<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from ______ to ______
COMMISSION FILE NO. 0-22623
OCULAR SCIENCES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-2985696
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
475 ECCLES AVENUE
SOUTH SAN FRANCISCO, CALIFORNIA 94080
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(650) 583-1400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ].
As of April 24, 2000, there were outstanding 23,055,825 shares of the
Registrant's Common Stock, par value $0.001 per share.
<PAGE> 2
OCULAR SCIENCES, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets -
March 31, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Income -
Three Months Ended March 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows - Three
Months Ended March 31, 2000 and 1999 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 19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURES 21
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
OCULAR SCIENCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS) - (UNAUDITED)
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 13,701 $ 10,053
Restricted cash 426 429
Short-term investments 24,557 28,389
Accounts receivable, less allowance for sales returns and doubtful
accounts of $1,789 and $1,674 for 2000 and 1999, respectively 33,883 34,556
Inventories 18,422 15,728
Loans to officers and employees 75 113
Prepaid expenses and other current assets 16,230 15,043
--------- ---------
Total Current Assets 107,294 104,311
Property and equipment, net 108,473 102,591
Intangible assets, net 7,375 7,617
Long-term investments 6,125 7,630
Other assets 166 166
--------- ---------
Total Assets $ 229,433 $ 222,315
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 8,899 $ 7,191
Accrued liabilities 21,468 23,065
Current portion of long-term debt 1,220 1,214
--------- ---------
Total Current Liabilities 31,587 31,470
Deferred income taxes 4,966 5,008
Long-term debt, less current portion 2,091 2,228
--------- ---------
Total Liabilities 38,644 38,706
Stockholders' Equity:
Common stock, $0.001 par value; 80,000,000
shares authorized; 23,051,555 and 22,953,985 shares
issued and outstanding for 2000 and 1999, respectively 23 23
Additional paid-in capital 81,484 81,249
Retained earnings 110,293 103,160
Accumulated other comprehensive income (1,011) (823)
--------- ---------
Total Stockholders' Equity 190,789 183,609
--------- ---------
Total Liabilities and Stockholders' Equity $ 229,433 $ 222,315
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
OCULAR SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - (UNAUDITED)
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Net sales $ 43,442 $ 37,009
Cost of sales 16,967 12,332
------------ ------------
Gross profit 26,475 24,677
Selling and marketing expenses 11,422 10,011
General and administrative expenses 5,042 5,317
Research and development expenses 976 564
------------ ------------
Income from operations 9,035 8,785
Interest expense
(277) (75)
Interest income 501 556
Other income (expense), net 5 (158)
------------ ------------
Income before taxes 9,264 9,108
Income taxes (2,131) (2,453)
------------ ------------
Net Income $ 7,133 $ 6,655
============ ============
Net income per share data:
Net income per share basic $ 0.31 $ 0.29
============ ============
Net income per share diluted $ 0.31 $ 0.29
============ ============
Weighted average common
shares outstanding 23,004,744 22,627,032
Weighted average dilutive potential
common shares under the
treasury stock method 332,162 700,334
------------ ------------
Total weighted average common
and dilutive potential common
shares outstanding 23,336,906 23,327,366
============ ============
</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>
Three months ended March 31,
------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,133 $ 6,655
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 2,602 1,623
Income tax benefits from stock options exercised - 232
Provision for sales returns and doubtful accounts 224 157
Provision for excess and obsolete inventory 185 244
Provision for damaged and scrap products 38 138
Exchange loss 42 105
Changes in operating assets and liabilities:
Accounts receivable 353 2,934
Inventories (3,027) (2,794)
Prepaid expenses, other current and non-current assets (1,209) (956)
Accounts payable 1,731 1,708
Accrued liabilities (1,557) (888)
Income and other taxes payable (3) 2,119
-------- --------
Net cash provided by operating activities 6,512 11,277
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (8,111) (13,939)
Purchase of short and long-term investments (6,607) (8,050)
Sales and maturities of short and long-term investments 11,984 8,150
(Deposits to) payments from restricted cash (3) 53
-------- --------
Net cash used in investing activities (2,737) (13,786)
-------- --------
Cash flows from financing activities:
Repayment of long-term debt (127) (95)
Proceeds from issuance of common stock 235 201
-------- --------
Net cash provided by financing activities 108 106
Effect of exchange rate changes on cash and cash equivalents (235) 25
-------- --------
Net increase (decrease) in cash and cash 3,648 (2,378)
equivalents
Cash and cash equivalents at beginning of period 10,053 26,520
-------- --------
Cash and cash equivalents at end of period $ 13,701 $ 24,142
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
OCULAR SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PREPARATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not contain all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements have been
prepared on the same basis as the audited consolidated financial statements and
include all adjustments, consisting only of normal recurring adjustments,
necessary for the fair presentation of the Company's financial condition as of
March 31, 2000 and the results of its operations, its changes in other
comprehensive income, and its cash flows for the three month periods ended March
31, 2000 and 1999. These condensed consolidated financial statements should be
read in conjunction with the Company's audited financial statements as of
December 31, 1999 and 1998 and for each of the years in the three-year period
ended December 31, 1999, including notes thereto, included in the Company's
Annual Report on Form 10-K. Operating results for the three-month period ended
March 31, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000.
