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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999;
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NO. 0-22623
OCULAR SCIENCES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 94-2985696
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
475 ECCLES AVENUE
SOUTH SAN FRANCISCO, CALIFORNIA 94080
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 583-1400
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $0.001 PER SHARE
(TITLE OF CLASS)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the closing sale price of the Registrant's Common
Stock on March 1, 2000 ($14.4375) as reported on the Nasdaq National Market was
$245,740,600.88
As of March 1, 2000, Registrant had outstanding 22,996,495 shares of Common
Stock.
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OCULAR SCIENCES, INC.
1999 FORM 10-K
TABLE OF CONTENTS
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 26
Item 3. Legal Proceedings........................................... 27
Item 4. Submission of Matters to a Vote of Security Holders......... 27
PART II
Item 5. Market for the Registrant's Common Equity and Related Stock
Holder Matters.............................................. 28
Item 6. Selected Consolidated Financial Data........................ 29
Item 7. Management's Discussion and Analysis of Financial Condition
and
Results of Operations....................................... 30
Item Quantitative and Qualitative Disclosures About Market
7A . Risk........................................................ 39
Item 8. Financial Statements and Supplementary Data................. 40
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 64
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 64
Item 11. Executive Compensation...................................... 67
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 71
Item 13. Certain Relationships and Related Transactions.............. 72
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form
8-K......................................................... 74
Signatures............................................................ 78
Index to Exhibits..................................................... 81
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This Annual Report on Form 10-K contains 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 statements
involve risks and uncertainties, including the impact of intense competition,
risks of expansion and automation of manufacturing facilities, risks of trade
practice litigation, fluctuations in operating results, risks of international
operations, the management of growth and the other risks discussed in the
sections entitled "Item 1, Business -- Risk Factors" and "Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this Annual Report on Form 10-K. The actual results that the
Company achieves may differ materially from the results discussed or implied in
such forward-looking statements due to such risks and uncertainties. Words such
as "believes," "anticipates," expects," future," "intends," "may" and similar
expressions are intended to identify forward-looking statements, but are not the
exclusive means of identifying such statements. The Company undertakes no
obligation to revise any of these forward-looking statements.
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PART I
ITEM 1. BUSINESS
Ocular Sciences, Inc. (the "Company") is a growing manufacturer and
marketer of soft contact lenses. The Company manufactures a broad line of soft
contact lenses marketed for annual and disposable replacement regimens. The
Company believes that its lens designs provide wearers with a higher level of
comfort and greater ease of handling than those of its leading competitors. The
Company's manufacturing technologies permit consistent, cost-effective
reproduction of these designs, allowing the Company to offer its lenses at
competitive prices. In addition, the Company has implemented marketing
strategies designed to assist eyecare practitioners, both in independent
practice and in retail chains, in retaining their patients and monitoring their
patients' ocular health. These strategies provide a significant incentive for
practitioners to prescribe the Company's lenses. Furthermore, the Company has
continuously focused on lowering its non-manufacturing costs, or
"cost-to-serve," enabling it to increase its profitability and its flexibility
to reduce prices. To minimize its cost-to-serve, the Company utilizes a
telemarketing sales force and directs its marketing efforts toward eyecare
practitioners rather than consumers.
The Company believes that practitioners can increase their patient
retention and provide better ongoing patient care by providing
competitively-priced, high-quality products that are differentiated by brand
from those offered by competing distribution channels. Accordingly, the Company
has successfully implemented a strategy to address the needs of eyecare
practitioners. The Company markets its lenses solely to eyecare practitioners,
both in private practice and in retail optical chains, rather than to consumers.
The Company believes that focusing on the eyecare practitioner, who
significantly influences the selection of the brand of contact lenses worn by
the patient, is critical to its ability to market contact lenses successfully.
The Company does not sell to mail-order companies, pharmacies or other
distribution channels that do not provide the regular eye examinations necessary
to maintain overall ocular health.
Over the last five years, the Company has established itself as a leader in
the spherical annual replacement segment of the United States market with a
market share estimated at approximately 20% in the fourth quarter of 1999, based
on unit sales. Since its introduction of lenses marketed for weekly disposable
replacement regimens in 1993, the Company has steadily increased its share of
this growing market, reaching approximately 19% of total unit sales in the
United States during the fourth quarter of 1999, based on data published by the
Contact Lens Institute, an industry trade organization. The Company's overall
unit sales have increased at a compound annual growth rate of approximately 51%
from 1995 to 1999, primarily due to increased sales of its lenses marketed for
weekly disposable replacement regimens. During the same period, while the
overall average selling prices of all of the Company's lenses declined
approximately 49%, the Company reduced its per unit production costs by
approximately 45% by spreading its relatively fixed manufacturing costs over
higher production volumes, and by improving its manufacturing and packaging
processes. In addition, from 1995 to 1999, the Company has leveraged its low
"cost-to-serve" business model to lower operating expenses on a per-unit basis
by approximately 61%. As a result, from 1995 to 1999, the Company's net sales
and operating income have increased at compound annual growth rates of
approximately 27% and 32%, respectively, while its operating margins have
improved from 22.4% to 26.0%.
INDUSTRY OVERVIEW
The soft contact lens industry is characterized by increasing lens
consumption, declining unit prices and intense competition among the eyecare
practitioners and retail chains that fit, prescribe and sell contact lenses.
Industry analysts estimate that approximately 50% of the world's population
needs some type of vision correction. In the United States alone, over 135
million people require some form of vision correction. Approximately 27 million
people in the United States, or 20% of those requiring vision correction, wear
contact lenses according to estimates by industry analysts, making the United
States the world's largest market for contact lenses. While contact lenses have
been available for decades, the advent of soft lenses in 1971 changed the
industry substantially and stimulated significant penetration of the eyeglass
market by dramatically reducing the discomfort of earlier rigid lenses.
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The first soft contact lenses were generally prescribed for replacement
every one to two years. Although they were significantly more comfortable than
hard contact lenses, they required an extensive cleaning routine, consisting of
daily cleaning with a surfactant cleanser and an additional weekly enzymatic
cleaning to reduce protein accumulation. Even with this cleaning program, these
lenses often became progressively less comfortable to wear over time.
Additionally, the long replacement schedule of the lenses increased the
likelihood of ocular health problems if the wearer did not follow the required
cleaning program. In response to these and other factors, soft contact lenses
marketed for disposable replacement regimens were introduced in 1988. These
replacement regimens, in which lenses are to be replaced daily, weekly or
monthly, have spurred a rapid increase in contact lens consumption in the United
States. While contact lenses marketed for disposable replacement regimens are
often made from the same or similar polymers and can have the same or similar
designs as lenses marketed for annual replacement regimens, they are generally
produced at substantially higher volumes, sold in larger quantities and packaged
in less expensive materials. These factors allow the lenses to be sold at
substantially reduced per unit prices, making more frequent lens replacement
economically feasible for the consumer.
Largely as a result of this increased frequency of lens replacement, the
number of soft contact lenses sold in the United States has increased at a
compound annual growth rate of approximately 15% from 1995 through 1999,
according to the Contact Lens Institute. This increase in unit sales has
provided increased manufacturing economies of scale that, together with
increased competition in distribution channels, has led to significant
reductions in average retail prices per unit. The Company believes that this, in
turn, has led to further increases in lens consumption. Despite the decline in
per unit prices, as wearers switch to more frequent replacement regimens, their
annual expenditures for lenses increase. For example, the Company's annual sales
are from four to seven times higher for a wearer following a bi-weekly
replacement regimen than they are for a wearer following an annual replacement
regimen. As a result, total dollar sales of contact lenses in the U.S. have
increased at a compound annual growth rate of approximately 7% per year from
1995 through 1999. The Company believes that the United States market for
contact lenses will continue to grow, although at a slower rate, as wearers
continue to shift towards more frequent lens replacement regimens. In addition,
according to industry studies, while the United States and Canadian market
represented approximately 50% of worldwide contact lens unit sales volumes in
1996, market growth rates outside of North America now exceed those in North
America. The Company believes that international contact lens sales will
continue to increase as low-priced contact lenses become increasingly available
in many international markets.
