<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, 1999
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. 0-22623
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, 1999, there were outstanding 22,681,571 shares of the
Registrant's Common Stock, par value $0.001 per share.
<PAGE> 2
OCULAR SCIENCES, INC.
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
- ---- ------------------------- ----
<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets -
March 31, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Income -
Three Months Ended March 31, 1999 and 1998 4
Condensed Consolidated Statements of Comprehensive
Income - Three Months Ended March 31, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows - Three
Months Ended March 31, 1999 and 1998 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20
SIGNATURES 21
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
OCULAR SCIENCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
(unaudited) (audited)
--------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 24,142 $ 26,520
Restricted cash 419 486
Short-term investments 17,987 19,036
Accounts receivable, less allowance for sales returns and
doubtful accounts of $2,172 and $2,085 for 1999 and 1998,
respectively 21,949 25,126
Inventories 14,700 12,460
Deferred income taxes 4,619 4,638
Loans to officers and employees 225 263
Prepaid expenses and other current assets 7,438 6,495
--------- ---------
Total Current Assets 91,479 95,024
Property and equipment, net 75,457 62,966
Intangible assets, net 6,991 7,216
Long-term investments 12,152 11,207
Other assets 157 157
========= =========
Total Assets $ 186,236 $ 176,570
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 7,622 $ 6,003
Accrued liabilities 10,180 10,512
Accrued cooperative merchandise allowances 5,213 5,854
Current portion of long-term debt 1,190 929
Income and other taxes payable 3,238 1,148
--------- ---------
Total Current Liabilities 27,443 24,446
Deferred income taxes 6,560 6,640
Long-term debt, less current portion 2,179 2,535
--------- ---------
Total Liabilities 36,182 33,621
Stockholders' Equity:
Common stock, $0.001 par value; 80,000,000
shares authorized; 22,675,011 and 22,588,118 shares
issued and outstanding for 1999 and 1998, respectively 23 23
Additional paid-in capital 77,174 76,741
Retained earnings 73,382 66,727
Accumulated other comprehensive income (525) (542)
--------- ---------
Total Stockholders' Equity 150,054 142,949
--------- ---------
Total Liabilities and Stockholders' Equity $ 186,236 $ 176,570
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
OCULAR SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - (UNAUDITED)
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Three months ended
March 31,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net sales $ 37,009 $ 32,171
Cost of sales 12,332 10,141
------------ ------------
Gross profit 24,677 22,030
Selling and marketing expenses 10,011 8,731
General and administrative expenses 5,317 4,509
Research and development expenses 564 757
------------ ------------
Income from operations 8,785 8,033
Interest expense (75) (82)
Interest income 556 581
Other expense (158) (183)
------------ ------------
Income before taxes 9,108 8,349
Income taxes (2,453) (2,505)
------------ ------------
Net Income $ 6,655 $ 5,844
============ ============
Net income per share data:
Net income per share basic $ 0.29 $ 0.27
============ ============
Net income per share diluted $ 0.29 $ 0.25
============ ============
Weighted average common
shares outstanding 22,627,032 21,919,973
============ ============
Weighted average shares of stock
options under the treasury
stock method 700,334 1,268,723
Weighted average common and
dilutive potential common
shares outstanding 23,327,366 23,188,696
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
OCULAR SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
------------------------
1999 1998
------- -------
<S> <C> <C>
Net income $ 6,655 $ 5,844
Other comprehensive income, net of tax:
Foreign currency translation adjustment 21 31
Unrealized gains on securities:
Unrealized holding gains
arising during the period 1 27
Less: Reclassification adjustment for
losses included in net income (5) (2)
------- -------
Other comprehensive income 17 56
------- -------
