<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
_________________
FORM 10 - Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 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)
<TABLE>
<S> <C> <C>
Delaware 36-4023739
(State of Incorporation) 333 East Howard Avenue (I.R.S Employer Identification No.)
Des Plaines, Illinois 60018-5903
847-294-3000
</TABLE>
(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 May 7, 1998 was 17,918,520.
================================================================================
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
----------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
<S> <C>
Condensed Consolidated Balance Sheets at December 31, 1997
and March 28, 1998 1
Condensed Consolidated Statements of Operations for the
three months ended March 29, 1997 and March 28, 1998 2
Condensed Consolidated Statements of Cash Flows for the
three months ended March 29, 1997 and March 28, 1998 3
Notes to the Condensed Consolidated Financial Statements 4 - 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9 - 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, March 28,
1997 1998
------------ -----------
ASSETS (Unaudited)
------
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................. $ 4,759 $ 4,677
Accounts receivable-trade, net............................. 42,642 46,657
Other receivables.......................................... 4,773 5,713
Inventories................................................ 49,262 52,274
Deferred income taxes...................................... 18,102 18,233
Prepaid expenses........................................... 7,675 6,876
Assets held for sale....................................... 1,222 1,222
----------- -----------
Total current assets..................................... 128,435 135,652
----------- -----------
Property, plant and equipment, net........................... 21,480 22,420
Other assets................................................. 6,894 6,715
Deferred income taxes........................................ 10,838 8,569
Notes receivable............................................. 2,773 2,835
Capitalized financing fees, net.............................. 2,656 2,531
----------- -----------
Total assets............................................. $ 173,076 $ 178,722
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Trade accounts payable..................................... $ 14,229 $ 15,653
Accrued compensation and benefits.......................... 19,806 16,101
Accrued advertising........................................ 4,113 5,572
Other accrued liabilities.................................. 11,212 8,864
Transition reserve......................................... 11,225 10,238
Income taxes payable....................................... 2,015 331
----------- -----------
Total current liabilities................................ 62,600 56,759
----------- -----------
Negative goodwill, net....................................... 13,681 13,407
Long term debt............................................... 57,000 62,000
Other liabilities............................................ 2,949 2,267
----------- -----------
Total liabilities........................................ 136,230 134,433
----------- -----------
Stockholders' equity:
Common stock, $.01 par value, 50,000,000 shares authorized,
17,736,011 and 17,914,410 issued and outstanding at
December 31, 1997 and March 28, 1998 respectively........ 177 179
Additional paid in capital................................. 56,390 59,164
Accumulated deficit........................................ (19,159) (13,889)
Accumulated other comprehensive loss....................... (562) (1,165)
----------- -----------
Total stockholders' equity............................... 36,846 44,289
----------- -----------
Total liabilities and stockholders' equity............... $ 173,076 $ 178,722
=========== ===========
</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
------------------------
March 29, March 28,
1997 1998
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Net sales .................................................. $ 64,071 $ 70,595
-------- --------
Operating costs and expenses:
Cost of goods sold ..................................... 21,870 21,939
Cost of goods sold--inventory step-up (Note 5) ......... 13,092 --
Marketing and administrative ........................... 33,256 37,563
Research and development ............................... 3,021 2,386
Amortization of negative goodwill ...................... (196) (274)
-------- --------
Income (loss) from operations .............................. (6,972) 8,981
Other (income) expense:
Interest income ........................................ -- (124)
Interest expense ....................................... 1,860 1,120
-------- --------
Income (loss) before taxes and extraordinary loss .......... (8,832) 7,985
Income tax benefit (expense) ............................... 3,003 (2,715)
-------- --------
Net income (loss) before extraordinary loss ................ (5,829) 5,270
Extraordinary loss, net of related tax benefit of $2,526 ... (4,902) --
-------- --------
Net income (loss) .......................................... $(10,731) $ 5,270
======== ========
Income (loss) per common share:
Basic
Net income (loss) before extraordinary loss ........ $ (0.38) $ 0.30
Extraordinary loss, net of tax benefit ............. (0.32) --
-------- --------
Net income (loss) .................................. $ (0.70) $ 0.30
======== ========
Diluted
Net income (loss) before extraordinary loss ........ $ (0.38) $ 0.27
Extraordinary loss, net of tax benefit ............. (0.32) --
