<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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 October 22, 1999 there were 22,916,331 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 -
September 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Income -
Three and Nine Months Ended September 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 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 21
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 22
SIGNATURES 23
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
OCULAR SCIENCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------- ---------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 15,684 $ 26,520
Restricted cash 434 486
Short-term investments 27,500 19,036
Accounts receivable, less allowance for sales returns and doubtful
accounts of $ 1,981 and $ 2,085 for 1999 and 1998, respectively 31,385 25,126
Inventories 14,224 12,460
Deferred income taxes 4,092 4,638
Loans to officers and employees 150 263
Prepaid expenses and other current assets 7,883 6,495
--------- ---------
Total Current Assets 101,352 95,024
Property and equipment, net 92,687 62,966
Intangible assets, net 7,834 7,216
Long-term investments 9,605 11,207
Other assets 163 157
--------- ---------
Total Assets $ 211,641 $ 176,570
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 5,750 $ 6,003
Accrued liabilities 13,085 10,512
Accrued cooperative merchandise allowances 7,120 5,854
Current portion of long-term debt 1,206 929
Deferred income taxes 739 --
Income and other taxes payable 3,628 1,148
--------- ---------
Total Current Liabilities 31,528 24,446
Deferred income taxes 4,420 6,640
Long-term debt, less current portion 1,962 2,535
--------- ---------
Total Liabilities 37,910 33,621
Stockholders' Equity:
Common stock, $0.001 par value; 80,000,000 shares
authorized; 22,916,331 and 22,588,118 shares
issued and outstanding for 1999 and 1998, respectively 23 23
Additional paid-in capital 81,164 76,741
Retained earnings 93,120 66,727
Accumulated other comprehensive income (576) (542)
--------- ---------
Total Stockholders' Equity 173,731 142,949
--------- ---------
Total Liabilities and Stockholders' Equity $ 211,641 $ 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 Nine months ended
September 30, September 30,
----------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 49,475 $ 41,701 $ 130,402 $ 111,891
Cost of sales 17,921 13,053 46,247 34,879
------------ ------------ ------------ ------------
Gross profit 31,554 28,648 84,155 77,012
Selling and marketing expenses 12,139 11,124 32,758 30,370
General and administrative expenses 5,391 5,057 15,511 14,602
Research and development expenses 1,223 386 2,641 1,847
------------ ------------ ------------ ------------
Income from operations 12,801 12,081 33,245 30,193
Interest expense (74) (76) (213) (240)
Interest income 608 827 1,714 2,092
Other income (expense) 202 (225) (4) (532)
------------ ------------ ------------ ------------
Income before taxes 13,537 12,607 34,742 31,513
Income taxes (3,113) (3,782) (8,349) (9,454)
------------ ------------ ------------ ------------
Net income $ 10,424 $ 8,825 $ 26,393 $ 22,059
============ ============ ============ ============
Net income per share data:
Net income per share (basic) $ 0.45 $ 0.39 $ 1.16 $ 0.99
============ ============ ============ ============
Net income per share (diluted) $ 0.45 $ 0.38 $ 1.13 $ 0.95
============ ============ ============ ============
Weighted average common
shares outstanding 22,933,623 22,413,359 22,790,938 22,213,744
Weighted average shares of stock
options under the treasury
stock method 420,621 891,136 642,855 1,098,200
------------ ------------ ------------ ------------
Total weighted average common
and dilutive potential common
shares outstanding 23,354,244 23,304,495 23,433,793 23,311,944
============ ============ ============ ============
</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>
Nine months ended September 30,
-------------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 26,393 $ 22,059
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 5,880 4,366
Income tax benefits from stock options exercised 1,848 --
Allowances for sales returns and doubtful accounts 170 922
Provision for excess and obsolete inventory 745 823
Provision for damaged and scrap products 576 567
Provision for property and equipment -- 586
Exchange (gain) loss (39) 384
Deferred income taxes (936) (156)
Changes in operating assets and liabilities:
Accounts receivable (6,233) (3,420)
Inventories (2,904) (409)
Other current and non-current assets (1,409) 567
Accounts payable (772) 1,463
Accrued liabilities 3,587 2,204
Income and other taxes payable 2,503 4,134
-------- --------
Net cash provided by operating activities 29,409 34,090
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (34,477) (20,717)
Purchase of available-for-sale short-term and long-term
Investments (26,756) (23,993)
Sales and maturities of available-for-sale short-term
and long-term investments 19,510 14,274
Payment for Australian Acquisition, net of cash acquired (497) --
Payments from (deposits to) restricted cash 47 (10)
-------- --------
Net cash used in investing activities (42,173) (30,446)
-------- --------
Cash flows from financing activities:
Repayment of long-term debt (295) (288)
Proceeds from secondary public offering of common stock, net -- 133
Proceeds from stock options exercised 2,208 1,378
-------- --------
Net cash provided by financing activities 1,913 1,223
-------- --------
Effect of exchange rate changes on cash and cash equivalents 15 (373)
-------- --------
Net (decrease) increase in cash and cash
equivalents (10,836) 4,494
Cash and cash equivalents at beginning of period 26,520 27,895
-------- --------
Cash and cash equivalents at end of period $ 15,684 $ 32,389
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
OCULAR SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
September 30, 1999 and the results of its operations for the three and nine
month periods ended September 30, 1999 and 1998 and its cash flows for the nine
month periods ended September 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 nine month periods ended September 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>
September 30, December 31,
1999 1998
------- -------
<S> <C> <C>
Raw materials $ 2,464 $ 2,867
Work in process 1,825 1,252
Finished goods 9,935 8,341
------- -------
$14,224 $12,460
======= =======
</TABLE>
NOTE 3 - ACCUMULATED OTHER COMPREHENSIVE INCOME
Total comprehensive income for the three months ended September 30,
1999 is $10,444,000, compared with $8,888,000 for the same period a year ago.
