<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
----------------
FORM 10-Q
(Mark
One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
COMMISSION FILE NUMBER 0-22003
----------------
WESLEY JESSEN VISIONCARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-4023739
(STATE OF INCORPORATION) (I.R.S EMPLOYER IDENTIFICATION NO.)
333 EAST HOWARD AVENUE
DES PLAINES, ILLINOIS 60018-5903
847-294-3000
(ADDRESS AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL
EXECUTIVE OFFICE)
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
The number of shares of Common Stock ($0.01 par value) of the Registrant
outstanding as of November 4, 1998 was 16,988,521.
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<PAGE>
WESLEY JESSEN VISIONCARE, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at December 31, 1997 and
September 26, 1998................................................ 1
Condensed Consolidated Statements of Operations for the three
months and nine months ended September 27, 1997 and September 26,
1998.............................................................. 2
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 27, 1997 and September 26, 1998................... 3
Notes to the Condensed Consolidated Financial Statements........... 4-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 8-16
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................. 17
Signatures........................................................... 18
</TABLE>
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
WESLEY JESSEN VISIONCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 26,
1997 1998
------------ -------------
(UNAUDITED)
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 4,759 $ 5,630
Accounts receivable--trade, net................... 42,642 53,185
Other receivables................................. 4,773 7,243
Inventories....................................... 49,262 58,922
Deferred income taxes............................. 18,102 18,531
Prepaid expenses.................................. 7,675 6,428
Assets held for sale.............................. 1,222 1,222
-------- --------
Total current assets............................ 128,435 151,161
-------- --------
Property, plant and equipment, net.................. 21,480 33,296
Other assets........................................ 6,894 6,890
Deferred income taxes............................... 10,838 10,854
Notes receivable.................................... 2,773 1,833
Goodwill, net....................................... -- 2,581
Capitalized financing fees, net..................... 2,656 2,507
-------- --------
Total assets.................................... $173,076 $209,122
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Trade accounts payable............................ $ 14,229 $ 15,942
Accrued compensation and benefits................. 19,806 23,613
Accrued advertising............................... 4,113 5,334
Other accrued liabilities......................... 11,212 12,632
Transition reserve................................ 11,225 9,025
Income taxes payable.............................. 2,015 7,617
-------- --------
Total current liabilities....................... 62,600 74,163
-------- --------
Negative goodwill, net.............................. 13,681 12,860
Long term debt...................................... 57,000 77,000
Other liabilities................................... 2,949 4,961
-------- --------
Total liabilities............................... 136,230 168,984
-------- --------
Stockholders' equity:
Common stock, $.01 par value, 50,000,000 shares
authorized, 17,736,011 and 16,986,007 issued and
outstanding at December 31, 1997 and September
26, 1998 respectively............................ 177 180
Additional paid in capital........................ 56,390 60,036
Accumulated (deficit) earnings.................... (19,159) 1,889
Treasury stock, 1,000,000 shares at September 26,
1998, at cost.................................... -- (21,306)
Accumulated other comprehensive loss.............. (562) (661)
-------- --------
Total stockholders' equity...................... 36,846 40,138
-------- --------
Total liabilities and stockholders' equity...... $173,076 $209,122
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 27, SEPTEMBER 26,
1997 1998 1997 1998
------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales............... $75,235 $75,254 $211,389 $219,266
------- ------- -------- --------
Operating costs and
expenses:
Costs of goods sold... 23,891 23,255 70,707 67,957
Cost of goods sold--
inventory step-up
(Note 5)............. -- -- 22,666 --
Marketing and
administrative....... 36,486 35,891 104,049 108,894
Research and
development.......... 3,065 2,820 8,828 7,853
Amortization of
goodwill............. (196) (247) (588) (794)
------- ------- -------- --------
Income from operations.. 11,989 13,535 5,727 35,356
Other (income) expense:
Interest income....... (221) (159) (357) (414)
Interest expense...... 1,462 1,495 4,728 3,878
------- ------- -------- --------
Income before income
taxes and extraordinary
loss................... 10,748 12,199 1,356 31,892
Income tax expense...... 3,653 4,148 461 10,844
------- ------- -------- --------
Income before
extraordinary loss..... 7,095 8,051 895 21,048
Extraordinary loss, net
of related tax benefit
of $2,526.............. -- -- (4,902) --
------- ------- -------- --------
Net income (loss)....... $ 7,095 $ 8,051 $ (4,007) $ 21,048
======= ======= ======== ========
Income (loss) per common
share:
Basic
Income before
extraordinary
loss............... $ 0.41 $ 0.47 $ 0.05 $ 1.20
Extraordinary loss,
net of tax
benefit............ -- -- (0.29) --
------- ------- -------- --------
Net income (loss)... $ 0.41 $ 0.47 $ (0.24) $ 1.20
======= ======= ======== ========
Diluted
Income before
extraordinary
loss............... $ 0.37 $ 0.43 $ 0.05 $ 1.10
Extraordinary loss,
net of tax
benefits........... -- -- (0.29) --
------- ------- -------- --------
