<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
----------------
(Mark
One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 1997
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-22033
WESLEY JESSEN VISIONCARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 36-4023739
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
333 EAST HOWARD AVENUE 60018-5903
DES PLAINES, IL (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (847) 294-3000
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES (X) NO ( )
As of August 8, 1997, the number of shares of Common Stock of the Registrant
outstanding was 17,097,028.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
WESLEY JESSEN VISIONCARE, INC
INDEX
<TABLE>
<CAPTION>
PAGE
NO.
-------
<C> <S> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at December 31,
1996 and June 28, 1997................................... 2
Condensed Consolidated Statements of Operations for the
three months and six months ended June 29, 1996 and June
28, 1997................................................. 3
Condensed Consolidated Statements of Cash Flows for the
six months ended June 29, 1996 and June 28, 1997 ........ 4
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 six months ended June 28,
1997..................................................... 5
Notes to Condensed Consolidated Financial Statements..... 6 - 11
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 12 - 18
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K......................... 19
Signatures
</TABLE>
1
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
WESLEY JESSEN VISIONCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 28,
ASSETS 1996 1997
------ ------------ -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 7,073 $ 3,155
Accounts receivable--trade, net..................... 38,869 45,699
Other receivables................................... 5,155 5,172
Inventories......................................... 69,139 44,602
Deferred income taxes............................... 20,119 20,119
Prepaid expenses.................................... 9,531 9,856
Assets held for sale................................ 7,500 --
-------- --------
Total current assets.............................. 157,386 128,603
-------- --------
Property, plant and equipment, net.................... 10,125 17,013
Other assets.......................................... 1,346 1,137
Deferred income taxes................................. 4,227 10,786
Notes receivable...................................... -- 5,752
Capitalized financing fees, net....................... 7,516 2,340
-------- --------
Total assets...................................... $180,600 $165,631
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
<S> <C> <C>
Current liabilities:
Trade accounts payable.............................. $ 12,434 $ 9,473
Accrued compensation and benefits................... 16,121 13,714
Accrued advertising................................. 3,751 3,575
Other accrued liabilities........................... 20,938 16,231
Transition reserve.................................. 18,894 15,011
Income taxes payable................................ 6,989 6,153
Current portion of long term debt................... -- 5,000
-------- --------
Total current liabilities......................... 79,127 69,157
-------- --------
Negative goodwill, net................................ 10,577 10,186
Long term debt........................................ 102,975 72,300
Other liabilities..................................... 1,213 1,816
-------- --------
Total liabilities................................. 193,892 153,459
-------- --------
Stockholders' equity (deficit):
Common stock, $.01 par value, 50,000,000 shares
authorized, 14,276,028 and 17,097,028 issued and
outstanding at December 31, 1996 and June 28, 1997,
respectively....................................... 143 171
Additional paid in capital.......................... 7,654 44,475
Accumulated deficit................................. (22,457) (33,559)
Cumulative translation adjustment................... 1,368 1,085
-------- --------
Total stockholders' equity (deficit).............. (13,292) 12,172
-------- --------
Total liabilities and stockholders' equity
(deficit)........................................ $180,600 $165,631
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
JUNE 29, JUNE 28, JUNE 29, JUNE 28,
1996 1997 1996 1997
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales................. $ 32,250 $ 72,083 $ 62,397 $ 136,154
----------- ----------- ----------- -----------
Operating costs and
expenses:
Cost of goods sold...... 9,973 24,946 18,434 46,816
Cost of goods sold--
inventory step-up (Note
4)..................... 673 9,574 6,626 22,666
Marketing and
administrative......... 16,144 34,307 32,664 67,563
Research and
development............ 1,031 2,742 2,305 5,763
Amortization of negative
goodwill............... (196) (196) (392) (392)
----------- ----------- ----------- -----------
Income (loss) from
operations............... 4,625 710 2,760 (6,262)
Other (income) expense:
Interest expense, net... 914 1,270 2,010 3,130
Other income, net....... (3,500) -- (3,500) --
----------- ----------- ----------- -----------
Income (loss) before
income taxes and
extraordinary loss....... 7,211 (560) 4,250 (9,392)
Income tax benefit
(expense)................ (1,232) 189 (726) 3,192
----------- ----------- ----------- -----------
Net income (loss) before
extraordinary loss....... 5,979 (371) 3,524 (6,200)
Extraordinary loss, net of
related tax benefit
of $2,526................ -- -- -- (4,902)
----------- ----------- ----------- -----------
Net income (loss)......... $ 5,979 $ (371) $ 3,524 $ (11,102)
=========== =========== =========== ===========
Primary net loss per
common share (Note 2):
Net loss ............... $ (0.02)
===========
Weighted average common
shares used in
computation of primary
net loss per common
share.................. 17,097,028
===========
Pro forma primary net
income (loss) per common
share (Note 2):
Net income (loss) before
extraordinary loss..... $ 0.41 $ 0.24 $ (0.38)
=========== =========== ===========
Extraordinary loss, net
of tax benefit......... $ -- $ -- $ (0.30)
=========== =========== ===========
Net income (loss)....... $ 0.41 $ 0.24 $ (0.68)
=========== =========== ===========
Weighted average common
shares used in
computation of pro
forma primary net
income (loss) per
common share........... 14,637,984 14,637,984 16,272,793
=========== =========== ===========
Pro forma fully diluted
net income per common and
common equivalent share
(Note 2):
Net income.............. $ 0.36 $ 0.21
=========== ===========
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.
3
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-----------------------
JUNE 29, JUNE 28,
1996 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (loss).................................... $ 3,524 $ (11,102)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Extraordinary loss on early extinguishment of debt. -- 7,428
Depreciation expense............................... 45 353
Purchased inventory step-up........................ 6,626 22,666
Amortization of capitalized financing fees......... 291 243
Amortization of negative goodwill.................. (392) (392)
Deferred income taxes.............................. (657) (6,559)
Other.............................................. -- (83)
Changes in balance sheet items
Accounts receivable--trade, net.................... (2,566) (6,830)
Other receivables.................................. 475 (17)
Inventories........................................ 6,828 1,871
Prepaid expenses................................... (937) (325)
Other assets....................................... -- 209
Notes receivable................................... -- (1,252)
Trade accounts payable............................. (1,824) (2,961)
Accrued liabilities................................ (1,835) (11,172)
Other liabilities.................................. -- 603
Income taxes payable............................... 747 (836)
-------- ---------
Cash provided by (used in) operating activities.. 10,325 (8,156)
-------- ---------
Cash flows used in investing activities:
Proceeds from Natural Touch sale..................... -- 3,000
Capital expenditures................................. (1,527) (7,241)
-------- ---------
Cash used in investing activities................ (1,527) (4,241)
-------- ---------
Cash flows provided by (used in) financing activities:
Issuance of common stock............................. 83 36,849
Proceeds from long term debt......................... -- 84,000
Payment of financing fees............................ -- (2,495)
Payments of long term debt........................... (10,500) (109,875)
-------- ---------
Cash provided by (used in) financing activities.. (10,417) 8,479
-------- ---------
Net increase (decrease) in cash and cash equivalents. (1,619) (3,918)
Cash and cash equivalents:
Beginning of period.................................. 2,522 7,073
-------- ---------
End of period........................................ $ 903 $ 3,155
======== =========
Supplemental disclosure of cash flow information
Cash paid during the period for interest............. $ 2,075 $ 3,589
======== =========
Cash paid during the period for taxes, net........... $ 641 $ 3,032
======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<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)............ -- -- 2,821,000 28 36,564 -- -- 36,592
Stock compensation
(unaudited)............ -- -- -- -- 257 -- -- 257
Currency translation
adjustment (unaudited). -- -- -- -- -- -- (283) (283)
Net loss (unaudited).... -- -- -- -- -- (11,102) -- (11,102)
-------- ---- ---------- ---- ------- -------- ------ --------
Balance at June 28, 1997
(unaudited)............ -- -- 17,097,028 $171 $44,475 $(33,559) $1,085 $ 12,172
======== ==== ========== ==== ======= ======== ====== ========
</TABLE>
The accompanying notes are an integral part of these financial statements
5
<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 the 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.