Comprehensive income $ 6,672 $ 5,900
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
OCULAR SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,655 $ 5,844
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,623 1,456
Income tax benefits from stock options exercised 232 --
Allowances for sales returns and doubtful accounts 157 279
Provision for excess and obsolete inventory 244 177
Provision for damaged and scrap products 138 172
Exchange loss 105 150
Deferred income taxes -- (156)
Changes in operating assets and liabilities:
Accounts receivable 2,934 180
Inventories (2,794) (281)
Other current and non-current assets (956) 2,023
Accounts payable 1,708 922
Accrued liabilities (888) 64
Income and other taxes payable 2,119 689
-------- --------
Net cash provided by operating activities 11,277 11,519
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (13,939) (5,845)
Purchase of available-for-sale short-term and long-term
investments (8,050) (10,498)
Sales and maturities of available-for-sale short-term
and long-term investments 8,150 2,000
Interest from restricted cash 53 --
-------- --------
Net cash used in investing activities (13,786) (14,343)
-------- --------
Cash flows from financing activities:
Repayment of long-term debt (95) (100)
Proceeds from secondary public offering of common
stock, net 0 143
Proceeds from issuance of common stock 201 864
-------- --------
Net cash provided by financing activities 106 907
Effect of exchange rate changes on cash and cash equivalents 25 (168)
-------- --------
Net decrease in cash and cash equivalents (2,378) (2,085)
Cash and cash equivalents at beginning of period 26,520 27,895
-------- --------
Cash and cash equivalents at end of period $ 24,142 $ 25,810
======== ========
Supplemental cash flow disclosure:
Cash paid during the year for:
Interest $ 76 $ 86
======== ========
Income taxes $ 152 $ 14
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
OCULAR SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PREPARATION
The accompanying unaudited condensed 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 condensed 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, 1999 and the results of its operations, its changes in other
comprehensive income, and its cash flows for the three month periods ended March
31, 1999 and 1998. These condensed consolidated financial statements should be
read in conjunction with the Company's audited financial statements as of
December 31, 1998 and 1997 and for each of the years in the three-year period
ended December 31, 1998, including notes thereto, included in the Company's
Annual Report on Form 10-K. Operating results for the three-month period ended
March 31, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999.
NOTE 2 - INVENTORIES
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
Raw materials $ 1,546 $ 2,867
Work in process 1,143 1,252
Finished goods 12,011 8,341
------- -------
$14,700 $12,460
======= =======
</TABLE>
NOTE 3 - SUBSEQUENT EVENTS
LOANS TO OFFICERS AND DIRECTORS
On April 12 and 13, 1999, the Company loaned $339,000 and $751,000 to
Dan Kunst and Greg Lichtwardt, respectively. Mr. Kunst is the Company's Vice
President of Sales and Marketing and a director of the Company and Mr.
Lichtwardt is the Company's Vice President of Finance, Chief Financial Officer
and Treasurer. The loans bear interest at a rate of 8% per year and are due on
December 1, 1999, or earlier under certain circumstances. No payments of
principal or accrued interest have been made under either loan.
BANK LINE OF CREDIT
On April 27, 1999, the Company amended its credit agreement (the
"Amended Credit Agreement"). Under the Amended Credit Agreement, the maturity
date of the revolving line of credit was extended by one year to June 30, 2001
and the conversion date of the Ocular Sciences Puerto Rico term loan was
extended by six months to October 31, 1999. The term loan facility's negotiated
rate option is available only after October 31, 1999. On October 31, 1999, the
then outstanding term loan will become payable in twenty-two quarterly
installments of $250,000, beginning January 31, 2000 with any balance to be paid
on April 30, 2005.
7
<PAGE> 8
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 Condensed 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, 1998.