Net income (loss)... $ 0.37 $ 0.43 $ (0.24) $ 1.10
======= ======= ======== ========
Weighted average common
shares outstanding:
Basic................. 17,305 17,134 16,620 17,589
======= ======= ======== ========
Diluted............... 18,927 18,521 16,620 19,084
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------
SEPTEMBER 27, SEPTEMBER 26,
1997 1998
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows provided by operating activities:
Net income (loss)................................ $ (4,007) $ 21,048
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Extraordinary loss on early extinguishment of
debt.......................................... 7,428 --
Depreciation expense........................... 584 1,787
Purchased inventory step-up.................... 22,666 --
Amortization of capitalized financing fees..... 368 428
Amortization of goodwill....................... (588) (795)
Deferred income taxes.......................... (5,195) (96)
Gain on disposal of property, plant and
equipment..................................... -- (15)
Other.......................................... (1,778) 266
Changes in balance sheet items:
Accounts receivable--trade, net................ (7,188) (9,467)
Other receivables.............................. (27) (2,049)
Inventories.................................... 2,524 (8,715)
Prepaid expenses............................... 261 1,233
Other assets................................... (362) (218)
Notes receivable............................... (1,252) (60)
Trade accounts payable......................... 1,750 739
Accrued liabilities............................ (11,346) 2,745
Other liabilities.............................. 632 2,033
Income taxes payable........................... (3,040) 7,474
--------- --------
Cash provided by operating activities........ 1,430 16,338
--------- --------
Investing activities:
Proceeds from Natural Touch sale................. 6,000 1,000
Net assets acquired.............................. -- (3,078)
Proceeds from the sale of property, plant and
equipment....................................... -- 117
Capital expenditures............................. (11,801) (12,935)
--------- --------
Cash used in investing activities............ (5,801) (14,896)
--------- --------
Financing activities:
Issuance of stock................................ 47,562 1,556
Repurchase of shares............................. -- (21,306)
Proceeds from long term debt..................... 93,000 29,000
Payment of financing fees........................ (3,070) --
Payments of long term debt....................... (136,375) (9,000)
--------- --------
Cash provided by financing activities........ 1,117 250
--------- --------
Effect of exchange rates on cash and cash
equivalents..................................... -- (821)
Net increase (decrease) in cash and cash
equivalents..................................... (3,254) 871
Cash and cash equivalents:
Beginning of period.............................. 7,073 4,759
--------- --------
End of period.................................... $ 3,819 $ 5,630
========= ========
Supplemental disclosure of cash flow information
Cash paid during the period for interest......... $ 5,220 $ 3,277
========= ========
Cash paid during the period for taxes, net....... $ 5,827 $ 3,086
========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
Basis of presentation
The consolidated financial statements include the accounts of Wesley Jessen
VisionCare, Inc., its wholly owned subsidiary, Wesley Jessen Corporation, and
Wesley Jessen Corporation's wholly owned subsidiaries (collectively, the
"Company").
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 Annual Report on Form 10-K for
the year ended December 31, 1997.
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.
Description of business
Effective June 29, 1995, Wesley Jessen Corporation completed the acquisition
of the Wesley Jessen contact lens business of Schering-Plough Corporation for
$76.6 million, consisting of cash paid of $47.0 million and liabilities
assumed of $29.6 million. On October 2, 1996, the Company acquired the contact
lens business of Pilkington plc, operating as the Barnes-Hind Group ("the
Barnes-Hind Acquisition") for $62.4 million, consisting of $57.4 million in
cash and $5.0 million in debt. Both acquisitions were recorded under the
purchase method of accounting. 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.
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.
The IPO
In February and March, 1997, the Company completed an initial public
offering ("IPO") of 2,821,000 shares of common stock at $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"). 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.
The Offering
In August and September, 1997, the Company completed a public offering of
4,300,000 shares of common stock at $23.50 per share (the "Offering"). Of the
4,300,000 shares, 500,000 were offered by the Company and
4
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the remaining 3,800,000 shares were offered by certain selling stockholders.
Net proceeds received by the Company, after deducting underwriting discounts,
commissions and offering expenses, were used to reduce the Company's
indebtedness under its bank credit agreement and other indebtedness. In
connection with the Offering, the Company amended its existing bank credit
agreement (Note 7).
2. NET INCOME (LOSS) PER COMMON SHARE
The Company calculates net income (loss) per common share in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per Share." The
difference between the weighted average shares used in the computation of
basic and diluted earnings per share for the three and nine months ended
September 26, 1998 is the dilutive effect of outstanding stock options, using
the treasury stock method from the date of grant. Weighted average shares used
in the computation for the nine months ended September 27, 1997 does not
include the effect of these stock options, as the effect would be
antidilutive.