NOTE 2 - INVENTORIES
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------- -------
<S> <C> <C>
Raw materials $ 5,007 $ 3,906
Work in process 1,905 1,344
Finished goods 11,510 10,478
------- -------
$18,422 $15,728
======= =======
</TABLE>
NOTE 3 - PREPAID EXPENSES AND OTHER CURRENT ASSETS AND ACCRUED LIABILITIES
Prepaid expenses and other current assets consisted of the following (in
thousands):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------- -------
<S> <C> <C>
Refundable taxes $ 8,143 $ 6,530
Deferred income taxes 4,105 4,115
Prepaid expenses 2,650 1,918
Other current assets 1,332 2,480
------- -------
$16,230 $15,043
======= =======
</TABLE>
6
<PAGE> 7
Accrued liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------- -------
<S> <C> <C>
Accrued expenses $11,405 $11,050
Accrued cooperative merchandising allowances 5,971 8,510
Accrued value added taxes 2,970 2,371
Deferred income taxes 504 512
Income taxes payable 618 622
------- -------
$21,468 $23,065
======= =======
</TABLE>
NOTE 4 - PENDING MERGER AGREEMENT
On March 20, 2000, Wesley Jessen VisionCare, Inc. ("Wesley Jessen") and
the Company announced the signing of a definitive agreement and plan of merger
(the "Merger") providing for the statutory merger of the Company and Wesley
Jessen upon the satisfaction of stockholder and regulatory approval, and other
closing conditions and therefore there can be no assurance if and when the
Merger will close.
On March 23, 2000, Bausch & Lomb, Inc. ("Bausch & Lomb") made an
unsolicited offer to acquire Wesley Jessen in a transaction that would not
include the Company. Wesley Jessen has formally rejected Bausch & Lomb's offer,
and Bausch & Lomb has initiated a tender offer for Wesley Jessen shares, worth
$34 a share. On April 10, 2000 Wesley Jessen agreed to hold exploratory talks
with Bausch & Lomb, which could threaten the planned Merger of Wesley Jessen and
the Company.
In connection with the foregoing activities, as discussed in Part II,
Item 1 (Legal Proceedings), Bausch & Lomb has sued Wesley Jessen, its directors,
and the Company, in the Court of Chancery of Delaware. The Company has commenced
a lawsuit against Bausch & Lomb in California Superior Court for intentional and
negligent interference with contractual relations, and unfair competition.
Additionally, the Company and certain of its directors have been named in a suit
filed in California Superior Court, by a shareholder seeking class action status
for breach of fiduciary duties. The complaint seeks damages in an unspecified
amount and injunctive relief related to the Wesley Jessen transaction.
NOTE 5 - RELATED PARTY AGREEMENTS
If the Merger is consummated, the Company will pay to Edgar Cummins, a
member of its board of directors and a member of the Compensation Committee, a
fee equal to 3/8% of the aggregate value of the transaction, under a letter
agreement for certain consulting services provided to the Company by Mr. Cummins
related to the Merger. This agreement with Mr. Cummins also entitles him to be
reimbursed for reasonable expenses incurred by him in connection with the
performance of services under the letter agreement.
The Company has also entered into a separate consulting agreement with
Mr. Cummins to act as the Company's interim Chief Financial Officer.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
unaudited Condensed Consolidated Financial Statements and notes thereto included
in Part I - Item 1 of this Quarterly Report and the audited Consolidated
Financial Statements and notes thereto and Management's Discussion and Analysis
of Financial Condition and Results of Operations contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999.
Except for the historical information contained herein, the matters
discussed in this Form 10-Q are forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A
of the Securities Act of 1933, as amended. These forward-looking statements
involve risks and uncertainties, including the impact of the uncertainties
surrounding the proposed merger with Wesley Jessen, intense competition,
manufacturing capacity constraints, dependence on key personnel, trade practice
litigation, fluctuations in operating results, risks related to international
operations, the management of growth, new products and technological change,
interruption of manufacturing operations, regulatory action, product liability
and recall, influence by existing stockholders, certain anti-takeover provisions
and the other risks detailed below, including in the section labeled "Factors
That May Affect Future Results," and from time to time in the Company's other
reports filed with the Securities and Exchange Commission. The actual results
that the Company achieves may differ materially from any forward-looking
statements due to such risks and uncertainties. Various sentences within this
Form 10-Q contain such forward-looking statements, and words such as "believes",
"anticipates", "expects", "future", "intends", "would", "may" and similar
expressions are intended to identify forward-looking statements, although they
are not the exclusive means of identifying such statements. The Company
undertakes no obligation to revise any of these forward-looking statements to
reflect events or circumstances after the date hereof.
RESULTS OF OPERATIONS
Net Sales
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------------------------------
2000 1999 % Change
----------- ----------- -----------
<S> <C> <C> <C>
U.S. $31,218,000 $28,045,000 11.3%
As a percentage of net sales 71.9% 75.8%
International $12,224,000 $ 8,964,000 36.4%
As a percentage of net sales 28.1% 24.2%
----------- ----------- -----------
Net sales $43,442,000 $37,009,000 17.4%
</TABLE>
Net sales represents gross sales less allowances for returns, trial set
and prompt payment discounts. The Company recognizes sales upon shipment of
products to its customers. Discounts and allowances for sales returns are
accrued at the time sales are recognized. The growth in net sales from the
quarter ended March 31, 1999 to the quarter ended March 31, 2000 was primarily
due to increased sales of the Company's lenses marketed for daily and weekly
replacement regimens. Unit sales growth of the Company's lenses marketed for
disposable replacement regimens increased 31.8% from the first quarter of 1999
to the first quarter of 2000. A significant portion of such growth came from
international sales, which grew faster than domestic sales due primarily to
increased sales of lenses marketed for daily and weekly disposable regimens in
Europe and Asia. Unit growth of the Company's international sales increased
64.1% from the quarter ended March 31, 1999 to the quarter ended March 31, 2000.