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, risks of new products and technological
change 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 of numerous
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,
----------------------------
1999 1998 % Change
----------- ----------- --------
<S> <C> <C> <C>
U.S. $28,045,000 $25,352,000 10.6%
As a percentage of net sales 75.8% 78.8%
International $ 8,964,000 $ 6,819,000 31.5%
As a percentage of net sales 24.2% 21.2%
----------- -----------
Net sales $37,009,000 $32,171,000 15.0%
</TABLE>
Net sales represent gross sales less allowances for sales returns, trial
set and prompt payment discounts. 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 growth in net sales from the
quarter ended March 31, 1998 to the quarter ended March 31, 1999 was primarily
due to increased sales of the Company's lenses marketed for weekly disposable
replacement regimens in both the U.S. and International markets. Unit sales of
the Company's lenses marketed for weekly disposable replacement regimens
increased 44.5% while unit sales of the Company's lenses marketed for annual
replacement regimens decreased 13.2% from the first quarter of 1998 to the first
quarter of 1999. During the quarter ended March 31, 1999, 92.6% of all lenses
sold were for use in disposable replacement regimens, compared to 91.2% during
the quarter ended March 31, 1998. The Company's overall average selling price
declined 18.5% from the quarter ended March 31, 1998 to the quarter ended March
31, 1999. This was primarily due to i) price reductions of 12% on the weekly
disposable products in the U.S. ii) ongoing product mix shifts towards lower
priced lenses marketed for daily and weekly replacement, iii) increased
inventory set discounts associated with new distribution obtained in the first
quarter of 1999, and iv) lower priced introductory sales to the Company's
distributor in Japan.
8
<PAGE> 9
The price reductions on the Company's lenses marketed for weekly replacement
took place during the second half of 1998 in response to price changes by the
Company's largest competitor, and were offset in part by reductions in
cooperative merchandising allowances described in "Selling and Marketing
Expenses" below. Compared to the fourth quarter of 1998, the average price of
the weekly disposable products in the U.S. has remained stable. In the first
quarter of 1999, the Company shipped approximately 1,100 initial inventory sets
to new optical retail accounts obtained during the quarter which are customarily
heavily discounted. The Company launched its lenses marketed for daily and
weekly disposable replacement regimens in Japan during the first quarter of
1999. *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) increases in
products sold internationally to distributors at prices lower than direct sales
prices in the U.S. including the Company's new distributor in Japan, and (iii)
possible further decreases in the average per unit selling prices of lenses
marketed for disposable replacement regimens *The Company expects there to be
continued decline 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 expects that if the rate of U.S. market demand for soft
contact lenses continues to slow, as it has over the past few quarters, that the
demand for the Company's products will also slow. *The Company is planning the
introduction of a lens marketed for daily replacement in Europe later in 1999
and is evaluating the introduction of such lenses in the U.S. in 2000. *The
Company expects that introduction of lenses marketed for daily disposal will
result in increased unit and revenue growth due to the more frequent replacement
of such lenses, and result in a decrease to its overall average selling price.
Gross Profit
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998 % change
---- ---- --------
<S> <C> <C> <C>
Gross profit $24,677,000 $22,030,000 12.0%
As a percentage of net sales 66.7% 68.5%
</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, 1998 to the quarter ended March 31, 1999
was due primarily to increased net sales, decreases in production costs
resulting from the implementation of certain process improvements and increased
manufacturing volume. The reduction in gross profit percentage from 68.5% for
the first quarter of 1998 to 66.7% for the same quarter in 1999 was due to a
decrease in average selling price, as described above in "Net Sales", partially
offset by lower per unit production cost. *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. *As the Company expects that its overall average selling price will
continue to decline over time, as discussed above in "Net Sales", 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, increased volume and reduced packaging costs in order to
improve, or even to maintain, its gross margins. *The Company expects that the
ongoing rollout in Japan and introduction in Europe in the near future of a
lower-priced contact lens marketed for daily replacement regimens will result in
a further decline to its average selling price, 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 margin percentage to
decrease at least in the short term as sales of lenses marketed for daily
replacement regimens increase. *As a result, the Company could experience
variability in its gross margins. *See "Factors That May Affect Future
Results -- Manufacturing
9
<PAGE> 10
Capacity Constraints; Risks Associated With Expansion and Automation of
Manufacturing Operations."
Selling and Marketing Expenses
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998 % Change
---- ---- --------
<S> <C> <C> <C>
Selling and marketing expenses $10,011,000 $8,731,000 14.7%
As a percentage of net sales 27.1% 27.1%
</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 in sales and marketing
expenses from the quarter ended March 31, 1998 to the quarter ended March 31,
1999 resulted primarily from increases in the size of the U.S. sales force,
cooperative merchandising allowances, and sales and promotional activities.