3. TRANSITION RESERVE AND RESTRUCTURING CHARGE
In connection with the Barnes-Hind Acquisition, management approved a plan
to integrate the acquired operations, for which an accrual of $20.4 million
("transition reserve") was established in purchase accounting. The transition
reserve included costs related to the closure of the Barnes-Hind corporate
offices in Sunnyvale, California which was completed in the third quarter of
1997 and resulted in the termination of 123 employees. In September, 1998, the
Company announced the closing of its manufacturing operations in San Diego,
California over the next eighteen months, with a shift of conventional lens
production to its plant in Cidra, Puerto Rico. The plant closing will result
in the termination of 471 employees (of whom 198 had been terminated as of
September 26, 1998). Payments related to the transition reserve 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
December 31, 1997......... $ 9,551 $ 697 $ 977 $11,225
Charges against reserve.... (1,445) (124) (631) (2,200)
------- ----- ----- -------
Transition reserve at
September 26, 1998........ $ 8,106 $ 573 $ 346 $ 9,025
======= ===== ===== =======
</TABLE>
In addition to the transition plan, the Company committed to a plan to
restructure the Wesley Jessen operations following the Barnes-Hind
Acquisition. Pursuant to the restructuring plan, the Chicago distribution
facilities were consolidated with those at Des Plaines, Illinois in October,
1997. The restructuring reserve of $0.8 million at September 26, 1998,
consists of costs related to employee termination, lease termination and other
restructuring costs associated with the consolidation of certain Wesley Jessen
facilities in Europe with facilities acquired in the Barnes-Hind Acquisition.
Usage of the restructuring reserve is as follows (in thousands):
<TABLE>
<CAPTION>
EMPLOYEE LEASE
RELATED TERMINATION OTHER
COSTS COSTS COSTS TOTAL
-------- ----------- ----- ------
<S> <C> <C> <C> <C>
Restructuring reserve at December 31,
1997..................................... $376 $ 662 $ 210 $1,248
Charges against reserve................... (97) (100) (281) (478)
Reallocation of reserves.................. -- (200) 200 --
---- ----- ----- ------
Restructuring reserve at September 26,
1998..................................... $279 $ 362 $ 129 $ 770
==== ===== ===== ======
</TABLE>
5
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. ACCOUNTS RECEIVABLE-TRADE, NET
Accounts receivable-trade, net consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 26,
1997 1998
------------ -------------
<S> <C> <C>
Trade receivables.............................. $ 59,293 $66,718
Less allowances:
Doubtful accounts............................ (6,290) (5,641)
Sales returns and adjustments................ (10,361) (7,892)
-------- -------
$ 42,642 $53,185
======== =======
</TABLE>
5. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 26,
1997 1998
------------ -------------
<S> <C> <C>
Raw materials.................................. $ 3,558 $ 5,467
Work-in-process................................ 7,613 7,086
Finished goods................................. 38,091 46,369
------- -------
$49,262 $58,922
======= =======
</TABLE>
In connection with the Barnes-Hind Acquisition, under the purchase method of
accounting, the Company's total inventories were written up to fair value at
the date of acquisition by $36.7 million. Of this amount, $22.7 million was
charged to cost of goods sold for the nine months ended September 27, 1997.
6. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 26,
1997 1998
------------ -------------
<S> <C> <C>
Buildings and
improvements........... $ 8,369 $ 8,820
Machinery, equipment,
furniture and
fixtures............... 10,246 13,482
Construction-in-
progress............... 4,159 14,408
------- -------
22,774 36,710
Less accumulated
depreciation........... (1,294) (3,414)
------- -------
$21,480 $33,296
======= =======
</TABLE>
7. LONG-TERM DEBT
In connection with the Offering, the Company's existing 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. Effective July 29, 1998, the Company
entered into the First Amendment and Consent of the Amended Bank Credit
Agreement to increase the borrowing availability under the revolving credit
facility to $170.0 million and to permit the repurchase of a maximum of $35.0
million of the Company's common stock.
6
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Amounts borrowed under the Amended Bank Credit Agreement 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 0.5% 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 commitment, as defined in the credit agreement,
ranging from 0.175% to 0.400% based on leverage ratios calculated as of
certain dates. The unutilized portion of the credit facility at September 26,
1998 was $93.0 million. The credit facility is guaranteed by each of the
Company's domestic subsidiaries and secured by essentially all assets of the
domestic subsidiaries.
The Amended 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.
8. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income," which requires
the disclosure of all non-owner changes in equity. The Condensed Consolidated
Balance Sheets as of December 31, 1997 and September 26, 1998 have been
reclassified to reflect the adoption of this Standard.
The components of comprehensive income for the three and nine months ended
September 27, 1997 and September 26, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 27, SEPTEMBER 26,
1997 1998 1997 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income (loss)....... $ 7,095 $8,051 $(4,007) $21,048
Foreign currency
translation
adjustments............ (1,497) 1,156 (1,780) (99)
-------- ------ ------- -------
Comprehensive income
(loss)................. $ 5,598 $9,207 $(5,787) $20,949
======== ====== ======= =======
</TABLE>
9. TREASURY STOCK PURCHASE PLAN
The Board of Directors approved a share repurchase plan on June 10, 1998 and
the Company completed the program on September 18, 1998. Under the plan, the
Company repurchased one million shares of its outstanding common stock.
Repurchases were made periodically in normal market trading at prevailing
prices. The funding of the program came from operating cash flow and the
existing bank facility.
