<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 April 3, 1999
[_] 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 office)
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 May 7, 1999 was 17,095,350.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 April 3, 1999 and December
31, 1998........................................................... 1
Condensed Consolidated Statements of Operations for the three months
ended April 3, 1999 and March 28, 1998............................. 2
Condensed Consolidated Statements of Cash Flows for the three months
ended
April 3, 1999 and March 28, 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............................................ 8-12
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.............................. 13
Signatures.......................................................... 14
</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>
April 3, December 31,
1999 1998
---------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents............................ $ 7,557 $ 8,859
Accounts receivable--trade, net...................... 43,178 47,363
Other receivables.................................... 6,828 6,840
Inventories.......................................... 59,949 62,055
Deferred income taxes................................ 18,583 18,602
Prepaid expenses..................................... 6,148 6,977
Assets held for sale................................. 1,222 1,222
-------- --------
Total current assets.............................. 143,465 151,918
-------- --------
Property, plant and equipment, net.................... 42,340 36,338
Other assets.......................................... 6,302 6,011
Deferred income taxes................................. 3,528 3,528
Notes receivable...................................... 1,846 1,803
Goodwill, net......................................... 2,560 2,569
Capitalized financing fees, net....................... 2,194 2,351
-------- --------
Total assets...................................... $202,235 $204,518
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Trade accounts payable............................... $ 17,910 $ 17,689
Accrued compensation and benefits.................... 15,456 25,565
Accrued advertising.................................. 4,030 4,060
Other accrued liabilities............................ 8,435 9,744
Transition reserve................................... 6,663 7,886
Income taxes payable................................. 4,232 3,257
-------- --------
Total current liabilities......................... 56,726 68,201
-------- --------
Negative goodwill, net................................ 12,313 12,587
Long term debt........................................ 72,000 69,000
Other liabilities..................................... 5,869 4,778
-------- --------
Total liabilities................................. 146,908 154,566
-------- --------
Stockholders' equity
Common stock, $.01 par value, 50,000,000 shares
authorized, 17,093,699
and 16,994,884 issued and outstanding at April 3,
1999 and December 31, 1998, respectively............ 181 180
Additional paid in capital........................... 62,077 60,847
Accumulated earnings ................................ 16,642 10,438
Treasury stock, 1,000,000 shares at April 3, 1999 and
December 31,
1998, at cost....................................... (21,306) (21,306)
Accumulated other comprehensive loss................. (2,267) (207)
-------- --------
Total stockholders' equity........................ 55,327 49,952
-------- --------
Total liabilities and stockholders' equity........ $202,235 $204,518
======== ========
</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
----------------------
April 3, March 28,
1999 1998
----------- ----------
(Unaudited) (Unaudited)
<S> <C> <C>
Net sales............................................... $76,311 $70,595
------- -------
Operating costs and expenses:
Cost of goods sold..................................... 25,118 21,939
Marketing and administrative........................... 38,403 37,563
Research and development............................... 2,873 2,386
Amortization of goodwill............................... (229) (274)
------- -------
Income from operations.................................. 10,146 8,981
Other (income) expense:
Interest income........................................ (188) (124)
Interest expense....................................... 1,211 1,120
------- -------
Income before income taxes.............................. 9,123 7,985
Income tax expense...................................... (2,919) (2,715)
------- -------
Net income.............................................. $ 6,204 $ 5,270
======= =======
Net income per common share:
Basic.................................................. $ 0.36 $ 0.30
Diluted................................................ $ 0.34 $ 0.27
Weighted average common shares outstanding
Basic.................................................. 17,039 17,784
Diluted................................................ 18,455 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
----------------------
April 13, March 28,
1999 1998
----------- ----------
(Unaudited) (Unaudited)
<S> <C> <C>
Operating activities:
Net income............................................ $ 6,204 $ 5,270
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation expense................................. 1,135 475
Amortization of capitalized financing fees........... 156 141
Amortization of goodwill............................. (229) (274)
Gain (loss) on disposal of property, plant, and
equipment........................................... 8 (20)
Deferred income tax.................................. (11) 2,187
Changes in balance sheet items:
Accounts receivable--trade, net...................... 3,086 (4,002)
Other receivables.................................... (130) (1,060)
Inventories.......................................... 919 (2,882)
Prepaid expenses..................................... 794 824
Other assets......................................... (305) 166
