<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from ___ to ___
COMMISSION FILE NO. 0-27421
OCULAR SCIENCES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-2985696
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
475 ECCLES AVENUE
SOUTH SAN FRANCISCO, CALIFORNIA 94080
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(650) 583-1400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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 [ ].
As of April 30, 1998, there were outstanding 22,289,306 shares of the
Registrant's Common Stock, par value $0.001 per share.
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OCULAR SCIENCES, INC.
INDEX
<TABLE>
PART I - FINANCIAL INFORMATION Page
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets -
March 31, 1998 and December 31, 1997 3
Consolidated Statements of Income - Three Months
Ended March 31, 1998 and 1997 4
Consolidated Statements of Comprehensive Income -
Three Months Ended March 31, 1998 and 1997 5
Consolidated Statements of Cash Flows - Three
Months Ended March 31, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 23
SIGNATURES 24
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
OCULAR SCIENCES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
(unaudited) (audited)
--------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 25,810 $ 27,895
Restricted cash 469 464
Short-term investments 19,188 10,000
Accounts receivable, less allowance for sales
returns and doubtful accounts of $1,669 and $1,655
for 1998 and 1997, respectively 18,376 18,785
Inventories 12,915 12,941
Loans to officers and employees 1,000 927
Other current assets 3,183 5,173
--------- ---------
Total Current Assets 80,941 76,185
Property and equipment, net 40,889 36,248
Intangible assets, net 7,908 8,137
Long-term investments 8,404 9,070
Other assets 154 95
--------- ---------
Total Assets $ 138,296 $ 129,735
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,675 $ 3,723
Accrued liabilities 9,191 9,354
Accrued cooperative merchandise allowances 4,499 4,238
Current portion of long-term debt 454 445
Current deferred taxes 2,177 2,159
Income and other taxes payable 964 278
--------- ---------
Total Current Liabilities 21,960 20,197
Long-term debt, less current portion 3,325 3,434
--------- ---------
Total Liabilities 25,285 23,631
--------- ---------
Stockholders' Equity:
Common stock, $0.001 par value; 80,000,000 shares authorized;
22,232,076 and 21,738,166 shares issued and outstanding for 1998 and
1997, respectively 22 22
Additional paid-in capital 71,445 70,438
Retained earnings 42,008 36,164
Accumulated other comprehensive income (464) (520)
--------- ---------
Total Stockholders' Equity 113,011 106,104
--------- ---------
Total Liabilities and Stockholders' Equity $ 138,296 $ 129,735
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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OCULAR SCIENCES, INC.
CONSOLIDATED STATEMENTS OF INCOME - (UNAUDITED)
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net sales $ 32,171 $ 23,879
Cost of sales 10,141 9,462
------------ ------------
Gross profit 22,030 14,417
Selling and marketing expenses 8,731 5,774
General and administrative expenses 5,266 5,399
------------ ------------
Income from operations 8,033 3,244
Interest expense (82) (487)
Interest income 581 37
Other (expense) income (183) (191)
------------ ------------
Income before taxes 8,349 2,603
Income taxes (2,505) (781)
------------ ------------
Net income 5,844 1,822
Preferred stock dividends -- (20)
------------ ------------
Net income applicable
to common stockholders $ 5,844 $ 1,802
============ ============
Net income per share data:
Net income per share (basic) $ 0.27 $ 0.11
============ ============
Net income per share (diluted) $ 0.25 $ 0.09
============ ============
Weighted average common
shares outstanding 21,919,973 16,558,210
Weighted average dilutive
potential common shares 1,268,723 3,015,728
------------ ------------
Weighted average common and
dilutive potential common
shares outstanding 23,188,696 19,573,938
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
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OCULAR SCIENCES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
----------------------
1998 1997
------- -------
<S> <C> <C>
Net income $ 5,844 $ 1,822
Other comprehensive income, net of tax:
Foreign currency translation adjustment 31 (38)
Unrealized gains on securities:
Unrealized holding gain arising during the period 25 --
Less: Reclassification adjustment for
gains included in net income -- --
------- -------
Other comprehensive net income 56 (38)
------- -------
Comprehensive income $ 5,900 $ 1,784
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
5
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OCULAR SCIENCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1998 1997
--------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,844 $ 1,822
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 1,456 1,674
Allowances for sales returns and doubtful accounts 279 237
Provision for excess and obsolete inventory 177 289
Provision for damaged and scrap products 172 --
Exchange loss (gain) 150 214
Deferred income taxes (156) --
Changes in operating assets and liabilities:
Accounts receivable 180 2,157
Inventories (281) (1,460)
Other current and non-current assets 2,023 (760)
Accounts payable 922 (287)
Accrued liabilities 64 820
Income and other taxes payable 689 30
-------- --------
Net cash provided by operating activities 11,519 4,736
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (5,845) (2,041)
Purchase of available-for-sale
short-term and long-term investments (10,498) --
Sales and maturities of available-for-sale
short-term and long-term investments 2,000
Purchase of marketing rights and license agreement -- (2,499)
Payments from restricted cash -- 1,228
-------- --------
Net cash used in investing activities (14,343) (3,312)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt -- 2,878
Repayment of long-term debt (100) (5,101)
Proceeds from secondary public offering of common stock, net 143 --
Preferred stock dividends -- (21)
Proceeds from issuance of common stock 864 37
-------- --------
Net cash provided by (used in) financing activities 907 (2,207)
Effect of exchange rate changes on cash and cash equivalents (168) (73)
-------- --------
Net decrease in cash and cash equivalents (2,085) (856)
Cash and cash equivalents at beginning of period 27,895 3,795
-------- --------
Cash and cash equivalents at end of period $ 25,810 $ 2,939
======== ========
Supplemental cash flow disclosure:
Cash paid during the year for:
Interest $ 86 $ 465
======== ========
Income taxes $ 14 $ 671
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
6
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OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PREPARATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not contain all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying unaudited
consolidated financial statements have been prepared on the same basis as the
audited consolidated financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
statement of the Company's financial condition as of March 31, 1998 and the
results of its operations, and its cash flows for the three month periods ended
March 31, 1998 and 1997. These financial statements should be read in
conjunction with the Company's audited financial statements as of December 31,
1997 and 1996 and for each of the years in the three-year period ended December
31, 1997, including notes thereto, included in the Company's Annual Report on
Form 10-K. Operating results for the three month period ended March 31, 1998 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1998.
NOTE 2 - NEW ACCOUNTING POLICIES
The Company has adopted Statement of Financial Accounting Standards
("SFAS") Nos. 130 and 131, "Reporting Comprehensive Income" ("SFAS No. 130") and
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS No.
