<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 June 27, 1998
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
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 August 3, 1998 was 17,098,676.
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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 June
27, 1998.......................................................... 1
Condensed Consolidated Statements of Operations for the three
months and six months ended June 28, 1997 and June 27, 1998....... 2
Condensed Consolidated Statements of Cash Flows for the six months
ended June 28, 1997 and June 27, 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....................................... 8-15
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................. 16
Signatures........................................................... 17
</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, JUNE 27,
ASSETS 1997 1998
------ ------------ -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 4,759 $ 12,417
Accounts receivable--trade, net..................... 42,642 49,464
Other receivables................................... 4,773 5,619
Inventories......................................... 49,262 55,496
Deferred income taxes............................... 18,102 18,234
Prepaid expenses.................................... 7,675 6,737
Assets held for sale................................ 1,222 1,222
-------- --------
Total current assets.............................. 128,435 149,189
-------- --------
Property, plant and equipment, net.................... 21,480 27,135
Other assets.......................................... 6,894 7,960
Deferred income taxes................................. 10,838 10,838
Notes receivable...................................... 2,773 1,801
Capitalized financing fees, net....................... 2,656 2,390
-------- --------
Total assets...................................... $173,076 $199,313
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Trade accounts payable.............................. $ 14,229 $ 18,175
Accrued compensation and benefits................... 19,806 18,087
Accrued advertising................................. 4,113 5,046
Other accrued liabilities........................... 11,212 11,459
Transition reserve.................................. 11,225 9,385
Income taxes payable................................ 2,015 4,138
-------- --------
Total current liabilities......................... 62,600 66,290
-------- --------
Negative goodwill, net................................ 13,681 13,134
Long term debt........................................ 57,000 77,000
Other liabilities..................................... 2,949 2,771
-------- --------
Total liabilities................................. 136,230 159,195
-------- --------
Stockholders' equity:
Common stock, $.01 par value, 50,000,000 shares
authorized, 17,736,011 and 17,374,239 issued and
outstanding at December 31, 1997 and June 27, 1998
respectively....................................... 177 180
Additional paid in capital.......................... 56,390 59,784
Accumulated deficit................................. (19,159) (6,162)
Treasury stock, 597,000 shares at June 27, 1998, at
cost............................................... -- (11,867)
Accumulated other comprehensive loss................ (562) (1,817)
-------- --------
Total stockholders' equity........................ 36,846 40,118
-------- --------
Total liabilities and stockholders' equity........ $173,076 $199,313
======== ========
</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 SIX MONTHS ENDED
----------------------- -----------------------
JUNE 28, JUNE 27, JUNE 28, JUNE 27,
1997 1998 1997 1998
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales ..................... $72,083 $73,417 $136,154 $144,012
------- ------- -------- --------
Operating costs and expenses:
Cost of goods sold .......... 24,946 22,763 46,816 44,702
Cost of goods sold--inventory
step-up (Note 5) ........... 9,574 -- 22,666 --
Marketing and administrative
............................ 34,307 35,440 67,563 73,003
Research and development .... 2,742 2,647 5,763 5,033
Amortization of negative
goodwill ................... (196) (273) (392) (547)
------- ------- -------- --------
Income (loss) from operations . 710 12,840 (6,262) 21,821
Other (income) expense:
Interest income ............. (136) (131) (136) (255)
Interest expense ............ 1,406 1,263 3,266 2,383
------- ------- -------- --------
Income (loss) before taxes and
extraordinary loss ........... (560) 11,708 (9,392) 19,693
Income tax benefit (expense) .. 189 (3,981) 3,192 (6,696)
------- ------- -------- --------
Net income (loss) before
extraordinary loss ........... (371) 7,727 (6,200) 12,997
Extraordinary loss, net of
related tax benefit of $2,526. -- -- (4,902) --
------- ------- -------- --------
Net income (loss) ............. $ (371) $ 7,727 $(11,102) $ 12,997
======= ======= ======== ========
Income (loss) per common share:
Basic
Net income (loss) before
extraordinary loss ....... $ (0.02) $ 0.43 $ (0.38) $ 0.73
Extraordinary loss, net of
tax benefit .............. -- -- (0.30) --
------- ------- -------- --------
Net income (loss) ......... $ (0.02) $ 0.43 $ (0.68) $ 0.73
======= ======= ======== ========
Diluted
Net income (loss) before
extraordinary loss ....... $ (0.02) $ 0.40 $ (0.38) $ 0.67
Extraordinary loss, net of
tax benefit .............. -- -- (0.30) --
------- ------- -------- --------
Net income (loss) ......... $ (0.02) $ 0.40 $ (0.68) $ 0.67
======= ======= ======== ========
Weighted average common shares
outstanding:
Basic ....................... 17,097 17,859 16,273 17,822
======= ======= ======== ========
Diluted ..................... 17,097 19,326 16,273 19,367
======= ======= ======== ========
</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>
