<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 JUNE 30, 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 July 22, 1999, there were 22,900,941 outstanding 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>
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets -
June 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Income -
Three and Six Months Ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 23
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 24
SIGNATURES 25
</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>
June 30, December 31,
1999 1998
(unaudited)
--------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 18,368 $ 26,520
Restricted cash 412 486
Short-term investments 19,329 19,036
Accounts receivable, less allowance for sales returns and doubtful
accounts of $1,799 and $2,085 for 1999 and 1998, respectively 27,047 25,126
Inventories 13,834 12,460
Deferred income taxes 4,605 4,638
Loans to officers and employees 188 263
Prepaid expenses and other current assets 11,471 6,495
--------- ---------
Total Current Assets 95,254 95,024
Property and equipment, net 84,056 62,966
Intangible assets, net 6,770 7,216
Long-term investments 14,051 11,207
Other assets 163 157
--------- ---------
Total Assets $ 200,294 $ 176,570
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 5,793 $ 6,003
Accrued liabilities 12,225 10,512
Accrued cooperative merchandise allowances 5,787 5,854
Current portion of long-term debt 1,201 929
Income and other taxes payable 3,853 1,148
--------- ---------
Total Current Liabilities 28,859 24,446
Deferred income taxes 6,496 6,640
Long-term debt, less current portion 2,070 2,535
--------- ---------
Total Liabilities 37,425 33,621
Stockholders' Equity:
Common stock, $0.001 par value; 80,000,000
shares authorized; 22,898,441 and 22,588,118 shares
issued and outstanding for 1999 and 1998, respectively 23 23
Additional paid-in capital 80,745 76,741
Retained earnings 82,696 66,727
Accumulated other comprehensive income (595) (542)
--------- ---------
Total Stockholders' Equity 162,869 142,949
--------- ---------
Total Liabilities and Stockholders' Equity $ 200,294 $ 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 Six months ended
June 30, June 30,
------------------------ ------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 43,919 $ 38,019 $ 80,928 $ 70,190
Cost of sales 15,995 11,685 28,327 21,826
---------- ---------- ---------- ----------
Gross profit 27,924 26,334 52,601 48,364
Selling and marketing expenses 10,608 10,515 20,619 19,246
General and administrative expenses 4,803 5,035 10,120 9,544
Research and development expenses 854 705 1,418 1,462
---------- ---------- ---------- ----------
Income from operations 11,659 10,079 20,444 18,112
Interest expense (64) (82) (139) (164)
Interest income 550 684 1,106 1,265
Other expense (49) (124) (206) (307)
---------- ---------- ---------- ----------
Income before taxes 12,096 10,557 21,205 18,906
Income taxes (2,782) (3,167) (5,236) (5,672)
---------- ---------- ---------- ----------
Net income $ 9,314 $ 7,390 $ 15,969 $ 13,234
========== ========== ========== ==========
Net income per share data:
Net income per share (basic) $0.41 $0.33 $ 0.70 $ 0.60
========== ========== ========== ==========
Net income per share (diluted) $0.40 $0.32 $ 0.68 $ 0.57
========== ========== ========== ==========
Weighted average common
shares outstanding 22,809,644 22,302,477 22,718,704 22,112,282
Weighted average shares of stock
options under the treasury
stock method 680,141 1,135,606 684,333 1,195,675
---------- ---------- ---------- ----------
Total weighted average common
and dilutive potential common
shares outstanding 23,489,785 23,438,083 23,403,037 23,307,957
========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
OCULAR SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 15,969 $ 13,234
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 3,716 3,063
Income tax benefits from stock options exercised 1,839 --
Allowances for sales returns and doubtful accounts 46 358
Provision for excess and obsolete inventory 640 359
Provision for damaged and scrap products 533 385
Provision for property and equipment -- 586
Exchange loss 185 225
Deferred income taxes -- (156)
Changes in operating assets and liabilities:
Accounts receivable (2,138) (1,678)
Inventories (2,804) (324)
Other current and non-current assets (5,128) (1,122)
Accounts payable (54) 1,524
Accrued liabilities 1,825 1,290
Income and other taxes payable 2,762 3,469
-------- --------
Net cash provided by operating activities 17,391 21,213
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (24,136) (11,939)
Purchase of available-for-sale short-term and long-term
Investments (15,033) (14,495)
Sales and maturities of available-for-sale short-term and long-
term investments 11,625 3,915
Payments from (deposits to) restricted cash 50 (5)
-------- --------
Net cash used in investing activities (27,494) (22,524)
-------- --------
Cash flows from financing activities:
Repayment of long-term debt (192) (193)
Proceeds from secondary public offering of common stock, net -- 143
Proceeds from issuance of common stock 2,165 1,199
-------- --------
Net cash provided by financing activities 1,973 1,149
Effect of exchange rate changes on cash and cash equivalents (22) (174)
-------- --------
Net decrease in cash and cash
equivalents (8,152) (336)
Cash and cash equivalents at beginning of period 26,520 27,895
-------- --------
Cash and cash equivalents at end of period $ 18,368 $ 27,559
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
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 June
30, 1999 and the results of its operations for the three and six month periods
ended June 30, 1999 and 1998 and its cash flows for the six month period ended
June 30, 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 and six month
periods ended June 30, 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>
June 30, December 31,
1999 1998
------- ------------
<S> <C> <C>
Raw materials $ 2,062 $ 2,867
Work in process 895 1,252
Finished goods 10,877 8,341
------- -------
$13,834 $12,460
======= =======
</TABLE>
NOTE 3 - ACCUMULATED OTHER COMPREHENSIVE INCOME
Total comprehensive income for the three months ended June 30, 1999
is $9,244,000, compared with $7,340,000 for the same period a year ago. The
total comprehensive income for the six months ended June 30, 1999 is
$15,915,000, compared with $13,240,000 for the same period a year ago. Total
comprehensive income includes primarily net income, foreign currency translation
adjustment and net unrealized gains and losses on investments.