131"), respectively (collectively, the "Statements") effective in the year
ending December 31, 1998. SFAS No. 130 establishes standards for reporting of
comprehensive income and its components in annual financial statements. The
Company has included a new statement of comprehensive income that begins with
net income and reconciles to comprehensive income. SFAS No. 131 establishes
standards for reporting financial and descriptive information about an
enterprise's operating segments in its annual financial statements and selected
segment information in interim financial reports. The Company operates in a
single industry segment and will disclose the enterprise-wide disclosures in its
annual financial statements as of and for the year ended December 31, 1998.
Application of the Statements' disclosure requirements did not have an impact on
the Company's consolidated financial position, results of operations or net
income per share data as currently reported.
NOTE 3 - SIGNIFICANT EVENTS
The Secondary Public Offering
In March 1998, the Company completed a secondary offering in which
5,343,381 shares of its Common Stock were sold to the public at a price of
$27.50 per share (including shares sold pursuant to the underwriters'
over-allotment option). The shares sold consisted of 30,000 shares sold by the
Company and 5,313,381 shares sold by selling stockholders. The Company incurred
aggregate expenses of $640,000 in connection with the secondary offering
(excluding underwriting discounts and commissions paid by the Company and the
selling stockholders).
Financing
Ocular Sciences Puerto Rico has entered into a letter of intent and is
negotiating the final terms of an agreement with the Puerto Rico Industrial
Development Company ("PRIDCO") to manage on PRIDCO's behalf the construction of
a new building in Puerto Rico that will be leased by Ocular Sciences Puerto Rico
as its manufacturing facility, based upon completion of
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construction. Ocular Sciences Puerto Rico plans to use term loans under its
Comerica Credit Agreement to finance the building construction as well as the
leasehold improvements. Under the anticipated agreement, PRIDCO would reimburse
Ocular Sciences Puerto Rico for up to a maximum of $3,470,000 for certain
structural construction costs of the facility at the end of the construction
project, as specified in the agreement. Annual rental payments of approximately
$489,000 per year would be due to PRIDCO to commence four months after
completion of the project, for a period of ten years. No assurance can be given
as to the terms of the final agreement between PRIDCO and Ocular Sciences Puerto
Rico.
NOTE 4 - INVENTORIES
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- ------------
<S> <C> <C>
Raw materials $ 885 $ 2,767
Work in process 581 812
Finished goods 11,449 9,362
------- -------
$12,915 $12,941
======= =======
</TABLE>
NOTE 5 - NET INCOME PER SHARE
The following table reconciles net income per share (basic) to net
income per share (diluted) (in thousands, except per share amounts):
<TABLE>
<CAPTION>
March 31,
----------------------
1998 1997
------- -------
<S> <C> <C>
Net income used in the net income per share (basic) calculation $ 5,844 $ 1,802
Preferred stock dividends -- 20
------- -------
Net income used in the net income per share (diluted) calculation $ 5,844 $ 1,822
======= =======
Weighted average common shares outstanding 21,920 16,558
Weighted average dilutive potential common shares 1,269 3,016
------- -------
Weighted average common and dilutive potential common shares
outstanding 23,189 19,574
======= =======
Net income per share (basic) $ 0.27 $ 0.11
======= =======
Net income per share (diluted) $ 0.25 $ 0.09
======= =======
</TABLE>
NOTE 6 - ACCUMULATED OTHER COMPREHENSIVE INCOME BALANCES
Accumulated other comprehensive income consists of the following (in
thousands):
<TABLE>
<CAPTION>
ACCUMULATED
FOREIGN UNREALIZED OTHER
CURRENCY GAINS ON COMPREHENSIVE
ITEMS SECURITIES INCOME
--------------- --------------- ---------------
<S> <C> <C> <C>
Balances at December 31, 1997 (531) 11 (520)
Current-period change 31 25 56
--------------- --------------- ---------------
Balances at March 31, 1998 (500) 36 (464)
=============== =============== ===============
</TABLE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
unaudited Consolidated Financial Statements and notes thereto included in Part I
- - Item 1 of this Quarterly Report and the audited Consolidated Financial
Statements and notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
Except for the historical information contained herein, the matters
discussed in this Form 10-Q are forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A
of the Securities Act of 1933, as amended. These forward-looking statements
involve risks and uncertainties, including the impact of intense competition,
risks of expansion and automation of manufacturing facilities, risks of trade
practice litigation, fluctuations in operating results, risks of international
operations, the management of growth and the other risks detailed below,
including in the section labeled "Factors That May Affect Future Results," and
from time to time in the Company's other reports filed with the Securities and
Exchange Commission. The actual results that the Company achieves may differ
materially from any forward-looking projections due to such risks and
uncertainties. The Company has identified with a preceding asterisk ("*"),
various sentences within this Form 10-Q which contain such forward-looking
statements, and words such as "believes", "anticipates", "expects", "future",
"intends", "would", "may" and similar expressions are also intended to identify
forward-looking statements. However, the asterisk and these words are not the
exclusive means of identifying such statements. In addition, the section labeled
"Factors That May Affect Future Results", which has no asterisks for improved
readability, consists primarily of forward-looking statements. The Company
undertakes no obligation to revise any of these forward-looking statements to
reflect events or circumstances after the date hereof.
RESULTS OF OPERATIONS
Net Sales
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------
1998 1997 % Change
----------- ----------- -----------
<S> <C> <C> <C>
U.S. $25,352,000 $18,904,000 34.1%
As a percentage of net sales 78.8% 79.2%
International $ 6,819,000 $ 4,975,000 37.1%
As a percentage of net sales 21.2% 20.8%
----------- -----------
Net sales $32,171,000 $23,879,000 34.7%
</TABLE>
Net sales represents gross sales less volume discounts, trial set
discounts, prompt payment discounts and allowances for sales returns. The
Company recognizes sales upon shipment of products to its customers. Discounts
and allowances for sales returns are accrued at the time sales are recognized.
The majority of the growth in net sales from the quarter ended March 31, 1997 to
the quarter ended March 31, 1998 resulted from increased sales of the Company's
lenses marketed for disposable replacement regimens. Unit sales of the Company's
lenses marketed for disposable replacement regimens increased 62.9% from the
first quarter of 1997 to the first quarter of 1998, compared to an increase of
59.0% from the year ended December 31, 1996 to the year ended December 31, 1997.
Unit sales of the Company's lenses marketed for annual replacement regimens
increased 14.3% from the
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first quarter of 1997 to the first quarter of 1998, compared to a decrease of
6.3% from the year ended December 31, 1996 to the year ended December 31, 1997.