SIX MONTHS ENDED
-----------------------
JUNE 28, JUNE 27,
1997 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income (loss).................................... $ (11,102) $ 12,997
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............................... 353 945
Purchased inventory step-up........................ 22,666 --
Amortization of capitalized financing fees......... 243 282
Amortization of negative goodwill.................. (392) (547)
Deferred income taxes.............................. (6,559) (132)
Gain on disposal of fixed assets................... -- (24)
Stock option related tax benefit................... -- 2,056
Other.............................................. (83) --
Changes in balance sheet items:
Accounts receivable--trade, net.................... (6,830) (6,970)
Other receivables.................................. (17) (836)
Inventories........................................ 1,871 (6,488)
Prepaid expenses................................... (325) 887
Other assets....................................... 209 (1,100)
Notes receivable................................... (1,252) 972
Trade accounts payable............................. (2,961) 3,914
Accrued liabilities................................ (11,172) (2,211)
Other liabilities.................................. 603 (170)
Income taxes payable............................... (836) 2,030
--------- --------
Cash provided by (used in) operating activities.. (8,156) 5,605
--------- --------
Investing activities:
Proceeds from Natural Touch sale..................... 3,000 --
Capital expenditures................................. (7,241) (6,652)
--------- --------
Cash used in investing activities................ (4,241) (6,652)
--------- --------
Financing activities:
Issuance of stock.................................... 36,849 1,338
Repurchase of shares................................. -- (11,867)
Proceeds from long term debt......................... 84,000 21,000
Payment of financing fees............................ (2,495) --
Payments of long term debt........................... (109,875) (1,000)
--------- --------
Cash provided by financing activities............ 8,479 9,471
--------- --------
Effect of exchange rates on cash..................... -- (766)
Net increase (decrease) in cash and cash equivalents. (3,918) 7,658
Cash and cash equivalents:
Beginning of period.................................. 7,073 4,759
--------- --------
End of period........................................ $ 3,155 $ 12,417
========= ========
Supplemental disclosure of cash flow information
Cash paid during the period for interest............. $ 3,589 $ 2,088
========= ========
Cash paid during the period for taxes, net........... $ 3,032 $ 2,353
========= ========
</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)
(UNAUDITED)
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 six months ended June
27, 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 corresponding 1997 periods do 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 addition, management
plans to curtail certain manufacturing activities in San Diego, California
which will comprise reductions in direct labor, quality assurance, maintenance
and other manufacturing functions as well as site support and administrative
operations, including distribution, customer service, credit and collections.
These activities will be transferred to other Company locations and will
result in the termination of 291 employees (of whom 152 had been terminated as
of June 27, 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. 1,277 102 461 1,840
------ ---- ---- -------
Transition reserve at
June 27, 1998.......... $8,274 $595 $516 $ 9,385
====== ==== ==== =======
</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 $1.0 million at June 27, 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............... 44 75 179 298
---- ---- ---- ------
Restructuring reserve at June 27,
1998................................. $332 $587 $ 31 $ 950
==== ==== ==== ======
</TABLE>
5
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
4. ACCOUNTS RECEIVABLE--TRADE, NET
Accounts receivable--trade, net consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE
DECEMBER 31, 27,
1997 1998
------------ -------
<S> <C> <C>
Trade receivables................................... $59,293 $64,181
Less allowances:
Doubtful accounts................................. (6,290) (6,001)
Sales returns and adjustments..................... (10,361) (8,716)
------- -------
$42,642 $49,464
======= =======
</TABLE>
5. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE
DECEMBER 31, 27,
1997 1998
------------ -------
<S> <C> <C>
Raw materials........................................ $ 3,558 $ 5,091
Work-in-process...................................... 7,613 8,419
Finished goods....................................... 38,091 41,986
------- -------
$49,262 $55,496
======= =======
</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, $9.6 million and
$22.7 million were charged to cost of goods sold for the three and six months
ended June 28, 1997, respectively.
6. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE
DECEMBER 31, 27,
1997 1998
------------ -------
<S> <C> <C>
Buildings and improvements.......................... $ 8,369 $ 8,760
Machinery, equipment, furniture and fixtures........ 10,246 11,345
Construction-in-progress............................ 4,159 9,269
------- -------
22,774 29,374
Less accumulated depreciation....................... (1,294) (2,239)
------- -------
$21,480 $27,135
======= =======
</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. The Company incurred approximately $0.3
million of fees and expenses associated with the First Amendment and Consent
of the Amended Bank Credit Agreement. These costs will be capitalized and
amortized through September, 2002.
