<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 July 1, 2000
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-22003
-------
----------------
WESLEY JESSEN VISIONCARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-4023739
(State of Incorporation) (I.R.S Employer Identification No.)
333 East Howard Avenue
Des Plaines, Illinois 60018-5903
847-294-3000
(Address and telephone number, including area code, of registrant's principal
executive office)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
The number of shares of Common Stock ($0.01 par value) of the Registrant
outstanding as of August 4, 2000 was 17,695,968.
================================================================================
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<C> <S> <C>
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets at July 1, 2000
and December 31, 1999 1
Condensed Consolidated Statements of Operations for
the three and six months ended July 1, 2000 and
July 3, 1999 2
Condensed Consolidated Statements of Cash Flows for
the six months ended July 1, 2000 and July 3, 1999 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
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
WESLEY JESSEN VISIONCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
<TABLE>
<CAPTION>
July 1, December 31,
2000 1999
----------- ------------
ASSETS (Unaudited)
------
<S> <C> <C>
Current Assets:
Cash and cash equivalents.............................................. $ 10,123 $ 8,945
Accounts receivable - trade, net....................................... 56,062 48,372
Other receivables...................................................... 8,881 5,935
Inventories............................................................ 52,056 57,507
Deferred income taxes.................................................. 18,235 18,324
Prepaid expenses....................................................... 7,274 7,063
-------- --------
Total current assets................................................ 152,631 146,146
-------- --------
Properties:
Property, plant and equipment, at cost................................. 79,687 69,940
Accumulated depreciation .............................................. 11,566 8,762
-------- --------
Net property, plant and equipment ..................................... 68,121 61,178
-------- --------
Other Assets:
Investment in affiliates .............................................. 5,457 2,034
Goodwill, net.......................................................... 2,545 2,720
Other assets........................................................... 12,630 10,936
-------- --------
Total assets........................................................ $241,384 $223,014
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Trade accounts payable................................................. $ 12,681 $ 17,281
Accrued compensation and benefits...................................... 19,996 27,776
Accrued advertising.................................................... 3,375 3,778
Other accrued liabilities.............................................. 13,212 8,964
Transition reserve..................................................... 3,733 4,404
Income taxes payable................................................... - 1,152
Short term debt ....................................................... 2,946 2,441
-------- --------
Total current liabilities........................................... 55,943 65,796
-------- --------
Negative goodwill, net................................................... 10,945 11,492
Long term debt........................................................... 86,000 48,000
Other liabilities........................................................ 9,828 6,858
-------- --------
Total liabilities................................................... 162,716 132,146
-------- --------
Stockholders' Equity:
Common stock, $.01 par value, 50,000,000 shares authorized, 18,175,585
issued at July 1, 2000 and December 31, 1999.......................... 182 182
Additional paid in capital............................................. 59,847 59,851
Accumulated earnings................................................... 33,099 45,449
Treasury stock, at cost, 500,151 and 613,812 shares at July 1, 2000 and
December 31, 1999, respectively...................................... (10,654) (13,077)
Accumulated other comprehensive loss................................... (3,806) (1,537)
-------- --------
Total stockholders' equity.......................................... 78,668 90,868
-------- --------
Total liabilities and stockholders' equity.......................... $241,384 $223,014
======== ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
1
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------- -------------------------
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net sales............................................ $ 87,046 $80,005 $168,938 $156,316
-------- ------- -------- --------
Operating costs and expenses:
Cost of goods sold................................. 27,120 25,306 53,812 50,424
Marketing and administrative....................... 38,807 37,654 77,618 76,057
Research and development........................... 2,804 2,913 5,599 5,786
Merger and defense costs........................... 33,602 - 33,602 -
Amortization of goodwill, net...................... (226) (228) (451) (457)
-------- ------- -------- --------
Income (loss) from operations........................ (15,061) 14,360 (1,242) 24,506
Other (income) expense:
Interest income.................................... (228) (143) (418) (331)
Interest expense................................... 1,210 1,025 2,263 2,236
Equity in net loss of affiliate.................... 330 - 578 -
-------- ------- -------- --------
Income (loss) before income taxes.................... (16,373) 13,478 (3,665) 22,601