During the quarter ended March 31, 1998, 91.2% of all lenses sold were for use
in disposable replacement regimens, compared to 88.1% during the quarter ended
March 31, 1997. The Company's international sales grew at a lower rate than
recent quarters due primarily to weakness in the Asian market and an unfavorable
exchange rate against the Canadian dollar, offset in part by strong sales to
European customers. The Company's overall average selling price declined
approximately 14.1% from the quarter ended March 31, 1997 to the quarter ended
March 31, 1998, as a combined result of a continued shift in product mix towards
sales of lower priced products for disposable replacement regimens as well as a
shift in the geographic mix towards products sold internationally to
distributors at prices lower than direct sales prices in the United States.
Within each principal distribution channel, except for Asia, the average price
of each of the Company's primary products remained relatively stable from the
first quarter of 1997 to the first quarter of 1998. The Company discounted
lenses for sale into Asian markets in order to maintain unit volume and market
share. *The Company expects that the overall average selling price that it
realizes across its products will continue to decline over time, and may decline
at a greater rate than in the past, because of (i) shifts in the Company's
product mix from lenses marketed for annual replacement regimens to lenses
marketed for disposable replacement regimens and, within the disposable
category, to lenses that are replaced more frequently, (ii) decreases in the
average per unit selling prices of lenses marketed for disposable replacement
regimens and (iii) increases in products sold internationally to distributors at
prices lower than direct sales prices in the United States. *The Company does
not expect there to be significant growth, if any, in its sales of lenses for
annual replacement as a result of the continuing shift in consumer demand
towards more frequent replacement regimens. *The Company does not believe that
its net sales growth rate from the quarter ended March 31, 1997 to the quarter
ended March 31,1998 is indicative of the Company's long-term sales growth rate.
*The Company believes that at least one of its competitors may be changing its
pricing structure on lenses marketed for weekly disposable replacement regimens
to some customers and that the effect may be to lower overall prices. The
Company is monitoring this pricing situation and is developing strategies to
respond, if necessary.
Gross Profit
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------
1998 1997 % Change
------------- ------------- -------------
<S> <C> <C> <C>
Gross profit $ 22,030,000 $ 14,417,000 52.8%
As a percentage of net sales 68.5% 60.4%
</TABLE>
Cost of sales is comprised primarily of the labor, overhead and material
costs of production and packaging, freight and duty, inventory reserves,
royalties to third parties and amortization of certain intangible assets. A
substantial portion of the Company's cost of sales is fixed and therefore
declines as a percentage of net sales as volume increases. The increase in gross
profit from the quarter ended March 31, 1997 to the quarter ended March 31, 1998
was due primarily to increased net sales, and to decreases in per unit
production costs resulting from the implementation of certain process
improvements and increases in manufacturing volume. *The Company expects cost
reductions resulting from improvements in the Company's current production
process to be less significant in the immediate future. *The Company intends to
add new, highly automated production lines at its United Kingdom and Puerto Rico
facilities, which are designed to reduce further its per unit cost of production
over time, and anticipates the first such line to begin operating during the
second half of 1998. *As the Company expects that its overall average selling
price will continue to decline over time, and anticipates higher depreciation,
which is a component of cost of sales, as a result of significantly increased
investment in property and equipment, the Company will need to continue to
reduce its per unit production costs through increased automation,
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increased volume and reduced packaging costs in order to improve, or even to
maintain, its gross margins. See "Factors That May Affect Future Results -
Manufacturing Capacity Constraints; Risks Associated With Expansion and
Automation of Manufacturing Operations." *In addition, the Company may
experience decreased per unit prices in future periods, while not achieving
comparable decreases in its cost of sales until subsequent periods, if at all.
*As a result, the Company would experience significant variability in its gross
margins. *For example, if the Company introduces a lower-priced contact lens
marketed for daily replacement regimens, its average selling price will decline,
and may decline significantly, while reductions in costs of sales would likely
not reach comparable levels until subsequent periods, if at all. *Accordingly,
the Company would expect its gross margins to decrease at least in the short
term following the introduction of lenses marketed for daily replacement
regimens. See "Factors That May Affect Future Results - Fluctuations in
Operating Results; Seasonality; Decreasing Average Sales Prices."
Selling and Marketing Expenses
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
1998 1997 % Change
------------ ------------ ------------
<S> <C> <C> <C>
Selling and marketing expenses $ 8,731,000 $ 5,774,000 51.2%
As a percentage of net sales 27.1% 24.2%
</TABLE>
Selling and marketing expenses are comprised primarily of cooperative
merchandising allowances, sample diagnostic products provided to eyecare
practitioners without charge, salaries, commissions and benefits for selling and
marketing personnel and postage and freight charges not billed to customers.
Cooperative merchandising allowances are reimbursements made principally to
chain stores and mass merchants for items such as advertising, displays and
mailings that are intended to encourage the fitting and wearing of the Company's
lenses marketed for disposable replacement regimens. These allowances are
limited to a percentage of purchases of lenses marketed for disposable
replacement regimens from the Company. The increase, both in dollars and as a
percentage of net sales, from the quarter ended March 31, 1997 to the quarter
ended March 31, 1998 resulted primarily from increases in cooperative
merchandising allowances and, to a lesser extent, from increased shipments of
diagnostic lenses, increases in the size of the U.S. sales force and increases
in royalties which are due on certain U.K. sales. Cooperative merchandising
allowances grew at a higher rate than the Company's net sales from lenses
marketed for disposable replacement regimens, as the Company responded to
competitive pressures. *The Company believes selling and marketing expenses,
particularly cooperative merchandising allowances, may continue to grow at a
faster rate than the overall increase in sales as the Company seeks to increase
its market share and respond to pricing and promotional pressures from
competitors.
General and Administrative Expenses
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
1998 1997 % Change
------------ ------------ ------------
<S> <C> <C> <C>
General and administrative expenses $ 5,266,000 $ 5,399,000 (2.5%)
As a percentage of net sales 16.4% 22.6%
</TABLE>
General and administrative expenses are comprised primarily of salaries
and benefits for distribution, general and administrative, research and
development personnel, professional services, consultants' fees and
non-manufacturing facilities costs. General and administrative expenses
decreased both in dollars and as a percentage of sales. The decrease was due
primarily to lower legal fees due to the settlement in February 1997 of certain
United
11
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Kingdom litigation, lower depreciation expense because of a write-off of the
Company's existing computer operating system, which is in the process of being
replaced, and lower sales and use taxes. The decrease was partially offset by
increases in research and development related to the development of the
automated production process. *The Company believes that if net sales grow, its
general and administrative expenses will increase in absolute dollars, but would
decrease as a percentage of net sales.
Income from operations
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
1998 1997 % Change
------------ ------------ ------------
<S> <C> <C> <C>
Income from operations $ 8,033,000 $ 3,244,000 147.6%
As a percentage of net sales 25.0% 13.6%
</TABLE>
The increase in income from operations, both in dollars and as a
percentage of net sales, is due primarily to increased sales and improved gross
margins.