Cooperative merchandising allowances as a percentage of sales were lower in the
first quarter of 1999 as compared to the same quarter of last year primarily as
a result of the price reductions discussed in "Net Sales". *The Company believes
that the rate of growth of cooperative merchandising allowances will continue to
slow, and as a result expects the rate of growth in the amount spent on sales
and marketing expenses to also slow through the remainder of the year. *However,
if the Company is required to respond to pricing and promotional pressures from
its competitors, its rate of spending on cooperative merchandising allowances
could increase in the future.
General and Administrative Expenses
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998 % Change
---- ---- --------
<S> <C> <C> <C>
General and administrative expenses $5,317,000 $4,509,000 17.9%
As a percentage of net sales 14.4% 14.0%
</TABLE>
General and administrative expenses are comprised primarily of salaries
and benefits for distribution, general and administrative, professional
services, consultants' fees and non-manufacturing facilities costs. General and
administrative expenses increased both in dollars and as a percentage of sales.
The increase was due primarily to increases in U.S. salaries and benefits,
expenses associated with the Company's new operating structure (see Income
Taxes), and the increased distribution infrastructure in the United Kingdom due
to growth in European sales. *The Company believes that if net sales grow, its
general and administrative expenses will increase in absolute dollars, but will
decrease as a percentage of net sales on an annualized basis.
Research and Development Expenses
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998 % Change
---- ---- --------
<S> <C> <C> <C>
Research and development expenses $564,000 $757,000 (25.5%)
As a percentage of net sales 1.5% 2.4%
</TABLE>
Research and development expenses are comprised primarily of consulting costs
for research and development personnel and in-house labor related to process
development. The decrease from the quarter ended March 31, 1998 to the quarter
ended March 31, 1999, both in dollars and as a percentage of revenue, was
primarily due to the fact that the Company completed the research and
development
10
<PAGE> 11
phase related to its new automated production technology during the third
quarter of 1998. *The Company does not believe that the change in research and
development expense from the quarter ended March 31, 1998 to the quarter ended
March 31, 1999 is indicative of the Company's long-term expense growth rate.
*Research and development expenses may fluctuate as the Company undertakes new
engineering projects and new products.
Interest and Other Income, Net
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998 % Change
---- ---- --------
<S> <C> <C> <C>
Interest and other income, net $323,000 $316,000 2.2%
As a percentage of net sales 0.9% 1.0%
</TABLE>
The increase in interest and other income, net from the quarter ended
March 31, 1998 to the quarter ended March 31, 1999 resulted primarily from a
decrease in exchange losses, almost completely offset by a reduction in interest
income, due to lower interest rates, and a reduction in other income.
Income Taxes
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998 % Change
---- ---- --------
<S> <C> <C> <C>
Income taxes 2,453,000 $2,505,000 (2.1%)
Effective tax rate 26.9% 30.0%
</TABLE>
The Company's lower effective tax rate for the quarter ended March 31,
1999 was a result of the implementation of a new corporate structure in March of
1999, which increased the Company's foreign earnings that are taxed at lower tax
rates. Additionally, 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 Puerto Rican
partial exemption through 2001, with limited exemption during the transition
period from 2002 through 2006, when the benefit will expire under the current
provisions of the Internal Revenue Code. *The Company also expects the new
corporate structure once fully implemented, to further reduce its effective tax
rate.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had cash and cash equivalents of $24.1
million compared to cash and cash equivalents of $26.5 million at December 31,
1998. The decrease in cash and cash equivalents was primarily attributable to
purchases of property and equipment. Working capital decreased from $70.6
million at December 31, 1998 to $64.0 million at March 31, 1999. The decrease in
working capital was also due primarily to the purchase of property and
equipment.
In the first three months of 1999, net cash provided by operating
activities of $11.3 million, was derived principally from net income of $6.7
million, adjusted primarily for depreciation and amortization of $1.6 million
and net cash provided of $2.1 million from decreases in accounts receivable and
increases to vendor and income taxes payable partially offset by an increase to
inventory and decrease in accrued liabilities.