6
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
The Offering
On July 31, 1997, the Company filed with the Securities and Exchange
Commission (the "SEC") a Form S-1 registration statement relating to a
proposed public offering of 4.0 million shares of Common Stock (the
"Offering"). Of the 4.0 million shares, 0.5 million shares will be offered by
the Company and the remaining 3.5 million will be offered by certain selling
stockholders. Certain selling stockholders have granted the underwriters a 30-
day option to purchase up to 0.6 million additional shares solely to cover any
over-allotments.
Net proceeds to be received by the Company, after deducting the underwriting
discounts and commissions and estimated offering expenses payable by the
Company, will be used to repay the "Pilkington Note" (Note 6) and to reduce
the Company's indebtedness under the current Bank Credit Agreement. The
Company expects that the Offering will be completed in the third quarter of
1997.
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.
In addition, 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 six months ended June 29, 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 three months ended June 28, 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 were used to retire indebtedness existing
under the Company's bank credit agreement (Note 6). Supplemental pro forma net
loss per share is ($0.63) for the six months ended June 28, 1997; 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
$0.3 million for the six months ended June 28, 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). 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 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
7
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
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.
Based upon preliminary purchase accounting, no significant goodwill or
negative goodwill arose from the Barnes-Hind Acquisition. In July 1997, the
Company negotiated a purchase price reduction of $1.6 million with Pilkington
based upon specific net current asset measures as of the closing date of the
acquisition. Additionally, certain pension valuations associated with the
Barnes-Hind employees are expected to be completed in the third quarter of
1997. Management also is finalizing the operational details and related cost
estimates of its plans to integrate Barnes-Hind operations and expects to
complete this process by October 1997. Preliminary management estimates
indicate that the final Barnes-Hind purchase accounting could result in
recognition of negative goodwill ranging from $3.0 to $9.0 million, which would
be amortized to income over a period of up to 15 years.
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.
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 six
months ended June 29, 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>
SIX MONTHS ENDED
JUNE 29, 1996
----------------
<S> <C>
Net sales.............................................. $ 125,465
==========
Net income............................................. $ 8,778
==========
Pro forma net income per common and common equivalent
share................................................. $ 0.53
==========
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,
8
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
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 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, JUNE 28,
1996 1997
------------ --------
<S> <C> <C>
Accounts receivable--trade......................... $ 56,480 $63,694
Less allowances:
Doubtful accounts................................ (6,989) (8,007)
Sales returns and adjustments.................... (10,622) (9,988)
-------- -------
Accounts receivable--trade, net.................... $ 38,869 $45,699
======== =======
</TABLE>
Inventories
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 28,
1996 1997
------------ --------
<S> <C> <C>
Raw materials....................................... $ 6,073 $ 4,839
Work-in-process..................................... 8,958 7,232
Finished goods...................................... 54,108 32,531
------- -------
Total............................................. $69,139 $44,602
======= =======
</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, $9.6 million, $0.7
million, $22.7 million and $6.6 million were charged to cost of goods sold
during the three months ended June 28, 1997 and June 29, 1996 and the six
months ended June 28, 1997 and June 29, 1996, respectively.
Property, plant and equipment, net
Property, plant and equipment, net, consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE
DECEMBER 31, 28,
1996 1997
------------ -------
<S> <C> <C>
Building and improvements........................... $ 1,230 $ 4,119
Machinery, equipment, furniture and fixtures........ 6,257 9,464
Construction-in-progress............................ 3,034 4,179
------- -------
10,521 17,762
Less: accumulated depreciation...................... (396) (749)
------- -------
Property, plant and equipment, net.................. $10,125 $17,013
======= =======
</TABLE>
9
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
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 termination costs related to the closure of the Barnes-Hind corporate
offices in Sunnyvale, California to be 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 six months ended
June 28, 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.. 3,097 544 242 3,883
------- ------ ------ -------
Transition reserve at June
28, 1997.................... $12,526 $1,476 $1,009 $15,011
======= ====== ====== =======
</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 will be consolidated with those in Des Plaines,
Illinois in September 1997. The restructuring reserve, totaling $2.6 million at
June 28, 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 six months ended June 28, 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 5 518 818
---- ---- ------ ------
Restructuring reserve at June 28,
1997............................ $518 $892 $1,172 $2,582
==== ==== ====== ======
</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") which bears interest at 8.0%
10
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
compounded annually and payable at maturity. The note matures on February 1,
2005, subject to certain acceleration provisions. The Pilkington Note is
subordinate to all current and long term debt of the Company. In July 1997,
the note was reduced by $1.6 million.