NOTE 4 - 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 loan principal and related interest were repaid to the
Company by Mr. Kunst and Mr. Lichtwardt in May 1999. The interest rate on the
loans was 8% per year.
6
<PAGE> 7
NOTE 5 - 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.
On June 26, 1999, the credit agreement was amended to lower the ratio
requirements on limitations of interest to certain defined assets and current
assets to current liabilities.
NOTE 6 - SUBSEQUENT EVENTS
On July 1, and August 2, 1999, the Company completed two acquisitions
in Australia. Both Companies are contact lens distributors selling to Australian
eyecare practitioners, both in private practice and in retail optical chains.
The purchase price of the first acquisition is 4.1 times the audited net
earnings after taxes ("NEAT"), as defined in the agreement, of the new
Australian entity for the calendar year 2002. Initial payments totaling
approximately U.S. $945,000 was paid in connection with these acquisitions at
closing. Both purchases were and will be funded with existing cash and cash
equivalents.
The Company will account for the acquisitions under the purchase
method of accounting and accordingly the operating results of both company's
will be included in the Company's consolidated financial statements effective
the date of acquisition. The excess of the aggregate purchase price over the
fair market value of net assets acquired will be allocated to goodwill and
intangible assets based upon estimates of fair value and will be amortized on a
straight-line basis over five to 15 years. Neither of these acquisitions are
considered material to the Company's financial statements.
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 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 June 30,
-----------------------------
1999 1998 % Change
----------- ----------- --------
<S> <C> <C> <C>
U.S. $31,948,000 $30,320,000 5.4%
As a percentage of net sales 73% 80%
International $11,971,000 $ 7,699,000 55.5%
As a percentage of net sales 27% 20%
----------- -----------
Net sales $43,919,000 $38,019,000 15.5%
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------
1999 1998 % Change
----------- ----------- --------
<S> <C> <C> <C>
U.S. $59,993,000 $55,672,000 7.8%
As a percentage of net sles 74% 79%
International $20,935,000 $14,518,000 44.2%
As a percentage of net sales 26% 21%
----------- -----------
Net sales $80,928,000 $70,190,000 15.3%
</TABLE>
Net sales represents gross sales less allowances for sales returns,
trial sets 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. There were three main
factors which had an impact on the Company's net sales
8
<PAGE> 9
growth for the three and six-month periods ended June 30, 1998 to 1999: (i) the
Company's launch of its lower priced lenses marketed for daily and weekly
replacement in Japan, and its lenses marketed for daily replacement in Europe,
at the end of the first quarter 1999, (ii) the increase in sales of the
Company's lenses marketed for weekly disposable replacement regimens and (iii)
the price reductions of the Company's lenses marketed for weekly replacement
during the second half of 1998. The price reduction was 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.
The growth in net sales from the quarter and six months ended June 30,
1998 to the quarter and six months ended June 30, 1999 resulted primarily from
increased sales of the Company's lenses marketed for daily and weekly
replacement regimens. A significant portion of such growth came from
international sales, which grew faster than domestic sales due to the Company's
new product launches in Japan and Europe. Additionally, the soft contact lens
market is growing faster overseas than in the U.S., where market growth
continues to be slow. Unit sales of the Company's lenses marketed for disposable
replacement (defined as lenses marketed for monthly, weekly and daily disposable
regimen) regimens increased 65.2% from the second quarter of 1998 to the second
quarter of 1999 and 57.0% from the six months ended June 30, 1998 to the six
months ended June 30, 1999. During the three and six months ended June 30, 1999,
96% of all lenses sold were for use in disposable replacement regimen, compared
to 93% and 92% during the same three and six-month periods in 1998,
respectively. As a result of the general market decline in the demand of the
lenses marketed for annual replacement regimens, unit sales of the Company's
lenses in this segment, as expected, decreased 15.7% and 18.6% from the second
quarter and six-months ended June 30, 1998 to the same quarter and six-month
periods in 1999.
The Company's overall average selling price decreased from the quarter
and six months ended June 30, 1998 to the quarter and six months ended June 30,
1999 primarily as a result of the increase in sales of lenses marketed for daily
disposable regimens, which have lower average selling prices, and the 1998 price
reductions on the Company's weekly disposable products. *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 (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. *The Company expects there to be a continued shift in the
overall market demand in the U.S. towards more frequent replacement regimens and
as a result expects its own sales of lenses marketed for annual replacement
regimens to decline accordingly. *The Company is evaluating the introduction of
lenses marketed for daily disposable regimen in the U.S. and other international
markets in 2000, as well as other new products. *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.
9
<PAGE> 10
Gross Profit
<TABLE>
<CAPTION>
Three Months Ended June 30,
-----------------------------
1999 1998 % Change
----------- ----------- --------
<S> <C> <C> <C>
Gross profit $27,924,000 $26,334,000 6.0%
As a percentage of net sales 63.6% 69.3%
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------
1999 1998 % Change
----------- ----------- --------
<S> <C> <C> <C>
Gross profit $52,601,000 $48,364,000 8.8%
As a percentage of net sales 65.0% 68.9%
</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 dollar
increase in gross profit from the quarter and six months ended June 30, 1998 to
the quarter and six months ended June 30, 1999 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. Gross profit as a percentage of sales in the three and six months ended
June 30, 1999 decreased from the comparable periods in 1998 and such percentage
for the second quarter of 1999 was also less than was realized for the first
quarter of 1999. This reduction in gross profit margin percentage is due to
reductions to the Company's average selling prices, as discussed in "Net Sales",
which were partially offset by lower production costs. *The Company is in the
process of adding 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. *The Company does not expect significant
additional cost reductions, until full implementation of its new highly
automated production lines are substantially complete. *As the Company expects
that its overall average selling price will continue to decline over time due to
product mix shift, 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 margin percentage. *The Company expects that the
ongoing rollout in Japan and Europe of the 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. *Accordingly, the Company would
expect its gross margin percentage to decrease, in the short term, as sales of
lower average selling price 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 Capacity
Constraints; Risks Associated With Expansion and Automation of Manufacturing
Operations."