Net cash used in investing activities in the first three months of 1999
was $13.8 million, primarily related to the purchase of property and equipment.
*The Company anticipates that capital expenditures will be approximately $53.0
million in 1999 (including the $13.9 million purchased in the first quarter) as
the Company continues to invest in the 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 -
11
<PAGE> 12
Manufacturing Capacity Constraints; Risks Associated With Expansion and
Automation of Manufacturing Operations."
Net cash provided by financing activities in the first quarter of 1999
was $106,000. The decrease of $801,000 from the first quarter of 1998 to the
first quarter of 1999 was due primarily to a decrease in proceeds from stock
option exercises in the first quarter of 1999 as compared to the first quarter
of 1998. The Company also received net proceeds of $143,000, in the first
quarter of 1998 from the secondary offering of common stock.
In addition to cash, cash equivalents and short 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
$20.0 million of revolving credit loans to the Company and up to $10.0 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 1.25% above the eurodollar rate, and term loans bear interest at the bank's
base rate or at 1.25% to 1.50% 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, 1999, 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 are
available to finance the construction and development of the Company's planned
new Puerto Rican manufacturing facility. On April 27, 1999, the Company amended
this credit agreement whereby the maturity date was extended by one year and the
conversion date of the term loan was extended by six months (see note 3 to the
Condensed Consolidated Financial Statements.) The revolving credit loans will be
available through June 30, 2001 and the term loan facility provides for advances
through October 31, 1999, at which time the principal amount outstanding will
become payable over twenty-two quarterly principal installments, with a final
maturity date of April 30, 2005. 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 believes that its current cash and cash equivalents and
short and long-term investments, 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.
YEAR 2000
Many currently installed computer systems and software products are
unable to distinguish between twentieth century dates and twenty-first century
dates because such systems may have been developed using two digits rather than
four to determine the applicable year. For example, computer programs that have
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This error could result in system failures or
miscalculations causing disruptions of operations, including among other things,
a temporary inability to process transactions, send invoices or engage in
similar normal business activities. As a result, many companies' software and
computer systems may need to be upgraded or replaced to comply with such "Year
2000" requirements.
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<PAGE> 13
The Company's business is dependent on the operation of numerous systems
that could potentially be impacted by Year 2000 related problems. Those systems
include, among others: hardware and software systems used by the Company to
manufacture and deliver products and services to its customers; the internal
systems of the Company's customers and suppliers; the hardware and software
systems used internally by the Company in the management of its business; and
non-information technology systems and services used by the Company in the
management of its business, such as telephone systems and building systems.
In early 1998, the Company's Board of Directors named it's Chief
Information Officer ("CIO") to head up a compliance project to identify all
information technology ("IT"), non-IT systems and third party related issues.
The CIO or other appropriate person will make presentations on the Company's
compliance program at each Board of Directors meeting until the year 2000. At
present, the Company has completed an inventory of all IT and non-IT systems and
has assessed the requirements for modifications. The Company believes that
correction and testing will be completed by the third quarter of 1999 and
implementation by October 1999. To date, the Company's expenditures to review
and remedy Year 2000 compliance problems have not been material, and the Company
does not expect such expenditures to be material in the future.
The Company is also in the process of replacing its business control
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 August 1999. The Company expects that, with the new information system, the
Year 2000 issue will not pose significant operational problems for the Company's
computer system, however, there can be no assurance there will not be a delay
in, or increased costs associated with, the implementation of the new
information system and the Company's inability to install such a system could
have a material adverse effect on future results of operations. If this project
is delayed, the Company believes that it can modify its current systems at a
cost of approximately $750,000 to handle Year 2000 dates.
The Company has developed contingency plans to address and mitigate
potential Year 2000 problems that may arise. As part of the Company's
contingency plans, the Company has developed specific plans for each critical
system to allow for interrupted operations to resume in a timely manner.