The total comprehensive income for the nine months ended September 30, 1999 is
$26,359,000, compared with $22,128,000 for the same period a year ago. Total
comprehensive income includes net income, foreign currency translation
adjustment and net unrealized gains and losses on investments.
NOTE 4 - BANK LINE OF CREDIT
In the second quarter of 1999, two amendments were made to the credit
agreement in order to extend the maturity date of the revolving line of credit
by one year to June 30, 2001 and to lower the ratio requirements on limitations
of interest to certain defined assets and current assets to current liabilities.
On October 14, 1999, the Company amended its credit agreement (the
"Amended Credit Agreement"). Under the Amended Credit Agreement, the conversion
date of the Ocular Sciences Puerto Rico term loan was extended from October 31,
1999 to April 30,
6
<PAGE> 7
2000. The term loan facility's negotiated rate option is available only after
May 1, 2000. On May 1, 2000, the then outstanding term loan will become payable
in eighteen quarterly installments of $300,000, beginning July 31, 2000, with
any balance to be paid on October 31, 2004.
NOTE 5 - ACQUISITIONS
On July 1, and August 2, 1999, the Company completed the acquisitions
of two companies in Australia. Both Companies are contact lens distributors
selling to Australian and New Zealand 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. The additional payments, if any, will be accounted for as additional
goodwill. The Company paid approximately U.S. $497,000 in connection with both
of these acquisitions at closing. Additionally, 30,000 stock options were issued
in connection with these acquisitions and were valued at approximately $365,000
using the Black-Scholes option-pricing model. These options will vest over five
years. Both purchases were and will be funded with existing cash and cash
equivalents.
The Company has accounted for the acquisitions under the purchase
method of accounting and accordingly the operating results of both companies are
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 is allocated to goodwill and will be amortized on a
straight-line basis over 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 and often depend on assumptions, data or methods
that may be incorrect or imprecise. 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, competition, manufacturing capacity expansion and
automation, trade practice litigation, fluctuations in operating results,
international operations, the management of growth, new products and
technological change, and the other risks detailed in the Company's Form 10-K
for the year ended December 31, 1998, and other reports filed with the
Securities and Exchange Commission. 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
Overview
The Company is maintaining its worldwide strategy to market
high-quality contact lenses at competitive prices using a low cost-to-serve
operating structure. The contact lens industry and the Company's business are
characterized by increasing unit sales and declining average selling prices,
resulting primarily from a world-wide shift in demand from lenses marketed for
annual replacement regimens to lenses marketed for disposable replacement
regimens. According to an industry research firm, unit volumes in the U.S.
weekly disposable market grew 5.1% in the third quarter of 1999 as compared to
10.5% in the second quarter of 1999 and low single digit growth in the previous
four quarters. The second quarter growth was substantially caused by the
introduction of the Acuvue 2 lens by the market share leader, the Vistakon
division of Johnson and Johnson, and the resulting shipments of trial sets and
consumer advertising. *The Company also has plans to launch new products into
this market during the fourth quarter of 1999, including a UV inhibited lens and
a new weekly disposable lens for the private practitioner segment. International
growth rates continue in excess of the U.S. market, spurred primarily by demand
in Japan and Europe for lenses marketed for daily disposability.
8
<PAGE> 9
Net Sales
<TABLE>
<CAPTION>
Three Months Ended September 30,
------------------------------
1999 1998 % Change
------------ ------------ ----
<S> <C> <C> <C>
U.S. $ 36,245,000 $ 33,164,000 9.3%
As a percentage of net sales 73.3% 79.5%
International $ 13,230,000 $ 8,537,000 55.0%
As a percentage of net sales 26.7% 20.5%
------------ ------------ ----
Net sales $ 49,475,000 $ 41,701,000 18.6%
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------
1999 1998 % Change
------------ ------------ ----
<S> <C> <C> <C>
U.S. $ 96,238,000 $ 88,836,000 8.3%
As a percentage of net sales 73.8% 79.4%
International $ 34,164,000 $ 23,055,000 48.2%
As a percentage of net sales 26.2% 20.6%
------------ ------------ ----
Net sales $130,402,000 $111,891,000 16.5%
</TABLE>
The majority of the Company's net sales are derived from the sale of
lenses marketed for disposable replacement (defined as lenses marketed for
monthly, weekly and daily disposable regimen) regimens. In the three and
nine-month periods ended September 30, 1999, the sale of the Company's lenses
marketed for disposable replacement regimens represented 96.6% and 96.1% of its
total unit volume compared to 93.5% and 92.6%, respectively, for the three and
nine-month periods ended September 30, 1998. The growth in net sales from the
quarter and nine months ended September 30, 1998 to the quarter and nine months
ended September 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. The Company is currently experiencing backorders on certain of its
products which has been caused by the delay in the automated production lines.