The Company ended the quarter with an order backlog of $5.7 million, in certain
of its product lines, which represented an increase of $1.2 million from the
previous quarter. This order backlog is a result of manufacturing capacity
constraints related primarily to the new automated production equipment in the
Company's U.K. and Puerto Rico facilities. See --- Factors That May Affect
Future Results --- Manufacturing Capacity Constraints; Risks Associated with
Expansion and Automation of Manufacturing Operations."
8
<PAGE> 9
The Company's overall average selling price declined 9.3% from the
quarter ended March 31, 1999 to the quarter ended March 31, 2000, primarily as a
result of the greater mix of lower priced international distributor sales. The
overall average selling price in the quarter ended March 31, 2000 was 6% higher
than that of the previous quarter, due primarily to the limited shipments of
lenses marketed for daily disposable regimens in the first quarter of 2000,
which continue to be on allocation. 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.
Gross Profit
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------------------------------------
2000 1999 % Change
------------- ------------- -------------
<S> <C> <C> <C>
Gross profit $ 26,475,000 $ 24,677,000 7.3%
As a percentage of net sales 60.9% 66.7%
</TABLE>
Cost of sales is comprised primarily of the labor, overhead and material
costs of production and packaging, freight and duty, inventory reserves, and
amortization of certain intangible assets. The dollar increase in gross profit
from the quarter ended March 31, 1999 compared to the quarter ended March 31,
2000 was due primarily to increased net sales. Gross profit as a percentage of
sales in the quarter ended March 31, 2000 decreased from the comparable period
in 1999 due to reductions to the Company's average selling prices, as discussed
in "Net Sales" and higher production costs. The higher production cost in the
quarter was due to increased overhead costs and limited production volume from
the Company's new manufacturing facility in Juana Diaz, Puerto Rico, which
commenced commercial production for the U.S. when it received FDA approval in
December 1999. The Company expects per unit cost reductions as production volume
increases as more production lines are implemented in this new P.R. facility.
Additionally, the Company is in the process of adding new, automated production
equipment at both its U.K. and P.R. facilities, which are designed to further
reduce its per unit cost of production over time, although such cost reductions
may not be seen until future periods. The first automated line was FDA validated
in the U.K. in mid-January 2000. The Company expects that the initial production
volume from this first automated line and subsequent 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 15 to 18 months. See
"Factors That May Affect Future Results --- Manufacturing Capacity Constraints;
Risks Associated with Expansion and Automation of Manufacturing Operations." 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 believes that the decline in average selling price, as sales of lower
average selling price lenses marketed for daily replacement regimens increase,
will exceed the rate of decline in production cost in the near term and
accordingly, the Company would expect its gross profit margin percentage to be
lower over at least the next quarter. See "Factors That May Affect Future
Results --- Fluctuations in Operating Results; Decreasing Average Sales Prices."
Selling and Marketing Expenses
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------------------------------------
2000 1999 % Change
------------- ------------- -------------
<S> <C> <C> <C>
Selling and marketing expenses $ 11,422,000 $ 10,011,000 14.1%
As a percentage of net sales 26.3% 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
9
<PAGE> 10
billed to customers. Cooperative merchandising allowances are reimbursements to
encourage the fitting and wearing of the Company's lenses marketed for
disposable replacement regimens. Such activities may include, but are not
limited to advertising, in-office promotion, displays and mailings. These
allowances are limited to a percentage of purchases of lenses marketed for
disposable replacement regimens from the Company. The increase in sales and
marketing expenses from the quarter ended March 31, 1999 to the quarter ended
March 31, 2000 resulted primarily from cooperative merchandising allowances and
additional sales and marketing expenses related to the Company's newly acquired
Australian distributor. The decrease in selling and marketing expenses as a
percentage of net sales from the first quarter ended March 31, 1999 to the same
quarter in 2000, was due primarily to the greater mix of international sales to
U.S. sales. International sales are typically sold through distributors and
therefore require less sales and marketing expenditure. The Company believes
selling and marketing expenses, particularly cooperative merchandising
allowances will grow in absolute dollars and as a percentage of sales.
General and Administrative Expenses
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------------------------------
2000 1999 % Change
------------ ------------ ------------
<S> <C> <C> <C>
General and administrative expenses $ 5,042,000 $ 5,317,000 (5.2%)
As a percentage of net sales 11.6% 14.4%
</TABLE>
General and administrative expenses are comprised primarily of salaries
and benefits for distribution, general and administrative personnel,
professional services, consultants' fees and non-manufacturing depreciation and
facilities costs. General and administrative expenses decreased both in dollars
and as a percentage of sales. The decrease was due primarily to one-time legal
and consulting expenditures in 1999, related to the implementation of the
Company's new operating structure and higher 1999 management bonuses, salaries
and benefits. The Company believes that if net sales grow, its general and
administrative expenses will increase in absolute dollars, but will decrease as
a percentage of net sales on an annualized basis.
Research and Development Expenses
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------------------------
2000 1999 % Change
---------- ---------- ----------
<S> <C> <C> <C>
Research and development expenses $ 976,000 $ 564,000 73.0%
As a percentage of net sales 2.2% 1.5%
</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
ended March 31, 1999 to the quarter ended March 31, 2000, both in dollars and as
a percentage of revenue, 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. Research and development
expenses may fluctuate based on the timing of new product development projects.
