<PAGE>
Filed Pursuant to Rule 424(B)(1)
Registration No. 333-39867
1,375,000 Shares
Wesley Jessen VisionCare, Inc.
LOGO
Common Stock
------------
All of the 1,375,000 shares of Common Stock of Wesley Jessen VisionCare,
Inc. (the "Company") being offered hereby (the "Offering") will be sold by
certain stockholders of the Company (the "Selling Stockholders"). See
"Principal and Selling Stockholders." The Company is not selling shares of
Common Stock in the Offering and will not receive any of the proceeds from the
sale of the shares offered hereby. The Company's Common Stock is quoted on the
Nasdaq National Market under the symbol "WJCO." On November 12, 1997, the last
reported sale price of the Common Stock was $33.00 per share. See "Price Range
of Common Stock."
------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 12.
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Purchaser has agreed to purchase from the Selling Stockholders the
shares of Common Stock offered hereby for a purchase price of $30.85 per
share. The proceeds to the Selling Stockholders from the sale of the shares of
Common Stock will be $42,418,750, and expenses payable by the Company are
estimated to be $300,000.
The Common Stock offered hereby may be offered by the Purchaser from time to
time to purchasers directly or through agents, or through brokers in brokerage
transactions on the Nasdaq National Market, or to dealers in negotiated
transactions or in a combination of such methods of sale, at a fixed price or
prices, which may be changed, or at market prices prevailing at the time of
sale, at prices related to such prevailing market prices, or at negotiated
prices. See "Plan of Distribution."
The Company and the Selling Stockholders have agreed to indemnify the
Purchaser against certain liabilities, including certain liabilities under the
Securities Act of 1933, as amended. See "Plan of Distribution."
------------
The shares of Common Stock are offered by the Purchaser, subject to prior
sale, when, as and if delivered to and accepted by it, and subject to the
right of the Purchaser to reject any order in whole or in part. It is expected
that delivery of the shares of Common Stock will be made at the offices of BT
Alex. Brown Incorporated, Baltimore, Maryland, on or about November 18, 1997.
BT ALEX. BROWN
THE DATE OF THIS PROSPECTUS IS NOVEMBER 13, 1997.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK IN
CONNECTION WITH THE OFFERING, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-
COVERING TRANSACTIONS IN SUCH SECURITIES, AND THE IMPOSITION OF PENALTY BIDS.
IN ADDITION, THE PURCHASER (AND SELLING GROUP MEMBERS, IF ANY) MAY ALSO ENGAGE
IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ
NATIONAL MARKET IN ACCORDANCE WITH RULE 103 UNDER THE SECURITIES EXCHANGE ACT
OF 1934. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "PLAN OF DISTRIBUTION."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. Unless otherwise stated in this Prospectus, references to (i)
the "Company" or "Wesley Jessen" shall mean Wesley Jessen VisionCare, Inc., its
consolidated subsidiaries and their respective predecessors; (ii) the
"Predecessor" shall mean the operations of the Wesley Jessen division of
Schering-Plough Corporation prior to the acquisition thereof by Bain Capital,
Inc. ("Bain Capital") and management on June 28, 1995 (the "Wesley Jessen
Acquisition"); and (iii) "Barnes-Hind" shall mean the contact lens business of
the Barnes-Hind division of Pilkington plc ("Pilkington") prior to the
acquisition thereof by the Company on October 2, 1996 (the "Barnes-Hind
Acquisition," and together with the Wesley Jessen Acquisition, the
"Acquisitions"). Statement of operations data presented herein on a pro forma
basis give effect to, among other things, the Barnes-Hind Acquisition and the
other transactions related thereto as if the Barnes-Hind Acquisition and such
other transactions had occurred on January 1, 1996. See "Unaudited Pro Forma
Financial Data." This Prospectus contains forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in such forward-looking statements.
THE COMPANY
Wesley Jessen is the leading worldwide developer, manufacturer and marketer
of specialty soft contact lenses, based on its share of the specialty lens
market. The Company's products include cosmetic lenses, which change or enhance
the wearer's eye color appearance; toric lenses, which correct vision for
people with astigmatism; and premium lenses, which offer value-added features
such as improved comfort for dry eyes and protection from ultraviolet ("UV")
light. The Company offers a broad range of both conventional contact lenses,
which can typically be used for up to 24 months, and disposable contact lenses,
which are intended to be replaced at least every two weeks. Founded in 1946 by
pioneers in the contact lens industry, the Company has a long-standing
reputation for innovation and new product introductions. The Company was
acquired by Bain Capital and management in June 1995, and in October 1996 the
Company strengthened its product offerings, technology and distribution
capabilities through the acquisition of Barnes-Hind. For the year ended
December 31, 1996, the Company's pro forma net revenues were $250.0 million and
its pro forma operating profit was $25.9 million.
The contact lens industry is large and rapidly growing. In 1995,
manufacturers' sales of contact lenses worldwide totaled $1.8 billion,
representing a compound annual growth rate of 11% from $1.1 billion in 1990.
According to industry analysts, the U.S. market for contact lenses is expected
to grow by approximately 10% per year through the year 2000. The Company
believes that market growth outside the United States will likely exceed
domestic growth because of lower contact lens penetration rates
internationally. Future growth in the contact lens market is expected to result
from (i) continued increases in the number of wearers, as more people use
contact lenses as an alternative to eyeglasses, and (ii) increased revenues per
wearer, as specialty products and disposable lenses grow in popularity. Because
the hard contact lens portion of the industry is relatively mature, the Company
expects that most future growth will occur in the soft lens portion, which is
comprised of the clear lens segment (lenses that do not provide value-added
features) and the specialty lens segment.
The Company operates primarily in the specialty segment of the soft lens
market, where it has the leading share in each of the cosmetic and premium lens
segments and the second leading share in the toric lens segment. The Company
has the leading position in the specialty segment of the soft lens market as a
whole, which, at $600 million in net sales, accounted for approximately 30% of
industry sales volume
3
<PAGE>
in 1996 and is projected to grow at approximately 15% per year through the year
2000. In recent years, in both the clear and specialty lens segments, there has
been a pronounced shift in consumers' preferences toward disposable lenses and
away from conventional lenses, which has led to a significant increase in
contact lens expenditures per wearer. The Company estimates that currently more
than 35% of U.S. soft lens wearers use disposable lenses, up from 21% in 1993.
The Company believes that its leading portfolio of disposable specialty lenses
has positioned it to benefit from the preference shift toward disposable
lenses. The Company also offers a complete line of conventional and disposable
clear lenses, which are positioned as companion products to the Company's
cosmetic lenses.
According to an independent research firm, more than 70% of all contact lens
prescribers in the United States offer the Company's products, which permits
the Company to rapidly launch new categories of products. Wesley Jessen
develops proprietary technologies, manufacturing processes and products through
a combination of its in-house staff of more than 50 engineers and scientists
and Company-sponsored research by third-party experts. The Company markets and
sells its products to consumers through the second largest advertising campaign
in the industry and to eyecare practitioners through its 190-person salesforce
and network of 67 independent distributors, which together sell the Company's
products in more than 75 countries.
Wesley Jessen believes that several characteristics of the contact lens
industry, including the chronic need for corrective eyewear, the high degree of
consumer loyalty to contact lens brands, significant barriers to entry and the
industry's projected growth, make it an attractive market for the Company to
serve. Competing successfully in the contact lens industry requires, among
other things, (i) a significant investment in sales and marketing in order to
persuade wearers to switch to a new product; (ii) the development and cost-
efficient application of sophisticated manufacturing processes required to
produce contact lenses; (iii) U.S. Food and Drug Administration ("FDA") product
clearances; and (iv) a patent portfolio covering materials, design and
processes. As a result, no new significant competitors have entered the soft
contact lens industry in the last ten years.
The Company believes it has achieved its leading worldwide market position in
specialty soft contact lenses because of the following competitive strengths:
. HIGH-QUALITY BRANDED PRODUCTS. Wesley Jessen produces a broad range of
high-quality contact lenses that meet customers' demand for improved cosmetic,
comfort, ease-of-care and vision-correction features, and are sold under brand
names recognized by ophthalmologists and optometrists worldwide.
. SUCCESSFUL DEVELOPMENT AND INTRODUCTION OF NEW PRODUCTS. The Company has a
strong track record of developing new specialty contact lens products, with the
five new product lines introduced since 1994 accounting for more than 30% of
the Company's pro forma net sales in the year ended December 31, 1996.
. BROAD PATENT PORTFOLIO. Wesley Jessen believes that its intellectual
property, including more than 70 U.S. patents in product design, materials and
manufacturing processes, makes imitation of the Company's products difficult,
supports the Company's strong gross margins and provides the Company with a
competitive advantage.
. ESTABLISHED SALES AND DISTRIBUTION NETWORK. The Company believes its
salesforce and distributor network constitute the largest and most
sophisticated sales organization in the specialty contact lens segment,
contributing to its strong relationships with eyecare practitioners.
. STRONG INTERNATIONAL MARKET PRESENCE. For the year ended December 31, 1996,
Wesley Jessen derived approximately 45% of its pro forma net sales from sales
outside the United States. The Company's specialty contact lens products have
leading market shares in Europe, Japan and Latin America.
4
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. LOW-COST, PROPRIETARY MANUFACTURING CAPABILITIES. The Company produces
substantially all of its contact lens products in four state-of-the-art
manufacturing facilities, which apply proprietary technology, allow the Company
to be a flexible, low-cost manufacturer of specialty lenses and have sufficient
capacity to meet the Company's rapidly growing needs for several years.
. EXPERIENCED MANAGEMENT WITH A PROVEN RECORD OF IMPROVING PROFITABILITY. The
Company's senior management, who on average have more than 10 years of
experience in the contact lens industry, have increased the Company's operating
margin 44 percentage points, comparing the six months immediately prior to the
Wesley Jessen Acquisition with the comparable period in 1996.
The Company's principal objective is to leverage these competitive strengths
into continued expansion of its contact lens business in the faster-growing
specialty contact lens segment and continued growth in revenues and earnings
per share. The Company's strategy for achieving this objective is to
(i) capitalize on favorable industry trends; (ii) increase the Company's market
share using targeted marketing programs; (iii) develop and successfully launch
new products, particularly category-creating products such as the Company's new
line of disposable lenses offering UV protection; (iv) increase the
international penetration of the Company's products; (v) realize synergies
through completing the integration of Barnes-Hind; and (vi) benefit from the
Company's significant operating leverage by utilizing excess manufacturing
capacity, investing in new low-cost manufacturing and distribution technologies
and achieving economies of scale in development, manufacturing and
distribution. In addition to the above strategies for growth, the Company
regularly considers the expansion of its contact lens business through
acquisitions, joint ventures and other strategic alliances. The Company is
currently in preliminary discussions with a potential acquisition candidate to
compliment geographical strengths.
1997 ACCOMPLISHMENTS. The Company believes that it has made significant
progress towards achieving its strategic objectives in the last nine months.
The Company's accomplishments during 1997 include:
. CONTINUED INTEGRATION OF THE BARNES-HIND OPERATIONS. The Company has
completed substantially all of the integration of Barnes-Hind, including
substantial personnel reductions, facilities consolidation and sales force
integration and has gained increased cross-selling opportunities as a result of
such integration.
. INCREASED OPERATING LEVERAGE. The Company believes it has achieved improved
manufacturing efficiencies, increased marketing effectiveness and decreased
overhead as a percent of sales.
. ESTABLISHMENT OF BRAZILIAN SUBSIDIARY. The Company has established a
marketing subsidiary in Brazil as part of its strategy to target key emerging
markets for contact lenses.
. APPROVAL OF PRECISION UV IN JAPAN. In May 1997, the Company received
approval to begin marketing its Precision UV disposable lenses in Japan. The
Company believes it is the first to receive such approval for disposable
contact lenses with UV protection.
THE IPO. In February 1997, the Company consummated an initial public offering
(the "IPO") of its Common Stock, which included the sale by the Company of
2,821,000 shares of Common Stock at an initial public offering price of $15.00
per share. Proceeds from the sale of the Common Stock were used to reduce the
Company's indebtedness outstanding under its then existing credit agreement.
Immediately prior to the IPO, the Company effected a 3.133-for-one stock split
of the existing Common Stock (the "Stock Split") and reclassified all classes
of capital stock into shares of Common Stock (the "Reclassification"). The IPO
and the application of the net proceeds therefrom, the Stock Split, the
Reclassification and the refinancing of the then-existing bank credit agreement
are collectively referred to herein as the "IPO Transactions."
5
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THE SECONDARY OFFERING. In August 1997, the Company completed a secondary
offering of 4,341,040 shares of its Common Stock, of which 500,000 shares were
sold by the Company and 3,841,040 shares were sold by certain selling
stockholders, at a price of $23.50 per share (the "August 1997 Offering"). In
connection with such offering, the Company amended and restated its then-
existing bank credit agreement to, among other things, increase its borrowing
availability to $135 million (as amended and restated, the "Bank Credit
Agreement").
RISK FACTORS
The Common Stock offered hereby involves a number of risks, including: (i)
that the contact lens market is highly competitive; (ii) that the specialty
segment of the soft contact lens market is characterized by rapid technological
advancement and new product innovation; (iii) the ability of the Company to
successfully complete the integration of the Barnes-Hind Acquisition; (iv) the
possibility of a prolonged disruption in the operations of any of the Company's
facilities; (v) risks associated with international sales; (vi) the Company's
dependence on the services of its senior management team; and (vii) the
Company's dependence on certain of its intellectual property rights. For a more
complete discussion of the foregoing risk factors, see "Risk Factors."
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Selling
Stockholders......................... 1,375,000 shares
Common Stock outstanding after the
Offering............................. 17,652,374 shares(1)
Use of proceeds....................... The Company is not selling shares in the
Offering and will not receive any of the
proceeds from the sale of shares offered
hereby.
Nasdaq National Market symbol......... WJCO
</TABLE>
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(1) Based on the number of shares outstanding as of November 1, 1997. Does not
include 2,894,270 shares of Common Stock reserved for issuance upon the
exercise of options outstanding as of November 13, 1997, with a weighted
average exercise price of $3.87, or 1,223,300 shares of Common Stock
reserved for issuance to employees or non-employee Directors under the
Company's stock purchase and incentive plans (collectively, the "Stock
Plans"). See "Management."
Market data used throughout this Prospectus were obtained from industry
publications and internal Company surveys. Industry publications generally
state that the information contained therein has been obtained from sources
believed to be reliable, but that the accuracy and completeness of such
information are not assured. The Company has not independently verified these
market data. Similarly, internal Company surveys, while believed by the Company
to be reliable, have not been verified by any independent sources. Aquaflex(R),
CSI(R), DuraSoft(R), DuraSoft 2, DuraSoft 3, DuraSoft Optifit, Elegance,
FreshLook(R), Gentle Touch, Hydrocurve, Hydrocurve II(R), Natural Touch,
Optifit, Optifit Custom, Polycon(R), Precision UV, SoftPerm(R), Wesley-
Jessen(R) and WJ(R) are trademarks of the Company and its subsidiaries.
6
<PAGE>
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
(in thousands, except per share data)
Set forth below are summary unaudited pro forma financial data of the Company
for the periods and dates indicated. The summary unaudited pro forma statement
of operations data for the year ended December 31, 1996 give effect to: (i) the
Barnes-Hind Acquisition (and related financing transactions); (ii) the
divestiture of Barnes--Hind's U.S. Natural Touch product line (the "U.S.
Natural Touch Product Line"); (iii) the IPO Transactions; (iv) the August 1997
Offering and the application of the net proceeds to the Company therefrom; and
(v) the execution of the Bank Credit Agreement, as if each had occurred on
January 1, 1996. The summary unaudited pro forma statement of operations data
for the nine months ended September 27, 1997 give effect to the transactions
described in items (ii) through (v) above, as if each had occurred on January
1, 1996. The final allocation of the purchase price of the Barnes-Hind
Acquisition and the resulting depreciation and amortization expense in the
summary unaudited pro forma income statement data may differ somewhat from the
preliminary estimates for the reasons described in more detail in "Unaudited
Pro Forma Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and in the Notes to Consolidated Financial
Statements of the Company. The summary pro forma financial data have not been
audited, do not purport to represent what the Company's results of operations
actually would have been if the foregoing transactions had actually occurred as
of such dates or what such results will be for any future periods, and should
be read in conjunction with, and are qualified by reference to, "Unaudited Pro
Forma Financial Data," "Selected Historical Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the audited consolidated financial statements and accompanying
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 27, 1997
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<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................. $249,999 $211,389
Operating costs and expenses:
Cost of goods sold....................... 86,232 70,573
Marketing and administrative............. 126,910 102,916
Research and development................. 12,025 8,818
Amortization of intangible assets
(negative goodwill)..................... (1,092) (819)
Income from operations................... 25,924 29,901
Other (income) expense:
Interest expense......................... 4,990 3,386
Other income, net........................ (3,051) --
Income before income taxes................ 23,985 26,515
Income tax expense........................ (8,154) (9,015)
Net income................................ $ 15,831 $ 17,500
Pro forma net income per common share(1).. $ 0.78 $ 0.87
Pro forma weighted average number of
common shares outstanding (1)............ 20,176 20,133
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1996 SEPTEMBER 27, 1997
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<S> <C> <C>
OTHER DATA:
EBITDA(2)(3).............................. $28,510 $29,474
Depreciation and amortization, including
negative goodwill........................ (814) (427)
</TABLE>
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(1) Pro forma net income per share and pro forma weighted average number of
common shares outstanding include all outstanding common stock equivalents
and have been adjusted to give effect to the IPO Transactions, the August
1997 Offering and the execution of the Bank Credit Agreement.
The accompanying notes are an integral part of the Summary Unaudited Pro Forma
Financial Data.
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(2) "EBITDA" is defined herein as income from operations plus depreciation and
amortization expense, non-recurring charges and other non-cash expense
items. Management believes that EBITDA, as presented, represents a useful
measure of assessing the performance of the Company's ongoing operating
activities as it reflects the earnings trends of the Company without the
impact of the purchase accounting applied in connection with the Wesley
Jessen Acquisition or the Barnes-Hind Acquisition or the financing required
to consummate those historical transactions. Income derived from non-
operating sources, including license fees received during the periods
presented, have been excluded from EBITDA as they are non-recurring in
nature and are not representative of the ongoing operations of the Company.
Targets and positive trends in EBITDA are used by the Company's creditors
in assessing debt covenant compliance. The Company understands that while
EBITDA is frequently used by security analysts in the evaluation of
companies, it is not necessarily comparable to other similarly titled
captions of other companies due to potential inconsistencies in the method
of calculation. EBITDA is not intended as an alternative to cash flow from
operating activities as a measure of liquidity, an alternative to net
income as an indicator of the Company's operating performance or any other
measure of performance in accordance with generally accepted accounting
principles.
(3) Because of the subjectivity inherent in the assumptions concerning the
timing and nature of the uses of cash generated by the pro forma interest
and other cost savings adjustments, cash flows from operating, investing
and financing activities are not presented for the pro forma periods.
8
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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
Set forth below are summary historical consolidated financial data of the
Company and the Predecessor for the periods and dates indicated. The summary
historical consolidated financial data for the year ended December 31, 1994 and
the period from January 1, 1995 through June 28, 1995 of the Predecessor were
derived from the audited financial statements of the Predecessor. The summary
historical consolidated financial data as of December 31, 1995 and 1996 and for
the periods from June 29, 1995 through December 31, 1995 and for the year ended
December 31, 1996 of the Company were derived from the audited financial
statements of the Company. The unaudited interim financial data have been
derived from the historical unaudited consolidated interim financial statements
of the Company. Such interim financial statements include all material
adjustments, consisting only of normal recurring adjustments, which management
considers necessary for fair presentation of results for such periods and
should be read in conjunction with, and are qualified by reference to,
"Selected Historical Consolidated Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the audited
consolidated financial statements and accompanying notes thereto included
elsewhere in this Prospectus. Results for interim periods are not necessarily
indicative of results for the full year.
<TABLE>
<CAPTION>
THE PREDECESSOR THE COMPANY
---------------------- ----------------------------------------------------
YEAR ENDED
DECEMBER 31, NINE MONTHS ENDED
JANUARY 1 JUNE 29 ------------------ -------------------
YEAR ENDED THROUGH THROUGH SEPTEM- SEPTEM-
DECEMBER 31, JUNE 28, DECEMBER 31, BER 28, BER 27,
1994 1995 1995 1995(A) 1996 1996 1997
------------ --------- ------------ -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $109,640 $ 51,019 $ 54,315 $105,334 $156,752 $ 96,048 $ 211,389
Operating costs and
expenses:
Cost of goods sold..... 65,591 20,871 19,916 38,442 43,152 26,471 70,707
Cost of goods sold--
inventory step-up..... -- -- 33,929 -- 20,706 6,626 22,666
Marketing and
administrative........ 79,185 43,236 29,476 69,162 88,274 51,014 104,049
Research and
development........... 9,843 4,569 2,524 4,677 7,178 3,786 8,828
Amortization of
intangible assets
(negative goodwill)... 5,472 2,736 (392) (784) (784) (588) (588)
Income (loss) from
operations............. (50,451) (20,393) (31,138) (6,163) (1,774) 8,739 5,727
Other (income) expenses:
Interest expense, net.. -- -- 2,599 4,889 5,385 2,757 4,371
Financing charge....... 7,172 3,511 -- -- -- -- --
Other (income), net.... (202) (1,360) -- (1,360) (3,051) (3,500) --
Income (loss) before
income taxes and
extraordinary loss..... (57,421) (22,544) (33,737) (9,692) (4,108) 9,482 1,356
Income tax benefit
(expense).............. 26,935 9,401 14,022 4,032 3,037 (1,621) (461)
Net income (loss) before
extraordinary loss..... (30,486) (13,143) (19,715) (5,660) (1,071) 7,861 895
Extraordinary loss, net
of tax benefit......... -- -- -- -- (1,671) -- (4,902)
Net loss................ $(30,486) $(13,143) $(19,715) $ (5,660) $ (2,742) $ 7,861 $ (4,007)
PRO FORMA PRIMARY NET
INCOME (LOSS) PER
COMMON SHARE (B):
Net income (loss) before
extraordinary loss..... $ (1.37) $ (0.07) $ 0.54 $ 0.05
Net income (loss)....... $ (1.37) $ (0.19) $ 0.54 $ (0.24)
Weighted average common
shares used in
computation of pro
forma primary net
income (loss) per
common share........... 14,416 14,638 14,638 16,621
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 27,
1996 1997
------------ -------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital...................................... $ 78,259 $ 56,279
Total assets......................................... 180,600 169,529
Total debt........................................... 102,975 58,000
Stockholders' equity (deficit)....................... (13,292) 28,485
</TABLE>
The accompanying notes are an integral part of the Summary Historical
Consolidated Financial Data.
9
<PAGE>
<TABLE>
<CAPTION>
THE PREDECESSOR THE COMPANY
---------------------- ----------------------------------------------------------
YEAR ENDED
JANUARY 1 JUNE 29 DECEMBER 31, NINE MONTHS ENDED
YEAR ENDED THROUGH THROUGH ---------------- ---------------------------
DECEMBER 31, JUNE 28, DECEMBER 31, SEPTEMBER 28, SEPTEMBER 27,
1994 1995 1995 1995(A) 1996 1996 1997
------------ --------- ------------ ------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Net cash provided by
(used in) operating
activities............ $ (6,664) $ (9,835) $ 4,035 $--(c) $ 19,238 $ 22,351 $1,430
Net cash provided by
(used in) investing
activities............ (2,271) (1,657) (47,926) --(c) (68,006) (3,809) (5,801)
Net cash provided by
(used in) financing
activities............ 7,652 11,272 46,033 --(c) 53,369 (13,228) 1,117
EBITDA(d).............. (37,391) (13,786) 2,399 22,010 14,936 28,389
Depreciation and
amortization,
including negative
goodwill.............. 13,060 6,607 (392) (784) (322) (429) (4)
Capital expenditures... 3,187 1,959 893 2,852 6,617 3,809 11,801
</TABLE>
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(a) The pro forma combined operating results for the year ended December 31,
1995 combine the operations of the Predecessor from January 1, 1995 through
June 28, 1995 and the Company from June 29, 1995 through the end of the
period and have been adjusted to reflect the period as if the Wesley Jessen
Acquisition and related financing transactions had occurred on January 1,
1995. Because of the purchase accounting adjustments made to the
Predecessor's financial statements, the financial statements of the
Predecessor for the periods prior to June 29, 1995 are not comparable to
those of subsequent periods. The combined pro forma data are intended to
assist in making comparisons for periods prior to the Barnes-Hind
Acquisition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Notes to Consolidated
Financial Statements of the Company included herein.
(b) No historical earnings per share data are presented as the Company does not
consider such data to be meaningful. See "Unaudited Pro Forma Financial
Data."
(c) Because of the subjectivity inherent in the assumptions concerning the
timing and nature of the uses of cash generated by the pro forma interest
and other cost savings adjustments, cash flows from operating, investing
and financing activities are not presented for the pro forma periods.
(d) "EBITDA" is defined herein as income from operations plus depreciation and
amortization expense, non-recurring charges and other non-cash expense
items. Management believes that EBITDA, as presented, represents a useful
measure of assessing the performance of the Company's ongoing operating
activities as it reflects the earnings trends of the Company without the
impact of the purchase accounting applied in connection with the Wesley
Jessen Acquisition or the Barnes-Hind Acquisition or the financing required
to consummate those historical transactions. Income derived from non-
operating sources, including license fees received during the periods
presented, have been excluded from EBITDA as they are non-recurring in
nature and are not representative of the ongoing operations of the Company.
Targets and positive trends in EBITDA are used by the Company's creditors
in assessing debt covenant compliance. The Company understands that while
EBITDA is frequently used by security analysts in the evaluation of
companies, it is not necessarily comparable to other similarly titled
captions of other companies due to potential inconsistencies in the method
of calculation. EBITDA is not intended as an alternative to cash flow from
operating activities as a measure of liquidity, an alternative to net
income as an indicator of the Company's operating performance or any other
measure of performance in accordance with generally accepted accounting
principles. A reconciliation of net income (loss) to EBITDA for each period
included herein is set forth below:
<TABLE>
<CAPTION>
THE PREDECESSOR THE COMPANY
---------------------- -----------------------------------------------------
JANUARY 1 JUNE 29 NINE MONTHS ENDED
YEAR ENDED THROUGH THROUGH YEAR ENDED ---------------------------
DECEMBER 31, JUNE 28, DECEMBER 31, DECEMBER 31, SEPTEMBER 28, SEPTEMBER 27,
1994 1995 1995 1996 1996 1997
------------ --------- ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss)....... $(30,486) $(13,143) $(19,715) $(2,742) $ 7,861 $(4,007)
Income tax (benefit)
expense................ (26,935) (9,401) (14,022) (3,037) 1,621 461
Interest expense, net... -- -- 2,599 5,385 2,757 4,371
Financing charge(1)..... 7,172 3,511 -- -- -- --
Other income, net(2).... (202) (1,360) -- (3,051) (3,500) --
Restructuring charge(3). -- -- -- 3,400 -- --
Depreciation and
amortization........... 13,060 6,607 (392) (322) (429) (4)
Extraordinary item, net
of tax
benefit(4)............. -- -- -- 1,671 -- 4,902
Inventory step-up(5).... -- -- 33,929 20,706 6,626 22,666
EBITDA.................. $(37,391) $(13,786) $ 2,399 $22,010 $14,936 $28,389
</TABLE>
10
<PAGE>
--------
(1) Represents financing charges from Schering-Plough in lieu of interest
expense related to Schering-Plough's investment in the Predecessor.
(2) Represents income derived from non-operating sources (e.g., gains on
fixed asset disposals and interest income) and certain one-time gains
related to licensing fees excluded from EBITDA as they do not relate to
the ongoing operations of the Company.
(3) Represents a charge recorded in the fourth quarter of 1996 relating to
costs to be incurred for restructuring the Company's operations
following the Barnes-Hind Acquisition.
(4) Represents extraordinary losses relating to the write-off of
capitalized financing fees in connection with the fourth quarter 1996
and first quarter 1997 refinancings.
(5) Represents the amortization of the inventory revaluation recorded in
conjunction with the Acquisitions excluded from EBITDA as it represents
a non-cash charge to operations.
11
<PAGE>
RISK FACTORS
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act").
Such forward-looking statements are based on the beliefs of the Company's
management as well as on assumptions made by and information currently
available to the Company at the time such statements were made. When used in
this Prospectus, the words "anticipate," "believe," "estimate," "expect,"
"intends" and similar expressions, as they relate to the Company are intended
to identify forward-looking statements, which include statements relating to,
among other things, (i) the ability of the Company to continue to successfully
compete in the contact lens market; (ii) the anticipated benefits from new
product introductions; (iii) the completion of the integration of Barnes-Hind
with the Company; (iv) the strategic benefits of the Barnes-Hind Acquisition;
(v) the continued effectiveness of the Company's sales and marketing strategy;
and (vi) the ability of the Company to continue to successfully develop and
launch new products. Actual results could differ materially from those
projected in the forward-looking statements as a result of the risk factors
set forth below, the matters set forth or incorporated in the Prospectus
generally and certain economic and business factors, some of which may be
beyond the control of the Company. The Company cautions the reader, however,
that this list of factors may not be exhaustive, particularly with respect to
future filings with the Commission. In analyzing an investment in the Common
Stock offered hereby, prospective investors should carefully consider, along
with the other matters referred to herein, the risk factors described below.
Competition and Industry Dynamics. The contact lens market is highly
competitive. The Company faces competition from other companies within each
segment of the contact lens market in which it operates. In the specialty
segment of the market, the Company principally competes with divisions of
large medical and pharmaceutical companies as well as with smaller companies.
To the extent the Company operates in the clear lens segment, it faces
competition primarily from Vistakon (a division of Johnson & Johnson) and
other large contact lens manufacturers. Certain of the Company's competitors
in each segment have lower costs of operations, products with enhanced
features, substantially greater resources to invest in product development and
customer support, greater vertical integration and greater access to financial
and other resources than the Company. To a lesser extent, the Company also
competes with manufacturers of eyeglasses and other forms of vision
correction. There can be no assurance that the Company will not encounter
increased competition in the future, particularly from large manufacturers of
clear lenses that have entered or are seeking to enter the specialty lens
segment, which could have a material adverse effect on the Company's financial
condition or results of operations. See "Business--Competition."
The contact lens industry has experienced significant growth in recent
years. There can be no assurance that such growth will continue in the future
or that a general economic slowdown or recession will not have a material
adverse effect on the Company's results of operations. In addition, the
Company believes that it currently benefits from significant advertising
expenditures by certain of its competitors, which serve to raise consumer
awareness of the benefits of disposable contact lenses. There can be no
assurance that the Company's operations would not be adversely effected in the
event such advertising campaigns were discontinued or substantially reduced.
Importance of New Product Introductions; Risk of Product Obsolescence. The
specialty segment of the soft contact lens market is characterized by rapid
technological advancements and new product innovations. The Company believes
that the manufacturer who is the first to introduce a new product in a
particular category is likely to maintain the leading market share in such
category. Although the Company has in the past been successful in attaining an
early market share lead in new product categories, there can be no assurance
that it will be successful in doing so in the future. In addition, the expense
involved in developing new products, as well as the cost of obtaining
regulatory approval to market such
12
<PAGE>
products, can be substantial. There can be no assurance that such new products
will be successful in the marketplace and, as a result, justify the expenses
involved in their development and approval. In addition, there can be no
assurance that the Company's competitors will not develop new products or
technology which will lead to the obsolescence of the Company's products,
which could have a material adverse effect on the Company's business,
financial condition or results of operations.
Risks in the Integration of Barnes-Hind; Management Information Systems
Integration. On October 2, 1996, the Company completed the Barnes-Hind
Acquisition. The Barnes-Hind Acquisition approximately doubled the size of the
Company as measured by net sales. The Company has completed substantially all
of the integration of the Barnes-Hind Acquisition, however, the future success
of the Barnes-Hind Acquisition and its effect on the financial and operating
results of the Company will depend in large part on the ability of the Company
to complete the integration of the Barnes-Hind manufacturing functions into
its operations and achieve the expected cost savings therefrom. The ability of
the Company to accomplish its objectives in connection with the Barnes-Hind
Acquisition is, as in any acquisition, subject to certain risks including the
potentially negative effects of diverting management resources and the
possible inability to realize expected cost savings and synergies. In
addition, the Company is in the process of integrating its management
information systems in order to facilitate the integration of Barnes-Hind.
These systems will significantly affect many aspects of the Company's
business, including its manufacturing, sales and marketing, and accounting
functions, and the successful implementation of these systems will be
important to the Company's current operations and to facilitate future growth.
Integration of the management information systems could cause significant
disruption in operations. If the Company is not successful in integrating its
systems or if the Company experiences difficulties in such integration, the
Company could experience problems with the delivery of its products or an
adverse impact on its ability to access timely and accurate financial and
operating information.
Risks Associated with Manufacturing Operations. The Company produces
substantially all of its contact lens products in four state-of-the-art
manufacturing facilities. Each facility is dedicated to producing individual
product lines. As a result, any prolonged disruption in the operations of any
one of the Company's facilities, whether due to technical or labor
difficulties, destruction of or damage to any facility or other reasons, could
have a material adverse effect on the Company's financial condition or results
of operations. For example, one of the Company's manufacturing facilities is
located in Puerto Rico and is thus exposed to the risks of damage from
hurricanes. See "Business--Manufacturing."
The Company utilizes a number of advanced polymers and other sophisticated
materials in the production of its contact lenses. Due to the highly technical
and specialized nature of certain of its production materials, the Company
relies from time to time on single suppliers to provide it with sufficient
quantities of certain materials used in the production of one or more of its
product lines. To minimize its reliance on any particular vendor, the Company
continually seeks to identify multiple vendors qualified to supply its
production materials. Although the Company believes that it is not dependent
on any single supplier, the inability of the Company to obtain sufficient
quantities of certain production inputs could have a material adverse effect
on the Company's financial condition or results of operations.
Risks Associated with International Sales. The Company derived
approximately 45% of its pro forma net sales from the sale of products outside
the United States in the year ended December 31, 1996. The Company expects
that sales to international customers will continue to represent a significant
portion of its net sales. Risks inherent in the Company's international
business activities generally include difficulties and unexpected changes in
the regulatory environment, currency fluctuation risk, longer accounts
receivable payment cycles and greater difficulty in collecting accounts
receivable, costs and risks associated with localizing products for foreign
countries, the burdens of complying with foreign laws, tariffs and other trade
barriers, trade embargoes and political instability. There can be no assurance
that these factors or other factors relating to the Company's international
business operations will not have a material adverse effect on the Company's
financial condition or results of operations.
13
<PAGE>
Dependence on Key Personnel. The Company is dependent to a large degree on
the services of its senior management team, including Kevin J. Ryan, President
and Chief Executive Officer. While Mr. Ryan has entered into an employment
agreement with the Company, there can be no assurance that he or other members
of the senior management team will remain with the Company. The loss of any of
these individuals could have a material adverse effect on the Company. See
"Management--Employment Agreements."
Historical Net Losses. Prior to the Wesley Jessen Acquisition, the
Predecessor experienced significant net losses. Such losses were $18.3
million, $30.5 million and $13.1 million in the years ended December 31, 1993
and 1994 and the period from January 1, 1995 through June 28, 1995,
respectively. The Company recorded a net loss of $19.7 million in the period
from June 29, 1995 through December 31, 1995 and Barnes-Hind experienced net
losses equal to approximately $13.6 million and $11.1 million in the twelve
month periods ended March 31, 1995 and 1996, respectively. As a result of the
Barnes-Hind Acquisition, the Company incurred significant non-recurring
charges in the fourth quarter of fiscal 1996 and in the first and second
quarters of fiscal 1997. In addition, the Company incurred pre-tax charges for
extraordinary debt extinguishment costs of $2.8 million in the fourth quarter
of 1996 and $7.4 million in the first quarter of 1997. As a result of such
charges, the Company reported a net loss of $2.7 million for the year ended
December 31, 1996 and $4.0 million for the nine months ended September 27,
1997. There can be no assurance that the Company will report positive net
income in the future.
Risks Associated with Indebtedness. As of September 27, 1997, the Company
had approximately $58.0 million of long-term indebtedness. Subject to the
restrictions in the Bank Credit Agreement, the Company may incur additional
indebtedness from time to time to finance acquisitions or capital expenditures
or for other purposes. The level of the Company's indebtedness could have
important consequences, including: (i) a portion of the Company's cash flow
from operations must be dedicated to debt service and will not be available
for other purposes; (ii) the Company's ability to obtain additional debt
financing in the future for working capital, capital expenditures or
acquisitions may be limited; and (iii) the Company's level of indebtedness
could limit its flexibility in reacting to changes in the industry and
economic conditions generally. Certain of the Company's competitors currently
have greater operating and financing flexibility than the Company. The Company
believes that, based upon current levels of operations, it should be able to
meet its debt service obligations when due. The Company's ability to service
such indebtedness, however, will be dependent on its future performance, which
will be affected by prevailing economic conditions and financial, business and
other factors, certain of which are beyond the Company's control. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." In addition, the Bank Credit
Agreement imposes certain operating and financial restrictions on the Company.
See "Description of Certain Indebtedness."
Risks Associated with Future Acquisitions. The Company expects to continue
to seek acquisitions, joint ventures or other strategic arrangements that
would enable it to expand its existing product line, broaden its geographic
coverage or allow it to offer complementary product lines. There can be no
assurance that the Company will continue to acquire businesses or establish
such arrangements on satisfactory terms or that any business acquired by the
Company will be integrated successfully into the Company's operations or be
able to operate profitably. Future acquisitions or other strategic
arrangements could require additional financing, which could result in an
increase in the Company's indebtedness.
Government Regulation. The Company's manufacturing facilities and products
are subject to stringent regulation by the FDA and by various governmental
agencies for the states and localities in which the Company's products are
manufactured and/or sold, as well as by governmental agencies in certain
foreign countries in which the Company's products are manufactured and/or
sold. Pursuant to the Federal Food, Drug, and Cosmetic Act (the "FDC Act"),
and the regulations promulgated thereunder, the FDA regulates the preclinical
and clinical testing, manufacture, labeling, distribution and promotion of
medical devices such as contact lenses. Noncompliance with applicable
requirements can result in, among other
14
<PAGE>
things, fines, injunctions, civil penalties, recall or seizure of products,
total or partial suspension of production, failure of the government to grant
premarket clearance or premarket approval for devices, withdrawal of marketing
clearances or approvals and criminal prosecution. The FDA also has the
authority to request the recall, repair, replacement or refund of the cost of
any device manufactured or distributed by the Company. In addition, as the
Company continues to expand internationally, it will be subject to regulation
in most of the foreign countries in which it sells its products; such
regulations may or may not be similar to those of the FDA. Compliance with
U.S. and foreign governmental regulations, which are subject to change, can
delay new product introduction and may have a material adverse effect on the
Company's financial condition or results of operations.
Under the FDC Act, products developed by the Company, and significant
changes or modifications to existing products, generally require FDA clearance
("510(k) clearance") pursuant to the Section 510(k) notification process
("510(k) notice") or approval of a premarket approval application ("PMA"). The
Company manufactures and markets contact lenses which have received 510(k)
clearances as well as lenses which have been the subject of approved PMA
applications.
The Company has made modifications to its products which the Company
believes do not require the submission of new 510(k) notices or PMA
supplements. There can be no assurance, however, that the FDA would agree with
any of the Company's determinations not to submit a new 510(k) notice or PMA
supplement for any of these changes or would not require the Company to submit
a new 510(k) notice or PMA supplement for any of the changes made to the
device. If the FDA requires the Company to submit a new 510(k) notice or PMA
supplement for any device modification, the Company may be prohibited from
marketing the modified device until the 510(k) notice or PMA supplement is
cleared or approved by the FDA.
The process of obtaining FDA approvals is lengthy, expensive and uncertain.
Moreover, approvals, if granted, may limit the uses for which a product may be
marketed. No assurance can be given that future changes in the FDC Act or the
FDA's regulations will not have a material adverse effect on any FDA clearance
or approval previously received with respect to the Company's products.
The Company's products are also subject to regulation in other countries in
which it sells its products. The laws and regulations of such countries range
from comprehensive medical device approval procedures such as those described
above to simple requests for product data or certifications. The number and
scope of these laws and regulations are increasing. Specifically, the
Company's products are subject to the "CE marking" approval process in the
European Union ("EU"). Additional approvals from foreign regulatory
authorities may be required for international sale of the Company's products
in non-EU countries. Failure to comply with applicable regulatory requirements
can result in the loss of previously received approvals and other sanctions
and could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company's success depends to a significant extent upon the success of
its customers in the retail optical industry. These customers are subject to a
variety of federal, state and local laws, regulations and ordinances,
including those regarding advertising, location and design of stores, products
sold and qualifications and practices of the industry. The state and local
legal requirements vary widely among jurisdictions and are subject to frequent
change. Furthermore, numerous health-care related legislative proposals have
been made in recent years in the United States Congress and in various state
legislatures. The potential impact of these proposals with respect to the
business of the Company's customers is uncertain, and there is no assurance
that the proposals, if adopted, would not have a material adverse impact on
the Company. See "Business--Government Regulation."
Risk of Trade Practice Litigation. The contact lens industry has been the
subject of a number of class action and government lawsuits and government
investigations in recent years. In December 1996, over twenty states sued
three of the Company's largest competitors, as well as certain eyecare
15
<PAGE>
practitioners and trade organizations. The suit alleges, among other things, a
conspiracy among such persons to violate antitrust laws by refusing to sell
contact lenses to mail-order and other non-practitioner contact lens
providers, so as to reduce competition in the contact lens industry. A similar
lawsuit was filed by the State of Florida in 1994 and may go to trial in 1997.
Several similar class action lawsuits were also filed in 1994. It has recently
been announced that one of the defendants in such suits has agreed to settle
the lawsuits as to itself by agreeing to sell contact lenses to mail-order and
other alternative distribution channels, and to make substantial cash and
product rebates available to consumers. Although the Company has not been
named in any of the foregoing lawsuits, there can be no assurance that the
Company will not face similar actions relating to its marketing and pricing
practices or other claims or lawsuits in the future. The defense of any such
action, lawsuit or claim could result in substantial expense to the Company
and significant diversion of attention and effort by the Company's management
personnel. There can be no assurance that any such lawsuit would be settled or
decided in a manner favorable to the Company, and a settlement or adverse
decision in any such action, lawsuit or claim could have a material adverse
effect on the Company's business, financial condition and results of
operations.
Risk of Changes in Trade Practices. There is substantial federal and state
governmental regulation related to the prescribing of contact lenses. These
regulations relate to who is permitted to prescribe and fit contact lenses,
the prescriber's obligation to provide prescriptions to its patients, the
length of time a prescription is valid, the ability or obligation of
prescribers to prescribe lenses by brand rather than by generic equivalent or
specification, and other matters. Although these regulations primarily affect
contact lens prescribers, and not manufacturers or distributors of lenses such
as the Company, changes in these regulations, or their interpretation or
enforcement, could adversely affect the effectiveness of the Company's
marketing strategy to eyecare practitioners. Additionally, given the Company's
strategic emphasis on focusing its marketing efforts on eyecare practitioners,
the Company may be more vulnerable than its competitors to changes in current
trade practices. Adverse regulatory or other decisions affecting eyecare
practitioners, or material changes in the selling and prescribing practices
for contact lenses, could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--
Government Regulation."
Dependence on Certain Intellectual Property Rights. The Company considers
certain of its intellectual property rights, including patents, trademarks and
licensing agreements, to be an integral component of its business. The
Company's policy is to file patent applications to protect technology,
inventions and improvements that are considered important to the development
of its business. There can be no assurance that patent applications filed by
the Company will result in the issuance of patents or that any of the
Company's intellectual property will continue to provide competitive
advantages for the Company's products or will not be challenged, circumvented
by others or invalidated. The Company's policy is to aggressively prosecute
and defend its patents and other proprietary technology. The prosecution and
defense of intellectual property protection, like any lawsuit, is inherently
uncertain and carries no guarantee of success. The protection of intellectual
property in certain foreign countries is particularly uncertain. See
"Business--Patents and Trademarks."
Product Liability Exposure. The Company faces an inherent risk of exposure
to product liability claims in the event that the use of its products results
in personal injury. Although the Company has not experienced any material
losses due to product liability claims, there can be no assurance that it will
not experience such losses in the future. Also, in the event that any of the
Company's products prove to be defective, the Company may be required to
recall or redesign such products. The Company maintains insurance against
product liability claims, but there can be no assurance that such coverage
will be adequate to cover any liabilities that the Company may incur or that
such insurance will continue to be available on terms acceptable to the
Company. A successful claim brought against the Company in excess of available
insurance coverage, or any claim or product recall that results in significant
adverse publicity against the Company, may have a material adverse effect on
the Company's financial condition or results of operations. See "Business--
Legal Proceedings."
16
<PAGE>
Significant Stockholders; Potential Conflicts of Interest. Upon completion
of the Offering, investment funds controlled by Bain Capital (the "Bain
Capital Funds") will beneficially own approximately 45.8% of the outstanding
Common Stock. By virtue of such stock ownership, Bain Capital will be able to
effectively control the election of the members of the Company's Board of
Directors and to generally exercise control over the affairs of the Company.
Such concentration of ownership could also have the effect of delaying,
deterring or preventing a change in control of the Company that might
otherwise be beneficial to stockholders. In addition, three representatives of
Bain Capital currently serve on the Company's Board of Directors, which is
currently comprised of eight members. There can be no assurance that conflicts
of interest will not arise with respect to such Directors or that such
conflicts will be resolved in a manner favorable to the Company. See
"Principal Stockholders."
Certain Anti-Takeover Effects. Certain provisions of the Company's Restated
Certificate of Incorporation (the "Restated Certificate") and Amended and
Restated By-laws (the "By-laws") may inhibit changes in control of the Company
not approved by the Company's Board of Directors. These provisions include:
(i) a classified Board of Directors; (ii) a prohibition on stockholder action
through written consents; (iii) a requirement that special meetings of
stockholders be called only by the Board of Directors; (iv) advance notice
requirements for stockholder proposals and nominations; (v) limitations on the
ability of stockholders to amend, alter or repeal the By-laws; and (vi) the
authority of the Board to issue without stockholder approval preferred stock
with such terms as the Board may determine. The Company will also be afforded
the protections of Section 203 of the Delaware General Corporation Law, which
could have similar effects. See "Description of Capital Stock."