See "Risk Factors - Manufacturing Capacity Constraints; Risks Associated with
Expansion and Automation of Manufacturing Operations."
The Company's overall average selling price decreased 24.1% and 24.0%
from the quarter and nine months ended September 30, 1998 to the quarter and
nine months ended September 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 because of (i)
shifts in the Company's product mix from lenses marketed for annual replacement
regimens to lenses marketed for disposable replacement regimens, particularly
lenses marketed for daily disposal, and (ii) increases in products sold
internationally to distributors at prices lower than direct sales prices in the
U.S.
9
<PAGE> 10
Gross Profit
<TABLE>
<CAPTION>
Three Months Ended September 30,
-------------------------------
1999 1998 % Change
------------- ------------- --------
<S> <C> <C> <C>
Gross profit $ 31,554,000 $ 28,648,000 10.1%
As a percentage of net sales 63.8% 68.7%
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 1998 % Change
------------- ------------- --------
<S> <C> <C> <C>
Gross profit $ 84,155,000 $ 77,012,000 9.3%
As a percentage of net sales 64.5% 68.8%
</TABLE>
The dollar increase in gross profit from the quarter and nine months
ended September 30, 1998 to the quarter and nine months ended September 30, 1999
was due primarily to increased net sales. Gross profit as a percentage of sales
in the three and nine months ended September 30, 1999 decreased from the
comparable periods in 1998 due to reductions to the Company's average selling
prices, as discussed in "Net Sales", which were partially offset by lower
production costs resulting from the implementation of certain process
improvements and increases in manufacturing volume. *As the Company expects that
its overall average selling price will continue to decline over time due to
product and geographic mix shift, as discussed above in "Net Sales", 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 is in the process of
adding new, automated production lines at its United Kingdom and Puerto Rico
facilities, which are designed to significantly reduce its per unit cost of
production over time. *However, the Company expects that the initial production
volume from these automated lines will be somewhat limited, and that the full
reduction in production cost per unit will not be achieved until these automated
lines have been operating 12 to 15 months from FDA validation. *The first of the
Company's automated lines is expected to be validated by December 31, 1999. *As
a result, the Company believes that the decline in average selling price in the
near term will exceed the rate of decline in production cost and accordingly,
the Company would expect its gross profit margin percentage to decrease in the
short term, as sales of lower average selling price lenses marketed for daily
replacement regimens increase.
Selling and Marketing Expenses
<TABLE>
<CAPTION>
Three Months Ended September 30,
-------------------------------
1999 1998 % Change
------------- ------------- ---
<S> <C> <C> <C>
Selling and marketing expenses $ 12,139,000 $ 11,124,000 9.1%
As a percentage of net sales 24.5% 26.7%
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------
1999 1998 % Change
------------- ------------- ---
<S> <C> <C> <C>
Selling and marketing expenses $ 32,758,000 $ 30,370,000 7.9%
As a percentage of net sales 25.1% 27.1%
</TABLE>
Selling and marketing expenses are comprised primarily of cooperative
merchandising allowances, sample diagnostic products provided to eyecare
practitioners without charge, salaries, commissions and benefits for selling and
marketing personnel and postage and freight charges not billed to customers.
Cooperative merchandising allowances
10
<PAGE> 11
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 nine months ended September 30, 1998 to the quarter and nine
months ended September 30, 1999 resulted primarily from increases in
expenditures related to cooperative merchandising allowances, 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 diagnostic expenditures. The
decrease in selling and marketing expenses as a percentage of net sales is due
to a reduction in the amount of cooperative merchandising allowances paid on a
per unit basis. *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 September 30,
-------------------------------
1999 1998 % Change
------------- ------------- --------
<S> <C> <C> <C>
General and administrative expenses $ 5,391,000 $ 5,057,000 6.6%
As a percentage of net sales 10.9% 12.1%
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 1998 % Change
------------- ------------- --------
<S> <C> <C> <C>
General and administrative expenses $ 15,511,000 $ 14,602,000 6.2%
As a percentage of net sales 11.9% 13.1%
</TABLE>
General and administrative expenses are comprised primarily of salaries
and benefits for distribution, general and administrative, professional
services, consultants' fees, and non-manufacturing facilities costs. The dollar
increase was due primarily to general and administrative expenses related to the
new Australian subsidiary acquired in July 1999, additional infrastructure
related to the U.K. distribution facility and implementation of the Company's
new operating structure in the first quarter of 1999. Additionally, included in
the expense for the nine months ended September 30, 1998 is a charge of $586,000
related to a custom-built packaging machine which failed factory acceptance
tests and Company specifications. *The Company believes that as net sales grow,
its general and administrative expenses will increase in absolute dollars, but
decrease as a percentage of net sales.