6
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
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 June 27, 1998
was $58.0 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 June 27, 1998 have been
reclassified to reflect the adoption of this Standard.
The components of comprehensive income for the three and six months ended
June 28, 1997 and June 27, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------- -----------------
JUNE
JUNE 28, JUNE 27, JUNE 28, 27,
1997 1998 1997 1998
--------- --------- -------- -------
<S> <C> <C> <C> <C>
Net income (loss).............. $ (371) $ 7,727 $(11,102) $12,997
Foreign currency translation
adjustments................... 206 (652) (283) (1,255)
-------- --------- -------- -------
Comprehensive income (loss).... $ (165) $ 7,075 $(11,385) $11,742
======== ========= ======== =======
</TABLE>
9. TREASURY STOCK PURCHASE PLAN
On June 10, 1998, the Company announced that the Board of Directors had
approved a share repurchase program. Under the program, the Company may
repurchase up to one million shares of the Company's outstanding common stock.
Repurchases will be made from time to time in normal market trading at
prevailing prices. It is expected that the funding of the program will come
from operating cash flow and the existing bank facility. As of June 27, 1998,
the Company had repurchased 597,000 shares.
10. SUBSEQUENT EVENTS
On June 26, 1998, the Company acquired the operations of Plastic Contact
Lens Argentina SAIC (PCL) from its sole shareholder, Dr. Erwin Voss. 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 purchase price
for both acquisitions of approximately $3.3 million (plus fees and expenses of
$0.3 million) was funded with existing liquidity. The Company will account 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 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.
8
<PAGE>
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 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. 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 significant
non-recurring charges for non-cash increases in cost of goods sold of $9.6
million in the three months ended June 28, 1997 and $22.7 million in the six
months ended June 28, 1997 related to the amortization of the Barnes-Hind
purchased inventory step-up to fair value at the acquisition date. Adjustments
for these non-recurring charges 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 three months and six months ended June 28, 1997 are not
comparable to the financial statements for the three months and six months
ended June 27, 1998, respectively. 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 second three
months and first six 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 three month and the six month periods ended June 28, 1997 giving
effect to the cost-reduction and operating improvements as if such
transactions occurred on January 1, 1997. The pro forma adjustments are set
forth in the notes 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.
9
<PAGE>
UNAUDITED STATEMENT OF OPERATIONS DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------
ACTUAL PRO FORMA ACTUAL
JUNE 28, 1997 JUNE 28, 1997(a) JUNE 27, 1998
------------- ---------------- -------------
<S> <C> <C> <C>
Net sales........................ $72,083 $72,083 $73,417
Operating costs and expenses:
Cost of goods sold............. 34,520 24,946 22,763
Marketing and administrative... 34,307 33,973 35,440
Research and development....... 2,742 2,742 2,647
Amortization of negative
goodwill...................... (196) (196) (273)
------- ------- -------
Income from operations......... 710 10,618 12,840
Other (income) expense:
Interest expense, net.......... 1,270 1,270 1,132
------- ------- -------
Income (loss) before income
taxes........................... (560) 9,348 11,708
Income tax (expense) benefit..... 189 (3,179) (3,981)
------- ------- -------
Net income (loss)................ $ (371) $ 6,169 $ 7,727
======= ======= =======
Net income (loss) per common
share:
Basic.......................... $ (0.02) $ 0.36 $ 0.43
======= ======= =======
Diluted........................ $ (0.02) $ 0.33 $ 0.40
======= ======= =======
Weighted average common shares
outstanding:
Basic.......................... 17,097 17,097 17,859
======= ======= =======
Diluted........................ 17,097 18,593 19,326
======= ======= =======
</TABLE>
- --------
(a) The pro forma results include adjustments to (i) eliminate the $9,574 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 $334 in non-recurring transitional
administrative expenses incurred at the Barnes-Hind corporate facility in
Sunnyvale, California; and (iii) reflect the pro forma income tax expense
at an estimated effective income tax rate of 34%.