Risks Associated with Dividend Policy. Since the Wesley Jessen Acquisition
in 1995, the Company has not declared or paid any cash or other dividends on
its Common Stock and does not expect to pay dividends for the foreseeable
future. Instead, the Company currently intends to retain earnings to support
its growth strategy and reduce indebtedness. As a holding company, the ability
of the Company to pay dividends in the future is dependent upon the receipt of
dividends or other payments from its principal operating subsidiary. The Bank
Credit Agreement permits the payment of dividends of up to $3.0 million
annually plus certain excess cash available at the time of payment, if any.
Any future determination to pay dividends will be at the discretion of the
Company's Board of Directors and will depend upon, among other factors, the
Company's results of operations, financial condition, capital requirements and
contractual restrictions. See "Dividend Policy" and "Description of Certain
Indebtedness."
Potential Adverse Impact from Shares Eligible for Future Sale. The Company
has 17,652,374 shares of Common Stock outstanding. In addition to the shares
of Common Stock to be sold in the Offering, the 7,162,040 shares sold in the
IPO and the secondary offering are freely tradeable without restriction under
the Securities Act, unless held by an "affiliate" of the Company. The
remaining 9,115,334 shares of Common Stock held by existing stockholders of
the Company are currently eligible for sale in the public market, subject to
compliance with the resale volume limitations and other restrictions of Rule
144 under the Securities Act. The holders of an aggregate of approximately
8,105,491 shares of Common Stock have certain rights to require the
registration of their shares of Common Stock under the Securities Act at the
Company's expense. No prediction can be made as to the effect, if any, that
market sales of shares of Common Stock or the availability of shares of Common
Stock for sale will have on the market price of the Common Stock from time to
time. The sale of a substantial number of shares held by the existing
stockholders, whether pursuant to a subsequent public offering or otherwise,
or the perception that such sales could occur, could adversely affect the
market price of the Common Stock and could materially impair the Company's
future ability to raise capital through an offering of equity securities. See
"Shares Eligible For Future Sale" and "Underwriting."
Potential Volatility of Market Price of Common Stock. Prior to the IPO,
there was no public market for the Common Stock. The Offering price of the
Common Stock may not be indicative of the market price for shares of the
Common Stock after the Offering. Numerous factors, many of which are beyond
the
17
<PAGE>
control of the Company, may cause the market price of the Common Stock to
fluctuate significantly, such as fluctuations in product revenues and net
income of the Company or its competitors, shortfalls in the Company's
operating results from levels forecast by securities analysts, announcements
concerning the Company, its competitors or its customers, its competitors or
its customers, the introduction of new products or changes in product pricing
policies by the Company, its competitors or its customers, market conditions
in the industry and the general state of the securities market. These
fluctuations, as well as general economic, political and market conditions,
may adversely affect the market price of the Common Stock.
THE COMPANY
Wesley Jessen is the leading worldwide developer, manufacturer and marketer
of specialty soft contact lenses, based on its share of the specialty lens
market. The Company operates primarily in the specialty segment of the soft
lens market, where it has the leading share in each of the cosmetic and
premium lens segments and the second leading share in the toric lens segment.
The Company's principal objective is to expand its contact lens business in
the faster-growing specialty segment of the market in order to achieve growth
in revenues and earnings per share.
The Company was founded in 1946 by contact lens pioneers Drs. Newton K.
Wesley and George Jessen, after the two doctors discovered that hard contact
lenses could be used to prevent a rare sight-threatening eye disease suffered
by Dr. Wesley. Originally known as The Plastic Contact Lens Company, the
Company went on to pioneer the design, manufacturing and fitting techniques of
hard contact lenses. Throughout its history, the Company has remained a market
leader in research and development, accounting for numerous technological
breakthroughs in contact lenses. In 1978, the Company received FDA approval of
its hydrogel lens, a durable and highly oxygen-permeable soft plastic lens
made from a unique polymer. In 1986, the Company pioneered the development of
the conventional opaque color lens (which change the color of dark eyes), and
in 1989, the Company introduced its Optifit toric lenses, which correct vision
for people with astigmatism (the condition of an irregularly shaped cornea).
The Company's most significant product introductions to the soft contact lens
market in the last three years have been its Precision UV lenses, which
provide eyes with protection from ultraviolet light, and its FreshLook
disposable opaque and eyecolor-enhancing lenses.
From 1980 to 1995, Wesley Jessen operated as a wholly owned subsidiary of
Schering-Plough Corporation ("Schering-Plough"). On June 28, 1995, Bain
Capital together with new and certain then-existing members of management (the
"Management Investors") acquired the Predecessor in the Wesley Jessen
Acquisition. The following table sets forth the sources and uses of funds in
the Wesley Jessen Acquisition (dollars in millions):
<TABLE>
<S> <C>
SOURCES:
Borrowings under a bank credit
agreement..................... $43.0
Equity contributions........... 7.5
-----
Total........................ $50.5
=====
</TABLE>
<TABLE>
<S> <C>
USES:
Acquisition consideration.. $47.0
Fees and expenses.......... 3.5
-----
Total.................... $50.5
=====
</TABLE>
After the Wesley Jessen Acquisition, the Company's new management team
pursued an aggressive strategy of cost savings and revenue enhancement to
improve the Company's results of operations. During this period, management:
(i) redefined the Company's disposable lens marketing strategy by repricing
and repackaging the Company's products to be more competitive with industry
standards; (ii) launched a national consumer advertising campaign featuring
Christy Turlington; (iii) expanded its product offerings in its FreshLook line
of disposable colored contact lenses; (iv) heightened its sales and marketing
focus on serving the needs of eyecare practitioners; and (v) achieved
substantial cost savings through personnel reductions, decreased overall
marketing and administrative expenses, consolidation of facilities and
increased operating efficiencies.
18
<PAGE>
On October 2, 1996, the Company acquired substantially all the assets and
assumed certain liabilities of Barnes-Hind from Pilkington. Founded in 1939,
Barnes-Hind is widely recognized in the contact lens industry as a leader in
product and material innovation and design. Barnes-Hind was acquired by
Pilkington in 1987 and combined with its existing contact lens operations. At
the time of the Barnes-Hind Acquisition, Barnes-Hind was the third largest
manufacturer of specialty contact lenses in the world, with a leading market
position in premium and toric lenses. The following table sets forth the
sources and uses of funds in the Barnes-Hind Acquisition (dollars in
millions):
<TABLE>
<S> <C>
SOURCES:
Borrowings under Bank Credit
Agreement.................... $ 96.6
Issuance of Pilkington Note... 5.0
------
Total....................... $101.6
======
</TABLE>
<TABLE>
<S> <C>
USES:
Repayment of then existing bank
credit agreement................ $ 28.5
Acquisition consideration........ 62.4
Fees and expenses................ 10.7
------
Total.......................... $101.6
======
</TABLE>
The Company's principal executive offices are located at 333 East Howard
Avenue, Des Plaines, Illinois 60018-5903 and its telephone number is (847)
294-3000.
USE OF PROCEEDS
The Company is not selling shares in the Offering and will not receive any
of the proceeds from the sale of the shares offered hereby. See "Principal and
Selling Stockholders."
PRICE RANGE OF COMMON STOCK
The Common Stock of the Company has been included for quotation in the
Nasdaq National Market under the symbol "WJCO" since the IPO on February 13,
1997. Prior to that time, there was no public market for the Common Stock. The
following table sets forth the high and low bid prices for the Common Stock
for the periods indicated as reported by the Nasdaq National Market:
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1997:
First Quarter (from February 13, 1997)........................... $16.75 $14.63
Second Quarter................................................... 25.88 13.00
Third Quarter.................................................... 31.00 22.50
Fourth Quarter (through November 12, 1997)....................... 34.88 26.00
</TABLE>
On November 12, 1997, the last reported sale price of the Common Stock was
$33.00 per share. As of September 27, 1997, there were approximately 100
holders of record of the Company's Common Stock. The Company believes that the
number of beneficial owners of the Common Stock is substantially larger.
DIVIDEND POLICY
Since the Wesley Jessen Acquisition in 1995, the Company has not declared or
paid any cash or other dividends on its Common Stock and does not expect to
pay dividends for the foreseeable future. Instead, the Company currently
intends to retain earnings to support its growth strategy and reduce
indebtedness. As a holding company, the ability of the Company to pay
dividends in the future is dependent upon the receipt of dividends or other
payments from its principal operating subsidiary. The Bank Credit Agreement
permits the payment of dividends of up to $3.0 million annually plus certain
excess cash available at the time of payment, if any. Any future determination
to pay dividends will be at the discretion of the Company's Board of Directors
and will depend upon, among other factors, the Company's results of
operations, financial condition, capital requirements and contractual
restrictions. See "Description of Certain Indebtedness."
19
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 27, 1997.
<TABLE>
<CAPTION>
SEPTEMBER 27,
1997
--------------
(IN THOUSANDS)
<S> <C>
Long-term debt, including current maturities:
Term loans and revolving credit facility...................... $ 58,000
--------
Total long-term debt........................................ 58,000
Stockholders' equity:
Serial Preferred Stock, $.01 par value, 5,000,000 shares
authorized; no shares issued and outstanding, actual and as
adjusted..................................................... --
Common Stock, $.01 par value, 50,000,000 shares authorized;
17,652,374 shares issued and outstanding(1).................. 177
Additional paid-in capital.................................... 55,184
Accumulated deficit........................................... (26,464)
Cumulative translation adjustment............................. (412)
--------
Total stockholders' equity.................................. 28,485
--------
Total capitalization...................................... $ 86,485
========
</TABLE>
- --------
(1) Does not include 2,894,270 shares of Common Stock reserved for issuance
upon the exercise of options outstanding as of September 27, 1997, with a
weighted average exercise price of $3.87, or 1,223,300 shares of Common
Stock reserved for issuance under the Stock Plans. See "Management--Stock
Options."
20
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The Unaudited Pro Forma Consolidated Statements of Operations for the year
ended December 31, 1996 give pro forma effect to: (i) the Barnes-Hind
Acquisition (and related financing transactions); (ii) the divestiture of
Barnes-Hind's U.S. Natural Touch Product Line; (iii) the IPO Transactions;
(iv) the August 1997 Offering and the application of the net proceeds to the
Company therefrom; and (v) the execution of the Bank Credit Agreement, as if
each had occurred on January 1, 1996. The Unaudited Pro Forma Consolidated
Statement of Operations for the nine months ended September 27, 1997 give pro
forma effect to the transactions described in items (ii) through (v) above as
if each had occurred on January 1, 1996.
The unaudited pro forma financial data are provided for informational
purposes only and are not necessarily indicative of the results of operations
or financial position of the Company had the transactions assumed therein
occurred, nor are they necessarily indicative of the results of operations
which may be expected to occur in the future. Furthermore, the unaudited pro
forma financial data are based upon assumptions that the Company believes are
reasonable and should be read in conjunction with the financial statements and
the accompanying notes thereto included elsewhere in this Prospectus.
21
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(in thousands, except per share data)
<TABLE>
<CAPTION>
BARNES-
COMPANY HIND
YEAR JANUARY 1 PRO FORMA
ENDED THROUGH PRO AUGUST 1997 YEAR ENDED
DECEMBER 31, OCTOBER 1, ACQUISITION FORMA IPO OFFERING DECEMBER 31,
1996 1996 ADJUSTMENTS COMBINED ADJUSTMENTS ADJUSTMENTS 1996
------------ ---------- ----------- -------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $156,752 $ 99,601 $ (6,354)(a) $249,999 $ -- $ -- $249,999
Operating costs and
expenses:
Cost of goods sold..... 43,152 48,928 (2,781)(a) 86,232 -- -- 86,232
(2,350)(b)
(717)(c)
]
Cost of goods sold--
inventory step-up..... 20,706 -- (20,706)(d) -- -- -- --
Marketing and
administrative........ 88,274 58,866 (2,534)(a) 126,910 -- -- 126,910
(839)(b)
(17,607)(c)
750 (e)
]
Research and
development........... 7,178 7,403 (168)(b) 12,025 -- -- 12,025
(2,388)(c)
]
Amortization of
intangible assets
(negative goodwill)... (784) -- (308)(f) (1,092) -- -- (1,092)
-------- -------- -------- -------- ------ ----- --------
Income (loss) from
operations............. (1,774) (15,596) 43,294 25,924 -- -- 25,924
Other (income) expenses:
Interest income........ -- (340) 340 (g) -- -- -- --
Interest expense....... 5,385 378 4,958 (h) 10,721 (4,912)(k) (819)(l) 4,990
Financing charge....... -- -- -- -- -- -- --
Other (income) expense,
net................... (3,051) -- -- (3,051) -- -- (3,051)
-------- -------- -------- -------- ------ ----- --------
Income (loss) before
income taxes and
extraordinary item..... (4,108) (15,634) 37,996 18,254 4,912 819 23,985
Income tax (expense)
benefit................ 3,037 (2,989) (6,254)(i) (6,206) (1,670)(h) (278)(i) (8,154)
-------- -------- -------- -------- ------ ----- --------
Income (loss) before
extraordinary item..... (1,071) (18,623) 31,742 12,048 3,242 541 15,831
Extraordinary loss, net
of tax................. (1,671) -- 1,671 (j) -- -- -- --
-------- -------- -------- -------- ------ ----- --------
Net income (loss)....... $ (2,742) $(18,623) $ 33,413 $ 12,048 $3,242 $ 541 $ 15,831
======== ======== ======== ======== ====== ===== ========
Pro forma net income per common share........................................................ $ 0.78(m)
========
Pro forma weighted average common shares outstanding......................................... 20,176(m)
</TABLE>
The accompanying notes are an integral part of the Unaudited Pro Forma
Consolidated Statements of Operations.
22
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 27, 1997
(in thousands, except per share data)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED PRO AUGUST 1997 PRO FORMA NINE
SEPTEMBER 27, ACQUISITION FORMA IPO OFFERING MONTHS ENDED
1997 ADJUSTMENTS COMBINED ADJUSTMENTS ADJUSTMENTS SEPTEMBER 27, 1997
------------- ----------- -------- ----------- ----------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $211,389 $ -- $211,389 $-- $-- $211,389
Operating costs and
expenses:
Cost of goods sold..... 70,707 (134)(b) 70,573 -- -- 70,573
Cost of goods sold--
inventory step-up..... 22,666 (22,666)(d) -- -- -- --
Marketing and
administrative........ 104,049 (48)(b) 102,916 -- -- 102,916
(1,085)(c)
Research and
development........... 8,828 (10)(b) 8,818 -- -- 8,818
Amortization of
intangible assets
(negative goodwill)... (588) (231)(f) (819) -- -- (819)
-------- ------- -------- ---- ---- --------
Income (loss) from
operations............. 5,727 24,174 29,901 -- -- 29,901
Other expense:
Interest expense, net.. 4,371 -- 4,371 (371)(k) (614)(l) 3,386
-------- ------- -------- ---- ---- --------
Income (loss) before
income taxes and
extraordinary item..... 1,356 24,174 25,530 371 614 26,515
Income tax (expense)
benefit................ (461) (8,219) (8,680) (126)(i) (209)(i) (9,015)
-------- ------- -------- ---- ---- --------
Income (loss) before
extraordinary item..... 895 15,955 16,850 245 405 17,500
Extraordinary item, net
of tax................. (4,902) 4,902 (j) -- -- -- --
-------- ------- -------- ---- ---- --------
Net income (loss)....... $ (4,007) $20,857 $ 16,850 $245 $405 $ 17,500
======== ======= ======== ==== ==== ========
Pro forma net income (loss) per common share....................................... $ 0.87(m)
========
Pro forma weighted average common shares outstanding............................... 20,133(m)
</TABLE>
The accompanying notes are an integral part of the Unaudited Pro Forma
Consolidated Statements of Operations.
23
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
The Unaudited Pro Forma Statements of Operations give effect to the
following unaudited pro forma adjustments:
(a) Reflects the divestiture of the U.S. Natural Touch Product Line pursuant
to the terms of the Company's voluntary consent order with the Federal
Trade Commission ("FTC"). See "Business--Required Divestiture." The
Company does not believe that this disposition has had a material impact
on the Company's results of operations. The unaudited historical operating
results of the U.S. Natural Touch Product Line were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
Net sales....................................................... $6,354
Operating costs and expenses:
Cost of goods sold............................................ 2,781
Marketing and administrative.................................. 2,534
------
Pre-tax contribution............................................ $1,039
======
</TABLE>
(b) Represents the reduction of depreciation expense as a result of the
Company's application of purchase accounting whereby the excess of the
fair market value of the net assets acquired over the purchase price was
allocated as a reduction to the fair market value of the property, plant
and equipment acquired in the Barnes-Hind Acquisition, as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 27,
1996 1997
------------ -------------
<S> <C> <C>
Reduction in depreciation expense recorded in:
Cost of goods sold................................ $2,350 $134
Marketing and administrative.................... 839 48
Research and development........................ 168 10
------ ----
Total pro forma reduction in depreciation
expense...................................... $3,357 $192
====== ====
</TABLE>
(c) Represents the recurring cost savings to the Company relating to the
Barnes-Hind corporate consolidation plan, which includes the actual
reduction of certain operating expenses related primarily to the closure
of the Sunnyvale, California corporate offices upon consummation of the
Barnes-Hind Acquisition, a reduction of 139 corporate level employees and
related personnel and facilities expenses. The cost savings outlined
herein do not reflect potential additional, as yet unquantified, savings
which may arise following implementation of management's plans to curtail
certain manufacturing activities in San Diego, California and transfer
production to other Company locations. The Company has commenced the
implementation of the consolidation plan. The effect of the cost savings
related to the above described items are presented below:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 27,
1996 1997
------------ -------------
<S> <C> <C>
Cost savings by category:
Wages and related personnel costs............... $ 9,998 $ 479
Contractual "change-in-control" employment
obligations.................................... 7,346 --
Facilities and related occupancy costs.......... 3,368 606
------- ------
Total reduction in Barnes-Hind operating
expenses..................................... $20,712 $1,085
======= ======
Cost savings by statement of operations caption:
Cost of goods sold.............................. $ 717 $ --
Marketing and administrative.................... 17,607 1,085
Research and development........................ 2,388 --
------- ------
Total reduction in Barnes-Hind operating
expenses..................................... $20,712 $1,085
======= ======
</TABLE>
24
<PAGE>
(d) Reflects the adjustment to eliminate the non-recurring impact of the
inventory write-up as a result of the Company's application of purchase
accounting in connection with both the Wesley Jessen Acquisition and the
Barnes-Hind Acquisition, as applicable.
(e) Represents the additional annual management fee paid by the Company to
Bain Capital for management and advisory services under the Advisory
Agreement in connection with the Barnes-Hind Acquisition. See "Certain
Transactions."
(f) Represents the adjustment of amortization to reflect the Company's
application of purchase accounting whereby the excess of the fair value of
the net assets acquired over the purchase price was allocated as a
reduction to the fair value of the Company's noncurrent intangible assets
acquired in connection with the Barnes-Hind Acquisition, resulting in
negative goodwill.
(g) Reflects the elimination of intercompany interest income allocated to
Barnes-Hind by Pilkington.
(h) Represents additional pro forma interest expense, as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
Elimination of Wesley Jessen and Barnes-Hind historical interest
expense........................................................ $(5,327)
-------
Elimination of Wesley Jessen historical amortization of
capitalized financing fees..................................... (436)
-------
Interest on borrowings under the then existing bank credit
agreement:
Revolving credit facility at LIBOR plus 2.75% (8.19% on $10.0
million assumed average balance)............................. 819
Term Loan A at LIBOR plus 2.75% (8.19% on $45.0 million)...... 3,686
Term Loan B at LIBOR plus 3.25% (8.69% on $50.0 million)...... 4,345
Commitment fee on pro forma unutilized revolving credit
facility (0.50% on $35.0 million assumed average unutilized
balance)..................................................... 175
-------
Total interest and fees on borrowings under the then existing
bank credit agreement.......................................... 9,025
-------
Interest on the Pilkington Note at the stated rate (8.0% on $5.0
million)....................................................... 400
Amortization of capitalized deferred financing fees related to
the refinancing of the then existing bank credit agreement
($7.8 million over an average 6-year period)................... 1,296
-------
Net increase in pro forma interest expense...................... $ 4,958
=======
</TABLE>
(i) Represents the elimination of the pro forma combined historical income tax
(expense) benefit and the inclusion of the income tax (expense) benefit
resulting from the pro forma adjustments to pro forma income (loss) before
taxes to arrive at an estimated ultimate effective income tax rate of 34%.
Significant tax benefits, in the form of a tax credit, are available for
companies with operations in Puerto Rico, where one of Wesley Jessen's
principal manufacturing facilities is located. The amount of such
qualified credit to the Company, which would offset future federal income
taxes payable in any period, is dependent on the Company's labor
expenditures, depreciation and other factors in Puerto Rico. Recent
legislation will phase out this tax credit through December 31, 2005.
(j) Reflects the elimination of the non-recurring impact of the write-off of
capitalized financing fees in connection with the refinancings of the
respective bank credit agreements existing immediately prior to the
Barnes-Hind Acquisition and the IPO.
25
<PAGE>
(k) Represents the reduction of pro forma interest expense resulting from the
refinancing of the then existing bank credit agreement and the use of a
portion of the net proceeds from the IPO to repay pro forma outstanding
debt, as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 27,
1996 1997
------------ -------------
<S> <C> <C>
Elimination of pro forma interest under the then
existing bank credit agreement.................. $(9,025) $(4,060)
Elimination of pro forma amortization of
capitalized financing fees...................... (1,296) (368)
Interest on borrowings under the Bank Credit
Agreement:
Revolving credit facility at LIBOR plus 1.25%
(6.69% on $8.0 million assumed average
balance)...................................... 535 401
Term Loan A at LIBOR plus 1.25% (6.69% on $65.0
million)...................................... 4,349 3,262
Interest on pro forma unutilized revolving
credit facility commitment (0.40% on $27.0
million assumed average unutilized)........... 108 81
Amortization of capitalized financing fees
related to the Bank Credit Agreement ($2.5
million over an average 6-year period).......... 417 313
------- -------
Net decrease in pro forma interest expense....... $(4,912) $ (371)
======= =======
</TABLE>
(l) Represents the reduction of pro forma interest expense resulting from the
use of a portion of the net proceeds from the August 1997 Offering to
repay pro forma outstanding debt, as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 27,
1996 1997
------------ -------------
<S> <C> <C>
Elimination of pro forma interest under the Bank
Credit Agreement............................... $(4,992) $(3,744)
Elimination of pro forma interest on the
Pilkington Note................................ (400) (300)
Interest on borrowings under the Bank Credit
Agreement:
Revolving Credit Facility at LIBOR plus 0.75%
(6.61% on $65 million assumed average
balance)..................................... 4,297 3,223
Interest on pro forma unutilized Revolving
Credit Facility commitment (0.275% on $70
million assumed average unutilized).......... 193 145
Amortization of incremental capitalized
financing fees related to the Bank Credit
Agreement, as amended ($0.5 million over an
average 6-year period)......................... 83 62
------- -------
Net decrease in pro forma interest expense...... $ (819) $ (614)
======= =======
</TABLE>
(m) Reflects the issuance of 500,000 shares of Common Stock in the August 1997
Offering and the application of the net proceeds to the Company therefrom.
26
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
THE COMPANY/PREDECESSOR
Set forth below are selected historical consolidated financial data of the
Predecessor and the Company for the dates and for the periods indicated. The
selected historical consolidated financial data of the Predecessor as of
December 31, 1993 and 1994 and for the years ended December 31, 1993 and 1994
and the period from January 1, 1995 through June 28, 1995 were derived from
the historical financial statements of the Predecessor that were audited by
Price Waterhouse LLP, whose report appears elsewhere in this Prospectus. The
selected historical consolidated financial data of the Company as of December
31, 1995 and 1996 and for the period June 29, 1995 through December 31, 1995
and for the year ended December 31, 1996 were derived from the historical
financial statements of the Company that were audited by Price Waterhouse LLP,
whose report appears elsewhere in this Prospectus. The selected historical
consolidated financial data of the Predecessor for the year ended December 31,
1992 has not been audited. The unaudited interim financial data have been
derived from the historical unaudited consolidated interim financial
statements of the Company. Such interim financial statements include all
adjustments, consisting only of normal recurring adjustments, which management
considers necessary for fair presentation of results for such periods and
should be read in conjunction with, and are qualified by reference to,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the audited consolidated financial statements and accompanying
notes thereto included elsewhere in this Prospectus. Results for interim
periods are not necessarily indicative of results for the full year.
<TABLE>
<CAPTION>
THE PREDECESSOR THE COMPANY
--------------------------------------- ------------------------------------------------------------
YEAR ENDED
YEAR ENDED DECEMBER 31, JANUARY 1 JUNE 29 DECEMBER 31, NINE MONTHS ENDED
---------------------------- THROUGH THROUGH ------------------ ---------------------------
JUNE 28, DECEMBER 31, SEPTEMBER 28, SEPTEMBER 27,
1992 1993 1994 1995 1995 1995(A) 1996 1996 1997
-------- -------- -------- --------- ------------ -------- -------- ------------- -------------
STATEMENT OF
OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales......... $111,030 $103,386 $109,640 $ 51,019 $ 54,315 $105,334 $156,752 $96,048 $211,389
Operating costs
and expenses:
Cost of goods
sold............ 37,524 56,780 65,591 20,871 19,916 38,442 43,152 26,471 70,707
Costs of goods
sold--inventory
step-up......... -- -- -- -- 33,929 -- 20,706 6,626 22,666
Marketing and
administrative.. 58,350 59,764 79,185 43,236 29,476 69,162 88,274 51,014 104,049
Research and
development..... 11,029 10,286 9,843 4,569 2,524 4,677 7,178 3,786 8,828
Amortization and
intangible
assets (negative
goodwill)....... 6,094 5,472 5,472 2,736 (392) (784) (784) (588) (588)
-------- -------- -------- -------- -------- -------- -------- ------- --------
Income (loss)
from operations. (1,967) (28,916) (50,451) (20,393) (31,138) (6,163) (1,774) 8,739 5,727
Other (income)
expenses:
Interest expense,
net............. -- -- -- -- 2,599 4,889 5,385 2,757 4,371
Financing charge. 8,021 6,886 7,172 3,511 -- -- -- -- --
Other (income),
net............. (4,078) (256) (202) (1,360) -- (1,360) (3,051) (3,500) --
-------- -------- -------- -------- -------- -------- -------- ------- --------
Income (loss)
before income
taxes and
extraordinary
loss............. (5,910) (35,546) (57,421) (22,544) (33,737) (9,692) (4,108) 9,482 1,356
Income tax benefit
(expense)........ 2,364 17,214 26,935 9,401 14,022 4,032 3,037 (1,621) (461)
-------- -------- -------- -------- -------- -------- -------- ------- --------
Net income (loss)
before
extraordinary
loss............. (3,546) (18,332) (30,486) (13,143) (19,715) (5,660) (1,071) 7,861 895
Extraordinary
loss, net of tax
benefit.......... -- -- -- -- -- -- (1,671) -- (4,902)
-------- -------- -------- -------- -------- -------- -------- ------- --------
Net income (loss). $ (3,546) $(18,332) $(30,486) $(13,143) $(19,715) $ (5,660) $ (2,742) $ 7,861 $ (4,007)
======== ======== ======== ======== ======== ======== ======== ======= ========
PRO FORMA PRIMARY
NET INCOME (LOSS)
PER COMMON SHARE
(B):
Net income (loss)
before
extraordinary
loss............. $ (1.37) $ (0.07) $ 0.54 $ 0.05
Extraordinary
loss, net of tax
benefit.......... -- (0.12) -- (0.29)
-------- -------- ------- --------
Net income (loss). $ (1.37) $ (0.19) $ 0.54 $ (0.24)
======== ======== ======= ========
Weighted average
common shares
used in
computation of
pro forma primary
net income (loss)
per common share. 14,416 14,638 14,638 16,621
BALANCE SHEET DATA (AT END
OF PERIOD):
Working capital... $ 42,538 $ 30,940 $ 30,262 $ 78,259 $ 56,279
Total assets...... 214,747 191,429 67,330 180,600 169,529
Total debt........ -- -- 42,000 102,975 58,000
Stockholders'
equity (deficit). 196,243 173,409 (12,190) (13,292) 28,485
</TABLE>
The accompanying notes are an integral part of the Selected Historical
Consolidated Financial Data.
27
<PAGE>
<TABLE>
<CAPTION>
THE PREDECESSOR THE COMPANY
----------------------------- -------------------------------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, JANUARY 1 JUNE 29 DECEMBER 31, NINE MONTHS ENDED
------------------ THROUGH THROUGH ------------------- ---------------------------
JUNE 28, DECEMBER 31, SEPTEMBER 28, SEPTEMBER 27,
1993 1994 1995 1995 1995(A) 1996 1996 1997
-------- -------- --------- ------------ ------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Net cash provided by
(used in) operating
activities............ $ 12,301 $ (6,664) $ (9,835) $ 4,035 $ -- (c) $ 19,238 $ 22,351 $ 1,430
Net cash provided by
(used in) investing
activities............ (25,122) (2,271) (1,657) (47,926) -- (c) (68,006) (3,809) (5,801)
Net cash provided by
(used in) financing
activities............ 13,994 7,652 11,272 46,033 -- (c) 53,369 (13,228) 1,117
EBITDA(d).............. (17,408) (37,391) (13,786) 2,399 -- 22,010 14,936 28,389
Depreciation and
amortization,
including negative
goodwill.............. 11,508 13,060 6,607 (392) (784) (322) (429) (4)
Capital expenditures... 25,297 3,187 1,959 893 2,852 6,617 3,809 11,801
</TABLE>
- -------
(a) The pro forma operating results for the year ended December 31, 1995
combine the operations of the Predecessor from January 1, 1995 through
June 28, 1995 and the Company from June 29, 1995 through the end of the
period and have been adjusted to reflect the period as if the Wesley
Jessen Acquisition and related financing transactions had occurred on
January 1, 1995. Because of the purchase accounting adjustments made to
the Predecessor's financial statements, the financial statements of the
Predecessor for the periods prior to June 29, 1995 are not comparable to
those of subsequent periods. The combined pro forma data are intended to
assist in making comparisons for periods prior to the Barnes-Hind
Acquisition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Notes to Consolidated
Financial Statements of the Company included herein.
(b) No historical earnings per share data are presented as the Company does
not consider such data to be meaningful. See "Unaudited Pro Forma
Financial Data."
(c) Because of the subjectivity inherent in the assumptions concerning the
timing and nature of the uses of cash generated by the pro forma interest
and other cost savings adjustments, cash flows from operating, investing
and financing activities are not presented for the pro forma periods.
(d) "EBITDA" is defined herein as income from operations plus depreciation and
amortization expense, nonrecurring charges and other non-cash expense
items. Management believes that EBITDA, as presented, represents a useful
measure of assessing the performance of the Company's ongoing operating
activities as it reflects the earnings trends of the Company without the
impact of the purchase accounting applied in connection with the Wesley
Jessen Acquisition or the Barnes-Hind Acquisition or the financing
required to consummate those historical transactions. Income derived from
non-operating sources, including license fees received during the periods
presented, have been excluded from EBITDA as they are non-recurring in
nature and are not representative of the ongoing operations of the
Company. Targets and positive trends in EBITDA are used by the Company's
creditors in assessing debt covenant compliance. The Company understands
that while EBITDA is frequently used by security analysts in the
evaluation of companies, it is not necessarily comparable to other
similarly titled captions of other companies due to potential
inconsistencies in the method of calculation. EBITDA is not intended as an
alternative to cash flow from operating activities as a measure of
liquidity, an alternative to net income as an indicator of the Company's
operating performance or any other measure of performance in accordance
with generally accepted accounting principles. A reconciliation of net
income (loss) to EBITDA for each period included herein is set forth
below:
<TABLE>
<CAPTION>
THE PREDECESSOR
-----------------------------
<CAPTION>
THE COMPANY
-----------------------------------------------------
YEAR ENDED
DECEMBER 31, JANUARY 1
------------------ THROUGH
JUNE 28,
1993 1994 1995
-------- -------- ---------
<S> <C> <C> <C>
Net income (loss)..................... $(18,332) $(30,486) $(13,143)
Income tax (benefit) expense.......... (17,214) (26,935) (9,401)
Interest expense, net................. -- -- --
Financing charge(1)................... 6,886 7,172 3,511
Other income, net(2).................. (256) (202) (1,360)
Restructuring charge(3)............... -- -- --
Depreciation and amortization......... 11,508 13,060 6,607
Extraordinary item, net of income
tax(4)............................... -- -- --
Inventory step-up(5).................. -- -- --
-------- -------- --------
EBITDA................................ $(17,408) $(37,391) $(13,786)
- --------------------------------------------------
======== ======== ========
JUNE 29 NINE MONTHS ENDED
THROUGH YEAR ENDED ---------------------------
DECEMBER 31, DECEMBER 31, SEPTEMBER 28, SEPTEMBER 27,
1995 1996 1996 1997
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Net income (loss)..................... $(19,715) $(2,742) $ 7,861 $(4,007)
Income tax (benefit) expense.......... (14,022) (3,037) 1,621 461
Interest expense, net................. 2,599 5,385 2,757 4,371
Financing charge(1)................... -- -- -- --
Other income, net(2).................. -- (3,051) (3,500) --
Restructuring charge(3)............... -- 3,400 -- --
Depreciation and amortization......... (392) (322) (429) (4)
Extraordinary item, net of income
tax(4)............................... -- 1,671 -- 4,902
Inventory step-up(5).................. 33,929 20,706 6,626 22,666
------------ ------------ ------------- -------------
EBITDA................................ $ 2,399 $22,010 $14,936 $28,389
- --------------------------------------------------
============ ============ ============= =============
</TABLE>
-------
(1) Represents financing charges from Schering-Plough in lieu of interest
expense related to Schering-Plough's investment in the Predecessor.
(2) Represents income derived from non-operating sources (e.g., gains on
fixed asset disposals and interest income) and certain one-time gains
related to licensing fees excluded from EBITDA as they do not relate to
the ongoing operations of the Company.
(3) Represents a charge recorded in the fourth quarter of 1996 relating to
costs to be incurred for restructuring the Wesley Jessen operations
following the Barnes-Hind Acquisition.
28
<PAGE>
(4) Represents extraordinary losses relating to the write-off of
capitalized financing fees in connection with the fourth quarter 1996
and first quarter 1997 refinancings.
(5) Represents the amortization of the inventory revaluation recorded in
conjunction with the Acquisitions excluded from EBITDA as it represents
a non-cash charge to operations.
BARNES-HIND
Set forth below are summary historical combined financial data of Barnes-
Hind for the dates and for the periods indicated. The summary historical
combined financial data as of March 31, 1995 and 1996 and for the periods then
ended were derived from the historical financial statements of Barnes-Hind
that were audited by Coopers & Lybrand L.L.P., whose report appears elsewhere
in this Prospectus. The unaudited summary historical combined financial data
for the six months ended September 30, 1995 and the period from April 1, 1996
through October 1, 1996 and as of October 1, 1996 have been derived from the
historical unaudited combined statements of Barnes-Hind which, in the opinion
of management, contain all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the combined results of operations
and financial position of Barnes-Hind for such periods and at such date.
Financial data presented herein include the financial data associated with the
U.S. Natural Touch Product Line, which the Company divested in compliance with
a consent order entered into with the FTC on March 17, 1997. See "Business--
Required Divestiture." The U.S. Natural Touch Product Line generated
approximately $6.9 million of net sales for the year ended March 31, 1996. The
summary historical financial data set forth below should be read in
conjunction with, and are qualified by reference to, the audited financial
statements and accompanying notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
PERIOD
FROM
YEAR ENDED SIX MONTHS APRIL 1
MARCH 31, ENDED THROUGH
------------------ SEPTEMBER 30, OCTOBER 1,
1995 1996 1995 1996
-------- -------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................ $124,994 $132,581 $67,154 $ 64,805
Costs and expenses:
Cost of sales.................. 62,435 63,341 33,197 34,695
Research and development....... 10,317 7,884 4,160 3,448
Selling and marketing.......... 37,609 43,292 21,012 20,634
General and administrative..... 21,516 22,536 11,901 21,318
-------- -------- ------- --------
Operating income (loss)........ (6,883) (4,472) (3,116) (15,290)
Interest income.................. 615 773 323 95
Interest expense................. (4,623) (4,315) (3,287) (590)
-------- -------- ------- --------
Income (loss) before provision
for income taxes................ (10,891) (8,014) (6,080) (15,785)
Income tax expense............... 2,708 3,116 2,365 6,140
-------- -------- ------- --------
Net income (loss)................ $(13,599) $(11,130) $(8,445) $(21,925)
======== ======== ======= ========
OTHER DATA:
Depreciation..................... $ 6,749 $ 4,017 $ 3,375 $ 3,349
Capital expenditures............. 12,899 13,572 4,205 5,417
<CAPTION>
MARCH 31,
------------------ OCTOBER 1,
1995 1996 1996
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficiency)..... $(36,364) $ 43,509 $ 29,324
Total assets..................... 102,313 112,184 98,432
Total debt....................... 90,868 10,414 --
Parent company investment (defi-
cit)............................ (18,738) 70,680 63,522
</TABLE>
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following management's discussion and analysis provides information with
respect to the results of operations of the Predecessor for the year ended
December 31, 1994 and the period from January 1, 1995 through June 28, 1995
and the Company for the period from June 29, 1995 through December 31, 1995,
the year ended December 31, 1996, and the nine months ended September 28, 1996
and September 27, 1997. The Company completed the Wesley Jessen Acquisition on
June 28, 1995, the Barnes-Hind Acquisition on October 2, 1996 and the IPO on
February 19, 1997. The Acquisitions were accounted for under the purchase
method of accounting. Because of the revaluation of the assets and liabilities
of Wesley Jessen and Barnes-Hind and the related effects on cost of sales and
expenses, the historical financial statements for the periods discussed are
not directly comparable. For comparative purposes, the combined results of the
Predecessor and the Company for the year ended December 31, 1995 have been
restated on a "pro forma" basis as if the Wesley Jessen Acquisition had
occurred on January 1, 1995. Also for comparative purposes, the combined
results of operations of the Predecessor and the Company for the years ended
December 31, 1996 and 1995 and for the nine months ended September 27, 1997
and September 28, 1996 have been restated on a "pro forma" basis as if the
Acquisitions and the IPO had occurred on January 1, 1995. See "Results of
Operations."
OVERVIEW
Wesley Jessen is the leading worldwide developer, manufacturer and marketer
of specialty soft contact lenses, based on its share of the specialty lens
market. The Company's products include cosmetic lenses, which change or
enhance the wearer's eye color appearance; toric lenses, which correct vision
for people with astigmatism; and premium lenses, which offer value-added
features such as improved comfort for dry eyes and protection from UV light.
Founded in 1946 by pioneers in the contact lens industry, the Company has a
long-standing reputation for innovation and new product introductions. Wesley
Jessen develops proprietary technologies, manufacturing processes and products
through a combination of its in-house staff of more than 50 engineers and
scientists and Company-sponsored research by third-party experts. The Company
markets and sells its products to consumers through the second largest
advertising campaign in the industry and to eyecare practitioners through its
190-person salesforce and network of 67 independent distributors, which
together sell the Company's products in more than 75 countries.
WESLEY JESSEN ACQUISITION
On June 28, 1995, Bain Capital and the Management Investors acquired the
Predecessor in the Wesley Jessen Acquisition. The cash purchase price in the
Wesley Jessen Acquisition of $47.0 million (plus fees and expenses of $3.5
million) was funded with $7.5 million of equity and $43.0 million of
borrowings under a bank credit agreement. The aggregate purchase price in the
Wesley Jessen Acquisition, including assumed liabilities, was $76.6 million.
The Wesley Jessen Acquisition was accounted for under the purchase method of
accounting, including an increase in the book value of the inventory which was
charged to cost of goods sold. After the Wesley Jessen Acquisition, the
Company's new management team pursued an aggressive strategy of cost savings
and revenue enhancement to improve the Company's results of operations. During
this period, management: (i) redefined the Company's disposable and
conventional lens marketing strategy by repricing and repackaging the
Company's products to be more competitive with industry standards; (ii)
launched a national consumer advertising campaign featuring Christy
Turlington; (iii) expanded its product offerings in its FreshLook line of
disposable colored contact lenses; (iv) heightened its sales and marketing
focus on serving the needs of eyecare practitioners; and (v) achieved
substantial cost savings through personnel reductions, decreased overall
marketing and administrative expenses, consolidation of facilities and
increased operating efficiencies. As a result of management's efforts, the
Company's profitability and results of operations have improved significantly
following the Wesley Jessen Acquisition.
30
<PAGE>
As a result of the Wesley Jessen Acquisition, the Company recognized a
significant non-cash increase in cost of goods sold of $33.9 million in 1995
and $6.6 million in 1996 related to the amortization of Wesley Jessen
purchased inventory step-up to fair value at the acquisition date. Following
such acquisition, the Company realized certain cost savings of $4.9 million in
1995 related primarily to the consolidation of duplicative facilities
including corporate offices and marketing support facilities, as well as a
reduction in the actual number of corporate level employees and related
benefit expenses. Adjustments for this non-recurring charge and cost savings
have been reflected in the Company's unaudited Pro Forma Financial Data. See
"Results of Operations." While the Company believes that these expenses will
not recur, there can be no assurance that the Company will be able to achieve
such cost savings in future periods.
BARNES-HIND ACQUISITION
On October 2, 1996, the Company acquired substantially all the assets and
assumed certain liabilities of Barnes-Hind from Pilkington. The purchase price
in the Barnes-Hind Acquisition of approximately $62.4 million (plus related
acquisition and financing fees of $10.7 million) was funded with approximately
$68.1 million of borrowings under the then existing $140.0 million credit
agreement and the $5.0 million Pilkington Note. In connection with the Barnes-
Hind Acquisition, the Company borrowed an additional $28.5 million to repay
its then outstanding term loans and to fund ongoing working capital needs.
In September 1997, the Company negotiated a purchase price reduction of $1.6
million with Pilkington plc based upon specified net current asset measures as
of the closing date of the acquisition. As a result, the purchase price of
Barnes-Hind, after taking into consideration additional acquisition related
fees and expenses, decreased by $0.1 million. Additionally, certain pension
valuations associated with the Barnes-Hind employees were completed in the
third quarter of 1997. Management also has revised the operational details and
related cost estimates of its plans to integrate the Barnes-Hind operations.
These changes in estimates used in the initial purchase accounting resulted in
recognition of negative goodwill of $4.0 million, which will be amortized to
income through June 2010.
In connection with the Barnes-Hind Acquisition, the Company identified
significant operating synergies and substantial cost savings opportunities.
The Company has completed the majority of its initial cost reduction measures,
which are expected to improve the Company's operating results. The Company
believes that additional cost savings are available through consolidation of
facilities and operating leverage.
In connection with the Barnes-Hind Acquisition, the Company entered into a
voluntary consent order with the FTC which provided, among other things, that
the Company must divest Barnes-Hind's U.S. Natural Touch Product Line. On
March 17, 1997, the Company completed the sale of the product line for which,
under the agreement, it received aggregate consideration of $7.5 million,
consisting of $3.0 million in cash and a four-year $4.5 million promissory
note which accrues interest at a compound rate of 12% per annum, 8% of which
is payable currently and 4% of which is payable-in-kind. On July 31, 1997, the
purchaser made a voluntary prepayment of $3.0 million on the promissory note.
As part of the agreement, the Company entered into a supply agreement pursuant
to which the Company will supply the purchaser with Natural Touch lenses for
sale in the United States.
THE IPO
In February 1997, the Company consummated an IPO of its Common Stock, which
included the sale by the Company of 2,821,000 shares of Common Stock at an
initial public offering price of $15.00 per share.
In connection with the IPO, the Company incurred a non-recurring charge for
extraordinary debt extinguishment costs of $7.4 million ($4.9 million, net of
income tax benefits) related to the write-off of capitalized financing fees
incurred in connection with the Barnes-Hind Acquisition financing.
Additionally, the Company incurred and capitalized financing fees of $2.5
million, which are being amortized over 60 months.
31
<PAGE>
Interest expense reductions as if the IPO had occurred on January 1, 1995
are reflected in the Company's pro forma financial data. See "Results of
Operations." While the Company believes that this interest expense will not
recur, there can be no assurance that the Company's interest expense will not
increase in future periods either as a result of increased borrowings or
higher interest rates.
RESULTS OF OPERATIONS
The Company was established to acquire the Predecessor, which acquisition
was effective for accounting purposes on June 29, 1995. Because of the
revaluation of the assets and liabilities of the Predecessor and the related
impact on cost of sales and expenses, the financial statements of the
Predecessor for periods prior to June 29, 1995 are not comparable to those of
subsequent Company periods. In order to facilitate management's discussion of
financial results, the following table of pro forma operating income data
combines 1995 data for the Predecessor and the Company on a pro forma basis
and gives effect to the Wesley Jessen Acquisition as if it had occurred on
January 1, 1995.
The Barnes-Hind Acquisition was effective for accounting purposes on October
2, 1996. Because of the revaluation of the assets and liabilities of Barnes-
Hind and the related impact on cost of sales and expenses, the historical
financial statements for the year ended December 31, 1996, the nine months
ended September 28, 1996 and the nine months ended September 27, 1997 are not
comparable. Accordingly, the following table of pro forma operating income
data combines the results of operations for the years ended December 31, 1995
and 1996 and the nine months ended September 28, 1996 and September 27, 1997
of the Company and Barnes-Hind on a pro forma basis as if the Acquisitions and
the IPO had occurred on January 1, 1995.