11
<PAGE> 12
Research and Development Expenses
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1999 1998 % Change
------------ ------------ -----
<S> <C> <C> <C>
Research and development expenses $ 1,223,000 $ 386,000 216.8%
As a percentage of net sales 2.5% 0.9%
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 1998 % Change
------------ ------------ -----
<S> <C> <C> <C>
Research and development expenses $ 2,641,000 $ 1,847,000 43.0%
As a percentage of net sales 2.0% 1.7%
</TABLE>
Research and development expenses are comprised primarily of consulting
costs for research and development personnel and in-house labor related to
manufacturing process and new product development. The increase from the quarter
and nine months ended September 30, 1998 to the quarter and nine months ended
September 30, 1999 in dollars, was primarily due to expenditures related to
activities in connection with new product development and the hiring of the new
Vice President of Research and Development in accordance with the Company's
initiative to invest in new product development. *The Company does not believe
that the change in research and development expense from the quarter and nine
months ended September 30, 1998 to the quarter and nine months ended September
30, 1999 is indicative of the Company's long-term research and development
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 (Expense), Net
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1999 1998 % Change
---------- ---------- ----
<S> <C> <C> <C>
Interest and other income (expense), net $ 736,000 $ 526,000 39.9%
As a percentage of net sales 1.5% 1.3%
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1999 1998 % Change
---------- ---------- ----
<S> <C> <C> <C>
Interest and other income (expense), net $1,497,000 $1,320,000 13.4%
As a percentage of net sales 1.1% 1.2%
</TABLE>
The increase in the dollar amount of interest and other income, net from
the quarter and nine months ended September 30, 1998 to the quarter and nine
months ended September 30, 1999 resulted primarily from increase in foreign
currency exchange gains, partially offset by a reduction in interest income due
to lower interest rates on lower invested balances.
12
<PAGE> 13
Income Taxes
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
1999 1998 % Change
------------ ------------ --------
<S> <C> <C> <C>
Income taxes $ 3,113,000 $ 3,782,000 -17.7%
Effective tax rate 23.0% 30.0%
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------
1999 1998 % Change
------------ ------------ --------
<S> <C> <C> <C>
Income taxes $ 8,349,000 $ 9,454,000 -11.7%
Effective tax rate 24.0% 30.0%
</TABLE>
The Company's lower effective tax rate for the quarter and nine months
ended September 30, 1999 was primarily a result of the implementation of a new
operating structure in March of 1999, which increased the Company's foreign
earnings that are taxed at lower tax rates, and other tax strategies.
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.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had a cash and cash equivalents
balance of $15.7 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 slightly from
$70.6 million at December 31, 1998 to $69.8 million at September 30, 1999. The
Company had $37.1 million in short-term and long-term investments as of
September 30, 1999, compared to $30.2 million as of December 31, 1998.
In the first nine months of 1999, net cash provided by operating
activities of $29.4 million, was derived principally from net income of $26.4
million, adjusted primarily for depreciation and amortization of $5.9 million,
income tax benefits from stock options exercised of $1.8 million, offset by net
increases in current asset accounts, accrued liabilities and income taxes.
Net cash used in investing activities in the first nine months of 1999
was $42.2 million. During this period, the Company used $34.5 million to
purchase property and equipment, and $7.2 million for net purchases of
short-term and long-term investments. *The Company anticipates that capital
expenditures will be approximately $17 and $40 million, for the remainder of
1999 and for the 12 months ended December 31, 2000, respectively, 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.
Net cash provided by financing activities in the first nine months of
1999 was $1.9 million, an increase of $690,000 from the comparable period in
1998, due primarily to the increase in proceeds from stock option exercises in
the first nine months of 1999 as compared to the first nine months of 1998.
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
13
<PAGE> 14
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 September 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 October 14, 1999, the Company amended this
credit agreement whereby the conversion date of the Ocular Sciences Puerto Rico
term loan was extended to April 30, 2000. The term loan facility's negotiated
rate option is available only after May 1, 2000. On May 1, 2000, the then
outstanding term loan will become payable in eighteen quarterly installments of
$300,000, beginning July 31, 2000, with any balance to be paid on October 31,
2004 (see note 5 to the Condensed Consolidated Financial Statements.) 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: business information control systems used by the Company
to manufacture and deliver products and services to its customers and manage is
business; the internal systems of the Company's customers and suppliers; and
non-information technology systems and services used by the Company in the
management of its business, such as telephone systems and building systems.
The Company has successfully completed its conversion to a new business
information control system at all but its Canadian subsidiary. In addition to
providing enhanced systems applications, this new global business information
control system will function properly with respect to dates in the Year 2000 and
thereafter. *The Company anticipates that the final implementation at its
Canadian subsidiary, will be completed by December 1, 1999.
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<PAGE> 15
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.
At present, the Company has completed an inventory of all information
technology ("IT") and non-IT systems and believes that correction and testing of
all significant IT and non-IT systems is substantially complete. *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. *Continued monitoring of systems and equipment will
occur throughout the remainder of 1999.
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 believes that its internal operating systems will be Year
2000 compliant before December 31, 1999. *Therefore, the Company believes that
the most reasonably likely worst-case scenario will be that one or more of third
parties with which the Company has a material business relationship will not
have successfully dealt with its Year 2000 issues. *A critical third party
failure (such as telecommunication, utilities or financial institutions) could
have a material adverse affect on the Company by adversely affecting the
Company's ability to manufacture and distribute its products, order and pay for
production materials from suppliers and receive orders and payments from
customers. *Additionally, Year 2000 problems at customers may result in reduced
purchasing by such customers. *It is also possible that one or more of the
Company's internal operating systems will not function properly and make it
difficult to complete routine tasks, such as accounting and other record keeping
duties. *Based on information currently available, the Company does not believe
that it will 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.