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 will be
amortized over the term of the Bank Credit Agreement.
Amounts borrowed under the 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 0.75% based on leverage ratios calculated as of certain
dates) 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 ranging from 0.30% to 0.50% based on leverage ratios calculated as
of certain dates. The unutilized portion of the revolving credit facilities at
June 28, 1997 was $28.0 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. The cap rate
is based on three month LIBOR.
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. In
connection with the Offering (Note 1), the Company has waived the requirements
that Mr. Ryan repay such loan pursuant to clause (iii) above.
11
<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 Company for the three months and
the six months ended June 29, 1996 and June 28, 1997. The Company completed
the Wesley Jessen Acquisition on June 29, 1995, the Barnes-Hind Acquisition on
October 2, 1996 and the initial public offering ("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 costs of sales and expenses, the
historical financial statements for the periods discussed are not directly
comparable. For comparative purposes, the combined results of operations of
the Company and Barnes-Hind for the three months and the six months ended June
29, 1996 and June 28, 1997 have been restated on a "pro forma" basis as if the
Barnes-Hind Acquisition and the IPO had occurred on January 1, 1996. 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 JENSEN 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, assumed certain liabilities of the Predecessor, and paid
certain acquisition costs directly attributable to the Wesley Jessen
Acquisition. The 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.
BARNES-HIND ACQUISITION
On October 2, 1996, the Company acquired substantially all the assets and
assumed certain liabilities of the Barnes-Hind division of Pilkington plc (the
"Barnes-Hind Acquisition"). 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.
Based upon preliminary purchase accounting, no significant goodwill or
negative goodwill arose from the Barnes-Hind Acquisition. Certain pension
valuations associated with the Barnes-Hind employees are expected to be
completed in the third quarter of 1997. Management also is finalizing the
operational details and related cost estimates of its plans to integrate
Barnes-Hind operations and expects to complete this process by October 1997.
12
<PAGE>
Preliminary management estimates indicate that the final Barnes-Hind purchase
accounting could result in recognition of negative goodwill ranging from $3.0
to $9.0 million, which would be amortized to income over a period of up to 15
years.
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 Federal Trade Commission 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. 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 consumated 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.
Interest expense reductions as if the IPO had occurred on January 1, 1996 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.
THE OFFERING
On July 31, 1997, the Company filed with the Securities and Exchange
Commission (the "SEC") a Form S-1 registration statement relating to a proposed
public offering of 4.0 million shares of Common Stock (the "Offering"). Of the
4.0 million shares, 0.5 million shares will be offered by the Company and the
remaining 3.5 million will be offered by certain selling stockholders. Certain
selling stockholders have granted the underwriters a 30-day option to purchase
up to 0.6 million additional shares solely to cover any over-allotments.
Net proceeds to be received by the Company, after deducting the underwriting
discounts and commissions and estimated offering expenses payable by the
Company, will be used to repay the Pilkington Note and to reduce the Company's
indebtedness under the current Bank Credit Agreement. The Company expects that
the Offering will be completed in the third quarter of 1997.
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 for the three months ended June
29, 1996 and for the six months ended June 29, 1996 are not comparable to the
financial statements for the three months ended June 28, 1997 and the six
months ended June 28, 1997, respectively. In order to facilitate management's
13
<PAGE>
discussion of financial results, the following table of pro forma operating
data gives effect to the Wesley Jessen Acquisition as if it had occurred on
January 1, 1996.