10. ACQUISITIONS
On June 26, 1998, the Company acquired the operations of Plastic Contact
Lens Argentina SAIC (PCL) from its sole shareholder. On July 31, 1998, the
Company, through its Australian subsidiary, executed a purchase agreement to
acquire certain assets and assume certain liabilities of Eycon Lens
Laboratories, Pty, Ltd. from its shareholders. The total adjusted purchase
price for both acquisitions of approximately $2.8 million (plus additional
fees and expenses of $0.3 million) was funded with existing liquidity. The
Company has accounted for the acquisitions under the purchase method of
accounting.
7
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND 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 technology, 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 196-person
salesforce and network of 76 independent distributors, which together sell the
Company's products in more than 75 countries.
WESLEY JESSEN ACQUISITION
On June 29, 1995, Bain Capital, together with new and certain then-existing
members of management, acquired the Wesley Jessen contact lens business from
Schering-Plough Corporation (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.
BARNES-HIND ACQUISITION
On October 2, 1996, the Company acquired substantially all the assets and
assumed certain liabilities of the Pilkington Barnes-Hind Group from
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 $140.0 million credit agreement and a
$5.0 million seller note (the "Pilkington Note"). Concurrently, the Company
borrowed an additional $28.5 million to repay its then outstanding term loans
and to fund ongoing working capital needs.
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 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 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. On May 7,
1998, the purchaser made an additional voluntary prepayment of $1.0 million.
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.
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 revised the operational details and
related cost estimates
8
<PAGE>
of its plans to integrate the Barnes-Hind operations. These changes in
estimates 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 saving opportunities. The
Company has completed the majority of its initial cost reduction measures
which, as expected, have improved the Company's operating results. In
September, 1998, the Company announced the closing of its manufacturing
operations in San Diego, California over the next eighteen months, with a
shift of conventional contact lens production to its plant in Cidra, Puerto
Rico. The Company believes this consolidation of facilities will generate
additional cost savings and further operating leverage. However, there can be
no assurance that the Company will be able to achieve such cost savings in
future periods.
As a result of the Barnes-Hind Acquisition, the Company incurred a
significant non-recurring charge for a non-cash increase in cost of goods sold
of $22.7 million in the nine months ended September 27, 1997 related to the
amortization of the Barnes-Hind purchased inventory step-up to fair value at
the acquisition date. Adjustments for this non-recurring charge and expected
cost savings related 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 have been reflected in the pro forma column of the
Company's Unaudited Statement of Operations Data. See "Results of Operations."
THE IPO AND THE OFFERING
In February and March, 1997, the Company consummated an initial public
offering (the "IPO") of 2.8 million shares of Common Stock at $15.00 per
share. A secondary public offering (the "Offering") of 4.3 million shares of
Common Stock at $23.50 per share was completed in August and September, 1997,
of which 3.8 million shares were sold by certain selling stockholders and 0.5
million shares were sold by the Company.
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.
In September, 1997, in connection with the Offering, the Company entered
into the Amended Bank Credit Agreement which increased the total borrowing
availability thereunder to $135.0 million, converted all remaining term loan
borrowings into revolving loans, and reduced the interest rate thereunder. The
Company incurred an additional $0.6 million of fees and expenses associated
with the Amended Bank Credit Agreement. These costs have been capitalized and
are being amortized through September, 2002.
Interest expense reductions as if the IPO had occurred on January 1, 1997
are reflected in the pro forma column of the Company's Unaudited Statement of
Operations Data. See "Results of Operations." However, 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 Barnes-Hind Acquisition occurred on October 2, 1996. Because of the
revaluation of the assets and liabilities, the related impact on cost of sales
and expenses and the several cost-reduction and operating improvements
undertaken in connection with such Acquisition, the financial statements of
the Company for the nine months ended September 27, 1997 are not comparable to
the financial statements for the nine months ended September 26, 1998. In
addition, the Company completed its IPO in February, 1997, which had a
significant impact on the Company's on-going interest expense. To improve the
comparability of the Company's first nine months in 1997 and 1998, and to
assist the reader in better understanding the changes in the Company's
operations over such periods, the Company has set forth below certain pro
forma operating results for the nine month period ended September 27, 1997
giving effect to the cost-reduction and operating improvements as if
9
<PAGE>
such transactions occurred on January 1, 1997. The pro forma adjustments are
set forth in the note to the tables. THE PRO FORMA INFORMATION INCLUDED HEREIN
FOR THE PRIOR YEAR PERIODS ARE PRESENTED FOR INFORMATIONAL PURPOSES ONLY AND
SHOULD NOT BE VIEWED AS A SUBSTITUTE FOR THE COMPANY'S RESULTS OF OPERATIONS
CALCULATED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. IN
ADDITION, THE FOLLOWING PRO FORMA INFORMATION DOES NOT PURPORT TO REPRESENT
THE RESULTS OF OPERATIONS OF THE COMPANY HAD SUCH TRANSACTIONS IN FACT
OCCURRED ON SUCH DATE, NOR DO THEY PURPORT TO BE INDICATIVE OF THE RESULTS OF
OPERATIONS OF ANY FUTURE PERIODS. The following pro forma information should
be read in conjunction with the Condensed Consolidated Financial Statements of
the Company included herein.