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<PAGE> 16
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 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
16
<PAGE> 17
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, or in certain cases at,
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 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. These delays have caused the Company difficulties in meeting customer
demand in certain of its products and delay of the introduction of new products.
Further delays may increase the Company's level of backorders and impact the
Company's ability to meet revenue projections. 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 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
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<PAGE> 18
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
fourth quarter 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 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
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<PAGE> 19
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 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 third 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
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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
third quarter and nine-months ended September 30, 1999, the Company had an
exchange gain of $224,000 and $39,000, respectively, 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 into
its overall operations and to continue to improve its operational, financial and
management information systems.
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: business information control systems used by the Company
to manufacture and deliver products and services to its customers and manage is
business; the internal systems of the Company's customers and suppliers; and
non-information technology systems and services used by the Company in the
management of its business, such as telephone systems and building systems.
The Company has successfully completed its conversion to a new business
information control system at all but its Canadian subsidiary. In addition to
providing enhanced systems applications, this new global business information
control system will function properly with respect to dates in the Year 2000 and
thereafter. The Company anticipates that the final implementation at its
Canadian subsidiary, will be completed by December 1, 1999. However, the Company
could experience unanticipated delays in the implementation of the remaining
system in Canada, which could cause significant disruption in that subsidiary's
operation and have an adverse impact on the Company's ability to access timely
and accurate consolidated financial and operating information.
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
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<PAGE> 21
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.
At present, the Company has completed an inventory of all IT and non-IT
systems and believes that correction and testing of all significant IT and
non-IT systems is substantially complete. However, there can be no assurance
that the Company has identified all of the potential problem areas related to
the Year 2000 issue and that failure to do so may have an adverse effect on the
Company. See "-- Management's Discussion and Analysis of Financial Condition and
Results of Operation - Year 2000."
Risk of New Products and Technological Change. The Company does not
allocate substantial resources to new product development and has historically
leveraged or licensed the technology developments of others. The Company
believes that many of its competitors have invested, and will continue to
invest, substantial amounts in developing new products and technologies, and
there can be no assurance that the Company's competitors do not have or will not
develop new products and technologies that could render the Company's products
less competitive. For example, Bausch & Lomb has received FDA approval to market
a contact lens based on a new polymer for seven day continuous wear, and it has
been reported that it will seek approval for longer continuous wear. It has also
been reported that Ciba is developing a similar lens. Additionally, certain of
the Company's competitors have or are believed to be developing a toric lens
marketed for weekly disposal. There can be no assurance that the Company will be
able to develop its own technology or utilize technology developed by third
parties in order to 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.
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.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed herewith:
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
- ------- -------------
<S> <C>
5.01 - Amendment Number Four to Amended and Restated Credit Agreement among
Ocular Sciences, Inc., Ocular Sciences Puerto Rico, Inc. and Comerica Bank -
California, dated October 14, 1999
5.02 - Inter-Company Loan Agreement among Ocular Sciences, Inc., and Precision Lens
Manufacturing and Technology, Inc., dated March 1, 1999
21.01 - List of Subsidiaries
27.01 - Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
The Company did not file a report on Form 8-K during the quarter ended September
30, 1999.
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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: November 15, 1999 /s/ Gregory E. Lichtwardt
-----------------------------------
Gregory E. Lichtwardt
Vice President, Finance,
Chief Financial Officer, and Treasurer
(Duly Authorized Officer and Chief
Accounting Officer)
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
- ------- -------------
<S> <C>
5.01 - Amendment Number Four to Amended and Restated Credit Agreement among
Ocular Sciences, Inc., Ocular Sciences Puerto Rico, Inc. and Comerica Bank -
California, dated October 14, 1999
5.02 - Inter-Company Loan Agreement among Ocular Sciences, Inc., and Precision Lens
Manufacturing and Technology, Inc., dated March 1, 1999
21.01 - List of Subsidiaries
27.01 - Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 5.01
AMENDMENT NUMBER FOUR TO AMENDED AND RESTATED CREDIT AGREEMENT
This AMENDMENT NUMBER FOUR TO AMENDED AND RESTATED CREDIT AGREEMENT (this
"Amendment") dated as of October 14, 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, Amendment Number Two to Amended and Restated Credit Agreement
dated as of April 27, 1999, and Amendment Number Three to Amended and Restated
Credit Agreement dated as of June 28, 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 "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
<PAGE> 2
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 April 30, 2000, an assumed amount of
$2,222,222, plus (D) from and after May 1, 2000, 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.
3. 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 May 1, 2000, is converted
into an Advance bearing interest at the Negotiated Rate as provided in
Section 2.6(d).
4. 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 April 30,
2000, 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 May 1, 2000. From and
after May 1, 2000, subject to the terms and conditions hereof, O.S.I.
Puerto Rico may 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.
2
<PAGE> 3
5. 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 $300,000 (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 July 31, 2000, and the last such installment to
be paid on October 31, 2004, 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.
6. 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 October 31, 2004 at which
time the Facility B Advances and any accrued but unpaid interest thereon
shall be due and payable.
7. 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 July 31, 2000 and on such
other date that the Facility B Advances are repaid, or required to be
repaid, in full.
8. 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.
<PAGE> 4
9. 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.
10. 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.
11. 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.
12. 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.
13. 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.