Interest and Other Income, Net
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------------------------
2000 1999 % Change
---------- ---------- ----------
<S> <C> <C> <C>
Interest and other income, net $ 229,000 $ 323,000 (29.1%)
As a percentage of net sales 0.5% 0.9%
</TABLE>
The decrease in interest and other income, net from the quarter ended
March 31, 1999 to the quarter ended March 31, 2000 resulted primarily from
interest on certain tax payments made in the first quarter of 2000.
10
<PAGE> 11
Income Taxes
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------------------------------
2000 1999 % Change
------------ ------------ ------------
<S> <C> <C> <C>
Income taxes $ 2,131,000 $ 2,453,000 (13.1%)
Effective tax rate 23.0% 26.9%
</TABLE>
The Company's lower effective tax rate for the quarter ended March 31,
2000 was a result of an increase in the earnings from the Company's Puerto Rican
operations, which are partially exempt from U.S. taxation and 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. The Company anticipates that
it will continue to benefit from the favorable effect of the 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 March 31, 2000, the Company had cash and cash equivalents of $13.7
million compared to cash and cash equivalents of $10.1 million at December 31,
1999. The increase in cash and cash equivalents was primarily attributable to
cash provided by operating activities and net sales and maturities of short and
long-term investments partially offset by purchases of property and equipment.
Working capital increased from $72.8 million at December 31, 1999 to $75.7
million at March 31, 2000. The increase in working capital was due primarily to
the increase in inventories.
In the first three months of 2000, net cash provided by operating
activities of $6.5 million, was derived principally from net income of $7.1
million, adjusted for depreciation and amortization of $2.6 million, and a net
decrease from operating accounts of $3.7 million as a result of increases in
inventory and prepaid expenses and other assets, offset by a decrease in
accounts receivable and increases to vendors payable.
Net cash used in investing activities in the first three months of 2000
was $2.7 million, related to $8.1 million of purchases of property and equipment
offset with $5.4 million net sales and maturities of short and long-term
investments. The Company anticipates that capital expenditures will be
approximately $45.0 million in 2000 (including $8.1 million in the first
quarter) as the Company continues to invest in the implementation and
development of automated production equipment at its manufacturing facilities.
However, the amount of capital expenditures may increase or decrease, as the
Company may accelerate or delay the implementation of the automated production
equipment based on market conditions and demand for its products. See "Factors
That May Affect Future Results --- Manufacturing Capacity Constraints; Risks
Associated With Expansion and Automation of Manufacturing Operations."
Net cash provided by financing activities in the first quarter of 2000
was $108,000. The slight increase in comparison to the first quarter of 1999 of
$106,000 was due to the increase in proceeds from issuances of common stock
offset against the increase in repayments of long-term debt.
In addition to cash, cash equivalents and short and long-term
investments, the Company has a credit facility with Comerica Bank - California.
Under the Comerica Credit Agreement, the Company and its subsidiary Ocular
Sciences Puerto Rico, Inc. ("Ocular Sciences Puerto Rico") can borrow up to an
aggregate of $25.9 million. The Comerica Credit Agreement provides for up to
$20.0 million of revolving credit loans to the Company and up to $10.0 million
of term loans to Ocular Sciences Puerto Rico. Revolving credit borrowings under
the Comerica Credit Agreement bear interest at the bank's base rate or at 1.00%
to 1.25% above the eurodollar rate, and term loans bear interest at the bank's
base rate or at 1.25% to 1.50% above the eurodollar rate, in each case with the
applicable margin over the eurodollar rate depending on the Company's ratio of
debt to tangible net worth. As of March 31, 2000, there were no revolving credit
loans outstanding under the Comerica Credit Agreement and $2.3 million of term
loans outstanding with the remaining $7.7 million of term loans available to
finance the construction and development of the Company's planned new Puerto
Rican manufacturing facility. On
11
<PAGE> 12
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. The Company has decided not to utilize the negotiated
rate option. On May 1, 2000, the then outstanding term loan became payable in
eighteen quarterly installments of $300,000, beginning July 31, 2000, with any
balance to be paid on October 31, 2004. The Company is required to maintain
minimum ratios of debt to tangible net worth and of current assets to current
liabilities, and a minimum tangible net worth. Borrowings under the Comerica
Credit Agreement are secured by a pledge of 100% of the outstanding common stock
of Ocular Sciences Puerto Rico and 65% of the outstanding capital stock of the
Company's 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 and
short and long-term investments, further borrowings available under its credit
facilities and its anticipated net cash flow from operations, will be sufficient
to meet its anticipated cash needs for working capital, contractual commitments
and capital expenditures for the foreseeable future.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements". SAB
No. 101 expresses the views of the SEC staff in applying accounting principles
generally accepted in the United States to certain revenue recognition issues.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN No. 44"), "Accounting for Certain Transactions
involving Stock Compensation". This Interpretation clarifies the application of
APB Opinion No. 25, "Accounting for Stock Issued to Employees". This
Interpretation is effective for July 1, 2000, but certain conclusions in this
Interpretation cover specific events that occur after either December 15, 1998,
or January 12, 2000. To the extent that this Interpretation covers events
occurring during the period after December 15, 1998, or January 12, 2000, but
before the effective date of July 1, 2000, the effects of applying this
Interpretation are recognized on a prospective basis from July 1, 2000.
The Company does not expect a material impact from implementation of SAB
No. 101 and FIN No. 44 on its financial position, results of operations and cash
flows.