Most contact lenses are purchased from optometrists, either in private
practice or in retail chains, and from ophthalmologists in private practice. The
Company believes that the eyecare profession suffers from a surplus of eyecare
practitioners and the resulting competitive pressure has been exacerbated by the
increased prevalence of retail optical chains and mass merchandisers that
provide eyecare services. Eyecare practitioners in retail chains offer services
and products similar to those provided by practitioners in private practice but
offer longer hours in more convenient locations, such as shopping malls and
other high-traffic areas. Retail chains generally require higher patient volumes
and accordingly rely heavily on consumer advertising and promotional pricing to
generate sales. Consequently, the Company believes that competition to acquire
and retain patients has intensified.
The typical eyecare practitioner in both the private practice and retail
chain channels depends heavily on sales of products, such as contact lenses and
eyeglasses. The Company believes, based on a 1996 industry survey, that the
typical optometric practice or retail optical chain realizes approximately
two-thirds of its revenue from sales of corrective products, such as contact
lenses and eyeglasses, and approximately one-third of its revenue from
professional services such as eye examinations. Since the need for vision
correction is chronic, repeat sales of contact lenses can provide the
practitioner with a recurring, predictable revenue base.
While the introduction of disposable lens replacement regimens has led to
growth in the contact lens market, it has placed additional competitive pressure
on practitioners. Traditionally, patients purchased new lenses annually in
connection with their eye examinations. Today, a patient is still required to
see an eyecare practitioner initially to be fitted for contact lenses and to
receive a prescription. After the initial fitting, however, while the patient
may see the practitioner annually to monitor eye health, he or she may purchase
new contact lenses to refill the prescription three or four times per year. Most
patients select contact lenses
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based on the recommendation of their eyecare practitioners, and accordingly
practitioners have significant influence in determining the brands of contact
lenses worn by their patients. In addition, because contact lens prescriptions
are generally brand-specific, patients typically continue to purchase the same
brand for their prescription refills. However, the prescribing practitioner
risks losing the recurring sales represented by prescription refills as
nationally advertised lens brands are available through virtually every possible
channel of distribution, including mail-order companies and pharmacies.
The Company believes that practitioners can increase their patient
retention and provide better ongoing patient care by providing
competitively-priced, high-quality products that are differentiated by brand
from those offered by competing distribution channels. As a result, the Company
believes that there exist significant opportunities for manufacturers of contact
lenses that can effectively address these needs. Moreover, the Company believes
that the increased frequency of lens purchases resulting from the shift to
disposable replacement regimens can provide significant recurring revenues for
manufacturers that are able to produce and distribute large quantities of
high-quality lenses on a cost-effective basis.
STRATEGY
The Company has successfully implemented a strategy based on addressing the
needs of eyecare practitioners. The principal elements of the Company's strategy
include:
Employ Brand Segmentation by Channel. The high-volume use of lenses
marketed for disposable replacement regimens has resulted in increased
mass-market advertising of competing products and intensified competition across
distribution channels. Unlike its larger competitors, which promote nationally
advertised consumer brands across multiple distribution channels, the Company
advertises and promotes its lenses marketed for disposable replacement regimens
under specific brand names for the private practice channel and other brand
names for the retail chain channel. The Company also provides private label
brands for its larger customers. Branding by distribution channel creates brand
exclusivity and allows practitioners to differentiate lenses sold by them from
those sold through competing channels, providing them with a greater ability to
retain their patients' prescription refill business. The Company believes that,
as a result, its channel-specific branding has become increasingly valuable to
eyecare practitioners. By promoting the repeat purchase of lenses from the
prescribing practitioner, the Company believes that its marketing strategies
increase patient satisfaction and thereby encourage long-term loyalty to its
products, while also motivating practitioners to prescribe its lenses.
Expand Internationally. The Company believes that many international
markets for soft contact lenses will grow at faster rates than the United States
market and that this growth will be driven by increased availability of
low-priced lenses marketed for disposable replacement regimens in developed
markets such as Europe, Japan and Canada and by increased disposable income in
emerging markets in Asia and Latin America. However, many markets outside the
United States do not have the level of demand necessary for local manufacturers
to achieve the economies of scale required for low-cost lens production.
Consistent with its strategy of minimizing cost-to-serve, the Company's primary
international growth strategy has been to establish strategic distribution and
marketing relationships with regional optical companies, such as the contact
lens division of Carl Zeiss Company ("Zeiss") in Europe and Seiko Contactlens,
Inc. ("Seiko") in Japan, to capitalize on their existing market presence,
customer relationships and local infrastructure. The Company has also
established distribution relationships with other soft contact lens distributors
in a number of other countries throughout the world. In 1999, the Company
acquired two optical goods distributors in Australia, one of which was the
Company's pre-existing distributor. As such, the Company now has direct sales
forces in the United Kingdom, Canada and Australia and believes that its future
growth in international markets will come from a combination of direct sales
presence and utilizing strategic distributor arrangements.
Produce Superior Performing Products. The Company believes that its contact
lenses are superior in performance to those of its major competitors in terms of
comfort and ease of handling. The Company's advanced dry cast molding process
and sophisticated lens designs maximize wearers' comfort and improve shape
retention of lenses, making them easier for wearers to handle. In addition, the
Company's lenses are designed and manufactured to provide fitting
characteristics similar to competitors' lenses. In general, this
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interchangeability enables the practitioner to switch a patient to the Company's
lenses without extensive refitting time. These advantages enable the Company to
market its lenses to eyecare practitioners for both existing, as well as new,
contact lens wearers.
Emphasize Low-Cost Efficient Manufacturing. With the growth of the
high-volume disposable market segment, low-cost, scaleable manufacturing has
become increasingly important. The Company's dry cast molding technology allows
it to manufacture high-quality lenses efficiently. As a result, the Company has
been able to reduce its per unit production costs by approximately 45% over the
last five years while increasing its production volumes by approximately 318%.
The Company is currently implementing highly automated production lines in its
U.K. manufacturing facility and has expanded its Puerto Rican manufacturing
operations to include a substantially larger new facility in 1999, which is
expected to also include these highly automated production lines, in the
2000 - 2001 time period. The Company believes that the increased unit volumes
resulting from the growing disposable replacement market and this continued
investment in automation and capacity will enable it to further reduce per unit
production costs and increase production volumes.
Minimize Cost-to-Serve. A substantial portion of the Company's costs
consists of the costs required to sell and market lenses and to take and fill an
order. The Company focuses on lowering these non-manufacturing costs, or
"cost-to-serve," in order to increase its profitability and its flexibility to
reduce prices. The Company's primary means of minimizing cost-to-serve are its
use of telemarketing rather than a traditional direct sales organization and its
use of advertising targeted to practitioners rather than to consumers. This
strategy differentiates the Company from its competitors, and the Company
believes that the cost of its average sales call is substantially lower than
that of its competitors that rely on field sales representatives, as the
Company's inside sales personnel can make more calls per day at a lower annual
cost per salesperson. Unlike its leading competitors, which market their
products to consumers through expensive mass-media campaigns, the Company
further controls its operating expenses by directing its marketing solely to the
eyecare practitioners who prescribe contact lenses. In addition, the Company
continues to invest in increased automation in its distribution operations in
order to maintain its low cost-to-serve.
Focus Marketing on Eyecare Practitioners. The Company's sales and marketing
efforts are directed at eyecare practitioners because the practitioner strongly
influences the brand of lenses purchased by the patient. The Company advertises
and promotes its products solely to practitioners rather than to consumers. In
addition, the Company does not sell its lenses to mail-order companies,
pharmacies and other distribution channels that do not provide the eyecare
services necessary to confirm lens fit and monitor ocular health. By bar-coding
each unit shipped for disposable replacement regimens, the Company can identify
diversion of its lenses to non-eyecare practitioner channels. The Company
structures its branding and marketing strategies so that the patient will be
more likely to refill prescriptions from the practitioner or retail chain from
whom he or she received the initial prescription. As a result, the Company
believes that it assists eyecare practitioners in retaining patient reorders and
improves practitioners' ability to monitor their patients' ongoing ocular
health, thereby providing a significant incentive for practitioners to prescribe
the Company's lenses.