UNAUDITED STATEMENT OF OPERATIONS DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------
ACTUAL ACTUAL
SEPTEMBER 27, 1997 SEPTEMBER 26, 1998
------------------ ------------------
<S> <C> <C>
Net sales............................... $75,235 $75,254
Operating costs and expenses:
Cost of goods sold.................... 23,891 23,255
Marketing and administrative.......... 36,486 35,891
Research and development.............. 3,065 2,820
Amortization of goodwill.............. (196) (247)
------- -------
Income from operations................ 11,989 13,535
Other (income) expense:
Interest expense, net................. 1,241 1,336
------- -------
Income before income taxes.............. 10,748 12,199
Income tax expense...................... 3,653 4,148
------- -------
Net income.............................. $ 7,095 $ 8,051
======= =======
Net income per common share:
Basic................................. $ 0.41 $ 0.47
======= =======
Diluted............................... $ 0.37 $ 0.43
======= =======
Weighted average common shares
outstanding:
Basic................................. 17,305 17,134
======= =======
Diluted............................... 18,927 18,521
======= =======
</TABLE>
10
<PAGE>
UNAUDITED STATEMENT OF OPERATIONS DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------------------------------------
ACTUAL PRO FORMA ACTUAL
SEPTEMBER 27, 1997 SEPTEMBER 27, 1997(A) SEPTEMBER 26, 1998
------------------ --------------------- ------------------
<S> <C> <C> <C>
Net sales............... $211,389 $211,389 $219,266
Operating costs and
expenses:
Cost of goods sold.... 93,373 70,707 67,957
Marketing and
administrative....... 104,049 102,964 108,894
Research and
development.......... 8,828 8,828 7,853
Amortization of
goodwill............. (588) (588) (794)
-------- -------- --------
Income from
operations........... 5,727 29,478 35,356
Other (income) expense:
Interest expense,
net.................. 4,371 3,960 3,464
-------- -------- --------
Income before income
taxes and extraordinary
loss................... 1,356 25,518 31,892
Income tax expense...... 461 8,675 10,844
-------- -------- --------
Income before
extraordinary loss..... 895 16,843 21,048
Extraordinary loss net
of tax................. (4,902) -- --
-------- -------- --------
Net income (loss)....... $ (4,007) $ 16,843 $ 21,048
======== ======== ========
Net income (loss) per
common share:
Basic................. $ (0.24) $ 0.98 $ 1.20
======== ======== ========
Diluted............... $ (0.24) $ 0.90 $ 1.10
======== ======== ========
Weighted average common
shares outstanding:
Basic................. 16,620 17,167 17,589
======== ======== ========
Diluted............... 16,620 18,818 19,084
======== ======== ========
</TABLE>
- --------
(A) These pro forma results include adjustments 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 February, 1997 initial public
offering (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
pro forma income tax expense at an estimated effective tax rate of 34%.
THREE MONTHS ENDED SEPTEMBER 26, 1998 (UNAUDITED) COMPARED TO THREE MONTHS
ENDED SEPTEMBER 27, 1997 (UNAUDITED)
Net sales for the three months ended September 26, 1998 of $75.3 million
were even with net sales of $75.2 million for the three months ended September
27, 1997. This comparability resulted primarily from 15.0% growth in the sales
of disposable and planned replacement contact lenses, from $27.7 million to
$31.9 million, offset by an 8.7% decline in the sales of conventional lens
products, from $47.5 million to $43.4 million. Sales of disposable and planned
replacement lenses grew 30.8% in the U.S. but were flat internationally, while
sales of conventional lenses fell 6.9% domestically and 11.5% in the rest of
the world. For the three month period, total U.S. sales rose 5.2%, with total
international sales posting a decrease of 6.6%.
11
<PAGE>
Gross profit for the three months ended September 26, 1998 increased $0.7
million, or 1.3%, to $52.0 million from $51.3 million in the comparable 1997
period. Gross profit margin improved 0.9% to 69.1% in the 1998 period,
reflecting the higher margins realized on disposable and planned replacement
lenses due to higher production volumes, as well as cost savings from improved
plant utilization and other operating efficiencies.
Marketing and administrative expenses for the three months ended September
26, 1998 decreased by $0.6 million, or 1.6%, to $35.9 million from $36.5
million for the three months ended September 27, 1997. As a percentage of net
sales, marketing and administrative expenses decreased to 47.7% in the 1998
period from 48.5% in the 1997 period. This decrease resulted as higher
promotional spending for the new FreshLook toric lens and WildEyes specialty
cosmetic products, along with increased performance related compensation
expenses, were more than offset by favorable foreign exchange gains.
Research and development expenses decreased $0.3 million, or 8.0%, to $2.8
million for the three months ended September 26, 1998 from $3.1 million for
the three months ended September 27, 1997. As a percent of net sales, research
and development expenses decreased to 3.7% in the 1998 period from 4.1% in the
1997 period. The decrease was driven by the continuing realization of
operational synergies related to the Barnes-Hind Acquisition.
Amortization of goodwill was comparable at $0.2 million for the three months
ended September 26, 1998 and September 27, 1997 as the prior year impact on
negative goodwill of the purchase price reduction, pension valuation and
integration cost estimate changes related to the Barnes-Hind Acquisition was
partially offset by the current year effect of the initial amortization of
goodwill related to recent acquisitions.