Income tax expense................................... (4,364) (4,313) (8,685) (7,232)
-------- ------- -------- --------
Net income (loss).................................... $(20,737) $ 9,165 $(12,350) $ 15,369
======== ======= ======== ========
Net income (loss) per common share:
Basic.............................................. $ (1.18) $ 0.53 $ (0.70) $ 0.90
Diluted............................................ $ (1.18) $ 0.49 $ (0.70) $ 0.83
Weighted average common shares outstanding:
Basic.............................................. 17,621 17,139 17,631 17,081
Diluted............................................ 17,621 18,599 17,631 18,530
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
-------------------------
July 1, July 3,
2000 1999
-------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Operating activities:
Net income (loss)................................... $(12,350) $ 15,369
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation expense.............................. 4,427 2,366
Amortization of capitalized financing fees........ 312 313
Amortization of goodwill, net.................... (451) (458)
Equity in net loss of affiliate................... 578 -
Deferred income tax............................... 29 (11)
Other............................................. 17 5
Changes in balance sheet items:
Accounts receivable - trade, net.................. (8,850) 670
Other receivables................................. (2,681) (369)
Inventories....................................... 3,876 2,223
Other assets...................................... (2,311) 1,068
Trade accounts payable............................ (4,260) (1,818)
Accrued liabilities............................... (4,347) (5,049)
Other liabilities................................. 3,005 1,333
Income taxes payable.............................. (755) 2,594
-------- --------
Cash (used in) provided by operating activities. (23,761) 18,236
-------- --------
Investing activities:
Investment in affiliates............................ (4,000) (2,415)
Capital expenditures................................ (12,644) (16,225)
Proceeds from the sale of assets.................... 224 1,257
-------- --------
Cash used in investing activities................. (16,420) (17,383)
-------- --------
Financing activities:
Issuance of stock................................... 2,074 1,163
Proceeds from issuance of debt...................... 39,404 9,844
Payments of debt.................................... (842) (10,000)
-------- --------
Cash provided by financing activities............. 40,636 1,007
-------- --------
Effect of exchange rates on cash and cash
equivalents........................................ 723 684
Net increase in cash and cash equivalents............ 1,178 2,544
Cash and cash equivalents:
Beginning of period.................................. 8,945 8,859
-------- --------
End of period........................................ $ 10,123 $ 11,403
======== ========
</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''). All significant intercompany accounts and transactions have been
eliminated in consolidation.
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, 1999.
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. Components of Merger and Defense Costs
Results for the three and six months ended July 1, 2000 include $33.6 million of
merger and defense costs. On June 6, 2000 a definitive agreement was announced
whereby Ciba Vision ("Ciba"), the eye care unit of Novartis A.G., will acquire
all the common stock of the Company for $38.50 per share in cash, or
approximately $785 million. Completion of the merger is expected in the third
quarter of fiscal 2000. As a result of the planned merger with Ciba, the Company
has terminated its announced merger agreement with Ocular Sciences, Inc.
("Ocular") and paid a termination fee of $25 million to Ocular during the second
quarter. The Company has incurred additional legal, defense, regulatory and
other expenses related to the unconsummated merger with Ocular, an unsuccessful
takeover attempt by Bausch & Lomb, Inc., and the pending merger with Ciba.
3. 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 is the dilutive effect of outstanding stock
4
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(unaudited)
options, using the treasury stock method from the date of grant. The weighted
average shares used in the computation for the three and six months ended July
1, 2000 do not include the effect of outstanding stock options, as the effect
would be antidilutive. The computation of basic and diluted net income per share
are as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------- --------------------
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Basic Net Income (Loss) Per Share:
Net income (loss) $(20,737) $ 9,165 $(12,350) $15,369
Weighted average common shares outstanding 17,621 17,139 17,631 17,081
Basic net income (loss) per share $ (1.18) $ 0.53 $ (0.70) $ 0.90
Diluted Net Income (Loss) Per Share:
Net income (loss) $(20,737) $ 9,165 $(12,350) $15,369
Weighted average common shares outstanding 17,621 17,139 17,631 17,081
Net additional shares issuable in
connection with stock options -- 1,460 -- 1,449
Diluted weighted average common shares
outstanding 17,621 18,599 17,631 18,530
Diluted net income (loss) per share $ (1.18) $ 0.49 $ (0.70) $ 0.83
</TABLE>
4. Transition Reserve
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 is currently
closing its manufacturing operations in San Diego, California and continues to
shift conventional lens production to its plant in Cidra, Puerto Rico. The plant
closing will result in the termination of 471 employees (of whom 356 had been
terminated as of July 1, 2000). Payments related to the transition reserve were
$499 for employee related costs and $172 for lease termination and other
facility related costs for the six months ended July 1, 2000.