10
<PAGE>
UNAUDITED STATEMENT OF OPERATIONS DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------------------------
ACTUAL PRO FORMA ACTUAL
JUNE 28, 1997 JUNE 28, 1997(b) JUNE 27, 1998
------------- ---------------- -------------
<S> <C> <C> <C>
Net sales......................... $136,154 $136,154 $144,012
Operating costs and expenses:
Cost of goods sold.............. 69,482 46,816 44,702
Marketing and administrative.... 67,563 66,478 73,003
Research and development........ 5,763 5,763 5,033
Amortization of negative
goodwill....................... (392) (392) (547)
-------- -------- --------
Income (loss) from operations... (6,262) 17,489 21,821
Other (income) expense:
Interest expense, net........... 3,130 2,719 2,128
-------- -------- --------
Income (loss) before income taxes
and extraordinary item........... (9,392) 14,770 19,693
Income tax (expense) benefit...... 3,192 (5,022) (6,696)
-------- -------- --------
Income (loss) before extraordinary
item............................. (6,200) 9,748 12,997
Extraordinary loss net of tax..... (4,902) -- --
-------- -------- --------
Net income (loss)................. $(11,102) $ 9,748 $ 12,997
======== ======== ========
Net income (loss) per common
share:
Basic........................... $ (0.68) $ 0.57 $ 0.73
======== ======== ========
Diluted......................... $ (0.68) $ 0.52 $ 0.67
======== ======== ========
Weighted average common shares
outstanding:
Basic........................... 16,273 17,097 17,822
======== ======== ========
Diluted......................... 16,273 18,582 19,367
======== ======== ========
</TABLE>
- --------
(b) 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 June 27, 1998 (Unaudited) Compared to Pro Forma Three
Months Ended June 28, 1997 (Unaudited)
Net sales for the three months ended June 27, 1998 increased $1.3 million,
or 1.9%, to $73.4 million from $72.1 million for the three months ended June
28, 1997. This increase resulted primarily from 30.6% growth in the sales of
disposable and planned replacement contact lenses, from $23.0 million to $30.1
million, offset by an 11.6% decline in the sales of conventional lens
products, from $49.1 million to $43.3 million. Sales of disposable and planned
replacement lenses grew 34.3% in the U.S. and 27.0% internationally, while
sales of conventional lenses fell 10.8% domestically and 13.0% in the rest of
the world. For the three month period, total international sales rose 2.2%,
surpassing the total U.S. sales growth of 1.6%.
11
<PAGE>
Gross profit for the three months ended June 27, 1998 increased $3.5
million, or 7.5%, to $50.6 million from $47.1 million in the comparable 1997
period. Gross profit margin improved 3.6% to 69.0% 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 June 27,
1998 increased by $1.4 million, or 4.3%, to $35.4 million from $34.0 million
for the three months ended June 28, 1997. As a percentage of net sales,
marketing and administrative expenses increased to 48.3% in the 1998 period
from 47.1% in the 1997 period. This increase was largely due to higher
promotional spending to support the market expansion of disposable and planned
replacement product lines plus the launch of the new FreshLook toric lens and
other conventional specialty cosmetic products.
Research and development expenses decreased $0.1 million, or 3.5%, to $2.6
million for the three months ended June 27, 1998 from $2.7 million for the
three months ended June 28, 1997. As a percent of net sales, research and
development expenses decreased to 3.6% in the 1998 period from 3.8% in the
1997 period. The decrease was driven by non-recurring spending in the prior
year to investigate new product potential.
Amortization of negative goodwill income increased $0.1 million, or 39.3%,
to $0.3 million for the three months ended June 27, 1998 from $0.2 million for
the three months ended June 28, 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 10.9% to $1.1 million for the three months
ended June 27, 1998 from $1.3 million for the three months ended June 28, 1997
due to lower current year interest rates available to the Company under its
revolving credit facility and lower average debt balances in 1998.
Net income for the three months ended June 27, 1998 increased by $1.5
million to $7.7 million from $6.2 million for the three months ended June 28,
1997 as the improvement in gross margin was partially offset by higher
spending in marketing and administrative expenses.
Six Months Ended June 27, 1998 Compared to Pro Forma Six Months Ended June
28, 1997
Net sales for the six months ended June 27, 1998 increased $7.8 million, or
5.8%, to $144.0 million from $136.2 million for the six months ended June 28,
1997. This increase resulted primarily from 30.8% growth in the sales of
disposable and planned replacement contact lenses, from $43.9 million to $57.4
million, offset by a 6.2% decline in the sales of conventional lens products,
from $92.2 million to $86.6 million. Sales of disposable and planned
replacement lenses grew 41.6% in the U.S. and 20.6% internationally while
sales of conventional lenses fell 7.0% domestically and 4.8% in the rest of
the world. For the six month period, total U.S. sales increased 6.2%, while
international sales rose 5.2%.
Gross profit for the six months ended June 27, 1998 increased $10.0 million,
or 11.2%, to $99.3 million from $89.3 million in the comparable 1997 period.