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 three months ended June 29, 1996 and the six
months ended June 29, 1996 are not comparable to the financial statements for
the three months ended June 28, 1997 and the six months ended June 28, 1997,
respectively. Accordingly, the following table of pro forma operating income
data combines the results of operations for the three months ended June 29,
1996 and June 28, 1997 and the six months ended June 29, 1996 and June 28,
1997 of the Company and Barnes-Hind on a pro forma basis as if the
Acquisitions and the IPO had occurred on January 1, 1996.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------------- --------------------------------
JUNE 28, 1997(A) JUNE 29, 1996(B) JUNE 28, 1997(A) JUNE 29, 1996(B)
---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $72,083 $63,732 $136,154 $125,465
Operating costs and
expenses:
Cost of goods sold.... 24,946 24,005 46,816 46,671
Marketing and
administrative....... 33,973 28,550 66,478 58,368
Research and
development.......... 2,742 2,442 5,763 5,658
Amortization of
negative goodwill.... (196) (196) (392) (392)
------- ------- -------- --------
Income from
operations........... 10,618 8,931 17,489 15,160
Other expense--
Interest expense, net. 1,316 1,452 2,770 2,890
Other (income)
expense, net......... -- (3,500) -- (3,500)
------- ------- -------- --------
Income before income
taxes.................. 9,302 10,979 14,719 15,770
Income tax expense...... (3,163) (3,733) (5,005) (5,362)
------- ------- -------- --------
Net income.............. $ 6,139 $ 7,246 $ 9,714 $ 10,408
OTHER DATA:
Net income per common
and common share
equivalent............. $ 0.32 $ 0.37 $ 0.50 $ 0.54
======= ======= ======== ========
Weighted average shares
used in computation of
income per common and
common equivalent
share.................. 19,401 19,353 19,383 19,353
======= ======= ======== ========
</TABLE>
- --------
(a) Includes pro forma adjustments to: (i) eliminate the non-recurring impact
of the inventory step-up in connection with the Barnes-Hind Acquisition of
$9,574 in the three months ended June 28, 1997 and $22,666 in the six
months ended June 28, 1997; (ii) exclude non-recurring transitional
administrative expenses incurred at the Barnes-Hind corporate facility in
Sunnyvale, California, of $334 in the three months ended June 28, 1997 and
$1,085 in the six months ended June 28, 1997; (iii) reflect the IPO
Transactions as if they had occurred on January 1, 1996; and (iv) reflect
the pro forma income tax expense at an estimated effective income tax rate
of 34%.
(b) Includes pro forma adjustments to give effect to: (i) the Barnes-Hind
Acquisition; (ii) the divestiture of Barnes-Hind's U.S. Natural Touch
Product Line; (iii) the elimination of the non-recurring impact of the
inventory step-up in connection with the Wesley Jessen Acquisition of $673
for the three months ended June 29, 1996 and $6,626 for the six months
ended June 29, 1996; (iv) the IPO Transactions as if they had occurred on
January 1, 1996; and (v) the pro forma income tax expense at an estimated
effective tax rate of 34%.
14
<PAGE>
PRO FORMA THREE MONTHS ENDED JUNE 28, 1997 COMPARED TO PRO FORMA THREE MONTHS
ENDED JUNE 29, 1996
Net sales for the three months ended June 28, 1997 increased $8.4 million,
or 13.1%, to $72.1 million from $63.7 million for the three months ended June
29, 1996. This increase resulted primarily from growth in sales of the
Company's disposable and planned replacement contact lenses, from $17.5
million to $23.0 million, a 31.4% increase, as well as sales increases in the
conventional lens product lines, from $46.2 million to $49.1 million, a 6.2%
increase. The Company believes sales increases were due to the increased
popularity of the Company's disposable lenses along with benefits realized
from its increased promotional support of the conventional product lines.
Domestic sales increased by 29.2% from $32.5 million to $42.1 million, while
sales in the rest of the world decreased slightly by 3.7%.
Gross profit for the three months ended June 28, 1997 increased $7.4
million, or 18.7%, to $47.1 million from $39.7 million in the comparable 1996
period. Gross profit margin increased to 65.4% for the three months ended June
28, 1997 from 62.3% in the comparable period. This improvement 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 sales volume of the Company's higher margin conventional lens
product lines.
