dividend accretion.

Risks and Contingencies:

• TRAVATAN® Settlement: Alcon reached a global settlement with Pharmacia Corporation regarding intellectual property disputes. Alcon will pay royalties on TRAVATAN® sales but retains unrestricted global selling rights.
• Currency Risk: A 10% depreciation in non-U.S. dollar currencies could decrease pre-tax earnings by approximately $21.9 million due to unhedged exposures.
• Interest Rate Risk: A 1% increase in short-term interest rates would decrease pre-tax earnings by $8.5 million.
• Market Conditions: Sales in Japan and Argentina were negatively affected by pricing pressures, reimbursement cuts, and currency fluctuations.

Investor Verification Checklist

• Goodwill Accounting Impact: Verify the sustainability of earnings growth by analyzing results excluding the one-time benefit from the cessation of goodwill amortization (FAS 142).
• Liquidity Position: Confirm the company's ability to service its $972 million in short-term borrowings given the low cash balance of $60.6 million, relying heavily on credit facilities.
• TRAVATAN® Royalties: Assess the long-term margin impact of the royalty payments to Pharmacia resulting from the IP settlement.
• Preferred Share Dividends: Monitor the impact of the new preferred share structure in the U.S. subsidiary on future earnings per share.
• Refractive Surgery Trends: Evaluate the sensitivity of surgical product sales to U.S. consumer confidence and elective procedure volumes.