5. Other Balance Sheet Accounts
Accounts receivable-trade, net consist of the following (in thousands):
<TABLE>
<CAPTION>
July 1, December 31,
2000 1999
------- ------------
<S> <C> <C>
Trade receivables $65,666 $58,452
Less allowances:
</TABLE>
5
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(unaudited)
Doubtful accounts (3,865) (4,258)
Sales returns and adjustments (5,739) (5,822)
------- -------
$56,062 $48,372
======= =======
Inventories consist of the following (in thousands):
July 1, December 31,
2000 1999
---- ----
Raw materials $ 7,543 $ 6,744
Work-in-process 8,816 7,896
Finished goods 49,571 58,569
Less reserves (13,874) (15,702)
-------- --------
$ 52,056 $ 57,507
======== ========
6. 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 in August 1999 when the
then-existing bank credit agreement was amended to increase the levels allowed
for intercompany loans, capital contributions to foreign subsidiaries,
investments, stock repurchases and capital expenditures.
Amounts borrowed under the 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 as
of July 1, 2000 was $84.0 million. The credit facility is guaranteed by each of
the Company's domestic subsidiaries and collateralized by essentially all assets
of the domestic subsidiaries.
The 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)
7. Comprehensive Income (Loss)
The components of comprehensive income (loss) for the three and six months ended
July 1, 2000 and July 3, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ----------------
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $(20,737) $9,165 $(12,350) $15,369
Foreign currency translation adjustments (1,613) (849) (2,269) (2,909)
-------- ------ -------- -------
Comprehensive income (loss) $(22,350) $8,316 $(14,619) $12,460
======== ====== ======== =======
</TABLE>
8. Treasury Stock Purchase Plan
The Board of Directors approved a share repurchase plan on June 10, 1998 which
the Company completed 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.
Currently, the Company reissues its treasury stock to satisfy share requirements
related to the Company's stock incentive plans, the employee stock purchase
plans and employee stock awards.
9. Affiliates
In June 2000, the Company purchased a 6.8% investment in Optobionics Corporation
for $2.0 million represented by shares of Series C convertible preferred stock.
Optobionics is developing a device which, when surgically implanted under the
retina, is intended to produce limited vision in certain otherwise blind
individuals. Limited human clinical trials have recently begun.
In June 1999, the Company purchased a 16.4% minority interest in Inoveon
Corporation for $2.4 million represented by shares of convertible Series A
preferred stock. In January and June 2000, the Company made additional
investments of $1.0 million each, which increased its ownership to 30.0%.
Inoveon, an Internet disease management company, has granted the Company
exclusive U.S. rights to market a proprietary national system to help
optometrists manage diabetic retinopathy, a leading cause of preventable
blindness. After an initial implementaion period, during which Inoveon will
deploy the system to integrated health care providers, the Company will begin
marketing it to the optometric community. The investment is being accounted for
under the equity method of accounting. The excess of the Company's investment
over the equity in the net assets of Inoveon represents purchased technology
which is being amortized over 5 years.
7
<PAGE>
WESLEY JESSEN VISIONCARE, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(unaudited)
10. Business segment 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>
Three Months Ended Six Months Ended
---------------------- ------------------------
July 1, July 3, July 1, July 3,
2000 1999 2000 1999
------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales:
United States (including Puerto Rico) $55,939 $51,104 $108,863 $101,302
United Kingdom 7,742 9,986 14,698 18,647
Rest of the world 23,365 18,915 45,377 36,367
------- ------- -------- --------
$87,046 $80,005 $168,938 $156,316
======= ======= ======== ========
</TABLE>
11. Commitments and Contingencies
Upon the completion of the pending merger with Ciba, the Company will be
obligated to pay transaction fees to certain professional advisors.
8
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Wesley Jessen is the leading worldwide developer, manufacturer and marketer
of specialty soft contact lenses, based on its share of the specialty lens
market. The Company's products include cosmetic lenses, which change or enhance
the wearer's eye color appearance; toric lenses, which correct vision for people
with astigmatism; and premium lenses, which offer value-added features such as
improved comfort for dry eyes and protection from UV light. Founded in 1946 by
pioneers in the contact lens industry, the Company has a long-standing
reputation for innovation and new product introductions. Wesley Jessen develops
technology, manufacturing processes and products through a combination of its
in-house staff of more than 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 222 person salesforce and network of
independent distributors, which together sell the Company's products in more
than 75 countries.