PRO FORMA STATEMENT OF OPERATIONS DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
PRO
FORMA FOR
THE WESLEY
JESSEN
PREDECESSOR ACQUISITION PRO FORMA FOR THE ACQUISITIONS
----------- ----------- -----------------------------------------------
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
------------------------------------------ ---------------------------
SEPTEMBER 28, SEPTEMBER 27,
1994 1995(A) 1995(B) 1996(C) 1996(C) 1997(C)
----------- ----------- -------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................................ $109,640 $105,334 $230,997 $249,999 $189,979 $211,389
Operating costs and expenses:
Cost of goods sold.................................. 65,591 38,442 91,681 86,568 70,549 70,707
Marketing and administrative........................ 79,185 69,162 120,876 127,030 91,623 102,964
Research and development............................ 9,843 4,677 13,670 12,050 9,171 8,828
Amortization of intangible assets (negative
goodwill).......................................... 5,472 (784) (784) (784) (588) (588)
-------- -------- -------- -------- -------- --------
Income (loss) from operations....................... (50,451) (6,163) 5,554 25,135 19,224 29,478
Other (income) expenses:
Interest expense.................................... -- 4,889 5,809 5,809 4,182 3,960
Financing charge.................................... 7,172 -- -- -- -- --
Other income, net................................... (202) (1,360) (1,360) (3,051) (3,500) --
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes.................... (57,421) (9,692) 1,105 22,377 18,542 25,518
Income tax (expense) benefit......................... 26,935 4,032 (376) (7,608) (6,304) (8,675)
-------- -------- -------- -------- -------- --------
Net income (loss).................................... $(30,486) $ (5,660) $ 729 $ 14,769 $ 12,238 $ 16,843
======== ======== ======== ======== ======== ========
</TABLE>
- --------
(a) The pro forma results comprise the Wesley Jessen operations and include
adjustments for (i) interest expense associated with the financing of the
Wesley Jessen Acquisition; (ii) actual cost savings relating to the
reduction of certain operating expenses including the consolidation of
corporate offices, a reduction in the number of corporate-level employees
and related expenses, consolidation of marketing support facilities and
the rationalization of the international sales and marketing functions;
(iii)
32
<PAGE>
elimination of the inventory step-up amortization; (iv) a reduction in
depreciation and amortization expense as a result of the Company's
application of purchase accounting; and (v) the pro forma combined
historical income tax (expense) benefit at an estimated effective income tax
rate of 41.6%.
(b) The pro forma results comprise the Wesley Jessen operations and the
Barnes-Hind operations and include adjustments for (i) through (iv) in
note (a) above, as well as those adjustments in note (c) below.
(c) The pro forma results comprise the Wesley Jessen operations and the
Barnes-Hind operations and include adjustments for (i) interest expense
associated with the financing of the Barnes-Hind Acquisition and the IPO;
(ii) cost savings relating to the reduction of certain operating expenses
including the consolidation of corporate offices, a reduction in the
number of corporate-level employees and related expenses, and the
curtailment of certain manufacturing activities; (iii) elimination of
inventory step-up; (iv) a reduction in depreciation and amortization
expense as a result of the Company's application of purchase accounting;
(v) the divesture of the U.S. Natural Touch Product Line; (vi) the
elimination of the extraordinary write-off of capitalized financing fees;
and (vii) the adjusted income tax expense resulting from the preceding
adjustments at an effective income tax rate of 34%.
33
<PAGE>
PRO FORMA NINE MONTHS ENDED SEPTEMBER 27, 1997 (UNAUDITED) COMPARED TO PRO
FORMA NINE MONTHS ENDED SEPTEMBER 28, 1996 (UNAUDITED)
The discussion that follows compares the Company's pro forma results of
operations for the nine months ended September 27, 1997 to the pro forma
results of operations for the nine months ended September 28, 1996. The actual
results of operations for the nine months ended September 27, 1997 have been
adjusted to: (i) eliminate the $22,666 non-recurring impact of the inventory
write-up resulting from the Company's application of purchase accounting in
connection with the October 1996 Barnes-Hind Acquisition; (ii) exclude $1,085
in non-recurring transitional administrative expenses incurred at the Barnes-
Hind corporate facility in Sunnyvale, California; (iii) reflect the $411 pro
forma reduction in interest expense resulting from the February 1997
refinancing of the Company's bank credit agreement and the use of a portion of
the net proceeds of the Company's IPO (and the subsequent over-allotment sale
of additional shares) to repay outstanding debt; (iv) eliminate the $4,902
($7,428 pre-tax) extraordinary write-off of capitalized financing fees; and
(v) reflect the as adjusted income tax expense at an estimated effective
income tax rate of 34%. The actual results of operations for the nine months
ended September 28, 1996 have been adjusted to give effect to: (i) the Barnes-
Hind Acquisition; (ii) the March 1997 divestiture of the Barnes-Hind U.S.
Natural Touch product line; (iii) the elimination of the non-recurring impact
of the inventory step-up in connection with the June 1995 Wesley Jessen
Acquisition; (iv) the refinancing of the Company's then outstanding bank
credit agreement; (v) the Company's IPO (and the subsequent over-allotment
sale of additional shares) and the application of the net proceeds therefrom,
as if each had occurred on January 1, 1996; and (vi) taxes at an estimated
effective income tax rate of 34%.
Net sales
Net sales for the nine months ended September 27, 1997 increased $21.4
million, or $11.3%, to $211.4 million from $190.0 million for the nine months
ended September 28, 1996. This increase resulted primarily from growth in
sales of the Company's disposable and planned replacement contact lenses, from
$52.8 million to $71.6 million, a 35.7% increase. The Company believes sales
increases were due to the continued growing popularity of the Company's
disposable lenses. Domestic sales increased by 14.4% from $105.7 million to
$121.0 million, while sales in the rest of the world also increased by 7.3%
from $84.2 million to $90.4 million.
Gross profit
Gross profit for the nine months ended September 27, 1997 increased $21.3
million, or 17.8%, to $140.7 million from $119.4 million in the comparable
1996 period. Gross profit margin increased to 66.6% for the nine months ended
September 27, 1997 from 62.9% in the comparable period. This improvement is
due to realized operating efficiencies resulting from the initial cost
reduction measures implemented as part of the Barnes-Hind Acquisition. The
higher gross profit margin also is due to higher margins realized on the
Company's disposable and planned replacement lenses because of higher
production volumes and efficiencies as well as increased margins on the
Company's conventional lens product lines.
Marketing and administrative expenses
Marketing and administrative expenses for the nine months ended September
27, 1997 increased by $11.3 million, or 12.4%, to $103.0 million from $91.6
million for the nine months ended September 28, 1996. As a percentage of net
sales, marketing and administrative expenses increased slightly to 48.7% in
the 1997 period from 48.2% in the 1996 period. This increase is largely due to
higher promotional spending for all product lines, in particular the former
Barnes-Hind conventional lens products, along with higher performance related
compensation expenses.
Research and development expenses
Research and development expenses for the nine months ended September 27,
1997 decreased by $0.3 million, or 3.7%, to $8.8 million from $9.2 million for
the nine months ended September 28, 1996.
34
<PAGE>
This decrease is due to operating synergies being realized by the Company as a
result of the Barnes-Hind Acquisition, most notably in compensation-related
expenses, partially offset by higher spending related to investigating
alternate production materials. As a percentage of net sales, research and
development expenses for the nine months ended September 27, 1997 decreased to
4.2% from 4.8% in the 1996 period.
Income from operations
Income from operations for the nine months ended September 27, 1997 increased
by $10.3 million to income of $29.5 million from $19.2 million for the nine
months ended September 28, 1996. This resulted from higher sales volume and the
substantial improvement in gross margin partially offset by the increase in
marketing and administrative expenses.
Other income
Other income for the nine months ended September 28, 1996 of $3.5 million
represents non-recurring licensing fee income. There was no such income in the
comparable 1997 period.
Net income
Net income for the nine months ended September 27, 1997 increased by $4.6
million to $16.8 million from $12.2 million for the nine months ended September
28, 1996. Excluding the 1996 license fee income, net income for the nine months
ended September 27, 1997 increased $6.9 million. This resulted from higher
sales volume and improvement in the Company's gross margins, offset by
increased spending in marketing and administrative expenses.
PRO FORMA YEAR ENDED DECEMBER 31, 1996 (UNAUDITED) COMPARED TO PRO FORMA YEAR
ENDED DECEMBER 31, 1995 (UNAUDITED)
Net sales
Net sales for the year ended December 31, 1996 increased $19.0 million, or
8.2%, to $250.0 million from $231.0 million for the year ended December 31,
1995. This increase resulted primarily from the following: (i) the Company's
redefined marketing strategy of repricing and repackaging disposable and
conventional lenses to be more competitive; (ii) the expansion of product
offerings in the FreshLook line of disposable colored contact lenses; and (iii)
unit volume growth, driven by new marketing programs and the continued
penetration of the Company's cosmetic lenses. Following the Wesley Jessen
Acquisition, the Company adopted more stringent return and exchange policies,
which lowered product returns and allowances and resulted in generally lower
reserve requirements. The sales returns and allowances reserve increased from
$7.2 million at December 31, 1995 to $10.6 million at December 31, 1996. This
is a result of the addition of Barnes-Hind sales in the fourth quarter of 1996,
the conformity of Barnes-Hind's reserve methodology to that of the Company's
and the overall increase in sales volume.
Gross profit
Gross profit, excluding the inventory step-up, for the year ended December
31, 1996 increased $24.1 million, or 17.3%, to $163.4 million from $139.3
million in the comparable 1995 period. Gross profit margin increased to 65.4%
for the year ended December 31, 1996 from 60.3% in the comparable period. This
improvement reflects the cost savings that resulted from improved plant
utilization, personnel reductions and other operating efficiencies. Gross
profit for the year ended December 31, 1995 was negatively impacted by a write-
off of $2.2 million related to conventional lens inventory produced prior to
the Wesley Jessen Acquisition that did not meet new management's higher
standards for customer satisfaction. Excluding this effect, gross margin for
the year ended December 31, 1995 would have been 61.3%.
Marketing and administrative expenses
Marketing and administrative expenses for the year ended December 31, 1996
increased by $6.2 million, or 5.1%, to $127.0 million from $120.9 million for
the year ended December 31, 1995. However,
35
<PAGE>
as a percentage of sales, marketing and administrative expenses decreased to
50.8% in 1996 from 52.3% in the 1995 period. This increase is largely due to
higher promotional spending and an increase in performance related
compensation expenses.
Research and development expenses
Research and development expenses for the year ended December 31, 1996
decreased by $1.6 million, or 11.9% to $12.1 million from $13.7 million for
the year ended December 31, 1995. As a percentage of net sales, research and
development expenses for the year ended December 31, 1996 decreased to 4.8%
from 5.9% in the prior year. This decrease is due to the successful completion
of 1995 manufacturing development projects which became operational in 1996.
Income from operations
Income from operations for the year ended December 31, 1996 increased by
$19.6 million to income of $25.1 million from $5.6 million for the year ended
December 31, 1995. This increase resulted from the improvement in the
Company's gross margin resulting from improved plant utilization due to unit
volume growth and overall cost reductions, partially offset by increased
promotional spending and higher performance related compensation expenses.
Other income
Other income for the year ended December 31, 1996 increased by $1.7 million
to $3.1 million in 1996 from $1.4 million in 1995. This increase is due
primarily to an increase of $2.7 million in licensing fee income from 1995 to
1996, partially offset by unfavorable foreign exchange variances recognized in
1996.
Net income
Net income for the year ended December 31, 1996 increased by $14.0 million
to $14.8 million from $0.7 million for year ended December 31, 1995. This
increase is due to improvement in the Company's gross margin offset by higher
marketing and administrative expenses.
PRO FORMA YEAR ENDED DECEMBER 31, 1995 (UNAUDITED) COMPARED TO PREDECESSOR
YEAR ENDED DECEMBER 31, 1994
Prior to June 28, 1995 the Predecessor was a wholly owned subsidiary of
Schering-Plough. The discussion that follows compares the Company's pro forma
combined results of operations for the year ended December 31, 1995, which
give effect to the Wesley Jessen Acquisition as if it had occurred as of
January 1, 1995, to the results of operations for the Predecessor for the year
ended December 31, 1994.
Net sales
Net sales for the year ended December 31, 1995 decreased by $4.3 million, or
3.9%, to $105.3 million from $109.6 million for the year ended December 31,
1994. This decline reflects: (i) the one-time positive impact in 1994 of
initial trade orders of FreshLook disposable contact lenses associated with
the product launch; (ii) price changes implemented in early 1995 (prior to the
Wesley Jessen Acquisition); and (iii) the impact of new management's efforts
to reduce high trade inventory levels following the Wesley Jessen Acquisition.
The Company believes that steps taken by management subsequent to the Wesley
Jessen Acquisition better positioned the Company for future growth and that
the number of wearers of its products increased during 1995.
Gross profit
Gross profit in 1995 increased by $22.8 million, or 51.9%, to $66.9 million
from $44.0 million in 1994. Gross profit margin increased to 63.5% in 1995
from 40.2% in the prior year. Gross profit in 1995 was negatively impacted by
a write-off of $2.2 million related to conventional lens inventory produced
prior to the Wesley Jessen Acquisition which did not meet new management's
higher standards for customer satisfaction. Additionally, cost of goods sold
for the year ended December 31, 1995 includes $5.2 million less depreciation
than the comparable period due to the Company's application of purchase
accounting for the Wesley Jessen Acquisition. Management believes that the
gross margins recorded in 1994 are not comparable to the ongoing level of
operations of the business because of product returns and subsequent inventory
write-offs and manufacturing start-up costs incurred which were associated
with the Company's launch of disposable lenses which began in the United
States in the fall of 1994. In particular, the
36
<PAGE>
Company experienced substantial product returns in 1994 and early 1995 due to
poor consumer acceptance of the initial FreshLook lens and the associated
inventory write-offs of first generation FreshLook lenses upon the
introduction of a second generation FreshLook lens in 1995. Gross profit in
1994 was negatively impacted by product returns and the subsequent write-off
of $10.1 million of first generation inventory and $15.3 million of start-up
costs associated with the FreshLook launch. Excluding the effects outlined
above, gross profit would have been $69.1 million for 1995 and $74.7 million
in 1994 and gross margins would have been 65.6% and 68.1%, respectively. This
decline is due to a shift to lower margin disposable products as a percentage
of total sales, coupled with increased price discounts to distributors in the
first half of 1995.
Marketing and administrative expenses
Marketing and administrative expenses in 1995 decreased by $10.0 million, or
12.7%, to $69.2 million from $79.2 million in 1994. As a percentage of net
sales, marketing and administrative expenses decreased to 65.7% in 1995 from
72.2% in 1994. Approximately $1.5 million of this reduction is due to a
decrease in depreciation expense associated with the 1995 write-down of fixed
assets as a result of the Company's application of purchase accounting. The
remaining cost savings are due largely to personnel reductions in connection
with the Wesley Jessen Acquisition.
Research and development expenses
Research and development expenses in 1995 decreased by $5.2 million, or
52.5%, to $4.7 million from $9.8 million in 1994. As a percentage of net
sales, research and development expenses decreased to 4.4% in 1995 from 9.0%
in 1994. Expenses decreased due to the completion of development associated
with the launch of FreshLook disposable lenses and personnel reductions
effected in connection with the Wesley Jessen Acquisition.
Loss from operations
Loss from operations for the year ended December 31, 1995 improved by $44.3
million, to a loss of $6.2 million from a loss of $50.5 million for the year
ended December 31, 1994. Most of this improvement resulted from the non-
recurrence of the write-offs and start-up manufacturing costs incurred in 1994
as a result of the FreshLook launch.
Management has not included discussions of interest expense, tax expense and
net income because they believe that these items are not reflective of the
Company's ongoing operations given the Predecessor's status during a portion
of this time period as a wholly owned subsidiary of Schering-Plough.
BARNES-HIND
Wesley Jessen acquired all of the assets and assumed certain liabilities of
Barnes-Hind from Pilkington on October 2, 1996. The discussion that follows
compares Barnes-Hind's results of operations while under the control of
Pilkington and may not be representative of its results following its
acquisition by Wesley Jessen.
Net sales
Net sales for the year ended March 31, 1996 ("fiscal 1995") increased $7.6
million, or 6.1%, to $132.6 million from $125.0 million for the year ended
March 31, 1995 ("fiscal 1994"). This increase in revenue was due to continued
growth in Barnes-Hind's disposable lenses, particularly the recently
introduced Precision UV disposable lens, which was partially offset by a
decline in the conventional lens business. Geographically, sales were
strongest in international markets due to a full year impact of Precision UV
as well as growth in private label sales in Europe and Japan.
Gross profit
Gross profit for fiscal 1995 increased $6.7 million, or 10.7%, to $69.2
million from $62.6 million for the prior year. Gross margins increased from
50.0% in fiscal 1994 to 52.2% in fiscal 1995 due to overhead reduction in
manufacturing and a decrease in the production cost of disposable lenses
through the increased use of automated manufacturing processes.
Research and development expenses
Research and development expenses in fiscal year 1995 decreased by $2.4
million, or 23.6%, to $7.9 million from $10.3 million in fiscal year 1994. As
a percentage of net sales, research and development
37
<PAGE>
expenses for fiscal 1995 decreased to 5.9% from 8.3% in fiscal 1994. This
decrease was due to the completion of primary development activities
associated with the launch of Precision UV products.
Selling and marketing expenses
Selling and marketing expenses for fiscal 1995 increased by $5.7 million, or
15.1%, to $43.3 million from $37.6 million in fiscal 1994. As a percentage of
net sales, selling and marketing expenses increased to 32.7% from 30.1%,
largely due to increased promotional expenses from the launch of Precision UV
in the United States and its expansion into Europe. Additionally, marketing
and selling expenses for fiscal 1995 included a non-recurring $1.0 million
restructuring charge relating to consolidation of the European distribution
infrastructure.
General and administrative expenses
General and administrative expenses for fiscal 1995 increased by $1.0
million, or 4.7%, to $22.5 million from $21.5 million for fiscal 1994. As a
percentage of sales, general and administrative expenses for fiscal 1995
decreased to 17.0% from 17.2% in fiscal 1994.
Income taxes
Despite operating losses, Barnes-Hind incurred income tax expense of $2.7
million and $3.1 million in fiscal 1994 and fiscal 1995, respectively. These
tax provisions reflect Barnes-Hind as if it were a separate taxable entity and
represent international tax obligations resulting from its transfer pricing
system. The provisions of this transfer pricing system were determined by the
needs of the other members of the Pilkington consolidated group. These tax
obligations are not reflective of the ongoing tax obligations of Barnes-Hind
as acquired by Wesley Jessen.
LIQUIDITY AND CAPITAL RESOURCES
Prior to the Wesley Jessen Acquisition, the financing requirements of the
Company were funded by Schering-Plough through intercompany transfers. Such
transfers were significant because of the substantial operating losses
incurred by the Predecessor and the magnitude of its liquidity requirements.
Since the Wesley Jessen Acquisition, the Company has financed its operations
primarily through funds provided from operations and through borrowings under
a revolving credit facility. Net cash provided by operating activities for the
period from June 29, 1995 through December 31, 1995 totaled approximately $4.0
million. For the year ended December 31, 1996, the Company generated
approximately $19.2 million in cash from operating activities, primarily as a
result of increases in profitability (giving effect to the inventory step-up
amortization), a decrease in accounts receivable and increases in income taxes
payable and accrued liabilities offset by a decrease in accounts payable. For
the period from January 1, 1997 through September 27, 1997, the Company
generated approximately $1.4 million in cash from operating activities,
primarily as a result of improvements in profitability and reductions in
inventory, partially offset by an increase in accounts receivable and payments
made relating to the prior year's performance related compensation,
integration costs relating to the Barnes-Hind Acquisition and income taxes.
For the nine months ended September 28, 1996, the Company generated
approximately $22.4 million in cash from operating activities, primarily as a
result of improvements in profitability and decreases in inventories, offset
by a higher level of accounts receivable and lower accounts payable and
accrued liabilities.
During the period from June 29, 1995 to December 31, 1995, for the year
ended December 31, 1996, and the nine months ended September 27, 1997, the
Company made capital expenditures of approximately $0.9 million, $6.6 million
and $11.8 million, respectively. The majority of these capital expenditures
were for facility and equipment improvement, information technology
enhancements, and site consolidations. Barnes-Hind incurred capital
expenditures of $12.9 million and $13.6 million in fiscal 1994 and fiscal
1995, respectively. Approximately $5.0 million of this spending funded
improvements in information technology. The remainder was primarily spent on
improving manufacturing efficiencies, including the partial automation of the
United Kingdom disposable lens manufacturing lines. The Company has currently
budgeted approximately $8.4 million of capital expenditures for the remainder
of 1997 to (i) facilitate the consolidation of the businesses; (ii) complete
the integration of the Company's management information systems; and (iii)
complete the automation of the Company's Southampton manufacturing facility.
The Company expects to fund these capital expenditures primarily from cash
generated from operating activities and borrowings under its revolving credit
facility.
38
<PAGE>
In connection with the Wesley Jessen Acquisition, the Company initiated a
series of restructuring activities as part of its cost rationalization
program. As part of such acquisition, Schering-Plough agreed to incur the
significant one-time expenses associated with the elimination of approximately
430 positions. In addition, the Company has expended $5.0 million in cash from
June 29, 1995 through September 27, 1997 to close facilities. As a result of
the Barnes-Hind Acquisition, the Company expects to incur integration costs of
approximately $20.4 million, principally for severance costs and lease
expenses on vacated premises. Management expects that this restructuring will
be substantially completed by April, 1999. As of September 27, 1997, the
Company has paid $7.6 million of these integration costs.
As a result of the Acquisitions, the Company's borrowings under its Bank
Credit Agreement increased significantly as did its liquidity requirements. As
of September 27, 1997, the Company had approximately $77.0 million in
borrowing availability under the revolving credit facility portion of the Bank
Credit Agreement. The Bank Credit Agreement imposes certain restrictions on
the Company, including restrictions on its ability to incur indebtedness,
declare dividends or other distributions, make investments and capital
expenditures, grant liens, sell its assets and engage in certain other
activities. In addition, the indebtedness of the Company under the Bank Credit
Agreement is secured by substantially all of the assets of the Company,
including the Company's real and personal property, inventory, accounts
receivable, intellectual property and other tangible assets. See "Description
of Certain Indebtedness--Bank Credit Agreement."
Management believes that, based on current levels of operations and
anticipated internal growth, the Company's cash flow from operations, together
with other available sources of funds including borrowings under the Bank
Credit Agreement and available cash on hand at September 27, 1997, of $3.8
million, will be adequate over the next twelve months to make required
payments of principal and interest on the Company's indebtedness, to fund
anticipated capital expenditures and working capital requirements, including
the aforementioned restructuring and integration costs, and to enable the
Company and its subsidiaries to comply with the terms of their debt
agreements. However, actual capital requirements may change, particularly as a
result of any acquisitions which the Company may pursue. The ability of the
Company to meet its debt service obligations and reduce its total debt will be
dependent, however, upon the future performance of the Company and its
subsidiaries which, in turn, will be subject to general economic conditions
and to financial, business and other factors, including factors beyond the
Company's control. A portion of the consolidated debt of the Company bears
interest at floating rates; therefore, the Company's financial condition is
and will continue to be affected by changes in prevailing interest rates. In
December of 1996, the Company purchased an interest rate cap on $35.0 million
notional principal amount at a fixed rate of 8.5%, which expires on December
31, 1999. The cap is intended to provide partial protection from exposure
relating to the Company's variable rate debt instruments in the event of
higher interest rates.
In September 1997, the Company entered into the Bank Credit Agreement to,
among other things, (i) increase the total borrowing availability thereunder
to a maximum of $135 million, (ii) convert all remaining term loan borrowings
into revolving loans and (iii) reduce the interest rate thereunder.
Approximately 45% of the Company's pro forma net sales for the year ended
December 31, 1996 were to international customers and the Company expects that
sales to international customers will continue to represent a material portion
of its net sales. Historically, fluctuations in foreign currency exchange
rates have had only a minor impact on the Company's results of operations and
the Company does not expect such fluctuations to be material in the
foreseeable future. See "Risk Factors--Risks Associated with International
Sales."
SEASONALITY
Historically, the Company has experienced limited seasonality, with slightly
greater revenues in the quarters ended June and September and slightly lower
revenues in the quarters ended March and December. The following table sets
forth the unaudited operating results of the Company for the last eight fiscal
quarters, excluding the impact of the inventory step-up:
39
<PAGE>
<TABLE>
<CAPTION>
QUARTERS ENDED
-------------------------------------------------------------------------------
DECEMBER MARCH JUNE SEPTEMBER DECEMBER MARCH JUNE SEPTEMBER
31, 1995 31, 1996 29, 1996 28, 1996 31, 1996 29, 1997 28, 1997 27, 1997
-------- -------- -------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $27,257 $30,147 $32,250 $33,651 $60,704 $64,071 $72,083 $75,235
Gross profit............ 17,017 21,686 22,277 25,614 44,023 42,201 47,137 51,344
Income (loss) from
operations............. (113) 4,088 5,298 5,979 3,567 6,120 10,284 11,989
OTHER DATA:
Amortization of negative
goodwill............... $ (196) $ (196) $ (196) $ (196) $ (196) $ (196) $ (196) $ (196)
Depreciation............ -- 8 37 114 303 122 231 231
Inventory step-up....... 14,301 5,953 673 -- 14,080 13,092 9,574 --
</TABLE>
INFLATION
Management believes that inflation has not had a material impact on results
of operations for the Company or the Predecessor during the three years ended
December 31, 1996 and the nine months ended September 27, 1997.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share," issued in February 1997, changes the method of calculating earnings
per share and will be effective for the Company's financial statements for the
year ending December 31, 1997. Earlier application is not permitted. However,
the Company is permitted to disclose pro forma earnings per share amounts
computed using this Statement in periods prior to adoption. Upon adoption, all
prior period earnings per share data presented shall be restated to conform to
this Statement. The calculation of earnings per share under SFAS No. 128 is
simpler than prior methods and more consistent with International Accounting
Standards. Given the Company's historical losses, common stock equivalents
were excluded from prior pro forma earnings per share calculations because
they were anti-dilutive. Therefore, adoption of this standard is not expected
to have a material impact on amounts previously reported as pro forma net loss
per common share.
As calculated under SFAS 128, pro forma basic and diluted earnings per share
for the Company, on the adjusted basis presented on page 32, would be as
follows:
<TABLE>
<CAPTION>
BASIC EARNINGS DILUTED EARNINGS
PER SHARE PER SHARE
-------------- ----------------
<S> <C> <C>
Year ended December 31, 1996.................... $0.84 $0.76
Year ended December 31, 1995.................... $0.04 $0.04
Nine months ended September 27, 1997............ $0.98 $0.86
Nine months ended September 28, 1996............ $0.70 $0.63
</TABLE>
SFAS No. 130, "Reporting Comprehensive Income," issued in June 1997, will
require the Company to disclose, in financial statement format, all non-owner
changes in equity. Such changes include, for example, cumulative foreign
currency translation adjustments, certain minimum pension liabilities and
unrealized gains and losses on available-for-sale securities. This Statement
is effective for fiscal years beginning after December 15, 1997 and requires
presentation of prior period financial statements for comparability purposes.
The Company expects to adopt this Statement beginning with its 1998 financial
statements.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," issued in June 1997, establishes standards for reporting
information about operating segments in annual financial statements and
interim financial reports. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in
assessing performance. Generally, financial information is required to be
reported on the basis that is used internally for evaluating segment
performance and deciding how to allocate resources to segments. The Company is
currently evaluating the Statement, which it will adopt, in its financial
statements for the year ending December 31, 1998.
40
<PAGE>
BUSINESS
Wesley Jessen is the leading worldwide developer, manufacturer and marketer
of specialty soft contact lenses, based on its share of the specialty lens
market. The Company's products include cosmetic lenses, which change or
enhance the wearer's eye color appearance; toric lenses, which correct vision
for people with astigmatism; and premium lenses, which offer value-added
features such as improved comfort for dry eyes and protection from UV light.
The Company offers a broad range of both conventional contact lenses, which
can typically be used for up to 24 months, and disposable contact lenses,
which are intended to be replaced at least every two weeks. Founded in 1946 by
pioneers in the contact lens industry, the Company has a long-standing
reputation for innovation and new product introductions. The Company was
acquired by Bain Capital and management in June 1995, and in October 1996 the
Company strengthened its product offerings, technology and distribution
capabilities through the acquisition of Barnes-Hind. For the year ended
December 31, 1996, the Company's pro forma net revenues were $250.0 million
and its pro forma operating profit was $25.9 million.
The Company operates primarily in the specialty segment of the soft lens
market, where it has the leading share in each of the cosmetic and premium
lens segments and the second leading share in the toric lens segment. The
Company has the leading position in the specialty segment of the soft lens
market as a whole, which, at $600 million in net sales, accounted for 30% of
industry sales volume in 1996 and is projected to grow at approximately 15%
per year through the year 2000. In recent years, in both the clear and
specialty lens segments, there has been a pronounced shift in consumers'
preferences toward disposable lenses and away from conventional lenses, which
has led to a significant increase in contact lens expenditures per wearer. The
Company estimates that currently more than 35% of U.S. soft lens wearers use
disposable lenses, up from 21% in 1993. The Company believes that its leading
portfolio of disposable specialty lenses has positioned it to benefit from the
preference shift toward disposable lenses. The Company also offers a complete
line of conventional and disposable clear lenses, which are positioned as
companion products to the Company's cosmetic lenses.
According to an independent research firm, more than 70% of all contact lens
prescribers in the United States offer the Company's products, which permits
the Company to rapidly launch new categories of products. Wesley Jessen
develops proprietary technologies, manufacturing processes and products
through a combination of its in-house staff of more than 50 engineers and
scientists and Company-sponsored research by third-party experts. The Company
markets and sells its products to consumers through the second largest
advertising campaign in the industry and to eyecare practitioners through its
190-person salesforce and network of 67 independent distributors, which
together sell the Company's products in more than 75 countries.
The Company was founded by Drs. Newton K. Wesley and George Jessen, who went
on to pioneer the design, manufacture and fitting techniques of hard contact
lenses. From 1980 to 1995, the Company operated as a wholly owned subsidiary
of Schering-Plough. On June 28, 1995, Bain Capital and management acquired the
Predecessor in the Wesley Jessen Acquisition. On October 2, 1996, the Company
acquired Barnes-Hind, the third largest manufacturer of specialty contact
lenses in the world, with a leading market position in premium and toric
lenses.
INDUSTRY OVERVIEW
Industry analysts estimate that over 50% of the world's population needs
some type of corrective eyewear. In the United States alone, there are over
154 million people who require some form of corrective eyewear. Most
individuals who wear contact lenses begin to do so in their early teens and
the majority of wearers are between the ages of 18 and 39. The Company
believes that the number of contact lens wearers will expand as technology
improves the convenience, comfort and fit of contact lenses, so that lenses
provide cost-effective and comfortable vision correction to a larger segment
of the population.
41
<PAGE>
The contact lens industry is large and rapidly growing. In 1995,
manufacturers' sales of contact lenses worldwide totaled $1.8 billion,
representing a compound annual growth rate of 11% from $1.1 billion in 1990.
According to industry analysts, the U.S. market for contact lenses is expected
to grow approximately 10% per year through the year 2000. The Company believes
that market growth outside the United States will likely exceed domestic
growth because of lower contact lens penetration rates internationally. Since
1991, the number of contact lens wearers in the United States has increased by
4.5% per year while revenue per wearer has increased by 6.5% per year as
conventional users have shifted to more costly specialty and disposable
lenses. While the market for hard contact lenses has been relatively flat
since 1991 with approximately 6 million U.S. wearers, the number of people
wearing soft contact lenses has grown at a compound annual growth rate of 5.9%
since that time.
The contact lens industry can be divided into the soft lens portion, which
represents approximately 80% of U.S. wearers, and the hard lens portion
(primarily rigid gas permeable ("RGP")), which represents approximately 20% of
U.S. wearers. Within the soft contact lens market, there are three principal
replacement regimes: conventional, disposable and planned replacement.
Conventional lenses are typically replaced after 12 to 24 months and require
periodic cleaning throughout the life of the lens. Disposable soft contact
lenses were introduced in the late 1980s based on the concept that changing
lenses on a more frequent basis helped to improve comfort, convenience and
health of the eye for many wearers. Disposable lenses are changed as often as
daily or up to every two weeks depending on the product. Planned replacement
lenses are designed to be changed as often as every month or up to every three
months and currently represent a small portion of the overall soft lens
market.
The two primary segments within the soft lens market are clear and
specialty. Clear lenses (lenses that do not provide value-added features that
specialty lenses offer) represent approximately 70% of the U.S. soft lens
market and include both conventional and disposable products. Growth in the
clear lens segment has been driven primarily by growth in the population of
14- to 25-year-olds (the prime age group for new lens wearers), the
substitution of soft for hard contact lenses and the continuous evolution in
the contact lens market toward more frequent replacement of contact lenses.
Specialty lenses represent the remaining 30% of the U.S. soft lens market
and generally command a premium price because they are designed for patients
who have a medical need for a specialized lens or who desire a lens with
additional features. Specialty lenses include cosmetic lenses (which change or
enhance the natural color of eyes while correcting vision), toric lenses (for
astigmatics) and premium lenses that offer protein deposit resistance,
improved visual acuity, enhanced comfort for dry eyes or UV protection.
Disposable lenses have recently been introduced into the specialty segment and
are expected to gain market share. The specialty lens segment of the soft
contact lens market has higher projected growth rates than the clear lens
segment. For the period from 1993 to 1996, the number of specialty lens
wearers increased at a rate of 8% per year as compared to a 4% per year
increase in the number of clear lens wearers. The Company believes that
continued rapid growth in sales of specialty lenses will result from (i) the
continued trend toward disposables; (ii) increased awareness among consumers
and eyecare practitioners of the value-added features available with specialty
lenses; and (iii) new product innovations, such as disposable toric contact
lenses, new cosmetic designs, UV protection lenses and effective bifocal
contact lenses.
An important characteristic of the contact lens industry is that an
individual's need for corrective eyewear is chronic. The need for vision
correction is often diagnosed at an early age and increases over time. Contact
lenses represent an alternative to eyeglasses, while offering improved
peripheral vision and additional features, such as eyecolor enhancement and UV
protection. Contact lens wearers will typically purchase lenses regularly for
several years.
Contact lenses require a prescription specifying a particular brand of
lenses. Such prescriptions are written by either ophthalmologists or
optometrists, referred to in the contact lens industry as "fitters". An
ophthalmologist is a physician with a Doctor of Medicine ("MD") degree who
specializes in eyecare
42
<PAGE>
and an optometrist is a state-licensed eyecare specialist who holds a Doctor
of Optometry ("OD") degree. Fitters have the ability to influence patients'
choice of which contact lens brand they will wear. Therefore, if a contact
lens manufacturer successfully markets its products to a fitter, that fitter
will carry that manufacturer's brand of contact lenses in inventory and offer
it to patients. Once the brand is in the fitter's inventory, the manufacturer
will likely receive a stream of revenues from new patients for whom the brand
is prescribed as well as from patients who are refitted, change lens types or
need different prescriptions. Also, the manufacturer will be more likely to
successfully place new products in the fitter's inventory. Prescriptions for
contact lenses are filled by either ophthalmologists, optometrists, optical
chains, health maintenance organizations (HMOs), pharmacies or mail order
houses.
The contact lens industry is characterized by high brand loyalty. The
Company believes that wearers resist switching brands once a particular brand
is prescribed and fitted successfully. By staying with an existing brand, a
customer can replace his or her current lens without an eye examination. Even
for an adjusted prescription, customers typically acclimate to a particular
lens design and may experience discomfort if refitted with a new brand.
Typically, only when a customer is experiencing difficulty with a lens or the
customer wants to switch from conventional to disposable lenses or from clear
to specialty lenses will a fitter refit with a different brand of lens. The
Company believes, based on historical patterns in the contact lens industry
that once a product category has matured, brand loyalty causes competitive
market share to remain relatively constant. However, overall market share may
shift because of different growth rates of each category or the creation of
new categories.
No new significant competitors have entered the soft contact lens industry
in the last ten years. To compete successfully in the industry entails
substantial risks and requires significant investment of time and resources.
In particular, the Company believes a new entrant must successfully (i)
develop innovative product offerings; (ii) master the sophisticated processes
required to manufacture contact lenses; (iii) invest the significant capital
required to develop manufacturing capacity; (iv) overcome existing patent
protections covering the design, materials and manufacturing processes of
contact lenses; and (v) obtain FDA product clearances, each of which may take
several years.
COMPETITIVE STRENGTHS
The Company believes it has achieved its leading worldwide market position
in specialty contact lenses because of the following competitive strengths:
High-Quality Branded Products. Wesley Jessen produces a broad range of high-
quality contact lenses that meet customers' demand for improved cosmetic,
comfort, ease-of-care and vision-correction features and are sold under brand
names recognized by ophthalmologists and optometrists worldwide. The Company's
cosmetic lens products are marketed under the DuraSoft, Elegance and FreshLook
brand names; its toric lenses under the Optifit, Hydrocurve and CSI brand
names; and its premium lenses under the Gentle Touch, Precision UV, Aquaflex
and CSI brand names. Both eyecare practitioners and wearers tend to show
significant brand loyalty once a particular brand of lenses is properly fitted
and prescribed. As a result, the Company's large installed base of contact
lens fitters and current wearers affords the Company a recurring revenue
stream. According to Health Products Research syndicated data, 46% of
consumers newly fitted with cosmetic lenses during 1996 chose the Company's
lenses, making Wesley Jessen the leader in this segment of the contact lens
market.
Successful Development and Introduction of New Products. The Company has a
strong track record of developing new specialty contact lens products, with
the five new product lines introduced since 1994 accounting for more than 30%
of the Company's pro forma net revenues in the year ended December 31, 1996.
The Company introduced the first disposable opaque lens and the first
disposable lens that offers UV protection in 1994. The Company believes that
being the first to introduce a new specialty lens is a competitive advantage
over subsequent entrants to that product category because of the significant
brand loyalty in the contact lens industry.
43
<PAGE>
Broad Patent Portfolio. Wesley Jessen believes that its intellectual
property, including more than 70 U.S. patents in product design, materials and
manufacturing processes, makes imitation of the Company's products difficult,
supports the Company's strong gross margins and provides the Company with a
competitive advantage. The Company's most important patents cover the design
of its toric lenses, the material, process and design of clear-pupil cosmetic
lenses and the technology necessary to produce certain advanced polymer
lenses. The Company believes that its patent portfolio and manufacturing
expertise allow it to produce and sell specialty lens products that are
differentiated from other products on the market.
Established Sales and Distribution Network. The Company believes its
salesforce and distributor network constitute the largest and most
sophisticated sales organization in the specialty contact lens market. The
Company's salesforce has focused on developing strong relationships with
eyecare practitioners throughout North America, Europe, Asia and Latin
America. Through its sales efforts, the Company seeks to educate and inform
eyecare practitioners as to the breadth of its specialized product line, the
extent to which they can build their practice through the use of the Company's
products and their ability to generate more revenue per patient by prescribing
the Company's value-added lenses instead of conventional or disposable clear
lenses.
Strong International Market Presence. In the year ended December 31, 1996,
Wesley Jessen derived approximately 45% of its pro forma net sales from sales
outside the United States, and the Company's specialty contact lens products
have leading market shares in Europe, Japan and Latin America. The Company has
over 85 international sales representatives and 67 distributors covering more
than 75 countries.
Low-Cost, Proprietary Manufacturing Capabilities. The Company produces
substantially all of its contact lens products in four state-of-the-art
manufacturing facilities, which apply proprietary technology, allow the
Company to be a flexible, low-cost manufacturer of specialty lenses and have
sufficient capacity to meet the Company's rapidly growing needs for several
years. The Company believes that it enjoys a competitive advantage over other
contact lens manufacturers as a result of its ability to produce cost-
effective specialized contact lenses using short production runs.
Consequently, the Company can offer approximately 180,000 stock-keeping units
(SKUs). Furthermore, the Company's manufacturing operations in Puerto Rico
provide it with significant tax benefits.
Experienced Management with a Proven Record of Improving Profitability. The
Company's senior management, who on average have more than 10 years of
experience in the contact lens industry, have increased the Company's
operating margin 44 percentage points, comparing the six months immediately
prior to the Wesley Jessen Acquisition with the comparable period in 1996.
This operating improvement was accomplished through the successful
implementation of cost reduction programs, rationalization of manufacturing
processes, refocusing of research and development programs, and execution of
targeted marketing strategies. Furthermore, certain of the Company's key
managers, including the Company's Chief Executive Officer and Chief Financial
Officer, have significant experience with the operations of Barnes-Hind,
having managed it profitably prior to its sale to Pilkington in 1987.
GROWTH STRATEGY
The Company's principal objective is to expand its contact lens business in
the faster-growing specialty segments of the market in order to achieve
continued growth in revenues and operating profit. The Company's continuing
business strategy is to:
Capitalize on Favorable Industry Trends. According to industry analysts, the
number of soft contact lens wearers in the United States has increased from 19
million in 1990 to over 25 million in 1996. The Company estimates that the
number of soft contact lens wearers will increase by approximately 5% annually
through the year 2000 as soft contact lenses continue to gain popularity and
the number of 14- to 25-year-olds (the prime age group for new lens wearers)
increases. In addition, there has been an
44
<PAGE>
ongoing shift among wearers from conventional lenses to more profitable
disposable lenses as well as from clear lenses to specialty lenses, which
favors the Company's product lines, including its FreshLook disposable
cosmetic lenses and Precision UV disposable premium lenses.
Increase the Company's Market Share. The Company employs a two-pronged
marketing strategy to increase Wesley Jessen's market share, using both direct
consumer advertising and targeted marketing to eyecare practitioners. The
Company has spent approximately $10 million to date on a national consumer
advertising campaign featuring Christy Turlington to raise brand awareness and
demand among consumers. In total, the Company anticipates spending more than
$20 million worldwide during 1997 for the advertisement and promotion of its
disposable cosmetic lenses. In addition, the Company uses its highly trained
salesforce to market its specialty lens products to eyecare practitioners. The
salesforce seeks to train new ODs and MDs to fit the Company's lenses and to
educate eyecare practitioners as to the value-added features and revenue
potential of the Company's products.
Develop and Successfully Launch New Products. The Company's research and
development program is geared toward developing new products with commercial
appeal, particularly category-creating products (such as the Company's new
line of disposable lenses offering UV protection), as industry dynamics have
historically provided considerable advantages to manufacturers that
successfully introduce the first product in a category. In the last twelve
months, the Company has introduced five new products or line extensions,
including disposable color-enhancing lenses for light eyes, custom and colored
toric lenses, custom cosmetic lenses and cosmetic lenses for farsighted
patients. The Company currently has several new products and product line
extensions in various stages of development. See "--Research and Development."
Increase International Penetration. The Company believes that several
international markets, particularly Europe, Japan and Brazil, offer
significant opportunities for growth. In Europe, the Company intends to expand
its direct sales organization, and in Japan, the Company will continue to
expand its product offerings, as well as develop strategic partnerships with
leading local manufacturers and distributors. In the first quarter of 1997,
the Company established a marketing subsidiary in Brazil to facilitate its
growth in Brazil and other South American markets.
Realize Synergies through Completing the Integration of Barnes-Hind. The
Company's acquisition of Barnes-Hind has created a number of significant
opportunities to improve the Company's results of operations. While Wesley
Jessen and Barnes-Hind had roughly equivalent net sales in the twelve months
ended September 28, 1996, Wesley Jessen employed approximately 1,000 persons
as of that date whereas Barnes-Hind employed approximately 1,600 persons.
Consequently, the Company believes that substantial cost savings will be
realized from completed personnel reductions. Management plans to implement
other identified cost reductions, such as facilities consolidations, and to
seek further cost savings opportunities. Finally, the Company is capitalizing
on cross-selling opportunities available to sell Barnes-Hind products to
current Wesley Jessen customers and vice versa.
Benefit from the Company's Significant Operating Leverage. The Company plans
to further improve its results of operations by improving manufacturing
efficiency, investing in new low-cost manufacturing and distribution
technologies and achieving economies of scale in development, manufacturing
and distribution. The Company enjoys significant operating leverage (i.e., a
disproportionately greater impact on earnings resulting from a change in
revenues) due to significant fixed-cost components of the Company's
manufacturing operations, research and development program and marketing
efforts. Because the Company's disposable lens manufacturing facilities are
currently operating at approximately 70% of their capacity, increased
production volumes through the addition of new lens wearers to the Company's
customer base generally should not require the incurrence of significant
additional costs.
In addition to the above strategies for growth, the Company regularly
considers the expansion of its contact lens business through acquisitions,
joint ventures and other strategic alliances. Through such
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<PAGE>
arrangements, the Company will seek to broaden its product lines, expand its
geographic coverage, acquire complementary product lines and improve its
technological and manufacturing capabilities.
PRODUCTS
The following table sets forth the approximate composition, by product line,
of the Company's net sales for the year ended December 31, 1996 on a pro forma
basis:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
----------------------
AMOUNT PERCENT
-------------- -------
PRODUCT LINE
- ------------ (IN THOUSANDS)
<S> <C> <C>
Specialty Lenses......................................... $196,142 78%
Clear Lenses............................................. 43,746 18%
Hard/Other Lenses........................................ 10,111 4%
-------- ---
Total Lenses........................................... $249,999 100%
======== ===
</TABLE>
SPECIALTY LENSES. The Company's products primarily consist of specialty soft
contact lenses, including cosmetic, toric and premium lenses. With the
broadest product offering in the industry, the Company captured nearly 36% of
the U.S. specialty lens market in 1996. The Company's specialty soft contact
lens products include the following:
Cosmetic Lenses. Cosmetic lenses enhance or change the color of a
wearer's eyes. The Company's opaque color lenses, which change the color of
dark eyes (e.g., brown to green), utilize a patented dot matrix technology
that the Company believes allows for superior cosmetic appeal. As a result,
the Company's opaque cosmetic lens products have become the standard in the
market. In early 1996, the Company introduced its new enhancer color
lenses, which enhance the natural color of light eyes and which the Company
believes will become the market standard due to its patented color printing
process that allows the pupil-covering zone of the lens to remain clear.
The Company manufactures a complete line of cosmetic lenses, including: (i)
the conventional DuraSoft 2 daily wear lens, which is removed and cleaned
daily and typically is replaced after 12 to 24 months; (ii) the
conventional DuraSoft 3 extended wear lens, which can be worn overnight for
up to seven days and is also typically replaced after 12 to 24 months; and
(iii) the disposable FreshLook contact lens, which is typically replaced
every two weeks. With the broadest product offering in the cosmetic lens
segment, the Company captured over 44% of the U.S. cosmetic lens market in
1996.