Marketing and administrative expenses for the three months ended June 28,
1997 increased by $5.4 million, or 19.0%, to $34.0 million from $28.6 million
for the three months ended June 29, 1996. As a percentage of net sales,
marketing and administrative expenses increased to 47.1% in the 1997 period
from 44.8% 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 for the three months ended June 28, 1997
increased by $0.3 million, or 12.3%, to $2.7 million from $2.4 million for the
three months ended June 29, 1996. This increase is due to higher spending
related to investigating alternate production materials. As a percentage of
net sales, research and development expenses remained the same at 3.8% for the
two periods.
Income from operations for the three months ended June 28, 1997 increased by
$1.7 million to income of $10.6 million from $8.9 million for the three months
ended June 29, 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 for the three months ended June 29, 1996 of $3.5 million
represents non-recurring licensing fee income. There was no such income in the
comparable 1997 period.
Net income for the three months ended June 28, 1997 decreased by $1.1
million to $6.1 million from $7.2 million for the three months ended June 29,
1996. Excluding the 1996 license fee income, net income for the three months
ended June 28, 1997 increased $1.2 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 SIX MONTHS ENDED JUNE 28, 1997 COMPARED TO PRO FORMA SIX MONTHS
ENDED JUNE 29, 1996
Net sales for the six months ended June 28, 1997 increased $10.7 million, or
8.5%, to $136.2 million from $125.5 million for the six months ended June 29,
1996. This increase resulted primarily from growth in sales of the Company's
disposable and planned replacement contact lenses, from $33.2 million to $43.9
million, a 32.2% increase. The Company believes sales increases were due to
the increased popularity of the Company's disposable lenses. Domestic sales
increased by 14.4% from $68.8 million to $78.7 million, while sales in the
rest of the world decreased slightly by 1.4%.
Gross profit for the six months ended ended June 28, 1997 increased $10.5
million, or 13.4%, to $89.3 million from $78.8 million in the comparable 1996
period. Gross profit margin increased to 65.6% for the six months ended June
28, 1997 from 62.8% in the comparable period. This improvement is due to
higher margins
15
<PAGE>
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 for the six months ended June 28, 1997
increased by $8.1 million, or 13.9%, to $66.5 million from $58.4 million for
the six months ended June 29, 1996. As a percentage of net sales, marketing
and administrative expenses increased to 48.8% in the 1997 period from 46.5%
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 for the six months ended June 28, 1997
increased by $0.1 million, or 1.9%, to $5.8 million from $5.7 million for the
six months ended June 29, 1996. This increase is due to higher spending
related to investigating alternate production materials, offset by operational
synergies being realized by the Company as a result of the Barnes-Hind
Acquisition. As a percentage of net sales, research and development expenses
for the six months ended June 28, 1997 decreased to 4.2% from 4.5% in the
prior year period.
Income from operations for the six months ended June 28, 1997 increased by
$2.3 million to income of $17.5 million from $15.2 million for the six months
ended June 29, 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 for the six months ended June 29, 1996 of $3.5 million
represents non-recurring licensing fee income. There was no such income in the
comparable 1997 period.
Net income for the six months ended June 28, 1997 decreased by $0.7 million
to $9.7 million from $10.4 million for the six months ended June 29, 1996.
Excluding the 1996 license fee income, net income for the six months ended
June 28, 1997 increased $1.6 million. This resulted from higher sales volume
and improvement in the Company's gross margins, offset by increased spending
in marketing and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company financed its operations in the second quarter of 1997 primarily
through funds provided from operations and through borrowings under a
revolving credit facility. For the six months ended June 28, 1997, the Company
used approximately $8.2 million in cash for operating activities, primarily as
a result of 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 six months ended June
29, 1996, the Company generated approximately $10.3 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 payables and accrued liabilities.
For the six months ended June 28, 1997 and June 29, 1996, the Company made
capital expenditures of approximately $7.2 million and $1.5 million,
respectively. The majority of these capital expenditures were for facility and
equipment improvement, information technology enhancements, and site
consolidations. The Company currently has budgeted approximately $10.2 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.