Gross profit margin increased 3.4% 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 six months ended June 27, 1998
increased by $6.5 million, or 9.8%, to $73.0 million from $66.5 million for
the six months ended June 28, 1997. As a percentage of net sales, marketing
and administrative expenses increased to 50.7% in the 1998 period from 48.8%
in the 1997 period. This increase was largely due to higher promotional
spending to support the launch of the new FreshLook toric lens and other
conventional specialty cosmetic products, along with the market expansion of
the disposable and planned replacement product lines.
Research and development expenses for the six months ended June 27, 1998
decreased by $0.8 million, or 12.7%, to $5.0 million from $5.8 million for the
six months ended June 28, 1997. As a percentage of net sales, research and
development expenses for the six months ended June 27, 1998 declined to 3.5%
from 4.2% in the
12
<PAGE>
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 negative goodwill income for the six months ended June 27,
1998 increased by $0.1 million, or 39.5%, to $0.5 million from $0.4 million
for the six months ended June 28, 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 21.7% to $2.1 million for the six months
ended June 27, 1998 from $2.7 million for the six months ended June 28, 1997
due to the paydown of debt throughout 1997 with proceeds from the offerings
and funds generated from operations.
Net income for the six months ended June 27, 1998 increased by $3.3 million
to $13.0 million from $9.7 million for the six months ended June 28, 1997 as
higher sales volume and improvement in gross margin were 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
six months ended June 27, 1998, the Company provided approximately $5.6
million in cash for operating activities. This source of funds resulted from
improvements in profitability along with increases in accounts payable and
income taxes payable, partially offset by increases in accounts receivable and
inventories. For the six months ended June 28, 1997, the Company used
approximately $8.2 million in cash for operating activities. This use resulted
from increases in accounts receivable along with payments made for 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.
For the six months ended June 27, 1998 and June 28, 1997, the Company made
capital expenditures of approximately $6.7 million and $7.2 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 will
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 April, 1999. As of June 27,
1998, the Company has paid $11.0 million of these integration costs.
As of June 27, 1998, the Company had approximately $58.0 million in
borrowing availability under the revolving credit facility portion of the
Amended Bank Credit Agreement. The Amended 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
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.
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
13
<PAGE>
to permit the repurchase of a maximum of $35.0 million of the Company's Common
Stock. The Company incurred approximately $0.3 million of fees and expenses
associated with the First Amendment and Consent of the Amended Bank Credit
Agreement. These costs will be capitalized and amortized through September,
2002.
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 June 27, 1998 of $12.4 million will be adequate
over the next twelve months to make required payments of principal and
interest on the Company's indebtedness, to fund anticipated capital
expenditures and working capital requirements, including the aforementioned
restructuring and integration costs, and to enable the Company and its
subsidiaries to comply with the terms of their debt agreements. However,
actual capital requirements may change, particularly as a result of any
acquisitions which the Company may pursue. The ability of the Company to meet
its debt service obligations and reduce its total debt will be dependent,
however, upon the future performance of the Company and its subsidiaries
which, in turn, will be subject to general economic conditions and to
financial, business and other factors, including factors beyond the Company's
control. A portion of the consolidated debt of the Company bears interest at
floating rates; therefore, the Company's financial condition is and will
continue to be affected by changes in prevailing interest rates. In December,
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 six months ended June
27, 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
On June 10, 1998, the Company announced that the Board of Directors had
approved a share repurchase program. Under the program, the Company may
repurchase up to one million shares of the Company's outstanding common stock.
Repurchases will be made from time to time in normal market trading at
prevailing prices. It is expected that the funding of the program will come
from operating cash flow and the existing bank facility. Under this program,
through June 27, 1998, and July 29, 1998, respectively, the Company has
repurchased 597,000 and 875,000 shares at an average cost of $20 and $21,
respectively.
RECENT ACQUISITIONS
On June 26, 1998, the Company acquired the operations of Plastic Contact
Lens Argentina SAIC (PCL) from its sole shareholder, Dr. Erwin Voss. 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 purchase price
for both acquisitions of approximately $3.3 million (plus fees and expenses of
$0.3 million) was funded with existing liquidity. The Company will account 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 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.
14
<PAGE>
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.