Toric Lenses. Toric lenses are designed to correct vision for people with
astigmatism, which is characterized by an irregularly shaped cornea. Prior
to the introduction of the Company's toric lenses and other competing
products in the late 1980s, this condition was not effectively correctable
through the use of soft contact lenses. In February 1997, the Company
introduced a toric version of its enhancer color lenses. Approximately 30%
of the U.S. population requiring vision correction are diagnosed with
astigmatism, of which only 5% currently wear soft contact lenses. The
Company's Optifit, Hydrocurve and CSI toric lenses captured approximately
20% of the U.S. toric lens market in 1996.
Premium Lenses. Premium lenses offer the wearer value-added features such
as protein deposit resistance, improved visual acuity, enhanced comfort for
dry eyes and UV protection. The Company manufactures the premium CSI lens,
which has long been regarded by eyecare practitioners and optical retailers
as having superior visual acuity and deposit resistance. The Company also
recently repositioned Precision UV, the first disposable lens available
with UV protection, which is quickly gaining share from many clear
disposable lenses. The Company's market research suggests that some 90% of
contact lens wearers are interested in lenses offering UV protection. The
Company's Gentle Touch product, which is typically replaced every three
months, was the first lens designed specifically for and approved by the
FDA for use without intensive cleaning or special handling required of
46
<PAGE>
conventional lenses and offers the unique combination of enhanced comfort
for dry eyes, deposit resistance and low cost relative to disposable
alternatives. The Company captured 89% of the U.S. premium lens segment in
1996.
The following table sets forth certain of the brand names under which the
Company's specialty contact lenses are sold:
<TABLE>
<CAPTION>
SPECIALTY CONTACT LENS
---------------------------------------------
TYPE OF LENS COSMETIC TORIC PREMIUM
- ------------ ------------------- ------------ ------------
<S> <C> <C> <C>
Conventional: DuraSoft CSI Aquaflex
Elegance(a) Optifit CSI
Natural Touch(a) Hydrocurve SoftPerm
Disposable/Planned Replacement: FreshLook Colors FreshLook(b) Gentle Touch
FreshLook Enhancers Precision UV
</TABLE>
- --------
(a) Used only in international markets.
(b) Under development.
The Company has successfully entered into the private label market with the
offering of a private label UV protection lens. The Company sells its
specialty contact lenses under private label primarily in Japan, the United
Kingdom and France. The Company believes that the private label market offers
significant growth opportunities due to the Company's unique product offerings
and low-cost manufacturing capabilities.
CLEAR LENSES. Wesley Jessen manufactures a complete line of conventional and
disposable clear lenses that are positioned as companion lenses to the
DuraSoft and FreshLook cosmetic product lines. The Company believes that
eyecare practitioners can increase their revenues and profitability, as well
as the value provided to lens wearers, by fitting patients with either a
DuraSoft or FreshLook clear or cosmetic lens and then selling the patient a
companion cosmetic or clear lens with no additional fitting expense. In fact,
approximately 70% of color lens wearers also own clear lenses.
HARD/OTHER LENSES. The Company also sells Polycon RGP lenses to a large base
of eyecare practitioners who fit RGP lenses. In addition, the Company
manufactures prosthetic lenses, which are custom cosmetic products that return
damaged or disfigured eyes to normal appearance. The Company donates all
profits generated from its prosthetic product line to professional
associations to generate goodwill with eyecare practitioners.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are focused on product
development and process technology to support its specialty lens business. The
Company maintains a core research and development staff of over 50 engineers
and scientists, which oversees the Company's research projects. Such projects
are generally conducted by independent laboratories and universities at the
Company's direction and expense. The Company's research and development
expenses totaled $12.1 million, or 4.8% of net revenues, for the year ended
December 31, 1996 on a pro forma basis.
In the last twelve months, the Company has introduced four new products or
line extensions, including colored toric lenses, custom toric and color lenses
and expanded cosmetic powers and colors. The Company also developed an
improved, patented UV protection specialty lens for which it received FDA
approval in January 1996. The UV protection lens allows the Company to further
penetrate the emerging health-conscious market and permits cross-promotion
with the Company's current specialty lens wearers.
47
<PAGE>
The Company has a history of innovation and new product introductions. The
Company is currently investing in the development of, among other specialty
products, a disposable toric lens, a next generation cosmetic lens, and a new
disposable UV protection lens. The Company is also investing in the
development of bifocal contact lenses (for persons, typically over age 45, who
experience both farsightedness and nearsightedness) and has received several
patents related to its bifocal lens technology. In the contact lens industry,
no products currently being marketed in the bifocal category have achieved
widespread commercial acceptance, and as a result, the Company believes that a
significant market opportunity is available to the Company if it can harness
its capabilities to successfully launch bifocal contact lenses. Finally, the
Company has targeted additional research and development projects to cut
manufacturing costs in the cosmetic, premium and toric product lines.
MANUFACTURING
Substantially all of the Company's products are manufactured in the
Company's four principal production facilities, which are located in Cidra,
Puerto Rico; Des Plaines, Illinois; San Diego, California; and Southampton,
United Kingdom. See "--Facilities." The Company utilizes state-of-the-art
manufacturing equipment and process technology to control the quality of its
products and to minimize costs. The Company engages in manufacturing processes
that are designed to handle short production runs. As a result, the Company
believes that it enjoys a competitive advantage over other contact lens
manufacturers because it can be more versatile and cost-competitive in market
segments that require special features and products manufactured to meet more
stringent specifications. The Company's disposable lens manufacturing
facilities are currently operating at approximately 70% of their maximum
capacity and have sufficient capacity to meet the Company's needs for several
years.
The Company produces its hard and soft contact lens products primarily
through manufacturing processes known as lathing and cast molding. Lathing is
a machining process through which a piece of rigid lens material is shaped
into a concave form with refractive characteristics by using a high-precision
lathe. Following this machining, soft lenses are hydrated in a saline solution
and sterilized, while RGP lenses are produced using polymers that do not
absorb moisture and do not require sterilization. Lathing technology is
particularly well suited for use in short production runs and is used by the
Company to produce soft lenses at its Cidra, Puerto Rico; San Diego,
California; and Southampton, United Kingdom facilities and to produce RGP
lenses at its Atlanta, Georgia and Farnham, United Kingdom facilities.
The Company also uses cast molded technology to produce its disposable
contact lenses. In this process, a disposable plastic mold is made through the
use of an automated injection molding press containing highly engineered
optical tooling. A liquid monomer is then dispensed into the mold which
polymerizes to form the lens. In dry cast molding, the lenses are formed in a
rigid state and are hydrated to their final characteristics after being
removed from the mold. In wet cast molding, the lenses are formed fully
hydrated. The Company uses dry cast molded technology at its Southampton,
United Kingdom and Des Plaines, Illinois facilities.
SALES AND MARKETING
The Company has implemented a two-pronged sales and marketing strategy that
reflects the Company's belief that both consumers and eyecare practitioners
are important to the success of the Company's products. To generate consumer
awareness and increase demand for its products, the Company has spent
approximately $10 million to date on a national advertising campaign featuring
Christy Turlington. In total, the Company anticipates spending more than $20
million worldwide during 1997 for the advertisement and promotion of its
disposable cosmetic lenses. The Company also has developed cross-promotion
programs designed to increase sales of its cosmetic lenses by offering a set
of the Company's most popular cosmetic lenses with each purchase of a set of
six pairs of clear disposable lenses.
48
<PAGE>
Due to the fitter's influence over a patient's choice of contact lens brand,
the Company believes that developing and maintaining strong relationships with
eyecare practitioners is the most critical aspect of its sales and marketing
strategy. The Company has a salesforce of 190 persons who market the Company's
products to eyecare practitioners. The Company's salesforce seeks to train new
ODs and MDs to fit the Company's lenses and to inform them of the revenue
potential and value-added features of the Company's products. In marketing to
eyecare practitioners, the Company stresses the quality and features offered
by its products, the breadth of its product line and the ability of such
practitioners to generate more revenue per patient by offering the Company's
value-added products. The Company also advertises its products to eyecare
practitioners through promotional materials, trade publications and
conventions.
The Company currently sells through a direct salesforce in North America,
Europe and Australia. Countries in Europe, Asia and Latin America not directly
served by the Company are serviced by a broad network of distributors. The
Barnes-Hind Acquisition strengthened the Company's global distribution
infrastructure by contributing direct salesforces in Germany, Spain, Belgium,
Netherlands, Luxembourg and Australia, in addition to strengthening existing
salesforces in the United States, France, Italy, Canada and the United
Kingdom.
The following table sets forth the Company's net sales to the geographic
regions indicated for the year ended December 31, 1996 on a pro forma basis:
<TABLE>
<CAPTION>
REGION AMOUNT PERCENT
- ------ -------------- -------
(IN THOUSANDS)
<S> <C> <C>
United States............................................ $137,358 55%
Rest of World............................................ 112,641 45%
-------- ---
Total.................................................. $249,999 100%
======== ===
</TABLE>
See Note 15 to Notes to Consolidated Financial Statements for information
relating to the Company's international operations.
CUSTOMERS
The Company currently sells its products through a variety of channels
including fitters and distributors who sell to fitters and lens-replacement
suppliers. The Company sells to a highly fragmented account base with no one
customer accounting for more than 5% of its revenues for the year ended
December 31, 1996 on a pro forma basis. Furthermore, the Company's top 10
customers accounted for less than 25% of its revenues for the year ended
December 31, 1996 on a pro forma basis.
49
<PAGE>
In the United States, the Company sells to three customer segments: private
practitioners, chain accounts and distributors. There are approximately 17,700
private practitioners (MDs and ODs not affiliated with a retail chain) who fit
the Company's products. In addition, the Company has distribution in over
5,000 retail chain locations, such as Cole National Corporation, LensCrafters,
National Vision Association and Wal-Mart Stores, Inc., that advertise, promote
and fill prescriptions for the Company's products. Distributors supply but do
not fit the Company's lenses. The chart below illustrates the mix of
distribution channels used by Wesley Jessen and Barnes-Hind on a combined
basis in the United States in 1996:
<TABLE>
<CAPTION>
PERCENT OF
DISTRIBUTION CHANNEL 1996 U.S. SALES
- -------------------- ---------------
<S> <C>
Private Practitioners........................................... 45%
Chain Accounts.................................................. 23%
Distributors.................................................... 32%
---
Total......................................................... 100%
===
</TABLE>
In Europe, key corporate accounts like Boots and D&A in the United Kingdom
and Optic 2000 in France have selected the Company's lenses as their private
label as well as offering its branded products. In Japan, the world's second
largest contact lens market, the Company has formed strategic relationships
with five of the leading hard and soft contact lens manufacturers. The Company
has doubled its Japanese sales in the last year using this strategy.
The Barnes-Hind Acquisition provided Wesley Jessen with access to a new set
of accounts and the opportunity to cross-sell existing product lines between
Wesley Jessen's and Barnes-Hind's extensive customer bases.
DISTRIBUTION
The Company performs most warehousing, inventory management, order taking
and order fulfillment functions in-house. The Company's fulfillment system
provides the flexibility to receive, fill and ship orders as small as a single
lens and as large as a full truckload. Approximately 8,500 orders are received
daily, primarily by telephone and facsimile in seven customer service centers
in North America, Europe, Japan and Australia.
In the U.S., approximately 68% of the Company's lenses are shipped primarily
by common carriers directly to eyecare practitioners from distribution centers
in San Diego, California and Chicago, Illinois. The remaining 32% are shipped
to distributors, who resell lenses to practitioners and mail-order houses. In
several key markets outside the U.S., the Company sells and distributes lenses
directly to eyecare practitioners. In other international markets, the Company
serves customers through its network of 67 independent distributors.
COMPETITION
The contact lens market is highly competitive. The Company faces competition
from other companies within each segment of the contact lens market in which
it operates. In the specialty segment of the market, the Company principally
competes with divisions of large medical and pharmaceutical companies,
including Ciba Vision (a division of Novartis Corporation) and Bausch & Lomb,
Inc. as well as with smaller companies. To the extent the Company operates in
the clear lens segment, it faces competition primarily from Vistakon (a
division of Johnson & Johnson) and other large contact lens
50
<PAGE>
manufacturers such as Ciba Vision and Bausch & Lomb, Inc. Certain of the
Company's competitors in each segment have lower costs of operations, products
with enhanced features, substantially greater resources to invest in product
development and customer support, greater vertical integration and greater
access to financial and other resources than the Company. While the Company is
the leading manufacturer and distributor of specialty contact lenses, the
Company ranks fourth in the contact lens market overall in terms of net
revenues. To a lesser extent, the Company also competes with manufacturers of
eyeglasses and providers of other methods of vision correction, including
refractive surgical procedures.
Within the contact lens market, the Company believes that the principal
competitive factors in the specialty segment include product innovation, brand
awareness, product quality and price. Due to the manner in which contact
lenses are distributed (i.e., through prescription), the Company also competes
on the basis of its relationships and reputation with eyecare practitioners.
SUPPLIERS
The Company has a broad base of suppliers. The Company has qualified
multiple vendors to supply substantially all of the materials used by the
Company in its manufacturing processes and actively seeks to qualify new
vendors to insure adequate access to such materials. The primary raw materials
used by the Company in the production of contact lenses are specialty
chemicals. For the year ended December 31, 1996 on a pro forma basis, no
supplier accounted for more than 5% of the Company's cost of goods sold.
The Company utilizes a number of advanced polymers and other sophisticated
materials in the production of its contact lenses. Due to the highly technical
and specialized nature of certain of its production materials, the Company
relies from time to time on single suppliers to provide it with sufficient
quantities of certain materials used in the production of one or more of its
product lines. To minimize its reliance on any particular vendor, the Company
continually seeks to identify multiple vendors qualified to supply its
production materials. Although the Company believes that it is not dependent
on any single supplier, the inability of the Company to obtain sufficient
quantities of certain production inputs could have a material adverse effect
on the Company's financial condition or results of operations.
FACILITIES
The Company's principal manufacturing facilities are located in Cidra,
Puerto Rico; Des Plaines, Illinois; San Diego, California; and Southampton,
United Kingdom. Following the Wesley Jessen Acquisition, the Company's
headquarters were relocated from Chicago to its facility in Des Plaines,
Illinois (a suburb of Chicago). By December 1997, the Company will have
significantly consolidated its distribution operations as part of management's
cost savings strategy. In Europe, Barnes-Hind has consolidated warehouses and
customer service centers into one distribution center in the United Kingdom
and two customer service centers in the United Kingdom and France. In
addition, the former corporate headquarters of Barnes-Hind, which was located
in Sunnyvale, California, was closed in the third quarter of 1997.
51
<PAGE>
The Company believes that substantially all of its property and production
equipment is in good condition and that it has sufficient capacity to meet its
current and projected manufacturing and distribution needs for the foreseeable
future. All of the Company's owned properties are subject to a mortgage as
collateral under the Bank Credit Agreement. The following table describes the
principal properties of the Company as of March 29, 1997:
<TABLE>
<CAPTION>
SQUARE OWNED/
LOCATION FUNCTION FOOTAGE LEASED
-------- -------- ------- ------
<S> <C> <C> <C>
Des Plaines, Corporate Headquarters/Disposable Manufacturing/R&D
Illinois 340,000 Owned
Chicago, Distribution Center(1)
Illinois 48,000 Leased
San Diego, Conventional Manufacturing
California 19,000 Owned
San Diego, Conventional Manufacturing/Distribution
California 117,700 Leased
Sunnyvale, Former Headquarters of Barnes-Hind(2)
California 74,000 Leased
Atlanta, RGP Manufacturing
Georgia 7,200 Leased
Cidra, Conventional Lens Manufacturing
Puerto Rico 65,000 Owned
Southampton, Disposable Manufacturing/R&D
United
Kingdom 66,200 Leased
Southampton, Conventional Manufacturing
United
Kingdom 12,250 Leased
Farnham, RGP Manufacturing
United
Kingdom 5,000 Leased
Chandlers Conventional Manufacturing
Ford,
United
Kingdom 24,500 Leased
Mississauga, Sales Office/Distribution
Ontario 7,000 Leased
Bagnolet, Sales Office/Distribution
France 6,997 Leased
Rome, Italy Sales Office/Distribution 7,750 Leased
Brooklyn, Sales Office/Distribution
Australia 5,900 Leased
Tokyo, Japan Sales Office/Distribution 5,000 Leased
Madrid, Sales Office
Spain * Leased
Reeuwijk, Sales Office
Holland * Leased
Milan, Italy Sales Office(3) * Leased
Paris, Sales Office
France * Leased
Munich, Sales Office
Germany * Leased
</TABLE>
- --------
*Less than 5,000 square feet.
(1) This facility is scheduled to be closed in the fourth quarter of 1997.
(2) This facility was closed in the third quarter of 1997.
(3) This facility was closed in the second quarter of 1997.
Cidra, Puerto Rico. This 65,000 square foot facility was completed in 1991
and produces the Company's DuraSoft and Optifit conventional clear and
specialty lenses.
Des Plaines, Illinois. This 340,000 square foot facility currently produces
all of the Company's FreshLook disposable lenses, and also houses its
corporate headquarters, research and development activities and other
administrative services.
San Diego, California. This 136,700 square foot facility produces the
Company's CSI, Hydrocurve and Gentle Touch premium and toric lenses.
Additionally, the facility is used for U.S. distribution, customer service and
management information systems.
Southampton, United Kingdom. This 66,200 square foot facility was
substantially completed in 1996 and supports production of the Company's
Precision UV lenses.
PATENTS AND TRADEMARKS
The Company's business and competitive position benefit from the validity
and enforcement of its intellectual property protection. The Company owns a
variety of patents, trademarks, trade secrets, know-how and other intellectual
property which it believes to be important to its current and future success.
The market for the Company's products rewards product innovation, which tends
to amplify the importance of intellectual property protection.
The Company holds numerous U.S. and foreign patents and patent applications
which relate to aspects of the technology used in the Company's products. The
Company's policy is to file patent applications to protect technology,
inventions and improvements that are considered important to the development
of its business. There can be no assurance that patent applications filed by
the Company
52
<PAGE>
will result in the issuance of patents or that any of the Company's
intellectual property will continue to provide competitive advantages for the
Company's products or will not be challenged, circumvented by others or
invalidated.
The Company holds more than 70 U.S. patents, many of which have been
extended into key foreign countries. The most important part of the Company's
patent portfolio relates to the design and production techniques of the
Company's cosmetic lenses. These patents begin to expire in the year 2004. The
Company's patents include patterns for changing the color of and enhancing the
iris, as well as methods for performing the printing operation and promoting
the adhesion of the printed ink to the lens. This group of patents covers both
the technology used by the Company in the production of its cosmetic lenses,
as well as many viable alternatives which could be used to replicate such
production techniques. Another important group of patents covers the Company's
newest lens molding technology, which accommodates a high degree of automation
with correspondingly lower manufacturing cost. The features covered are
casting cup design, numerous process techniques and blister package design.
The Company has filed but not yet received a patent for its automatic lens
inspection system. The Company also holds patents covering a UV-absorbing lens
and a proprietary compound for making such lenses, the design and manufacture
of toric lenses, lens materials and bifocal lens technology.
The Company's policy is to aggressively prosecute and defend its patents and
other proprietary technology. The Company is currently seeking to enforce its
intellectual property rights to cosmetic lenses in lawsuits pending in Italy.
The prosecution and defense of intellectual property protections, like any
lawsuit, is inherently uncertain and carries no guarantee of success. The
protection of intellectual property in certain foreign countries is
particularly uncertain. There can be no assurance that the prosecution and
defense of its intellectual property will be successful or that the Company
will be able to secure adequate intellectual property protections in the
future.
The Company's trademarks include the following well recognized brand names:
Aquaflex(R), CSI(R), DuraSoft(R), Elegance, FreshLook(R), Gentle Touch,
Hydrocurve, Optifit(R), Polycon(R), Precision UV and SoftPerm(R). The
Company's policy is to register trademarks in countries where registration is
available and deemed necessary or appropriate. Trademark applications are
pending for various marks in the United States and other countries. There are
gaps in registrations, and some marks may not be available for use in various
countries.
In addition to patents and trademarks, the Company owns certain trade
secrets, copyrights, know-how and other intellectual property. The Company
seeks to protect these assets, in part, by entering into confidentiality
agreements with its business partners, consultants and vendors and appropriate
non-competition agreements with its officers and employees. There can be no
assurance that these agreements will not be breached, that the Company will
have adequate remedies for any such breach or that the Company's trade secrets
and other intellectual property will not otherwise become known or be
independently developed by others and thereby become unprotected.
GOVERNMENT REGULATION
The Company's products are generally regulated in the United States and in
foreign countries as "medical devices." As a manufacturer of medical devices,
the Company is subject to regulation in the United States by the FDA and
corresponding state and foreign regulatory agencies where the Company sells
its products. These regulations generally govern the introduction of new
medical devices, the maintenance of certain records, the tracking of devices
and other matters. The regulatory environment in which the Company operates
can be expensive, time-consuming and uncertain.
FDA Regulation
Pursuant to the FDC Act, and the regulations promulgated thereunder, the FDA
regulates the preclinical and clinical testing, manufacture, labeling,
distribution, and promotion of medical devices.
53
<PAGE>
Noncompliance with applicable requirements can result in, among other things,
fines, injunctions, civil penalties, recall or seizure of products, total or
partial suspension of production, failure of the government to grant premarket
clearance or premarket approval for devices, withdrawal of marketing
clearances or approvals and criminal prosecution. The FDA also has the
authority to request the recall, repair, replacement or refund of the cost of
any device manufactured or distributed by the Company.
Under the FDC Act, clearance or approval by the FDA is required prior to the
commercialization of a medical device. The FDA classifies medical devices as
Class I, Class II or Class III, depending on the nature of the medical device
and the existence in the market of any similar devices. The nature of the
clearance or approval procedures is dependent on the classification of the
medical device in question. Class I medical devices are subject to general
controls, including labeling, premarket notification and adherence to the
FDA's good manufacturing practice regulations ("GMP Regulations"). Class II
medical devices are subject to general and special controls, including
performance standards, post-market surveillance, patient registries and FDA
guidelines. Class III medical devices are those which must receive premarket
approval by FDA to ensure their safety and effectiveness, are generally life-
sustaining, life-supporting devices or implantable devices or new devices
which have been found not to be substantially equivalent to currently marketed
medical devices. The Company's products are generally regulated as Class II
medical devices, with some products (extended wear lenses) regulated as Class
III medical devices.
Before a new device can be introduced into the U.S. market, it must receive
from the FDA clearance or approval, either premarket notification clearance
under Section 510(k) of the FDC Act or approval pursuant to the more costly
and time-consuming PMA procedure. The Company's daily wear contact lenses are
generally subject to the 510(k) clearance procedure while its extended wear
contact lenses are subject to the PMA requirements. A PMA application must be
supported by valid scientific evidence to demonstrate the safety and
effectiveness of the device, typically including the results of clinical
trials, bench tests, laboratory and animal studies. The PMA must also contain
a complete description of the device and its components, and a detailed
description of the methods, faculties and controls used to manufacture the
device. In addition, the submission must include the proposed labeling,
advertising literature and any training materials. The PMA process can be
expensive, uncertain and lengthy, and a number of devices for which FDA
approval has been sought by other companies have never been approved for
marketing. Modifications to a device that is the subject of an approved PMA,
its labeling, or manufacturing process may require approval by the FDA of PMA
supplements or new PMAs. Supplements to a PMA often require the submission of
the same type of information required for an initial PMA, except that the
supplement is generally limited to that information needed to support the
proposed change from the product covered by the original PMA.
A 510(k) clearance will be granted if the submitted information establishes
that the proposed device is "substantially equivalent" to a legally marketed
Class I or Class II medical device or a Class III medical device for which the
FDA has not called for PMAs. For any devices that are cleared through the
510(k) process, modifications or enhancements that could significantly affect
safety or effectiveness, or constitute a major change in the intended use of
the device, will require new 510(k) submissions. While less expensive and
time-consuming than obtaining PMA clearance, securing 510(k) clearance may
involve the submission of a substantial volume of data, including clinical
data, and may require a substantive review of six months or more. The Company
markets contact lenses which have received 510(k) clearances as well as lenses
which have been the subject of approved PMA applications.
Any products manufactured or distributed pursuant to 510(k) clearance or an
approved PMA are subject to pervasive and continuing regulation by the FDA,
including recordkeeping requirements and reporting of adverse experience with
the use of the device.
The Company currently has over 20 PMAs and 510(k) clearances for its
products marketed in the United States. New products may require clinical
studies to support a PMA or 510(k) clearance. There is no certainty that
clinical studies involving new products will be completed in a timely manner
or that the
54
<PAGE>
data and information obtained will be sufficient to support the filing of a
PMA or 510(k) clearance. There can be no assurance that the Company will be
able to obtain necessary approvals to market new devices or any other products
under development on a timely basis, if at all, and delays in receipt or
failure to receive such approvals, the loss of previously received approvals,
or failure to comply with existing or future regulatory requirements could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company has made modifications to its devices which the Company believes
do not require the submission of new 510(k) notices or PMA supplements. There
can be no assurance, however, that the FDA would agree with any of the
Company's determinations not to submit a new 510(k) notice or PMA supplement
for any of these changes or would not require the Company to submit a new
510(k) notice or PMA supplement for any of the changes made to the device. If
the FDA requires the Company to submit a new 510(k) notice or PMA supplement
for any device modification, the Company may be prohibited from marketing the
modified device until the 510(k) notice or PMA supplement is cleared by the
FDA. There can be no assurance that future clearances or approvals, whether
under the 510(k) clearance procedure or the PMA procedure, will be obtained in
a timely fashion or at all. The failure to obtain such clearances or approvals
in a timely fashion or at all could have a material adverse effect on the
Company's business, financial condition or results of operations.
If human clinical trials of a device are required, whether for a 510(k) or a
PMA, and the device presents a "significant risk," the sponsor of the trial
(usually the manufacturer or the distributor of the device) is required to
file an investigational device exemption ("IDE") application prior to
commencing human clinical trials. IDE regulations generally require FDA
approval and approval by an independent institutional review board before a
clinical study may begin. Conforming with IDE regulations can add significant
cost and/or delay to the process of obtaining FDA approval for a medical
device. Submission of an application IDE does not give assurance that the FDA
will approve the IDE application and, if it is approved, there can be no
assurance that the FDA will determine that the data derived from these studies
support the safety and efficacy of the device or warrant the continuation of
clinical studies. Sponsors of clinical trials are permitted to sell
investigational devices distributed in the course of the study provided such
compensation does not exceed recovery of the costs of manufacture, research,
development and handling. An IDE supplement must be submitted to and approved
by the FDA before a sponsor or investigator may make a change to the
investigational plan that may affect its scientific soundness or the rights,
safety or welfare of human subjects.
As a manufacturer of medical devices, the Company is required to register
with the FDA and comply with the FDA's good manufacturing practice
regulations. GMP Regulations require that the Company manufacture its products
and maintain its manufacturing, testing and control activities records in a
prescribed manner. Further, the Company is required to comply with FDA
requirements for labeling and promoting its products. The Company is subject
to periodic inspections by the FDA and can be subjected to a number of
regulatory actions if it is found not to be in compliance with applicable laws
and regulations. If the FDA believes that a company may not be operating in
compliance with applicable laws and regulations, it can record its
observations on a form FDA 483; place the company under observation and
reinspect the facilities; institute proceedings to issue a warning letter
apprising of violative conduct; detain or seize products; mandate a recall;
enjoin future violations; and assess civil and criminal penalties against the
company, its officers or its employees. In addition, clearances or approvals
could be withdrawn in appropriate circumstances. Failure to comply with
regulatory requirements or any adverse regulatory action could have a material
adverse affect on the Company. On occasion, the Company has received
notifications from the FDA of alleged deficiencies in the Company's compliance
with FDA requirements. The Company's Sunnyvale, California; San Diego,
California; Southampton, United Kingdom; Cidra, Puerto Rico; and Des Plaines,
Illinois facilities have been inspected within the past three years. Two form
FDA 483s were issued. The Company responded to one such form with corrective
action which the FDA accepted. In March 1996, the Company objected to the
other form as unfounded. The Company has received no
55
<PAGE>
further communications from the FDA on such matter. The Company does not
expect such inspections to give rise to any material FDA compliance issues or
to otherwise have a material adverse effect on the Company.
Manufacturers of medical devices for marketing in the United States must
also comply with medical device reporting ("MDR") requirements that a firm
report to FDA any incident in which its product may have caused or contributed
to a death or serious injury, or in which its product malfunctioned and, if
the malfunction were to recur, it would be likely to cause or contribute to a
death or serious injury. Labeling and promotional activities are subject to
scrutiny by the FDA and, in certain circumstances, by the FTC. Current FDA
enforcement policy prohibits the marketing of approved medical devices for
unapproved uses.
The Company is subject to routine inspection by the FDA and certain state
agencies for compliance with GMP requirements, MDR requirements, and other
applicable regulations. The FDA has recently finalized changes to the GMP
regulations, including the addition of design control requirements, which will
likely increase the cost of compliance with GMP requirements. There can be no
assurance that the Company will not incur significant costs to comply with
laws and regulations in the future or that laws and regulations will not have
a material adverse effect upon the Company's business, financial condition or
results of operation. The Company believes that all of its products offered
for sale have received all required FDA approvals or clearance, and that it is
in substantial compliance with FDA regulations, including GMP and MDR
requirements.
International Regulation
The Company's products are also subject to regulation in other countries in
which it sells its products. The laws and regulations of such countries range
from comprehensive medical device approval procedures such as those described
above to simple requests for product data or certifications. The number and
scope of these laws and regulations are increasing. In particular, medical
devices in the EU are subject to the EU's new medical devices directive (the
"Directive").
Under the system established by the Directive, all medical devices other
than active implants and in vitro diagnostic products must qualify for CE
marking by June 14, 1998. "CE marking" means the manufacturer certifies that
its product bearing the CE mark satisfies all requirements essential for the
product to be considered safe and fit for its intended purpose. During the
transitional period (from January 1, 1995 to June 14, 1998) medical devices
can be placed on the market and put into service if they comply with the
requirements of the Directive or national requirements that were in force on
December 31, 1994.
In order to qualify for CE marking, the manufacturer must comply with the
"Essential Requirements" of the Directive, relating to the safety and
performance of the product. In order to demonstrate compliance, a manufacturer
is required to undergo a conformity assessment, which includes assessment of
the manufacturer's quality assurance system by self- selected certification
organizations referred to as a "Notified Body." After all necessary conformity
assessment tests have been completed to the satisfaction of the Notified Body
and the manufacturer is convinced that it is in full compliance with the
Directive, CE marking may be affixed on the products concerned. The Company
has undergone such conformity assessment, with two Dutch and one British non-
governmental entities chosen by the Company as its Notified Bodies. The
Company has received CE marking authorization for all products it currently
markets in the EU.
Although member countries must accept for marketing medical devices bearing
a CE marking without imposing further requirements related to product safety
and performance, each country may require the use of its own language or
labels and instructions for use. "National Competent Authorities" who are
required to enforce compliance with the requirements of the Directive, can
restrict, prohibit and recall CE-marked products if they are unsafe. Such a
decision must be confirmed by the European Commission in order to be valid.
Member countries can impose additional requirements as long as they do not
violate the Directive or constitute technical barriers to trade.
56
<PAGE>
Additional approvals from foreign regulatory authorities may be required for
international sale of the Company's products in non-EU countries. Failure to
comply with applicable regulatory requirements can result in the loss of
previously received approvals and other sanctions and could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Additional Regulation
The Company also is subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. There can be no assurance that the Company
will not be required to incur significant costs to comply with such laws and
regulations in the future or that such laws or regulations will not have a
material adverse effect upon the Company's ability to do business.
The Company's success depends to a significant extent upon the success of
its customers in the retail optical industry. These customers are subject to a
variety of federal, state and local laws, regulations and ordinances,
including those regarding advertising, location and design of stores, products
sold and qualifications and practices of the industry. The state and local
legal requirements vary widely among jurisdictions and are subject to frequent
change. Furthermore, numerous health-care related legislative proposals have
been made in recent years in the United States Congress and in various state
legislatures. The potential impact of these proposals with respect to the
business of the Company's customers is uncertain, and there is no assurance
that the proposals, if adopted, would not have a material adverse impact on
the Company.
EMPLOYEES
As of September 27, 1997, the Company had approximately 2,956 full-time and
part-time employees, including 1,918 in the United States (including Puerto
Rico), 982 in Europe, and 56 in the rest of the world. The Company has no
collective bargaining agreements with any union and believes that its overall
relations with employees are satisfactory.
ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
The Company is subject to federal, state, local and foreign environmental
laws and regulations and is subject to liabilities and compliance costs
associated with the past and current handling, processing, storing and
disposing of hazardous substances and wastes. The Company's operations are
also subject to federal, state and local occupational health and safety laws
and regulations. The Company devotes resources to maintaining environmental
regulatory compliance and managing environmental risk and believes that it
conducts its operations in substantial compliance with applicable
environmental and occupational health and safety laws and regulations. The
Company does not expect to incur material capital expenditures for
environmental controls in the current or succeeding fiscal year.
In connection with the Wesley Jessen Acquisition and the Barnes-Hind
Acquisition, the respective sellers, subject to certain limitations, agreed to
retain responsibility for, and indemnify the Company from and against, certain
environmental matters. These matters include addressing a limited area of
historical contamination at the Company's Des Plaines facility and settling
any liability of Barnes-Hind at a Superfund site located in Whittier,
California. Notwithstanding these contractual agreements, the Company could be
pursued in the first instance by governmental authorities or third parties
with respect to certain indemnified matters, subject to the Company's right to
seek indemnification from the appropriate seller. Management does not
currently believe that any such matter will have a material adverse effect on
the business or financial condition of the Company.
REQUIRED DIVESTITURE
In connection with the Barnes-Hind Acquisition, the Company was required to
file a notice with the FTC and the Department of Justice under the Hart-Scott-
Rodino Antitrust Improvements Act of 1976, as
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<PAGE>
amended. In connection with such filing, the FTC requested additional
information regarding the effect of the Barnes-Hind Acquisition on competition
in the opaque contact lens market. Subsequently, the Company and the FTC
entered into a voluntary consent order which required among other things, that
the Company divest the U.S. Natural Touch Product Line. The Company also
agreed to supply the acquiror with opaque contact lenses for at least 18
months following such divestiture, to license on a royalty-free basis certain
patents related to the manufacture, import, offer for sale, sale and use of
opaque contact lenses in the United States and to allow an FTC-appointed
trustee to monitor the divestiture. For a period of 10 years after the order
becomes final, the Company is prohibited from acquiring more than a 5%
interest in, or certain assets of, any entity engaged in the opaque contact
lens business in the United States and must notify the FTC in advance of any
proposed change in its corporate structure. The Company is required to file
compliance reports showing that it has fully complied with the consent order
and may be liable for civil penalties for each violation of the consent order.
On March 17, 1997, the Company completed the sale of the U.S. Natural Touch
Product Line. Under the agreement, the Company received aggregate
consideration equal to $7.5 million, consisting of $3.0 million in cash and a
four-year $4.5 million promissory note. The promissory note accrues interest
at a rate of 12% per annum, 4% of which is payable-in-kind. As part of the
agreement, the Company entered into a supply agreement pursuant to which the
Company will supply the purchaser with Natural Touch lenses for sale in the
United States at a profitable price. The U.S. Natural Touch Product Line
generated net sales of approximately $6.9 million in the year ended December
31, 1996. The Company does not believe that the disposition of the U.S.
Natural Touch Product Line has had a material impact on the Company's results
of operations.
LEGAL PROCEEDINGS
The Company is currently a party to various claims and legal actions which
arise in the ordinary course of business. The Company believes such claims and
legal actions, individually or in the aggregate, will not have a material
adverse effect on the business, financial condition or results of operations
of the Company. The Company carries insurance coverage in the types and
amounts that management considers reasonably adequate to cover the risks it
faces in the industry in which it competes. There can be no assurance,
however, that such insurance coverage will be adequate to cover all losses
which the Company may incur in future periods.
In connection with the Barnes-Hind Acquisition, Pilkington agreed, subject
to certain limitations, to retain responsibility for, and indemnify the
Company from and against, certain litigation and other claims. Notwithstanding
these contractual agreements, the Company could be pursued in the first
instance by third parties with respect to certain indemnified matters, subject
to the Company's right to seek indemnification from such seller. Management
does not currently believe that any such matter will have a material adverse
effect on the business or financial condition of the Company.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information with respect to the
Directors, executive officers and certain key employees of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Stephen G. Pagliuca..... 42 Chairman of the Board
Kevin J. Ryan........... 56 President, Chief Executive Officer and Director
Edward J. Kelley........ 49 Vice President, Finance, Chief Financial Officer and Director
Raleigh S. Althisar,
Jr. ................... 47 Vice President, Worldwide Manufacturing
Ronald J. Artale........ 47 Vice President and Controller
Lawrence L. Chapoy...... 53 Vice President, Research & Development
William M. Flynn........ 39 Vice President, Pan Asia
Joseph F. Foos.......... 45 Vice President, Scientific Affairs
George H. McCrary....... 54 Vice President, Americas
Daniel M. Roussel....... 47 Vice President, Europe
Thomas F. Steiner....... 52 Vice President, Marketing
Michael A. D'Amato...... 43 Director
Adam W. Kirsch.......... 35 Executive Vice President and Director
Sol Levine.............. 69 Director
John W. Maki............ 36 Vice President and Director
John J. O'Malley........ 49 Director
</TABLE>
Mr. Pagliuca has been Chairman of the Board of the Company since its
incorporation. Mr. Pagliuca has been a Managing Director of Bain Capital since
May 1993 and a general partner of Bain Venture Capital since 1989, where he
founded Information Partners. Prior to joining Bain Venture Capital, Mr.
Pagliuca was a partner at Bain & Company, where he provided strategic and
operational advice for clients in the healthcare and information industries.
He also worked as a senior accountant and international tax specialist for
Peat Marwick Mitchell & Company in the Netherlands. Mr. Pagliuca serves as
Chairman of the Board of Dade International Inc. and Physio-Control
International Corporation. He also serves as a director of several other
companies including Coram Healthcare Corporation, Gartner Group, Inc., Medical
Specialties Group, Inc. and Physician Quality Care.
Mr. Ryan has served as President, Chief Executive Officer and a Director of
the Company since June 1995. From 1991 to 1995, Mr. Ryan was President of
BioSource Genetics Corporation. From 1987 to 1990, Mr. Ryan served as
President of the Barnes-Hind contact lens business; from 1983 to 1987, as
President of Revlon VisionCare (a division of Revlon, Inc.); and from 1978 to
1983, as President of Barnes-Hind (then a part of Revlon VisionCare).
Mr. Kelley has served as Vice President, Finance, Chief Financial Officer
and a Director of the Company since June 1995. Prior to joining the Company,
Mr. Kelley served as the President, Asia Pacific and Latin America of Barnes-
Hind and its Chief Financial Officer. Prior to joining Barnes-Hind, Mr. Kelley
held positions of increasing responsibility with Simon & Schuster, Revlon
Health Care and Peat Marwick Mitchell & Company.
Mr. Althisar, Jr. has served as Vice President, Worldwide Manufacturing of
the Company since October 1996. Prior to joining the Company, Mr. Althisar
served as Executive Vice President, Worldwide Manufacturing of Barnes-Hind.
Prior thereto, he held positions of increasing responsibility with the Sola
division of Barnes-Hind, Syntex Ophthalmics, Retail Optical Management and
Milton Roy Ophthalmics.
Mr. Artale has served as Vice President of the Company since February 1997
and Controller since March 1996. Prior to joining the Company, Mr. Artale
served as Corporate Vice President, Planning with
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<PAGE>
Simon & Schuster. In addition, Mr. Artale has held positions of increasing
responsibility with Revlon VisionCare, including Vice President, Finance for
Barnes-Hind.
Mr. Chapoy has served as Vice President, Research & Development of the
Company since 1993. Prior to joining the Company, Dr. Chapoy spent eight years
with Montedison Chemical Company as a Project Researcher and fifteen years as
a Chemical Engineering Professor at the Polytechnic University of Denmark. In
these positions, Dr. Chapoy conducted and managed research in a variety of
materials science related areas. Dr. Chapoy holds more than 25 patents, has
authored more than 75 publications and presented over 100 lectures during the
course of his career.
Mr. Flynn has served as the Vice President, Pan Asia of the Company since
1994. Prior to being named to his current position, Mr. Flynn served as
International Finance Manager for two years and in other positions in the
Finance Department of Schering-Plough Corporation for two years. In addition,
Mr. Flynn held a variety of finance positions with Prudential Insurance
Company of America and RCA Records.
Mr. Foos has served as Vice President, Scientific Affairs of the Company
since 1994. Mr. Foos joined Wesley Jessen in 1987 and has served as Manager,
Quality for two years, Project Manager for Research and Development Pilot
Manufacturing and various other positions of increasing responsibility.
Mr. McCrary has served as Vice President, Americas of the Company since
1996. Prior to joining the Company, Mr. McCrary held the position of Senior
Vice President of Sales, Marketing and Distribution for Foster Grant
Corporation and prior to that, Vice President Sales and Marketing, Consumer
Products Division for Revlon VisionCare. Before joining Revlon VisionCare, he
held sales and marketing positions of increasing responsibility with the
Warner-Lambert Company.
Mr. Roussel has served as Vice President, Europe for Wesley Jessen since
1995. Mr. Roussel opened the Company's French subsidiary and served for three
years as General Manager Wesley Jessen, France. Previously, Mr. Roussel held
positions in marketing and sales with Schering-Plough in Hong Kong, Japan and
Portugal. Mr. Roussel also worked as Regional Director, Asia Pacific, for
Goupit Labs based in Hong Kong.
Mr. Steiner has served as Vice President, Marketing of the Company since
1996. Mr. Steiner has served in various marketing-related positions since
joining the Company in 1982. Prior to joining the Company, Mr. Steiner worked
at Sara Lee Corporation for seven years as Group Product Manager and Project
Research Manager. Mr. Steiner also worked at J. Walter Thompson Company as
Associate Research Director.
Mr. D'Amato has been a Director of the Company since September 1997. Mr.
D'Amato has served as the Chief Financial Officer of The Advisory Board
Company, a private information industry company, since 1996 and as Special
Adviser to the Chairman since 1995. Prior to joining The Advisory Board
Company, Mr. D'Amato was a Partner of Bain & Company, an international
management consulting firm, from 1982 through 1995. Mr. D'Amato joined Bain &
Company in 1977.
Mr. Kirsch has been Executive Vice President of the Company since June 1995
and a Director of the Company since its incorporation. Mr. Kirsch has been a
Managing Director of Bain Capital since May 1993 and a general partner of Bain
Venture Capital since 1990. Mr. Kirsch joined Bain Venture Capital in 1985 as
an associate, and prior to joining Bain Venture Capital, Mr. Kirsch was a
consultant at Bain & Company, where he worked in mergers and acquisitions. He
serves on the board of several companies including Therma-Wave, Inc., Stage
Stores, Inc., Brookstone, Inc. and Dade International Inc.
Mr. Levine has been a Director of the Company since September 1997. Mr.
Levine is currently the President of Mardan Corporation. Mr. Levine served as
President of Revlon, Inc. prior to his retirement in December 1991. Mr. Levine
also serves on the board of Biosource Technologies, Inc. and several other
private companies.
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<PAGE>
Mr. Maki has been a Director of the Company since November 1996 and a Vice
President of the Company since June 1995. Mr. Maki is currently a Managing
Director of Technology Directors II, LLC. Mr. Maki was a Principal at Bain
Capital from 1995 to July 1997 and was an associate at Bain Capital from 1993
to 1995 and at Bain Venture Capital from 1988 to 1993. Prior to joining Bain
Venture Capital, Mr. Maki was a consultant at Bain & Company, where he
specialized in healthcare and consumer product companies. He also serves on
the board of Medical Specialties Group, Inc. and Biosource Technologies, Inc.
Mr. O'Malley has been a Director of the Company since November 1996. Mr.
O'Malley has been an Executive Vice President of Bain Capital since 1993. From
1991 to 1993, Mr. O'Malley was President and Chief Executive Officer of
Robertson Ceco, an international construction products and engineering
company. From 1986 to 1991, he was Executive Vice President of HMK Group Inc.,
a diversified manufacturing and services company. Mr. O'Malley is also a
director of Physio-Control International Corporation, GS Industries, Inc. and
Medical Specialties Group, Inc.
Executive officers of the Company are duly elected by the Board of Directors
to serve until their respective successors are elected and qualified. There
are no family relationships between any of the Directors or executive officers
of the Company.
The Board is divided into three classes, as nearly equal in number as
possible, with each Director serving a three-year term and one class being
elected at each year's annual meeting of stockholders. The Company's By-laws
provide that Directors shall be elected by a plurality vote, with no
cumulative voting. Messrs. Maki and D'Amato are in the class of directors
whose term expires at the 1998 annual meeting of the Company's stockholders.
Messrs. Kirsch, Kelley and Levine are in the class of directors whose term
expires at the 1999 annual meeting of the Company's stockholders. Messrs.
Pagliuca, Ryan and O'Malley are in the class of directors whose term expires
at the 2000 annual meeting of the Company's stockholders. At each annual
meeting of the Company's stockholders, successors to the class of directors
whose term expires at such meeting will be elected to serve for three-year
terms and until their respective successors are elected and qualified.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
or accrued for the years ended December 31, 1996 and 1995 for the Chief
Executive Officer and each of the four other most highly compensated executive
officers of the Company as of the end of the last fiscal year (the "Named
Executives"). The amounts shown include the combined compensation for services
in all capacities that were provided to the Predecessor from January 1, 1995
through June 28, 1995, and to the Company from June 29, 1995 through December
31, 1995.