10
<PAGE> 11
Selling and Marketing Expenses
<TABLE>
<CAPTION>
Three Months Ended June 30,
-----------------------------
1999 1998 % Change
----------- ----------- --------
<S> <C> <C> <C>
Selling and marketing expenses $10,608,000 $10,515,000 0.9%
As a percentage of net sales 24.2% 27.7%
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------
1999 1998 % Change
----------- ----------- --------
<S> <C> <C> <C>
Selling and marketing expenses $20,619,000 $19,246,000 7.1%
As a percentage of net sales 25.5% 27.4%
</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 to encourage the fitting
and wearing of the Company's lenses marketed for disposable replacement
regimens. Such activities may include but are not limited to advertising,
in-office promotion, displays and mailings. These allowances are limited to a
percentage of purchases of lenses marketed for disposable replacement regimens
from the Company. The increase in dollars from the quarter and six months ended
June 30, 1998 to the quarter and six months ended June 30, 1999 resulted
primarily from increases in expenditures related to promotional programs, the
size of the U.S. sales force, and royalties which are due on certain U.K. sales,
offset in part by lower cooperative merchandising allowances and diagnostic
expenditures. The decrease in selling and marketing expenses as a percentage of
net sales was due to decreased cooperative merchandising allowances. Cooperative
merchandising allowances were decreased in connection with the Company's product
price reductions in the second half of 1998. *The Company believes selling and
marketing expenses, particularly cooperative merchandising allowances, will
continue to grow in absolute dollars, but will be flat as a percentage of sales
through the remainder of the year.
General and Administrative Expenses
<TABLE>
<CAPTION>
Three Months Ended June 30,
-----------------------------
1999 1998 % Change
----------- ----------- --------
<S> <C> <C> <C>
General and administrative expenses $4,803,000 $5,035,000 (4.6%)
As a percentage of net sales 10.9% 13.2%
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------
1999 1998 % Change
----------- ----------- --------
<S> <C> <C> <C>
General and administrative expenses $10,120,000 $9,544,000 6.0%
As a percentage of net sales 12.5% 13.6%
</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. Included in the expense for the second
quarter of 1998 is a charge of $586,000 related to a custom-built packaging
machine which failed factory acceptance tests and Company specifications.
Excluding this charge, general and administrative expenses would have increased
in dollars but decreased as a percentage of sales from both the quarter and six
months ended June 30, 1998 to the quarter and six months ended June 30, 1999.
The dollar increase was due primarily to expenses related to the implementation
of the Company's new operating structure in the first quarter of 1999, partially
offset by a reduction of the Company's provision for uncollectible accounts in
the second quarter of 1999. *The Company believes
11
<PAGE> 12
that if net sales grow, its general and administrative expenses will increase in
absolute dollars, but decrease as a percentage of net sales.
Research and Development Expenses
<TABLE>
<CAPTION>
Three Months Ended June 30,
-----------------------------
1999 1998 % Change
----------- ----------- --------
<S> <C> <C> <C>
Research and development expenses $854,000 $705,000 21.1%
As a percentage of net sales 1.9% 1.9%
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------
1999 1998 % Change
----------- ----------- --------
<S> <C> <C> <C>
Research and development expenses $1,418,000 $1,462,000 (3.0%)
As a percentage of net sales 1.8% 2.1%
</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 six months ended June 30,
1998 to the six months ended June 30, 1999 was due primarily to the fact that
the Company completed the research and development phase related to its new
automated production technology during the third quarter of 1998. The increase
from the quarter ended June 30, 1998 to the quarter ended June 30, 1999 in
dollars, was primarily due to expenditures related to new product development
and the hiring of a new Vice President of Research and Development in accordance
with the Company's initiative to invest in new product development, partially
offset by reduced expenses on the automated production technology. *The Company
does not believe that the change in research and development expense from the
quarter and six months ended June 30, 1998 to the quarter and six months ended
June 30, 1999 is indicative of the Company's long-term expense growth rate.
*Research and development expenses may fluctuate as the Company hires new
employees and increases its focus on new product development.
Interest and Other Income, Net
<TABLE>
<CAPTION>
Three Months Ended June 30,
-----------------------------
1999 1998 % Change
----------- ----------- --------
<S> <C> <C> <C>
Interest and other income, net $437,000 $478,000 (8.6%)
As a percentage of net sales 1.0% 1.3%
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------
1999 1998 % Change
----------- ----------- --------
<S> <C> <C> <C>
Interest and other income, net $761,000 $794,000 (4.2%)
As a percentage of net sales 1.0% 1.1%
</TABLE>
The decrease in interest and other income, net from the quarter and six
months ended June 30, 1998 to the quarter and six months ended June 30, 1999
resulted primarily from a reduction in interest income due to lower interest
rates on lower invested balances.