Recent Events
On June 6, 2000 a definitive agreement was announced whereby Ciba Vision
("Ciba"), the eye care unit of Novartis A.G., will acquire the Company for
$38.50 per share in cash, or a total of approximately $785 million. Completion
of the merger is expected in the third quarter of fiscal 2000. As a result of
the planned merger with Ciba, the Company has terminated its announced merger
agreement with Ocular Sciences, Inc. ("Ocular") and paid a termination fee of
$25 million to Ocular during the second quarter. The Company has incurred
additional legal, defense, regulatory and other expenses related to the
unconsummated merger with Ocular, an unsuccessful takeover attempt by Bausch &
Lomb, Inc., and the pending merger with Ciba.
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 its initial cost reduction measures
which, as expected, have improved the Company's operating results. The Company
is in the process of closing its manufacturing operations in San Diego,
California and continues to shift 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.
9
<PAGE>
Results of Operations
Three Months Ended July 1, 2000 (Unaudited) Compared to Three Months Ended
July 3, 1999 (Unaudited)
Net sales for the three months ended July 1, 2000 increased $7.0 million,
or 8.8%, to $87.0 million from $80.0 million for the three months ended July 3,
1999. This increase resulted primarily from a 31.1% growth in the sales of
disposable and planned replacement contact lenses primarily FreshLook
ColorBlends/R/ and FreshLook/R/ Toric, from $41.1 million to $53.8 million,
offset by a 14.7% decline in the sales of conventional lens products, from $38.9
million to $33.2 million. Sales of disposable and planned replacement lenses
grew 28.8% in the U.S. and 34.1% internationally. Sales of conventional lenses
fell 17.0% domestically and 10.7% in the rest of the world. For the three month
period, total U.S. sales rose 5.3%, while total international sales grew by
14.1%.
Gross profit for the three months ended July 1, 2000 increased $5.2
million, or 9.6%, to $59.9 million from $54.7 million in the comparable 1999
period primarily as a result of higher sales. Gross profit margin increased 0.4%
to 68.8% in 2000.
Marketing and administrative expenses for the three months ended July 1,
2000 increased by $1.5 million, or 3.9%, to $39.1 million from $37.7 million for
the three months ended July 3, 1999. This increase was largely due to increased
performance related compensation costs and an increase in required bad debt
reserve partially offset by lower consumer advertising expenses. As a percentage
of net sales, marketing and administrative expenses decreased to 45.0% in the
2000 period from 47.1% in the 1999 period.
Research and development expenses decreased $0.1 million, or 3.7%, to $2.8
million for the three months ended July 1, 2000 from $2.9 million for the three
months ended July 3, 1999. The decrease was primarily a result of higher
spending on UV lenses for the 1999 period. As a percent of net sales, research
and development expenses decreased to 3.2% in the 2000 period from 3.6% in the
1999 period.
Merger and defense costs for the three months ended July 1, 2000 include
charges associated with the unconsummated merger with Ocular, defense costs
relative to an unsuccessful takeover attempt by Bausch & Lomb, Inc., and
expenses relative to the pending merger of the Company with Ciba.
Equity in net loss of affiliate represents the Company's percentage
ownership of the operations of Inoveon Corporation in which the Company holds a
minority interest investment. There was no comparable expense in the prior
period.
Interest expense increased 13.6% to $1.2 million for the three months ended
July 1, 2000 from $1.0 million for the three months ended July 3, 1999 due to
higher debt balances coupled with higher interest rates.
Net loss of $20,737 for the three months ended July 1, 2000 was a result of
the merger and defense costs discussed above. Excluding the merger and defense
costs, net of the related tax benefit, of $31.6 million, net income increased by
18.0% from $9.2 million for the three months ended July 3, 1999 to $10.8 million
for the
10
<PAGE>
three months ended July 1, 2000 as the higher gross profit was only partially
offset by higher spending in marketing and administrative expenses from the
comparable period in 1999.
Six Months Ended July 1, 2000 (Unaudited) Compared to Six Months Ended July 3,
1999 (Unaudited)
Net sales for the six months ended July 1, 2000 increased $12.6 million, or
8.1%, to $168.9 million from $156.3 million for the six months ended July 3,
1999. This increase resulted primarily from a 26.4% growth in the sales of
disposable and planned replacement contact lenses primarily FreshLook
ColorBlends and FreshLook(R) Toric, from $80.2 million to $101.4 million, offset
by a 11.2% decline in the sales of conventional lens products, from $76.1
million to $67.6 million. Sales of disposable and planned replacement lenses
grew 22.5% in the U.S. and 31.8% internationally. Sales of conventional lenses
fell 15.3% domestically and 4.0% in the rest of the world. For the six month
period, total U.S. sales rose 3.3%, while total international sales grew by
15.6%.