Interest and Other Income (Expense), Net
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997 % Change
---------- ---------- ----------
<S> <C> <C> <C>
Interest and other income (expense), net $ 316,000 $ (641,000) (149.3%)
As a percentage of net sales 1.0% (2.7%)
</TABLE>
The increase in interest and other income (expense), net from the
quarter ended March 31, 1997 to the quarter ended March 31, 1998 resulted
primarily from a reduction in interest expense as the aggregate amount of the
Company's borrowings was reduced following its initial public offering in August
1997 and an increase in interest earned as a result of the investment of a
portion of the net proceeds from the Company's initial public offering.
Additionally, the Company recorded an exchange loss of $150,000 in the quarter
ended March 31, 1998 related primarily to the strength of the dollar compared to
the British pound.
Income Taxes
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
1998 1997 % Change
----------- ----------- -----------
<S> <C> <C> <C>
Income taxes $ 2,505,000 $ 781,000 220.7%
Effective tax rate 30.0% 30.0%
</TABLE>
The Company's effective tax rate remained constant at 30% from the
quarter ended March 31, 1997 to the quarter ended March 31, 1998. Earnings
attributable to the Company's Puerto Rican operations are partially exempt from
U.S. taxation. The Company anticipates that it will continue to benefit from the
favorable effect of this partial exemption through 2001, when the benefit will
expire under the current provisions of the Internal Revenue Code. Certain
pending federal legislation would, if adopted, extend this exemption beyond 2001
or replace it with other tax benefits after that year. In addition, the
Company's planned installation of highly automated production lines in Puerto
Rico could cause an increase in the Company's tax rate if the automation results
in a reduction in the Company's labor costs in Puerto Rico relative to its
Puerto Rican earnings.
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Net Income Per Share (Basic and Diluted)
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------
1998 1997 % Change
-------------- -------------- --------------
<S> <C> <C> <C>
Net income per share (basic):
Net income per share - basic $ 0.27 $ 0.11 145.5%
Weighted average common
share outstanding 21,919,973 16,558,210 32.4%
Net income per share (diluted):
Net income per share - diluted $ 0.25 $ 0.09 177.8%
Weighted average common and
dilutive potential common
shares outstanding 23,188,696 19,573,938 18.5%
</TABLE>
The increase in weighted average shares from the quarter ended March 31,
1997 to the quarter ended March 31, 1998 was the result of the Company's
offering of 3.6 million shares of common stock in August 1997.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998, the Company had a cash and cash equivalents balance
of $25.8 million and restricted cash of $469,000 held in escrow for the rent of
the Company's United Kingdom facility, compared to a cash and cash equivalents
balance of $27.9 million and restricted cash of $464,000 at December 31, 1997.
The decrease in cash and cash equivalents was primarily attributable to
purchases of short-term and long-term investments and property and equipment.
Working capital increased from $56.0 million at December 31, 1997 to $59.0
million at March 31, 1998. The increase in working capital was due primarily to
the increase in short-term and long-term investments. The Company had $27.6
million in short-term and long-term investments as of March 31, 1998, compared
to $19.1 million as of December 31, 1997. The Company's short-term and long-term
investments may be easily liquidated at minimal cost and, accordingly, a
decrease in cash and cash equivalents due to purchases of short-term and
long-term investments does not affect the overall liquidity of the Company.
In the first three months of 1998, net cash provided by operating
activities of $11.5 million, was derived principally from net income of $5.8
million, adjusted primarily for depreciation and amortization of $1.5 million,
and a $2.0 million increase in other current and non-current assets due
primarily to the receipt of a tax refund on 1997 payments. Net cash provided by
operating activities in the three months ended March 31, 1998 increased $6.8
million compared to the three months ended March 31, 1997, due primarily to the
increase in net income and changes in operating assets and liabilities.
Net cash used in investing activities in the first three months of 1998
was $14.3 million. During this period, the Company used $5.8 million to purchase
property and equipment, and $8.5 million for net purchases of short-term and
long-term investments. Net cash used in investing activities in the three months
ended March 31, 1998 increased $11.0 million compared to the three months ended
March 31, 1997, due primarily to increased purchases of property and equipment
and short-term and long-term investments, offset in part by the effect of the
purchase of intangible assets in the first quarter of 1997 as part of the
settlement of certain United Kingdom litigation. *The Company anticipates that
capital expenditures
13
<PAGE> 14
will be approximately $45.0 million in 1998 (including the $5.8 million
purchased in the first quarter) as the Company invests in the development and
implementation of automated production lines at its manufacturing facilities and
the development and construction of a new Puerto Rican manufacturing facility.
*However, the amount of capital expenditures may increase or decrease, as the
Company may accelerate or delay the implementation of the automated production
lines based on market conditions and demand for its products. See "Factors That
May Affect Future Results - Manufacturing Capacity Constraints; Risks Associated
With Expansion and Automation of Manufacturing Operations."
Net cash provided by financing activities in the first three months of
1998 was $900,000. The increase of $3.1 million from the first three months of
1997 to the first three months of 1998 was due primarily to the net repayment of
debt of $100,000 in the first quarter of 1998 compared to $2.2 million in the
first quarter of 1997. The Company repaid all debt outstanding under its
previous credit facility with Comerica Bank-California with proceeds from the
initial public offering and therefore, the average debt outstanding was
significantly lower in the first quarter of 1998 than in the first quarter of
1997. Additionally the Company received $864,000 in proceeds from stock option
exercises in the first quarter of 1998. The Company also received net proceeds
of $143,000 from the secondary offering of common stock. The Company used the
proceeds primarily to pay the expenses incurred in the offering.
In addition to cash, cash equivalents, short-term investments and
long-term investments, the Company has a credit facility with Comerica Bank -
California. Under the Comerica Credit Agreement, the Company and its subsidiary
Ocular Sciences Puerto Rico, Inc. ("Ocular Sciences Puerto Rico") can borrow up
to an aggregate of $30.0 million. The Comerica Credit Agreement provides for up
to $20 million of revolving credit loans to the Company and up to $10 million of
term loans to Ocular Sciences Puerto Rico. Revolving credit borrowings under the
Comerica Credit Agreement bear interest at the bank's base rate or at 1.00% to
1.50% above the eurodollar rate, and term loans bear interest at the bank's base
or at 1.25% to 1.75% above the eurodollar rate, in each case with the applicable
margin over the eurodollar rate depending on the Company's ratio of debt to
tangible net worth. As of March 31, 1998, there were no revolving credit loans
outstanding under the Comerica Credit Agreement. $2.4 million of term loans were
borrowed on November 7, 1997 and used to repay outstanding loans from the Banco
Bilbao de Vizcaya, and the remaining $7.6 million of term loans will be
available to finance the construction and development of the Company's planned
new Puerto Rican manufacturing facility. The revolving credit loans will be
available through June 30, 2000 and the term loan facility provides for advances
through April 30, 1999, at which time the principal amount outstanding will
become payable over twenty-two quarterly principal installments, with a final
maturity date of October 31, 2004. The Company is required to maintain minimum
ratios of debt to tangible net worth and of current assets to current
liabilities, and a minimum tangible net worth. Borrowings under the Comerica
Credit Agreement are secured by a pledge of 100% of the outstanding common stock
of Ocular Sciences Puerto Rico and 65% of the outstanding capital stock of the
Company's United Kingdom and Canadian subsidiaries. In addition, the Company and
Ocular Sciences Puerto Rico have each guaranteed the other's borrowings under
the Comerica Credit Agreement.