PRODUCTS
The Company manufactures a broad line of soft contact lenses that it
believes provide superior performance to other leading products at competitive
prices. Soft contact lens performance is defined primarily by comfort (how the
lens feels on the eye), handling (ease of placement and removal), acuity of
vision and physiological response. These qualities, in turn, are determined
primarily by lens design and the manufacturing process. The Company's lenses
incorporate sophisticated designs, including extremely thin edges, a
lenticulated carrier and a low-edge apex, that provide a high level of comfort,
enhanced shape retention and ease of handling. The Company's dry cast molding
process further improves handling and comfort by consistently and accurately
reproducing these designs. In addition, the Company's lenses are designed and
manufactured to provide fitting characteristics similar to those of competitors'
lenses. In general, these characteristics enable the practitioner to switch a
patient to the Company's lenses without extensive refitting time. The Company
believes that this, together with its lenses' performance and price, allows
practitioners to easily prescribe the Company's lenses to existing, as well as
new, contact lens wearers.
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The Company's contact lenses are made from flexible polymers containing
38%, 55% or 60% water. The Company offers different brands for different
replacement regimens, from weekly and monthly replacement (and recently daily
replacement in Japan and in Europe) to annual replacement. A wearer's
replacement regimen is generally based on the recommendation of his or her
eyecare practitioner, who typically prescribes a lens brand targeted to that
regimen and who advises the wearer on the appropriate lens care procedures for
that regimen. However, the wearer may actually replace his or her lenses on a
more or less frequent basis. Given the basic functional similarity of lenses
marketed for different replacement regimens, many of the Company's lenses
marketed for annual and disposable replacement regimens are made from the same
or similar polymers and have the same or similar design specifications. Most of
the Company's lenses contain a light blue bulk-applied visibility tint that
enables the wearer to see and handle the lenses more easily, although some of
the Company's more expensive lenses marketed for annual replacement contain a
more expensive, individually applied masked tint that improves handling and is
less noticeable in the eye, and some of the Company's lenses are untinted. In
addition, some of the Company's lenses marketed in Europe contain an ultraviolet
absorber and the Company launched this lens in the U.S. in the fourth quarter of
1999. The Company's lenses marketed for disposable and annual replacement
regimens are generally packaged in different quantities and priced differently.
See "-- Risk Factors -- Risk of Trade Practice Litigation; Changes in Trade
Practices."
Within different replacement regimens, the Company offers daily-wear
lenses, to be removed, cleaned and disinfected each night, and extended-wear
lenses that may be worn continuously, night and day, for up to seven days. In
addition, within each replacement regimen, the Company offers lenses having
different design parameters, diameters and base curves to enable practitioners
to fit their patients better.
Disposable Replacement Regimens
Lenses marketed for disposable replacement regimens accounted for 96.3% of
the Company's unit volume in 1999.
Weekly Replacement Regimens. The Company entered the growing weekly
disposable segment of the soft contact lens market with a 38% water content lens
in September 1993. The Company's introduction of a 55% water content lens in the
first quarter of 1995 provided a product directly competitive with the market
leader, Acuvue, which was the first soft contact lens to be marketed broadly in
the United States for weekly replacement. These lenses are marketed for
replacement every one to two weeks. The Company believes that its 55% water
lenses marketed for weekly replacement can provide handling and comfort superior
to that provided by Acuvue, at a competitive price. The design and water content
of the 55% water lens permit a high level of oxygen transmissibility and provide
increased comfort for overnight wear. A May 1998 independent study comparing the
Company's 55% water lens marketed for weekly replacement to a wide variety of
competing contact lens brands, including Acuvue, found that a substantial
majority of the 289 patients studied preferred the Company's lens for ease of
use and comfort. This study reported that overall, 86% of these patients
preferred the Company's lens over their habitual lens. In mid-1999, Johnson &
Johnson introduced the Acuvue 2 lens (which is marketed in addition to the
Acuvue lens), a 20% thicker lens which exhibits improved handling
characteristics as compared to the Acuvue lens but also results in a 20%
reduction in oxygen transmission to the cornea. The Company believes that its
lenses marketed for weekly replacement regimens have demonstrated strong market
acceptance, gaining U.S. market share steadily since their introduction and
representing approximately 20% of total unit sales in the weekly disposable
market segment in the United States in the fourth quarter of 1999. The Company
sells its lenses marketed for weekly disposal to independent practitioners under
the Hydron Biomedics and certain other private label brands and to retail chains
under the UltraFlex 7/14 brand and private label brands. The Company packages
its lenses for weekly replacement in boxes, each containing six identical
blister-packed lenses. In January 2000, the Company introduced the Hydrogenics
60 UV, a new lens marketed for weekly replacement regimens, which will be sold
only to independent practitioners. The Company believes this new product will
further enhance the Company's branding strategy by segmenting the distribution
channels with dedicated products.
Monthly Replacement Regimens (Planned Replacement Lenses). The Company's
lenses marketed for monthly replacement regimens are sold under the Hydron
ProActive 55, Edge III ProActive, UltraFlex,
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SmartChoice and private label brands. These lenses are marketed for replacement
every one to three months. This replacement regimen provides a lower cost
alternative to weekly replacement.
Daily Replacement Regimens (Recently Introduced). In the first quarter of
1999, the Company introduced a low-priced lens to be marketed for daily
replacement in Japan and Europe. The product is packaged in boxes of 30 or more
lenses. The Company believes that there may be substantial demand for the
convenience of a lens for single-day wear. However, the Company believes that
the level of demand for lenses marketed for daily disposal is still uncertain.
Certain of the Company's competitors, including the Vistakon division of Johnson
& Johnson ("Johnson & Johnson") and, more recently, the Ciba Vision division of
Novartis ("Ciba") and Bausch & Lomb, Inc. ("Bausch & Lomb"), have introduced,
and certain others plan to introduce, lower-priced lenses marketed for daily
replacement in the United States. The Company intends to evaluate the market
response to competitors' offerings, as well as the response to its own lenses
marketed for daily disposal in Europe and Japan, before introducing its own lens
marketed for daily disposal in the United States. In addition, because of the
substantially greater volume requirements and lower selling prices that the
Company believes will be required to support daily replacement, the Company does
not intend to offer lenses for this replacement regimen in the United States
until it has significantly increased its manufacturing capacity and decreased
its per unit production costs. See "-- Risk Factors -- Intense Competition" and
"-- Risk Factors -- Manufacturing Capacity Constraints; Risks Associated with
Expansion and Automation of Manufacturing Operations."
Annual Replacement Regimens
The Company is a leading provider of soft lenses marketed for annual
replacement regimens in the United States. Lenses marketed for annual
replacement regimens accounted for 3.4% of the Company's unit volume in 1999.
These lenses must be cleaned nightly, with an additional weekly enzymatic
cleaning to reduce protein accumulation. Patients generally wear these lenses
until they become dirty or uncomfortable (usually a year for 38% water products
and about nine months for 55% water products). The Company markets its lenses
for annual replacement regimens primarily under three brand names, Edge III,
UltraFlex and Hydron. These product lines include a number of lens designs to
allow practitioners to choose the lens that best meets their patients' needs.
Under both the Edge III and UltraFlex brands, the Company offers a low-priced,
daily-wear product, a thinner product, a product that is both thinner and larger
in diameter and a product that may be utilized as an extended-wear lens. The
Company packages its lenses marketed for annual replacement regimens in
single-lens vials or blister packs.
Specialty Lenses
Specialty lenses accounted for less than 1.0% of the Company's unit volume
in 1999. Toric lenses are designed to correct vision for people with
astigmatism, which is characterized by an irregularly shaped cornea. The Company
offers daily-wear toric lenses under the Ultra T brand that are manufactured for
the Company by a third party. The Company plans to launch a weekly disposable
toric lens in 2001. Bifocal contact lenses can help to correct presbyopia, or
age-related difficulty in focusing on near objects. The Company offers daily-
wear bifocal lenses under the Echelon brand that are cast-molded by the Company.
In addition, the Company produces its Versa-Scribe tinted lenses, sold in blue,
aqua and green, to enhance the color of the eye.