12
<PAGE> 13
Income Taxes
<TABLE>
<CAPTION>
Three Months Ended June 30,
-----------------------------
1999 1998 % Change
----------- ----------- --------
<S> <C> <C> <C>
Income taxes $2,782,000 $3,167,000 (12.2%)
Effective tax rate 23.0% 30.0%
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
-----------------------------
1999 1998 % Change
----------- ----------- --------
<S> <C> <C> <C>
Income taxes $ 5,236,000 $ 5,672,000 (7.7%)
Effective tax rate 24.7% 30.0%
</TABLE>
The Company's lower effective tax rate for the quarter and six months
ended June 30, 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 June 30, 1999, the Company had a cash and cash equivalents balance
of $18.4 million, compared to a cash and cash equivalents balance of $26.5
million at December 31, 1998. The decrease in cash and cash equivalents was
primarily attributable to purchases of property and equipment and purchase of
short-term and long-term investments. Working capital decreased from $70.6
million at December 31, 1998 to $66.4 million at June 30, 1999. The decrease in
working capital was due primarily to the purchase of property and equipment
partially offset by increases to other receivables and prepaid expenses. The
Company had $33.4 million in short-term and long-term investments as of June 30,
1999, compared to $30.2 million as of December 31, 1998.
In the first six months of 1999, net cash provided by operating
activities of $17.4 million, was derived principally from net income of $16.0
million, adjusted primarily for depreciation and amortization of $3.7 million,
income tax benefits from stock options exercised of $1.8 million, and net cash
used of $5.5 million from increases in other assets, inventory, accounts
receivable, accrued liabilities and income taxes payable.
Net cash used in investing activities in the first six months of 1999
was $27.5 million. During this period, the Company used $24.1 million to
purchase property and equipment, and $3.4 million for net purchases of
short-term and long-term investments. *The Company anticipates that capital
expenditures will be approximately $27 million for the remainder of 1999 as the
Company invests 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 - Manufacturing Capacity
Constraints; Risks Associated With Expansion and Automation of Manufacturing
Operations."
Net cash provided by financing activities in the first six months of
1999 was $2.0 million, an increase of $824,000 from the comparable period in
1998, due primarily to the increase in proceeds from stock option exercises in
the first six months of 1999 as compared to the first six months of 1998.
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<PAGE> 14
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 June 30, 1999, there were no revolving credit
loans outstanding under the Comerica Credit Agreement and $2.4 million of term
loans outstanding with the remaining $7.6 million of term loans 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 5 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 Barbados
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,
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 the
foreseeable future.
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.
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 made several and
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<PAGE> 15
will continue to make presentations on the Company's compliance program at
future Board of Directors meetings 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 and is on target with its planned procedures. The
Company believes that correction and testing of all IT and non-IT systems will
be completed by the end of the third quarter of 1999, and implementated by
November 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 information
control 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
November 1, 1999. Recently, the Company determined that in connection with this
implementation, the processing time of its order entry application did not meet
expectations and the Company is in the process of determining the need for new
computer hardware or additional software modifications. Purchase of new computer
hardware is estimated to cost approximately $400,000 to $800,000. *The Company
expects to purchase and implement this computer hardware along with certain
other software modifications over the next few weeks and believes that such
installation will be completed as planned. *The Company expects that, with the
new information systems and hardware, the Year 2000 issue will not pose
significant operational problems for the Company's computer system, however,
there can be no assurance that there will not be a delay in, or increased costs
associated with, the implementation of the new information systems and hardware
and the Company's inability to install such systems could have a material
adverse effect on future results of operations. *The Company does not anticipate
any further delays in the implementation of these systems, however the Company
is exploring alternatives if the new information systems and hardware cannot be
implemented in time. The Company is considering engaging an outside consulting
firm to assist in such modification of such current systems and estimates the
cost to be less than $500,000.
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 received a significant
number of representations from its suppliers and service providers that their
systems are year 2000 compliant, particularly those deemed to be mission
critical, 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
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<PAGE> 16
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 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 primarily of 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"). 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. Additionally, 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. 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 could
continue to reduce prices to achieve the sales volumes necessary to utilize
their capacity, or for other reasons. 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.
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
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<PAGE> 17
failure of the Company to respond to competitive pressures, and particularly
price competition, in a timely manner could 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."
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 Europe, and is evaluating the
introduction of such a lens in 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 worsen, 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 molding process that is
based in part on technology also licensed to and used by the Company.
Additionally, Johnson & Johnson has recently introduced a new lens marketed for
weekly replacement, referred to as Acuvue 2, which Johnson & Johnson claims has
superior comfort and handling than their original Acuvue lens.
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 is currently adding 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
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<PAGE> 18
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 delays in implementing the
first line of this automated technology and there can be no assurance that it
will not encounter significant delays and difficulties in the future. 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 2001, it will
invest approximately $40.0 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.
The Company is currently experiencing space constraints at its Puerto
Rican facility. The Company is in the process of relocating its Puerto Rican
manufacturing operations to a substantially larger new facility that has been
constructed to the Company's specifications and leased to the Company by the
Puerto Rico Industrial Development Company. Relocation costs will be expensed as
incurred, however the Company does not expect these costs to be material. The
facility will be inspected by the U.S. Food and Drug Administration in order to
obtain site approval to make extended wear lenses. The Company currently expects
the inspection to be completed in the fall of 1999, with occupancy to be phased
in over nine months thereafter. However, there can be no assurance that the
Company will receive all necessary approvals, or be able to commence production
in the new facility, according to the foregoing schedule.
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
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<PAGE> 19
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; 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 could be materially
adversely affected. In particular, the affect on net income may be
proportionately greater than net sales because only a 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
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<PAGE> 20
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. 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 (ii) increases in products sold internationally through
distributors at prices lower than direct sales prices.
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
maintain, its gross margins.