The Company is in the process of replacing its information systems with
new systems that function properly with respect to dates in the year 2000 and
thereafter. *The Company has implemented several of these applications and
anticipates implementing the other planned applications by the middle of 1999.
*Delays in implementing the new systems could require additional expenditures,
estimated at approximately $500,000, to modify or replace portions of its
existing information systems so that they will function properly with respect to
dates in the year 2000 and thereafter. See "Factors That May Affect Future
Results - Uncertain Ability to Manage Growth: Risks Associated with
Implementation of New Management Information Systems."
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<PAGE> 15
*The Company believes that its current cash and cash equivalents,
further borrowings available under its credit facilities and its anticipated net
cash flow from operations, will be sufficient to meet its anticipated cash needs
for working capital, contractual commitments and capital expenditures for at
least the next 12 months. *If cash generated from operations proves insufficient
to satisfy the Company's liquidity requirements, the Company may seek to sell
additional equity or debt securities or obtain further credit facilities. *The
sale of additional equity or convertible debt securities could result in
additional dilution to the Company's stockholders *The sale of additional debt
or further bank borrowings could subject the Company to additional restrictive
financial covenants and restrictions on the payment of dividends. There can be
no assurance that financing will be available to the Company in amounts or on
terms acceptable to the Company, if at all.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's future operating results may differ materially from the
results discussed in, or implied by, forward-looking statements made by the
Company. Factors that may cause such differences include, but are not limited
to, those discussed below and elsewhere in this Report.
As referenced in the first paragraph of Part 1 - Item 2, this section
consists primarily of forward-looking statement and associated risks but, for
improved readability, does not include asterisks.
Intense Competition. The market for soft contact lenses is intensely
competitive and is characterized by decreasing prices for many products. The
Company's products compete with products offered by a number of larger companies
including the Vistakon division of Johnson & Johnson ("Johnson & Johnson"),
Ciba-Geigy Corporation ("Ciba-Geigy"), Bausch & Lomb, Inc. ("Bausch & Lomb"),
Wesley Jessen VisionCare, Inc. ("Wesley Jessen") and The Cooper Companies, Inc.,
which recently acquired Aspect Vision Care Ltd. Many of the Company's
competitors have substantially greater financial, manufacturing, marketing and
technical resources, greater market penetration and larger manufacturing volumes
than the Company. Among other things, these advantages may afford the Company's
competitors greater ability to manufacture large volumes of lenses, reduce
product prices and influence customer buying decisions. The Company believes
that certain of its competitors are expanding, or are planning to expand, their
manufacturing capacity, and are implementing new, more automated manufacturing
processes, in order to support anticipated increases in volume. As many of the
costs involved in producing contact lenses are relatively fixed, if a
manufacturer can increase its volume, it can generally reduce its per unit costs
and thereby increase its flexibility to reduce prices. In addition, competitors
may reduce prices to achieve the sales volumes necessary to utilize their
increased capacity. Price reductions by competitors could make the Company's
products less competitive, and there can be no assurance that the Company would
be able to reduce its prices in response. The Company's ability to respond to
competitive pressures by decreasing its prices without adversely affecting its
gross margins and operating results will depend on its ability to decrease its
costs per lens. Any significant decrease in the Company's costs per lens will
depend, in part, on the Company's ability to increase its sales volume and
production capacity. There can be no assurance that the Company will be able to
continue to increase its sales volume or reduce its per unit production costs.
In response to competition, the Company may also increase cooperative
merchandising allowances or otherwise increase spending, which may adversely
affect its business, financial condition and results of operations. The failure
of the Company to respond to competitive pressures, and particularly price
competition, in a timely manner would have a material adverse effect on the
Company's business, financial condition and results of operations. See "-
Manufacturing Capacity Constraints; Risks Associated with Expansion and
Automation of Manufacturing Operations."
15
<PAGE> 16
The market for contact lenses is shifting from lenses marketed for
annual replacement regimens, where the Company has significant experience and a
leading market position, to lenses marketed for disposable replacement regimens,
where the Company is less experienced and has a significantly smaller market
share. The disposable replacement market is particularly competitive and
price-sensitive and is currently dominated by the Acuvue product produced by
Johnson & Johnson. The Company believes that the per unit production costs of
Johnson & Johnson and certain of the Company's other competitors are currently
lower than those of the Company. A significant price reduction by Johnson &
Johnson or certain of the Company's other competitors could limit or reduce the
Company's market share in the disposable replacement segment and, as a result,
could materially adversely affect the Company's business, financial condition
and results of operations. The Company is evaluating the introduction of a lens
marketed for daily disposal regimens. The Company's ability to enter and to
compete effectively in the market for daily disposable lenses will depend in
large part upon the Company's ability to expand its production capacity and
reduce its per unit production costs.
The Company believes that its manufacturing process technology, lens
designs and marketing strategies differentiate it from its leading competitors.
However, there can be no assurance that competitors will not adopt technologies,
lens designs or marketing strategies that are similar to those used by the
Company. Any such action by competitors could have a material adverse effect on
the Company's business, results of operations and financial condition.
The Company also encounters competition from manufacturers of eyeglasses
and from alternative technologies, such as surgical refractive procedures
(including new refractive laser procedures such as PRK, or photorefractive
keratectomy, and LASIK, or laser in situ keratomileusis). If surgical refractive
procedures become increasingly accepted as an effective and safe technique for
permanent vision correction, they could substantially reduce the demand for
contact lenses by enabling patients to avoid the ongoing cost and inconvenience
of contact lenses. Accordingly, there can be no assurance that these procedures,
or other alternative technologies that may be developed in the future, will not
cause a substantial decline in the number of contact lens wearers and thus have
a material adverse effect on the Company's business, financial condition and
results of operations.
Manufacturing Capacity Constraints; Risks Associated with Expansion and
Automation of Manufacturing Operations. The Company's success will depend upon
its ability to increase its production volume on a timely basis while
maintaining product quality and lowering per unit production costs.
Manufacturers often encounter difficulties in increasing production volumes,
including problems involving delays, quality control and shortages of qualified
personnel. Any significant increase in production volume will require that the
Company increase its manufacturing capacity.