Interest expense, net increased 7.7% to $1.3 million for the three months
ended September 26, 1998 from $1.2 million for the three months ended
September 27, 1997 due to higher average debt balances in 1998, reduced by the
effects of lower current year interest rates available to the Company under
its revolving credit facility.
Net income for the three months ended September 26, 1998 increased by $1.0
million to $8.1 million from $7.1 million for the three months ended September
27, 1997 driven by the improvement in gross margin and lower marketing and
administrative expenses.
NINE MONTHS ENDED SEPTEMBER 26, 1998 COMPARED TO PRO FORMA NINE MONTHS ENDED
SEPTEMBER 27, 1997
Net sales for the nine months ended September 26, 1998 increased $7.9
million, or 3.7%, to $219.3 million from $211.4 million for the nine months
ended September 27, 1997. This increase resulted primarily from 24.7% growth
in the sales of disposable and planned replacement contact lenses, from $71.6
million to $89.3 million, offset by a 7.0% decline in the sales of
conventional lens products, from $139.8 million to $130.0 million. Sales of
disposable and planned replacement lenses grew 37.4% in the U.S. and 12.6%
internationally while sales of conventional lenses fell 7.0% domestically and
7.1% in the rest of the world. For the nine month period, total U.S. sales
increased 5.9%, while international sales rose 0.9%.
Gross profit for the nine months ended September 26, 1998 increased $10.6
million, or 7.6%, to $151.3 million from $140.7 million in the comparable 1997
period. Gross profit margin increased 2.4% to 69.0% in the 1998 period,
reflecting sales-driven increases in production of the high margin disposable
and planned replacement lenses, as well as cost savings from improved plant
utilization and other operating efficiencies.
Marketing and administrative expenses for the nine months ended September
26, 1998 increased by $5.9 million, or 5.8%, to $108.9 million from $103.0
million for the nine months ended September 27, 1997. As a percentage of net
sales, marketing and administrative expenses increased to 49.7% in the 1998
period from 48.7% in the 1997 period. This increase was largely due to higher
promotional spending to support the launch of the new FreshLook toric lens and
WildEyes specialty cosmetic products, along with the market expansion of the
disposable and planned replacement product lines.
12
<PAGE>
Research and development expenses for the nine months ended September 26,
1998 decreased by $0.9 million, or 11.0%, to $7.9 million from $8.8 million
for the nine months ended September 27, 1997. As a percentage of net sales,
research and development expenses for the nine months ended September 26, 1998
declined to 3.6% from 4.2% in the prior year period. The decrease was driven
by the realization of operational synergies related to the Barnes-Hind
Acquisition and the successful completion of various production-related
development projects.
Amortization of goodwill for the nine months ended September 26, 1998
increased by $0.2 million, or 35.0%, to $0.8 million from $0.6 million for the
nine months ended September 27, 1997 due to the impact on negative goodwill of
the purchase price reduction, pension valuation and integration cost estimate
changes related to the Barnes-Hind Acquisition.
Interest expense, net decreased 12.5% to $3.5 million for the nine months
ended September 26, 1998 from $4.0 million for the nine months ended September
27, 1997 due to the paydown of debt throughout 1997 and early 1998 with
proceeds from the offerings and funds generated from operations.
Net income for the nine months ended September 26, 1998 increased by $4.2
million to $21.0 million from $16.8 million for the nine months ended
September 27, 1997 as improvement in gross margin was partially offset by
increased spending in marketing and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its operations primarily through funds provided from
operations and through borrowings under its revolving credit facility. For the
nine months ended September 26, 1998, the Company provided approximately $16.3
million in cash for operating activities. This source of funds resulted from
improvements in profitability along with increases in income taxes payable and
accrued liabilities, partially offset by higher accounts receivables and
inventory balances. For the nine months ended September 27, 1997, the Company
provided approximately $1.4 million in cash for operating activities. This
source of funds resulted from 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.
Since December 31, 1997, the Company has additional borrowings of $20.0
million, which were used to fund capital expenditures, recent acquisitions and
a portion of the share repurchase program.
For the nine months ended September 26, 1998 and September 27, 1997, the
Company made capital expenditures of approximately $12.9 million and $11.8
million, respectively. The majority of these capital expenditures were for
facility and equipment improvement, information technology enhancements, and
site consolidations. The Company anticipates additional capital expenditures
of approximately $8 million to be made throughout 1998 to expand production
capacity, further consolidate locations and improve management information
systems. The Company expects to fund these capital expenditures primarily by
cash generated from operating activities and borrowings under its revolving
credit facility.
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 March, 2000. As of September
26, 1998, the Company has paid $11.4 million of these integration costs.
Effective July 29, 1998, the Company entered into the First Amendment and
Consent of the Amended Bank Credit Agreement to increase the borrowing
availability under the revolving credit facility to $170.0 million and to
permit the repurchase of a maximum of $35.0 million of the Company's common
stock.
As of September 26, 1998, the Company had $93.0 million in borrowing
availability under the revolving credit facility portion of the Amended Bank
Credit Agreement. The Amended Bank Credit Agreement imposes
13
<PAGE>
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
Amended 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 together with other
available sources of funds including borrowings under the Amended Bank Credit
Agreement and cash on hand at September 26, 1998 of $5.6 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 significant 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, 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.