Gross profit for the six months ended July 1, 2000 increased $9.2 million,
or 8.7%, to $115.1 million from $105.9 million in the comparable 1999 period
primarily as a result of higher sales. Gross profit margin increased 0.4% to
68.1% in 2000.
Marketing and administrative expenses for the six months ended July 1, 2000
increased by $2.1 million, or 2.8%, to $78.2 million from $76.1 million for the
six months ended July 3, 1999. This increase was largely due to increased
performance related compensation costs and an increase in required bad debt
reserve partially offset by lower consumer advertising expenses. As a percentage
of net sales, marketing and administrative expenses decreased to 46.3% in the
2000 period from 48.7% in the 1999 period.
Research and development expenses decreased $0.2 million, or 3.3%, to $5.6
million for the six months ended July 1, 2000 from $5.8 million for the six
months ended July 3, 1999. The decrease was primarily a result of higher
spending on UV lenses for the 1999 period. As a percent of net sales, research
and development expenses decreased to 3.3% in the 2000 period from 3.7% in the
1999 period.
Merger and defense costs for the six months ended July 1, 2000 include
charges associated with the unconsummated merger with Ocular, defense costs
relative to an unsuccessful takeover attempt by Bausch & Lomb, Inc., and
expenses relative to the pending merger of the Company with Ciba.
Equity in net loss of affiliate represents the Company's percentage
ownership of the operations of Inoveon Corporation in which the Company holds a
minority interest investment. There was no comparable expense in the prior
period.
Interest expense was flat between the six month periods ended July 1, 2000
and July 3, 1999 as higher debt balances coupled with higher interest rates were
offset by capitalized interest in the 2000 period.
Net loss of $12,350 for the six months ended July 1, 2000 was a result of
the merger and defense costs discussed above. Excluding the merger and defense
costs, net of the related tax benefit, of $31.6 million, net income increased by
25.0% from $15.4 million for the six months ended July 3, 1999 to $19.2 million
for the six months ended July 1, 2000 as the higher gross profit was only
partially offset by higher spending in marketing and administrative expenses
from the comparable period in 1999.
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Liquidity and Capital Resources
The Company finances its operations primarily through funds provided from
operations and through borrowings under its revolving credit facility. For the
six months ended July 1, 2000, the Company used approximately $23.8 million in
cash from operating activities, primarily for the cash payouts for the merger
and defense costs, payments made for prior year's performance related
compensation and higher receivable balances due to higher sales. This use of
cash was partially offset by higher gross margins and lower inventory levels
Since December 31, 1999 the Company has incurred additional long term borrowings
of $38.0 million.
For the six months ended July 1, 2000 and July 3, 1999, the Company made
capital expenditures of approximately $12.6 million and $16.2 million,
respectively. The majority of the 2000 capital expenditures were for information
technology enhancements and production capacity expansion. The Company
anticipates that additional capital expenditures of approximately $22 million
will be made throughout 2000 related to the upgrade in management information
systems and to continue capacity expansion. During 2000 the Company expects to
incur $4.4 million of costs to complete its integration of the Barnes Hind
operations. For the six months ended July 1, 2000, the Company has paid $0.7
million of these costs. In addition, the Company is obligated to pay transaction
fees to certain professional advisors upon the completion of the pending merger
agreement with Ciba. The Company expects to fund all of the above commitments
primarily by cash generated from operating activities and borrowings under its
revolving credit facility.
The Company maintains a $170 million revolving credit facility which
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. The indebtedness of the Company under the credit
agreement is collateralized 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. As of July 1, 2000,
the Company had approximately $84.0 million in borrowing availability under this
facility.
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 credit agreement and
cash on hand at July 1, 2000 of $10.1 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, integration
and transaction costs, and to enable the Company and its subsidiaries to comply
with debt obligations. However, actual capital requirements may change. 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, 1999, the Company purchased an interest rate cap on $35.0 million
notional principal amount at a fixed rate of 8.5%, which expires on December 31,
2001. The cap is intended to provide partial protection from exposure relating
to the Company's variable rate debt instruments.
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Approximately 42% of the Company's net sales for the six months ended July
1, 2000 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.