14. 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
4
<PAGE> 5
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
5
<PAGE> 6
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 Four to Amended and Restated Credit Agreement dated as of October 14,
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> 7
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 Four to Amended and Restated Credit Agreement dated as of
October 14, 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
INTER-COMPANY LOAN AGREEMENT
This Inter-Company Loan Agreement (this "AGREEMENT") is made and entered
into effective as of March 1, 1999 (the "EFFECTIVE DATE") by and between
Ocular Sciences, Inc., a Delaware corporation ("OSI"), and Precision Lens
Manufacturing & Technology, Inc., a Barbados corporation ("PLMT").
RECITALS
WHEREAS, PLMT wishes to borrow sums from OSI, its parent corporation, from
time to time, on and subject to the terms and conditions contained in this
Agreement;
WHEREAS, OSI is willing to provide loans of money to PLMT from time to
time, on and subject to the terms and conditions contained in this Agreement;
NOW, THEREFORE, in consideration of the mutual promises, representations,
warranties, covenants and conditions set forth in this Agreement, OSI and PLMT
hereby agree as follows:
1. CERTAIN DEFINITIONS. As used herein:
1.1 BUSINESS DAY. The term "BUSINESS DAY" means any day other than a
Saturday, Sunday, or other day on which commercial banks in San Mateo County,
California are authorized or required by law to close.
1.2 LOAN DOCUMENTS. The term "LOAN DOCUMENTS" means, collectively,
this Agreement, the Note (as defined below) executed and delivered pursuant
hereto and any other documents executed or delivered by OSI or PLMT pursuant to
this Agreement or in connection with any Loan (as defined below).
1.3 LOAN PERIOD. The term "LOAN PERIOD" means that period of time
beginning on the Effective Date and ending on the Maturity Date.
1.4 MATURITY DATE. The term "MATURITY DATE" means that date which is
the earlier to occur of: (a) March 1, 2004; (b) the sale of all or
substantially all the assets of PLMT; (c) the merger or consolidation of PLMT
with or into another company or other reorganization of PLMT following which
the shareholders of PLMT immediately prior to such transaction do not own at
least 51% of the company emerging as the survivor or parent company in such
transaction; (d) the date the OSI Loan Facility (as defined in Section 2.1) is
terminated pursuant to Section 5.2(a); (e) the date on which OSI declares the
entire unpaid principal amount and all accrued interest on an outstanding Note
immediately due and payable in full pursuant to the terms of such Note or under
Section 5.2(b), or such amount otherwise becomes immediately due and payable in
full; or (f) the date on which OSI and PLMT mutually agree to terminate this
Agreement.
<PAGE> 2
2. AMOUNT AND TERMS OF LOAN.
2.1 OSI LOAN FACILITY. Subject to all the terms and conditions of
this Agreement, and in reliance on the representations, warranties and
covenants of PLMT set forth in this Agreement, OSI agrees to make loans of
funds to PLMT, in each case subject to the sole discretion of OSI, during the
Loan Period on a revolving basis (such loans being collectively hereinafter
referred to as "LOANS" and each individually as a "LOAN"), in an aggregate
cumulative total principal amount outstanding at any one time not to exceed
Twenty Million Dollars (US$20,000,000). Loans may be requested and drawn down
by PLMT as and when PLMT needs such sums for general corporate purposes upon
two (2) business days written notice to OSI. OSI in its sole discretion, for
any reason or no reason and without liability to PLMT, may refuse to provide
one or more loans requested by PLMT. OSI's obligation to consider requests for
Loans to PLMT under this Agreement is referred to as the "OSI LOAN FACILITY."
PLMT's indebtedness to OSI for Loans advanced by OSI under this Agreement will
be evidenced by a Promissory Note of PLMT in the form attached hereto as
"Exhibit A" (the "NOTE").
2.3 MATURITY. Unless payment thereof is accelerated or otherwise
becomes due earlier under the terms of this Agreement (including but not
limited to the provisions of Section 5.2), the unpaid principal amount of all
Loans and all unpaid interest accrued thereon, together with any other fees,
expenses or costs incurred in connection therewith, will be immediately due and
payable to OSI in full on the earlier of the Maturity Date or the Payment Date
set forth in the applicable Note.
2.4 CANCELING OR REDUCING LOAN FACILITY. Upon ten (10) calendar days
written notice to PLMT, OSI may cancel the OSI Loan Facility or reduce the
amount of the OSI Loan Facility. Upon OSI providing a notice electing to cancel
the amount of the OSI Loan Facility made available to PLMT hereunder, the Note
shall be deemed automatically converted, without further action required on the
part of either party hereto, into a non-revolving fixed promissory note, due on
the Payment Date set forth in such Note, in a principal amount equal to then
aggregate principal amount of all Loans outstanding under such Note plus accrued
interest thereon, and will bear interest from such date forward at the rate
specified in such Note, and no further Loans will be made by OSI to PLMT under
such Note or this Agreement. Upon OSI providing a notice electing to reduce the
amount of the OSI Loan Facility made available to PLMT hereunder, the Note
shall be deemed automatically converted, without further action required on the
part of either party hereto, into a promissory note, due on the Payment Date
set forth in such Note, in a principal amount equal to the amount to which the
OSI Loan Facility is so reduced and all other terms of the Note shall remain
unchanged.