Risks Relating to International Operations; Need to Increase Sales in
International Markets. In 1997, 1998 and the second quarter of 1999, the
Company's international sales represented approximately 21%, 22% and 27%,
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, changes in currency
exchange rates, longer accounts receivable payment cycles, and foreign tax laws
or tariffs. These factors, among others, could materially adversely affect the
Company's ability to sell its products in international markets. 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 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
second quarter of 1999, the Company had an exchange loss of $80,000 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 many of these markets the Company is dependent on
the efforts of distributors, and there can be no assurance that the distributors
will be successful or that they will maintain their relationship with the
Company. 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 sales will meet expectations. 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
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<PAGE> 21
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 information
control 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 remaining planned
applications by November 1, 1999. Recently, the Company determined that in
connection with this implementation, the processing time of its order entry
application did not meet expectations and the Company is in the process of
determining the need for new computer hardware or additional software
modifications. Purchase of new computer hardware is estimated to cost
approximately $400,000 to $800,000. The Company expects to purchase and
implement this computer hardware, along with certain other software
modifications, over the next few weeks and believes that such installation will
be completed as planned. 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 made several and will continue to make
presentations on the Company's compliance program at future Board of Directors
meetings 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
and is on target with its planned procedures. The Company believes that
correction and testing of all IT and non-IT systems will be completed by the end
of the third quarter of 1999, and implementation by November 1999. The Company
expects that, with the new information systems and hardware discussed above, the
Year 2000 issue will not pose significant operational problems for the Company's
computer system, however, there can be no assurance that there will not be a
delay in, or increased costs associated with, the implementation of the new
information systems and hardware and the Company's inability to install such
systems could have a material adverse effect on future results of operations.
The Company does not anticipate any further delays in the implementation of
these systems, however the Company is exploring alternatives if the new
information systems and hardware cannot be implemented in time. The Company is
considering engaging an outside consulting firm to assist in such modification
of such current systems and estimates the cost to be less than $500,000.
However, there can be no assurance that there will not be a delay in, or
increased costs associated with the correction, testing and implementation of
the new information systems and hardware, 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."
21
<PAGE> 22
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 compete in these products. 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 could 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. The Company also undertakes product recalls from time to time, and
while such recalls have not historically had a material adverse effect on the
Company, there can be no assurance that such will not occur in the future.
22
<PAGE> 23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the Company's assessment of its
sensitivity to market risk since its presentation set forth in Item 7A,
"Quantitative and Qualitative Disclosures About Market Risk," in its Annual
Report on Form 10-K for the fiscal year ended December 31, 1998.
23
<PAGE> 24
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual Meeting of Stockholders, held on May 25, 1999, the
stockholders elected the following individuals to the Board of Directors: Edgar
J. Cummins, John D. Fruth, Terence M. Fruth, Norwick B.H. Goodspeed, William R.
Grant, Daniel J. Kunst and Francis R. Tunney, Jr.
Votes
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For Withheld
--- --------
<S> <C>
20,168,927 176,163
</TABLE>
In addition, the following matter was voted upon by the Stockholders:
To approve the increase in the number of Common Stock available for issuance
under the Company's 1997 Equity Incentive Plan by 1,000,000 shares from
2,000,000 to a total of 3,000,000 shares.
Votes
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For Against Abstain
--- ------- -------
<S> <C> <C>
16,631,959 3,798,657 14,474
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
- ------- -------------
<S> <C>
5.01 Amendment Number Two to Amended and Restated Credit
Agreement among Ocular Sciences, Inc., Ocular Sciences Puerto
Rico, Inc. and Comerica Bank - California, dated April 27, 1999
5.02 Amendment Number Three to Amended and Restated Credit
Agreement among Ocular Sciences, Inc., Ocular Sciences Puerto
Rico, Inc. and Comerica Bank - California, dated June 28, 1999
27.01 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
A Form 8-K was filed on June 8, 1999 to report that on May 25, 1999, the Board
of Directors of Ocular Sciences, Inc. (the "Company") appointed Wick Goodspeed,
currently President of the Company, to the position of Chief Executive Officer
and President of the Company. John Fruth will remain Chairman of the Board of
Directors of the Company.
24
<PAGE> 25
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: August 13, 1999 /s/ Gregory E. Lichtwardt
--------------------------------
Gregory E. Lichtwardt
Vice President, Finance,
Chief Financial Officer, and Treasurer
(Duly Authorized Officer and
Chief Accounting Officer)
25
<PAGE> 26
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
<S> <C>
5.01 Amendment Number Two to Amended and Restated Credit Agreement
among Ocular Sciences, Inc., Ocular Sciences Puerto Rico, Inc.
and Comerica Bank - California, dated April 27, 1999
5.02 Amendment Number Three to Amended and Restated Credit Agreement
among Ocular Sciences, Inc., Ocular Sciences Puerto Rico, Inc.
and Comerica Bank - California, dated June 28, 1999
27.01 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 5.01
Amendment Number Two to Amended and Restated Credit Agreement among
Ocular Sciences, Inc., Ocular Sciences Puerto Rico, Inc. and
Comerica Bank -- California, dated April 27, 1999
<PAGE> 2
AMENDMENT NUMBER TWO TO AMENDED AND RESTATED CREDIT AGREEMENT
This AMENDMENT NUMBER TWO TO AMENDED AND RESTATED CREDIT AGREEMENT (this
"Amendment") dated as of April 27, 1999 is entered into by and between OCULAR
SCIENCES, INC., a Delaware corporation ("Ocular Sciences"), and OCULAR SCIENCES
PUERTO RICO, INC., a Delaware corporation ("O.S.I. Puerto Rico"), and COMERICA
BANK-CALIFORNIA, a California chartered bank (the "Lender").
RECITALS
A. Ocular Sciences and O.S.I. Puerto Rico (each, a "Borrower", and
collectively, the "Borrowers") and the Lender are parties to a certain Amended
and Restated Credit Agreement dated as of November 7, 1997, as amended by
Amendment Number One to Amended and Restated Credit Agreement dated as of
August 5, 1998 (as so amended, the "Agreement").
B. The Borrowers have requested that the Lender amend the Agreement in
certain respects.
C. The Lender is willing so to amend the Agreement upon the terms and
subject to the conditions set forth below.