The Company intends to add new, highly automated production lines at its
facilities in the United Kingdom and Puerto Rico to increase its manufacturing
capacity and reduce its per unit manufacturing costs. However, there can be no
assurance that the Company will be able to implement these automated lines on a
timely basis or that the new automated lines will operate as efficiently as
expected. The Company has encountered a delay in implementing these automated
lines and there can be no assurance that it will not encounter significant
delays and difficulties in the future. For example, suppliers could miss their
equipment delivery schedules, the efficiency of the new production lines and
facility could improve less rapidly than expected, if at all, or the equipment
or processes could require longer design time than anticipated, or redesigning
after installation. In addition, the new production lines will involve processes
and equipment with which the Company and its personnel are not experienced.
Difficulties experienced by the Company in automating its manufacturing
facilities could impair the Company's ability to reduce its per unit production
costs and to compete in the disposable replacement market and, accordingly,
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, the installation of these
highly automated production lines in Puerto
16
<PAGE> 17
Rico could increase the Company's tax rate if it results in a significant
reduction in the Company's labor costs in Puerto Rico in relation to its Puerto
Rican earnings.
The Company currently expects that from 1998 through the end of 2000, it
will invest approximately $64.0 million in capital expenditures on automated
production lines in the United Kingdom and Puerto Rico and expects to continue
to invest in additional automated production lines after this period. The
Company intends to finance these capital expenditures with net cash provided by
operating activities, existing cash balances and borrowings under its credit
facilities. No assurances can be given as to the availability of such net cash
from operations or borrowings, and if such funds are not available, the Company
could be required to curtail the installation of the automated lines.
The Company is currently experiencing space constraints at its Puerto
Rican facility. As a result, the Company intends to relocate its Puerto Rican
manufacturing operations to a substantially larger new facility to be
constructed to the Company's specifications and leased to the Company by the
Puerto Rico Industrial Development Company. The development and construction of
a new manufacturing facility is subject to significant risks and uncertainties,
including cost estimation errors and overruns, construction delays, weather
problems, equipment delays or shortages, production start-up problems and other
factors. As many of such factors are beyond the Company's control, the Company
cannot predict the length of any such delays, which could be substantial.
Construction of the new facility began during the fourth quarter of 1997 and is
expected to be completed during the first quarter of 1999. There can be no
assurances as to when the Company will complete construction and begin
production. Before this new facility begins production, it must be inspected by
the U.S. Food and Drug Administration (the "FDA") for compliance with current
good manufacturing practices ("GMP"), and the inspection and approval process
could significantly delay the Company's ability to begin production in this new
facility.
The Company's development of a new facility and implementation of new
automated production lines will result in new fixed and operating expenses,
including substantial increases in depreciation expense that will increase the
Company's cost of sales. If revenue levels do not increase sufficiently to
offset these new expenses, the Company's operating results could be materially
adversely affected. There can be no assurance that the Company will not
encounter unforeseen difficulties, costs or delays in automating its facilities,
in constructing and equipping the new manufacturing facility in Puerto Rico or
in commencing production on the new lines and at the new facility. Any such
difficulties or delays would limit the Company's ability to increase production
volume and lower per unit costs (and consequently prices), would limit the
Company's ability to compete in the disposable replacement regimen market and,
accordingly, could have a material adverse effect on the Company's business,
financial condition and results of operations.
Risk of Trade Practice Litigation; Changes in Trade Practices. The
contact lens industry has been the subject of a number of class action and
government lawsuits and government investigations in recent years. In December
1996, over twenty states sued three of the Company's largest competitors, as
well as certain eyecare practitioners and trade organizations. The lawsuit
alleges, among other things, a conspiracy among such persons to violate
antitrust laws by refusing to sell contact lenses to mail-order and other
non-practitioner contact lens providers, so as to reduce competition in the
contact lens industry. A similar lawsuit was filed by the State of Florida in
1994 and several similar class action lawsuits were also filed in 1994. One of
the defendants has agreed to settle the lawsuits as to itself by agreeing to
sell contact lenses to mail-order and other alternative distribution channels,
and to make substantial cash and product rebates available to consumers.
In an unrelated matter, one of the Company's largest competitors was
sued in a national class action lawsuit brought in the Federal District Court in
the Northern District of Alabama in 1994 (the "Alabama Lawsuit"). This suit
alleged that the defendant engaged in fraudulent and deceptive practices in the
marketing and sale of contact lenses by selling identical contact lenses, under
different brand names and for different replacement regimens,
17
<PAGE> 18
at different prices. The defendant subsequently modified certain of its
marketing practices and ultimately settled the lawsuit in August 1996 by making
substantial cash and product payments available to consumers. In August 1997,
such competitor also settled an investigation by 17 states into similar matters
by agreeing to certain restrictions on its future contact lens marketing
practices and making certain payments to each of the states. In October 1996, a
class action lawsuit was brought against another of the Company's largest
competitors in the Superior Court of New Jersey-Camden (the "New Jersey
Lawsuit"). This suit alleges that the defendant engaged in fraudulent and
deceptive practices in the marketing and sale of contact lenses by selling
interchangeable contact lenses, under different brand names and for different
replacement regimens, at different prices. The suit was certified as a national
class action in December 1997.
Although the Company has not been named in any of the foregoing
lawsuits, the Company from time to time receives claims or threats similar to
those brought against its competitors, and in one circumstance a suit was filed
against the Company making allegations similar to those made in the Alabama and
New Jersey Lawsuits, which suit was dismissed without prejudice for
non-substantive reasons. There can be no assurance that the Company will not
face similar actions relating to its marketing and pricing practices or other
claims or lawsuits in the future. The defense of any such action, lawsuit or
claim could result in substantial expense to the Company and significant
diversion of attention and effort by the Company's management personnel. There
can be no assurance that any such lawsuit would be settled or decided in a
manner favorable to the Company, and a settlement or adverse decision in any
such action, lawsuit or claim could have a material adverse effect on the
Company's business, financial condition and results of operations.
In addition to the foregoing lawsuits, there is substantial federal and
state governmental regulation related to the prescribing of contact lenses.
These regulations relate to who is permitted to prescribe and fit contact
lenses, the prescriber's obligation to provide prescriptions to its patients,
the length of time a prescription is valid, the ability or obligation of
prescribers to prescribe lenses by brand rather than by generic equivalent or
specification, and other matters. Although these regulations primarily affect
contact lens prescribers, and not manufacturers or distributors of lenses such
as the Company, changes in these regulations, or their interpretation or
enforcement, could adversely affect the effectiveness of the Company's marketing
strategy to eyecare practitioners, most notably the effectiveness of the
Company's channel-specific and private label branding strategies. Additionally,
given the Company's strategic emphasis on focusing its marketing efforts on
eyecare practitioners, the Company may be more vulnerable than its competitors
to changes in current trade practices. Finally, although cost controls or other
requirements imposed by third party health-care payors such as insurers and
health maintenance organizations have not historically had a significant effect
on contact lens prices or distribution practices, this could change in the
future, and could adversely affect the Company's business, financial condition
and results of operations. Adverse regulatory or other decisions affecting
eyecare practitioners, or material changes in the selling and prescribing
practices for contact lenses, could have a material adverse effect on the
Company's business, financial condition and results of operations.