2.5 PAYMENT OF AMOUNTS OWING; OFFSET. Upon the earliest to occur of
the Payment Date set forth in the applicable Note or the Maturity Date
specified in this Agreement, OSI shall provide PLMT written notice of the
aggregate amount of principal and accrued interest owing to OSI by PLMT as of
such date under the Note and this Agreement and such amounts shall be offset
against any amounts then owing by OSI to PLMT, if any, and the net amount owing
to OSI shall be immediately due and payable by PLMT.
2
<PAGE> 3
3. REPRESENTATIONS AND WARRANTIES OF PLMT. PLMT hereby represents and
warrants to OSI that:
3.1 ORGANIZATION AND STANDING. PLMT is a corporation duly
organized, validly existing and in good standing under the laws of Barbados,
and has all requisite corporate power and authority to own, lease and operate
its properties and to conduct its business as such is presently conducted and
as proposed to be conducted.
3.2 AUTHORIZATION. All corporate action on the part of PLMT and its
officers, directors and shareholders that is necessary for the authorization,
execution, delivery and performance of each of the Loan Documents by PLMT has
been taken; and each of the Loan Documents constitutes valid and legally binding
obligations of PLMT, enforceable in accordance with their terms.
4. REPRESENTATIONS AND WARRANTIES OF OSI. OSI hereby represents and
warrants to PLMT that:
4.1 ORGANIZATION AND STANDING. OSI is a corporation duly organized
validly existing and in good standing under the laws of the State of Delaware,
and has all requisite corporate power and authority to own, lease and operate
its properties and to conduct its business as such is presently conducted and as
proposed to be conducted.
4.2 AUTHORIZATION. All corporate action on the part of OSI and its
officers, directors and shareholders that is necessary for the authorization,
execution, delivery and performance of each of the Loan Documents by OSI has
been taken; and each of the Loan Documents constitutes valid and legally
binding obligations of OSI, enforceable in accordance with their terms.
5. EVENTS OF DEFAULT OF BORROWER.
5.1 EVENTS OF DEFAULT. The occurrence of any of the following
events will constitute an "EVENT OF DEFAULT" under this Agreement and the
applicable Note:
(a) PLMT fails to pay any principal or any accrued interest
under any Note or any Loan when the same is due and payable, or fails to pay
any amount of principal or accrued interest due under any Note or any Loan on
the Payment Date or Maturity Date therefor, and such failure to pay is not
cured by PLMT within two (2) Business Days after OSI gives written notice of
such failure to pay to PLMT; or
(b) PLMT is in default under any other agreement, note or
instrument pursuant to which PLMT has borrowed money from OSI; or
(c) PLMT is in default with respect to any agreement or other
evidence of indebtedness or liability for borrowed money if the effect of such
default is to (i) to accelerate the maturity of such indebtedness or liability
or to require the prepayment thereof, or (ii) to permit the holder thereof to
cause such indebtedness to become due prior to the stated maturity thereof;
3
<PAGE> 4
(d) PLMT becomes insolvent, or admits in writing its inability
to pay its debts as they mature, or makes an assignment for the benefit of
creditors, or applies for or consents to the appointment of a receiver,
liquidator, custodian or trustee for it or for a substantial part of its
property or business, or such a receiver, liquidator, custodian or trustee
otherwise is appointed and is not discharged within thirty (30) calendar days
after such appointment;
(e) bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law or any law
for the relief of debtors are instituted by or against PLMT, or any order,
judgment or decree is entered against PLMT decreeing its dissolution or
liquidation; provided, however, with respect to an involuntary petition in
bankruptcy, such petition is not dismissed within thirty (30) days after the
filing of such petition;
(f) a court order or judgment for the payment of money in
excess of US$500,000 is entered against PLMT; or
(g) the assets of PLMT are seized by or surrendered to any
governmental entity.
5.2 REMEDIES OF OSI. Upon and after the occurrence of any Event of
Default, OSI will have no further obligation to make any Loan or Loans to PLMT,
and in addition, at OSI's sole option by written notice to PLMT, OSI may take
any one or more of the following actions:
(a) OSI may immediately terminate the Loan Facility it provides
hereunder and all other liabilities and obligations of OSI under this
Agreement, without affecting OSIs rights under this Agreement and the
applicable Note; and
(b) OSI may declare the entire principal amount of and all
accrued interest on the Note and all Loans immediately due and payable in full,
whereupon such amounts will immediately be due and payable in full, provided
that in the case of an Event of Default listed in paragraph (d), (e) or (g) of
Section 5.1, the principal and interest will immediately become due and payable
without the requirement of any notice or other action by OSI; and
(c) Exercise all rights and remedies granted under the Loan
Documents or otherwise available to OSI at law or in equity.
6. SECURITY INTEREST.
6.1 GRANT OF SECURITY INTEREST. PLMT hereby grants OSI a present and
continuing security interest in all of PLMT's right, title and interest in and
to and arising under that certain contract with Arthur D. Little, Inc. dated
August 17, 1995, as amended, regarding the contact lens automation project.
4
<PAGE> 5
6.2 FURTHER ASSURANCES. PLMT hereby covenants and agrees to take all
steps and execute and file all documents requested by OSI to document, evidence
and perfect such security interest in favor of OSI.
7. MISCELLANEOUS.
7.1 ENTIRE AGREEMENT. This Agreement and the Notes and schedules
attached thereto constitute the entire agreement and understanding among the
parties with respect to the subject matter thereof and supersede any prior
understandings or agreements of the parties with respect to such subject matter.