OTHER MATTERS
The Company currently is working to resolve the potential impact of the year
2000 on the processing of date-sensitive information by the Company's
management information systems and other computerized systems. The year 2000
problem is the result of computer programs being written using two digits,
rather than four, to define the applicable year. Any of the Company's programs
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000, which could result in miscalculations or
system failures. Based on preliminary information, costs of addressing
potential problems are not currently expected to have a material adverse
effect on the Company's financial position, results of operations or cash
flows in future periods. However, if the Company, its customers or vendors are
unable to resolve such processing issues in a timely manner, it could result
in a material financial risk. Accordingly, the Company plans to devote the
necessary resources to resolve all significant year 2000 issues in a timely
manner.
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; 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.
15
<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>
10.1 First Amendment and Consent to the Credit Agreement, dated as
of February 19, 1997 and as amended as of September 10, 1997,
among Wesley Jessen VisionCare, Inc., Wesley Jessen
Corporation, various lending institutions, and Bankers Trust
Company, as Agent.
11.1 Computation of Earnings (Loss) Per Share.
27.1 Financial Data Schedule.
</TABLE>
(b) REPORTS ON FORM 8-K.
None.
16
<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)
17
<PAGE>
[CONFORMED COPY]
FIRST AMENDMENT AND CONSENT
---------------------------
FIRST AMENDMENT AND CONSENT (this "Consent"), dated as of June 9,
1998, among WESLEY JESSEN VISIONCARE, INC. ("Holdings"), WESLEY-JESSEN
CORPORATION (the "Borrower"), the financial institutions party to the Credit
Agreement referred to below (the "Banks") and BANKERS TRUST COMPANY, as agent
(the "Agent"). All capitalized terms used herein and not otherwise defined shall
have the respective meanings provided such terms in the Credit Agreement
referred to below.
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Holdings, the Borrower, the Banks and the Agent are parties
to a Credit Agreement, dated as of February 19, 1997 and amended and restated as
of September 10, 1997 (as modified, supplemented and amended to, but not
including, the date hereof, the "Credit Agreement");
WHEREAS, the Borrower has requested that the Agent and the Banks agree
to the amendments and grant the consents provided herein, and the Agent and the
Banks (subject to the terms and conditions hereof) are willing to agree to such
amendments and grant such consent;
NOW, THEREFORE, it is agreed:
1. On the Consent Effective Date (as hereinafter defined), the
Revolving Loan Commitment of Bankers Trust Company shall be increased from
$20,000,000 to $55,000,000, and in connection therewith, the Borrower shall in
coordination with the Agent and the Banks repay outstanding Revolving Loans of
certain Banks, and, if necessary, incur additional Revolving Loans from other
Banks, in each case so that the Banks participate in each Borrowing of Revolving
Loans pro rata on the basis of the Revolving Loan Commitments (after giving
effect to this Consent). It is hereby agreed that any breakage costs incurred by
the Banks in connection with the repayment of Revolving Loans contemplated by
this Section 1 shall be for the account of the Borrower. On the Consent
Effective Date, Annex I to the Credit Agreement shall be deemed amended to read
as set forth in Annex I hereto to give effect to the foregoing.
2. Notwithstanding anything to the contrary contained in Section
8.06 of the Credit Agreement, in addition to any other Dividends permitted under
such Section, (a) at any time and from time to time Holdings may redeem or
purchase shares of Holdings Common Stock, provided that the aggregate amount
expended by Holdings to redeem or purchase such Holdings Common Stock pursuant
to this Consent shall not exceed $35,000,000, and (b) so long as no Default or
Event of Default then exists or would result therefrom, the Borrower may pay
cash Dividends to Holdings so long as the cash proceeds thereof are promptly
used by Holdings for the purpose described in clause (a) above.
<PAGE>
3. In order to induce the Agent and the Banks to enter into this
Consent, the Borrower hereby represents and warrants that (i) no Default or
Event of Default exists on the Consent Effective Date (as defined below) both
before and after giving effect to this Consent and (ii) all of the
representations and warranties contained in the Credit Agreement or the other
Credit Documents are true and correct in all material respects on the date
hereof and on the Consent Effective Date with the same effect as though such
representations and warranties had been made on and as of such date (it being
understood that any representation or warranty made as of a specific date shall
be true and correct in all material respects as of such specific date).
4. This Consent is limited as specified and shall not constitute a
modification, acceptance or waiver of any other provision of the Credit
Agreement or any other Credit Document.
5. This Consent may be executed in any number of counterparts and by
the different parties hereto on separate counterparts, each of which
counterparts when executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument. A complete set of
counterparts shall be lodged with each of the Borrower and the Agent.
6. THIS CONSENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE
STATE OF NEW YORK.