Fluctuations in Operating Results; Seasonality; Decreasing Average Sales
Prices. The Company's quarterly operating results have varied significantly in
the past and are likely to vary significantly in the future based upon a number
of factors. The Company's quarterly results can be affected significantly by
pricing changes by the Company or its competitors, the Company's ability to
increase manufacturing capacity efficiently and to reduce per unit manufacturing
costs, the time and costs involved in expanding existing distribution channels
and establishing new distribution channels, discretionary marketing and
promotional expenditures such as cooperative merchandising allowances paid to
the Company's customers, timing of the introduction of new products by the
Company or its competitors, inventory shortages, timing of regulatory approvals
and other factors. The Company's customers generally do not have long-term
commitments to purchase products and products are generally shipped as orders
are received. Consequently, quarterly sales and operating
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<PAGE> 19
results depend primarily on the volume and timing of orders received during the
quarter, which are difficult to forecast. A significant portion of the Company's
operating expenses are relatively fixed, and planned expenditures are based on
sales forecasts. If sales levels fall below expectations, operating results are
likely to be materially adversely affected. In particular, net income may be
disproportionately affected because only a small portion of the Company's
expenses varies with net sales in the short term. In response to competition,
the Company may reduce prices, increase cooperative merchandising allowances or
otherwise increase marketing expenditures, and such responses may adversely
affect the Company's business, financial condition and results of operations.
Due to the foregoing factors, the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance. Further, it is
likely that in some future quarter the Company's net sales or operating results
will be below the expectations of public market analysts and investors. In such
event, the price of the Company's Common Stock would likely be materially
adversely affected.
The Company's historical net sales have exhibited seasonality, with the
third and fourth quarters typically having the highest net sales in any year and
the first quarter of the following year typically having lower net sales than
the preceding two quarters. Due to the relatively high proportion of the
Company's fixed costs to its total costs, the Company's level of profitability
has historically increased significantly with increasing sales volumes,
resulting in disproportionately better results in the second half of each year.
There can be no assurance that the Company's sales patterns will not continue in
future years, although the pattern may be somewhat less pronounced if the
Company continues to increase the proportion of sales represented by more
frequently replaced lenses marketed for disposable replacement regimens.
The Company expects that the overall average selling price that it
realizes across its products will decline over time because of (i) shifts in the
Company's product mix from lenses marketed for annual replacement regimens to
lenses marketed for disposable replacement regimens and, within the disposable
segment, to lenses that are marketed for more frequent replacement, (ii)
decreases in the prices of lenses marketed for disposable replacement regimens
and (iii) increases in products sold internationally through distributors at
prices lower than direct sales prices in the United States. The Company does not
expect there to be significant growth in its sales of lenses marketed for annual
replacement. Accordingly, the Company will need to continue to reduce its per
unit production costs through increased automation, increased volume and reduced
packaging costs in order to improve, or even to maintain, its gross margins, and
the Company does not believe that its recent net sales and operating income
growth rates are indicative of the Company's long-term growth rates.
Need to Increase Sales of Lenses Marketed for Disposable Replacement
Regimens. The market for contact lenses is shifting from lenses marketed for
annual replacement regimens, where the Company has significant experience and a
leading market position, to lenses marketed for disposable replacement regimens,
where the Company is less experienced and has a significantly smaller market
share. The Company's success depends on both continued growth of the disposable
replacement market and increased penetration of this market by the Company's
products. There can be no assurance that the Company's contact lenses marketed
for disposable replacement regimens will achieve widespread consumer acceptance,
or that net sales or net income from the sale of such lenses will be sufficient
to offset the decline in the Company's net sales or net income from its contact
lenses marketed for annual replacement regimens, which have higher prices and
gross margins. The Company anticipates that prices for its products targeted for
disposable replacement regimens will decline in the future. In addition, the
lenses currently offered in the United States by the Company in the disposable
lens segment are marketed for weekly and monthly replacement regimens. Certain
of the Company's competitors have introduced lenses for daily replacement at
lower prices than their current weekly and bi-weekly disposable lenses. The
Company's ability to enter and to compete effectively in the market for lenses
marketed for
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<PAGE> 20
daily disposal will depend in large part upon the Company's ability to expand
its production capacity and reduce its per unit production costs.
Risks Relating to International Operations; Need to Increase Sales in
International Markets. In 1996, 1997 and the first three months of 1998, the
Company's international sales represented 18.2%, 21.0% and 21.2%, respectively,
of the Company's net sales. In addition, a substantial portion of the Company's
products are manufactured in the United Kingdom. As a result, the Company's
business is subject to the risks generally associated with doing business
abroad, such as foreign consumer preferences, disruptions or delays in
shipments, changes in currency exchange rates, longer accounts receivable
payment cycles and greater difficulties in collecting accounts receivable,
foreign tax laws or tariffs, political unrest and changing economic conditions
in countries in which the Company's products are sold or manufacturing
facilities are located. These factors, among others, could adversely affect the
Company's ability to sell its products in international markets, as well as its
ability to manufacture its products. If any such factors were to render the
conduct of business in a particular country undesirable or impractical, there
could be a material adverse effect on the Company's business, financial
condition and results of operations. The Company and its representatives, agents
and distributors are also subject to the laws and regulations of foreign
jurisdictions in which they operate or in which the Company's products are sold,
and there can be no assurance that new laws or regulations will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
A substantial portion of the Company's sales and expenditures are
collected or paid in currencies other than the U.S. dollar. Therefore, the
Company's operating results are affected by fluctuations in foreign currency
exchange rates. Although the impact of exchange rate fluctuations on the
Company's results of operations have not been significant in the past, there can
be no assurance that in the future exchange rate movements will not have a
material adverse effect on the Company's sales, gross profit, operating expenses
or foreign currency exchange gains and losses.
The Company's continued growth is dependent on the expansion of
international sales of its products. This expansion will involve operations in
markets with which the Company is not experienced and there can be no assurance
that the Company will be successful in capturing a significant portion of these
markets for contact lenses. In addition, the Company will not be able to market
and sell its products in certain international markets, such as Japan, until it
obtains regulatory approval. The failure of the Company to increase its
international sales substantially could have a material adverse effect on the
Company's business, financial condition and results of operations.