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.
Merger with Wesley Jessen. On March 20, 2000, the Company and Wesley
Jessen VisionCare, Inc. entered into an Agreement and Plan of Merger pursuant to
which the Company and Wesley Jessen agreed to merge. On March 23, 2000, Bausch &
Lomb, Inc. made an unsolicited offer to acquire Wesley Jessen in a transaction
that would not include the Company. Wesley Jessen has rejected the Bausch & Lomb
offer, and Bausch & Lomb has initiated a tender offer for Wesley Jessen shares.
On April 10, 2000, Wesley Jessen agreed to hold exploratory talks with Bausch &
Lomb. In connection with the foregoing activities, Bausch & Lomb has sued Wesley
Jessen, the Company and others in Delaware Chancery Court, and the Company has
sued Bausch & Lomb in California Superior Court. Additionally, the Company and
its directors have been named in a suit filed in California Superior Court, by a
shareholder seeking class action status for breach of fiduciary duties and
injunctive relief.
There is significant uncertainty as to whether the Merger will be
consummated. Among other things, the Merger is subject to various conditions,
including the approval of both companies' shareholders. Additionally, either
company can terminate the merger agreement under specified circumstances. If the
Merger is consummated, then the stockholders of the Company will become
stockholders of Wesley Jessen, and will be subject to the risks attendant to
ownership of stock in that
12
<PAGE> 13
company, including risks related to the integration of two companies with
different headquarter locations, product lines, manufacturing facilities and
management teams.
If the Merger is not consummated, the Company will face the
uncertainties of continuing as an independent enterprise, following extended
planning for and implementation of strategies tied to, the unconsummated Merger,
and concomitant effects on the Company's relationships with its customers,
suppliers and employees, as well as the increased legal and professional fees
related to the Merger negotiations. Additionally, if Bausch & Lomb or another
competitor of the Company acquires Wesley Jessen, the Company will likely face
increased competition in the market by the combined entity. In any event, the
litigation in which the Company is now involved can be costly and time consuming
and the results cannot be predicted with certainty.
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 Johnson & Johnson, Ciba ("Ciba"), Bausch & Lomb, Inc., Wesley Jessen
and The Cooper Companies, Inc. 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. As many of the costs
involved in producing contact lenses are relatively fixed, if a manufacturer can
increase its volume, it can generally reduce its per unit costs and thereby
increase its flexibility to reduce prices. For example, Bausch & Lomb has
announced its intention of introducing a new weekly disposable lens in mid-2000,
which they claim is produced from a low-cost manufacturing platform. The
Company's competitors could also reduce prices to increase sales volumes
necessary so as 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. Any significant decrease in the
Company's costs per lens will depend, in part, on the Company's ability to
increase its sales volume and production capacity. There can be no assurance
that the Company will be able to continue to increase its sales volume or reduce
it per unit production costs. In response to competition, the Company may also
increase cooperative merchandising allowances or otherwise increase spending,
which may adversely affect its business, financial condition and results of
operations. The failure of the Company to respond to competitive pressures, and
particularly price competition, in a timely manner 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 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 introduced a lens marketed for
daily disposal in Japan and Europe in early 1999. 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 18 months, the growth rate of U.S.
market demand has slowed. Should such trend worsen, it could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company believes that its manufacturing process technology, lens
designs and marketing strategies differentiate it from its leading competitors.
However, there can be no assurance that competitors will not adopt technologies,
lens designs or marketing strategies that are similar or superior 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
13
<PAGE> 14
U.S. a new line of contact lenses for weekly and monthly replacement regimens
that utilize a manufacturing molding process technology 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, and Bausch & Lomb has plans to
introduce a weekly disposable lens in mid-2000.
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 reduce the demand for 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 as the Company intends to add additional lines. For example, suppliers
could miss their equipment delivery schedules, new automated equipment could
improve less rapidly than expected, if at all, or the equipment or processes
could require longer design time than anticipated, or redesigning after
installation. The delays in implementing the first automated line, have caused
the Company difficulties in meeting customer demand in certain of its products,
which resulted in an order backlog of $5.7 million at the end of the first
quarter of 2000, and the 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 $30.7 million in capital expenditures on automated
production equipment in the United Kingdom and Puerto Rico facilities and
expects to continue to invest in additional automated production lines after
this period. The Company intends to finance these capital expenditures with net
cash provided by operating activities, existing cash balances and borrowings
under its credit facilities.
The Company is currently experiencing space constraints at its Puerto
Rican facility. The Company is in the process of relocating its Puerto Rican
manufacturing operations to a substantially larger new facility that has been
constructed to the Company's specifications and leased to the Company by the
Puerto Rico Industrial Development Company. Relocation costs will be expensed as
incurred. The facility has been inspected by the U.S. Food and Drug
Administration and approval has been obtained to manufacture extended wear
lenses. The Company currently expects that the Company's occupancy will be
phased in and completed over the next ten months. The Company's
14
<PAGE> 15
occupancy of a new facility and implementation of the new automated production
technology will result in new fixed and operating expenses, including
substantial increases in depreciation expense that will increase the Company's
cost of sales. If revenue levels do not increase sufficiently to offset these
new expenses, the Company's operating results could be materially adversely
affected. There can be no assurance that the Company will not encounter
unforeseen difficulties, costs or delays in automating its production process,
or in equipping the new manufacturing facility in Puerto Rico. Any such
difficulties or delays would limit the Company's ability to compete in the
weekly and daily disposable replacement regimen markets and, accordingly, could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Dependence on Key Personnel; Recent Resignations. The Company is
dependent upon a limited number of key management and technical personnel. The
Company's future success will depend in part upon its ability to attract and
retain highly qualified personnel. The Company competes for such personnel with
other companies, academic institutions, government entities and other
organizations. There can be no assurance that the Company will be successful in
retaining or hiring qualified personnel.