Approximately 42% of the Company's net sales for the nine months ended
September 26, 1998 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.
SHARE REPURCHASE PROGRAM
The Board of Directors approved a share repurchase plan on June 10, 1998 and
the Company completed the program on September 18, 1998. Under the plan, the
Company repurchased one million shares of its outstanding common stock at an
average cost of $21 per share. Repurchases were made in normal market trading
at prevailing prices and were funded from operating cash flow and the existing
bank facility.
RECENT ACQUISITIONS
On June 26, 1998, the Company acquired the operations of Plastic Contact
Lens Argentina SAIC (PCL) from its sole shareholder. On July 31, 1998, the
Company, through its Australian subsidiary, executed a purchase agreement to
acquire certain assets and assume certain liabilities of Eycon Lens
Laboratories, Pty, Ltd. from its shareholders. The total adjusted purchase
price for both acquisitions of approximately $2.8 million (plus additional
fees and expenses of $0.3 million) was funded with existing liquidity. The
Company has accounted for the acquisitions under the purchase method of
accounting.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("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
14
<PAGE>
segment performance and deciding how to allocate resources to segments. The
Company is currently evaluating the potential impact of the Statement, which
it will adopt in its financial statements for the year ending December 31,
1998.
SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," issued in February, 1998, standardizes the
disclosure requirements for pensions and other postretirement benefits.
Amending SFAS 87, "Employers' Accounting for Pensions," SFAS 88, "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans
and for Termination Benefits," and SFAS 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," it requires additional
disclosure of changes in benefit obligations and fair values of plan assets.
This Statement is effective for fiscal years beginning after December 15, 1997
and requires presentation of prior period information for comparability
purposes. The Company expects to adopt this Statement in its financial
statements for the year ending December 31, 1998.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
issued in June, 1998, establishes accounting and reporting standards for
derivative instruments and for hedging activities. Amending SFAS 52, "Foreign
Currency Translation" and SFAS 107, "Disclosures about Fair Value of Financial
Instruments" and superceding SFAS 80, "Accounting for Futures Contracts," SFAS
105 "Disclosure of Information about Financial Instruments with Off-Balance-
Sheet Risk and Financial Instruments with Concentrations of Credit Risk," and
SFAS 119, "Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments," it requires the recognition of all derivatives as
either assets or liabilities in the statement of financial position and
measurement of those instruments at fair value. This Statement is effective
for fiscal quarters of fiscal years beginning after June 15, 1999 and does not
permit retroactive application to prior period financial statements. The
Company expects to adopt this Statement in its financial statements for the
year ending December 31, 2000. This statement is not expected to have a
material impact on the Company's financial statements.
YEAR 2000
The Company utilizes and relies upon computer technology in many facets of
its operations, such as in the manufacture of contact lenses, the distribution
of lenses to customers, the arrangement of credit in connection with the
purchase of goods and the internal and external reporting of financial and
operational information. The technologies employed by the Company throughout
its operation include hardware and software as well as microprocessors and
other electronic devices which are components of equipment ("embedded chips").
In the past, certain computer programs were written using two digits rather
than four digits to define the applicable year. Consequently, any of the
Company's systems and equipment that involve the use of time-sensitive
software programmed in that manner may recognize a date identified as "00" as
the year "1900" rather than "2000", which could result in miscalculations or
system failures. This is commonly referred to as the "Year 2000" or "Y2K"
issue.
The Company has undertaken a global approach to addressing the Year 2000
issue. Thus far, the Company has preliminarily identified the areas of its
operations in which the Year 2000 issue may arise and conducted a global
survey of all personal computers, software and other essential equipment to
identify components that must be modified or replaced. A formal plan has been
established to acquire new and repair existing Company personal computers and
associated software by June 1999. An assessment of manufacturing equipment and
software is underway, and modifications to mainframe system software are
progressing according to plan. In addition, the Company has initiated written
communications with significant suppliers and all banking institutions with
which the Company has financial arrangements to determine the extent to which
the Company's systems and operations are vulnerable to those third parties'
failures to remediate their Year 2000 compliance problems. The Company's
global steering committee meets bi-weekly to monitor the progress of testing
of all Company Information Technology ("IT") and relevant non-IT systems, to
establish milestones for completion of specific Year 2000-related tasks
throughout the Company's facilities, and to supervise generally the measures
taken by the Company to address the Year 2000 issue.
15
<PAGE>
The Company presently believes that, as a result of its actions, the Year
2000 issue will not pose significant operational problems for its computer
systems. If, however, the modifications, conversions and testing described
above are not accomplished in a timely manner, the Year 2000 issue could have
a material impact on the Company's operations. In addition, there can be no
guarantee that the systems of third parties will be made compliant in a timely
manner and would not have an adverse effect on the Company.
The Company is using both internal and external resources to identify and
test systems for Year 2000 compliance and to modify or replace them where
necessary. The Company expects to spend at least $4.2 million to assure Year
2000 compliance. The majority of these costs will be expensed as incurred,
with the remainder treated as capital expenditures. Costs related to Year 2000
compliance were not significant in prior years.