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------------------------- ------------
OTHER SECURITIES
NAME AND ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS(A) COMPENSATION(B) OPTIONS COMPENSATION
------------------ ---- --------- -------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Kevin J. Ryan(c)........ 1996 $ 250,008 $590,000 $ -- 126,398 $1,800(e)
President and Chief 1995 127,885 125,000 -- 1,018,202 720(e)
Executive Officer
Edward J. Kelley(d)..... 1996 $175,000 $417,500 $ -- 35,800 $ 688(e)
Chief Financial Officer 1995 83,574 87,500 -- 234,969 145(e)
and Vice President,
Finance
Lawrence L. Chapoy...... 1996 $146,100 $216,228 $ -- 5,592 $ 841(e)
Vice President, Research 1995 143,100 10,000 -- 67,137 5,870(f)
& Development
Daniel M. Roussel....... 1996 $ 133,843 $184,703 $ -- 15,621 $ --
Vice President, Europe 1995 127,339 20,000 -- 134,271 --
Thomas F. Steiner....... 1996 $ 120,000 $177,600 $ -- 16,103 $ 668(e)
Vice President, 1995 120,000 18,000 -- 100,698 9,404(g)
Marketing
</TABLE>
- --------
(a) Reflects bonuses received by such Named Executives as a result of the
Company meeting certain performance targets in such fiscal year. Bonuses
for 1996 also include payments made under the Company's profit sharing
plan in the following amounts: Mr. Ryan--$15,000; Mr. Kelley--$15,000; Mr.
Chapoy--$14,610; and Mr. Steiner--$12,000. Mr. Roussel is not eligible to
participate in such plan.
(b) None of the perquisites and other benefits paid to each Named Executive in
1996 or 1995 exceeded 10% of the total annual salary and bonus received by
such Named Executive during that year.
(c) Mr. Ryan commenced employment with the Company in June 1995.
(d) Mr. Kelley commenced employment with the Company in June 1995.
(e) Reflects premium payments made by the Company on behalf of such Named
Executives for life and long-term disability insurance as follows: Mr.
Kelley--$435; Mr. Chapoy--$554; and Mr. Steiner--$403; and premium
payments for long-term disability insurance as follows: Mr. Kelley--$253;
Mr. Chapoy--$287; and Mr. Steiner--$265.
(f) Includes $5,329 paid by Schering-Plough under its Profit Sharing Plan
prior to the Wesley Jessen Acquisition and $541 as a result of premium
payments made by the Company on behalf of Mr. Chapoy for life insurance.
(g) Includes $9,003 paid by Schering-Plough under its Profit Sharing Plan
prior to the Wesley Jessen Acquisition and $401 as a result of premium
payments made by the Company on behalf of Mr. Steiner for life insurance.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding stock options granted
by the Company to the Named Executives during the Company's last fiscal year
(giving effect to the Reclassification and the Stock Split):
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF
NUMBER OF OPTIONS MARKET STOCK PRICE
SECURITIES GRANTED TO EXERCISE PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES OR ON OPTION TERM(D)
OPTIONS IN FISCAL BASE PRICE DATE OF EXPIRATION ---------------------
NAME GRANTED(#)(A) YEAR ($/SHARE) GRANT(B) DATE(C) 5%($) 10%($)
---- ------------- ---------- ---------- -------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Kevin J. Ryan........... 126,398 21.8% $7.24 $7.24 10/21/06 $ 575,320 $ 1,457,665
Edward J. Kelley........ 35,800 6.2 7.24 7.24 10/21/06 162,949 412,858
Lawrence L. Chapoy...... 5,592 1.0 7.24 7.24 10/21/06 25,454 64,492
Daniel M. Roussel....... 15,621 2.7 7.24 7.24 10/21/06 71,100 180,144
Thomas F. Steiner....... 16,103 2.8 7.24 7.24 10/21/06 73,296 185,708
</TABLE>
62
<PAGE>
- --------
(a) Options were immediately exercisable on the date of grant.
(b) Market price was determined in good faith by the Company's Board of
Directors on the date of grant.
(c) Options will expire the earlier of 30 days after the date of termination
or October 21, 2006.
(d) Amounts reflect certain assumed rates of appreciation set forth in the
executive compensation disclosure rules of the Securities and Exchange
Commission (the "Commission"). Actual gains, if any, on stock option
exercises depend on future performance of the Company's stock and overall
market conditions. At an annual rate of appreciation of 5% per year for
the option term, the price of the Common Stock would be approximately
$11.79 per share. At an annual rate of appreciation of 10% per year for
the option term, the price of the Common Stock would be approximately
$18.77 per share.
FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning options outstanding at
the end of the last fiscal year held by the Named Executives (giving effect to
the Reclassification and the Stock Split). There were no options exercised in
the last fiscal year for securities of the Company.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT FY-END (#) OPTIONS AT FY-END ($)
SHARES ACQUIRED VALUE ------------------------- -----------------------------
NAME ON EXERCISE (#) REALIZED ($) UNEXERCISABLE/EXERCISABLE UNEXERCISABLE/EXERCISABLE (A)
---- --------------- ------------ ------------------------- -----------------------------
<S> <C> <C> <C> <C>
Kevin J. Ryan........... -- -- 293,712/850,888 $3,517,445/$8,191,832
Edward J. Kelley........ -- -- 58,742/212,027 703,489/2,009,351
Lawrence L. Chapoy...... -- -- 17,902/54,827 214,386/538,632
Daniel M. Roussel....... -- -- 35,806/114,086 428,772/1,098,367
Thomas F. Steiner....... -- -- 26,852/89,949 321,579/844,662
</TABLE>
- --------
(a)Assumes a fair market value of the Common Stock at December 31, 1996 equal
to $12.00 per share.
DIRECTOR COMPENSATION
Directors of the Company currently do not receive a salary or an annual
retainer for their services. The Company expects, however, that new non-
employee Directors not otherwise affiliated with the Company or its
stockholders will be paid an annual cash retainer of $10,000 and will be
reimbursed for all reasonable expenses incurred in attending Board meetings.
Such Directors will also be entitled to participate in the Company's 1997 Non-
Employee Directors Stock Option Plan.
COMMITTEES OF THE BOARD OF DIRECTORS
Prior to the IPO, the Board of Directors of the Company (the "Board of
Directors" or the "Board") had no formal committees. Immediately prior to the
completion of the IPO, the Board of Directors established two committees: (i)
an Audit Committee and (ii) a Compensation Committee.
The Audit Committee makes recommendations to the Board of Directors
regarding the independent auditors to be nominated for election by the
stockholders and reviews the independence of such auditors, approves the scope
of the annual audit activities of the independent auditors, approves the audit
fee payable to the independent auditors and reviews such audit results. The
Audit Committee is currently comprised of Messrs. Pagliuca, Kirsch and Maki.
Price Waterhouse LLP presently serves as the independent auditors of the
Company.
The duties of the Compensation Committee are to provide a general review of
the Company's compensation and benefit plans to ensure that they meet
corporate objectives. In addition, the Compensation Committee reviews the
President's recommendations on (i) compensation of all officers of the Company
and (ii) adopting and changing major Company compensation policies and
practices, and report its recommendations to the whole Board of Directors for
approval and authorization. The Compensation Committee administers the
Company's Stock Plans and is currently comprised of Messrs. Pagliuca and
Kirsch. The Board may also establish other committees to assist in the
discharge of its responsibilities.
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<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the IPO, the Company did not have a compensation committee.
Instead, compensation decisions regarding the Company's executive officers
were made by the Board of Directors. Messrs. Ryan and Kelley, both executive
officers of the Company, serve on the Board of Directors of the Company. The
compensation for both Messrs. Ryan and Kelley for the year ended December 31,
1996 was established pursuant to the terms of their respective employment
agreements with the Company.
EMPLOYMENT AGREEMENTS
On June 28, 1995, the Company and Kevin J. Ryan entered into an employment
agreement (the "Employment Agreement"), pursuant to which Mr. Ryan agreed to
serve as President and Chief Executive Officer of the Company for a period
that will end with Mr. Ryan's resignation, death or disability, or upon
termination by the Company, with or without cause. Under the Employment
Agreement, Mr. Ryan will receive (i) an annual base salary equal to at least
$250,000; (ii) an annual bonus based on the Company's achievement of certain
targeted operating results; and (iii) certain fringe benefits. If Mr. Ryan's
employment is terminated by the Company without cause (as defined therein), he
will be entitled to receive his base salary and fringe benefits for 12 months
following such termination in addition to his bonus for the year in which his
employment was terminated, pro rated based on the number of days elapsed in
the year, if he would have otherwise been entitled to receive such bonus had
he not been terminated. Mr. Ryan has agreed not to compete with the Company
for a period of one year following his termination of employment with the
Company and not to disclose any confidential information at any time without
the prior written consent of the Company.
On June 28, 1995, Edward J. Kelley entered into an employment agreement with
the Company containing substantially similar terms as those described above.
Under such agreement, Mr. Kelley has agreed to serve as the Chief Financial
Officer of the Company for (i) an annual base salary equal to at least
$175,000; (ii) an annual bonus based on the Company's achievement of certain
targeted operating results; and (iii) certain fringe benefits.
MANAGEMENT BONUS PLAN
In May 1997, the Board of Directors adopted the Wesley Jessen Corporation
Professional Incentive Plan for calendar year 1997 (the "Bonus Plan"). Under
the Bonus Plan, participants will be eligible to earn an annual bonus upon the
achievement of certain personalized operating achievement targets, which will
be based on the Company's earnings per share. The annual bonus will be equal
to a specified percentage of a participant's annual salary (the "Target
Percentage"), subject to increase based on achievement beyond targeted levels.
Bonuses under the Bonus Plan are not subject to any cap. Approximately 155
employees are expected to be eligible to participate in the Bonus Plan for the
1997 fiscal year, including each of the Named Executives.
STOCK OPTIONS
1995 Stock Plan
In connection with the Wesley Jessen Acquisition, the Board of Directors
adopted the Wesley-Jessen Holding, Inc. 1995 Stock Purchase and Option Plan
(the "1995 Stock Plan"), which authorized the grant of stock options,
including options that are intended to qualify as "incentive stock options"
within the meaning of Section 422 of the Internal Revenue Code ("ISOs"), and
sales of the Company's Class L Common Stock ("Class L Common") or Common Stock
to current or future employees, directors, consultants or advisors of the
Company or its subsidiaries. Under the 1995 Stock Plan (without giving effect
to the Reclassification and Stock Split), the Board was authorized to sell any
class or classes of Common Stock at any time prior to the termination of the
1995 Stock Plan in such quantity, at such price, on such terms and subject to
such conditions as established by the Board up to an aggregate of 15,000
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<PAGE>
shares of Class L Common and 835,000 shares of Common Stock (including shares
of Common Stock with respect to which options may be granted), subject to
adjustment upon the occurrence of certain events to prevent any dilution or
expansion of the rights of participants that might otherwise result from the
occurrence of such events. Giving effect to the Reclassification and Stock
Split, an aggregate of 491,180 shares of Common Stock were sold to members of
the Company's management and options to purchase an aggregate of 2,193,051
shares of Common Stock were granted under the 1995 Stock Plan. Stock and
options sold or granted under the 1995 Stock Plan are subject to various
restrictions that limit the transferability of such shares and subject such
shares to repurchase at a predetermined price upon the termination of a
participant's employment with the Company. The 1995 Stock Plan was terminated
in 1996.
The options granted under the 1995 Stock Plan consist of: (i) options to
purchase an aggregate of 469,940 shares of Common Stock that vest in equal
installments over a four-year period beginning on June 28, 1996 and options to
purchase an aggregate of 313,293 shares of Common Stock that vest in equal
installments over a five-year period beginning on April 5, 1996 (collectively,
the "Time Vesting Options"), which have a weighted average exercise price of
approximately $0.03 per share; (ii) options to purchase an aggregate of
704,909 shares of Common Stock that were immediately exercisable on the date
of grant at an exercise price of approximately $1.18 per share; and (iii)
options to purchase an aggregate of 704,909 shares of Common Stock that were
immediately exercisable on the date of grant at an exercise price of
approximately $2.34 per share. The Time Vesting Options become immediately
exercisable in the event the Company is sold or if at any time after the
Company completes an initial public offering, Bain Capital and its related
investors cease to own at least 20% of the outstanding Common Stock.
1996 Stock Plan
On October 22, 1996, the Board of Directors and the stockholders of the
Company adopted the Wesley-Jessen Holding, Inc. 1996 Stock Option Plan (the
"1996 Stock Plan"). The 1996 Stock Plan authorizes the grant of stock options,
including ISOs, to current and future employees, Directors, consultants and
advisors of the Company or its subsidiaries. The 1996 Stock Plan authorizes
the granting of stock options up to an aggregate of 424,519 shares of Common
Stock, subject to adjustment upon the occurrence of certain events. The
Company has granted options for all of the shares authorized by the 1996 Stock
Plan. Options to purchase an aggregate of 267,872 shares of Common Stock were
immediately exercisable on the date of grant at an exercise price of
approximately $7.24 per share and options to purchase an aggregate of 156,647
shares of Common Stock vest in equal installments over a five-year period
beginning on October 22, 1997, at an exercise price of approximately $7.24 per
share. No additional options are currently available to be granted under the
1996 Stock Plan.
1997 Stock Incentive Plan
In connection with the IPO, the Board and stockholders of the Company
approved the Wesley Jessen VisionCare, Inc. 1997 Stock Incentive Plan (the
"1997 Stock Plan"). The 1997 Stock Plan is administered by a Compensation
Committee (the "Committee"), composed of at least two Non-Employee Directors
(as that term is defined in Rule 16b-3 under the Exchange Act), who will be
appointed by the Board. Certain employees, advisors and consultants of the
Company are eligible to participate in the 1997 Stock Plan (a "Participant").
The Committee is authorized under the 1997 Stock Plan to select the
Participants and determine the terms and conditions of the awards under the
1997 Stock Plan. The 1997 Stock Plan provides for the issuance of the
following types of incentive awards: stock options, stock appreciation rights,
restricted stock, performance grants and other types of awards that the
Committee deems consistent with the purposes of the 1997 Stock Plan. An
aggregate of 800,000 shares of Common Stock of the Company have been reserved
for issuance under the 1997 Stock Plan, subject to certain adjustments
reflecting changes in the Company's capitalization. The 1997 Stock Plan
provides that Participants will be limited to receiving awards relating to no
more than 50,000 shares of Common Stock per year. To date, options to purchase
an aggregate of 266,700 shares of Common Stock have been granted under the
1997 Stock Plan.
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<PAGE>
Options granted under the 1997 Stock Plan may be either ISOs or such other
forms of non-qualified stock options ("NQOs") as the Committee may determine.
ISOs are intended to qualify as "incentive stock options" within the meaning
of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code").
The exercise price of (i) an ISO granted to an individual who owns shares
possessing more than 10% of the total combined voting power of all classes of
stock of the Company (a "10% Owner") will be at least 110% of the fair market
value of a share of common stock on the date of grant and (ii) an ISO granted
to an individual other than a 10% Owner and an NQO will be at least 100% of
the fair market value of a share of Common Stock on the date of grant.
Options granted under the 1997 Stock Plan may be subject to time vesting and
certain other restrictions at the sole discretion of the Committee. Subject to
certain exceptions, the right to exercise an option generally will terminate
at the earlier of (i) the first date on which the initial grantee of such
option is not employed by the Company for any reason other than termination
without cause, death or permanent disability or (ii) the expiration date of
the option. If the holder of an option dies or suffers a permanent disability
while still employed by the Company, the right to exercise all unexpired
installments of such option shall be accelerated and shall vest as of the
latest of the date of such death, the date of such permanent disability and
the date of the discovery of such permanent disability, and such option shall
be exercisable, subject to certain exceptions, for 180 days after such date.
If the holder of an option is terminated without cause, to the extent the
option has vested, such option will be exercisable for 30 days after such
date.
All outstanding awards under the 1997 Stock Plan will terminate immediately
prior to consummation of a liquidation or dissolution of the Company, unless
otherwise provided by the Board. In the event of the sale of all or
substantially all of the assets of the Company or the merger of the Company
with another corporation, all restrictions on any outstanding awards will
terminate and Participants will be entitled to the full benefit of their
awards immediately prior to the closing date of such sale or merger, unless
otherwise provided by the Board.
The Board generally will have the power and authority to amend the 1997
Stock Plan at any time without approval of the Company's stockholders, subject
to applicable federal securities and tax laws limitations (including
regulations of the Nasdaq National Market).
EMPLOYEE STOCK PURCHASE PLAN
The Wesley Jessen VisionCare, Inc. Employee Stock Discount Purchase Plan
(the "Employee Stock Purchase Plan") was approved by the Board and
stockholders prior to the consummation of the IPO. The Employee Stock Purchase
Plan was established to give employees desiring to do so a convenient means of
purchasing shares of Common Stock through payroll deductions. The Employee
Stock Purchase Plan provides an incentive to participate by permitting
purchases at a discounted price. The Company believes that ownership of stock
by employees will foster greater employee interest in the success, growth and
development of the Company.
Subject to certain restrictions, each employee of the Company who is a U.S.
resident or a U.S. citizen temporarily on location at a facility outside of
the United States is eligible to participate in the Employee Stock Purchase
Plan if he or she has been employed by the Company for more than six months.
Participation is discretionary with each eligible employee. The Company has
reserved 500,000 shares of Common Stock for issuance in connection with the
Employee Stock Purchase Plan. Each eligible employee is entitled to purchase a
maximum of 500 shares per year. Elections to participate and purchases of
stock are made on a quarterly basis. Each participating employee contributes
to the Employee Stock Purchase Plan by choosing a payroll deduction in any
specified amount, with a minimum deduction of $10 per payroll period. A
participating employee may increase or decrease the amount of such employee's
payroll deduction, including a change to a zero deduction as of the beginning
of any calendar quarter. Elected
66
<PAGE>
contributions are credited to participants' accounts at the end of each
calendar quarter. In addition, employees may make lump sum contributions at
the end of the year to enable them to purchase the maximum number of shares
available for purchase during the plan year.
Each participating employee's contributions are used to purchase shares for
the employee's share account within 15 days after the last day of each
calendar quarter. The cost per share is 85% of the lower of the closing price
of the Company's Common Stock on the Nasdaq National Market on the first or
the last day of the calendar quarter. The number of shares purchased on each
employee's behalf and deposited in his/her share account is based on the
amount accumulated in such participant's cash account and the purchase price
for shares with respect to any month. Shares purchased under the Employee
Stock Purchase Plan carry full rights to receive dividends declared from time
to time. Under the Employee Stock Purchase Plan, any dividends attributable to
shares in the employee's share account are automatically used to purchase
additional shares for such employee's share account. Share distributions and
share splits are credited to the participating employee's share account as of
the record date and effective date, respectively. A participating employee has
full ownership of all shares in such employee's share account and may withdraw
them for sale or otherwise by written request to the Committee following the
close of each calendar quarter. Subject to applicable federal securities and
tax laws, the Board of Directors has the right to amend or to terminate the
Employee Stock Purchase Plan. Amendments to the Employee Stock Purchase Plan
will not affect a participating employee's right to the benefit of the
contributions made by such employee prior to the date of any such amendment.
In the event the Employee Stock Purchase Plan is terminated, the Committee is
required to distribute all shares held in each participating employee's share
account plus an amount of cash equal to the balance in each participating
employee's cash account.
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
The 1997 Non-Employee Director Stock Option Plan (the "Director Option
Plan") was adopted and approved by the Board and stockholders prior to the
consummation of the IPO. The Director Option Plan was established to encourage
stock ownership by certain Directors of the Company and to provide those
individuals with an additional incentive to manage the Company in the
shareholders' best interests and to provide a form of compensation that will
attract and retain highly qualified individuals as members of the Board. The
Director Option Plan provides for the granting of options to non-employee
Directors, as defined, covering an aggregate of 250,000 shares of Common Stock
of the Company, subject to certain adjustments reflecting changes in the
Company's capitalization. To date, options to purchase an aggregate of 60,000
shares of Common Stock have been granted under the Director Option Plan.
The Committee or the full Board is authorized under the Director Option Plan
to make discretionary grants of options and determine the terms and conditions
of such options. In addition, the Director Option Plan provides for an initial
one- time grant of options to purchase 10,000 shares of Common Stock to each
non-employee Director serving as a member of the Board upon the effectiveness
of the Director Option Plan or to any new non-employee Director upon being
elected to the Board. The Director Option Plan also provides that each non-
employee Director shall automatically be granted options to purchase 2,000
shares of Common Stock upon each anniversary of such Director's election to
the Board (which will be granted at the Company's next annual meeting of
stockholders following such anniversary). The Director Option Plan requires
that the exercise price for each option granted under the plan must equal 100%
of the fair market value of the Company's Common Stock on the date the option
is granted. The initial one-time grants are immediately exercisable and the
annual grants will vest in three equal installments commencing on the first
anniversary of the grant date. Nothing contained in the Director Option Plan
or any agreement to be executed pursuant to the Director Option Plan will
obligate the Company, its Board or its stockholders to retain an optionee as a
Director of the Company.
WESLEY JESSEN RETIREMENT PLAN
Substantially all full-time United States and Puerto Rico employees of the
Company participate in the Wesley Jessen Cash Balance Pension Plan (the
"Retirement Plan"), a defined benefit plan intended to
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<PAGE>
qualify under Section 401(a) of the Code. The Retirement Plan became effective
on January 1, 1996. The Retirement Plan is a cash balance plan whereby each
participant's benefits are determined based on annual pay credits and interest
credits made to each participant's account. In general, a participant becomes
vested under the Retirement Plan upon completion of five years of service.
Annual pay credits range from 3.0% to 6.0% of compensation, depending on a
participant's length of service with the Company. Compensation refers to
pension eligible earnings of a participant under the Retirement Plan (up to
$150,000 for 1995, as limited by the Code), including base pay, overtime, and
pre-tax deferrals, but excluding bonuses, stipends, special items such as
allowances for living expenses and employer contributions to benefit plans.
Interest credits are based on a participant's account balance on the last
day of each calendar month and the plan's interest credit rate. This interest
credit rate is determined for each calendar quarter and equals the value as of
the immediately preceding calendar quarter of the average yield on 30-day
Treasury bills for the week in which each day falls, subject to a 4.0% minimum
and 12.0% maximum rate.
No pay or interest credits are granted under the Retirement Plan for periods
of employment prior to June 29, 1995. However, service is calculated from date
of hire for the purpose of determining the level of pay credit for the plan
year. The normal retirement age under the plan is age 65. Benefits are
computed on a straight line basis. The Company contributes actuarially
determined amounts to fund benefits under the Retirement Plan within
regulatory minimum requirements and maximum tax deductible limits.
The aggregate estimated annual benefits payable from the Retirement Plan to
Messrs. Ryan, Kelley, Chapoy and Steiner upon normal retirement age is $6,070,
$15,590, $11,964 and $29,109, respectively. Mr. Roussel is not eligible to
participate in the Retirement Plan. Messrs. Ryan, Kelley, Chapoy and Steiner
currently have approximately 2, 2, 4 and 14 years of credited service,
respectively, under the Retirement Plan.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The table below sets forth certain information regarding the equity
ownership of the Company: (a) as of November 13, 1997 and (b) immediately
following the Offering by: (i) each person or entity who beneficially owns
five percent or more of the Common Stock; (ii) each Director and the Named
Executives; (iii) each Selling Stockholder; and (iv) all Directors and
executive officers of the Company as a group. Unless otherwise stated, each of
the persons named in the table has sole voting and investment power with
respect to the securities beneficially owned by it or him as set forth
opposite its or his name. Beneficial ownership of the Common Stock listed in
the table has been determined in accordance with the applicable rules and
regulations promulgated under the Exchange Act.
<TABLE>
<CAPTION>
SHARES OF
SHARES OF COMMON STOCK COMMON STOCK
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO THE OFFERING AFTER THE OFFERING(1)
------------------------ ---------------------
PERCENTAGE PERCENTAGE
OF OF
NUMBER OUTSTANDING SHARES NUMBER OF OUTSTANDING
NAME OF SHARES SHARES OFFERED HEREBY SHARES SHARES
---- ------------ ----------- -------------- --------- -----------
<S> <C> <C> <C> <C> <C>
PRINCIPAL STOCKHOLDERS:
Bain Capital Funds...... 8,744,414(2) 49.5% 1,263,933 7,480,481 42.3%
c/o Bain Capital, Inc.
Two Copley Place
Boston, Massachusetts
02116
DIRECTORS AND EXECUTIVE
OFFICERS:
Stephen G. 8,724,414 49.4% 1,263,933 7,460,481 42.2%
Pagliuca(3)(4).........
Kevin J. Ryan(5)(6)..... 1,160,739 6.2% -- 1,160,739 6.2%
Edward J. Kelley(7)..... 285,592 1.6% -- 285,592 1.6%
Lawrence L. Chapoy(8)... 70,586 * -- 70,586 *
Daniel M. Roussel(9).... 145,601 * -- 145,601 *
Thomas F. Steiner(10)... 113,588 * -- 113,588 *
Michael A. D'Amato(3)... 13,000 * -- 13,000 *
Adam W. Kirsch(3)(4).... 8,724,414 49.4% 1,263,933 7,460,481 42.2%
Sol Levine(3)........... 25,000 * -- 25,000 *
John W. Maki(3)(4)...... 1,181,942 6.7% 146,175 1,035,767 5.9%
John J. O'Malley(3)(4).. 1,181,942 6.7% 146,175 1,035,767 5.9%
All Directors and
executive officers as a
group (16 persons)(11). 10,850,031 56.0% 1,263,933 9,586,098 49.5%
OTHER SELLING
STOCKHOLDERS:
BT Investment Partners, 499,438 2.8% 69,504 429,934 2.4%
Inc.(12)...............
Combined Jewish
Philanthropies(13)..... 39,500 * 39,500 -- --
Corporation of the
President of the Church
of Jesus Christ of
Latter-Day Saints(13).. 1,063 * 1,063 -- --
Fidelity Investments
Charitable Gifts
Fund(13)............... 1,000 * 1,000 -- --
</TABLE>
- --------
* Represents less than one percent.
(1) Does not give effect to any purchases, if any, by such persons named in
the table in the Offering.
(2) Includes: (i) 3,521,011 shares of Common Stock held by Bain Capital Fund
IV, L.P. ("Fund IV"); 4,021,461 shares of Common Stock held by Bain
Capital Fund IV-B, L.P. ("Fund IV-B"); 529,950 shares of Common Stock
held by BCIP Associates ("BCIP"); and 641,992 shares of Common Stock held
by BCIP Trust Associates, L.P. ("BCIP Trust" and collectively with Fund
IV, Fund IV-B and BCIP, the "Bain Capital Funds") and (ii) currently
exercisable options to purchase an aggregate of 30,000 shares
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<PAGE>
granted to Messrs. Pagliuca, Kirsch and O'Malley pursuant to the Director
Option Plan. The Bain Capital Funds may distribute a portion of such shares
to certain of their Managing Directors, who may make a contribution of such
shares of Common Stock to one or more charities prior to the Offering. In
such case, the recipient charity will be the selling stockholder in the
Offering.
(3) Includes currently exercisable options to purchase 10,000 shares of Common
Stock issued to such person pursuant to the Director Option Plan.
(4) Messrs. Pagliuca, Kirsch, Maki and O'Malley are each Directors of the
Company. Messrs. Pagliuca and Kirsch are each Managing Directors of Bain
Capital Investors, Inc. ("BCII") and limited partners of Bain Capital
Partners IV, L.P., the sole general partner of Fund IV and Fund IV-B. BCII
is the sole general partner of Bain Capital Partners IV, L.P. Accordingly,
Messrs. Pagliuca and Kirsch may be deemed to beneficially own shares owned
by Fund IV and Fund IV-B. Messrs. Pagliuca, Kirsch, Maki and O'Malley are
each general partners of BCIP and BCIP Trust and, accordingly, may be
deemed to beneficially own shares owned by such funds. Each such person
disclaims beneficial ownership of any such shares in which he does not
have a pecuniary interest. The address of such person is c/o Bain Capital,
Inc., Two Copley Place, Boston, Massachusetts 02116.
(5)The address of such person is c/o the Company, 333 East Howard Avenue, Des
Plaines, Illinois 60018-5903.
(6) Includes 923,792 shares of Common Stock that can be acquired through
currently exercisable options. Certain of Mr. Ryan's shares are held by an
individual retirement account for his sole benefit.
(7) Includes 206,608 shares of Common Stock that can be acquired through
currently exercisable options. Certain of Mr. Kelley's shares are held by
an individual retirement account for his sole benefit.
(8)Includes 59,302 shares of Common Stock that can be acquired through
currently exercisable options.
(9) Includes 123,037 shares of Common Stock that can be acquired through
currently exercisable options.
(10) Includes 96,661 shares of Common Stock that can be acquired through
currently exercisable options.
(11) Includes an aggregate of 1,713,664 shares of Common Stock that can be
acquired through currently exercisable options held by the executive
officers and Directors of the Company. Excluding the shares owned by the
Bain Capital Funds that are attributed to Messrs. Pagliuca, Kirsch, Maki
and O'Malley, the Directors and executive officers of the Company as a
group would own 2,135,616 shares of Common Stock, representing
approximately 11.0% of the outstanding Common Stock.
(12) BT Investment Partners, Inc. ("BTIP") is a limited partner in Fund IV-B.
Shares listed in the table do not include any shares which BTIP may be
deemed to hold as a result of such position.
(13) Represents shares received by such institutions as a result of charitable
contributions by certain principals of Bain Capital. Such institutions
have indicated their desire to participate in the Offering.
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<PAGE>
CERTAIN TRANSACTIONS
ADVISORY AGREEMENT
On June 28, 1995, the Company entered into an Advisory Agreement with Bain
Capital pursuant to which Bain Capital agreed to provide management
consulting, advisory services and support, negotiation and analysis of
financial alternatives, acquisitions and dispositions and other services
agreed upon by the Company and Bain Capital. Messrs. Pagliuca, Kirsch and
O'Malley are all Directors of the Company. Messrs. Pagliuca and Kirsch are
each Managing Directors of Bain Capital and Mr. O'Malley is an Executive Vice
President of Bain Capital. Pursuant to the Advisory Agreement, the Company
agreed to pay Bain Capital: (i) a financial advisory fee of $600,000, plus
out-of-pocket expenses of $52,000, at the closing of the Wesley Jessen
Acquisition; (ii) an annual fee of $1.0 million, plus reasonable out-of-pocket
expenses, for ongoing management, consulting and financial services; and (iii)
a transaction fee equal to 1.0% of the amount of any future financing (whether
debt or equity) incurred by the Company or any subsidiary of the Company in
connection with any future acquisition. From June 29, 1995 to October 2, 1996,
the Company paid Bain Capital $1.25 million in financial advisory fees under
such agreement. At the time of the Barnes-Hind Acquisition, the Company and
Bain Capital entered into an Amended and Restated Advisory Agreement (the
"Advisory Agreement"), pursuant to which Bain Capital provides similar
services to the Company and its subsidiaries. In exchange for such services,
Bain receives: (i) a quarterly management fee of not more than $500,000, plus
reasonable out-of-pocket expenses; and (ii) a transaction fee in connection
with the consummation of each acquisition, divestiture or financing by the
Company or its subsidiaries in an amount equal to 1.0% of the aggregate value
of such transaction. In addition, the Company paid Bain Capital a fee of
approximately $3.0 million, plus its out-of-pocket expenses, in connection
with the structuring of the Bank Credit Agreement used to finance the Barnes-
Hind Acquisition. The Advisory Agreement has an initial term ending on January
31, 2004, subject to automatic one-year extensions unless the Company or Bain
Capital provides written notice of its desire not to extend such term. The
Company believes that the fees paid for the professional services rendered are
at least as favorable to the Company as those which could be negotiated with a
third party.
STOCKHOLDERS AGREEMENT
On October 22, 1996, the Company, the Bain Capital Funds (and their related
investors) and BTIP entered into a stockholders agreement (the "Stockholders
Agreement"). The Stockholders Agreement (i) provides that BTIP may not sell,
transfer or otherwise dispose of any shares of its Common Stock without the
prior written approval of holders representing a majority of the shares
currently held by the Bain Capital Funds and its related investors
(collectively, the "Bain Group"); (ii) grants BTIP certain participation
rights in connection with certain transfers made by the Bain Group; and (iii)
requires BTIP to consent to a sale of the Company to an independent third
party if such sale is approved by holders representing a majority of the
shares held by the Bain Group. In addition, the Company agreed not to issue
any shares of its capital stock at a price per share below fair market value
(as determined in good faith by the Board) other than: (i) to employees,
directors or consultants of the Company or its subsidiaries (excluding Bain
Capital, its employees and its affiliates); (ii) as consideration (in whole or
in part) for an acquisition; (iii) to each of the Company's then existing
stockholders, on a pro rata basis; or (iv) upon the exercise or conversion of
any then outstanding securities or issued thereafter in accordance with the
foregoing provisions. The Stockholders Agreement terminated upon the
consummation of the IPO.
SALES OF COMMON STOCK TO NAMED EXECUTIVES
Effective as of June 28, 1995 and pursuant to the 1995 Stock Plan, the
Company sold shares of its capital stock to certain executive officers of the
Company. Kevin J. Ryan, President and Chief Executive Officer, purchased 7,500
shares of Class L Common and 67,500 shares of Common Stock for an aggregate
amount equal to $135,944 (in each case without giving effect to the
Reclassification or Stock Split). All sales to other executive officers of the
Company involved amounts less than $60,000.
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INDEMNIFICATION AGREEMENTS
In connection with the IPO, the Company entered into agreements to provide
indemnification for its Directors and executive officers in addition to the
indemnification provided for in the Company's Restated Certificate and By-laws
of the Company.
LOAN TO EXECUTIVE OFFICER
On May 7, 1997, the Company loaned Mr. Ryan $1.2 million pursuant to the
terms of an unsecured promissory note bearing interest at an annual rate of
8%, payable quarterly. The note is due on the earlier of (i) May 9, 2002, (ii)
the date Mr. Ryan ceases to be employed by the Company or (iii) the date Mr.
Ryan disposes of any shares of Common Stock held by him.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
BANK CREDIT AGREEMENT
In connection with IPO, the Company (i) refinanced and retired all remaining
indebtedness under the then existing bank credit agreement with a portion of
the proceeds of the IPO and (ii) entered into the Bank Credit Agreement. In
September 1997, the Company amended and restated the Bank Credit Agreement to,
among other things, (i) increase the total borrowing availability thereunder
to a maximum of $135 million, (ii) convert all remaining term loan borrowings
into revolving loans and (iii) reduce the interest rate thereunder. The Bank
Credit Agreement consists of a revolving credit facility of $135.0 million
(with a $23.0 million letter of credit sublimit). Borrowing made under the
Bank Credit Agreement are made directly to the Company's principal operating
subsidiary, Wesley Jessen Corporation ("WJC"), and are guaranteed by the
Company and each of its domestic subsidiaries (other than WJC). The loans
under the Bank Credit Agreement are secured. As of September 27, 1997, the
Company had outstanding borrowings of $58.0 million under the Bank Credit
Agreement.
Loans made under the Bank Credit Agreement bear interest at a rate per annum
equal to, at the Company's option, (i) the Base Rate plus the Applicable
Margin or (ii) the Eurodollar Rate plus the Applicable Margin (as each term is
defined in the Bank Credit Agreement). The Applicable Margin for the Base Rate
loans varies from 0% to 0.50% and the Applicable Margin for Eurodollar loans
varies from 0.375% to 1.50%. The Applicable Margin for a particular borrowing
is based on the Company's Leverage Ratio (as defined in the Bank Credit
Agreement) and the type of loan. At September 27, 1997, the Company's weighted
average interest rate for borrowings under the Bank Credit Agreement was
6.71%.
The Bank Credit Agreement mature in 2002. The revolving loans are able to be
repaid and reborrowed. Availability under the Bank Credit Agreement is subject
to an unused commitment fee which is a percentage of the unutilized revolving
loan commitment. This percentage varies from 0.175% to 0.4% based on the
Company's Leverage Ratio.
The Bank Credit Agreement contains restrictive covenants, financial tests
and events of default that are customary for this type of financing.
PILKINGTON NOTE
The Pilkington Note bears interest at 8.0% per annum, payable-in-kind, and
matures on February 1, 2005 or on any date that Bain Capital and its
affiliates (i) cease to beneficially own at least 25% of the Company's voting
stock or (ii) receive any proceeds from the sale of any of their shares of
Common Stock in a public offering. The Pilkington Note was issued by the
Company on October 2, 1996 in connection with the Barnes-Hind Acquisition and
is expected to be repaid from a portion of the net proceeds to the Company
from the Offering. The Company expects that the outstanding principal amount
of the Pilkington Note will be reduced by $1.6 million as a result of a
purchase price adjustment related to the Barnes-Hind Acquisition. The
Pilkington Note was repaid in September 1997.
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DESCRIPTION OF CAPITAL STOCK
GENERAL MATTERS
The total amount of authorized capital stock of the Company consists of
50,000,000 shares of Common Stock, par value $0.01 per share, and 5,000,000
shares of preferred stock, par value $0.01 per share (the "Serial Preferred
Stock"). As of September 27, 1997, the Company had 17,652,374 shares of Common
Stock issued and outstanding and no shares of Serial Preferred Stock issued
and outstanding. As of September 27, 1997, the Company had approximately 100
stockholders of record. The following summary of certain provisions of the
Company's capital stock describes all material provisions of, but does not
purport to be complete and is subject to, and qualified in its entirety by,
the Restated Certificate and the By-laws, which are included as exhibits to
the Registration Statement of which this Prospectus forms a part and by the
provisions of applicable law.
The Restated Certificate and By-laws contain certain provisions that are
intended to enhance the likelihood of continuity and stability in the
composition of the Board of Directors and which may have the effect of
delaying, deferring or preventing a future takeover or change in control of
the Company unless such takeover or change in control is approved by the Board
of Directors.
COMMON STOCK
The issued and outstanding shares of Common Stock are validly issued, fully
paid and nonassessable. Subject to the prior rights of the holders of any
Serial Preferred Stock, the holders of outstanding shares of Common Stock are
entitled to receive dividends out of assets legally available therefor at such
time and in such amounts as the Board of Directors may from time to time
determine. See "Dividend Policy." The shares of Common Stock are not
convertible and the holders thereof have no preemptive or subscription rights
to purchase any securities of the Company. Upon liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to receive
pro rata the assets of the Company which are legally available for
distribution, after payment of all debts and other liabilities and subject to
the prior rights of any holders of Serial Preferred Stock then outstanding.
Each outstanding share of Common Stock is entitled to one vote on all matters
submitted to a vote of stockholders. There is no cumulative voting.
The Common Stock is included for trading on the Nasdaq National Market under
the symbol "WJCO."
SERIAL PREFERRED STOCK
The Company's Board of Directors may, without further action by the
Company's stockholders, from time to time, direct the issuance of shares of
Serial Preferred Stock in series and may, at the time of issuance, determine
the rights, preferences and limitations of each series. Satisfaction of any
dividend preferences of outstanding shares of Serial Preferred Stock would
reduce the amount of funds available for the payment of dividends on shares of
Common Stock. Holders of shares of Serial Preferred Stock may be entitled to
receive a preference payment in the event of any liquidation, dissolution or
winding-up of the Company before any payment is made to the holders of shares
of Common Stock. Under certain circumstances, the issuance of shares of Serial
Preferred Stock may render more difficult or tend to discourage a merger,
tender offer or proxy contest, the assumption of control by a holder of a
large block of the Company's securities or the removal of incumbent
management. Upon the affirmative vote of a majority of the total number of
Directors then in office, the Board of Directors of the Company, without
stockholder approval, may issue shares of Serial Preferred Stock with voting
and conversion rights which could adversely affect the holders of shares of
Common Stock. There are no shares of Serial Preferred Stock outstanding, and
the Company has no present intention to issue any shares of Serial Preferred
Stock.
CERTAIN PROVISIONS OF THE RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS
The Restated Certificate provides for the Board to be divided into three
classes, as nearly equal in number as possible, serving staggered terms.
Approximately one-third of the Board will be elected each year. See
"Management." Under the Delaware General Corporation Law, directors serving on
a classified
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board can only be removed for cause. The provision for a classified board
could prevent a party who acquires control of a majority of the outstanding
voting stock from obtaining control of the Board until the second annual
stockholders meeting following the date the acquiror obtains the controlling
stock interest. The classified board provision could have the effect of
discouraging a potential acquiror from making a tender offer or otherwise
attempting to obtain control of the Company and could increase the likelihood
that incumbent directors will retain their positions.
The Restated Certificate provides that stockholder action can be taken only
at an annual or special meeting of stockholders and cannot be taken by written
consent in lieu of a meeting. The Restated Certificate and the By-laws provide
that, except as otherwise required by law, special meetings of the
stockholders can only be called pursuant to a resolution adopted by a majority
of the Board of Directors or by the Chief Executive Officer of the Company.
Stockholders will not be permitted to call a special meeting or to require the
Board to call a special meeting.
The By-laws establish an advance notice procedure for stockholder proposals
to be brought before an annual meeting of stockholders of the Company,
including proposed nominations of persons for election to the Board.
Stockholders at an annual meeting may only consider proposals or nominations
specified in the notice of meeting or brought before the meeting by or at the
direction of the Board or by a stockholder who was a stockholder of record on
the record date for the meeting, who is entitled to vote at the meeting and
who has given to the Company's Secretary timely written notice, in proper
form, of the stockholder's intention to bring that business before the
meeting. Although the By-laws do not give the Board the power to approve or
disapprove stockholder nominations of candidates or proposals regarding other
business to be conducted at a special or annual meeting, the By-laws may have
the effect of precluding the conduct of certain business at a meeting if the
proper procedures are not followed or may discourage or defer a potential
acquiror from conducting a solicitation of proxies to elect its own slate of
directors or otherwise attempting to obtain control of the Company.
The Restated Certificate and By-laws provide that the affirmative vote of
holders of at least 66 2/3% of the total votes eligible to be cast in the
election of directors is required to amend, alter, change or repeal certain of
their provisions. This requirement of a super-majority vote to approve
amendments to the Restated Certificate and By-laws could enable a minority of
the Company's stockholders to exercise veto power over any such amendments.
CERTAIN PROVISIONS OF DELAWARE LAW
The Company is subject to the "Business Combination" provisions of the
Delaware General Corporation Law. In general, such provisions prohibit a
publicly held Delaware corporation from engaging in various "business
combination" transactions with any "interested stockholder" for a period of
three years after the date of the transaction which the person became an
"interested stockholder," unless (i) the transaction is approved by the Board
of Directors prior to the date the "interested stockholder" obtained such
status; (ii) upon consummation of the transaction which resulted in the
stockholder becoming an "interested stockholder," the "interested
stockholder," owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned by (a) persons
who are directors and also officers and (b) employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or (iii) on or subsequent to such date the "business
combination" is approved by the Board of Directors and authorized at an annual
or special meeting of stockholders by the affirmative vote of at least 66 2/3%
of the outstanding voting stock which is not owned by the "interested
stockholder." A "business combination" is defined to include mergers, asset
sales and other transactions resulting in financial benefit to a stockholder.
In general, an "interested stockholder" is a Person who, together with
affiliates and
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associates, owns (or within three years, did own) 15% or more of a
corporation's voting stock. The statute could prohibit or delay mergers or
other takeover or change in control attempts with respect to the Company and,
accordingly, may discourage attempts to acquire the Company.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Restated Certificate limits the liability of Directors to the fullest
extent permitted by the Delaware General Corporation Law. In addition, the
Restated Certificate provides that the Company shall indemnify Directors and
officers of the Company to the fullest extent permitted by such law. In
connection with the IPO, the Company entered into indemnification agreements
with its current Directors and executive officers and expects to enter into a
similar agreement with any new Directors or executive officers. The Company
obtained the directors' and officers' insurance prior to the completion of the
IPO.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to the IPO, there was no market for the Common Stock of the Company.
The Company can make no predictions as to the effect, if any, that sales of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. Nevertheless, sales of significant amounts of
the Common Stock in the public market, or the perception that such sales may
occur, could adversely affect prevailing market prices. See "Risk Factors--
Shares Eligible for Future Sale."
The Company currently has 17,652,374 shares of Common Stock outstanding. In
addition, 2,894,270 shares of Common Stock are issuable upon the exercise of
outstanding stock options. In addition to the shares of Common Stock to be
sold in the Offering, the 7,162,040 shares sold in the IPO and the secondary
offering are freely tradeable without restriction under the Securities Act,
except for any such shares which may be held or acquired by an "affiliate" of
the Company (an "Affiliate"), as that term is defined in Rule 144 promulgated
under the Securities Act ("Rule 144"), which shares will be subject to the
volume limitations and other restrictions of Rule 144 described below. An
aggregate of 8,402,484 shares of Common Stock held by existing stockholders of
the Company upon completion of the Offering will be "restricted securities"
(as that phrase is defined in Rule 144) and may not be resold in the absence
of registration under the Securities Act or pursuant to an exemption from such
registration, including among others, the exemptions provided by Rule 144 and
Rule 701 under the Securities Act.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, if a period of at least one year has elapsed
since the later of the date the "restricted securities" were acquired from the
Company or the date they were acquired from an Affiliate, then the holder of
such restricted securities (including an Affiliate) is entitled to sell in the
public market a number of shares within any three-month period that does not
exceed the greater of 1% of the then outstanding shares of the Common Stock
(approximately 176,523 shares) or the average weekly reported volume of
trading of the Common Stock on the Nasdaq National Market during the four
calendar weeks preceding such sale. The holder may only sell such shares
through "brokers' transactions" or in transactions directly with a "market
maker" (as such terms are defined in Rule 144). Sales under Rule 144 are also
subject to certain requirements regarding providing notice of such sales and
the availability of current public information concerning the Company.
Affiliates may sell shares not constituting restricted securities in
accordance with the foregoing volume limitations and other requirements but
without regard to the two-year holding period. Under Rule 144(k), if a period
of at least two years has elapsed between the later of the date restricted
securities were acquired from the Company or the date they were acquired from
an Affiliate, as applicable, a holder of such restricted securities who is not
an Affiliate at the time of the sale and has not been an Affiliate for at
least three months prior to the sale would be entitled to sell the shares in
the public market without regard to the volume limitations and other
restrictions described above. Approximately 8,402,484 shares of Common Stock
are currently eligible for sale in the public market pursuant to Rule 144,
subject to the volume limitations and other restrictions described above.