However, contingency planning for Year 2000 issues is complicated due to the
possibility of multiple and simultaneous incidents, some of which may be outside
of the Company's control, for example, noncompliance of third party systems.
There can be no assurances that if these scenarios do occur, the Company will be
able to respond in a timely manner and resume normal business.
The Company has not fully determined the extent to which it may be
impacted by third parties' systems, which may not be Year 2000-compliant. The
Year 2000 computer issue creates risk for the Company from third parties with
whom the Company works on business transactions worldwide. Given the Company's
significant operations in the United Kingdom and Puerto Rico, the Company may be
especially susceptible to Year 2000 problems of third parties in those regions,
as well as in the United States. While the Company has begun efforts to seek
reassurance from its suppliers and service providers, there can be no assurance
that the systems of other companies that the Company works with or on which the
Company's systems rely will be timely converted, or that any such failure to
convert by another company could not have an adverse effect on the Company.
The Company believes that its internal operating systems will be Year
2000 compliant before December 31, 1999. Therefore, the Company believes that
the most reasonably likely worst-case scenario will be that one or more of third
parties with which the Company has a material business relationship will not
have successfully dealt with its Year 2000 issues. A critical third party
failure (such as telecommunication, utilities or financial institutions) could
have a material adverse affect on the Company by adversely affecting the
Company's ability to manufacture and distribute its products, order and pay for
production materials from suppliers and receive orders and payments from
customers. Additionally, Year 2000 problems at customers may result in reduced
purchasing by such customers. It is also possible that one or more of the
Company's internal operating systems will not function properly and make it
difficult to complete routine tasks, such as accounting and other record keeping
duties. Based on information currently available, the Company does not believe
that it will
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<PAGE> 14
experience any long-term operating systems failures. However, there can be no
assurance of this, and the Company intends to continue to monitor these issues
as part of its Year 2000 project and to concentrate its efforts on minimizing
their impact.
The foregoing discussion of the Company's Year 2000 readiness includes
forward-looking statements, including estimates of the time frames and costs for
addressing the known Year 2000 issues confronting the Company, and is based on
management's current estimates, which were derived using numerous assumptions.
There can be no assurance that these estimates will be achieved, and actual
events and results could differ materially from those anticipated. Specific
factors that might cause such material differences include, but are not limited
to, the availability of personnel with required remediation skills, the ability
of the Company to identify and correct or replace all relevant computer code and
other systems affected by the Year 2000 problem, and the success of third
parties with whom the Company does business in addressing their Year 2000
issues. See "-- Factors That May Affect Future Results -- Uncertain Ability to
Manage Growth; Risks Associated with Implementation of New Management
Information Systems and Year 2000 Related Problems."
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 of numerous forward-looking statements 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"), the
Ciba Vision division of Novartis ("Ciba"), Bausch & Lomb, Inc. ("Bausch &Lomb"),
Wesley Jessen VisionCare, Inc. ("Wesley Jessen") and The Cooper Companies, Inc.
("Cooper"), 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, the
Company's largest competitor reduced its U.S. prices during the second quarter
of 1998, and further restructured its pricing plan in the fourth quarter of
1998. The Company matched these changes in most respects in the third and fourth
quarters of 1998. The Company's competitors may continue to reduce prices to
achieve the sales volumes necessary to utilize their increased capacity, or for
other reasons. Future 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 either match the competitor's pricing plan or 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."
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<PAGE> 15
The market for contact lenses is shifting from lenses marketed for
annual replacement regimens to lenses marketed for weekly and daily disposable
replacement regimens. The weekly 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. The Company has recently introduced a
lens marketed for daily disposal in Japan, and plans to introduce a lens for
such market in Europe and possibly the U.S. The Company's ability to enter and
to compete effectively in the daily market will depend in large part upon the
Company's ability to expand its production capacity and reduce its per unit
production costs. Additionally, over the past few quarters, the growth rate of
U.S. market demand has slowed . Should such trend continue, it could have a
material adverse effect on the Company's business, financial condition and
results of operations.