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 expended $4.5 million in cash from
June 29, 1995 through June 28, 1997 to close facilities. Following
16
<PAGE>
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 September 1998. These costs were recorded in
connection with the purchase accounting for the Barnes-Hind Acquisition. As of
June 28, 1997, the Company has paid $5.4 million of these integration costs.
As a result of the Acquisitions, the Company's borrowings under its bank
credit agreement (the "Bank Credit Agreement") increased significantly as did
its liquidity requirements. As of June 28, 1997, the Company had approximately
$28.0 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.
Management believes that, based on current levels of operations and
anticipated internal growth, cash flow from operations, potential borrowings
available under the Bank Credit Agreement and available cash on hand at June
28, 1997 of $3.2 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, to
support 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.
The Company currently anticipates entering into an amendment to the Bank
Credit Agreement and a subsequent amendment and restatement thereof to (i)
increase the total borrowing availability thereunder to a maximum of $135
million, (ii) modify the requirement that at least 50% of the net proceeds of
the Offering be used to repay indebtedness thereunder to facilitate repayment
of the Pilkington Note, (iii) convert all remaining term loan borrowings into
revolving loans and (iv) reduce the interest rate thereunder. There can be no
assurance, however, that the Company will be able to amend the Bank Credit
Agreement on the foregoing terms or at all.
Approximately 42% of the Company's net sales for the six months ended June
28, 1997 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.
INFLATION
Management believes that inflation has not had a material impact on results
of operations for the Company during the six months ended June 28, 1997 and
June 29, 1996.
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
17
<PAGE>
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 14, would be as
follows:
<TABLE>
<CAPTION>
BASIC EARNINGS DILUTED EARNINGS
PER SHARE PER SHARE
-------------- ----------------
<S> <C> <C>
Three months ended June 28, 1997.......... $0.36 $0.32
Three months ended June 29, 1996.......... $0.42 $0.37
Six months ended June 28, 1997............ $0.57 $0.50
Six months ended June 29, 1996............ $0.60 $0.54
</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 its options for
disclosure and will adopt the Statement in its financial statements for the
year ending December 31, 1998.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MD&A") 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 MD&A, 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 matters
discussed herein and certain economic and business factors, some of which may
be beyond the control of the Company.
18
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Wesley Jessen VisionCare, Inc.
/s/ Edward J. Kelley
By: _________________________________
Edward J. Kelley
(Duly authorized officer and Chief
Financial Officer)
Date: August 12, 1997
<PAGE>
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 27.1 Financial Data Schedule.
The Company filed a Current Report on Form 8-K on July 30, 1997, relating to
its second quarter earnings release.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> MAR-30-1997
<PERIOD-END> JUN-28-1997
<CASH> 3,155
<SECURITIES> 0
<RECEIVABLES> 63,694
<ALLOWANCES> 17,995<F1>
<INVENTORY> 44,602<F2>
<CURRENT-ASSETS> 128,603
<PP&E> 17,762
<DEPRECIATION> 749
<TOTAL-ASSETS> 165,631
<CURRENT-LIABILITIES> 69,157
<BONDS> 0
0
0
<COMMON> 171
<OTHER-SE> 12,001
<TOTAL-LIABILITY-AND-EQUITY> 165,631
<SALES> 72,083
<TOTAL-REVENUES> 72,083
<CGS> 34,520<F3>
<TOTAL-COSTS> 71,569
<OTHER-EXPENSES> (196)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,270
<INCOME-PRETAX> (560)
<INCOME-TAX> 189
<INCOME-CONTINUING> (371)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (371)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> 0
<FN>
<F1> ALLOWANCES NETTED AGAINST TRADE RECEIVABLES INCLUDE BOTH BAD DEBT RESERVES
AND SALES RETURN RESERVES.
<F2> INVENTORY INCLUDES ADJUSTMENTS MADE IN ACCORDANCE WITH APB OPINION 16,
ACCOUNTING FOR BUSINESS COMBINATIONS.
<F3> COST OF GOODS SOLD INCLUDES THE FLOW THROUGH OF THE PREVIOUSLY MENTIONED
INVENTORY ADJUSTMENTS.
</FN>
</TABLE>