At this time, management is unable to estimate the effect of noncompliance
with the Year 2000 issue on the Company's results of operations, liquidity and
financial condition beyond the belief that noncompliance would be material in
nature. Accordingly, a contingency plan will be developed by June, 1999 to
mitigate the potential risk related to unsuccessful remediation on either the
part of the Company or its significant suppliers or bankers.
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European
Union are scheduled to establish fixed conversion rates between their existing
sovereign currencies and the euro, and have agreed to adopt the euro as their
common legal currency on that date. The Company is analyzing the potential
impact, if any, the conversion to the euro will have on its business
strategies and financial position. At this time, management is unable to
estimate the effect of the euro conversion on the Company's results of
operations, liquidity and financial condition.
FORWARD-LOOKING STATEMENTS
The 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 compete
successfully 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: (vi) the ability of the Company to continue to
successfully develop and launch new products and (vii) the timely resolution
of the Year 2000 issue by the Company and its suppliers. 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.
16
<PAGE>
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
The following exhibits are filed herewith and made a part hereof:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S> <C>
11.1 Computation of Earnings (Loss) Per Share.
27.1 Financial Data Schedule.
</TABLE>
(b) REPORTS ON FORM 8-K.
None.
17
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES AND
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/ Ronald J. Artale
By___________________________________
Ronald J. Artale
(Duly authorized officer,
Vice President and Controller)
18
<PAGE>
EXHIBIT 11.1
COMPUTATION OF EARNINGS (LOSS) PER SHARE
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
September 27, September 26, September 27, September 26,
1997 1998 1997 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Computation of basic net income (loss) per share:
Net income (loss) $ 7,095 $ 8,051 $(4,007) $21,048
======= ======= ======= =======
Weighted average common shares outstanding 17,305 17,134 16,620 17,589
Basic net income (loss) per share $ 0.41 $ 0.47 $ (0.24) $ 1.20
======= ======= ======= =======
Computation of diluted net income (loss) per share:
Net income (loss) $ 7,095 $ 8,051 $(4,007) $21,048
======= ======= ======= =======
Weighted average common shares outstanding 17,305 17,134 16,620 17,589
Net additional shares issuable in connection with
stock options pursuant to the treasury stock method 1,622 1,387 - 1,495
------- ------- ------- -------
Diluted weighted average common shares outstanding 18,927 18,521 16,620 19,084
======= ======= ======= =======
Diluted net income (loss) per share $ 0.37 $ 0.43 $ (0.24) $ 1.10
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUN-28-1998
<PERIOD-END> SEP-26-1998
<CASH> 5,630
<SECURITIES> 0
<RECEIVABLES> 66,718
<ALLOWANCES> 13,533<F1>
<INVENTORY> 58,922
<CURRENT-ASSETS> 151,161
<PP&E> 36,710
<DEPRECIATION> 3,414
<TOTAL-ASSETS> 209,122
<CURRENT-LIABILITIES> 74,163
<BONDS> 0
0
0
<COMMON> 180
<OTHER-SE> 39,958
<TOTAL-LIABILITY-AND-EQUITY> 209,122
<SALES> 75,254
<TOTAL-REVENUES> 75,254
<CGS> 23,255
<TOTAL-COSTS> 61,966
<OTHER-EXPENSES> (247)
<LOSS-PROVISION> 63
<INTEREST-EXPENSE> 1,336
<INCOME-PRETAX> 12,199
<INCOME-TAX> 4,148
<INCOME-CONTINUING> 8,051
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,051
<EPS-PRIMARY> 0.47
<EPS-DILUTED> 0.43
<FN>
<F1> ALLOWANCES NETTED AGAINST TRADE RECEIVABLES INCLUDE BOTH BAD DEBT RESERVES
AND SALES RETURN RESERVES.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,073
<SECURITIES> 0
<RECEIVABLES> 56,480
<ALLOWANCES> 17,611<F1>
<INVENTORY> 69,139<F2>
<CURRENT-ASSETS> 157,386
<PP&E> 10,521
<DEPRECIATION> (396)
<TOTAL-ASSETS> 180,600
<CURRENT-LIABILITIES> 79,127
<BONDS> 0
0
0
<COMMON> 143<F4>
<OTHER-SE> 13,435
<TOTAL-LIABILITY-AND-EQUITY> 180,600
<SALES> 156,752
<TOTAL-REVENUES> 156,752
<CGS> 63,858<F3>
<TOTAL-COSTS> 157,277
<OTHER-EXPENSES> (3,835)
<LOSS-PROVISION> 2,033
<INTEREST-EXPENSE> 5,385
<INCOME-PRETAX> (4,108)
<INCOME-TAX> (3,037)
<INCOME-CONTINUING> (1,071)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,671)
<CHANGES> 0
<NET-INCOME> (2,742)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
<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,
BUSINESS COMBINATIONS
<F3> COST OF GOODS SOLD INCLUDES THE FLOW THROUGH OF THE PREVIOUSLY MENTIONED
INVENTORY ADJUSTMENT
<F4> EQUITY REFLECTS THE EFFECT OF THE INITIAL PUBLIC OFFERING WHICH OCCURRED ON
FEBRUARY 19, 1997.
</FN>
</TABLE>