AGREEMENT
NOW, THEREFORE, in consideration of the above recitals and for other good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:
1. Capitalized terms used in this Amendment and not otherwise defined
shall have the respective meanings set forth in the Agreement.
2. The definition of "Facility A Maturity Date" set forth in Section 1.1
of the Agreement is hereby amended to read in its entirety as follows:
FACILITY A MATURITY DATE means June 30, 2001.
<PAGE> 3
3. The definition of "Fixed Charge Coverage Ratio" set forth in Section
1.1 of the Agreement is hereby amended to read in its entirety as follows:
FIXED CHARGE COVERAGE RATIO means, as of any Fiscal Quarter End Date,
the ratio of (i) Cash Flow for the four consecutive Fiscal Quarters ending
on such Fiscal Quarter End Date, DIVIDED BY (ii) the sum of (A)
Consolidated Interest Expense for the four consecutive Fiscal Quarters
ending on such Fiscal Quarter End Date, PLUS (B) the aggregate of all
principal payments with respect to all indebtedness for borrowed money
(including Capital Leases but specifically excluding Facility A Advances
and Facility B Advances) due and payable by Ocular Sciences or any of its
consolidated Subsidiaries during the four consecutive Fiscal Quarters
following such Fiscal Quarter End Date, PLUS (C) from the Closing Date
through October 31, 1999, an assumed amount of $1,818,182, PLUS (D) from
and after November 1, 1999, the aggregate principal amount of outstanding
Facility B Advances due and payable by O.S.I. Puerto Rico during the four
consecutive Fiscal Quarters following such Fiscal Quarter End Date.
4. The definition of "Negotiated Rate Advance" set forth in Section 1.1
of the Agreement is hereby amended to read in its entirety as follows:
NEGOTIATED RATE ADVANCE means a Base Rate Advance or a Eurodollar Rate
Advance under Facility B that, from and after November 1, 1999, is
converted into an Advance bearing interest at the Negotiated Rate as
provided in Section 2.6(d)
5. Section 2.1(b) of the Agreement is hereby amended to read in its
entirety as follows:
(b) FACILITY B ADVANCES. Subject to the terms and conditions herein,
the Lender agrees to make Facility B Advances to O.S.I. Puerto Rico, from time
to time on any Business Day from the Closing Date through October 31, 1999, in
an aggregate principal amount outstanding at any time not to exceed the
Facility B Amount, as such Facility B Amount may be reduced from time to time
in accordance with the provisions of this Agreement. Notwithstanding the
preceding sentence or any other provision hereof to the contrary, O.S.I. Puerto
Rico may not request, and the Bank shall have no obligation to make, Negotiated
Rate Advances prior to November 1, 1999. From and after November 1, 1999,
subject to the terms and conditions hereof, O.S.I. Puerto Rico may
2
<PAGE> 4
request that outstanding Base Rate Advances and outstanding Eurodollar Rate
Advances under Facility B be converted into Negotiated Rate Advances
pursuant to Section 2.8 of this Agreement. Facility B Advances which are
repaid or prepaid by O.S.I. Puerto Rico may not be reborrowed.
6. Section 2.5(b) of the Agreement is hereby amended to read in its
entirety as follows:
(b) FACILITY B. The Facility B Advances shall be repaid to the Lender
in consecutive principal installments of $250,000 (or such lesser amount as
is then outstanding with respect to Facility B), which shall be payable on
the last day of each January, April, July and October, with the first such
installment to be paid on January 31, 2000, and the last such installment
to be paid on April 30, 2005, at which time the entire unpaid principal and
accrued but unpaid interest with respect to the Facility B Advances shall
be due and payable in full.
7. Section 2.5(c) of the Agreement is hereby amended to read in its
entirety as follows:
(c) MATURITY. Facility A shall terminate on the Facility A Maturity
Date at which time all outstanding amounts under this Agreement shall be
due and payable. Facility B shall terminate on April 30, 2005 at which time
the Facility B Advances and any accrued but unpaid interest thereon shall
be due and payable.
8. Section 2.6(d) of the Agreement is hereby amended to read in its
entirety as follows:
(d) NEGOTIATED RATE ADVANCES. Whenever such Advance is a Negotiated
Rate Advance under Facility B, a rate per annum equal on each day during
the Interest Period for such Negotiated Rate Advance to the sum of the
Negotiated Rate for such Interest Period determined for such day plus the
Applicable Amount attributable to Negotiated Rate Advances, with all
interest so accrued payable quarterly in arrears on the last day of each
January, April, July and October, commencing January 31, 2000 and on such
other date that the Facility B Advances are repaid, or required to be
repaid, in full.
3
<PAGE> 5
9. Section 4.1 of the Agreement is hereby amended to add a new paragraph
(u), in proper alphabetical sequence, which reads in its entirety as follows:
(u) YEAR 2000 COMPLIANCE. Each Borrower and their Subsidiaries
have assessed their management information systems and believe that
they are relatively free of "year 2000 issues" (that is, the risk that
computer applications used by any Person may be unable to recognize
and perform properly date-sensitive functions involving certain dates
prior to and any dates after December 31, 1999) and that costs to be
incurred to address such issues will not have a significant impact on
the business, results of operations, cash flows and financial
condition of any Loan Party.
10. Each Borrower hereby certifies to the Lender that (a) it has all
requisite corporate power and authority to enter into this Amendment and to
carry out the transactions contemplated by, and perform its obligations under,
the Agreement as amended by this Amendment, (b) the execution, delivery and
performance of this Amendment have been duly authorized by all necessary
corporate action on the part of each Borrower, (c) the representations and
warranties contained in the Agreement and in the other Loan Documents are true
and correct in all material respects on and as of the date of this Amendment,
and (d) no Event of Default or Potential Default has occurred and is
continuing.