SALES AND MARKETING
The Company's products are sold worldwide, by its 74-person sales force (as
of December 31, 1999). In order to maintain a low cost-to-serve, the Company has
utilized an inside sales force since its inception in its South San Francisco
and United Kingdom facilities, which consisted of 49 inside sales personnel (as
of December 31, 1999). This inside sales force relies on telemarketing to sell
the Company's products to practitioners, both in independent practice and retail
chains. With over 40,000 practitioners in the United States, the Company
believes that this market can be reached effectively and frequently through
telemarketing, mailings, trade journals and trade shows, at a relatively low
cost. The Company's inside sales personnel can make presentations to a
significantly greater number of practitioners per day than the traditional field
sales representatives used by the Company's principal competitors, at a lower
annual cost per salesperson. The
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Company believes that this sales efficiency provides it with a competitive
advantage and contributes to its low cost-to-serve. For larger national
accounts, senior management also frequently makes outside sales calls.
In recruiting its sales personnel, the Company seeks well-educated
candidates who it believes will be capable of both discussing technical
information and developing relationships with practitioners. As part of a
continuing effort to ensure the motivation, professionalism and effectiveness of
its sales representatives, the Company provides each sales representative with
substantial training in a program that was developed by the Company and has been
used since its inception. This program typically includes two weeks of initial
training and at least two hours a week of continuing instruction. This training
emphasizes telemarketing, the development of personal relationships with
customers and the technical aspects of contact lens fitting and design. The
Company's current sales representatives average approximately three years with
the Company, providing a level of experience that the Company believes enables
them to work effectively with optometrists and ophthalmologists. Each
salesperson is assisted by a computer database that maintains each
practitioner's profile, monitors ongoing activities and orders, allows sales
personnel to enter information for follow-up calls and highlights dates for
return calls.
The Company also utilizes distributors that resell the Company's contact
lenses primarily to independent practitioners. In 1999, sales through
distributors represented approximately 15% of the Company's United States sales
and a substantial majority of its international sales. The Company believes that
by using distributors, it increases the availability of its lenses to many
practitioners who prefer to utilize a single source for several brands of lenses
and manages the costs involved in numerous small orders. In addition, the
Company utilizes advertising targeted to practitioners, such as direct-mail and
advertisements in professional journals, to generate leads for its inside sales
force. The Company also provides customers with merchandising allowances and has
developed a variety of promotional programs to offer lenses at significantly
reduced prices in order to encourage trial of its products.
As a matter of policy, the Company does not sell lenses to mail-order
companies because to do so would be inconsistent with its strategy of focusing
on the practitioner and because they do not provide the regular eye examinations
necessary to check the fit of the lenses and monitor overall ocular health. To
control the distribution of its lenses marketed for disposable replacement
regimens, the Company places serialized bar-codes on each disposable product box
and blister pack and routinely monitors product availability at mail-order
companies. The Company has a policy of terminating the supply of lenses marketed
for disposable replacement regimens to its customers who are found to have
diverted products to a mail-order company. See "-- Risk Factors -- Risk of Trade
Practice Litigation; Changes in Trade Practices."
In 1999, the Company sold its products to approximately 15,000 independent
practitioner accounts and approximately 90 retail chains. The Company's
customers in each of the past three years have included 18 of the top 20 United
States optical retailers. 15 of these top 20 U.S. retailers, as well as key
international corporate accounts that have selected the Company's lenses for
their private label. America's Best Contacts and Eyeglasses, Inc., and its
affiliates, accounted for approximately 10% of the Company's net sales in 1999,
and the Company's ten largest customers in 1999 represented approximately 30% of
the Company's net sales in that year.
Product Branding. The Company has developed many different trademarked
brands for its lenses marketed for disposable replacement regimens. Certain
brands are offered only to independent practitioners. Other brands are offered
only to retail chains. In addition, private label brands are offered to certain
high-volume customers that wish to develop their own brand recognition and
loyalty, and private practitioners (or groups of private practitioners) meeting
certain volume criteria can similarly purchase "semi-exclusive" brands that are
not widely offered to other practitioners in their local market. The Company
believes that this approach differentiates the Company from its leading
competitors, which typically rely heavily on expensive consumer advertising and
promotion of national brands to generate brand awareness and demand. With the
same nationally advertised and promoted brands of lenses marketed for disposable
replacement regimens available in a number of major distribution channels, often
including mail-order companies and pharmacies, patients can bypass their
original eyecare provider when purchasing replacement lenses. By marketing its
lenses under different brands, segmented by distribution channel, the Company
believes that it can assist
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eyecare professionals in retaining their patients and improve patients'
long-term eyecare. See "-- Risk Factors -- Risk of Trade Practice Litigation;
Changes in Trade Practices."
International Markets. The Company anticipates that many international
markets for soft contact lenses will grow at faster rates than the United States
market, driven by increased availability of low-priced lenses in developed
markets such as Europe, Japan and Canada and by increased disposable income in
emerging markets in Asia and Latin America. However, many markets outside the
United States do not have the volume of demand necessary for local manufacturers
to achieve the economies of scale required for low cost lens production. As a
result, the Company's international strategy is to enter into strategic
distribution and marketing relationships with established regional optical
companies. The Company offers these companies lower cost lenses afforded by its
volume production efficiencies and the marketing benefits of a private label
brand, and they provide the Company with the benefits of their existing market
presence, customer relationships and local infrastructure. The Company believes
that this strategy permits it to target growing international markets
effectively without significant investment in direct operations. See "-- Risk
Factors -- Risks Relating to International Operations; Need to Increase Sales in
International Markets" and Note 17 of Notes to Consolidated Financial
Statements. The following summarizes the Company's international sales
operations:
Europe. To expand its penetration of this growing market, the Company
has developed strategic partnerships with a number of regional and local
contact lens distributors including Carl Zeiss. In this relationship, Zeiss
sells the Company's contact lenses marketed for disposable replacement
regimens under its brand names on a non-exclusive basis throughout Europe.
The Company also currently has distribution relationships in Europe and the
Middle East serving a number of countries, as well as an inside sales
organization based in Southampton, England that uses telemarketing and
other sales methods in the United Kingdom similar to those used by the
Company in the United States.
Canada. The Company has a direct selling organization based in Ontario
that uses field sales representatives as well as direct mail, journal
promotion and cooperative merchandising allowance programs similar to those
used by the Company in the United States. The Company also utilizes a small
number of Canadian distributors to resell its products, primarily to
independent eyecare practitioners.
Latin America. Although the Company expects unit growth in the
disposable segment of this emerging market, it also believes that unit
sales of lenses marketed for annual replacement regimens will grow at a
much faster pace than in North America or Europe because of the lower level
of consumer disposable income. To expand the Company's penetration of this
growing market, the Company has entered into a number of non-exclusive
distribution arrangements in Latin America.
Asia Pacific Region. The Company believes that the growth of unit
sales in this market will be driven primarily by sales of contact lenses
marketed for disposable replacement regimens, particularly in Japan. Unit
sales of lenses marketed for annual replacement regimens in East Asia are
also expected to grow at a faster rate than in North America or Europe due
to comparatively low levels of consumer disposable income. To capitalize on
expected growth in the Japanese market, the Company has formed a strategic
distribution relationship with Seiko, which is responsible for obtaining
local regulatory approvals and distributes the Company's lenses to Japanese
eyecare practitioners through its network of approximately 45 direct sales
representatives. In early 1999, Seiko received Japanese government approval
to sell certain of the Company's contact lenses marketed for disposable
replacement regimens in Japan. The Company has also established
distribution relationships with other soft contact lens distributors in a
number of countries in the Asian market. In 1999, the Company acquired two
optical goods distributors in Australia, one of which was the Company's
pre-existing distributor.