7. This Consent shall become effective on the date (the "Consent
Effective Date") when each of the following conditions precedent have been
satisfied:
(a) each of Holdings, the Borrower, the Required Banks and
Bankers Trust Company shall have signed a copy hereof (whether the
same or different copies) and shall have delivered (including by way
of telecopier) the same to the Agent;
(b) the Borrower shall have delivered to Bankers Trust Company a
new Revolving Note reflecting its increased Revolving Loan Commitment,
which Note shall be issued in exchange for the Revolving Note
currently held by Bankers Trust Company; and
(c) the Borrower shall have delivered to the Agent a certified
copy of resolutions duly adopted by the Borrower authorizing the
increase in the Total Revolving Loan Commitment contemplated by this
Consent.
8. From and after the Consent Effective Date, all references in the
Credit Agreement and each of the Credit Documents to the Credit Agreement shall
be deemed to be references to such Credit Agreement as amended hereby.
***
-2-
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of
this Consent to be duly executed and delivered as of the date first above
written.
WESLEY JESSEN VISIONCARE, INC.
By: /s/ Edward J. Kelley
----------------------------------------
Name: Edward J. Kelley
Title: Vice President and Chief Financial Officer
WESLEY JESSEN CORPORATION
By: /s/ Edward J. Kelley
----------------------------------------
Name: Edward J. Kelley
Title: Vice President and Chief Financial Officer
BANKERS TRUST COMPANY,
individually and as Agent
By: /s/ Mary Kay Coyle
----------------------------------------
Name: Mary Kay Coyle
Title: Managing Director
THE FIRST NATIONAL BANK OF CHICAGO
By: /s/ Kevin L. Gillen
----------------------------------------
Name: Kevin L. Gillen
Title: Vice President
FLEET NATIONAL BANK
By: /s/ Kerry McElhiney
----------------------------------------
Name: Kerry McElhiney
Title: Vice President
<PAGE>
HARRIS TRUST AND SAVINGS BANK
By: /s/ Richard Michalik
-------------------------------------
Name: Richard Michalik
Title: Vice President
LASALLE NATIONAL BANK
By: /s/ Shonagh Aylsworth
-------------------------------------
Name: Shonagh Aylsworth
Title: First Vice President
NATIONAL BANK OF CANADA
By: /s/ Thomas W. Buda, Jr.
-------------------------------------
Name: Thomas W. Buda, Jr.
Title: Assistant Vice President
By: /s/ Jonathan M. Millard
-------------------------------------
Name: Jonathan M. Millard
Title: Assistant Vice President
SOCIETE GENERALE
By: /s/ John J. Wagner
-------------------------------------
Name: John J. Wagner
Title: Vice President
<PAGE>
BANK POLSKA KASA OPIEKI, SA
By: /s/ William A. Shea
----------------------------------------------
Name: William A. Shea
Title: Vice President & Senior Lending Officer
<PAGE>
ANNEX I
<TABLE>
<CAPTION>
LIST OF BANKS
Revolving Loan
Bank Commitment
---- --------------
<S> <C>
Bankers Trust Company $ 55,000,000
Bank Polska Kasa Opieki, SA $ 5,000,000
The First National Bank of Chicago $ 22,000,000
Fleet National Bank $ 20,000,000
Harris Trust and Savings Bank $ 20,000,000
Societe Generale $ 20,000,000
LaSalle National Bank $ 16,000,000
National Bank of Canada $ 12,000,000
---------------
Total $170,000,000
</TABLE>
<PAGE>
EXHIBIT 11.1
WESLEY JESSEN VISIONCARE, INC.