11. Except as specifically amended pursuant to the foregoing paragraphs
of this Amendment, the Agreement and the other Loan Documents shall remain in
full force and effect and are hereby ratified and confirmed in all respects.
Nothing herein shall be deemed to relieve or diminish the obligations of Ocular
Sciences or O.S.I. Puerto Rico under the Loan Documents.
12. The Borrowers agree to reimburse the Lender for all reasonable costs
and expenses incurred by it in connection with this Amendment, including the
reasonable fees and expenses of the Lender's counsel with respect thereto.
13. This Amendment shall become effective when the Lender shall have
received (a) a duly executed original of this Amendment, (b) a Consent of
Guarantor duly executed by Ocular Sciences in the form attached hereto, and (c)
a Consent of Guarantor duly executed by O.S.I. Puerto Rico in the form attached
hereto.
14. This Amendment may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which when so
executed shall be deemed to be an original and all of which taken together
shall constitute one and the same instrument.
4
<PAGE> 6
15. This Amendment and the Agreement constitute the entire agreement and
understanding among the parties hereto and supersede any and all prior
agreements and understandings, oral or written, relating to the subject matter
hereof.
16. This Amendment shall be governed by, and construed and enforced in
accordance with, the internal laws of the State of California without regard to
conflicts of laws principles.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers as of the date first above written.
OCULAR SCIENCES, INC.
By: /s/ GREGORY E. LICHTWARDT
-------------------------------------
Name: Gregory E. Lichtwardt
Title: Vice President, Finance
and Chief Financial Officer
OCULAR SCIENCES PUERTO RICO, INC.
By: /s/ GREGORY E. LICHTWARDT
-------------------------------------
Name: Gregory E. Lichtwardt
Title: Secretary
COMERICA BANK-CALIFORNIA
By: /s/ LORI EDWARDS
-------------------------------------
Name: Lori S. Edwards
Title: Senior Vice President
5
<PAGE> 7
CONSENT OF GUARANTOR
The undersigned, as a guarantor under that certain Parent Guaranty dated
as of November 7, 1997 (the "Parent Guaranty") executed in favor of COMERICA
BANK-CALIFORNIA, a California chartered bank (the "Lender"), with respect to
the obligations of OCULAR SCIENCES PUERTO RICO, INC., a Delaware corporation,
owing to the Lender, hereby acknowledges notice of the foregoing Amendment
Number Two to Amended and Restated Credit Agreement dated as of April 27, 1999,
consents to the terms contained therein, and agrees that the Parent Guaranty
shall remain in full force and effect, without defense, offset or counterclaim.
OCULAR SCIENCES, INC.
By: /s/ GREGORY E. LICHTWARDT
---------------------------------
Name: Gregory E. Lichtwardt
Title: Vice President, Finance
and Chief Financial Officer
6
<PAGE> 8
CONSENT OF GUARANTOR
The undersigned, as a guarantor under that certain Amended and Restated
Subsidiary Guaranty dated as of November 7, 1997 (the "Subsidiary Guaranty")
executed in favor of COMERICA BANK-CALIFORNIA, a California chartered bank (the
"Lender"), with respect to the obligations of OCULAR SCIENCES, INC., a Delaware
corporation, owing to the Lender, hereby acknowledges notice of the foregoing
Amendment Number Two to Amended and Restated Credit Agreement dated as of April
27, 1999, consents to the terms contained therein, and agrees that the
Subsidiary Guaranty shall remain in full force and effect, without defense,
offset or counterclaim.
OCULAR SCIENCES PUERTO RICO, INC.
By: /s/ GREGORY E. LICHTWARDT
--------------------------------
Name: Gregory E. Lichtwardt
Title: Secretary
7
<PAGE> 1
Exhibit 5.02
Amendment Number Three to Amended and Restated Credit Agreement among
Ocular Sciences, Inc., Ocular Sciences Puerto Rico, Inc. and Comerica Bank -
California, dated June 28, 1999
<PAGE> 2
AMENDMENT NUMBER THREE TO AMENDED AND RESTATED CREDIT AGREEMENT
This AMENDMENT NUMBER THREE TO AMENDED AND RESTATED CREDIT AGREEMENT
(this "Amendment") dated as of June 28, 1999 is entered into by and between
OCULAR SCIENCES, INC., a Delaware corporation ("Ocular Sciences"), and OCULAR
SCIENCES PUERTO RICO, INC., a Delaware corporation ("O.S.I. Puerto Rico"), and
COMERICA BANK-CALIFORNIA, a California chartered bank (the "Lender").
RECITALS
A. Ocular Sciences and O.S.I. Puerto Rico (each individually, a
"Borrower", and collectively, the "Borrowers") and the Lender are parties to a
certain Amended and Restated Credit Agreement dated as of November 7, 1997, as
amended by Amendment Number One to Amended and Restated Credit Agreement dated
as of August 5, 1998 and Amendment Number Two to Amended and Restated Credit
Agreement dated as of April 27, 1999 (as so amended, the "Agreement").
B. The Borrowers have requested that the Lender amend the Agreement in
certain respects.
C. The Lender is willing so to amend the Agreement upon the terms and
subject to the conditions set forth below.
AGREEMENT
NOW, THEREFORE, in consideration of the above recitals and for other good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties hereto agree as follows:
1. Capitalized terms used in this Amendment and not otherwise defined
shall have the respective meanings set forth in the Agreement.
2. The definition of "Cash Flow" set forth in Section 1.1 of the
Agreement is hereby amended to read in its entirety as follows:
CASH FLOW means, for any period, an amount determined as (i)
Consolidated Net Income for such period, PLUS (ii) to the extent deducted
in determining Consolidated Net Income and without duplication, the sum
of (A) all charges for Consolidated Interest Expense,
<PAGE> 3
depreciation and amortization for such period, PLUS (B) all non-cash
charges required by GAAP relating to dispositions of property, plant and
equipment for such period, MINUS (iii) preferred stock dividends paid or
payable by Ocular Sciences or any of its consolidated Subsidiaries during
such period, all computed and calculated in accordance with GAAP.