The uncertainty related to the Company's proposed merger with Wesley
Jessen has made it more difficult for the Company to hire employees during this
time period, and has resulted in the loss of some employees. Additionally,
Norwick Goodspeed, the Company's President and Chief Executive Officer, and Greg
Lichtwardt, the Company's Chief Financial Officer, have recently announced their
resignation from the Company. John Fruth, the Company's founder, Chairman of the
Board and ex-Chief Executive Officer, has replaced Mr. Goodspeed, and Ed
Cummins, a member of the Company's Board of Directors and ex-Chief Financial
Officer of Allergan, Inc., will replace Mr. Lichtwardt for a limited period. The
loss of any members of the Company's current management team, especially John
Fruth, or other key employees, could have a material adverse affect on the
Company's business, financial condition and results of operations.
Risk of Trade Practice Litigation; Changes in Trade Practices. The
contact lens industry has been the subject of a number of class action and
government lawsuits and government investigations in recent years. In December
1996, over twenty states sued three of the Company's largest competitors, as
well as certain eyecare practitioners and trade organizations. The lawsuit
alleges among other things, a conspiracy among such persons to violate antitrust
laws by refusing to sell contact lenses to mail order and other non-practitioner
contact lens providers, so as to reduce competition in the contact lens
industry. A similar lawsuit was filed by the State of Florida in 1994 and
several similar class action lawsuits were also filed in 1994. One of the
defendants has agreed to settle the lawsuits as to itself by agreeing to sell
contact lenses to mail-order and other alternative distribution channels, and to
make substantial cash and product rebates available to consumers.
In an unrelated matter, one of the Company's largest competitors was
sued in a national class action lawsuit brought in the Federal District Court in
the Northern District of Alabama in 1994 (the "Alabama Lawsuit"). This suit
alleged that the defendant engaged in fraudulent and deceptive practices in the
marketing and sale of contact lenses by selling identical contact lenses, under
different brand names and for different replacement regimens, at different
prices. The defendant subsequently modified certain of its marketing practices
and ultimately settled the lawsuit in August 1996 by making substantial cash and
product payments available to consumers. In August 1997, such competitor also
settled an investigation by 17 states into similar matters by agreeing to
certain restrictions on its future contact lens marketing practices and making
certain payments to each of the states. In October 1996, a class action lawsuit
was brought against another of the Company's largest competitors in the Superior
Court of New Jersey-Camden (the "New Jersey Lawsuit"). This suit alleges that
the defendant engaged in fraudulent and deceptive practices in the marketing and
sale of contact lenses by selling interchangeable contact lenses, under
different brand names and for different replacement regimens, at different
prices. The suit was certified as a national class action in December 1997.
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
15
<PAGE> 16
reasons. There can be no assurance that the Company will not face similar
actions relating to its marketing and pricing practices or other claims or
lawsuits in the future. The defense of any such action, lawsuit or claim could
result in substantial expense to the Company and significant diversion of
attention and effort by the Company's management personnel. There can be no
assurance that any such lawsuit would be settled or decided in a manner
favorable to the Company, and a settlement or adverse decision in any such
action, lawsuit or claim could have a material adverse effect on the Company's
business, financial condition and results of operations.
In addition to the foregoing lawsuits, there is substantial federal and
state governmental regulation related to the prescribing of contact lenses.
These regulations relate to who is permitted to prescribe and fit contact
lenses, the prescriber's obligation to provide prescriptions to its patients,
the length of time a prescription is valid, the ability or obligation of
prescribers to prescribe lenses by brand rather than by generic equivalent or
specification, and other matters. Although these regulations primarily affect
contact lens prescribers, and not manufacturers or distributors of lenses such
as the Company, changes in these regulations, or their interpretation or
enforcement, could adversely affect the effectiveness of the Company's marketing
strategy to eyecare practitioners, most notably the effectiveness of the
Company's channel-specific and private label branding strategies. Additionally,
given the Company's strategic emphasis on focusing its marketing efforts on
eyecare practitioners, the Company may be more vulnerable than its competitors
to changes in current trade practices. Finally, although cost controls or other
requirements imposed by third party health-care payors such as insurers and
health maintenance organizations have not historically had a significant effect
on contact lens prices or distribution practices, this could change in the
future, and could adversely affect the Company's business, financial condition
and results of operations. Adverse regulatory or other decisions affecting
eyecare practitioners, or material changes in the selling and prescribing
practices for contact lenses, could have a material adverse effect on the
Company's business, financial condition and results of operations.
Fluctuations in Operating Results; Decreasing Average Sales Prices. The
Company's quarterly operating results have varied significantly in the past and
are likely to vary significantly in the future based upon a number of factors.
The Company's quarterly results can be affected significantly by pricing changes
by the Company or its competitors, the Company's ability to increase
manufacturing capacity efficiently and to reduce per unit manufacturing costs,
the time and costs involved in expanding existing distribution channels and
establishing new distribution channels, discretionary marketing and promotional
expenditures such as cooperative merchandising allowances paid to the Company's
customers, timing of the introduction of new products by the Company or its
competitors, inventory shortages, timing of regulatory approvals and other
factors. The Company's customers generally do not have long-term commitments to
purchase products and products are generally shipped as orders are received. 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. Further, it is likely that in some future quarter the
Company's net sales or operating results will be below the expectations of
public market analysts and investors. In such event, the price of the Company's
Common Stock would likely be materially adversely affected.