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. In this
regard, Cooper's acquisition of Aspect Vision Care Ltd. in December 1997 has
given them the ability to market in the U.S. a new line of contact lenses for
weekly and monthly replacement regimens that utilize a manufacturing process
technology that is based in part on technology also licensed to and used by the
Company.
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 photo refractive
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. The Company is currently operating close to capacity, and while
incremental increases in capacity are implemented by the Company in the ordinary
course, the Company expects to need more significant increases in capacity in
the foreseeable future.
To this end, the Company intends to add new, highly automated production
technology 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 this
automated technology on a timely basis or that the automated technology will
operate as efficiently as expected. The Company has encountered and is
continuing to encounter delays in implementing the first line of this automated
technology, has had to write off the cost of a custom made piece of equipment,
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 technology will involve
processes and equipment with which the Company and its personnel are not
experienced. Difficulties experienced by the Company in automating its
manufacturing process could impair the Company's ability to reduce its per unit
production costs and to compete in the weekly and daily disposable replacement
market and, accordingly, could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company currently expects that through the end of 2000, it will
invest approximately $42.0 million in capital expenditures on automated
production lines in the United Kingdom and Puerto
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<PAGE> 16
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 being
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 second quarter of 1999, with occupancy in
the new facility expected to be phased in over a nine-month period. 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 the
new automated production technology 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
production process, 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 weekly and daily disposable
replacement regimen markets 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, 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.
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<PAGE> 17
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; 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 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 is
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 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 daily and weekly disposable replacement
regimens, (ii) further decreases in the prices of lenses marketed for weekly
disposable
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<PAGE> 18
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 or monthly 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.
Risks Relating to International Operations; Need to Increase Sales in
International Markets. In 1997, 1998 and the first quarter of 1999, the
Company's international sales represented approximately 21.0%, 21.5% and 24.2%,
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 materially 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. The regulation of medical devices in a number of
jurisdictions, particularly in the European Union, continues to develop, 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. In the first quarter of 1999, the Company had an exchange loss
of $105,000 primarily relating to changes in exchange rate between the U.S.
dollar, British Pound and the Canadian dollar. The Company does not generally
hedge its currency risk, and accordingly 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 until it obtains
regulatory approval. The Company has recently received regulatory approval to
have certain of its products sold in Japan and has forecast significant sales in
that country. However, the Company's products are new to Japan and there can be
no assurance that such sales will occur. 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 and Year 2000 Related Problems. The
Company has experienced rapid growth in recent years. Continued rapid growth may
place 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 also in the process of replacing its business control
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
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<PAGE> 19
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 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.
The Company's business is dependent on the operation of numerous systems
that could potentially be impacted by Year 2000 related problems. Those systems
include, among others: hardware and software systems used by the Company to
manufacture and deliver products and services to its customers; the internal
systems of the Company's customers and suppliers; the hardware and software
systems used internally by the Company in the management of its business; and
non-information technology systems and services used by the Company in the
management of its business, such as telephone systems and building systems.
In early 1998, the Company's Board of Directors named its Chief
Information Officer ("CIO") to head up a compliance project to identify all
information technology ("IT"), non-IT systems and third party related issues.
The CIO or other appropriate person will make presentations on the Company's
compliance program at each Board of Directors meeting until the year 2000. At
present, the Company has completed an inventory of all IT and non-IT systems and
has assessed the requirements for modifications. The Company believes that
correction and testing will be completed by the third quarter of 1999 and
implementation by October of 1999. However, there can be no assurance that the
Company will be successful in its correction, testing and implementation, or
that the Company will not be materially adversely affected by Year 2000 related
problems of third parties such as suppliers, service providers and customers.
See "-- Management's Discussion and Analysis of Financial Condition and Results
of Operation - Year 2000."