DISTRIBUTION
The Company's distribution operations provide its customers with rapid and
reliable deliveries of its products in a cost-effective manner. Because the
Company's customers place both small orders for individual patients and large
inventory stocking orders, the Company's fulfillment system has the flexibility
to receive, fill and ship orders as small as a single lens and as large as tens
of thousands of lenses. Customers may place orders by toll-free telephone call
or by facsimile. Certain of the Company's larger customers use the
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Company's electronic data interchange ("EDI") services to place orders and
receive order acknowledgments, invoices, inventory status reports and customized
pricing information online, improving efficiency and timeliness for both the
Company and the customer. If the product is in stock, customer orders received
by 2:00 p.m. local time are generally shipped the same day.
The Company maintains its primary warehouse and distribution facilities in
South San Francisco, California; Romsey, United Kingdom; and Markham, Ontario.
The largest and most sophisticated of these distribution centers is the South
San Francisco location, which primarily serves customers in the United States
and Latin America. Customers in Europe and Asia are primarily served from the
Romsey, United Kingdom facility and customers in Canada are primarily served
from the Markham, Ontario facility. Lenses are labeled and boxed at the
distribution center based on actual and anticipated customer orders. In 1999, an
average of approximately 3,178 orders were placed daily at the South San
Francisco facility from customers in North and Latin America and downloaded to
the distribution center for picking and shipping.
To further reduce its cost-to-serve and improve customer service, the
Company has implemented a highly computerized and automated retrieval system at
its South San Francisco facility. This system incorporates advanced handling
processes such as automatic dispensing, automated conveyors and radio frequency
dispatch. These processes are integrated by software that, in turn, is
integrated into the Company's order entry system, allowing orders to be
downloaded, stocking locations determined and fulfillment instructions delivered
automatically. The Company implemented a similar system in the United Kingdom in
1999.
MANUFACTURING
Substantially all of the Company's products are manufactured in facilities
in Santa Isabel, Puerto Rico and in Eastleigh, United Kingdom. The Company
produces its lenses primarily through a manufacturing process known as dry cast
molding. This process uses a single use, two-part plastic mold that is
manufactured by injection-molding machines utilizing high-precision optical
tooling that is also made by the Company. A liquid monomer mixture is dispensed
into the mold and polymerized to form a finished dry lens. The mold containing
the polymerized lens can be inventoried for an extended period under proper
conditions. The dry lens, once removed from the mold, is immersed in a fluid
bath to extract unreacted monomer and to be hydrated and is then inspected,
packaged and sterilized. Each of the Puerto Rico and United Kingdom plants can
generally hydrate dry lenses manufactured by the other. These capabilities
substantially increase the efficiency and flexibility of the Company's
manufacturing operations.
The Company's dry cast molding process enables the Company to reproduce
consistently the sophisticated designs of its lenses, including the lenticulated
carrier and low-edge apex that provide enhanced shape retention and superior
handling characteristics. In addition, the Company believes that this process
allows the reproduction of lenses that are designed to provide fitting
characteristics similar to those of leading competitors' lenses, regardless of
their manufacturing process. The Company also believes that the dry cast molding
process provides advantages over certain alternate production methods in yield,
throughput efficiency and performance. For example, each dry lens in the
Company's cast molding process emerges from the mold completely finished,
eliminating the need for additional polishing. This cast molding process reduces
manufacturing steps and facilitates automated handling and inspection. The
Company relies on a non-exclusive, perpetual, irrevocable patent license for a
significant element of its dry cast molding technology. See "-- Trademarks,
Trade Secrets and Patent Licenses." In addition to dry cast molding, certain of
the Company's competitors utilize wet cast molding, lathing or spin-casting
processes.
The Company believes that dry cast molding is a highly scaleable process,
which makes it well suited to address the high-volume requirements of the
growing disposable replacement market. Using this technology, the Company has
been able to increase production volumes by approximately 318% from 1995 to
1999. The disposable replacement market, however, is relatively price-sensitive,
and lenses marketed for disposable replacement regimens generally have
significantly lower selling prices than lenses marketed for annual replacement
regimens. The Company believes that its ability to compete effectively in this
growing market will depend on its ability to continue to reduce its per unit
production costs while increasing manufacturing capacity and maintaining the
high quality of its products.
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The Company believes that reducing its manufacturing costs requires
increased automation to further improve manufacturing efficiencies and yields,
improved packaging designs that utilize lower cost materials and larger
production volumes to take advantage of economies of scale. While the Company
has implemented a number of cost reduction measures, such as blister packaging,
hot water extraction, automatic demolding and in-monomer tinting over the past
several years, the most significant improvements are expected to come from the
ongoing implementation of additional production lines incorporating a new
automated process based on the Company's current dry cast molding technology.
The first automated dry line has been installed and validated in the UK and is
currently producing product for sale. Installation and validation of the first
automated wet processing line was completed in January 2000, and is now
producing commercial product. The second dry line is currently undergoing the
final stages of validation and has produced commercial product during the first
quarter of 2000. It is anticipated that approximately a year will be required to
fully optimize these lines before expected yields and production levels will be
achieved. During the year, the Company has expanded its Puerto Rican
manufacturing facility and completed the construction of a new 119,000 square
feet manufacturing facility in Juana Diaz in Puerto Rico. This facility received
FDA approval in December 1999, and commercial production of product for the U.S.
also commenced in December 1999. The Company will be manufacturing products in
both facilities in Santa Isabel and Juana Diaz for the forseeable future.
The Company anticipates installing additional automated lines in both the
United Kingdom and Puerto Rico. The Company believes that, as the new automated
lines are implemented and their production volumes increased, they will reduce
significantly the labor content of production as well as unit packaging costs
while increasing yields and efficiencies through improved controls and
consistency of environment. The Company believes that the automated production
lines will be capable of manufacturing considerably greater volumes while
occupying less space than the Company's existing lines. The Company currently
expects that from the beginning of 2000 through the end of 2001, it will invest
approximately $46.8 million in capital expenditures on these automated
production lines, and the Company expects to continue to invest in additional
automated production lines after this period. See "-- Risk
Factors -- Manufacturing Capacity Constraints; Risks Associated with Expansion
and Automation of Manufacturing Operations."
As of December 31, 1999, the Company had order backlogs totaling
approximately $4.5 million for certain of its products, including lenses for
disposable replacement regimens. These backorders resulted primarily from
customer demand for certain products being in excess of the Company's inventory
and short-term production capabilities as well as the Company's delay in
receiving FDA approval for the new manufacturing facility in Puerto Rico. See
"-- Risk Factors -- Manufacturing Capacity Constraints; Risks Associated with
Expansion and Automation of Manufacturing Operations."
The Company's success will depend in part upon its ability to increase its
production volume on a timely basis while maintaining product quality, reducing
per unit production costs and complying with the FDA's quality system (including
GMP) regulations. There can be no assurance that the Company will not encounter
difficulties in expanding and automating its manufacturing facilities and
increasing production, including problems involving production yields, quality
control, construction delays and shortages of qualified personnel. The Company's
failure to reduce per unit production costs and maintain product quality could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "-- Risk Factors -- Manufacturing Capacity
Constraints; Risks of Expansion and Automation of Manufacturing Operations" and
"-- Risk Factors -- Risks Associated with Interruption of Manufacturing
Operations."
INFORMATION SYSTEMS
The Company believes that its information systems are an integral component
of its strategy to minimize its cost-to-serve and improve customer service. The
Company successfully completed its final phase of its worldwide conversion to a
new business information system on December 1, 1999. The new systems affect many
aspects of the Company's business, including its manufacturing, sales and
marketing, distribution and accounting functions. The integration of these
applications is important to facilitate future growth. Worldwide applications
for forecasting and demand management, purchasing, accounts payable, general
ledger and labeling were completed in 1998, with order processing, accounts
receivable, and telemarketing implemented at the end of 1999. See "-- Risk
Factors -- Uncertain Ability to Manage Growth; Risks Associated with New
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Management Information Systems," and "Item 7 -- Management's Discussion and
Analysis of Financial Condition and Results of Operation -- Year 2000."
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are focused primarily on the
development of automated manufacturing processes to increase the efficiency and
capacity of the manufacturing operation. See "-- Manufacturing." In addition,
the Company is engaged in development of new soft contact lens products and
additional features. The Company's product development efforts are currently
focused on the development of a new toric product and other specialty lenses to
be marketed for disposable replacement regimens. During the years ended December
31, 1999, 1998 and 1997, expenditures for research and development (including
obtaining regulatory approvals) were approximately $2.9 million, $2.2 million
and $2.4 million, respectively. See "-- Risk Factors -- Risk of New Products and
Technological Change."