Uncertain Ability to Manage Growth; Risks Associated with Implementation
of New Management Information Systems. The Company has experienced rapid growth
in recent years. Continued rapid growth may place a significant strain on
management, operational infrastructure, working capital and financial and
management control systems. Growth in the Company's business has required, and
is expected to continue to require, significant personnel management and other
infrastructure resources. The Company's ability to manage any future growth
effectively will require it to attract, train, motivate and manage new employees
successfully, to integrate new employees into its overall operations and to
continue to improve its operational, financial and management information
systems.
The Company is in the process of replacing its information systems with
new systems that are expected to include a number of integrated applications,
including order entry, billing and labeling. The new systems will significantly
affect many aspects of the Company's business, including its manufacturing,
sales and marketing and accounting functions, and the successful implementation
and integration of these applications will be important to facilitate future
growth. The Company has implemented several of these applications, and
anticipates implementing the other planned applications by the middle of 1999.
However, the Company could experience unanticipated delays in the implementation
of the new systems and implementation of the new information systems could cause
significant disruption in
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<PAGE> 21
operations. If the Company is not successful in implementing its new systems or
if the Company experiences difficulties in such implementation, the Company
could experience problems with the delivery of its products or an adverse impact
on its ability to access timely and accurate financial and operating
information. In addition, delays in implementing the new systems could require
additional expenditures by the Company to modify or replace portions of its
existing information systems so that they will function properly with respect to
dates in the year 2000 and thereafter and there can be no assurance that the
Company will be able to correct any problems with respect to such dates in a
timely manner.
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<PAGE> 22
PART II - OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
Initial Public Offering
The Company's registration statement (the "Registration Statement") on
Form S-1, registering the offer and sale of an aggregate of 8,280,000 shares of
the Company's common stock in connection with the Company's initial public
offering (Securities and Exchange Commission File No. 333-27421) was declared
effective by the Securities and Exchange Commission on August 4, 1997, the
offering date for the initial public offering. The managing underwriters for the
offering were Morgan Stanley Dean Witter Incorporated, Bear, Stearns & Co. Inc.
and Cowen and Company.
In August 1997, the Company completed its initial public offering in
which 8,280,000 shares of its Common Stock were sold to the public at a price of
$16.50 per share (including shares sold pursuant to the underwriters'
over-allotment option). The shares sold consisted of 3,600,000 shares sold by
the Company at an aggregate public offering price of $59.4 million and 4,680,000
shares sold by selling stockholders at an aggregate public offering price of
$77.2 million. Effective immediately prior to the closing of the initial public
offering, all outstanding shares of the Company's then outstanding preferred
stock were automatically converted into shares of common stock.
The aggregate net offering proceeds to the Company from the initial
public offering after deducting the total expenses described above was $53.7
million. From the effective date of the Registration Statement through March 31,
1998, such proceeds were used for the following purposes:
<TABLE>
<S> <C>
Construction of plant, building and facilities ............. $ 667,000
Purchase and installation of machinery and equipment ....... 12,547,000
Repayment of indebtedness .................................. 14,728,000
Working capital ............................................ 0
Cash equivalents (1) ....................................... 0
Short-term and long-term investments (2) ................... 19,070,000
Final payment pursuant to UK settlement agreement .......... 6,685,000
</TABLE>
- ----------
(1)Represents investments with original maturities of three months or less
(2)Represents investments with original maturities of more than three months
None of such payments were direct or indirect payments to directors or
officers of the Company or any of their associates, to persons holding ten
percent or more of any class of equity securities of the Company or to
affiliates of the Company, except that $2,895,000 of the net proceeds were used
to repay indebtedness owed to John Fruth, the Company's Chief Executive Officer
and a Director and holder of in excess of ten percent of the Company's common
stock.
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<PAGE> 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed herewith:
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
- ------ -------------
<S> <C>
11.01 - Statement regarding computation of net income per share
(basic and diluted)
27.01 - Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
The Company did not file a report on Form 8-K during the period ended March 31,
1998.
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<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OCULAR SCIENCES, INC.
(Registrant)
Date: May 13, 1998 /s/ Gregory E. Lichtwardt
----------------------------------------
Gregory E. Lichtwardt
Vice President, Finance, Chief
Financial Officer, and Treasurer
(Duly Authorized Officer and Chief
Accounting Officer)
24
<PAGE> 25
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------ ----------- ----
<S> <C> <C>
11.01 Statement Regarding Computation of Net Income Per Share (Basic 27
and Diluted)
27.01 Financial Data Schedule 29
</TABLE>
25
<PAGE> 1
EXHIBIT 11.01
OCULAR SCIENCES, INC.
STATEMENT REGARDING COMPUTATION OF NET INCOME PER SHARE (BASIC AND DILUTED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
----------- -----------
<S> <C> <C>
Net income per share (basic):
Net income $ 5,844,000 $ 1,802,000
=========== ===========
Weighted average common shares outstanding 21,919,973 16,558,210
=========== ===========
Net income per share (basic) $ 0.27 $ 0.11
=========== ===========
Net income per share (diluted):
Net income (diluted) $ 5,844,000 $ 1,822,000
=========== ===========
Weighted average common shares outstanding 21,919,973 16,558,210
Weighted average shares of stock options
under the treasury stock method 1,268,723 2,779,392
Weighted average shares issuable upon conversion
of the Series A Preferred Stock 0 236,336
----------- -----------
Weighted average common and dilutive
potential common shares outstanding 23,188,696 19,573,938
=========== ===========
Net income per share (diluted) $ 0.25 $ 0.09
=========== ===========
</TABLE>
27
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet, consolidated statement of income and consolidated
statement of cash flows included in the Company's Form 10-Q for the period ended
March 31, 1998, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 26,279
<SECURITIES> 19,188
<RECEIVABLES> 20,045
<ALLOWANCES> 1,669
<INVENTORY> 12,915
<CURRENT-ASSETS> 80,941
<PP&E> 56,070
<DEPRECIATION> 15,181
<TOTAL-ASSETS> 138,296
<CURRENT-LIABILITIES> 21,960
<BONDS> 0
0
0
<COMMON> 22
<OTHER-SE> 112,989
<TOTAL-LIABILITY-AND-EQUITY> 138,296
<SALES> 32,171
<TOTAL-REVENUES> 32,171
<CGS> 10,141
<TOTAL-COSTS> 13,997
<OTHER-EXPENSES> 183
<LOSS-PROVISION> 279
<INTEREST-EXPENSE> 82
<INCOME-PRETAX> 8,349
<INCOME-TAX> 2,505
<INCOME-CONTINUING> 5,844
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,844
<EPS-PRIMARY> 0.27<F1>
<EPS-DILUTED> 0.25
<FN>
<F1>FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC
</FN>
</TABLE>