Risk of New Products and Technological Change. The Company does not
allocate substantial resources to new product development and has historically
leveraged or licensed the technology developments of others. The Company
believes that many of its competitors have invested, and will continue to
invest, substantial amounts in developing new products and technologies, and
there can be no assurance that the Company's competitors do not have or will not
develop new products and technologies that could render the Company's products
less competitive. For example, Bausch & Lomb has received FDA approval to market
a contact lens based on a new polymer for seven day continuous wear, and it has
been reported that it will seek approval for longer continuous wear. It has also
been reported that Ciba is developing a similar lens. Additionally, certain of
the Company's competitors have or are believed to be developing a toric lens
marketed for weekly disposal. There can be no assurance that the Company will be
able to develop its own technology or utilize technology developed by third
parties in order to remain competitive. Any failure by the Company to stay
current with its competitors with regard to new product offerings and
technological changes and to offer products that provide performance that is at
least comparable to competing products would have a material adverse effect on
the Company's business, financial condition and results of operations.
Risks of Regulatory Action; Product Liability; Product Recall. The
Company's products and manufacturing facilities are subject to stringent
regulation by the FDA and by various governmental agencies for the states and
localities in which the Company's products are manufactured and/or sold, as well
as by governmental agencies in certain foreign countries in which the Company's
products are manufactured and/or sold. In addition, the Company has in the past
been and continues to be, subject to occasional product liability claims and
lawsuits. In the second quarter of 1999, the Company initiated a product recall
of certain contact lenses manufactured in late 1998 due to a problem with the
package seal on such products. The Company is currently in the process of
notifying its customers to whom such products were sold. Although the Company
does not expect the cost of such recall to be material, nor is it aware of any
material problems caused by such lenses, there can be no assurance that the
Company will be able to recall all of these products, or that the Company will
not suffer a material adverse consequence as a result of the recall or the use
of any such lenses that the Company is not able to recall.
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<PAGE> 20
Part II - OTHER INFORMATION
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,
1999.
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<PAGE> 21
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 12, 1999 /s/ Gregory E. Lichtwardt
----------------------------------------
Gregory E. Lichtwardt
Vice President, Finance, Chief
Financial Officer, and Treasurer
(Duly Authorized Officer and Chief
Accounting Officer)
21
<PAGE> 22
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
11.01 - Statement regarding computation of net income per share (basic and diluted)
27.01 - Financial Data Schedule
</TABLE>
<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,
1999 1998
----------- -----------
<S> <C> <C>
Net income per share (basic):
Net income $ 6,655,000 $ 5,844,000
=========== ===========
Weighted average common shares outstanding 22,627,032 21,919,973
=========== ===========
Net income per share (basic) $ 0.29 $ 0.27
=========== ===========
Net income per share (diluted):
Net income (diluted) $ 6,655,000 $ 5,844,000
=========== ===========
Weighted average common shares outstanding 22,627,032 21,919,973
Weighted average shares of stock options
under the treasury stock method 700,334 1,268,723
Weighted average shares issuable upon conversion
of the Series A Preferred Stock 0 0
----------- -----------
Weighted average common and dilutive
potential common shares outstanding 23,327,366 23,188,696
=========== ===========
Net income per share (diluted) $ 0.29 $ 0.25
=========== ===========
</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, 1999, 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 24,561
<SECURITIES> 17,987
<RECEIVABLES> 24,121
<ALLOWANCES> 2,172
<INVENTORY> 14,700
<CURRENT-ASSETS> 91,479
<PP&E> 95,117
<DEPRECIATION> 19,660
<TOTAL-ASSETS> 186,236
<CURRENT-LIABILITIES> 27,443
<BONDS> 0
0
0
<COMMON> 23
<OTHER-SE> 150,031
<TOTAL-LIABILITY-AND-EQUITY> 186,236
<SALES> 37,009
<TOTAL-REVENUES> 37,009
<CGS> 12,332
<TOTAL-COSTS> 15,892
<OTHER-EXPENSES> 158
<LOSS-PROVISION> 157
<INTEREST-EXPENSE> 75
<INCOME-PRETAX> 9,108
<INCOME-TAX> 2,453
<INCOME-CONTINUING> 6,655
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,655
<EPS-PRIMARY> 0.29<F1>
<EPS-DILUTED> 0.29
<FN>
<F1>FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC
</FN>
</TABLE>