TRADEMARKS, TRADE SECRETS AND PATENT LICENSES
The Company believes that its trademarks are among its most valuable assets
and has numerous trademark registrations in the United States, Europe and other
foreign countries. The Company's channel-specific branding strategy is dependent
on the Company's strategic use of its trademark portfolio, as the trademark for
each product brand is generally registered. The Company licenses the Hydron
trademarks under a license agreement that prohibits the use of those trademarks
outside of the Americas. The Company believes that there are currently no
pending challenges to the use or registration of any of the Company's material
trademarks. There can be no assurance, however, that the Company's trademarks do
not or will not violate the proprietary rights of others, that they would be
upheld if challenged or that the Company would, in such an event, not be
prevented from using its trademarks, any of which could have a material adverse
effect on the Company and its business.
The Company has obtained non-exclusive licenses from third parties to
patents for certain contact lens designs and manufacturing technologies used in
the production of its products. Pursuant to a patent license agreement with
several parties, including Geoffrey and Anthony Galley, who were significant
stockholders of the Company prior to its initial public offering and adverse
parties in the litigation in 1996 (see Note 18 of Notes to Consolidated
Financial Statements), the Company has obtained a perpetual, fully paid,
worldwide, non-exclusive, irrevocable license to certain patents and patent
applications covering technology that is significant in the Company's dry cast
molding processes. See "-- Risk Factors -- Intense Competition." The Company has
filed patent applications on certain aspects of its new automated manufacturing
process and new toric product. The Company has also obtained non-exclusive,
fully paid, perpetual, worldwide licenses to use certain technology relating to
the tinting of lenses and to manufacture a monomer used to produce certain of
its lenses. In addition, the Company licenses technology used in manufacturing
its toric and bifocal contact lenses under non-exclusive license agreements that
limit the sales of products manufactured using the licensed technology to the
Americas. If the Company desires or is required to obtain additional licenses to
patents or proprietary rights of others, there can be no assurance that any such
licenses will be available on terms acceptable to the Company, if at all.
In addition to trademarks and patent licenses, the Company owns certain
trade secrets, copyrights, know-how and other intellectual property. The Company
seeks to protect these assets, in part, by entering into confidentiality
agreements with certain of its business partners, consultants and vendors. There
can be no assurance that these agreements will not be breached, that the Company
will have adequate remedies for any such breach or that the Company's trade
secrets and other intellectual property will not otherwise become known or be
independently developed by others and thereby become unprotected. Furthermore,
no assurance can be given that competitors will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's proprietary technology or that the Company can
meaningfully protect its rights in unpatented proprietary technology.
The defense and prosecution of intellectual property suits and related
administrative proceedings are both costly and time-consuming. There can be no
assurance that the prosecution and defense of the Company's
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intellectual property will be successful or that the Company will be able to
secure adequate intellectual property protections in the future. The protection
of intellectual property in certain foreign countries is particularly uncertain.
Adverse determinations in a judicial or administrative proceeding or failure to
obtain necessary licenses could prevent the Company from manufacturing and
selling its products, and such events would have a material adverse effect on
the Company's business, financial condition and results of operations. See
"-- Risk Factors -- Dependence on Trademarks, Patent Licenses and Trade Secrets;
Risk of Intellectual Property Infringement."
COMPETITION
The market for soft contact lenses is intensely competitive and is
characterized by decreasing prices for many products. As the number of wearers
of soft contact lenses in the U.S. has not grown significantly in recent years,
increased U.S. market penetration by the Company will require wearers of
competing products to switch to the Company's products. The Company's products
compete with products offered by a number of larger companies including Johnson
& Johnson, Ciba, Bausch & Lomb, Wesley Jessen and 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. The Company believes
that certain of its competitors are expanding, or are planning to expand, their
manufacturing capacity, and are implementing new, more automated manufacturing
processes, in order to support anticipated increases in volume. As many of the
costs involved in producing contact lenses are relatively fixed, if a
manufacturer can increase its volume, it can generally reduce its per unit costs
and thereby increase its flexibility to reduce prices. For example, Bausch &
Lomb plans to introduce 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 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 largest competitor reduced and
restructured its U.S. prices during 1998, which changes were matched by the
Company in most respects in the same year. The Company's ability to respond to
competitive pressures by decreasing its prices without adversely affecting its
gross margins and operating results will depend on its ability to decrease its
costs per lens. Any significant decrease in the Company's costs per lens will
depend, in part, on the Company's ability to increase its sales volume and
production capacity. There can be no assurance that the Company will be able to
continue to increase its sales volume or reduce its per unit production costs.
In response to competition, the Company may also increase cooperative
merchandising allowances or otherwise increase spending, which may adversely
affect its business, financial condition and results of operations. The failure
of the Company to respond to competitive pressures, and particularly price
competition, in a timely manner could have a material adverse effect on the
Company's business, financial condition and results of operations. See "-- Risk
Factors -- Intense Competition" and "-- Risk Factors -- 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 has introduced a lens marketed for
daily disposal in Japan and Europe in early 1999, 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 disposable lens 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.
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Soft contact lens manufacturers have generally sought to differentiate
themselves from their competitors on the basis of product performance,
marketing, distribution channels and price. In addition, the Company believes
that its manufacturing process technology, lens designs and marketing strategies
differentiate it from its leading competitors. Since the purchase of contact
lenses requires a prescription in the United States, the Company also competes
on the basis of its relationships and reputation with eyecare practitioners.
There can be no assurance that the Company will be able to continue to so
distinguish its products or that competitors will not adopt technologies, lens
designs or marketing strategies that are similar to those used by the Company.
Any such action by competitors could have a material adverse effect on the
Company's business, results of operations and financial condition. In this
regard, Cooper's acquisition of Aspect Vision Care Ltd. in December 1997 has
given them the ability to market in the U.S. a new line of contact lenses for
weekly and monthly replacement regimens that utilize a manufacturing process
technology that is based in part on technology also licensed to and used by the
Company. Additionally, Johnson & Johnson has recently introduced a new lens
marketed for weekly replacement, referred to as Acuvue 2, which Johnson &
Johnson claims has superior handling than their original Acuvue lens, and Bausch
& Lomb has plans to introduce a new 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 photorefractive keratectomy, and
LASIK, or laser in situ keratomileusis). If surgical refractive procedures
become increasingly accepted as an effective and safe technique for permanent
vision correction, they could substantially reduce the demand for contact lenses
by enabling patients to avoid the ongoing cost and inconvenience of contact
lenses. Accordingly, there can be no assurance that these procedures, or other
alternative technologies that may be developed in the future, will not cause a
substantial decline in the number of contact lens wearers and thus have a
material adverse effect on the Company's business, financial condition and
results of operations. See "-- Risk Factors -- Intense Competition" and "-- Risk
Factors -- Risk of New Products and Technological Change."
GOVERNMENT REGULATION
The U.S. Federal Food, Drug and Cosmetic Act (the "FDC Act"), other
statutes, regulations of the U.S. Food and Drug Administration (the "FDA") and
other agencies as well as state laws govern the preclinical and clinical
testing, manufacture, labeling, distribution, sale, marketing, advertising and
promotion of medical devices such as contact lenses. Noncompliance with
applicable regulations can result in, among other things, fines, injunctions,
product recall or product seizures, operating restrictions (including suspension
of production and distribution), refusal of the FDA to grant approval of a
Pre-Market Approval Application ("PMA") or clearance of a Section 510(k)
Pre-Market Notification ("a 510(k) Notification"), withdrawal of previously
granted marketing approvals or clearances, and criminal prosecution. Sales of
the Company's products outside the U.S. are subject to regulatory requirements
that, while generally comparable to those in the U.S., vary widely from country
to country.