-------- --------
Net income (loss) .................................. $ (0.70) $ 0.27
======== ========
Weighted average common shares outstanding
Basic .................................................. 15,420 17,784
======== ========
Diluted ................................................ 15,420 19,396
======== ========
</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>
Three Months Ended
---------------------------
March 29, March 28,
1997 1998
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows provided by operating activities:
Net income (loss)........................................... $ (10,731) $ 5,270
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................................... 122 475
Purchased inventory step-up............................ 13,092 --
Amortization of capitalized financing fees............. 118 141
Amortization of negative goodwill...................... (196) (274)
Deferred income taxes.................................. (5,799) 2,187
(Gain) loss on disposal of fixed assets................ -- (20)
Other.................................................. (489) --
Changes in balance sheet items:
Accounts receivable -- trade, net...................... (1,629) (4,002)
Other receivables...................................... 116 (1,060)
Inventories............................................ (948) (2,882)
Prepaid expenses....................................... 135 824
Other assets........................................... 226 166
Trade accounts payable................................. 1,303 1,329
Accrued liabilities.................................... (8,257) (5,649)
Other liabilities...................................... (361) (678)
Income taxes payable................................... (1,206) (1,884)
----------- -----------
Cash used in operating activities................. (7,076) (6,057)
----------- -----------
Investing activities:
Proceeds from Natural Touch sale....................... 3,000 --
Capital expenditures................................... (2,114) (1,972)
----------- -----------
Cash provided by (used in) investing activities... 886 (1,972)
----------- -----------
Financing activities:
Issuance of stock...................................... 36,849 2,776
Proceeds from long term debt........................... 78,000 5,000
Payment of financing fees.............................. (2,495) --
Payments of long term debt............................. (105,875) --
----------- -----------
Cash provided by financing activities............. 6,479 7,776
----------- -----------
Effect of exchange rates on cash....................... -- 171
Net increase (decrease) in cash and cash equivalents... 289 (82)
Cash and cash equivalents:
Beginning of period.................................... 7,073 4,759
----------- -----------
End of period.......................................... $ 7,362 $ 4,677
=========== ===========
Supplemental disclosure of cash flow information
Cash paid during the period for interest............... $ 2,414 $ 977
=========== ===========
Cash paid during the period for taxes, net............. $ 2,471 $ 1,582
=========== ===========
</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.
4
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Unaudited)
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 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 months ended March 28, 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 period 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 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 120 had been terminated as of March
28, 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 647 59 281 987
------ ---- ---- -------
Transition reserve at
March 28, 1998 $8,904 $638 $696 $10,238
====== ==== ==== =======
</TABLE>
5
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Unaudited)
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 $1.1 million at March 28, 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 59 82 185
---- ---- ---- ------
Restructuring reserve at
March 28, 1998 $332 $603 $128 $1,063
==== ==== ==== ======
</TABLE>
4. Accounts receivable-trade, net
Accounts receivable-trade, net consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, March 28,
1997 1998
------------ ---------
<S> <C> <C>
Trade receivables $ 59,293 $62,837
Less allowances:
Doubtful accounts (6,290) (6,398)
Sales returns and adjustments (10,361) (9,782)
-------- -------
$ 42,642 $46,657
======== =======
</TABLE>
5. Inventories
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, March 28,
1997 1998
------------ ---------
<S> <C> <C>
Raw materials $ 3,558 $ 4,308
Work-in-process 7,613 7,916
Finished goods 38,091 40,050
------- -------
$49,262 $52,274
======= =======
</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, $13.1 million was charged
to cost of goods sold for the three months ended March 29, 1997.
6
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
6. Property, plant and equipment
Property, plant and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, March 28,
1997 1998
------------- -------------
<S> <C> <C>
Buildings and improvements $ 8,369 $ 8,403
Machinery, equipment, furniture and fixtures 10,246 10,405
Construction-in-progress 4,159 5,378
------- -------
22,774 24,186
Less accumulated depreciation (1,294) (1,766)
------- -------
$21,480 $22,420
======= =======
</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.
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 commitments,
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 facilities at March 28, 1998 was $73.0 million. The credit facilities are
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.