Rule 701 provides that "restricted securities" issued by the Company in
transactions meeting the conditions set forth in Rule 701 are eligible to be
resold in the public market 90 days after the Company becomes subject to the
reporting requirements of the Exchange Act. In making such sales, Affiliates
must comply with the current public information, volume limitation, manner of
sale and notice provisions of Rule 144 and nonaffiliates must comply with the
manner of sale provision of Rule 144. In general, Rule 701 requires that
offers and sales of an issuer's securities be: (i) made pursuant to a written
compensatory benefit plan or a written contract relating to the compensation
of such issuer's employees, officers, directors or consultants (a copy of
which must be delivered to such person) and (ii) limited in value to a certain
aggregate amount during any 12-month period. The Company believes that 473,894
shares of Common Stock and 2,517,570 shares issuable upon the exercise of
outstanding options held by employees of the Company are eligible to be sold
in the public market pursuant to Rule 701.
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REGISTRATION AGREEMENT
The Company, the Bain Capital Funds (and their related investors) and BTIP
have entered into a registration agreement (the "Registration Agreement").
Under the Registration Agreement, the holders of a majority of the registerable
securities owned by the Bain Capital Funds and related investors have the right
at any time, subject to certain conditions, to require the Company to register
any or all of their shares of Common Stock under the Securities Act on Form S-1
(a "Long-Form Registration") or on Form S-2 or Form S-3 (a "Short-Form
Registration") each on an unlimited number of occasions at the Company's
expense. The Company is not required, however, to effect any such Long-Form
Registration or Short-Form Registration within six months after the effective
date of a prior demand registration and may postpone the filing of such
registration for up to six months if the holders of a majority of the
registerable securities agree that such a registration would reasonably be
expected to have an adverse effect on any proposal or plan by the Company or
any of its subsidiaries to engage in an acquisition, merger or similar
transaction. In addition, all holders of registerable securities are entitled
to request the inclusion of any shares of Common Stock subject to the
Registration Agreement in any registration statement at the Company's expense
whenever the Company proposes to register any of its securities under the
Securities Act, subject to certain conditions. In connection with all such
registrations, the Company has agreed to indemnify all holders of registerable
securities against certain liabilities, including liabilities under the
Securities Act. Beginning 90 days after the date of the Prospectus, the holders
of an aggregate of 7,967,531 shares of Common Stock will have demand
registration rights pursuant to the Registration Agreement. The Offering is
being commenced as a result of the exercise of certain demand rights pursuant
to the Registration Agreement.
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PLAN OF DISTRIBUTION
BT Alex. Brown Incorporated is acting as sole purchaser (the "Purchaser") in
the Offering. Subject to the terms and conditions of the Purchase Agreement
(the "Purchase Agreement"), the Purchaser has agreed to purchase from the
Selling Stockholders, and the Selling Stockholders severally have agreed to
sell to the Purchaser, an aggregate of 1,375,000 of shares of Common Stock.
The Purchase Agreement provides that the obligation of the Purchaser is
subject to certain conditions precedent and that the Purchaser will purchase
all the shares of Common Stock offered hereby if any of such shares are
purchased.
The distribution of the shares of Common Stock by the Purchaser may be
effected from time to time to purchasers directly or through agents, or
through brokers in brokerage transactions on the Nasdaq National Market, or to
dealers in negotiated transactions or in a combination of such methods of
sale, at a fixed price or prices, which may be changed, or at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. In connection with the sale of any shares of
Common Stock hereby, the Purchaser may be deemed to have received compensation
from the Selling Stockholders equal to the difference between the amount
received by the Purchaser upon the sale of such Common Stock and the price at
which the Purchaser purchased such Common Stock from the Selling Stockholders.
In addition, if the Purchaser sells Common Stock to or through certain
dealers, such dealers may receive compensation in the form of underwriting
discounts, concessions or commissions from the Purchaser and/or any purchasers
of Common Stock for whom they may act as agent. The Purchaser may also receive
compensation from the purchasers of Common Stock for whom it may act as agent.
The Company, WJC and the Selling Stockholders have agreed to indemnify the
Purchaser against certain liabilities, including liabilities under the
Securities Act.
In order to facilitate the offering of the Common Stock, the Purchaser may
engage in transactions that stabilize, maintain or otherwise affect the price
of the Common Stock. Specifically, the Purchaser may over-allot in connection
with the offering, creating a short position in the Common Stock for its own
account. In addition, to cover over-allotments or to stabilize the price of
the Common Stock, the Purchaser may bid for, and purchase, shares of the
Common Stock in the open market. The Purchaser may also reclaim selling
concessions allowed to an underwriter or a dealer for distributing the Common
Stock in the offering, if the Purchaser repurchases previously distributed
Common Stock in transactions to cover its short positions, in stabilization
transactions or otherwise. Finally, the Purchaser may bid for, and purchase,
shares of the Common Stock in market making transactions and impose penalty
bids. These activities may stabilize or maintain the market price of the
Common Stock above market levels that may otherwise prevail. The Purchaser is
not required to engage in these activities, and may end any of these
activities at any time.
As permitted by Rule 103 under the Exchange Act, the Purchaser may make bids
for or purchases of shares of Common Stock in the Nasdaq National Market until
such time, if any, when a stabilizing bid for such securities has been made.
Rule 103 generally provides that (1) a passive market maker's net daily
purchases of the Common Stock may not exceed 30% of its average daily trading
volume in such securities for the two full consecutive calendar months (or any
60 consecutive days ending within the 10 days) immediately preceding the
filing date of the registration statement of which this Prospectus forms a
part, (2) a passive market maker may not effect transactions or display bids
for the Common Stock at a price that exceeds the highest independent bid for
shares of Common Stock by persons who are not passive market makers and (3)
bids made by passive market makers must be identified as such.
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Bankers Trust New York Corporation is the parent company of BT Alex. Brown
Incorporated. BTIP, an affiliate of Bankers Trust New York Corporation, is the
beneficial owner of an aggregate of 499,438 shares of Common Stock of the
Company and is a limited partner in Fund IV-B of the Bain Capital Funds. Both
BTIP and the Bain Capital Funds are Selling Stockholders in the Offering. See
"Principal and Selling Stockholders." Bankers Trust Company, an affiliate of
Bankers Trust New York Corporation, is the administrative agent and a lender
under the Bank Credit Agreement. See "Description of Certain Indebtedness."
The Purchaser served as a representative of the several underwriters in the
IPO and the August 1997 Offering.
EXPERTS
The financial statements of the Company at December 31, 1995 and 1996 and
for the periods from June 29, 1995 through December 31, 1995 and the year
ended December 31, 1996 and the financial statements of the Predecessor for
the year ended December 31, 1994 and the period from January 1, 1995 through
June 28, 1995 included in this Prospectus have been so included in reliance
upon the report of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The combined balance sheets of Pilkington Barnes Hind Group as of March 31,
1995 and 1996 and the combined statements of operations, parent company
investment, and cash flows for each of the years then ended, included in this
Prospectus, have been so included in reliance on the report, which includes
explanatory paragraphs relating to substantial doubt about the entity's
ability to continue as a going concern and the sale of certain assets and
liabilities of the entity, of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Kirkland & Ellis, Chicago, Illinois (a partnership which includes
professional corporations). Certain current and former partners of Kirkland &
Ellis collectively own 87,116 shares of Common Stock. Certain legal matters
will be passed upon for the Purchaser by Ropes & Gray, Boston, Massachusetts.
Kirkland & Ellis and Ropes & Gray have from time to time represented, and may
continue to represent, the Purchaser in connection with various legal matters
and Bain Capital and certain of its affiliates (including the Company) in
connection with certain legal matters.
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ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and, in accordance therewith, will file reports and other information
with the Commission. The Registration Statement, the exhibits and schedules
forming a part thereof and the reports and other information filed by the
Company with the Commission in accordance with the Exchange Act may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the following regional offices of the Commission: Seven
World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of
such material or any part thereof may also be obtained by mail from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates or accessed electronically by means of the
Commission's home page on the Internet at http://www.sec.gov.
The Company has filed with the Commission a Registration Statement (of which
this Prospectus is a part and which term shall encompass any amendments
thereto) on Form S-1 pursuant to the Securities Act with respect to the Common
Stock being offered in the Offering. This Prospectus does not contain all the
information set forth in the Registration Statement and the exhibits and
schedules thereto, certain portions of which are omitted as permitted by the
rules and regulations of the Commission. Statements made in this Prospectus as
to the contents of any contract, agreement or other document referred to are
not necessarily complete; with respect to any such contract, agreement or
other document filed as an exhibit to the Registration Statement, reference is
made to the exhibit for a more complete description of the matter involved,
and each such statement shall be deemed qualified in its entirety by such
reference. For further information about the Company and the securities
offered hereby, reference is made to the Registration Statement and to the
financial statements, schedules and exhibits filed as a part thereof. The
Registration Statement and the exhibits and schedules thereto filed by the
Company with the Commission may be inspected at the public reference
facilities referenced above.
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INDEX TO FINANCIAL STATEMENTS
WESLEY JESSEN VISIONCARE, INC.
(FORMERLY KNOWN AS WESLEY-JESSEN HOLDING, INC.)
AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants--Company................................ F-2
Report of Independent Accountants--Predecessor............................ F-3
Consolidated Balance Sheets of the Company at December 31, 1995 and 1996.. F-4
Consolidated Statements of Operations of the Predecessor for the year
ended December 31, 1994 and for the period January 1, 1995 through June
28, 1995 and of the Company for the period June 29, 1995 through December
31, 1995 and for the year ended December 31, 1996........................ F-5
Consolidated Statements of Cash Flows of the Predecessor for the year
ended December 31, 1994 and for the period January 1, 1995 through June
28, 1995 and of the Company for the period June 29, 1995 through December
31, 1995 and for the year ended December 31, 1996........................ F-6
Consolidated Statements of Changes in Stockholders' Deficit of the Company
for the period June 29, 1995 through December 31, 1995 and for the year
ended December 31, 1996.................................................. F-7
Notes to Consolidated Financial Statements................................ F-8
UNAUDITED INTERIM FINANCIAL DATA
Condensed Consolidated Balance Sheets at December 31, 1996 and September
27, 1997 (unaudited)..................................................... F-30
Condensed Consolidated Statements of Operations for the three months and
nine months ended September 28, 1996 and September 27, 1997 (unaudited).. F-31
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 28, 1996 and September 27, 1997 (unaudited).................... F-32
Condensed Consolidated Statements of Changes in Stockholders' Equity
(Deficit) for the period June 29, 1995 through December 31, 1995, for the
year ended December 31, 1996 and for the nine months ended September 27,
1997 (unaudited)......................................................... F-33
Notes to Condensed Consolidated Financial Statements...................... F-34
BARNES-HIND
Report of Independent Accountants......................................... F-40
Combined Balance Sheets at March 31, 1995 and 1996........................ F-41
Combined Statements of Operations for the years ended March 31, 1995 and
1996..................................................................... F-42
Combined Statements of Parent Company Investment for the years ended March
31, 1995 and 1996........................................................ F-43
Combined Statements of Cash Flows for the years ended March 31, 1995 and
1996..................................................................... F-44
Notes to Combined Financial Statements.................................... F-45
BARNES-HIND
(UNAUDITED INTERIM FINANCIAL DATA)
Condensed Combined Balance Sheet at October 1, 1996 (unaudited)........... F-56
Condensed Combined Statements of Operations for the six months ended
September 30, 1995 (unaudited) and for the period from April 1, 1996
through October 1, 1996 (unaudited)...................................... F-57
Condensed Combined Statements of Cash Flows for the six months ended
September 30, 1995 (unaudited) and for the period from April 1, 1996
through October 1, 1996 (unaudited)...................................... F-58
Notes to Condensed Combined Interim Financial Data (unaudited)............ F-59
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS--COMPANY
To the Board of Directors and Stockholders
of Wesley Jessen VisionCare, Inc.
(formerly known as Wesley-Jessen Holding, Inc.)
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of cash flows and of changes in
stockholders' deficit present fairly, in all material respects, the financial
position of Wesley Jessen VisionCare, Inc. (formerly known as Wesley-Jessen
Holding, Inc.) and its subsidiaries (the "Company") at December 31, 1995 and
1996, and the results of their operations and their cash flows for the period
from June 29, 1995 (inception) through December 31, 1995 and for the year
ended December 31, 1996 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
Price Waterhouse LLP
Chicago, Illinois
February 28, 1997, except as to Note
3 which is as of March 17, 1997 and
Notes 1 and 2, which are as of March
20, 1997
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS--PREDECESSOR
To the Board of Directors and Stockholders
of Wesley Jessen VisionCare, Inc.
(formerly known as Wesley-Jessen Holding, Inc.)
In our opinion, the accompanying consolidated statements of operations and
of cash flows present fairly, in all material respects, the results of
operations and the cash flows of the Wesley-Jessen contact lens business of
Schering-Plough Corporation (predecessor of Wesley Jessen VisionCare, Inc.
(formerly known as Wesley-Jessen Holding, Inc.)--see Note 1) for the year
ended December 31, 1994 and for the period from January 1, 1995 through June
28, 1995 in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the management of Wesley Jessen
VisionCare, Inc. (formerly known as Wesley-Jessen Holding, Inc.) and its
subsidiaries; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
Price Waterhouse LLP
Chicago, Illinois
September 17, 1996
F-3
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
(FORMERLY KNOWN AS WESLEY-JESSEN HOLDING, INC.)
CONSOLIDATED BALANCE SHEETS
AT DECEMBER 31
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS 1995 1996
------ -------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents..................................... $ 2,522 $ 7,073
Accounts receivable--trade, net............................... 19,708 38,869
Other receivables............................................. 1,684 5,155
Inventories................................................... 25,654 69,139
Deferred income taxes......................................... 6,040 20,119
Prepaid expenses.............................................. 3,313 9,531
Assets held for sale.......................................... -- 7,500
-------- --------
Total current assets........................................ 58,921 157,386
-------- --------
Property, plant and equipment, net.............................. 893 10,125
Other assets.................................................... -- 1,346
Deferred income taxes........................................... 4,315 4,227
Capitalized financing fees, net................................. 3,201 7,516
-------- --------
Total assets................................................ $ 67,330 $180,600
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
<S> <C> <C>
Current liabilities:
Trade accounts payable........................................ $ 7,405 $ 12,434
Accrued compensation and benefits............................. 4,295 16,121
Accrued advertising........................................... 3,823 3,751
Other accrued liabilities..................................... 9,413 20,938
Transition reserve............................................ -- 18,894
Income taxes payable.......................................... 1,223 6,989
Current portion of long-term debt............................. 2,500 --
-------- --------
Total current liabilities................................... 28,659 79,127
-------- --------
Negative goodwill, net.......................................... 11,361 10,577
Long-term debt.................................................. 39,500 102,975
Other liabilities............................................... -- 1,213
-------- --------
Total liabilities........................................... 79,520 193,892
-------- --------
Commitments and contingencies (Note 13)......................... -- --
Stockholders' deficit:
Serial Preferred Stock, $.01 par value, 5,000,000 shares
authorized, none issued or outstanding at December 31, 1996
(Note 10).................................................... -- --
Class L Common Stock, $.01 par value, cumulative yield of
12.5%, 600,000 shares authorized, 429,177 and none issued and
outstanding at December 31, 1995 and 1996, respectively (Note
1)........................................................... 4 --
Common Stock, $.01 par value, 50,000,000 shares authorized,
3,862,604 and 14,276,028 issued and outstanding at December
31, 1995 and 1996, respectively (Note 1)..................... 38 143
Additional paid in capital.................................... 7,483 7,654
Accumulated deficit........................................... (19,715) (22,457)
Cumulative translation adjustment............................. -- 1,368
-------- --------
Total stockholders' deficit................................. (12,190) (13,292)
-------- --------
Total liabilities and stockholders' deficit............... $ 67,330 $180,600
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
(FORMERLY KNOWN AS WESLEY-JESSEN HOLDING, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
---------------------- --------------------------
JANUARY 1 JUNE 29
YEAR ENDED THROUGH THROUGH YEAR ENDED
DECEMBER 31, JUNE 28, DECEMBER 31, DECEMBER 31,
1994 1995 1995 1996
------------ --------- ------------ ------------
<S> <C> <C> <C> <C>
Net sales..................... $109,640 $ 51,019 $ 54,315 $ 156,752
======== ======== =========== ==========
Operating costs and expenses:
Cost of goods sold.......... 65,591 20,871 19,916 43,152
Cost of goods sold--
inventory step-up (Note 6). -- -- 33,929 20,706
Marketing and
administrative............. 79,185 43,236 29,476 88,274
Research and development.... 9,843 4,569 2,524 7,178
Amortization of intangibles. 5,472 2,736 (392) (784)
-------- -------- ----------- ----------
Loss from operations.......... (50,451) (20,393) (31,138) (1,774)
Other (income) expense:
Interest expense, net....... -- -- 2,599 5,385
Financing charge............ 7,172 3,511 -- --
Other income, net........... (202) (1,360) -- (3,051)
-------- -------- ----------- ----------
Loss before income taxes and
extraordinary loss........... (57,421) (22,544) (33,737) (4,108)
Income tax benefit............ 26,935 9,401 14,022 3,037
-------- -------- ----------- ----------
Net loss before extraordinary
loss......................... (30,486) (13,143) (19,715) (1,071)
Extraordinary loss on early
extinguishment of debt, net
of related tax benefit of
$1,093....................... -- -- -- (1,671)
-------- -------- ----------- ----------
Net loss...................... $(30,486) $(13,143) $ (19,715) $ (2,742)
======== ======== =========== ==========
Pro forma primary net loss per
common share (Note 1):
Net loss before
extraordinary loss......... $ (1.37) $ (0.07)
=========== ==========
Extraordinary loss, net of
tax benefit................ $ -- $ (0.12)
=========== ==========
Net loss.................... $ (1.37) $ (0.19)
=========== ==========
Weighted average common
shares used in computation
of pro forma primary net
loss per common share...... 14,415,531 14,637,984
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
(FORMERLY KNOWN AS WESLEY-JESSEN HOLDING, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
---------------------- -------------------------
JANUARY 1 JUNE 29
YEAR ENDED THROUGH THROUGH YEAR ENDED
DECEMBER 31, JUNE 28, DECEMBER 31, DECEMBER 31,
1994 1995 1995 1996
------------ --------- ------------ ------------
<S> <C> <C> <C> <C>
Cash flows provided by (used
in) operating activities:
Net loss.................... $(30,486) $(13,143) $(19,715) $ (2,742)
Adjustments to reconcile net
loss to net cash provided
by (used in) operating
activities:
Extraordinary loss on
early extinguishment of
debt..................... -- -- -- 2,764
Depreciation expense...... 7,588 3,871 -- 462
Purchased inventory step-
up....................... -- -- 33,929 20,706
Amortization of intangible
assets................... 5,472 2,736 -- --
Amortization of
capitalized financing
fees..................... -- -- 291 699
Amortization of negative
goodwill................. -- -- (392) (784)
Loss on disposal of
property, plant and
equipment................ 142 6 -- 187
Changes in balance sheet
items:
Accounts receivable--
trade.................... 9,151 2,430 409 5,625
Other receivables......... 1,836 455 (343) 799
Inventories............... 561 (8,857) 4,668 402
Deferred income taxes..... -- -- (15,245) (6,087)
Prepaid expenses.......... (1,803) 1,457 (962) (1,664)
Other assets.............. 1,358 (688) -- 83
Trade accounts payable.... 1,424 (1,388) (1,614) (4,690)
Accrued liabilities....... (1,907) 3,286 1,786 1,883
Other liabilities......... -- -- -- 145
Income taxes payable...... -- -- 1,223 1,450
-------- -------- -------- --------
Cash provided by (used in)
operating activities......... (6,664) (9,835) 4,035 19,238
-------- -------- -------- --------
Investing activities:
Net assets acquired
(exclusive of cash)........ -- -- (46,653) (61,816)
Capital expenditures........ (3,187) (1,959) (893) (6,617)
Proceeds from sale of
property, plant and
equipment.................. 916 302 -- 427
-------- -------- -------- --------
Cash used in investing
activities................... (2,271) (1,657) (47,546) (68,006)
-------- -------- -------- --------
Financing activities:
Issuance of stock........... -- -- 7,525 272
Proceeds from long-term
debt....................... -- -- 43,000 122,255
Payment of financing fees... -- -- (3,492) (7,778)
Payments of long-term debt.. -- -- (1,000) (61,380)
Advances from Schering-
Plough, net................ 7,652 11,272 -- --
-------- -------- -------- --------
Cash provided by financing
activities................... 7,652 11,272 46,033 53,369
-------- -------- -------- --------
Effect of exchange rates on
cash and cash equivalents.. -- -- -- (50)
-------- -------- -------- --------
Net increase (decrease) in
cash and cash equivalents.. (1,283) (220) 2,522 4,551
Cash and cash equivalents:
Beginning of period......... 3,818 2,535 -- 2,522
-------- -------- -------- --------
End of period............... $ 2,535 $ 2,315 $ 2,522 $ 7,073
======== ======== ======== ========
Supplemental disclosure of
cash flow information:
Cash paid during the period
for interest............... $ -- $ -- $ 1,400 $ 4,359
======== ======== ======== ========
Cash paid during the period
for taxes, net............. $ -- $ -- $ -- $ 744
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
(FORMERLY KNOWN AS WESLEY-JESSEN HOLDING, INC.)
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS' DEFICIT--COMPANY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CLASS L
COMMON STOCK COMMON STOCK ADDITIONAL CUMULATIVE TOTAL
---------------- ----------------- PAID IN ACCUMULATED TRANSLATION STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT DEFICIT
-------- ------ ---------- ------ ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 29,
1995................... -- $ -- -- $-- $ -- $ -- $ -- $ --
Issuance of stock....... 429,177 4 3,862,604 39 7,739 -- -- 7,782
Stock subscription
receivable............. -- -- -- (1) (256) -- -- (257)
Net loss................ -- -- -- -- -- (19,715) -- (19,715)
-------- ----- ---------- ---- ------ -------- ------ --------
Balance at December 31,
1995................... 429,177 4 3,862,604 38 7,483 (19,715) -- (12,190)
Issuance of stock....... 823 -- 7,396 -- 15 -- -- 15
Stock subscription
receivable............. -- -- -- 1 256 -- -- 257
Exchange of stock....... (108,933) (1) 220,582 2 -- -- -- 1
Foreign currency
translation adjustment. -- -- -- -- -- -- 1,368 1,368
Net loss................ -- -- -- -- -- (2,742) -- (2,742)
Retroactive effect of
February 12, 1997 Class
L Common Stock
Conversion (Note 1).... (321,067) (3) 1,460,517 15 -- -- -- 12
Retroactive effect of
February 12, 1997
Common Stock Split
(Note 1)............... -- -- 8,724,929 87 (100) -- -- (13)
-------- ----- ---------- ---- ------ -------- ------ --------
Balance at December 31,
1996................... -- $ -- 14,276,028 $143 $7,654 $(22,457) $1,368 $(13,292)
======== ===== ========== ==== ====== ======== ====== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
(FORMERLY KNOWN AS WESLEY-JESSEN HOLDING, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Basis of presentation
The consolidated financial statements for the period from June 29, 1995 to
December 31, 1995 and for the year ended December 31, 1996 include the
accounts of Wesley Jessen VisionCare, Inc. (formerly known as Wesley-Jessen
Holding, Inc.), its wholly owned subsidiary, Wesley-Jessen Corporation, and
Wesley-Jessen Corporation's wholly owned subsidiaries (collectively, the
"Company").
Description of business
The Company's primary business activity is the research, development,
manufacture, marketing and sale of conventional and disposable soft contact
lenses in the United States and certain other countries. The Company is
headquartered in Des Plaines, Illinois and operates in one business segment.
Wesley Jessen Acquisition
Effective June 29, 1995, Wesley-Jessen Corporation completed the acquisition
(the "Wesley Jessen Acquisition") of the Wesley-Jessen contact lens business
(the Predecessor) of Schering-Plough Corporation. As a result of the Wesley
Jessen Acquisition, Wesley-Jessen Corporation acquired certain assets from
Schering-Plough, consisting of manufacturing facilities in Des Plaines,
Illinois and Cidra, Puerto Rico, a distribution facility in Chicago, Illinois,
and a number of non-U.S. sales and service offices, assumed certain
liabilities of the Predecessor, and paid certain acquisition costs directly
attributable to the Wesley Jessen Acquisition (Note 3).
The consolidated financial statements for the year ended December 31, 1994
and the period from January 1, 1995 to June 28, 1995 of the Predecessor
present the "carve-out" results of operations and cash flows for the periods
presented for the contact lens business of Schering-Plough purchased by the
Company. The financial information of the Predecessor presented herein does
not necessarily reflect what the results of operations and cash flows of the
Wesley Jessen contact lens business would have been had it operated as a
stand-alone entity during the periods covered and may not be indicative of
future results of operations or cash flows.
Initial Public Offering
On February 19, 1997, the Company completed an initial public offering
("IPO") of 2.5 million shares of common stock at a price of $15.00 per share.
Concurrent with the offering, the Board of Directors declared a 4.549-to-one
conversion of Class L Common Stock into Common Stock (the "Conversion") and a
3.133-to-one split of the Common Stock (the "Split"). For balance sheet
presentation purposes the Conversion and the Split have been given effect as
if they had occurred on December 31, 1996. All per share data have been
presented as if the Conversion and Split had occurred on June 29, 1995.
Additionally, concurrent with the IPO, the Board of Directors amended the
Company's Articles of Incorporation, authorizing 5,000,000 and 50,000,000
shares of Serial Preferred Stock and Common Stock, respectively. On March 20,
1997, the Company sold an additional 321,000 shares of Common Stock at a price
of $15.00 per share.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
F-8
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
(FORMERLY KNOWN AS WESLEY-JESSEN HOLDING, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the period. Actual results could differ from those estimates.
Principles of consolidation
All significant intercompany accounts and transactions have been eliminated
in consolidation.
Pro forma primary net loss per share
Given the changes in the Company's capital structure described in Note 10,
historical loss per share amounts are not presented as they are not considered
to be meaningful. The calculation of pro forma primary net loss per share was
determined by dividing the net loss by the pro forma weighted average common
and common stock equivalent shares outstanding after giving retroactive effect
to the Wesley Jessen Acquisition, the Conversion and the Split. In addition,
in accordance with Securities and Exchange Commission Staff Accounting
Bulletin No. 83, using the treasury stock method, 361,956 shares have been
included in the calculation of common stock equivalent shares for 1995 and
1996.
Some of the proceeds from the Company's February and March 1997 Common Stock
offering were used to retire indebtedness existing under its credit agreement
(Note 9). Supplemental pro forma primary net loss per share is ($1.06) for the
period from June 29, 1995 through December 31, 1995 and less than ($0.01) for
the year ended December 31, 1996; the number of shares of Common Stock whose
proceeds are deemed to be used to retire debt is 2,821,000. This calculation
assumes the debt retirement had taken place at the later of the beginning of
the respective period or the issuance of the debt. The amount of interest
expense eliminated, net of income tax effects, is $1.4 million for the period
from June 29, 1995 through December 31, 1995 and $2.8 million for the year
ended December 31, 1996.
Revenue recognition
Revenue is recognized when product is shipped. Net sales include estimates
for returns and allowances. The Company grants credit terms to its customers
consistent with normal industry practices and does not require collateral. No
individual customer accounts for more than 10 percent of sales.
Other income
Other income for the year ended December 31, 1996 includes among other
items, income of $3.7 million relating to licensing of a patent by the
Company.
Cash and cash equivalents
All highly liquid investments with an original maturity of three months or
less are considered to be cash equivalents. These amounts are stated at cost
which approximates fair value.
Inventories
Inventories are stated at the lower of cost, determined by the first-in,
first-out (FIFO) method, or market. Market for raw materials is based on
replacement costs and for other inventory classifications on net realizable
value. Consideration is given to deterioration, obsolescence and other factors
in evaluating net realizable value.
F-9
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
(FORMERLY KNOWN AS WESLEY-JESSEN HOLDING, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Prepaid expenses
Prepaid expenses include sample inventory to be used for promotional
purposes. The sample value is charged to promotional expense during the period
in which the samples are shipped.
Property, plant and equipment
Property, plant and equipment is recorded at cost. Depreciation is
determined using the straight-line method over the estimated useful lives of
the assets, which are as follows (in years):
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
----------- -------
<S> <C> <C>
Buildings and improvements............................ 20 to 50 25
Machinery and equipment............................... 10 to 15 7
Furniture and fixtures................................ 8 to 12 7
Automobiles........................................... 4 3
</TABLE>
Expenditures for renewals and betterments are capitalized, and maintenance
and repairs are charged to operations.
Negative goodwill
Negative goodwill, resulting from the acquisition of the Wesley-Jessen
contact lens business of Schering-Plough Corporation, is being amortized on a
straight-line basis as a credit to income over a period of fifteen years which
is considered by management to be a reasonable period to correspond with the
economic benefit obtained from consumption of the acquired assets. Negative
goodwill was $11.4 million and $10.6 million, net of $0.4 million and $1.2
million of accumulated amortization, at December 31, 1995 and 1996,
respectively.
Capitalized financing fees
Capitalized financing fees are amortized to interest expense over the term
of the underlying debt utilizing the effective interest method.
Research and development costs
Expenditures related to the development of new products and processes,
including significant improvements and refinements of existing products, are
expensed as incurred.
Foreign currency translation
The functional currency of each of the Company's and the Predecessor's
foreign subsidiaries is the local currency of its respective country. Asset
and liability accounts of each entity are translated at the exchange rate in
effect at each period-end, and income and expense accounts are translated at
average exchange rates prevailing during the period. Gains and losses
resulting from the translation of these foreign currency financial statements
are included in the cumulative translation adjustment in stockholders'
deficit.
Income taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
is an asset and liability method of accounting
F-10
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
(FORMERLY KNOWN AS WESLEY-JESSEN HOLDING, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
for income taxes. Under this method, deferred tax assets and liabilities are
recognized for the expected future tax consequences, utilizing currently
enacted tax rates, of temporary differences between the carrying amounts and
the tax bases of assets and liabilities. Deferred tax assets are recognized,
net of any necessary valuation allowance, for the estimated future tax effects
of deductible temporary differences and tax operating loss and credit
carryforwards.
The Predecessor's operations were included in Schering-Plough's consolidated
U.S. federal tax returns. The provision for income taxes shown in the
Consolidated Statements of Operations has been determined as if the
Predecessor had filed separate tax returns for the periods presented; all U.S.
income taxes, including deferred taxes, were settled with Schering-Plough on a
current basis through the Schering-Plough investment account, and Schering-
Plough utilized the tax losses generated by the Predecessor. The income tax
attributes of the Predecessor did not carry over to the Wesley Jessen
Acquisition.
Concentration of credit risk
The Company provides credit, in the normal course of business, to
distributors, optical store chains and physicians' offices. The Company
performs ongoing credit evaluations of its customers and maintains reserves
for potential credit losses which, when realized, have been within the range
of management's allowance for doubtful accounts.
Fair value of financial instruments
Cash, accounts receivable, accounts payable, and accrued liabilities are
reflected in the financial statements at amounts which approximate fair value,
primarily because of the short-term maturity of those instruments. The Company
believes that due to the adjustable interest rates applicable to its long-term
debt, the fair value approximates the carrying value of the obligations.
New accounting pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share." This
Statement establishes standards for computing and presenting earnings per
share (EPS) and applies to entities with publicly held common stock. It
simplifies the standards for computing earnings per share previously defined
in APB Opinion No. 15, "Earnings per Share," and makes them comparable to
international EPS standards. It replaces the current presentation of primary
EPS with a presentation of basic EPS, requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of
the diluted EPS computation.
The Statement is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods, and requires
restatement of all prior-period EPS data presented. Earlier application is not
permitted.
3. ACQUISITIONS
Wesley Jessen Acquisition was completed for a total purchase price of $76.6
million, consisting of cash paid of $47.0 million and liabilities assumed of
$29.6 million. The Wesley Jessen Acquisition was financed by $43.0 million of
bank debt and $7.5 million of proceeds from the issuance of the Company's
common stock.
F-11
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
(FORMERLY KNOWN AS WESLEY-JESSEN HOLDING, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On October 2, 1996, the Company acquired the contact lens business of
Pilkington plc, operating as the Pilkington Barnes Hind Group ("the Barnes-
Hind Acquisition"). Aggregate consideration of $62.4 million for the
acquisition was comprised of $57.4 million in cash and a $5.0 million
subordinated promissory note (Note 9). In addition, the Company assumed
liabilities of $55.3 million and paid acquisition related fees of $2.9
million. The cash portion of the purchase price was financed by the proceeds
from the Barnes-Hind Acquisition Financing (Note 9).
The purchase method of accounting was used to record the acquisitions. The
excess of the estimated fair values of the assets acquired over the purchase
price paid for the Wesley Jessen Acquisition of $11.8 million has been
recorded as negative goodwill (Note 2). The results of the operations of the
acquired companies have been included in the results of operations of the
Company since their respective acquisition dates.
In connection with the Barnes-Hind Acquisition, the Company entered into a
voluntary consent order with the Federal Trade Commission which provides,
among other things, that the Company must divest Barnes-Hind's U.S. Natural
Touch Product Line. On March 17, 1997, the Company completed the sale of the
product line for which, under the agreement, it received aggregate
consideration of $7.5 million, consisting of $3.0 million in cash and a four-
year, $4.5 million promissory note. The promissory note accrues compounded
interest at a rate of 12% per annum, 8% of which is paid currently and 4% of
which is payable at the maturity of the note in 2001. As part of the
agreement, the Company has entered into a supply agreement pursuant to which
the Company will supply the purchaser with Natural Touch lenses for sale in
the United States. The purchase accounting for the Barnes-Hind Acquisition
includes the expected effects of the divestiture and has been reflected such
that no gain or loss results from the divestiture.
Pro forma results (unaudited)
The unaudited pro forma results of operations for the Company are set out
below, giving pro forma effect to the following: (i) the Wesley Jessen
Acquisition; (ii) the Barnes-Hind Acquisition; (iii) the Barnes-Hind
Acquisition Financing described in Note 9; (iv) the estimated recurring cost
savings to the Company from facilities and personnel rationalizations; (v)
elimination of non-recurring increases to cost of goods sold as a result of
applying purchase accounting to inventories and excluding fourth quarter 1996
charges of $3.4 million for restructuring the Wesley Jessen operations
following the Barnes-Hind Acquisition; (vi) the divestiture of Barnes-Hind's
U.S. Natural Touch Product Line; and (vii) adjusting the income tax (expense)
benefit to an assumed effective rate of 34%, each as if the transactions had
occurred as of January 1, 1995 (in thousands except share and per share data):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Net sales............................ $ 230,997 $ 249,999
========== ==========
Net income (loss) before
extraordinary loss.................. $ (1,523) $ 12,022
========== ==========
Extraordinary loss, net of tax....... $ -- $ (1,671)
========== ==========
Net income (loss).................... $ (1,523) $ 10,351
========== ==========
Pro forma income (loss) per common
and common share equivalent
Net income (loss) before
extraordinary loss................ $ (0.11) $ 0.73
========== ==========
Extraordinary loss, net of tax..... $ -- $ (0.10)
========== ==========
Net income (loss).................. $ (0.11) $ 0.63
========== ==========
Weighted average shares used in
computation of pro forma income
(loss) per common and common
equivalent share.................... 14,415,531 16,522,016
========== ==========
</TABLE>
F-12
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
(FORMERLY KNOWN AS WESLEY-JESSEN HOLDING, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The pro forma results are not necessarily indicative of what actually would
have occurred if the Barnes-Hind Acquisition had been in effect for the
periods presented and are not intended to be a projection of future results,
which are dependent on the ability of the Company to accomplish its objectives
in connection with the Barnes-Hind Acquisition. The future success of the
Barnes-Hind Acquisition and its effect on the financial and operating results
of the Company will depend in large part on the ability of management to
integrate the Barnes-Hind manufacturing, sales and marketing and
administrative functions into the Wesley Jessen operations and achieve the
cost savings expected to result from the acquisition-integration measures
adopted by the Company.
4. TRANSITION RESERVE AND RESTRUCTURING CHARGE
In connection with the Barnes-Hind Acquisition, management approved a
transition plan to integrate the acquired operations, for which an accrual of
$20.4 million (transition reserve) was established in purchase accounting. The
transition reserve includes costs related to the closure of the Barnes-Hind
corporate offices in Sunnyvale, California which will result in the
termination of 129 administrative employees by the end of the second quarter
of 1997 (71 employees have been terminated as of December 31, 1996). The
related costs of such terminations are estimated to be $6.3 million. In
addition, management plans to curtail certain manufacturing activities in San
Diego, California which will comprise reductions in direct labor, quality
assurance, maintenance and other manufacturing functions as well as site
support and administrative operations, including distribution, customer
service, credit and collections. These activities will be transferred to other
Company locations. Payments related to the transition through December 31,
1996 are as follows (in thousands):
<TABLE>
<CAPTION>
LEASE FACILITY
EMPLOYEE TERMINATION RESTORATION
RELATED COSTS COSTS AND OTHER COSTS TOTAL
------------- ----------- --------------- -------
<S> <C> <C> <C> <C>
Transition reserve at
October 2, 1996........ $16,772 $2,243 $1,385 $20,400
Charges against reserve. 1,149 -- 357 1,506
------- ------ ------ -------
Transition reserve at
December 31, 1996...... $15,623 $2,243 $1,028 $18,894
======= ====== ====== =======
</TABLE>
In the fourth quarter of 1996, the Company recorded a $3.4 million charge in
marketing and administrative expenses relating to costs to be incurred for
restructuring the Wesley Jessen operations following the Barnes-Hind
Acquisition. Pursuant to the restructuring plan, the Chicago distribution
facilities will be consolidated with those at Des Plaines, Illinois in
September, 1997. Costs totaling $1.4 million related to the shutdown of the
distribution facility include the present value of lease, property tax and
utility payments for the site through the year 2006. Also pursuant to the
plan, in 1997 management will consolidate the Company's facilities in Europe
with facilities acquired in the Barnes-Hind Acquisition. The anticipated costs
of the European facilities restructuring program comprise $1.0 million of
employee-termination costs, $0.5 million of lease termination costs and $0.5
million of other restructuring costs. There have been no charges against this
accrual during the period ended December 31, 1996.
F-13
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
(FORMERLY KNOWN AS WESLEY-JESSEN HOLDING, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. ACCOUNTS RECEIVABLE--TRADE
Accounts receivable--trade consist of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1995 1996
------- --------
<S> <C> <C>
Trade receivables....................................... $31,588 $ 56,480
Less allowances:
Doubtful accounts..................................... (4,655) (6,989)
Sales returns and adjustments......................... (7,225) (10,622)
------- --------
Net receivables......................................... $19,708 $ 38,869
======= ========
</TABLE>
6. INVENTORIES
Inventories consist of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Raw materials............................................. $ 3,212 $ 6,073
Work-in-process........................................... 2,090 8,958
Finished goods............................................ 20,352 54,108
------- -------
$25,654 $69,139
======= =======
</TABLE>
In connection with the Wesley Jessen Acquisition and the Barnes-Hind
Acquisition, under the purchase method of accounting, the Company's total
inventories were written up by $40.6 million and $36.7 million, respectively,
to fair value at the date of the respective acquisition. Of these amounts,
$33.9 million and $20.7 million was charged to cost of goods sold during the
period June 29, 1995 through December 31, 1995 and the year ended December 31,
1996, respectively.
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1995 1996
---- -------
<S> <C> <C>
Buildings and improvements.................................. $-- $ 1,230
Machinery, equipment, furniture and fixtures................ -- 6,257
Construction-in-progress.................................... 893 3,034
---- -------
893 10,521
Less--accumulated depreciation.............................. -- (396)
---- -------
Net property, plant and equipment........................... $893 $10,125
==== =======
</TABLE>
Expenditures for maintenance and repairs were $4.6 million, $1.9 million,
$1.7 million and $3.2 million for the year ended December 31, 1994, the period
from January 1, 1995 through June 28, 1995, the period from June 29, 1995
through December 31, 1995 and the year ended December 31, 1996, respectively.
8. ADVERTISING COSTS
The Predecessor and the Company participate in several cooperative
advertising programs with customers. The costs incurred under these programs
are accrued and expensed at the inception of the
F-14
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
(FORMERLY KNOWN AS WESLEY-JESSEN HOLDING, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
contract. All of the Predecessor's and the Company's other production costs of
advertising are expensed the first time the advertising takes place.
Advertising expense for the year ended December 31, 1994, the period from
January 1, 1995 through June 28, 1995, the period from June 29, 1995 through
December 31, 1995 and the year ended December 31, 1996 was $13.7 million, $8.8
million, $5.8 million and $11.7 million, respectively.
9. LONG-TERM DEBT
Wesley Jessen Acquisition Financing
On June 28, 1995, the Company entered into a $55 million credit agreement,
consisting of a $30 million term loan payable in 23 quarterly installments,
commencing December 31, 1995, and a $25 million revolving credit note, both of
which were due June 30, 2001. Interest on the term loan was computed on a
floating rate based on LIBOR while the revolver was based on a fixed rate. At
December 31, 1995, the Company's weighted average borrowing rate was 9.3%.
This agreement was refinanced on October 2, 1996.
Barnes-Hind Acquisition Financing
On October 2, 1996, in connection with the Barnes-Hind Acquisition, the
Company replaced its long-term borrowing arrangement with the following new
credit facilities:
$45 million revolving credit facility due February 28, 2002;
$45 million Term Loan A due February 28, 2002;
$50 million Term Loan B due February 29, 2004.
In connection with the refinancing, the Company recognized an extraordinary
loss of $2.8 million ($1.7 million, net of income tax benefits), relating to
the write-off of capitalized financing fees incurred in connection with the
Wesley Jessen Acquisition Financing. Additionally, the Company incurred and
capitalized financing fees of approximately $7.8 million, which were being
amortized over the term of the new credit facilities.
Amounts borrowed under the credit facilities bore interest, at the Company's
option, at either the Base Rate (higher of (i) 0.5% in excess of the Federal
Reserve reported adjusted certificate of deposit rate and (ii) the lender's
prime lending rate) plus a margin of 1.75% to 2.25%, or the Eurodollar Rate as
determined by the lenders plus a margin of 2.75% to 3.25%. At December 31,
1996, the applicable borrowing rates were as follows: Term Loan A, 8.25%; Term
Loan B, 8.75%; and revolving credit facility, 10.0%. Additionally, the Company
was required to pay a commitment fee of 0.5% of the unutilized commitments
under the revolving credit facility; the unutilized portion at December 31,
1996 was $42.0 million. The credit facilities were guaranteed by the Company
and secured by the capital stock and substantially all assets and property of
all its direct and indirect domestic subsidiaries. These facilities were
refinanced on February 19, 1997.
Additionally, as part of the consideration paid for the Barnes-Hind
Acquisition the Company entered into a $5.0 million promissory note with
Pilkington plc (the "Pilkington Note") which bears interest at 8.0% compounded
annually and payable at maturity. The note matures on February 1, 2005 subject
to acceleration on any date that Bain Capital, Inc. and its affiliates (i)
cease to beneficially own at least 25%
F-15
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
(FORMERLY KNOWN AS WESLEY-JESSEN HOLDING, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of the Company's voting stock or (ii) receive any proceeds from the sale of
any of their shares of Common Stock in a public offering. The Pilkington Note
is subordinate to all current and long-term debt of the Company.
Initial Public Offering-Refinancing
On February 19, 1997, in connection with the IPO, the Company replaced its
long-term borrowing arrangements with the following new credit facilities:
$35 million revolving loan facility due February 19, 2002;
$65 million Term Loan due February 19, 2002.
In connection with the refinancing, the Company recognized an extraordinary
loss of $7.4 million ($4.5 million, net of income tax benefits), relating to
the write-off of capitalized financing fees incurred in connection with the
Barnes-Hind Acquisition Financing. Additionally, the Company incurred and
capitalized financing fees of approximately $2.5 million, which will be
amortized over the term of the new credit facilities.
Amounts borrowed under the credit facilities bear interest at either the
Base Rate (higher of (i) 0.5% in excess of the Federal Reserve reported
adjusted certificate of deposit rate and (ii) the lender's prime lending rate)
plus a margin up to 0.75% based on leverage ratios calculated as of certain
dates as defined in the credit agreement, or the Eurodollar Rate as determined
by the lenders plus a margin of 0.75% to 1.75% based on leverage ratios
calculated as of certain dates as defined in the credit agreement and the type
of loan. Additionally, the Company is required to pay a commitment fee on the
unutilized revolving loan commitments, as defined in the credit agreement,
ranging from 0.30% to 0.50% based on leverage ratios calculated as of certain
dates as defined in the credit agreement; the unutilized portion of the credit
facilities at February 19, 1997 was $26.0 million. The credit facilities are
guaranteed by the Company and each of its domestic subsidiaries and secured by
essentially all assets of the domestic subsidiaries.
The credit facilities contain defined change of control provisions and
impose certain restrictive covenants regarding changes in business, business
combinations, asset purchases and sales, liens, indebtedness (including
capital lease obligations), investments, payment of dividends, capital
expenditures, limitations on voluntary payments and creation of subsidiaries,
modifications of indebtedness, certificate of incorporation and by-laws,
issuance of capital stock, and attainment of certain financial covenants
including consolidated EBITDA (as defined), interest coverage and leverage
ratios.
Following the February 19, 1997 refinancing, scheduled maturities of long-
term debt, including the Pilkington Note and availability under the revolving
loan facility, are as follows (in thousands):
<TABLE>
<S> <C>
1998............................................................ $10,000
1999............................................................ 15,000
2000............................................................ 15,000
2001............................................................ 20,000
2002............................................................ 40,000
Thereafter...................................................... 5,100
--------
$105,100
========
</TABLE>
F-16
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
(FORMERLY KNOWN AS WESLEY-JESSEN HOLDING, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Interest Rate Instrument
As of December 31, 1996, the Company purchased an interest rate cap on $35.0
million notional principal amount at 8.5%, which expires on December 31, 1999.
The cap purchased is intended to provide partial protection to the Company
from exposure relating to its variable rate instruments in the event a higher
floating interest rate scenario is encountered during the period covered. The
cap rate is based on three month LIBOR.