FDA Regulation. For purposes of the applicable statutes and regulations,
the Company's products are generally treated as "medical devices." With
exceptions for certain medical devices first marketed before May 28, 1976, prior
to their commercial sale in the United States, medical devices must be cleared
by the FDA, exempted from the requirement of FDA clearance, or approved by the
FDA. In general, the regulatory process can be lengthy, expensive and uncertain,
and securing FDA clearances or approvals may require the submission of extensive
clinical data together with other supporting information to the FDA.
In the United States, medical devices are classified as Class I, II or III,
on the basis of the controls deemed by the FDA to be necessary to reasonably
ensure their safety and effectiveness. Class I devices are subject to general
controls (e.g., labeling and adherence to FDA-mandated quality system (including
current GMP) requirements and, in some cases, 510(k) notification), and Class II
devices are subject to general controls including, in most cases, 510(k)
notification and special controls (e.g., performance standards). Generally,
Class III devices are those that must receive premarket approval by the FDA to
ensure their safety and effectiveness (e.g.,life-sustaining, life-supporting and
implantable devices) and also include most devices that were not on the market
before May 28, 1976 ("new medical devices") and for which the FDA has not
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made a finding of "substantial equivalence" based on a 510(k). Class III devices
usually require clinical testing and FDA approval prior to marketing and
distribution.
The Company's daily-wear products have been classified as Class II devices
subject to the 510(k) pre-market notification process, while the Company's
extended-wear products have been classified as Class III devices subject to the
PMA requirements. Regulation of the Company's daily-wear products under the pre-
market notification process requires that new product introductions in this
category be preceded by FDA clearance of a 510(k) pre-market notification
containing information which establishes the new product as substantially
equivalent to a legally marketed Class I or II medical device or to a legally
marketed Class III device that does not itself require an approved PMA prior to
marketing ("predicate device"). A 510(k) must contain information to support a
claim of substantial equivalence, and this information may include laboratory
test results or the results of clinical studies of the device in humans. The FDA
may determine that a device is not "substantially equivalent" to a predicate
device or that additional information is needed before a substantial equivalence
determination can be made. The premarket notification process generally takes
five to twelve months without clinical data, or twelve to eighteen months or
more if clinical data are required to be included in the notifications but it
may take longer, and 510(k) clearance may never be obtained. The range of
clinical data required to be included in a 510(k), if any, or a PMA application
varies depending on the nature of the new product or product modification.
Generally, the 510(k) notifications filed by the Company do not require clinical
data, and, if clinical data are required, the necessary clinical trials are
short-term. If the Company is unable to establish to the FDA's satisfaction that
a new product is substantially equivalent to a predicate device, extensive
preclinical and clinical testing will be required, additional costs will be
incurred, and FDA approval of a PMA for the product will be required prior to
market entry. Such approval, which cannot be assured in a timely manner or at
all, generally takes at least eighteen to twenty-four months, and can take
substantially longer.
Regulation of the Company's extended-wear products as Class III devices
requires that the Company submit a PMA to the FDA and obtain its approval of the
application prior to marketing such products in the United States. A PMA must be
supported by valid scientific evidence that typically includes extensive data,
including data from preclinical testing and human clinical trials to demonstrate
the safety and effectiveness of the device. The FDA ordinarily requires the
performance of at least two independent, statistically significant human
clinical trials that must demonstrate the safety and effectiveness of the device
in order to obtain FDA approval of the PMA. If the device presents a
"significant risk," the sponsor of the trial (usually the manufacturer or the
distributor of the device) is required to file an investigational device
exemption ("IDE") application with the FDA prior to commencing human clinical
trials. The IDE application must be supported by data, typically including the
results of animal and laboratory testing. If the IDE application is approved by
the FDA and the study protocol is approved by one or more appropriate
institutional review boards ("IRBs"), human clinical trials may begin at a
specific number of investigational sites with a specific number of patients, as
approved by the FDA. If the device presents a "nonsignificant risk" to the
patient, a sponsor may begin the human clinical trials after obtaining approval
of the study protocol by one or more appropriate IRBs, but FDA approval of an
IDE is not necessary unless the FDA notifies the sponsor that an IDE application
is required. An IDE supplement must be submitted to, and approved by, the FDA
before a sponsor or an investigator may make a change to the investigational
plan that may affect its scientific soundness or the rights, safety or welfare
of human subjects. The FDA has the authority to re-evaluate, alter, suspend or
terminate clinical testing based on its assessment of data collected throughout
the trials.
The PMA must also contain the results of all relevant bench tests,
laboratory and animal studies, a complete description of the device and its
components, and a detailed description of the methods, facilities and controls
used to manufacture the device. In addition, the submission must include the
proposed labeling and promotional labeling. Once the FDA accepts a PMA
submission for filing, the FDA begins an in-depth review of the PMA. An FDA
review of a PMA generally takes from twelve to eighteen months from the date the
PMA is accepted for filing, but may take significantly longer if the FDA
requests additional information and if the sponsor files any major amendments to
the PMA. The review time is often significantly extended by the FDA's request
for clarification of information already provided in the submission. Toward the
end of the PMA
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review process, the FDA generally will conduct an inspection of the
manufacturer's facilities to ensure that the facilities are in compliance with
the quality system (including current GMP) requirements.
If the FDA's evaluations of both the PMA and the manufacturing facilities
are favorable, the FDA will issue either an approval letter (order) or an
"approvable letter" containing a number of conditions that must be met in order
to secure approval of a PMA. When and if those conditions have been fulfilled to
the satisfaction of the FDA, the agency will issue an order approving the PMA
and authorizing commercial marketing of the device for certain indications. If
the FDA's evaluation of the PMA or manufacturing facilities is not favorable,
the FDA will deny approval of the PMA or issue a "not approvable letter." The
FDA may also determine that additional preclinical testing or human clinical
trials are necessary, in which case approval of the PMA could be delayed for
several years while additional testing or trials are conducted and submitted in
an amendment to the PMA. The PMA process can be expensive, uncertain and
lengthy, and a number of devices for which FDA approval has been sought by other
companies have never been approved for marketing.
Even if 510(k) clearance or PMA approval is obtained, this clearance or
approval can be withdrawn by the FDA due to the failure to comply with
regulatory requirements or the occurrence of unforeseen problems following
initial clearance or approval. Modifications to existing 510(k)-cleared devices,
including changes in design, material, or manufacturing process that could
significantly affect safety or effectiveness, require submission and clearance
of new 510(k) notifications as do significant changes in labeling, e.g., a
change in indications for use. Modifications to a device that is the subject of
an approved PMA, its labeling, or manufacturing process ordinarily require
approval by the FDA of PMA supplements or new PMAs. Supplements to a PMA
typically require the submission of similar information as is required for an
initial PMA, except that the supplement is generally limited to that information
needed to support the proposed change from the product covered by the original
PMA. The approval of supplemental PMAs requires approximately one to two years.
All of the products currently marketed by the Company have received 510(k)
clearance or PMA approval. The Company anticipates that its contemplated lens to
be marketed for daily disposal will be regulated as a Class II medical device,
requiring submission and clearance of a 510(k), and that its planned
ultraviolet-absorbing extended-wear lens will be regulated as a Class III
medical device, requiring submission and approval of a PMA supplement. There can
be no assurance that these planned products or any other future products will
receive FDA marketing clearance or approval on a timely basis or at all, or that
its new daily wear lens will not be subjected to the PMA process. The Company
has made minor modifications to its lenses which it believes do not require the
submission and clearance of new 510(k) notifications or the submission and
approval of PMA supplements. There can be no assurance, however, that the FDA
will agree with any of the Company's determinations not to submit new 510(k)
notifications or PMA supplements for these changes, that the FDA will not
require the Company to cease sales and distribution while seeking clearances of
510(k) notifications or approvals of PMA supplements for the changes, or that
such clearances and approvals, if required, will be obtained in a timely manner
or at all.