7
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
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 March 28, 1998 have been reclassified
to reflect the adoption of this standard.
The components of comprehensive income for the three months ended March 29, 1997
and March 28, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
March 29, March 28,
1997 1998
---------- ----------
<S> <C> <C>
Net income (loss) $(10,731) $5,270
Foreign currency translation adjustments (489) (603)
-------- ------
Comprehensive income (loss) $(11,220) $4,667
======== ======
</TABLE>
8
<PAGE>
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 28, 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
9
<PAGE>
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.
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 a
significant non-recurring charge of a non-cash increase in cost of goods sold of
$13.1 million in the three months ended March 29, 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 benefit) 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 ended March 29, 1997 and March 28, 1998 are not
comparable. 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 three 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 period ended March 29, 1997 giving effect to the cost-
reduction and
10
<PAGE>
operating improvements as if such transactions occurred on January 1, 1997. The
pro forma adjustments are set forth in the note to the table. The pro forma
information included herein for the prior year period is 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 Pro form Actual
March 29, March 29, March 28,
1997 1997(a) 1998
--------- --------- ---------
<S> <C> <C> <C>
Net sales......................................................... $ 64,071 $64,071 $70,595
Operating costs and expenses:
Cost of goods sold............................................ 34,962 21,870 21,939
Marketing and administrative.................................. 33,256 32,505 37,563
Research and development...................................... 3,021 3,021 2,386
Amortization of intangible assets
(negative goodwill).......................................... (196) (196) (274)
-------- ------- -------
Income (loss)from operations.................................. (6,972) 6,871 8,981
Other (income) expense:
Interest expense, net......................................... 1,860 1,449 996
-------- ------- -------
Income (loss) before income taxes and extraordinary item.......... (8,832) 5,422 7,985
Income tax (expense) benefit...................................... 3,003 (1,843) (2,715)
-------- ------- -------
Income (loss) before extraordinary item........................... (5,829) 3,579 5,270
Extraordinary loss net of tax..................................... (4,902) - -
-------- ------- -------
Net income (loss)................................................. $(10,731) $ 3,579 $ 5,270
======== ======= =======
Net income per common share:
Basic........................................................ ($0.70) $0.21 $0.30
====== ===== =====
Diluted...................................................... ($0.70) $0.19 $0.27
====== ===== =====
Weighted average common shares outstanding:
Basic........................................................ 15,420 17,097 17,784
======== ======= =======
Diluted...................................................... 15,420 18,564 19,396
======== ======= =======
</TABLE>
(a) The pro forma results include adjustments to (i) eliminate the $13,092 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 $751 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 income tax rate of 34%.
11
<PAGE>
Three Months Ended March 28, 1998 (Unaudited) Compared to Pro Forma Three Months
Ended March 29, 1997 (Unaudited)
The following discussion compares the Company's results of operations for
the three months ended March 28, 1998 to the pro forma results of operations for
the three months ended March 29, 1997.
Net sales for the three months ended March 28, 1998 increased $6.5 million,
or 10.2%, to $70.6 million from $64.1 million for the three months ended March
29, 1997. This increase resulted primarily from 31.0% growth in the sales of
disposable and planned replacement contact lenses, from $20.9 million to $27.4
million. Sales of disposable and planned replacement lenses grew 50.2% in the
U.S. and 14.1% internationally. Total sales in the United States grew 11.5%,
while sales in the rest of the world grew 8.5% for the three month period. The
sales returns and allowances reserve decreased moderately from $10.1 million at
March 29, 1997 to $9.8 million at March 28, 1998. This decrease resulted from
the lower actual sales returns and allowances trends which the Company is
currently experiencing.
Gross profit for the three months ended March 28, 1998 increased $6.5
million, or 15.3%, to $48.7 million from $42.2 million in the comparable 1997
period. Gross profit margin improved 3.0% to 68.9% in 1998, 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 March 28,
1998 increased by $5.1 million, or 15.6%, to $37.6 million from $32.5 million
for the three months ended March 29, 1997. As a percentage of net sales,
marketing and administrative expenses increased to 53.2% in the 1998 period from
50.7% 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 and other conventional
specialty cosmetic products, along with higher performance related compensation
expenses and the added costs of reporting as a public company.