Notes receivable..................................... (43) --
Trade accounts payable............................... 529 1,329
Accrued liabilities.................................. (12,354) (5,649)
Other liabilities.................................... 1,188 (678)
Income taxes payable................................. 1,747 (1,884)
-------- -------
Cash provided by (used in) operating activities.... 2,694 (6,057)
-------- -------
Investing activities:
Capital expenditures.................................. (7,783) (1,972)
Proceeds from the sale of property, plant and
equipment............................................ 9 --
-------- -------
Cash used in investing activities.................. (7,774) (1,972)
-------- -------
Financing activities:
Issuance of stock..................................... 685 2,776
Proceeds from long term debt.......................... 8,000 5,000
Payments of long term debt............................ (5,000) --
-------- -------
Cash provided by financing activities.............. 3,685 7,776
-------- -------
Effect of exchange rates on cash and cash
equivalents.......................................... 93 171
Net decrease in cash and cash equivalents............. (1,302) (82)
Cash and cash equivalents:
Beginning of period................................... 8,859 4,759
-------- -------
End of period......................................... $ 7,557 $ 4,677
======== =======
Supplemental disclosure of cash flow information
Cash paid during the period for interest.............. $ 1,079 $ 977
======== =======
Cash paid during the period for taxes, net............ $ 371 $ 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, 1998.
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
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.
2. Net Income Per Common Share
The Company calculates net income 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 of 1,416 and 1,612 for the three months ended
April 3, 1999 and March 28, 1998, respectively, is the dilutive effect of
outstanding stock options, using the treasury stock method from the date of
grant.
4
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
3. Transition Reserve and Restructuring Charge
On October 2, 1996, the Company acquired the contact lens business of
Pilkington plc, operating as the Pilkington Barnes Hind Group ("the Barnes-Hind
Acquisition"). 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. The Company
announced the closing of its manufacturing operations in San Diego, California
expected to be substantially complete by March, 2000, with a shift of
conventional lens production to its plant in Cidra, Puerto Rico. The plant
closing will result in the termination of 471 employees (of whom 261 had been
terminated as of April 3, 1999). Payments related to the transition reserve are
as follows (in thousands):
<TABLE>
<CAPTION>
Facility
Employee Lease Restoration
Related Termination and Other
Costs Costs Costs Total
-------- ----------- ----------- -------
<S> <C> <C> <C> <C>
Transition reserve at December 31,
1998............................... $7,169 $ 542 $ 175 $ 7,886
Charges against reserve............. (885) (235) (103) (1,223)
------ ----- ----- -------
Transition reserve at April 3,
1999............................... $6,284 $ 307 $ 72 $ 6,663
====== ===== ===== =======
In addition to the transition plan, the Company committed to a plan to
restructure the Wesley Jessen operations following the Barnes-Hind Acquisition.
Pursuant to the restructuring plan, the Chicago distribution facilities were
consolidated with those at Des Plaines, Illinois in October, 1997. The
restructuring reserve of $0.3 million at April 3, 1999, 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):
<CAPTION>
Employee Lease
Related Termination
Costs Costs Other Costs Total
-------- ----------- ----------- -------
<S> <C> <C> <C> <C>
Restructuring reserve at December
31, 1998........................... $ 187 $ 288 $ 114 $ 589
Charges against reserve............. (65) (55) (4) (124)
Reversed to income.................. -- (165) -- (165)
------ ----- ----- -------
Restructuring reserve at April 3,
1999............................... $ 122 $ 68 $ 110 $ 300
====== ===== ===== =======
</TABLE>
4. Accounts Receivable--Trade, Net
Accounts receivable--trade, net consist of the following (in thousands):
<TABLE>
<CAPTION>
April December 31,
3, 1999 1998
------- ------------
<S> <C> <C>
Trade receivables...................................... $58,175 $ 62,968
Less allowances:
Doubtful accounts.................................... (5,042) (4,992)
Sales returns and adjustments........................ (9,955) (10,613)
------- --------
$43,178 $ 47,363
======= ========
</TABLE>
5
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
5. Inventories
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
April December 31,
3, 1999 1998
------- ------------
<S> <C> <C>
Raw materials........................................ $ 5,929 $ 5,934
Work-in-process...................................... 5,914 6,463
Finished goods....................................... 48,106 49,658
------- -------
$59,949 $62,055
======= =======
</TABLE>
6. Property, Plant and Equipment, Net
Property, plant and equipment, net consist of the following (in thousands):
<TABLE>
<CAPTION>
April 3, December 31,
1999 1998
-------- ------------
<S> <C> <C>
Buildings and improvements......................... $ 9,411 $ 9,449
Machinery, equipment, furniture and fixtures....... 19,403 19,638
Construction-in-progress........................... 18,178 11,450
-------- -------
46,992 40,537
Less accumulated depreciation...................... (4,652) (4,199)
-------- -------
$ 42,340 $36,338
======== =======
</TABLE>
7. Long-Term Debt
The Company's credit agreement consists of a $170.0 million revolving loan
facility, 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. The agreement became effective on July 29, 1998
when the then-existing bank credit agreement was amended to increase the
borrowing availability to permit the repurchase of a maximum of $35.0 million
of the Company's common stock.