10. STOCKHOLDERS' DEFICIT
Pre-IPO Capital Structure
The Company's authorized capital stock consisted of 600,000 shares of Class
L Common Stock, par value $.01 per share ("Class L Common"), and 5,400,000
shares of Common Stock, par value $.01 per share ("Common Stock"). Concurrent
with the Wesley Jessen Acquisition, the Company issued 415,000 shares of Class
L Common (issued at $17.41 per share) and 3,735,000 shares of Common Stock
(issued at $0.081 per share).
Holders of Class L Common and Common Stock were entitled to one vote per
share on all matters to be voted on by the Company's stockholders, and the
holders of both classes of stock vote together as a single class. The
outstanding shares of one class of stock could not be the subject of a stock
split or a stock dividend unless the outstanding shares of the other class are
similarly affected.
Holders of Class L Common were entitled to a preferential payment ("Yield")
in the amount of 12.5% per year on the original cost paid for the shares
($17.41 per share) plus any accumulated and unpaid Yield thereon. The Yield
accumulated until such time as distributions were made by the Company. No
distributions were made by the Company during the periods ended December 31,
1995 and 1996 and the accumulated and unpaid Yield at December 31, 1995 and
1996, amounted to $0.5 million and $1.5 million, respectively. As part of the
Conversion this unpaid Yield was converted to Common Stock.
Post-IPO Capital Structure
Effective February 1997, the Company's authorized capital stock consists of
50,000,000 shares of Common Stock and 5,000,000 shares of Serial Preferred
Stock.
Holders of the Common Stock shares, subject to the prior rights of the
Serial Preferred Stock, are entitled to receive dividends, are entitled to one
vote per share and are entitled to receive, pro rata, the assets of the
Company which are legally available for distribution, after payment of all
debts and other liabilities and subject to the prior rights of any holders of
Serial Preferred Stock then outstanding.
The Company's Board of Directors may, without further action by the
Company's stockholders, direct the issuance of shares of Serial Preferred
Stock and may at the time of issuance, determine the rights, preferences and
limitations of each series.
Stock options
As permitted, the Company applies Accounting Principles Board Opinion 25 and
related Interpretations in accounting for its stock-based compensation plan,
and as a result recognized expense of $0.3 million for the year ended December
31, 1996. Had compensation cost for the Company's stock-based compensation
plan been determined based on the fair value of the options at the grant dates
for
F-17
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
(FORMERLY KNOWN AS WESLEY-JESSEN HOLDING, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the awards under the plan consistent with the alternative method of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," the pro forma effect on the Company's net loss and loss per
share for the period ended December 31, 1995 would not have been significant.
The pro forma effect for the year ended December 31, 1996 would have been as
follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1996
--------
<S> <C>
Net loss--as reported
Net loss before extraordinary loss............................. $(1,071)
Extraordinary loss, net of tax benefit......................... (1,671)
Net loss....................................................... (2,742)
Net loss--including pro forma FAS 123 effect
Net loss before extraordinary loss............................. $(1,447)
Extraordinary loss, net of tax benefit......................... (1,671)
Net loss....................................................... (3,118)
Pro forma primary net loss per share--as reported
Net loss before extraordinary loss............................. $ (0.07)
Extraordinary loss, net of tax benefit......................... (0.12)
Net loss....................................................... (0.19)
Pro forma primary net loss per share--including pro forma
FAS 123 effect
Net loss before extraordinary loss............................. $ (0.10)
Extraordinary loss, net of tax benefit......................... (0.12)
Net loss....................................................... (0.22)
</TABLE>
The Board of Directors granted non-qualified stock options to certain
members of management for an aggregate of 2,193,051 shares of Common Stock
pursuant to the Company's 1995 Stock Purchase and Option Plan. The stock
option grants are of two types: time options and target options. Of the
783,233 time option grants, 469,940 vest in four equal annual installments
beginning on June 28, 1996 and 313,293 vest in five equal annual installments
beginning on April 5, 1996. The time options were granted at the fair market
value of the Common Stock on the date of grant. The 1,409,818 target option
grants are exercisable immediately and were granted at prices that were in
excess of fair market value of the Common Stock on the date of grant. All
options expire in 10 years and include certain repurchase and participation
rights which cease upon (1) a sale of the Company or (2) sale of its Common
Stock by the Company pursuant to a Registration Statement under the Securities
Act of 1933 in connection with which Bain Capital, Inc. and affiliated
investors cease to own at least 20% of the Company. In October 1996, pursuant
to the 1996 Stock Option Plan, the Board of Directors authorized and granted
options to purchase an aggregate of 424,519 shares of Common Stock at an
exercise price which approximated fair market value at the date of grant.
Options to purchase 267,872 shares were immediately exercisable, and options
to purchase 156,647 shares vest in five equal annual installments beginning
October 22, 1997.
F-18
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
(FORMERLY KNOWN AS WESLEY-JESSEN HOLDING, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the Company's two stock option plans as of December 31, 1995
and 1996, and changes during the periods then ended is presented below:
<TABLE>
<CAPTION>
1995 1996
-------------------------- --------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning
of period.............. -- $ -- 2,038,658 $1.14
Granted................. 2,038,658 1.14 578,912 5.63
Exercised............... -- -- -- --
Forfeited............... -- -- -- --
--------- ---------
Outstanding at end of
period................. 2,038,658 $1.14 2,617,570 $2.13
========= =========
Options exercisable at
period-end............. 1,306,890 $1.76 1,857,834 $2.38
========= =========
Weighted-average fair
value of options
granted during the
period................. $ -- $ 2.36
========= =========
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions for options granted in 1995: expected volatility of 24.31%, risk-
free interest rate of 5.98%, and expected lives of 7 years. For options
granted in 1996, the following weighted average assumptions were used:
expected volatility of 25.69%, risk-free interest rate of 6.36%, and expected
lives of 7 years.
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ----------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
EXERCISE OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
PRICES AT 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE
-------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.03 to $0.13.......... 783,233 8.55 years $0.03 180,144 $0.03
$1.18................... 704,909 8.56 years 1.18 704,909 1.18
$2.34................... 704,909 8.56 years 2.34 704,909 2.34
$7.24................... 424,519 9.81 years 7.24 267,872 7.24
--------- ---------
2,617,570 8.76 years 2.13 1,857,834 2.38
========= =========
</TABLE>
1997 Stock Incentive Plan
The Wesley Jessen VisionCare, Inc. 1997 Stock Incentive Plan (the "1997
Stock Plan") was approved by the Board of Directors in February, 1997. The
1997 Stock Plan provides for the issuance of the following types of incentive
awards: stock options, stock appreciation rights, restricted stock,
performance grants and other types of awards. An aggregate of 800,000 shares
of Common Stock of the Company have been reserved for issuance under the 1997
Stock Plan, subject to certain adjustments reflecting changes in the Company's
capitalization. The 1997 Stock Plan provides that participants will be limited
to receiving awards relating to no more than 50,000 shares of Common Stock per
year.
Options granted under the 1997 Stock Plan may be subject to time vesting and
certain other restrictions. Subject to certain exceptions, the right to
exercise an option generally will terminate at the
F-19
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
(FORMERLY KNOWN AS WESLEY-JESSEN HOLDING, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
earlier of (i) the first date on which the initial grantee of such option is
not employed by the Company for any reason other than termination without
cause, death or permanent disability or (ii) the expiration date of the
option. All outstanding awards under the 1997 Stock Plan will terminate
immediately prior to consummation of a liquidation or dissolution of the
Company, unless otherwise provided by the Board. In the event of the sale of
all or substantially all of the assets of the Company or the merger of the
Company with another corporation, all restrictions on any outstanding awards
will terminate and participants will be entitled to the full benefit of their
awards immediately prior to the closing date of such sale or merger, unless
otherwise provided by the Board.
Stock Purchase Plan
The Wesley Jessen VisionCare, Inc. Employee Stock Discount Purchase Plan
(the "Stock Purchase Plan") was approved by the Board of Directors in
February, 1997 and provides that, subject to certain restrictions, each United
States employee of the Company will be eligible to participate in the Stock
Purchase Plan if he or she has been employed by the Company for more than six
months. The Company has reserved 500,000 shares of Common Stock for issuance
in connection with the Stock Purchase Plan and each participating employee is
entitled to purchase a maximum of 500 shares per year. Each participating
employee contributes to the Stock Purchase Plan by choosing a payroll
deduction in any specified amount, with a minimum deduction of $25.00 per
payroll period. Each participating employee's contributions will be used to
purchase shares for the employee's share account, and the cost per share will
be 85% of the price of the Company's Common Stock on the Nasdaq National
Market on specified dates.
Non-Employee Director Stock Option Plan
The 1997 Non-Employee Director Stock Option Plan (the "Director Option
Plan") was approved by the Board of Directors in February, 1997. The Director
Option Plan provides for the granting of options to non-employee Directors, as
defined, covering an aggregate of 250,000 shares of Common Stock of the
Company.
The Board of Directors is authorized under the Director Option Plan to make
discretionary grants of options and determine the terms and conditions of such
options. In addition, the Director Option Plan provides for an initial one-
time grant of options to purchase 10,000 shares of Common Stock to each non-
employee Director serving as a member of the board or to any new non-employee
Director upon being elected to the board. The Director Option Plan also
provides that each non-employee Director shall automatically be granted
options to purchase 2,000 shares of Common Stock upon each anniversary of the
Director's election to the Board. The Director Option Plan requires that the
exercise price for each option granted under the plan must equal 100% of the
fair market value of the Company's Common Stock on the date the option is
granted. The initial one-time grants will be immediately exercisable and the
annual grants will vest in three equal installments commencing on the first
anniversary of the grant date.
11. INCOME TAXES
Loss before income tax benefit for the Predecessor is as follows (in
thousands):
<TABLE>
<CAPTION>
PREDECESSOR
----------------------
JANUARY 1
YEAR ENDED THROUGH
DECEMBER 31, JUNE 28,
1994 1995
------------ ---------
<S> <C> <C>
Domestic (including Puerto Rico).................. $(54,031) $(17,936)
International..................................... (3,390) (4,608)
-------- --------
Loss before income tax benefit.................... $(57,421) $(22,544)
======== ========
</TABLE>
F-20
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
(FORMERLY KNOWN AS WESLEY-JESSEN HOLDING, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Loss before income tax benefit and extraordinary item for the Company is as
follows (in thousands):
<TABLE>
<CAPTION>
COMPANY
-------------------------
JUNE 29
THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
Domestic (including Puerto Rico)............... $(33,469) $(7,721)
International.................................. (268) 3,613
-------- -------
Loss before income tax benefit and
extraordinary item............................ $(33,737) $(4,108)
======== =======
</TABLE>
Income tax (expense) benefit is as follows (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR
----------------------
JANUARY 1
YEAR ENDED THROUGH
DECEMBER 31, JUNE 28,
1994 1995
------------ ---------
<S> <C> <C>
Current income tax benefit:
Domestic federal................................ $19,185 $6,338
Domestic state and local (including Puerto
Rico).......................................... 7,750 3,063
------- ------
$26,935 $9,401
======= ======
</TABLE>
<TABLE>
<CAPTION>
COMPANY
-------------------------
JUNE 29
THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
Current income tax expense:
Domestic federal............................. $ (872) $(2,126)
Domestic state and local (including Puerto
Rico)....................................... (287) (922)
International................................ (64) (116)
------- -------
$(1,223) $(3,164)
------- -------
Deferred income tax (expense) benefit:
Domestic federal............................. $13,045 4,307
Domestic state and local (including Puerto
Rico)....................................... 2,228 (1,237)
International................................ (28) 3,131
------- -------
$15,245 $ 6,201
------- -------
Income tax benefit............................. $14,022 $ 3,037
======= =======
</TABLE>
Income Tax Benefit
No allocation of the Predecessor's income tax benefits between current and
deferred amounts has been made as all U.S. income taxes, including deferred
taxes, were settled with Schering-Plough on a current basis through the
Schering-Plough investment account. Schering-Plough utilized in full the tax
losses generated by the Predecessor. The income tax attributes of the
Predecessor did not survive the Acquisition.
F-21
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
(FORMERLY KNOWN AS WESLEY-JESSEN HOLDING, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Differences between the U.S. federal income tax statutory rates applicable to
the Predecessor and the Company, respectively, and the income tax benefit
recorded are attributable to the following:
<TABLE>
<CAPTION>
PREDECESSOR
-----------------------
JANUARY 1,
YEAR ENDED THROUGH
DECEMBER 31, JUNE 28,
1994 1995
------------ ----------
<S> <C> <C>
Income tax statutory rate........................ 35.0% 35.0%
State and local taxes (including Puerto Rico),
net of federal tax benefit...................... 13.5 13.6
Effect of international operations............... (2.1) (7.2)
Other factors.................................... 0.5 0.3
---- ----
Income tax benefit............................... 46.9% 41.7%
==== ====
</TABLE>
<TABLE>
<CAPTION>
COMPANY
-------------------------
JUNE 29
THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
Income tax statutory rate...................... 34.0% 35.0%
State and local taxes (including Puerto Rico),
net of federal tax benefit.................... 8.4 39.4
Effect of international operations............. (0.5) (4.5)
Amortization of negative goodwill.............. 0.2 6.8
Other factors.................................. (0.5) (2.8)
---- ----
Income tax benefit............................. 41.6% 73.9%
==== ====
</TABLE>
F-22
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
(FORMERLY KNOWN AS WESLEY-JESSEN HOLDING, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred tax assets and liabilities are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
COMPANY
-------------------------
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable valuation allowances..... $ 5,058 $ 5,484
Inventory reserves........................... 5,950 695
Fixed assets................................. 4,578 5,980
Accrued expenses............................. 2,617 14,358
Other deductible temporary differences....... 46 --
Foreign net operating losses................. 752 2,296
------- -------
Total deferred tax assets...................... 19,001 28,813
------- -------
Deferred tax liabilities:
Inventory step-up and beginning basis
differences in opening inventory............ 6,680 --
Puerto Rico tollgate tax..................... 22 1,008
Federal benefit of deferred state taxes...... 780 868
Other taxable temporary differences.......... 412 295
------- -------
Total deferred tax liabilities................. 7,894 2,171
------- -------
Valuation allowance for foreign net operating
losses........................................ 752 2,296
------- -------
Net deferred tax assets........................ $10,355 $24,346
======= =======
Noncurrent portion of deferred tax assets...... $ 4,315 $ 4,227
======= =======
Current portion of deferred tax assets......... $ 6,040 $20,119
======= =======
</TABLE>
At December 31, 1995 and 1996, the Company has not provided a valuation
allowance against its deferred tax assets except for the asset relating to
foreign net operating losses ("NOLs") because, based upon its current
operating plans, the Company believes that it is more likely than not that the
assets will be realized through future profitable operations.
The Company has foreign net operating loss carryforwards which are available
to reduce future income in the relevant foreign tax jurisdictions and which
expire five to seven years from December 31, 1996. A full valuation allowance
has been provided against the deferred asset relating to these NOLs as the
Company believes it is more likely than not that the benefits of the NOLs will
not be realized in the future.
Estimated taxes have been provided for the Company's international
operations assuming repatriation of all available earnings. The Predecessor's
and the Company's manufacturing operations in Puerto Rico qualify for income
tax credit available under Section 936 of the Internal Revenue Code. Recent
legislation will phase out the income tax credit allowed under Section 936
over a ten year period. The phase out period will allow a tax credit under
present law through December 31, 2001. The credit will be subject to further
limitation through December 31, 2005, and thereafter the credit is eliminated.
F-23
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
(FORMERLY KNOWN AS WESLEY-JESSEN HOLDING, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. RETIREMENT BENEFITS
Defined Benefit Pension Plans
Eligible employees of the Predecessor in the United States and certain other
countries were participants, along with employees of other Schering-Plough
subsidiaries, in defined benefit pension plans sponsored by Schering-Plough.
Benefits under these plans are generally based upon the participants' average
final earnings and years of credited service, and take into account
governmental retirement benefits. Pension cost allocated by Schering-Plough to
the Predecessor for 1994 amounted to $0.8 million and was offset in full by
the allocated return on pension plan assets for a net cost of zero; the
Predecessor was allocated a net credit of $0.2 million for the period from
January 1, 1995 through June 28, 1995.
Effective June 29, 1995, the employees of the Company terminated
participation in the Schering-Plough pension plans. Pursuant to the Wesley
Jessen Acquisition agreement, the United States participants' pension
liabilities and the related assets are to be transferred from the Schering-
Plough plan to a new plan that is presently being established by the Company,
the Wesley Jessen Cash Balance Pension Plan (the "Wesley Jessen Plan"). The
amounts of pension liabilities and accompanying assets to be transferred from
the Schering-Plough plan to the Plan have not been finalized but are both
estimated to be approximately $4.5 million. Pending transfer to the Plan, the
pension assets will earn a 7% rate of return guaranteed by Schering-Plough.
The Wesley Jessen Plan is a defined benefit plan, effective as of January 1,
1996, covering substantially all United States employees (including Puerto
Rico). Under the Wesley Jessen Plan, the Company will contribute a percentage
of compensation for each participant (annual pay credits) based upon years of
service, excluding the period June 29, 1995 to December 31, 1995 and with the
Predecessor. Additionally, the Wesley Jessen Plan provides for a specified
return (interest credits) on participants' account balances. Under the Wesley
Jessen Plan, annual pay credits and interest credits will be accumulated in
participants' accounts as the basis for their Wesley Jessen Plan benefits. The
Company will contribute actuarially determined amounts to fund Wesley Jessen
Plan benefits within regulatory minimum requirements and maximum tax
deductible limits. Vesting occurs after five years of service and includes
service during the period June 29, 1995 to December 31, 1995.
In connection with the Barnes-Hind Acquisition the Company acquired a fully
funded portion of the Pilkington Vision Care Pension Plan, a non-contributory
defined benefit pension plan, which covers substantially all Barnes Hind
United States employees. Additionally, the Company acquired a fully-funded
contributory defined benefit pension plan covering certain Barnes Hind
employees in the United Kingdom.
Under the plans acquired in the Barnes-Hind Acquisition, benefit payments
for United States employees are based principally on earnings during the last
five-or ten-year period prior to retirement and/or length of service.
Employees are eligible to participate in domestic plans within one year of
employment and are vested after five years of service. For the international
employees, benefits are based on length of service and on compensation during
the last ten years of service prior to retirement. Funding is on an
actuarially determined basis, to provide for the plans' current service costs
and the plans' prior service cost over their amortization periods.
F-24
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
(FORMERLY KNOWN AS WESLEY-JESSEN HOLDING, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net pension expense for the pension plans includes the following components
(in thousands):
<TABLE>
<CAPTION>
COMPANY
-------------------------
JUNE 29
THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
Service cost--benefits earned during the period... $ -- $ 801
Interest cost on projected benefit obligation..... 151 745
Actual return on plan assets...................... (151) (1,424)
Net amortization and deferral..................... -- 656
----- -------
Net pension expense............................. $ -- $ 778
===== =======
</TABLE>
The following table sets forth the reconciliation of the funded status of
defined benefit plans where accumulated benefit obligations exceed plan assets
at December 31, 1996 (in thousands):
<TABLE>
<S> <C>
Actuarial present value of benefit obligations:
Vested benefit obligations......................................... $5,017
Nonvested benefit obligations...................................... 280
------
Accumulated benefit obligation....................................... $5,297
======
Plan assets at fair value............................................ $4,815
Projected benefit obligation......................................... 5,433
------
Plan assets less than projected benefit obligations.................. (618)
Unrecognized prior service cost...................................... 681
Unrecognized net gain................................................ (601)
------
Pension liability recognized......................................... $ (538)
======
</TABLE>
The following table sets forth the reconciliation of the funded status for
defined benefit plans where plan assets exceed accumulated benefit obligations
at December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
1996
-----------------------
1995 DOMESTIC INTERNATIONAL
------ -------- -------------
<S> <C> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefit obligations................. $4,017 $ 7,329 $6,508
Nonvested benefit obligations.............. 228 938 --
------ ------- ------
Accumulated benefit obligation............... $4,245 $ 8,267 $6,508
====== ======= ======
Plan assets at fair value.................... $4,500 $16,375 $8,647
Projected benefit obligation................. 4,245 14,872 8,411
------ ------- ------
Plan assets in excess of projected benefit
obligations................................. 255 1,503 236
Unrecognized prior service cost.............. -- -- --
Unrecognized net gain........................ (255) (509) (94)
------ ------- ------
Prepaid pension cost......................... $ -- $ 994 $ 142
====== ======= ======
</TABLE>
F-25
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
(FORMERLY KNOWN AS WESLEY-JESSEN HOLDING, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Assumptions used in the actuarial computations at December 31 are as
follows:
<TABLE>
<CAPTION>
1995 1996
---- --------
<S> <C> <C>
Domestic Plans:
Discount rate........................................... 7.25% 7.5%
Expected rate of compensation increase.................. 5.0% 5.0%
Expected rate of return on plan assets.................. 7.0% 7.0%-9.0%
International Plans:
Discount rate........................................... -- 8.5%
Expected rate of compensation increase.................. -- 6.5%
Expected rate of return on plan assets.................. -- 8.5%
</TABLE>
Defined Contribution Plans
The Company sponsors defined contribution plans covering substantially all
of its U.S. employees. The plans provide for specified Company matching of
participants' contributions. Contributions to the defined contribution plans
charged to operations for the year ended December 31, 1996 totaled $0.7
million.
Postretirement benefits other than pensions
Eligible United States retirees of the Predecessor and their dependents were
provided postretirement health care and other benefits under benefit plans
sponsored by Schering-Plough. Eligibility for such benefits depended upon age
and years of service, and retirees shared in the cost of health care benefits.
Postretirement health care cost allocated to the Predecessor by Schering-
Plough for the year ended December 31, 1994, and for the period from January
1, 1995 through June 28, 1995 was $0.3 million and $0.3 million, respectively.
In conjunction with the Wesley Jessen Acquisition, the Company did not assume
any existing retiree postretirement benefit obligations. The Company does not
offer postretirement health care benefits to its employees.
13. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain facilities and computer and other equipment under
operating leases. Total rent expense was as follows (in thousands):
<TABLE>
<S> <C>
Predecessor
Year ended December 31, 1994.................................... $2,983
======
The period from January 1, 1995 through June 28, 1995........... $1,513
======
Company
The period from June 29, 1995 through December 31, 1995......... $ 494
======
Year ended December 31, 1996.................................... $2,554
======
</TABLE>
F-26
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
(FORMERLY KNOWN AS WESLEY-JESSEN HOLDING, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future minimum lease payments under non-cancelable operating leases at
December 31, 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
-----------
<S> <C>
December 31, 1997................................................. $3,967
December 31, 1998................................................. 2,589
December 31, 1999................................................. 1,862
December 31, 2000................................................. 1,448
December 31, 2001................................................. 1,375
Thereafter........................................................ 8,589
</TABLE>
Litigation
The Company has certain product liability, personal injury and employment
related litigation and claims pending in the normal course of its business.
Management believes that any uninsured losses resulting from the resolution of
such litigation and claims would not have a material adverse impact on the
Company's financial position or results of operations as presented in the
accompanying financial statements.
14. RELATED PARTY TRANSACTIONS
Predecessor
Schering-Plough provided the Predecessor certain legal, audit, data
processing, engineering, insurance, facility, regulatory, and administrative
services. Charges to the Predecessor for these services are reflected in the
Consolidated Statements of Operations through June 28, 1995 and were based on
allocations of Schering-Plough's actual direct and indirect costs using
varying allocation bases as appropriate (hours worked, headcount, etc.)
designed to estimate the actual cost incurred by Schering-Plough to render
these services to the Predecessor. Management believes that the basis used for
allocating such services is reasonable, and the allocation process was
consistent with the methodology used by Schering-Plough to allocate the cost
of similar services provided to its other business units. No provision has
been made for possible incremental expenses that would have been incurred or
hypothetical savings achieved had the Predecessor operated as an independent
entity. These charges are included in marketing and administrative expenses
and are summarized as follows (in thousands):
<TABLE>
<CAPTION>
PREDECESSOR
-----------------------
JANUARY 1,
YEAR ENDED THROUGH
DECEMBER 31, JUNE 28,
1994 1995
------------ ----------
<S> <C> <C>
Allocations:
General and administrative...................... $1,946 $1,130
Legal........................................... 2,053 789
Compensation and benefits....................... 500 61
Direct charges:
Insurance....................................... 3,151 1,825
------ ------
$7,650 $3,805
====== ======
</TABLE>
The Predecessor's consolidated statements of operations also include a
financing charge from Schering-Plough based upon 11% of receivables
outstanding and inventories on-hand throughout the
F-27
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
(FORMERLY KNOWN AS WESLEY-JESSEN HOLDING, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
period. This charge amounted to $7.2 million, and $3.5 million for the year
ended December 31, 1994 and the period from January 1, 1995 through June 28,
1995, respectively.
A summary of changes in Schering-Plough's net investment in the Predecessor
is as follows (in thousands):
<TABLE>
<S> <C>
Excess of assets over liabilities at December 31, 1993.......... $196,243
1994 net loss................................................... (30,486)
Net change in amounts due to/from Schering-Plough............... 7,652
--------
Excess of assets over liabilities at December 31, 1994.......... 173,409
Net loss from January 1, 1995 through June 28, 1995............. (13,143)
Net change in amounts due to/from Schering Plough............... 11,272
--------
Excess of assets over liabilities at June 28, 1995.............. $171,538
========
</TABLE>
Management and advisory fees--Company
In connection with the Wesley Jessen Acquisition, the Company entered into
an agreement with Bain Capital, Inc., an affiliate of the Company's major
stockholder, for the provision of management and advisory services. Included
in marketing and administrative expense during the period from June 29, 1995
through December 31, 1995 and for the year ended December 31, 1996 are $0.5
million and $1.3 million, respectively, of management fees paid for the
services provided pursuant to this agreement. In addition, if the Company
enters into any acquisition transactions, it must pay specified fees to Bain
Capital, Inc. based upon the purchase price. The Company paid Bain Capital,
Inc. fees of $0.7 million for services provided in structuring the Wesley
Jessen Acquisition, and $3.0 million in connection with the structuring of the
Bank Credit Agreement used to finance the Barnes-Hind Acquisition.
15. GEOGRAPHICAL INFORMATION
Financial information for the Predecessor by geographic area is as follows
(in thousands):
<TABLE>
<CAPTION>
PREDECESSOR
-----------------------
JANUARY 1,
YEAR ENDED THROUGH
DECEMBER 31, JUNE 28,
1994 1995
------------ ----------
<S> <C> <C>
Total assets:
United States (including territories)........... $174,036 $177,260
Canada.......................................... 5,490 4,076
Europe.......................................... 11,903 10,119
-------- --------
Total assets.................................. $191,429 $191,455
======== ========
Net sales:
United States (including territories)........... $105,569 $ 45,366
Canada.......................................... 5,939 2,330
Europe.......................................... 13,334 6,549
Elimination..................................... (15,202) (3,226)
-------- --------
Net sales..................................... $109,640 $ 51,019
======== ========
</TABLE>
F-28
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
(FORMERLY KNOWN AS WESLEY-JESSEN HOLDING, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Predecessor's aggregate export sales, by geographic area, were as follows
(in thousands):
<TABLE>
<CAPTION>
PREDECESSOR
-------------------------
YEAR ENDED JANUARY 1,
DECEMBER 31, THROUGH
1994 JUNE 28,1995
------------ ------------
<S> <C> <C>
Europe.......................................... $ 2,332 $1,656
Asia Pacific.................................... 7,108 2,873
Latin America................................... 5,411 2,610
Africa and Middle East.......................... 3,368 488
------- ------
Total......................................... $18,219 $7,627
======= ======
</TABLE>
Financial information for the Company by geographic area is as follows (in
thousands):
<TABLE>
<CAPTION>
COMPANY
-------------------------
JUNE 29
THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
Total assets:
United States (including territories)......... $54,669 $104,220
Europe........................................ 8,609 62,509
Canada........................................ 4,052 4,576
Japan......................................... -- 7,271
Other......................................... -- 2,024
------- --------
Total assets................................ $67,330 $180,600
======= ========
Net sales:
United States (including territories)......... $49,198 $174,190
Europe........................................ 6,066 30,255
Canada........................................ 2,720 6,028
Japan......................................... -- 2,562
Other......................................... -- 2,274
Elimination................................... (3,669) (58,557)
------- --------
Net sales................................... $54,315 $156,752
======= ========
</TABLE>
The Company's aggregate export sales, by geographic area, were as follows (in
thousands):
<TABLE>
<CAPTION>
COMPANY
-------------------------
JUNE 29
THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
Europe.......................................... $ 1,559 $ 5,583
Asia Pacific.................................... 3,630 12,787
Latin America................................... 2,984 12,278
Africa and Middle East.......................... 1,933 3,287
------- -------
Total......................................... $10,106 $33,935
======= =======
</TABLE>
Transfer Pricing
Transfers among the Company's subsidiaries are at selling prices that
represent the selling subsidiary's cost plus a profit margin established by
management.
F-29
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 27,
ASSETS 1996 1997
------ ------------ -------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 7,073 $ 3,819
Accounts receivable--trade, net................... 38,869 45,888
Other receivables................................. 5,155 4,403
Inventories....................................... 69,139 44,286
Deferred income taxes............................. 20,119 17,490
Prepaid expenses.................................. 9,531 6,428
Assets held for sale.............................. 7,500 1,222
-------- --------
Total current assets............................ 157,386 123,536
-------- --------
Property, plant and equipment, net.................. 10,125 18,447
Other assets........................................ 1,346 6,981
Deferred income taxes............................... 4,227 15,023
Notes receivable.................................... -- 2,752
Capitalized financing fees, net..................... 7,516 2,790
-------- --------
Total assets.................................... $180,600 $169,529
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
<S> <C> <C>
Current liabilities:
Trade accounts payable............................ $ 12,434 $ 14,184
Accrued compensation and benefits................. 16,121 17,138
Accrued advertising............................... 3,751 4,625
Other accrued liabilities......................... 20,938 14,545
Transition reserve................................ 18,894 12,816
Income taxes payable.............................. 6,989 3,949
-------- --------
Total current liabilities....................... 79,127 67,257
-------- --------
Negative goodwill, net.............................. 10,577 13,955
Long term debt...................................... 102,975 58,000
Other liabilities................................... 1,213 1,832
-------- --------
Total liabilities............................... 193,892 141,044
-------- --------
Stockholders' equity (deficit):
Common stock, $.01 par value, 50,000,000 shares
authorized, 14,276,028 and 17,652,374 issued and
outstanding at December 31, 1996 and September
27, 1997, respectively........................... 143 177
Additional paid in capital........................ 7,654 55,184
Accumulated deficit............................... (22,457) (26,464)
Cumulative translation adjustment................. 1,368 (412)
-------- --------
Total stockholders' equity (deficit)............ (13,292) 28,485
-------- --------
Total liabilities and stockholders' equity
(deficit)...................................... $180,600 $169,529
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27,
1996 1997 1996 1997
------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales............... $ 33,651 $ 75,235 $ 96,048 $ 211,389
----------- ----------- ----------- -----------
Operating costs and
expenses:
Cost of goods sold.... 8,037 23,891 26,471 70,707
Cost of goods sold--
inventory step-up
(Note 4)............. -- -- 6,626 22,666
Marketing and
administrative....... 18,350 36,486 51,014 104,049
Research and
development.......... 1,481 3,065 3,786 8,828
Amortization of
negative goodwill.... (196) (196) (588) (588)
----------- ----------- ----------- -----------
Income from operations.. 5,979 11,989 8,739 5,727
Other (income) expense:
Interest income....... -- (221) -- (357)
Interest expense...... 747 1,462 2,757 4,728
Other income, net..... -- -- (3,500) --
----------- ----------- ----------- -----------
Income before income
taxes and extraordinary
loss................... 5,232 10,748 9,482 1,356
Income tax expense...... (895) (3,653) (1,621) (461)
----------- ----------- ----------- -----------
Net income before
extraordinary loss..... 4,337 7,095 7,861 895
Extraordinary loss, net
of related tax benefit
of $2,526.............. -- -- -- (4,902)
----------- ----------- ----------- -----------
Net income (loss)....... $ 4,337 $ 7,095 $ 7,861 $ (4,007)
=========== =========== =========== ===========
Primary net income per
common share
(Note 2):
Net income............ $ 0.36
===========
Weighted average
common shares used in
computation of
primary net income
per common share..... 19,796,144
===========
Pro forma primary net
income (loss) per
common share (Note 2):
Net income before
extraordinary loss... $ 0.30 $ 0.54 $ 0.05
=========== =========== ===========
Extraordinary loss,
net of tax benefit... $ -- $ -- $ (0.29)
=========== =========== ===========
Net income (loss)..... $ 0.30 $ 0.54 $ (0.24)
=========== =========== ===========
Weighted average
common shares used in
computation of pro
forma primary net
income (loss) per
common share......... 14,637,984 14,637,984 16,620,593
=========== =========== ===========
Pro forma fully diluted
net income per common
and common equivalent
share (Note 2):
Net income............ $ 0.26 $ 0.48
=========== ===========
Weighted average
common shares used in
computation of pro
forma fully diluted
net income per common
share................ 16,522,016 16,522,016
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------
SEPTEMBER 28, SEPTEMBER 27,
1996 1997
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows provided by operating activities:
Net income (loss)................................ $ 7,861 $ (4,007)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Extraordinary loss on early extinguishment of
debt.......................................... -- 7,428
Depreciation expense........................... 159 584
Purchased inventory step-up.................... 6,626 22,666
Amortization of capitalized financing fees..... 436 368
Amortization of negative goodwill.............. (588) (588)
Deferred income taxes.......................... (301) (5,195)
Other.......................................... (44) (1,778)
Changes in balance sheet items:
Accounts receivable--trade, net................ 2,463 (7,188)
Other receivables.............................. 420 (27)
Inventories.................................... 5,008 2,524
Prepaid expenses............................... (1,557) 261
Other assets................................... -- (362)
Notes receivable............................... -- (1,252)
Trade accounts payable......................... (3,788) 1,750
Accrued liabilities............................ 4,375 (11,346)
Other liabilities.............................. -- 632
Income taxes payable........................... 1,281 (3,040)
-------- --------
Cash provided by operating activities........ 22,351 1,430
-------- --------
Investing activities:
Proceeds from Natural Touch sale................. -- 6,000
Capital expenditures............................. (3,809) (11,801)
-------- --------
Cash used in investing activities............ (3,809) (5,801)
-------- --------
Financing activities:
Issuance of stock................................ 272 47,562
Proceeds from long term debt..................... -- 93,000
Payment of financing fees........................ -- (3,070)
Payments of long term debt....................... (13,500) (136,375)
-------- --------
Cash used in financing activities............ (13,228) 1,117
-------- --------
Net increase (decrease) in cash and cash
equivalents..................................... 5,314 (3,254)
Cash and cash equivalents:
Beginning of period.............................. 2,522 7,073
-------- --------
End of period.................................... $ 7,836 $ 3,819
======== ========
Supplemental disclosure of cash flow information
Cash paid during the period for interest......... $ 2,811 $ 5,220
======== ========
Cash paid during the period for income taxes,
net............................................. $ 641 $ 5,827
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CLASS L TOTAL
COMMON STOCK COMMON STOCK ADDITIONAL CUMULATIVE STOCKHOLDERS
---------------- ----------------- PAID IN ACCUMULATED TRANSLATION EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT (DEFICIT)
-------- ------ ---------- ------ ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 29,
1995................... -- $-- -- $-- $ -- $ -- $ -- $ --
Issuance of stock....... 429,177 4 3,862,604 39 7,739 -- -- 7,782
Stock subscription
receivable............. -- -- -- (1) (256) -- -- (257)
Net loss................ -- -- -- -- -- (19,715) -- (19,715)
-------- ---- ---------- ---- ------- -------- ------ -------
Balance at December 31,
1995................... 429,177 4 3,862,604 38 7,483 (19,715) -- (12,190)
Issuance of stock....... 823 -- 7,396 -- 15 -- -- 15
Stock subscription
receivable............. -- -- -- 1 256 -- -- 257
Currency translation
adjustment............. -- -- -- -- -- -- 1,368 1,368
Net loss................ -- -- -- -- -- (2,742) -- (2,742)
Exchange of stock....... (108,933) (1) 220,582 2 -- -- -- 1
Retroactive effect of
February 12, 1997
Class L Common Stock
Reclassification....... (321,067) (3) 1,460,517 15 -- -- -- 12
Retroactive effect of
February 12, 1997
Common Stock split..... -- -- 8,724,929 87 (100) -- -- (13)
-------- ---- ---------- ---- ------- -------- ------ -------
Balance at December 31,
1996................... -- -- 14,276,028 143 7,654 (22,457) 1,368 (13,292)
Issuance of stock
(unaudited)............ -- -- 3,376,346 34 47,273 -- -- 47,307
Stock compensation
(unaudited)............ -- -- -- -- 257 -- -- 257
Currency translation
adjustment (unaudited). -- -- -- -- -- -- (1,780) (1,780)
Net loss (unaudited).... -- -- -- -- -- (4,007) -- (4,007)
-------- ---- ---------- ---- ------- -------- ------ -------
Balance at September 27,
1997 (unaudited)....... -- -- 17,652,374 $177 $55,184 $(26,464) $ (412) $28,485
======== ==== ========== ==== ======= ======== ====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements
F-33
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of business
The Company's primary business activity is the research, development,
manufacture, marketing and sale of conventional and disposable soft contact
lenses in the United States and certain other countries. The Company is
headquartered in Des Plaines, Illinois and operates in one business segment.
Basis of presentation
The consolidated financial statements of the Company include the accounts of
Wesley Jessen VisionCare, Inc. (formerly known as Wesley-Jessen Holding, Inc.)
its wholly owned subsidiary, Wesley-Jessen Corporation, and Wesley-Jessen
Corporation's wholly owned subsidiaries (collectively, the "Company"). All
significant intercompany transactions have been eliminated.
The unaudited financial information presented reflects all adjustments which
are, in the opinion of management, necessary for a fair presentation of the
consolidated financial statements for an interim period. All such adjustments
are of a normal, recurring nature. Results of operations for an interim period
are not necessarily indicative of results for the full year. These interim
financial statements should be read in conjunction with the financial
statements and related notes contained in the Special Financial Report on Form
10-K filed pursuant to Rule 15d-2 for the year ended December 31, 1996.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
period. Actual results could differ from those estimates.
The IPO
In February, 1997, the Company completed an initial public offering of
2,821,000 shares of common stock at a price of $15.00 per share (the "IPO").
Additionally, the Company refinanced its remaining bank indebtedness through
borrowings under a new credit agreement (the "Bank Credit Agreement"). The IPO
and the refinancing are collectively referred to herein as the "IPO
Transactions".
Prior to the IPO, the Company had two classes of issued and outstanding
stock, the Class L common stock, (the "Class L Common") and the common stock,
which were identical except that each share of Class L Common was entitled to
a preferential payment (the "Preference Amount") upon any distribution by the
Company to holders of its capital stock (whether by dividend, liquidating
distribution or otherwise) equal to the original cost of such share ($17.41)
plus an amount which accrued on a daily basis at a rate of 12.5% per annum on
such cost and on the amount so accrued in prior quarters. As of February 12,
1997, the Preference Amount was $21.24 per share of Class L Common issued at
the time of the Wesley Jessen Acquisition. Prior to the completion of the IPO,
all of the outstanding shares of Class L Common were reclassified pursuant to
the terms of the Company's amended and restated Certificate of Incorporation
into shares of common stock (the "Reclassification") and a 3.133-for-one stock
split was effected as to all of the then outstanding shares of common stock
(the "Split"). In connection with the Reclassification (prior to the Split),
each outstanding share of Class L Common was reclassified into one share of
common stock plus an additional number of shares having a value, based on the
offering price, equal to the Preference Amount as of February 12, 1997. For
balance sheet presentation purposes the Reclassification and the Split have
been given effect as if they had occurred on December 31, 1996 and all share
and per share data have been restated.
F-34
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
The Offering
In August, 1997, the Company completed a public offering of 4,000,000 shares
of common stock at a selling price of $23.50 per share (the "Offering"). Of
the 4,000,000 shares, 500,000 shares were offered by the Company and the
remaining 3,500,000 shares were offered by certain selling stockholders. On
September 24, 1997, the underwriters exercised their option to purchase an
additional 341,040 shares from certain selling stockholders to cover over-
allotments.
Net proceeds received by the Company, after deducting underwriting discounts
and commissions and offering expenses, were used to repay the "Pilkington
Note" (Note 6) and to reduce the Company's indebtedness under the Bank Credit
Agreement. In connection with the Offering, the Company amended its Bank
Credit Agreement (Note 6).
2. NET INCOME (LOSS) PER SHARE
Pro forma primary and fully diluted net income (loss) per share were
calculated by dividing net income (loss) by the pro forma weighted average
common and common equivalent shares outstanding after giving retroactive
effect to the Wesley Jessen Acquisition, the Reclassification and the Split.
Additionally, in accordance with the Securities and Exchange Commission Staff
Accounting Bulletin No. 83, using the treasury stock method, 361,956 shares
have been included in the calculation of common stock equivalent shares for
pro forma primary net income (loss) per share as if they were outstanding for
the three and nine months ended September 28, 1996. For purposes of pro forma
fully diluted net income per share, all share options with exercise prices
below the initial public offering price have been included, using the treasury
stock method. Fully diluted per share amounts are not applicable for loss
periods.
Primary net loss per share for the nine months ended September 27, 1997 has
been calculated by dividing the net loss by the weighted average common shares
outstanding for the period. Common share equivalents have been excluded
because their effect is not dilutive.
The net proceeds from the IPO and the Offering were used by the Company to
retire indebtedness existing under its credit agreement (Note 6). Supplemental
pro forma net loss per share is ($0.19) for the nine months ended September
27, 1997; the number of shares of common stock whose proceeds are deemed to be
used to retire debt is 3,321,000. This calculation assumes the debt retirement
had taken place at the later of the beginning of the respective period or the
issuance of the debt. The amount of interest expense eliminated, net of income
tax effects, is $0.6 million for the nine months ended September 27, 1997.
3. ACQUISITIONS
Effective June 29, 1995, Wesley-Jessen Corporation completed the acquisition
(the "Wesley Jessen Acquisition") of the Wesley-Jessen contact lens business
of Schering-Plough Corporation for a total purchase price of $76.6 million,
consisting of cash paid of $47.0 million and liabilities assumed of $29.6
million. The Wesley Jessen Acquisition was financed by $43.0 million of bank
debt and $7.5 million of proceeds from the issuance of the Company's common
stock.
On October 2, 1996, the Company acquired the contact lens business of the
Barnes-Hind division of Pilkington plc ("the Barnes-Hind Acquisition").
Aggregate consideration of $62.4 million for the acquisition was comprised of
$57.4 million in cash and a $5.0 million subordinated promissory note (Note
6). The cash portion of the purchase was financed by the proceeds from the
Barnes-Hind Acquisition Financing (Note 6). The purchase method of accounting
was used to record the acquisition. The financial statements presented herein
reflect the allocation of the purchase price to the acquired assets and
liabilities based on their estimated fair values. The results of the
operations of the acquired company have been included in the results of
operations of the Company since the acquisition date.
F-35
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
In September, 1997, the Company negotiated a purchase price reduction of
$1.6 million with Pilkington plc based upon specific net current asset
measures as of the closing date of the acquisition. As a result, the purchase
price of Barnes-Hind, after taking into consideration additional acquisition
related fees and expenses, decreased by $0.1 million. Additionally, certain
pension valuations associated with the Barnes-Hind employees were completed in
the third quarter of 1997. Management also has revised the operational details
and related cost estimates of its plans to integrate Barnes-Hind operations.
These changes in estimates used in the initial purchase accounting resulted in
recognition of negative goodwill of $4.0 million, which will be amortized to
income through June 2010.
In connection with the Barnes-Hind Acquisition, the Company entered into a
voluntary consent order with the Federal Trade Commission which provides,
among other things, that the Company must divest Barnes-Hind's U.S. Natural
Touch product line. On March 17, 1997, the Company completed the sale of the
product line for which, under the agreement, it received aggregate
consideration of $7.5 million, consisting of $3.0 million in cash and a four-
year, $4.5 million promissory note. The promissory note accrues compounded
interest at a rate of 12% per annum, 8% of which is paid currently and 4% of
which is payable at the maturity of the note in 2001. As part of the
agreement, the Company has entered into a supply agreement pursuant to which
the Company will supply the purchaser with Natural Touch lenses for sale in
the United States. The purchase accounting for the Barnes-Hind Acquisition
included the expected effects of the divestiture and has been reflected such
that no gain or loss resulted from the divestiture.
On July 31, 1997, the purchaser made a voluntary prepayment of $3.0 million
plus accrued interest on the promissory note.
Pro forma results
The unaudited pro forma results of the operations of the Company for the
nine months ended September 28, 1996 are set forth below, giving pro forma
effect to the following: (i) the Barnes-Hind Acquisition; (ii) the Barnes-Hind
Acquisition Financing described in Note 6; (iii) the estimated recurring cost
savings to the Company from facilities and personnel rationalizations; (iv)
elimination of non-recurring increases to cost of goods sold as a result of
applying purchase accounting to inventories following the Wesley Jessen
Acquisition and the Barnes-Hind Acquisition; (v) the divestiture of Barnes-
Hind's U.S. Natural Touch product line; and (vi) adjusting the income tax
(expense) benefit to an assumed effective rate of 34%, each as if the
transactions had occurred as of January 1, 1996 (in thousands, except share
and per share data):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 28, 1996
------------------
<S> <C>
Net sales............................................. $ 189,979
==========
Net income............................................ $ 9,691
==========
Pro forma net income per common and common equivalent
share................................................ $ 0.59
==========
Weighted average shares used in computation of pro
forma income per common and common equivalent share.. 16,522,016
==========
</TABLE>
The pro forma results are not necessarily indicative of what actually would
have occurred if the Barnes-Hind Acquisition had been in effect for the period
presented and are not intended to be a projection of future results, which are
dependent on the ability of the Company to accomplish its objectives in
connection with the Barnes-Hind Acquisition. The future success of the Barnes-
Hind
F-36
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
Acquisition and its effect on the financial operating results of the Company
will depend in large part on the ability of management to integrate the
Barnes-Hind manufacturing, sales and marketing and administrative functions
into the Wesley Jessen operations and achieve the cost savings expected to
result from the acquisition-integration measures adopted by the Company.