3. Section 5.1(b) of the Agreement is hereby amended to read in its
entirety as follows:
(b) MINIMUM FIXED CHARGE COVERAGE RATIO. Neither of the Borrowers
will cause, permit or suffer the Fixed Charge Coverage Ratio as of
each Fiscal Quarter End Date to be less than 2.00 to 1.00.
4. Section 5.1(c) of the Agreement is hereby amended to read in its
entirety as follows:
(c) MINIMUM QUICK RATIO. Neither of the Borrowers will cause, permit
or suffer the Quick Ratio as of each Fiscal Quarter End Date to be less
than 1.50 to 1.00.
5. Each Borrower hereby certifies to the Lender that (a) it has all
requisite corporate power and authority to enter into this Amendment and to
carry out the transactions contemplated by, and perform its obligations under,
the Agreement as amended by this Amendment, (b) the execution, delivery and
performance of this Amendment have been duly authorized by all necessary
corporate action on the part of each Borrower, (c) the representations and
warranties contained in the Agreement and in the other Loan Documents are true
and correct in all material respects on and as of the date of this Amendment,
and (d) no Event of Default or Potential Default has occurred and is continuing.
6. Except as specifically amended pursuant to the foregoing paragraphs of
this Amendment, the Agreement and the other Loan Documents shall remain in full
force and effect and are hereby ratified and confirmed in all respects.
7. This Amendment shall become effective when the Lender shall have
received (a) a duly executed original of this Amendment, (b) a Consent of
Guarantor duly executed by Ocular Sciences in the form attached hereto, and (c)
a Consent of Guarantor duly executed by O.S.I. Puerto Rico in the form attached
hereto.
8. This Amendment may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which when so
executed shall be deemed to be an original and all of which taken together
shall constitute one and the same instrument.
2
<PAGE> 4
9. This Amendment and the Agreement constitute the entire agreement
and understanding among the parties hereto and supersede any and all prior
agreements and understandings, oral or written, relating to the subject matter
hereof.
10. This Amendment shall be governed by, and construed and enforced in
accordance with, the internal laws of the State of California without regard to
conflicts of laws principles.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers as of the date first above written.
OCULAR SCIENCES, INC.
By: /s/ GREGORY E. LICHTWARDT
------------------------------------
Name: Gregory E. Lichtwardt
Title: Vice President, Finance
and Chief Financial Officer
OCULAR SCIENCES PUERTO RICO, INC.
By: /s/ GREGORY E. LICHTWARDT
------------------------------------
Name: Gregory E. Lichtwardt
Title: Secretary
COMERICA BANK-CALIFORNIA
By: /s/ LORI S. EDWARDS
------------------------------------
Name: Lori S. Edwards
Title: Senior Vice President
3
<PAGE> 5
CONSENT OF GUARANTOR
The undersigned, as a guarantor under that certain Parent Guaranty dated as
of November 7, 1997 (the "Parent Guaranty") executed in favor of COMERICA
BANK-CALIFORNIA, a California chartered bank (the "Lender"), with respect to
the obligations of OCULAR SCIENCES PUERTO RICO, INC., a Delaware corporation,
owing to the Lender, hereby acknowledges notice of the foregoing Amendment
Number Three to Amended and Restated Credit Agreement dated as of June 28,
1999, consents to the terms contained therein, and agrees that the Parent
Guaranty shall remain in full force and effect, without defense, offset or
counterclaim.
OCULAR SCIENCES, INC.
By: /s/ GREGORY E. LICHTWARDT
-----------------------------------
Name: Gregory E. Lichtwardt
Title: Vice President, Finance
and Chief Financial Officer
4
<PAGE> 6
CONSENT OF GUARANTOR
The undersigned, as a guarantor under that certain Amended and Restated
Subsidiary Guaranty dated as of November 7, 1997 (the "Subsidiary Guaranty")
executed in favor of COMERICA BANK-CALIFORNIA, a California chartered bank (the
"Lender"), with respect to the obligations of OCULAR SCIENCES, INC., a Delaware
corporation, owing to the Lender, hereby acknowledges notice of the foregoing
Amendment Number Three to Amended and Restated Credit Agreement dated as of
June 28, 1999, consents to the terms contained therein, and agrees that the
Subsidiary Guaranty shall remain in full force and effect, without defense,
offset or counterclaim.
OCULAR SCIENCES PUERTO RICO, INC.
By: /s/ GREGORY E. LICHTWARDT
-----------------------------------
Name: Gregory E. Lichtwardt
Title: Secretary
5
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 18,780
<SECURITIES> 19,329
<RECEIVABLES> 28,846
<ALLOWANCES> 1,799
<INVENTORY> 13,834
<CURRENT-ASSETS> 95,254
<PP&E> 105,264
<DEPRECIATION> 21,208
<TOTAL-ASSETS> 200,294
<CURRENT-LIABILITIES> 28,859
<BONDS> 0
0
0
<COMMON> 23
<OTHER-SE> 162,846
<TOTAL-LIABILITY-AND-EQUITY> 200,294
<SALES> 80,928
<TOTAL-REVENUES> 80,928
<CGS> 28,327
<TOTAL-COSTS> 32,157
<OTHER-EXPENSES> 206
<LOSS-PROVISION> 46
<INTEREST-EXPENSE> 139
<INCOME-PRETAX> 21,205
<INCOME-TAX> 5,236
<INCOME-CONTINUING> 15,969
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,969
<EPS-BASIC> 0.70<F1>
<EPS-DILUTED> 0.68
<FN>
<F1>FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC
</FN>
</TABLE>