The Company expects that the overall average selling price that it
realizes across its products will decline over time because of (i) shifts in the
Company's product mix from lenses marketed for annual replacement regimens to
lenses marketed for daily and weekly disposable replacement regimens, 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
16
<PAGE> 17
production costs through increased automation, increased volume and reduced
packaging costs in order to maintain, or improve, its gross margins.
Risks Relating to International Operations; Need to Increase Sales in
International Markets. In 1998, 1999 and the first quarter of 2000, the
Company's international sales represented approximately 21%, 27% and 28%,
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.
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. 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. The failure of the Company to increase its international sales
substantially could have a material adverse effect on the Company's business,
financial condition and results of operations.
Uncertain Ability to Manage Growth; Risks Associated with Implementation
of New Management Information Systems. The Company has experienced rapid growth
in recent years. Continued rapid growth may place 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.
Risk of New Products and Technological Change. The Company has not
historically allocated substantial resources to new product development, but
rather has leveraged or licensed the technology developments of others. Recently
the Company has begun investing more in new product development, however in
general the Company's expenditures in this area are significantly below those of
its competitors. There can be no assurance that the Company's investments in new
product development will be successful. There can also 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 has a similar lens. Additionally, Bausch & Lomb launched a toric lens
marketed for weekly disposal in 1999 and Johnson & Johnson has recently launched
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 product areas. 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 Associated with Interruption of Manufacturing Operations. The
Company manufactures substantially all of the products it sells. As a result,
any prolonged disruption in the operations of the
17
<PAGE> 18
Company's manufacturing facilities, whether due to technical or labor
difficulties, destruction of or damage to any facility or other reasons, could
have a material adverse effect on the Company's business, financial condition
and results of operations. In this regard, one of the Company's principal two
manufacturing facilities is located in Puerto Rico and is thus exposed to the
risks of damage from hurricanes. If this facility were to be out of production
for an extended period, the Company's business, financial condition and results
of operation would be materially adversely affected.
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. Failure to comply with such regulations
could result in delays in product introduction or manufacturing, fines,
withdrawals of regulatory clearances or approvals, product recalls or other
actions that could harm the Company. 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.
Influence by Existing Stockholders. As of April 24, 2000, officers,
directors and related principal stockholders of the Company, in the aggregate,
beneficially own approximately 28.0% of the Company's outstanding Common Stock,
which does not include shares of common stock exercisable under an option held
by Wesley Jessen to acquire 4,577,830 shares of the Company's common stock upon
the occurrence of certain events provided for under the Merger agreement. As a
result, these stockholders, acting together, possess significant voting
influence over the election of the Company's Board of Directors and the approval
of significant corporate transactions, among other matters. Such influence could
have the effect of delaying, deferring or preventing a change in control of the
Company, or facilitating a change in control that other stockholders might not
desire.
Certain Anti-Takeover Provisions. The Company's Board of Directors has
the authority to issue up to 4,000,000 shares of Preferred Stock and to
determine the price, rights, preferences, privileges and restrictions, including
voting rights, of those shares without any further vote or action by the
stockholders. The rights of the holders of Common Stock are subject to, and may
be adversely affected by, the rights of the holders of any Preferred Stock that
may be issued in the future. The issuance of Preferred Stock, while providing
flexibility in connection with possible financing or acquisitions or other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of the
Company. The Company has no current plans to issue shares of Preferred Stock.
The Company's Bylaws and indemnity agreements provide that the Company will
indemnify officers and directors against losses they may incur in legal
proceedings resulting from their service to the Company. Further, the Company's
charter documents contain a provision eliminating the ability of the Company's
stockholders to take action by written consent. This provision is designed to
reduce the vulnerability of the Company to an unsolicited acquisition proposal
and to render the use of stockholder written consents unavailable as a tactic in
a proxy fight. However, such provision could have the effect of discouraging
others from making tender offers for the Company's shares, thereby inhibiting
increases in the market price of the Company's shares that could result from
actual or rumored takeover attempts. Such provision also may have the effect of
preventing changes in the management of the Company. In addition, Section 203 of
the Delaware General Corporation Law, to which the Company is subject, restricts
certain business combinations with any "interested stockholder" as defined by
such statute. This statute may delay, defer or prevent a change in control of
the Company.
18
<PAGE> 19
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, 1999.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
On March 23, 2000, the Company and certain of its directors were named
in a suit filed in California Superior Court, (Rand v. Ocular Sciences, Inc. et
al., Case No. 310935, San Francisco County), by a shareholder seeking class
action status for breach of fiduciary duties. The complaint seeks damages in an
unspecified amount and injunctive relief. The parties have agreed to transfer
this action to San Mateo County.
On April 3, 2000, Bausch & Lomb, Inc. filed suit against Wesley Jessen,
its board of directors and the Company in the Court of Chancery of Delaware
(Bausch & Lomb, Inc. v. Wesley Jessen VisionCare, Inc. et al., Civil Action No.