7.2 GOVERNING LAW. This Agreement will be governed by and construed
in accordance with the internal laws of the State of California as applied to
agreements entered into solely between residents of, and to be performed
entirely in, such state, without reference to that body of law relating to
conflicts of law or choice of law.
7.3 MODIFICATION; WAIVER. This Agreement may be modified or amended
only by a writing signed by both parties hereto. No waiver or consent with
respect to this Agreement will be binding unless it is set forth in writing and
signed by the party against whom such waiver is asserted. No course of dealing
between OSI and PLMT will operate as a waiver or modification of any party's
rights under this Agreement or any other Loan Document. No delay or failure on
the part of either party in exercising any right or remedy under this Agreement
or any other Loan Document will operate as a waiver of such right or any other
right. A waiver given on one occasion will not be construed as a bar to, or as
a waiver of, any right or remedy on any future occasion.
7.4 RIGHTS AND REMEDIES CUMULATIVE. The rights and remedies of OSI
herein provided will be cumulative and not exclusive of any other rights or
remedies provided by law or otherwise.
7.5 NOTICES. Any notice required or permitted under this Agreement
will be given in writing and will be deemed effectively given upon personal
delivery, upon confirmed transmission by telecopy or email, or three (3) days
following deposit with the United States Post Office, postage prepaid,
addressed:
To OSI:
475 Eccles Avenue
So. San Francisco, CA 94080
Attention: Chief Financial Officer
5
<PAGE> 6
To PLMT:
c/o KPMG
Chartered Accountants
Hastings Christ Church
Barbados
Attention: General Manager
or at such other address as such party may specify by written notice given in
accordance with this Section.
7.7 SEVERABILITY. Any invalidity, illegality or unenforceability of any
provision of this Agreement in any jurisdiction will not invalidate or render
illegal or unenforceable the remaining provisions hereof in such jurisdiction
and will not invalidate or render illegal or unenforceable such provision in any
other jurisdiction.
7.7 ATTORNEYS' FEES. If any party hereto commences or maintains any
action at law or in equity (including counterclaims or cross-complaints) against
the other party hereto by reason of the breach or claimed breach of any term or
provision of this Agreement, any Note or any other Loan Document, then the
prevailing party in said action will be entitled to recover its reasonable
attorneys' fees and court costs incurred therein.
7.8 SUCCESSORS AND ASSIGNS. The terms and conditions of this Agreement
will inure to the benefit of and be binding upon the respective successors and
permitted assigns of the parties; provided, however, that neither OSI nor PLMT
may assign its rights or obligations under this Agreement to anyone other than
an entity which such party controls, is controlled by or is under common control
with, without the prior written consent of the other party.
7.9 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
6
<PAGE> 7
IN WITNESS WHEREOF, the parties have duly executed and delivered this
Agreement as of the Effective Date.
OCULAR SCIENCES, INC. PRECISION LENS MANUFACTURING
& TECHNOLOGY, INC.
Name: GREGORY LICHTWARDT Name: FERNANDO VAZQUEZ
---------------------------- ---------------------------
By: /s/ GREGORY LICHTWARDT By: /s/ FERNANDO VAZQUEZ
------------------------------ -----------------------------
Title: Vice President, Finance Title: Director
---------------------------- ---------------------------
Executed at: South San Francisco Executed at: Rex Halcyon Cove, Antigua
--------------------- -------------------------
ATTACHMENTS:
Exhibit A - PLMT Revolving Secured Promissory Note
[SIGNATURE PAGE TO INTER-COMPANY LOAN AGREEMENT]
7
<PAGE> 1
EXHIBIT 21.01
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
ENTITY JURISDICTION OF INCORPORATION
- ------ -----------------------------
<S> <C>
Ocular Sciences Puerto Rico, Inc. Delaware
Ocular Sciences Canada, Inc. Province of New Brunswick
Ocular Sciences Limited United Kingdom
(formerly Precision Lens
Laboratories Ltd.)
Ocular Sciences Hungary Ltd. Budapest, Hungary
Precision Lens Manufacturing and Barbados
Technology, Inc.
Ocular Sciences Australia, Inc. Australia
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet, consolidated statement of income and consolidated
statement of cash flows included in the Company's Form 10-Q for the period ended
September 30, 1999, and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 16,118
<SECURITIES> 27,500
<RECEIVABLES> 33,366
<ALLOWANCES> 1,981
<INVENTORY> 14,224
<CURRENT-ASSETS> 101,352
<PP&E> 115,705
<DEPRECIATION> 23,018
<TOTAL-ASSETS> 211,641
<CURRENT-LIABILITIES> 31,528
<BONDS> 0
0
0
<COMMON> 23
<OTHER-SE> 173,708
<TOTAL-LIABILITY-AND-EQUITY> 211,641
<SALES> 130,402
<TOTAL-REVENUES> 130,402
<CGS> 46,247
<TOTAL-COSTS> 50,910
<OTHER-EXPENSES> 4
<LOSS-PROVISION> 170
<INTEREST-EXPENSE> 213
<INCOME-PRETAX> 34,742
<INCOME-TAX> 8,349
<INCOME-CONTINUING> 26,393
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,393
<EPS-BASIC> 1.16
<EPS-DILUTED> 1.13
</TABLE>