COMPUTATION OF EARNINGS (LOSS) PER SHARE
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------ -----------------------
June 28, June 27, June 28, June 27,
1997 1998 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Computation of basic net income (loss) per share:
Net income (loss) $ (371) $ 7,727 $ (11,102) $ 12,997
========= ========= ========= =========
Weighted average common shares outstanding 17,097 17,859 16,273 17,822
Basic net income (loss) per share $ (0.02) $ 0.43 $ (0.68) $ 0.73
========= ========= ========= =========
Computation of diluted net income (loss) per share:
Net income (loss) $ (371) $ 7,727 $ (11,102) $ 12,997
========= ========= ========= =========
Weighted average common shares outstanding 17,097 17,859 16,273 17,822
Net additional shares issuable in connection with
stock options pursuant to the treasury stock method -- 1,467 -- 1,545
--------- --------- --------- ---------
Diluted weighted average common shares outstanding 17,097 19,326 16,273 19,367
========= ========= ========= =========
Diluted net income (loss) per share $ (0.02) $ 0.40 $ (0.68) $ 0.67
========= ========= ========= =========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> MAR-29-1998
<PERIOD-END> JUN-27-1998
<CASH> 12,417
<SECURITIES> 0
<RECEIVABLES> 64,181
<ALLOWANCES> 14,717
<INVENTORY> 55,496<F1>
<CURRENT-ASSETS> 149,189
<PP&E> 29,375
<DEPRECIATION> 2,240
<TOTAL-ASSETS> 199,313
<CURRENT-LIABILITIES> 66,290
<BONDS> 0
0
0
<COMMON> 180
<OTHER-SE> 39,938
<TOTAL-LIABILITY-AND-EQUITY> 199,313
<SALES> 73,417
<TOTAL-REVENUES> 73,417
<CGS> 22,763
<TOTAL-COSTS> 60,850
<OTHER-EXPENSES> (273)
<LOSS-PROVISION> 244
<INTEREST-EXPENSE> 1,132
<INCOME-PRETAX> 11,708
<INCOME-TAX> 3,981
<INCOME-CONTINUING> 7,727
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,727
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.40
<FN>
<F1> ALLOWANCES NETTED AGAINST TRADE RECEIVABLES INCLUDE BOTH BAD DEBT RESERVES
AND SALES RETURN RESERVES.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-29-1997
<CASH> 7,362
<SECURITIES> 0
<RECEIVABLES> 58,634
<ALLOWANCES> 18,136<F1>
<INVENTORY> 56,995<F2>
<CURRENT-ASSETS> 139,409
<PP&E> 12,635
<DEPRECIATION> 518
<TOTAL-ASSETS> 169,637
<CURRENT-LIABILITIES> 70,967
<BONDS> 0
0
0
<COMMON> 171
<OTHER-SE> 12,166
<TOTAL-LIABILITY-AND-EQUITY> 169,637
<SALES> 64,071
<TOTAL-REVENUES> 64,071
<CGS> 34,962<F3>
<TOTAL-COSTS> 71,239
<OTHER-EXPENSES> (196)
<LOSS-PROVISION> 1,590
<INTEREST-EXPENSE> 1,860
<INCOME-PRETAX> (8,832)
<INCOME-TAX> 3,003
<INCOME-CONTINUING> (5,829)
<DISCONTINUED> 0
<EXTRAORDINARY> (4,902)
<CHANGES> 0
<NET-INCOME> (10,731)
<EPS-PRIMARY> (0.70)
<EPS-DILUTED> (0.70)
<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>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<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> (0.02)
<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>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUN-29-1997
<PERIOD-END> SEP-27-1997
<CASH> 3,819
<SECURITIES> 0
<RECEIVABLES> 65,733
<ALLOWANCES> 19,845<F1>
<INVENTORY> 44,286<F2>
<CURRENT-ASSETS> 123,536
<PP&E> 19,425
<DEPRECIATION> 978
<TOTAL-ASSETS> 169,529
<CURRENT-LIABILITIES> 67,257
<BONDS> 0
0
0
<COMMON> 177
<OTHER-SE> 28,308
<TOTAL-LIABILITY-AND-EQUITY> 169,529
<SALES> 75,235
<TOTAL-REVENUES> 75,235
<CGS> 23,891<F3>
<TOTAL-COSTS> 63,442
<OTHER-EXPENSES> (196)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,241
<INCOME-PRETAX> 10,748
<INCOME-TAX> 3,653
<INCOME-CONTINUING> 7,095
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,095
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0.37
<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>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,759
<SECURITIES> 0
<RECEIVABLES> 59,293
<ALLOWANCES> 16,651<F1>
<INVENTORY> 49,262
<CURRENT-ASSETS> 128,435
<PP&E> 22,774
<DEPRECIATION> 1,294
<TOTAL-ASSETS> 173,076
<CURRENT-LIABILITIES> 62,600
<BONDS> 0
0
0
<COMMON> 177
<OTHER-SE> 36,669
<TOTAL-LIABILITY-AND-EQUITY> 173,076
<SALES> 282,178
<TOTAL-REVENUES> 282,178
<CGS> 92,780
<TOTAL-COSTS> 265,093
<OTHER-EXPENSES> (862)
<LOSS-PROVISION> 4,892
<INTEREST-EXPENSE> 5,559
<INCOME-PRETAX> 12,388
<INCOME-TAX> 4,188
<INCOME-CONTINUING> 8,200
<DISCONTINUED> 0
<EXTRAORDINARY> (4,902)
<CHANGES> 0
<NET-INCOME> 3,298
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.18
<FN>
<F1> ALLOWANCES NETTED AGAINST TRADE RECEIVABLES INCLUDE BOTH BAD DEBT RESERVES
AND SALES RETURN RESERVES.
</FN>
</TABLE>