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 April 3, 1999 was $98.0 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.
6
<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 components of comprehensive income for the three months ended April 3,
1999 and March 28, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
-------------------
April 3, March 28,
1999 1998
-------- ---------
<S> <C> <C>
Net income............................................ $ 6,204 $5,270
Foreign currency translation adjustments.............. (2,060) (603)
------- ------
Comprehensive income.................................. $ 4,144 $4,667
======= ======
</TABLE>
9. Treasury Stock Purchase Plan
The Board of Directors approved a share repurchase plan on June 10, 1998 and
the Company completed the program on September 18, 1998. Under the plan, the
Company repurchased one million shares of its outstanding common stock.
Repurchases were made periodically in normal market trading at prevailing
prices. The funding of the program came from operating cash flow and the
existing bank facility.
10. Acquisitions
In May, 1999, the Company, through its Hong Kong subsidiary, executed a
purchase agreement to acquire certain assets of Eycon Lens (Hong Kong) Co.,
Ltd. from its sole shareholder. In June and July, 1998, the Company completed
two other international acquisitions. The total adjusted purchase price for the
three acquisitions, including related fees and expenses of approximately $3.2
million was funded with existing liquidity. The Company accounted for the
acquisitions under the purchase method of accounting. None of these
acquisitions were material to the Company's financial statements.
11. Business segments and geographical information
The Company operates in one product segment--the development, manufacture
and marketing of contact lenses. The aggregation criteria for sales are based
on point of production and shipment.
Financial information by geographic area is as follows (in thousands):
<TABLE>
<CAPTION>
For the Three
months Ended
-----------------
April March 28,
3, 1999 1998
------- ---------
<S> <C> <C>
Net sales:
United States (including Puerto Rico)................... $50,198 $50,228
United Kingdom.......................................... 8,661 7,049
Rest of the world....................................... 17,452 13,318
------- -------
$76,311 $70,595
======= =======
</TABLE>
7
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Wesley Jessen VisionCare, Inc. (the "Company" or "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 100 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 211 person salesforce and network of
independent distributors, which together sell the Company's products in more
than 75 countries.
Barnes-Hind Acquisition
On October 2, 1996, the Company acquired the contact lens business of
Pilkington plc, operating as the Pilkington Barnes Hind Group (the "Barnes-Hind
Acquisition"). In connection with the Barnes-Hind Acquisition, the Company
identified significant operating synergies and substantial cost saving
opportunities. The Company has completed the majority of its initial cost
reduction measures which, as expected, have improved the Company's operating
results. The Company announced the closing of its manufacturing operations in
San Diego, California, expected to be substantially completed by March, 2000,
with a shift of conventional lens production to its plant in Cidra, Puerto
Rico. The Company believes this consolidation of facilities will generate
additional cost savings and further operating leverage. However, there can be
no assurance that the Company will be able to achieve such cost savings in
future periods.