Research and development expenses decreased $0.6 million, or 21.0%, to $2.4
million for the three months ended March 28, 1998 from $3.0 million for the
three months ended March 29, 1997. As a percentage of net sales, research and
development expenses decreased to 3.4% in the 1998 period from 4.7% in the 1997
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 intangible assets income increased $0.1 million, or 39.8%,
to $0.3 million for the three months ended March 28, 1998 from $0.2 million for
the three months ended March 29, 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 31.3% to $1.0 million for the three months
ended March 28, 1998 from $1.4 million for the three months ended March 29, 1997
due to the paydown of debt with proceeds from the offerings and operations as
well as interest income earned on the promissory note receivable related to the
sale of the Natural Touch product line.
Net income for the three months ended March 28, 1998 increased $1.7
million, or 47.2%, to $5.3 million from $3.6 million for the three months ended
March 29, 1997 as higher sales volume and improvement in gross margin was
partially offset by increased spending in marketing and administrative expenses.
12
<PAGE>
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
three months ended March 28, 1998, the Company used approximately $6.1 million
in cash for operating activities. This use resulted from increases in accounts
receivable and inventories, along with payments made for the prior year's
performance related compensation and integration costs relating to the Barnes-
Hind Acquisition, partially offset by improvements in profitability and an
increase in accounts payable. For the three months ended March 29, 1997, the
Company used approximately $7.1 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, partially offset by increases in
accounts payable. Since December 31, 1997, the Company has incurred additional
borrowings of $5.0 million.
For the three months ended March 28, 1998 and March 29, 1997, the Company
made capital expenditures of approximately $2.0 million and $2.1 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 March 28,
1998, the Company has paid $10.2 million of these integration costs.
As of March 28, 1998, the Company had approximately $73.0 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.
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 March 28, 1998 of $4.7 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 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 of
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 potential exposure
relating to the Company's variable rate debt instruments.
Approximately 42% of net sales for the three months ended March 28, 1998
were to international customers and the Company expects that sales to
international customers will continue to represent a material portion of its
13
<PAGE>
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.
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.
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.
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
14
<PAGE>
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
----------- -----------------------
<S> <C>
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.
By /s/ Ronald J. Artale
------------------------------------
Ronald J. Artale
(Duly authorized officer,
Vice President and Controller)
17
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
COMPUTATION OF EARNINGS (LOSS) PER SHARE
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
---------------------
March 29, March 28,
1997 1998
--------- ---------
<S> <C> <C>
Computation of basic net income (loss) per share:
Net income (loss) $(10,731) $ 5,270
======== =======
Weighted average common shares outstanding 15,420 17,784
Basic net income (loss) per share $ (0.70) $ 0.30
======== =======
Computation of diluted net income (loss) per share:
Net income (loss) $(10,731) $ 5,270
======== =======
Weighted average common shares outstanding 15,420 17,784
Net additional shares issuable in connection with
stock options pursuant to the treasury stock method - 1,612
-------- -------
Diluted weighted average common shares outstanding 15,420 19,396
======== =======
Diluted net income (loss) per share $ (0.70) $ 0.27
======== =======
</TABLE>
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-28-1998
<CASH> 4,677
<SECURITIES> 0
<RECEIVABLES> 62,837
<ALLOWANCES> 16,180<F1>
<INVENTORY> 52,274
<CURRENT-ASSETS> 135,652
<PP&E> 24,186
<DEPRECIATION> 1,766
<TOTAL-ASSETS> 178,722
<CURRENT-LIABILITIES> 56,759
<BONDS> 0
0
0
<COMMON> 179
<OTHER-SE> 44,110
<TOTAL-LIABILITY-AND-EQUITY> 178,722
<SALES> 70,595
<TOTAL-REVENUES> 70,595
<CGS> 21,939
<TOTAL-COSTS> 61,888
<OTHER-EXPENSES> (274)
<LOSS-PROVISION> 479
<INTEREST-EXPENSE> 996
<INCOME-PRETAX> 7,985
<INCOME-TAX> 2,715
<INCOME-CONTINUING> 5,270
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,270
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.27
<FN>
<F1> ALLOWANCES NETTED AGAINST TRADE RECEIVABLES INCLUDE BOTH BAD DEBT RESERVES
AND SALES RETURN RESERVES.
</FN>
</TABLE>