17963, New Castle County). Bausch & Lomb's complaint alleges that the Company's
merger agreement with Wesley Jessen was entered into in breach of the Wesley
Jessen board's fiduciary duties to act on a fully informed basis and to advance
the best interests of Wesley Jessen shareholders. It also alleges that the
Company aided and abetted the Wesley Jessen board's purported breach of
fiduciary duties. The complaint seeks injunctive relief against various
provisions in the merger agreement that allegedly "defend against" the Bausch &
Lomb tender offer, and requests a declaration that any breakup fee the Company
receives be held in constructive trust. On April 19, 2000, the Company filed a
motion to dismiss this action, which is not yet fully briefed.
On April 19, 2000, the Company filed a lawsuit against Bausch & Lomb and
Dylan Acquisition, Inc., in California Superior Court, for intentional and
negligent interference with contractual relations and unfair competition (Ocular
Sciences, Inc. v. Bausch & Lomb, Inc. et al., Case No. 412625, San Mateo
County). This lawsuit seeks preliminary and permanent injunctive relief
enjoining Bausch & Lomb and Dylan Acquisition, Inc., from tortiously interfering
with the Company's contractual relationship between Wesley Jessen, and damages
in an amount to be determined at trial. On April 27, 2000, the defendants
removed this action to the United States District Court for the Northern
District of California.
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>
10.01 - Consulting agreement between Ed Cummins and Ocular Sciences, Inc. *
10.02 - Agreement and Plan of Merger dated March 19, 2000, among Wesley Jessen VisionCare Inc., and OSI Acquisition
Corporation and Ocular Sciences, Inc.**
11.01 - Statement regarding computation of net income per share
27.01 - Financial Data Schedule
</TABLE>
- -----------------
* Incorporated by reference from the Company's 1999 Form 10-K, exhibit 10.24,
filed with the SEC on March 30, 2000.
** Incorporated by reference from the Company's Form 13D, filed with the SEC
on March 29, 2000.
(b) Reports on Form 8-K
19
<PAGE> 20
A Form 8-K was filed on April 28, 2000 to report that on April 20, 2000,
Norwick B.H. Goodspeed, President and Chief Executive Officer, and Gregory E.
Lichtwardt, Vice President, Finance and Chief Financial Officer, would be
leaving the Company.
Mr. Goodspeed's resignation as an officer and director of the Company
was effective April 20, 2000 and Mr. Lichtwardt's resignation as an officer of
Ocular Sciences will become effective May 5, 2000. John D. Fruth, the Company's
Chairman, founder and former Chief Executive Officer has filled Mr. Goodspeed's
officer positions. Mr. Lichtwardt's officer positions will be filled on an
interim basis by Edgar J. Cummins, a member of the Company's board of directors
since 1992 and former Chief Financial Officer of Allergan, Inc.
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OCULAR SCIENCES, INC.
(Registrant)
Date: May 5, 2000 /s/ Gregory E. Lichtwardt
------------------------------------
Gregory E. Lichtwardt
Vice President, Finance, Chief
Financial Officer, and Treasurer
(Duly Authorized Officer and Chief
Accounting Officer)
21
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
- ------ -------------
<S> <C>
10.01 - Consulting agreement between Ed Cummins and Ocular Sciences, Inc. *
10.02 - Agreement and Plan of Merger dated March 19, 2000, among Wesley Jessen VisionCare Inc., and OSI Acquisition
Corporation and Ocular Sciences, Inc.**
11.01 - Statement regarding computation of net income per share
27.01 - Financial Data Schedule
</TABLE>
- -----------------
* Incorporated by reference from the Company's 1999 Form 10-K, exhibit 10.24,
filed with the SEC on March 30, 2000.
** Incorporated by reference from the Company's Form 13D, filed with the SEC
on March 29, 2000.
<PAGE> 1
EXHIBIT 11.01
OCULAR SCIENCES, INC.
STATEMENT REGARDING COMPUTATION OF NET INCOME PER SHARE (BASIC AND DILUTED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
2000 1999
----------- -----------
<S> <C> <C>
Net income per share (basic):
Net income $ 7,133,000 $ 6,655,000
=========== ===========
Weighted average common shares outstanding 23,004,744 22,627,032
=========== ===========
Net income per share (basic) $ 0.31 $ 0.29
=========== ===========
Net income per share (diluted):
Net income (diluted) $ 7,133,000 $ 6,655,000
=========== ===========
Weighted average common shares outstanding 23,004,744 22,627,032
Weighted average shares of stock options
under the treasury stock method 332,162 700,334
----------- -----------
Weighted average common and dilutive
potential common shares outstanding 23,336,906 23,327,366
=========== ===========
Net income per share (diluted) $ 0.31 $ 0.29
=========== ===========
</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
MARCH 31, 2000, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 14,127
<SECURITIES> 24,557
<RECEIVABLES> 35,672
<ALLOWANCES> 1,789
<INVENTORY> 18,422
<CURRENT-ASSETS> 107,294
<PP&E> 136,035
<DEPRECIATION> 27,562
<TOTAL-ASSETS> 229,433
<CURRENT-LIABILITIES> 31,587
<BONDS> 0
0
0
<COMMON> 23
<OTHER-SE> 190,766
<TOTAL-LIABILITY-AND-EQUITY> 229,433
<SALES> 43,442
<TOTAL-REVENUES> 43,442
<CGS> 16,967
<TOTAL-COSTS> 17,440
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 224
<INTEREST-EXPENSE> 277
<INCOME-PRETAX> 9,264
<INCOME-TAX> 2,131
<INCOME-CONTINUING> 7,133
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,133
<EPS-BASIC> 0.31
<EPS-DILUTED> 0.31
</TABLE>