Results of Operations
Three Months Ended April 3, 1999 (Unaudited) Compared to Three Months Ended
March 28, 1998 (Unaudited)
Net sales for the three months ended April 3, 1999 increased $5.7 million,
or 8.1%, to $76.3 million from $70.6 million for the three months ended March
28, 1998. This increase resulted primarily from 42.8% growth in the sales of
disposable and planned replacement contact lenses led by the launch of
FreshLook ColorBlends and FreshLook Toric, from $27.4 million to $39.1 million,
offset by a 13.9% decline in the sales of conventional lens products, from
$43.2 million to $37.2 million. Sales of disposable and planned replacement
lenses grew 59.2% in the U.S. and 23.7% internationally, while sales of
conventional lenses fell 8.2% domestically and 22.7% in the rest of the world.
Total sales in the United States grew 16.1%, with total international sales
posting a decrease of 2.8% for the three month period.
Gross profit for the three months ended April 3, 1999 increased $2.5
million, or 5.2%, to $51.2 million from $48.7 million in the comparable 1998
period. Gross profit margin decreased 1.8% to 67.1% in 1999, reflecting
temporary inefficiencies related to increased production to meet the sales
demand for new products.
Marketing and administrative expenses for the three months ended April 3,
1999 increased by $0.8 million, or 2.2%, to $38.4 million from $37.6 million
for the three months ended March 28, 1998. This increase was largely due to
higher selling expenses incurred to support an expansion of the international
direct salesforce. As a percentage of net sales, marketing and administrative
expenses decreased to 50.3% in the 1999 period from 53.2% in the 1998 period.
8
<PAGE>
Research and development expenses increased $0.5 million, or 20.4%, to $2.9
million for the three months ended April 3, 1999 from $2.4 million for the
three months ended March 28, 1998. As a percentage of net sales, research and
development expenses increased to 3.8% in the 1999 period from 3.4% in the 1998
period. The increase was driven by developmental spending for the bifocal lens
product and regulatory costs for gaining approval to market new products in
Japan.
Interest expense increased 8.1% to $1.2 million for the three months ended
April 3, 1999 from $1.1 million for the three months ended March 28, 1998 due
to higher average debt balances in 1999, partially offset by the effects of
lower current year interest rates available to the Company under its revolving
credit facility.
Net income for the three months ended April 3, 1999 increased $0.9 million,
or 17.7%, to $6.2 million from $5.3 million for the three months ended March
28, 1998 as improvement in gross profit was partially offset by increased
spending in marketing and administrative expenses along with higher research
and development costs and a more favorable year-over-year effective tax rate.
The decrease in the effective tax rate to 32% in 1999 from 34% in 1998 was
primarily due to a shift in the mix of earnings among the Company's various
operations.
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 April 3, 1999, the Company generated approximately $2.7
million in cash from operating activities, primarily as a result of
profitability gains and a higher income taxes payable balance, along with
improved customer collections and decreased inventory levels, partially offset
by payments made for the prior year's performance related compensation and
integration costs related to the Barnes-Hind Acquisition. For the three months
ended March 28, 1998, the Company used approximately $6.1 million in cash from
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. Since December 31, 1998, the Company has incurred
additional borrowings of $3.0 million, primarily to fund capital expenditures.
For the three months ended April 3, 1999 and March 28, 1998, the Company
made capital expenditures of approximately $7.8 million and $2.0 million,
respectively. The majority of these capital expenditures in 1999 were for
production capacity expansion, information technology enhancements, and site
consolidations. The Company anticipates additional capital expenditures of
approximately $23.4 million will be made throughout 1999 to continue capacity
expansion, further consolidate locations and improve management information
systems. The Company expects to fund these capital expenditures primarily by
cash generated from operating activities and borrowings under its revolving
credit facility.
As a result of the Barnes-Hind Acquisition, the Company expects to incur
integration costs of approximately $20.4 million, principally for severance
costs and lease expenses on vacated premises. Management expects that this
restructuring will be substantially completed by March, 2000. As of April 3,
1999, the Company has paid $13.7 million of these integration costs.
The Company maintains a $170 million revolving credit facility under the
Amended Bank Credit Agreement. As of April 3, 1999, the Company had
approximately $98.0 million in borrowing availability under this facility. 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.