4. COMPONENTS OF CERTAIN BALANCE SHEET ACCOUNTS
Accounts receivable-trade, net
Accounts receivable-trade, net consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 27,
1996 1997
------------ -------------
<S> <C> <C>
Accounts receivable--trade..................... $ 56,480 $ 65,733
Less allowances:
Doubtful accounts............................ (6,989) (8,013)
Sales returns and adjustments................ (10,622) (11,832)
-------- --------
Accounts receivable--trade, net................ $ 38,869 $ 45,888
======== ========
</TABLE>
Inventories
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 27,
1996 1997
------------ -------------
<S> <C> <C>
Raw materials.................................. $ 6,073 $ 4,267
Work-in-process................................ 8,958 7,795
Finished goods................................. 54,108 32,224
------- -------
Total........................................ $69,139 $44,286
======= =======
</TABLE>
In connection with the Wesley Jessen Acquisition and the Barnes-Hind
Acquisition, under the purchase method of accounting, the Company's total
inventories were written up $40.6 million and $36.7 million, respectively, to
fair value at the date of acquisition. Of these amounts $22.7 million and $6.6
million were charged to cost of goods sold during the nine months ended
September 27, 1997 and September 28, 1996, respectively.
Property, plant and equipment, net
Property, plant and equipment, net, consists of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 27,
1996 1997
------------ -------------
<S> <C> <C>
Building and improvements...................... $ 1,230 $ 4,382
Machinery, equipment, furniture and fixtures... 6,257 9,504
Construction-in-progress....................... 3,034 5,539
------- -------
10,521 19,425
Less: accumulated depreciation................. (396) (978)
------- -------
Property, plant and equipment, net............. $10,125 $18,447
======= =======
</TABLE>
5. TRANSITION AND RESTRUCTURING RESERVES
In connection with the Barnes-Hind Acquisition, management approved a
transition plan to integrate the acquired operations, for which an accrual of
$20.4 million (transition reserve) was established in purchase accounting.
Costs associated with the transition plan are comprised of facility and
employee
F-37
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
termination costs related to the closure of the Barnes-Hind corporate offices
in Sunnyvale, California which was completed during the third quarter of 1997.
In addition, management plans to curtail certain manufacturing activities in
San Diego, California which will include reductions in both manufacturing and
administrative functions. These activities will be transferred to other
Company locations. Payments related to the transition for the nine months
ended September 27, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
EMPLOYEE LEASE FACILITY
RELATED TERMINATION RESTORATION &
COSTS COSTS OTHER COSTS TOTAL
-------- ----------- ------------- -------
<S> <C> <C> <C> <C>
Transition reserve at
December 31, 1996............ $15,623 $2,020 $1,251 $18,894
Charges against the reserve... 4,967 895 216 6,078
------- ------ ------ -------
Transition reserve at
September 27, 1997........... $10,656 $1,125 $1,035 $12,816
======= ====== ====== =======
</TABLE>
In addition to the transition plan, the Company committed to a plan to
restructure the Wesley Jessen operations following the Barnes-Hind
Acquisition, resulting in a charge of $3.4 million in the fourth quarter of
1996 (restructuring reserve). Pursuant to the restructuring plan, the Chicago
distribution facilities were consolidated with those in Des Plaines, Illinois
in October 1997. The restructuring reserve, totaling $3.1 million at September
27, 1997, consists of costs related to the shutdown of the Chicago
distribution facility and employee termination, lease termination and other
restructuring costs associated with consolidation of the Company's European
facilities with those facilities acquired in the Barnes-Hind Acquisition.
Usage of the restructuring reserve for the nine months ended September 27,
1997 is as follows (in thousands):
<TABLE>
<CAPTION>
EMPLOYEE LEASE
RELATED TERMINATION
COSTS COSTS OTHER COSTS TOTAL
-------- ----------- ----------- ------
<S> <C> <C> <C> <C>
Restructuring reserve at
December 31, 1996............... $813 $897 $1,690 $3,400
Charges against the reserve...... 295 5 6 306
---- ---- ------ ------
Restructuring reserve at
September 27, 1997.............. $518 $892 $1,684 $3,094
==== ==== ====== ======
</TABLE>
6. LONG-TERM DEBT
Barnes-Hind Acquisition Financing
On October 2, 1996, in connection with the Barnes-Hind Acquisition, the
Company replaced its long-term borrowing arrangement with the following credit
facilities (the "1996 Credit Agreement"):
$45 million revolving credit facility due February 28, 2002
$45 million Term Loan A due February 28, 2002
$50 million Term Loan B due February 29, 2004
In connection with the refinancing, the Company incurred and capitalized
financing fees of approximately $7.8 million, which were being amortized over
the term of the 1996 Credit Agreement.
Additionally, as part of the consideration paid for the Barnes-Hind
Acquisition, the Company entered into a $5.0 million promissory note with
Pilkington plc (the "Pilkington Note") with an interest rate of 8.0%
compounded annually and payable at maturity. The note was to mature on
February 1, 2005, subject to certain acceleration provisions. In September,
1997, the note was reduced by $1.6 million, based on purchase price
negotiations, and the remaining principal was repaid.
F-38
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
Initial Public Offering Refinancing
On February 19, 1997, in connection with the IPO, the Company replaced its
long term borrowing arrangements with the following credit facilities (the
"Bank Credit Agreement"):
$35 million revolving loan facility due February 19, 2002
$65 million Term Loan A due February 19, 2002
In connection with the refinancing, the Company recognized an extraordinary
loss of $7.4 million ($4.9 million, net of income tax benefits), relating to
the write-off of capitalized financing fees incurred in connection with the
Barnes-Hind Acquisition Financing. Additionally, the Company incurred and
capitalized financing fees of approximately $2.5 million, which were being
amortized over the term of the Bank Credit Agreement.
On September 10, 1997, in connection with the Offering, the Bank Credit
Agreement was amended to consist of a $135.0 million revolving loan facility
(the "Amended Bank Credit Agreement"), the availability of which will be
reduced by $20.0 million on September 11, 2000 and $20.0 million on September
11, 2001. The facility matures on September 11, 2002.
An additional $0.6 million of financing fees were incurred and capitalized.
Capitalized fees of $2.8 will be amortized over the term of the Amended Bank
Credit Agreement.
Amounts borrowed under the Amended Bank Credit Agreement bear interest at
either Base Rate (higher of (i) 0.5% in excess of the Federal Reserve reported
adjusted certificate of deposit rate and (ii) the lender's prime lending rate
plus a margin up to 0.5% based on leverage ratios calculated as of certain
dates) or the Eurodollar Rate as determined by the lenders plus a margin of
0.375% to 1.500% based on the type of loan and leverage ratios calculated as
of certain dates as defined in the credit agreement. Additionally, the Company
is required to pay a commitment fee on the unutilized revolving loan
commitments ranging from 0.175% to 0.400% based on leverage ratios calculated
as of certain dates. The unutilized portion of the revolving credit facilities
at September 27, 1997 was $77.0 million. The credit facilities are guaranteed
by each of its domestic subsidiaries and secured by essentially all assets of
the domestic subsidiaries.
The Bank Credit Agreement contains a number of covenants restricting the
Company and its subsidiaries with respect to the incurrence of indebtedness,
the creation of liens, the consummation of certain transactions such as sales
of substantial assets, mergers or consolidations, the making of certain
investments, capital expenditures, and payment of dividends. In addition, the
Company is required to maintain certain financial covenants and ratios.
Interest Rate Instrument
The company has purchased an interest rate cap on $35.0 million notional
principal amount at 8.5%, which expires on December 31, 1999. The cap
purchased is intended to provide partial protection to the Company from
exposure relating to its variable rate debt instruments in the event a higher
floating interest rate scenario is encountered during a period.
7. RELATED PARTY TRANSACTION
On May 7, 1997, Wesley Jessen Corporation, a wholly owned subsidiary of the
Company, loaned the Company's Chief Executive Officer ("CEO") $1.2 million, in
exchange for an unsecured promissory note bearing interest at the rate of 8%,
interest payable quarterly. The note is due at the earlier of (i) May 9, 2002,
(ii) the date the CEO ceases to be employed by the Company, or (iii) the date
the CEO disposes of any of his common stock holdings in the company. For
purposes of the Offering (Note 1), the Company waived the requirement that Mr.
Ryan repay such loan pursuant to clause (iii) above.
F-39
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders, Pilkington Barnes Hind Group:
We have audited the accompanying combined balance sheets of Pilkington
Barnes Hind Group as of March 31, 1995 and 1996, and the related combined
statements of operations, parent company investment and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Pilkington Barnes
Hind Group as of March 31, 1995 and 1996, and the results of its combined
operations and its combined cash flows for each of the years then ended, in
conformity with generally accepted accounting principles in the United States.
The accompanying combined financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the financial statements, the Company has suffered recurring losses from
operations that raises substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also
described in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
As discussed in Note 16 to the financial statements, an agreement was
entered into in July 1996, where certain assets and liabilities of the Company
will be sold.
Coopers & Lybrand L.L.P.
San Jose, California
July 26, 1996, except as to Note 16,
which is as of September 24, 1996
F-40
<PAGE>
PILKINGTON BARNES HIND GROUP
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
--------------------
1995 1996
--------- ---------
(IN THOUSANDS OF
U.S. DOLLARS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 12,810 $ 14,958
Trade accounts receivable, less allowance for doubtful
accounts of $1,902 in 1995 and $1,671 in 1996........... 21,882 26,207
Receivables from affiliated companies.................... 147 67
Inventories.............................................. 38,139 30,128
Prepaids and other current assets........................ 3,423 4,821
Deferred income taxes.................................... 35 306
--------- ---------
Total current assets.................................... 76,436 76,487
Property, plant and equipment, net........................ 25,039 33,346
Other assets.............................................. 838 2,351
--------- ---------
Total assets............................................ $ 102,313 $ 112,184
========= =========
LIABILITIES AND PARENT COMPANY INVESTMENT
Current liabilities:
Notes payable to banks................................... $ 2,974 $ 963
Accounts payable:
Trade.................................................... 9,963 6,736
Affiliates............................................... 758 331
Notes payable to parent and affiliated companies......... 83,317 4,108
Accrued liabilities...................................... 8,846 8,128
Accrued payroll and related liabilities.................. 5,961 6,422
Deferred income taxes.................................... 459 1,748
Dividends payable........................................ 522 4,542
--------- ---------
Total current liabilities............................... 112,800 32,978
Long-term debt, due to affiliated companies............... 4,577 5,343
Other liabilities......................................... 3,674 3,183
--------- ---------
Total liabilities....................................... 121,051 41,504
--------- ---------
Commitments and contingencies (Notes 11 and 12).
Parent company investment (deficit)....................... (18,738) 70,680
--------- ---------
Total liabilities and parent company investment......... $ 102,313 $ 112,184
========= =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-41
<PAGE>
PILKINGTON BARNES HIND GROUP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------
1995 1996
---------- ----------
(IN THOUSANDS OF
U.S. DOLLARS)
<S> <C> <C>
Net sales............................................... $ 124,994 $ 132,581
---------- ----------
Costs and expenses:
Cost of sales......................................... 62,435 63,341
Research and development.............................. 10,317 7,884
Selling and marketing................................. 37,609 43,292
General and administrative............................ 21,516 22,536
---------- ----------
131,877 137,053
---------- ----------
Operating loss.......................................... 6,883 4,472
Interest income......................................... (615) (773)
Interest expense........................................ 4,623 4,315
---------- ----------
Loss before provision for income taxes.................. 10,891 8,014
Provision for income taxes.............................. 2,708 3,116
---------- ----------
Net loss................................................ $ 13,599 $ 11,130
========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-42
<PAGE>
PILKINGTON BARNES HIND GROUP
COMBINED STATEMENTS OF PARENT COMPANY INVESTMENT
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<S> <C>
BALANCES, APRIL 1, 1994.............................................. $ (15,710)
Net loss............................................................. (13,599)
Net change in cumulative translation adjustments..................... 617
Dividends declared................................................... (820)
Net change in parent company investment.............................. 10,774
---------
Balances, March 31, 1995............................................. (18,738)
Net loss............................................................. (11,130)
Net change in cumulative translation adjustments..................... (4,020)
Dividends declared................................................... (4,542)
Net change in parent company investment.............................. 109,110
---------
Balances, March 31, 1996............................................. $ 70,680
=========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-43
<PAGE>
PILKINGTON BARNES HIND GROUP
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------
1995 1996
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................ $ (13,599) $ (11,130)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation........................................ 6,749 4,017
Provision for excess and obsolete inventory......... 3,048 1,891
Provision for doubtful accounts..................... 359 972
Increase in net deferred taxes...................... 383 1,109
(Gain) loss on disposal/sale of property, plant and
equipment.......................................... 29 (230)
Changes in assets and liabilities:
Accounts receivable--trade.......................... (910) (6,034)
Accounts receivable--affiliate...................... 4,424 9,434
Inventories......................................... (1,842) 5,287
Prepaids and other current assets................... 855 (1,513)
Other assets........................................ (123) (1,598)
Accounts payable--trade............................. (1,068) (2,964)
Accounts payable--affiliated companies.............. 572 (411)
Accrued and other current liabilities............... (234) 110
Other long-term liabilities......................... 937 (220)
---------- ----------
Net cash used in operating activities............. (420) (1,280)
---------- ----------
Cash flows from investing activities:
Capital expenditures................................ (12,899) (13,572)
Proceeds from sale of fixed assets.................. 28 974
---------- ----------
Net cash used in investing activities............. (12,871) (12,598)
---------- ----------
Cash flows from financing activities:
Net receipts (payments) under notes payable to
banks.............................................. 138 (1,923)
Decrease (increase) in notes payable to parent and
affiliated companies............................... 10,765 (69,031)
Borrowings on long-term debt due to affiliated
companies.......................................... 2,047 1,096
Cash infusions from parent and affiliated companies. 90,579
Dividends paid to parent............................ (427) (498)
Net change in parent company investment............. 6,334 (3,780)
---------- ----------
Net cash provided by financing activities........... 18,857 16,443
---------- ----------
Effect of exchange rate changes on cash and cash
equivalents.......................................... 988 (417)
---------- ----------
Net increase in cash and cash equivalents............. 6,554 2,148
Cash and cash equivalents at beginning of year........ 6,256 12,810
---------- ----------
Cash and cash equivalents at end of year.............. $ 12,810 $ 14,958
========== ==========
Supplemental disclosures of cash flow information:
Interest paid....................................... $ 4,623 $ 4,315
========== ==========
Taxes paid.......................................... $ 218 $ 643
========== ==========
Supplemental disclosures of noncash financing
activities:
Dividends declared but not paid..................... $ 457 $ 4,558
========== ==========
Affiliated debt converted to parent company
investment......................................... $ 7,695
==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-44
<PAGE>
PILKINGTON BARNES HIND GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(IN THOUSANDS OF U.S. DOLLARS)
1. BASIS OF PRESENTATION:
Pilkington Barnes Hind Group (the Company) is a leading supplier of contact
lenses throughout the world. The Company is headquartered in Sunnyvale,
California with principal manufacturing sites in Southampton, England and San
Diego, California. The Company's contact lenses are sold directly in the U.S.,
Canada, most of Europe, Japan and Australia. Sales through distributors extend
the geographic coverage to Asia, Latin America, the Middle East, Africa and
European territories not served by direct sales.
The accompanying combined financial statements present the combined assets,
liabilities, revenues and expenses of all contact lens manufacturing and
distribution operations of Pilkington Barnes Hind Group, a vision care
division of Pilkington plc (Pilkington). The ultimate holding company,
Pilkington, is listed on the United Kingdom stock exchange. All significant
transactions between operations within the Company have been eliminated.
These combined financial statements are presented as if the Company existed
as a separate entity for the years presented. These combined financial
statements are presented exclusive of two other divisions of the Company which
were sold during the year ended March 31, 1996. These divisions (contact lens
solutions and contact lens raw materials manufacturing) have been excluded in
order to reflect the financial position and results of operations of the
contact lens manufacturing and distribution operations only.
Revenues, expenses, assets and liabilities that are specifically identified
as relating to the two other divisions have been excluded. Where revenues,
expenses, assets and liabilities could not be specifically identified,
estimates of amounts to be excluded have been made based on the activity of
the respective lines of business, which management believes to be reasonable.
These combined financial statements include transactions with Pilkington for
treasury functions, tax services, internal audit services, risk management
services, research and development, and travel (see Note 14). In addition, in
fiscal 1995 and 1996, certain costs shared with other Pilkington U.S. entities
have been allocated to the Company. Shared costs have been allocated based
upon usage, number of employees and other methods which management believes to
be reasonable.
The financial information included herein may not necessarily reflect the
financial position, results of operations or cash flows of the Company in the
future or what the financial position, results of operations or cash flow of
the Company would have been if it was a separate, stand-alone company during
the periods presented. However, management believes that, with respect to
general and administrative expenses, the amounts reflected in the combined
statements of operations are not less than the amounts the Company would have
incurred had the Company been an unaffiliated company in those periods.
The Company relies substantially on the financial support of Pilkington,
which has historically provided funding to the Company, if required, to
sustain business operations. Such support has, to date, been provided in the
form of cash investments and forgiveness of payables and intercompany debt;
however, continued support cannot be guaranteed (see Note 16).
As shown in the accompanying financial statements, the Company incurred a
net loss of $13,599 and $11,130 for the years ended March 31, 1995 and 1996,
respectively. Factors such as the recurring losses suffered by the Company,
the requirement for the ongoing support of Pilkington and the pending sale of
the Company (see Note 16), among others, raise substantial doubt about its
ability to continue as a going concern. Recoverability of a part of the
recorded asset amounts shown in the accompanying balance sheet
F-45
<PAGE>
PILKINGTON BARNES HIND GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
is dependent upon continued profitable operations and the ability to obtain
required working capital to fund operations. The financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts and the amount and classification of liabilities that
might be necessary should the Company be unable to continue in existence.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents:
Cash and cash equivalents, which are held at a variety of financial
institutions located in the United States, Europe and Asia, consist primarily
of short-term investments with a maturity of three months or less when
purchased, carried at cost which approximates market. Deposits in banks may
exceed the amount of insurance provided on such deposits. The Company has not
experienced any material losses relating to any investment instruments.
Fair Value of Financial Instruments:
The amounts reported for cash equivalents, accounts receivable, accounts
payable and accrued liabilities are considered to approximate fair values
based on comparable market information available at March 31, 1996. Based upon
interest rates available to the Company for debt with comparable maturities,
the carrying values of the Company's notes payable approximate fair values.
Financial instruments which potentially subject the Company to
concentrations of credit risk comprise, principally, cash, cash equivalents
and accounts receivables. The Company invests its cash in government
securities and time deposits. The Company performs ongoing evaluations of its
customers' financial condition and does not require collateral. The Company
maintains allowances for potential credit losses and such losses have been
within management's expectations.
Inventories:
Inventories are stated at the lower of standard cost (which approximates
actual cost on the first-in, first-out basis) or market. Inventories have been
reduced to what management believes are levels appropriate for the current
level of sales. Management has developed a program to reduce inventory to
desired levels over the near term and believes no material loss will be
incurred on its disposition. No estimate can be made of a range of amounts of
loss that are reasonably possible should the program not be successful.
Management Estimates:
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Property, Plant and Equipment:
Property, plant and equipment are stated at cost and are depreciated on a
straight-line basis over the estimated useful lives of the related assets
(buildings--10 to 40 years; plant and office equipment--3 to
F-46
<PAGE>
PILKINGTON BARNES HIND GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
10 years). Leasehold improvements and leased equipment are amortized over the
lesser of their useful lives or the remaining term of the related leases.
Upon sale or retirement, the costs and related accumulated depreciation are
eliminated from the respective accounts and the resulting gain or loss is
included in current income. Repairs and maintenance are charged to expense as
incurred.
Foreign Currency Translation:
The assets and liabilities, and revenue and expense accounts of the
Company's foreign subsidiaries have been translated using the exchange rate at
the balance sheet date, and the weighted average exchange rate for the period,
respectively.
The net effect of the translation of the accounts of the Company's
subsidiaries has been included in parent company investment as cumulative
foreign currency translation adjustments. Gains or losses that arise from
exchange rate changes on transactions denominated in a currency other than the
local currency are included in income as incurred.
Revenue Recognition:
Sales and related cost of sales are recognized upon shipment of product. No
individual customer accounts for more than 10% of sales. Sales are reported
net of a provision for estimated product returns and warranty reserves.
Income Taxes:
Income taxes have been provided in the Company's statements of income as if
the Company were a separate taxable entity and no recognition has been given
to tax attributes available to other members of the Pilkington consolidated
group or the Company's other divisions. Temporary and permanent differences
related to the Company's contact lens business have been allocated in
accordance with the methodology used for determining revenues, expenses,
assets and liabilities, as described in Note 1.
Where amounts paid to other Pilkington entities pursuant to a tax sharing
agreement were different from the computed current tax expense, the difference
has been treated as an addition to or deduction from parent company
investment. The current tax expense calculated for subsidiaries that did not
enter into a tax sharing agreement has been treated as an addition to parent
company investment.
Advertising:
The Company expenses advertising costs as they are incurred. Advertising
expense for the years ended March 31, 1995 and 1996 was $1,741 and $4,775,
respectively.
Recent Pronouncements:
In March 1995, the Financial Accounting Standards Board issued Statement No.
121 (SFAS No. 121), "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of," which establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles and goodwill related to those assets which are held and used or
disposed of. SFAS No. 121 will be effective for fiscal years beginning after
December 15, 1995. The Company does not anticipate that the adoption of SFAS
No. 121 will have a material adverse effect on the Company's results of
operations.
F-47
<PAGE>
PILKINGTON BARNES HIND GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
3. INVENTORIES:
<TABLE>
<CAPTION>
MARCH 31,
---------------
1995 1996
------- -------
<S> <C> <C>
Raw materials................................................... $ 1,589 $ 1,733
Work in process................................................. 5,645 4,789
Finished goods.................................................. 30,905 23,606
------- -------
$38,139 $30,128
======= =======
</TABLE>
Inventories are stated net of reserves of $6,787 and $4,915 at March 31,
1995 and 1996, respectively.
4. PROPERTY, PLANT AND EQUIPMENT:
<TABLE>
<CAPTION>
MARCH 31,
------------------
1995 1996
-------- --------
<S> <C> <C>
Buildings................................................... $ 8,224 $ 1,645
Leasehold improvements...................................... 9,949 10,880
Machinery................................................... 40,780 47,486
Office equipment and software............................... 11,182 11,579
-------- --------
70,135 71,590
Less accumulated depreciation and amortization.............. (56,164) (51,773)
-------- --------
13,971 19,817
Land........................................................ 4,585 4,510
Construction in progress.................................... 6,483 9,019
-------- --------
$ 25,039 $ 33,346
======== ========
</TABLE>
At March 31, 1995 and 1996, machinery and office equipment included assets
acquired under capital leases with a capitalized cost of $2,777 and $2,617,
respectively. Related accumulated amortization totaled $566 and $979,
respectively. Interest totaling $344 and $527 was capitalized during fiscal
1995 and 1996, respectively. Fully depreciated assets were $34,164 and $33,306
at March 31, 1995 and 1996, respectively.
5. CAPITAL LEASE OBLIGATIONS:
At March 31, 1996, future minimum lease payments under capital lease
obligations are summarized as follows:
<TABLE>
<CAPTION>
PERIOD ENDING MARCH 31,
-----------------------
<S> <C>
1997................................................................... $ 797
1998................................................................... 651
1999................................................................... 401
------
Total minimum lease payments........................................... 1,849
Less amount representing interest...................................... (133)
------
Present value of future minimum lease payments......................... 1,716
Less current portion................................................... (726)
------
Long-term capital lease obligation..................................... $ 990
======
</TABLE>
F-48
<PAGE>
PILKINGTON BARNES HIND GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
6. SHORT-TERM BORROWING AGREEMENTS:
Lines of credit for short-term borrowings have been established with banks
in the United States, Canada, Italy, and the United Kingdom. The agreements
generally have no termination date but are reviewed annually for renewal. At
March 31, 1995, the Company had an outstanding balance of $2,974 and an unused
line of credit amounting to $2,799. At March 31, 1996, the Company had an
outstanding balance of $963 and unused lines of credit amounting to $3,841.
Short-term borrowing arrangements have also been made with affiliated
Pilkington Group Companies. At March 31, 1995, the Company had an outstanding
balance of $83,317 and unused credit lines of $4,851. At March 31, 1996, the
Company had an outstanding balance of $4,108 and unused credit lines of
$56,029 (see Note 14).
Included in the outstanding balance at March 31, 1995 was $8,040 of
noninterest bearing debt from an affiliated company. In October 1995, this
amount was converted to Parent Company Investment (see Note 14).
The weighted average interest rate was 6.8% and 7.10% at March 31, 1995 and
1996, respectively. Interest rates are generally based upon U.K. prime rates
or the London Inter Bank Offering Rate plus up to a 1% premium.
7. LONG-TERM DEBT, AFFILIATED COMPANIES:
<TABLE>
<CAPTION>
MARCH 31,
1996
---------
<S> <C>
Loan with Pilkington Finance Limited, interest at 6.75% payable
quarterly, due at June 30, 1997..................................... $5,343
======
</TABLE>
8. DEFINED CONTRIBUTION PENSION PLAN:
The Company sponsors a defined contribution plan covering U.S. employees.
The plan provides for limited Company matching of participants' contributions.
Contributions to the defined contribution plans charged to operations were
$739 and $679 for the years ended March 31, 1995 and 1996, respectively.
9. DEFINED BENEFIT PENSION PLANS:
The Company participates in a noncontributory Pilkington single-employer
defined benefit pension plan (Domestic Pension Plan) in the United States
covering substantially all full-time domestic employees, as well as a
contributory single-employer defined benefit pension plan covering certain
employees in the United Kingdom (International Pension Plan).
Benefit payments for domestic employees are based principally on earnings
during the last five- or ten-year period prior to retirement and/or on length
of service. Employees are eligible to participate in domestic plans within one
year of employment and are vested after five years of service. For the
International Pension Plan, benefits are based on length of service and on
compensation during the last ten years of service prior to retirement.
The Company's policy is to fund such amounts as are necessary, on an
actuarial basis, to provide for the plans' current service costs and the
plans' prior service costs over their amortization periods.
F-49
<PAGE>
PILKINGTON BARNES HIND GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
The following table provides the net periodic pension cost of the Pilkington
Domestic Pension Plan and the Company's International Pension Plan.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------
1995 1996
---------- ----------
<S> <C> <C>
DOMESTIC PENSION PLAN:
Service cost-benefits earned during the period.......... $ 1,738 $ 1,460
Interest cost on projected benefit obligation........... 2,702 2,762
Actual return on plan assets............................ (942) (3,111)
Net amortization and deferral........................... (1,445) 175
Curtailment gain on sale of lenscare division......... (1,212)
---------- ----------
Total net periodic pension cost..................... $ 2,053 $ 74
========== ==========
INTERNATIONAL PENSION PLAN:
Service cost-benefits earned during the period.......... $ 410 $ 434
Interest cost on projected benefit obligation........... 451 497
Actual return on plan assets............................ (428) (486)
Net amortization and deferral........................... 31 32
---------- ----------
Total net periodic pension cost..................... $ 464 $ 477
========== ==========
</TABLE>
Costs incurred and charged to the Company's operations for its portion of
the Domestic Pension Plan were $1,472 and $1,069 for the years ended March 31,
1995 and 1996, respectively.
The significant actuarial assumptions for the following tables as of the
measurement date are as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------
1995 1996
---------- ----------
<S> <C> <C>
DOMESTIC PENSION PLAN:
Discount rate......................................... 8.5% 7.5%
Expected long-term rate of return on plan assets...... 8.0% 8.0%
Rate of increase in future compensation levels........ 5.5% 5.5%
INTERNATIONAL PENSION PLAN:
Discount rate......................................... 8.5% 8.5%
Expected long-term rate of return on plan assets...... 8.5% 8.5%
Rate of increase in future compensation levels........ 6.5% 6.5%
</TABLE>
At March 31, 1996, the Domestic and International Pension Plan assets
include cash items, fixed income securities, common stock and insurance
policies.
F-50
<PAGE>
PILKINGTON BARNES HIND GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
The funded status as of the measurement date was as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------
1995 1996
---------- ----------
<S> <C> <C>
DOMESTIC PENSION PLAN:
Actuarial present value of benefit obligations:
Vested benefit obligation............................ $ 25,187 $ 31,862
========== ==========
Accumulated benefit obligation....................... $ 26,642 $ 33,085
========== ==========
Projected benefit obligation......................... 33,000 40,116
Plan assets at fair value............................ 35,898 46,645
---------- ----------
Projected benefit obligation in excess of plan as-
sets................................................ (2,898) (6,529)
Unrecognized net gain................................ 5,000 5,978
Unrecognized prior service cost...................... (1,817) (1,394)
---------- ----------
Accrued (prepaid) pension cost....................... $ 285 $ (1,945)
========== ==========
INTERNATIONAL PENSION PLAN:
Actuarial present value of benefit obligations:
Vested benefit obligation............................ $ 5,604 $ 5,908
========== ==========
Accumulated benefit obligation....................... $ 5,661 $ 5,986
========== ==========
Projected benefit obligation......................... 6,202 6,586
Plan assets at fair value............................ 5,941 6,455
---------- ----------
Accrued pension cost................................. $ 261 $ 131
========== ==========
</TABLE>
The accrued (prepaid) pension cost allocated to the Company for its portion
of the Domestic Pension Plan was $700 and $(232) at March 31, 1995 and 1996,
respectively.
The measurement date for the Domestic Pension Plan for the years ended March
31, 1995 and 1996 is December 31, 1994 and 1995, respectively. The measurement
date for the International Pension Plan is March 31, 1995 and 1996,
respectively.
10. INCOME TAXES:
Components by region of loss before provision for income taxes consist of
the following:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------
1995 1996
---------- ----------
<S> <C> <C>
North America........................................... $ (17,306) $ (15,618)
Europe.................................................. 4,835 6,124
Australia............................................... (23) (99)
Asia.................................................... 1,603 1,579
---------- ----------
$ (10,891) $ (8,014)
========== ==========
</TABLE>
F-51
<PAGE>
PILKINGTON BARNES HIND GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
-----------------
1995 1996
------ ----------
<S> <C> <C> <C>
Current:
Foreign..................................................... $2,325 $2,007
Deferred:
Foreign..................................................... 383 1,109
------ ------
$2,708 $3,116
====== ======
</TABLE>
A reconciliation between income tax provisions computed at the U.S. federal
statutory rate and the effective rate reflected in the combined statements of
income:
<TABLE>
<CAPTION>
YEAR ENDED
MARCH 31,
-------------
1995 1996
----- -----
<S> <C> <C>
Benefit at statutory rate....................................... (35.0)% (35.0)%
Permanent items................................................. 6.2 2.7
Foreign taxes................................................... 24.9 38.9
Losses not benefited............................................ 28.8 32.3
----- -----
24.9 % 38.9 %
===== =====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------
1995 1996
---------- ----------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts...................... $ 195 $ 378
Reserves and accruals................................ 4,448 3,136
Depreciation......................................... 921 483
Net operating losses................................. 33,991 39,645
---------- ----------
Total gross deferred tax assets.................... 39,555 43,642
Less valuation allowance............................. (39,520) (43,336)
---------- ----------
Net deferred tax assets.............................. 35 306
---------- ----------
Deferred tax liabilities:
Deferred revenue..................................... (112) (107)
Other................................................ (347) (1,641)
---------- ----------
Deferred tax liabilities............................. (459) (1,748)
---------- ----------
Total.............................................. $ (424) $ (1,442)
========== ==========
</TABLE>
The net changes in the total valuation allowance for the years ended March
31, 1995 and 1996 relate primarily to movements in certain domestic net
operating losses.
The Company has recorded a deferred tax asset of $306 at March 31, 1996.
Realization is dependent on generating sufficient taxable income in the
following year in certain tax paying subsidiaries. Although
F-52
<PAGE>
PILKINGTON BARNES HIND GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
realization is not assured, management believes it is more likely than not
that all of the deferred tax asset will be realized. The amount of the
deferred tax asset considered realizable, however, could be reduced in the
near term, if estimates of future taxable income during the carryforward
period are reduced.
On a separate company basis, the Company had cumulative tax loss
carryforwards in the U.S. of approximately $35,000 in 1995 and $54,000 in
1996. As a result of the utilization of some of those losses by other members
of the U.S. consolidated group, however, the tax losses which may be used by
the Company to offset future taxable income were approximately $14,800 in 1995
and $13,800 in 1996. Of the $13,800 remaining in 1996, $4,200 will expire in
2007, $6,300 will expire in 2008 and $3,300 will expire in 2009.
The Company has not recognized a deferred tax liability for the
undistributed earnings of its foreign subsidiaries that arose in 1996 and
prior years because the Company does not expect those unremitted earnings to
reverse and become taxable to the Company in the foreseeable future. A
deferred tax liability will be recognized when the Company expects that it
will recover those undistributed earnings in a taxable manner, such as through
receipt of dividends or sale of the investments. The cumulative undistributed
earnings of these subsidiaries are not practicable to determine.
11. COMMITMENTS:
The Company leases certain warehouse and office facilities, office equipment
and automobiles under noncancelable operating leases which expire in years
1997 through 2018. The Company is responsible for taxes, insurance and
maintenance expenses related to the leased facilities. Under the terms of
certain lease agreements, the leases may be extended, at the Company's option,
and certain of the leases provide for adjustments of the minimum monthly rent.
Future minimum annual lease payments under the leases are as follows:
<TABLE>
<CAPTION>
PERIOD ENDING MARCH 31,
-----------------------
<S> <C>
1997.............................................................. $6,357
1998.............................................................. 4,180
1999.............................................................. 1,831
2000.............................................................. 1,222
2001.............................................................. 1,022
Thereafter........................................................ 6,678
</TABLE>
Rent expense for the years ended March 31, 1995 and 1996 was $5,010 and
$4,826, respectively.
12. CONTINGENCIES:
The Company is involved in a lawsuit relating to a worldwide patent
licensing agreement whereby it is alleged that the Company did not make good
faith efforts to manufacture, market and distribute the related contact lens.
The license agreement contains an arbitration provision and since
investigation of the plaintiffs' claims is still in progress, the Company's
potential liability in this matter, if any, cannot yet be determined.
The Company is involved in a dispute with a former employee in Germany
relating to alleged unfair dismissal.
F-53
<PAGE>
PILKINGTON BARNES HIND GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
In addition to the matters discussed above, in the ordinary course of
business, various legal actions and claims pending have been filed against the
Company. While it is reasonably possible that such contingencies, including
those matters discussed above, may result in a cost greater than that provided
for in the financial statements, it is the opinion of management that the
ultimate liability, if any, with respect to these matters, will not materially
affect the combined cash flows; results of operations or financial position of
the Company.
The Company has been notified by the United States Environmental Protection
Agency (USEPA) that it has been deemed a Potentially Responsible Party (PRP)
under the Comprehensive Environmental, Response, Compensation and Liability
Act of 1980 (or Superfund) at the Omega Chemical Corporation Site in Whittier,
California. The Company is one of approximately 145 PRPs identified at the
site who appear to share joint and several liability. The USEPA has issued an
administrative order to each of these parties directing that certain
investigative and remedial work be undertaken. The investigative work is still
under way and the extent of the contamination has not yet been determined.
Consequently, the Company's ultimate liability for this matter can not yet be
quantified and no provision has been made in the accompanying combined
financial statements.
13. CURRENT VULNERABILITIES DUE TO CERTAIN CONCENTRATIONS:
The Company currently buys a raw material, an important component of one of
its products, from one supplier. Although there are a limited number of
manufacturers of the raw material, management believes that other suppliers
could provide the raw material on comparable terms. A change in suppliers,
however, could cause a delay in manufacturing and a possible loss of sales,
which would adversely affect operating results. Included in the Company's
consolidated balance sheet at March 31, 1996, are the net assets of one of the
Company's two manufacturing operations which produce the Company's best
selling product, all of which are located in a single facility in the United
Kingdom and which total approximately $11.3 million.
14. SIGNIFICANT RELATED PARTY TRANSACTIONS:
Notes Payable to Parent Company:
The Company has various payables with affiliates (see Note 6).
Interest expense on notes payable to parent and affiliated companies for the
years ended March 31, 1995 and 1996 was $4,258 and $4,180, respectively.
Payables to Affiliated Companies and Other Activities:
During the year ended March 31, 1996, the Company received cash totaling
$88,760, representing the proceeds from the sale of an affiliated business. An
affiliated company also agreed to convert debt totaling $7,695 to parent
company investment. During the years ended March 31, 1995 and 1996, the
Company was forgiven current payables from affiliates totaling $8,474 and
$12,039, respectively. All transactions have been treated as additions to
parent company investment.
Pilkington charges the Company for services and shared costs relating to
treasury functions, tax return preparations, internal audit service, risk
management services, research and development and travel. For the years ended
March 31, 1995 and 1996, the Company expensed $561 and $1,036, respectively,
relating to Pilkington services and shared costs. In addition, Pilkington
facilitates the
F-54
<PAGE>
PILKINGTON BARNES HIND GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
Company's purchases of certain outside services, such as legal, worker's
compensation and other insurance premiums.
Other Related Party Transactions:
During the year ended March 31, 1995, the Company purchased a house from a
director of the Company for $217. The house was subsequently sold for $172
during the year ended March 31, 1996.
15. WORLDWIDE OPERATIONS:
The Company operates in the ophthalmic industry in the distribution of
contact lenses.
A summary of information about the Company's geographic areas is as follows:
<TABLE>
<CAPTION>
NORTH
AMERICA EUROPE AUSTRALIA ASIA ELIMINATIONS TOTAL
------- ------- --------- ------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED MARCH 31,
1995
Revenue:
External................ $78,407 $38,254 $1,633 $ 6,700 $124,994
Internal................ 43,343 25,933 $(69,276)
Operating loss (profit). 13,131 (5,205) 4 (1,606) 559 6,883
Identifiable assets..... 69,151 28,578 116 4,534 (66) 102,313
YEAR ENDED MARCH 31,
1996
Revenue:
External................ 78,907 44,050 1,793 7,831 132,581
Internal................ 32,050 35,691 14 (67,755)
Operating loss (profit). 12,154 (6,136) 85 (1,586) (45) 4,472
Identifiable assets..... 65,786 38,546 379 7,494 (21) 112,184
</TABLE>
16. SUBSEQUENT EVENTS:
Pilkington signed an agreement (as amended September 24, 1996) for the sale
of certain assets and liabilities of the Company at an aggregate purchase
price of approximately $62,000, consisting of a cash payment at closing and a
note in the amount of $5,000. The purchase price is subject to adjustment
based upon closing working capital of the divested assets. The assets and
liabilities to be divested consist primarily of inventory, accounts
receivable, fixed assets, accounts payable and certain accrued liabilities and
total approximately $57,000.
F-55
<PAGE>
PILKINGTON BARNES HIND GROUP
(A DIVISION OF PILKINGTON PLC)
CONDENSED COMBINED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
OCTOBER 1, 1996
----------------
(IN THOUSANDS OF
US DOLLARS)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................... $ 5,830
Trade accounts receivable, less allowance for doubtful ac-
counts of $1,902........................................... 25,143
Inventories................................................. 27,847
Prepaids and other current assets........................... 3,194
Deferred income taxes....................................... 556
-------
Total current assets...................................... 62,570
Property, plant and equipment, net ........................... 35,419
Other assets.................................................. 443
-------
Total assets.............................................. $98,432
=======
LIABILITIES AND PARENT COMPANY INVESTMENT
Current liabilities:
Accounts payable............................................ $ 9,720
Accrued liabilities......................................... 10,975
Accrued payroll and related liabilities..................... 12,551
-------
Total current liabilities ................................ 33,246
Deferred income taxes......................................... 1,280
Other liabilities............................................. 384
-------
Total liabilities......................................... 34,910
Parent company investment..................................... 63,522
-------
Total liabilities and parent company investment........... $98,432
=======
</TABLE>
The accompanying notes are an integral part of this condensed combined interim
financial data
F-56
<PAGE>
PILKINGTON BARNES HIND GROUP
(A DIVISION OF PILKINGTON PLC)
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
SIX MONTHS ENDED APRIL 1, 1996 THROUGH
SEPTEMBER 30, 1995 OCTOBER 1, 1996
------------------ ---------------------
(IN THOUSANDS OF U.S. DOLLARS)
<S> <C> <C>
Net sales............................. $67,154 $ 64,805
------- --------
Costs and expenses:
Cost of sales....................... 33,197 34,695
Research and development............ 4,160 3,448
Selling and marketing............... 21,012 20,634
General and administrative.......... 11,901 21,318
------- --------
70,270 80,095
------- --------
Operating loss........................ (3,116) (15,290)
Interest income....................... 323 95
Interest expense...................... (3,287) (590)
------- --------
Loss before provision for income tax-
es................................... (6,080) (15,785)
Provision for income taxes............ 2,365 6,140
------- --------
Net loss.............................. $(8,445) $(21,925)
======= ========
</TABLE>
The accompanying notes are an integral part of this condensed combined interim
financial data
F-57
<PAGE>
PILKINGTON BARNES HIND GROUP
(A DIVISION OF PILKINGTON PLC)
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
SIX MONTHS ENDED APRIL 1, 1996 THROUGH
SEPTEMBER 30, 1995 OCTOBER 1, 1996
------------------ ---------------------
(IN THOUSANDS OF U.S. DOLLARS)
<S> <C> <C>
Cash flows from operating activities:
Net loss............................. $(8,445) $(21,925)
Adjustments to reconcile net loss to
net cash used in operating activi-
ties:
Depreciation........................ 3,375 3,349
Provision for excess and obsolete
inventory.......................... 908 230
Provision for doubtful accounts..... 352 1,330
Increase in net deferred taxes...... (35) (718)
Change in assets and liabilities:
Accounts receivable--trade.......... (1,988) (605)
Accounts receivable--affiliate...... 147 67
Inventories......................... 2,383 1,475
Prepaids and other current assets... (3,577) (186)
Other assets........................ 403 1,908
Accounts payable--trade............. (3,202) 2,984
Accounts payable affiliated compa-
nies............................... 323 (331)
Accrued and other current liabili-
ties............................... 3,562 9,304
Other long-term liabilities......... 3,256 (2,799)
------- --------
Net cash used in operating activi- (2,538) (5,917)
ties................................ ------- --------
Cash flows from investing activities:
Capital expenditures................. (4,205) (5,417)
------- --------
Net cash used in investing activi- (4,205) (5,417)
ties................................ ------- --------
Cash flows from financing activities:
Financing activities with Pilkington
plc................................. 8,678 2,206
------- --------
Net cash provided by financing activ- 8,678 2,206
ities............................... ------- --------
Net change in cash and cash equiva-
lents................................ 1,935 (9,128)
Cash and cash equivalents at beginning 12,810 14,958
of year.............................. ------- --------
Cash and cash equivalents at end of $14,745 $ 5,830
period............................... ======= ========
Supplemental disclosures of cash flow
information:
Interest paid........................ $ 3,288 $ 641
======= ========
Taxes paid........................... $ 29 $ 1,231
======= ========
</TABLE>
The accompanying notes are an integral part of this condensed combined interim
financial data
F-58
<PAGE>
PILKINGTON BARNES HIND GROUP
(A DIVISION OF PILKINGTON PLC)
NOTES TO CONDENSED COMBINED INTERIM FINANCIAL DATA
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed combined interim financial data of
Pilkington Barnes Hind Group ("the Group"), a vision care division of
Pilkington plc, have been prepared in accordance with generally accepted
accounting principles for interim financial information and pursuant to the
rules and regulations of the Securities and Exchange Commission. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. For further
information, refer to the Group's audited financial statements as of March 31,
1995 and 1996 and for the years then ended.
The interim financial data is unaudited; however in the opinion of
management, the interim financial data includes all adjustments, consisting
only of normal recurring adjustments necessary for a fair statement of the
results for the interim periods. The results of operations for the interim
periods ended September 30, 1995 and October 1, 1996, are not necessarily
indicative of the results to be expected for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reported period. Actual results could differ from these estimates.
2. INVENTORIES
Inventories consist of the following at October 1, 1996 (in thousands of
U.S. dollars):
<TABLE>
<S> <C>
Raw materials........................................................ $ 2,804
Work in process...................................................... 4,788
Finished goods....................................................... 20,255
-------
$27,847
=======
</TABLE>
Inventories are stated net of valuation reserves of $5,145 at October 1,
1996.
3. SUBSEQUENT EVENT
Effective October 2, 1996, the Group was sold by Pilkington plc to Wesley
Jessen VisionCare, Inc. (formerly known as Wesley-Jessen Holding, Inc.) for an
aggregate purchase price of approximately $62.4 million. The purchase price is
subject to adjustment based on certain measures as of the closing date as
outlined in the purchase agreement. These financial statements do not reflect
any adjustments associated with the October 2, 1996 transaction.
F-59
<PAGE>
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NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PRO-
SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS
OR THE PURCHASER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 12
The Company............................................................... 18
Use of Proceeds........................................................... 19
Price Range of Common Stock............................................... 19
Dividend Policy........................................................... 19
Capitalization............................................................ 20
Unaudited Pro Forma Financial Data........................................ 21
Selected Historical Consolidated Financial Data........................... 27
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 30
Business.................................................................. 41
Management................................................................ 59
Principal and Selling Stockholders........................................ 69
Certain Transactions...................................................... 71
Description of Certain Indebtedness....................................... 73
Description of Capital Stock.............................................. 74
Shares Eligible for Future Sale........................................... 77
Plan of Distribution...................................................... 79
Experts................................................................... 80
Legal Matters............................................................. 80
Additional Information.................................................... 81
Index to Financial Statements............................................. F-1
</TABLE>
------------
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1,375,000 Shares
LOGO
Wesley Jessen VisionCare, Inc.
Common Stock
------------
PROSPECTUS
------------
BT ALEX. BROWN
November 13, 1997
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