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. The effective date for this Statement is fiscal
years beginning after June 15, 2000. Retroactive application to prior period
financial statements is not permitted. The Company expects to adopt this
Statement in its financial statements for the year ending December 31, 2001.
This Statement is not expected to have a material impact on the Company's
financial statements.
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements," which was amended by SAB No. 101A in March 2000 and further amended
by SAB No. 101B in June 2000. SAB No. 101B delayed the implementation date of
SAB No. 101. The SAB, which provides guidance on the recognition, presentation
and disclosure of revenue in financial statements, is required to be adopted by
the Company in the fourth quarter of fiscal 2001. The adoption of this Statement
is not expected to have a material impact on the Company's result of operations
or financial condition.
Forward-Looking Statements
The Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MD&A") contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act").
Such forward-looking statements are based on the beliefs of the Company's
management as well as on assumptions made by and information currently available
to the Company at the time such statements were made. When used in this MD&A,
the words "anticipate," "believe," "estimate," "expect," "intends," and similar
expressions, as they relate to the Company are intended to identify forward-
looking statements, which include statements relating to, among other things,
(i) the ability of the Company to continue to compete successfully in the
contact lens market; (ii) the anticipated benefits from new product
introductions; (iii) the completion of the integration of Barnes-Hind with the
Company; (iv) the strategic benefits of the Barnes-Hind Acquisition; (v) the
continued effectiveness of the Company's sales and marketing strategy and (vi)
the ability of the Company to continue to successfully develop and launch new
products. Actual results could differ materially from
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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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the Company's market risk exposure
since December 31, 1999.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On April 3, 2000, Bausch & Lomb commenced litigation against Wesley Jessen,
the Wesley Jessen Board and Ocular Sciences, Inc. ("OSI") in the Court of
Chancery of the State of Delaware, where both Wesley Jessen and OSI are
incorporated.. Bausch & Lomb's complaint states that the Ocular Merger Agreement
was entered into in breach of the Wesley Jessen Board's fiduciary duties to act
on a fully informed basis and to advance the best interests of Wesley Jessen
shareholders. The complaint seeks injunctive relief against the Ocular Merger
Agreement, seeks to require the Wesley Jessen Board to redeem the preferred
share purchase rights to permit shareholders to accept the Bausch & Lomb Offer
and requests a declaration that any break-up fee OSI receives will be held by it
as a constructive trustee. The foregoing summary is qualified in its entirety by
reference to the complaint, which is filed as Exhibit (a)(9) to Amendment No. 1
to the SC TO/A filed by Bausch & Lomb on April 4, 2000. On July 7, 2000, this
lawsuit was dismissed without prejudice.
On March 23, and March 24, 2000, respectively, Ari Parnes and Royla Cochran
commenced separate lawsuits, on behalf of themselves and all other holders of
Wesley Jessen Common Stock other than the defendants and their affiliates,
against Wesley Jessen and the Wesley Jessen Board in the Court of Chancery of
the State of Delaware, where Wesley Jessen is incorporated. On April 6, 2000,
Mr. Parnes and Ms. Cochran filed an amended complaint which joined their
separate actions. The amended complaint alleges that the Wesley Jessen Board
breached their fiduciary duties of care, loyalty and good faith toward Wesley
Jessen shareholders by approving the merger of OSI with Wesley Jessen. The
amended complaint seeks certification as a class action, injunctive relief
against the Ocular Merger Agreement and a direction that the Wesely Jessen Board
(i) give due consideration to any proposed business combination and (ii) ensure
that no conflicts exist between the interests of the Wesley Jessen directors and
those of the Wesley Jessen public shareholders or resolve any conflicts in favor
of the best interests of Wesley Jessen's public shareholders.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
The following exhibits are filed herewith and made a part hereof:
Exhibit No. Description of Exhibit
----------- -----------------------
27.1 Financial Data Schedule.
(b) Reports on Form 8-K.
April 7, 2000 - Amendment to Form 8 - K filed with the Securities and
Exchange Commission on March 31, 2000 - Item 5. Other Events - Agreement and
Plan of Merger dated March 19, 2000, among Wesley Jessen VisionCare, Inc. and
Ocular Sciences, Inc.
April 10, 2000 - Amendment to Form 8 - K filed with the Securities and
Exchange Commission on March 22, 2000 - Item 5. Other Events - Press release
announcing a definitive merger agreement between Wesley Jessen VisionCare, Inc.
and Ocular Sciences, Inc.
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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)
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