9
<PAGE>
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 April 3, 1999 of $7.6 million, will be adequate
over the next twelve months to make required payments of principal and interest
on the Company's indebtedness, to fund anticipated capital expenditures and
working capital requirements, including the aforementioned restructuring and
integration costs, and to enable the Company and its subsidiaries to comply
with the terms of their debt agreements. However, actual capital requirements
may change, particularly as a result of any acquisitions the Company may
pursue. The ability of the Company to meet its debt service obligations and
reduce its total debt will be dependent upon the future performance of the
Company and its subsidiaries which, in turn, will be subject to general
economic conditions and to financial, business and other factors, including
factors beyond the Company's control. A significant portion of the consolidated
debt of the Company bears interest at floating rates; therefore, the Company's
financial condition is and will continue to be affected by changes in
prevailing interest rates. In December, 1996, the Company purchased an interest
rate cap on $35.0 million 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 38% of net sales for the three months ended April 3, 1999 were
to international customers and the Company expects that sales to international
customers will continue to represent a material portion of its net sales.
Historically, fluctuations in foreign currency exchange rates have had only a
minor impact on the Company's results of operations and the Company does not
expect such fluctuations to be material in the foreseeable future.
Share Repurchase Program
The Board of Directors approved a share repurchase plan on June 10, 1998 and
the Company completed the program on September 18, 1998. Under the plan, the
Company repurchased one million shares of its outstanding common stock at an
average cost of $21 per share. Repurchases were made in normal market trading
at prevailing prices and were funded from operating cash flow and the existing
bank facility.
Recent Acquisitions
In May, 1999, the Company, through its Hong Kong subsidiary, executed a
purchase agreement to acquire certain assets of Eycon Lens (Hong Kong) Co.,
Ltd. from its sole shareholder. In June and July, 1998, the Company completed
two other international acquisitions. The total adjusted purchase price for the
three acquisitions, including additional fees and expenses, of approximately
$3.2 million was funded with existing liquidity. The Company accounted for the
acquisitions under the purchase method of accounting. None of these
acquisitions were material to the Company's financial statements.
Recently Issued Accounting Pronouncements
Statement of Financial Accounting Standards ("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," SFAS 133 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.
10
<PAGE>
Year 2000
The Company utilizes and relies upon computer technology in many facets of
its operations, such as in the manufacture of contact lenses, the distribution
of lenses to customers, the arrangement of credit in connection with the
purchase of goods and the internal and external reporting of financial and
operational information. The technologies employed by the Company throughout
its operation include hardware and software as well as microprocessors and
other electronic devices which are components of production equipment
("embedded chips"). In the past, certain computer programs were written using
two digits rather than four to define the applicable year. Consequently, any of
the Company's systems and equipment that involve the use of time-sensitive
software programmed in that manner may recognize a date identified as "00" as
the year "1900" rather than "2000", which could result in miscalculations or
system failures. This is commonly referred to as the "Year 2000" or "Y2K"
issue.
The Company has undertaken a global approach to addressing the Year 2000
issue. Thus far, the Company has identified the areas of its operations in
which the Year 2000 issue may arise and conducted a global survey of all
personal computer, software and other essential equipment to identify
components that must be modified or replaced. A formal plan has been
established to acquire and repair existing Company personal computers and
associated software by June, 1999. An assessment of manufacturing equipment and
software has been completed. Mainframe system software modifications are
progressing according to plan and, in instances where critical, are being
tested. During the first three months of 1999, certain manufacturing and
application software, which had been remediated and validated, were moved to
the production environment. By June 30, 1999, the Company expects critical
systems to be modified, tested and implemented. In addition, the Company has
initiated written communications with significant suppliers and all banking
institutions with which the Company has financial arrangements to determine the
extent to which the Company's systems and operations are vulnerable to those
third parties' failures to remediate their Year 2000 compliance problems. The
Company's global steering committee meets bi-weekly to monitor the progress of
testing all Company Information Technology ("IT") and relevant non-IT systems,
to establish milestones for completion of specific Year 2000-related tasks
throughout the Company's facilities, and to supervise generally the measures
taken by the Company to address the Year 2000 issue.
The Company presently believes that, as a result of its actions, the Year
2000 issue will not pose significant operational problems for its computer
systems. If, however, the modifications, conversions and testing described
above are not accomplished in a timely manner, the Year 2000 issue could have a
material impact on the Company's operations. In addition, there can be no
guarantee that the systems of third parties will be made compliant in a timely
manner and would not have an adverse effect on the Company.
The Company is using both internal and external resources to identify and
test systems for Year 2000 compliance and to modify or replace them where
necessary. To assure Year 2000 compliance, the Company has made commitments of
$1.9 million to date, of which $0.6 million and $0.8 million was spent in 1999
and 1998, respectively, and has projected additional commitments of $1.2
million in future periods. The majority of these costs will be expensed as
incurred, with the remainder treated as capital expenditures. Costs related to
Year 2000 compliance were not significant in the years prior to 1998.
At this time, management is unable to estimate the effect of noncompliance
with the Year 2000 issue on the Company's results of operations, liquidity and
financial condition beyond the belief that noncompliance would be material in
nature. To mitigate the potential risk related to unsuccessful remediation on
either the part of the Company or its significant suppliers or bankers, a
contingency plan is being developed and is scheduled for completion in the
third quarter of 1999.
Conversion to Euro Currency
On January 1, 1999, eleven member countries of the European Union
established fixed conversion rates between their existing currencies ("legacy
currencies") and one common currency-the euro. The conversion to
11
<PAGE>
the euro will eliminate currency exchange risk between member countries.
Beginning in January, 2002, new euro-denominated bills and coins will be
issued, and legacy currencies will be withdrawn from circulation. The
transition period for the introduction of the euro will be between January 1,
1999 and June 30, 2002.
The Company conducts business in some member countries affected. The more
important issues facing the Company include: converting information technology
systems; negotiating and amending business agreements and contracts; processing
tax and accounting records; and potentially the competitive impact of cross-
border price transparency. In conjunction with the Year 2000 effort, the
Company's operating subsidiaries affected by the euro currency conversion are
addressing the issues involved, currently with preliminary emphasis on order
processing, banking and assessment of financial systems. Due to the
uncertainties involved, the issue of one common currency's effect on pricing
and its impact on results of operations cannot be reasonably estimated at this
time.
Based on our work to date, we believe the euro currency conversion has not
and will not have a material impact on the Company's consolidated financial
condition and results of operations.
Forward-Looking Statements
The Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MD&A") contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended (the "Securities
Act"). Such forward-looking statements are based on the beliefs of the
Company's management as well as on assumptions made by and information
currently available to the Company at the time such statements were made. When
used in this MD&A, the words "anticipate," "believe," "estimate," "expect,"
"intends," and similar expressions, as they relate to the Company are intended
to identify forward-looking statements, which include statements relating to,
among other things, (i) the ability of the Company to continue to compete
successfully in the contact lens market; (ii) the anticipated benefits from new
product introductions; (iii) the completion of the integration of Barnes-Hind
with the Company; (iv) the strategic benefits of the Barnes-Hind Acquisition;
(v) the continued effectiveness of the Company's sales and marketing strategy;
(vi) the ability of the Company to continue to successfully develop and launch
new products; (vii) the timely resolution of the Year 2000 issue by the Company
and its suppliers; and (viii) the Euro conversion. 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.
12
<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>
27.1 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K.
None.
13
<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)
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 7,557
<SECURITIES> 0
<RECEIVABLES> 58,175<F1>
<ALLOWANCES> 14,997
<INVENTORY> 59,949
<CURRENT-ASSETS> 143,465
<PP&E> 46,992
<DEPRECIATION> 4,652
<TOTAL-ASSETS> 202,235
<CURRENT-LIABILITIES> 56,726
<BONDS> 0
0
0
<COMMON> 181
<OTHER-SE> 55,146
<TOTAL-LIABILITY-AND-EQUITY> 202,235
<SALES> 76,311
<TOTAL-REVENUES> 76,311
<CGS> 25,118
<TOTAL-COSTS> 66,394
<OTHER-EXPENSES> (229)
<LOSS-PROVISION> 512
<INTEREST-EXPENSE> 1,023
<INCOME-PRETAX> 9,123
<INCOME-TAX> 2,919
<INCOME-CONTINUING> 6,204
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,204
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.34
<FN>
<F1>ALLOWANCES NETTED AGAINST TRADE RECEIVABLES INCLUDE BOTH BAD DEBT RESERVES AND
SALES RETURN RESERVES.
</FN>
</TABLE>