The FDC Act requires that medical devices, including contact lenses, be
manufactured in accordance with the FDA's quality system ("QS") regulation,
which includes, among other things, the FDA's GMP requirements. This regulation
requires, among other things, that (i) the manufacturing process be regulated,
controlled and documented by the use of written procedures, and (ii) the ability
to produce devices which meet the manufacturer's specifications be validated by
extensive and detailed testing of every aspect of the process. The regulation
also requires (i) investigation of any deficiencies in the manufacturing process
or in the products produced, (ii) purchasing controls, (iii) detailed
record-keeping including the maintenance of service records and (iv)
pre-production design controls. Manufacturing facilities are subject to FDA
inspection on a periodic basis to monitor compliance with QS (including current
GMP) requirements. If violations of the applicable regulations are noted during
FDA inspections of manufacturing facilities, the FDA can prohibit further
manufacturing, distribution and sale of the devices until the violations are
cured. The Company believes that its facilities are in compliance with the FDA's
QS regulations and that the planned automation of its manufacturing facilities
will not require clearance or approval.
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In March 1996, the Company received a warning letter from the FDA regarding
certain procedures used in manufacturing products at its facilities in Santa
Isabel, Puerto Rico. The Company took steps to address the FDA's concerns, and
after reinspecting the facilities, the FDA notified the Company that its
concerns were satisfactorily addressed. In February and March 1998, the FDA
again inspected the Company's Santa Isabel facilities in Puerto Rico for
compliance with quality system (including GMP) requirements and received a
summary of certain deficiencies observed by the FDA inspector, primarily related
to complaint handling. In July 1999, the FDA conducted a final inspection of the
Company's Santa Isabel facilities and concluded that the facility was compliance
with quality systems including GMP. In December 1999, the Company's received PMA
approval from the FDA, for its new manufacturing facility in Juana Diaz, Puerto
Rico.
The Company is also required to register as a medical device manufacturer
and to list its products with the FDA. Devices marketed in the United States are
subject to pervasive and continuing regulatory oversight by the FDA and other
agencies, and the Company is subject to periodic inspection and record-keeping
requirements. As a medical device manufacturer, the Company is further required
to comply with FDA requirements regarding the reporting of allegations of death
or serious injury associated with the use of its medical devices, as well as
product malfunctions that would likely cause or contribute to death or serious
injury if the malfunction were to recur. Other FDA requirements govern product
labeling and prohibit a manufacturer from marketing a device with a cleared
510(k) or an approved PMA for an uncleared or unapproved indication. Failure to
comply with applicable regulatory requirements can result in a wide variety of
severe administrative, civil, and criminal sanctions and penalties. See "-- Risk
Factors-- Risks of Regulatory Action."
International Regulation. Sales of medical devices outside the U.S. are
subject to foreign regulatory requirements that vary widely from country to
country. These laws and regulations range from simple product registration
requirements in some countries to complex clearance and production controls such
as those described above in others. As a result, the processes and time periods
required to obtain foreign marketing approval may be longer or shorter than
those necessary to obtain FDA approval. These differences may affect the
efficiency and timeliness of international market introduction of the Company's
products, and there can be no assurance that the Company will be able to obtain
regulatory approvals or clearances for its products in foreign countries.
Medical devices sold or marketed in the European Union ("EU") are subject
to the EU's medical devices directive. Under this directive, CE mark
certification procedures became available for medical devices, and the
successful completion of such procedures would allow certified devices to be
marketed in all EU countries. In order to obtain the right to affix the CE mark
to its products, medical device companies must obtain certification that its
processes meet European quality standards and establish that the product is
considered safe and fit for its intended purpose. Medical devices other than
active implants and in vitro diagnostic products may not be sold in EU countries
unless they display the CE mark. Although member countries must accept for
marketing medical devices bearing a CE marking without imposing further
requirements related to product safety and performance, each country may require
the use of its own language or labels and instructions for use.
The Company may also have to obtain additional approvals from foreign
regulatory authorities in order to sell its products in non-EU countries. Some
countries have historically permitted human studies earlier in the product
development cycle than regulations in the United States permit. Other countries,
such as Japan, have requirements similar to those of the United States. This
disparity in the regulation of medical devices may result in more rapid product
clearance in certain countries than in the United States, while approvals in
countries such as Japan may require longer periods than in the United States.
Seiko Contactlens Inc., the Company's distributor in Japan, will be responsible
for management of clinical trials and obtaining regulatory approval for the
Company's products, and such approval will therefore be outside the Company's
control. Accordingly, there can be no assurance as to when or whether such
approval will be received.
Other Regulation. The Company is also subject to numerous federal, state
and local laws relating to such matters as safe working conditions,
manufacturing practices, environmental protection, fire hazard control and
disposal of hazardous or potentially hazardous substances. There can be no
assurance that the Company will
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not be required to incur significant costs to comply with such laws and
regulations in the future or that compliance with such laws or regulations will
not have a material adverse effect upon the Company's ability to do business.
The Company's success depends to a significant extent upon the success of
its customers in the retail optical industry. These customers are subject to a
variety of federal, state and local laws, regulations and ordinances, including
those regarding advertising, location and design of stores, products sold and
qualifications and practices of the industry. The state and local legal
requirements vary widely among jurisdictions and are subject to frequent change.
Furthermore, numerous health-care related legislative proposals have been made
in recent years in the United States Congress and in various state legislatures.
The potential impact of these proposals with respect to the business of the
Company's customers is uncertain, and there is no assurance that the proposals,
if adopted, would not have a material adverse impact on the Company.
There is substantial United States 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
rather than consumers, the Company may be more vulnerable than its competitors
to changes in current trade practices. 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 affect
on the Company's business, operating results and financial condition.
PRODUCT LIABILITY AND INSURANCE
The Company has in the past been, and continues to be, subject to product
liability claims and lawsuits. Because contact lenses are medical devices, the
Company faces an inherent risk of exposure to product liability claims in the
event that the use of its products results in personal injury. The Company also
faces the possibility that defects in the design or manufacture of its products
might necessitate a product recall. From time to time, the Company has received,
and may continue to receive, complaints of significant patient discomfort,
including corneal scarring and complications, while using the Company's contact
lenses. In certain cases, the reasons for the problems have never been
established. In addition, on two occasions, in 1995 and 1997, the Company has
recalled limited volumes of certain of its product because certain labels on the
vial or blister did not match the enclosed lens. Also in 1999, the Company
recalled a substantial volume of certain of its products because of an incorrect
sterility seal on the product blister. Although the Company has not experienced
material losses to date due to product liability claims or product recalls,
there can be no assurance that the Company will not experience such losses in
the future. The Company maintains product liability insurance with coverage of
$1 million per occurrence and an annual aggregate maximum of $2 million with
umbrella coverage of $20 million.
EMPLOYEES
As of December 31, 1999, the Company had 1,886 full-time employees,
including 328 in the United States, 741 in the United Kingdom, 773 in Puerto
Rico, 29 in Canada, 9 in Australia and 6 in Hungary. Of the Company's full-time
employees, 133 are engaged in sales and marketing, 1,537 in manufacturing, 116
in distribution, 20 in process development and 80 in finance and administration.
The Company also utilizes a number of part-time employees in its manufacturing
and distribution operations to supplement its full-time workforce. The Company's
success is dependent in part on its ability to attract and retain qualified
employees. In particular, the loss of any of the Company's senior management or
other key research, clinical, regulatory, or sales and marketing personnel,
particularly to competitors, could have a material adverse effect on the
Company's development and marketing efforts. None of the Company's employees is
represented by a labor
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union or is the subject of a collective bargaining agreement with respect to his
or her employment by the Company. The Company has never experienced a work
stoppage and believes that its employee relations are good. See "-- Risk
Factors -- Dependence on Key Personnel."
RECENT DEVELOPMENTS
On March 20, 2000, Wesley Jessen VisionCare, Inc. ("Wesley Jessen") and the
Company announced the signing of a definitive agreement and plan of merger
providing for the statutory merger of the Company and Wesley Jessen upon the
satisfaction of stockholder and regulatory approval, and other closing
conditions (the "Merger"). The Merger has been structured to qualify for tax
deferred treatment and to be accounted for as a pooling of interests for
accounting purposes. Under the terms of the agreement, at the closing date each
outstanding share of the Company's common stock will be converted into 0.7211
shares of Wesley Jessen common stock. Based upon the number of shares
outstanding as of the close of business on March 17, 2000, the former
stockholders of the Company would own approximately 48% of the outstanding
common stock of the combined companies (assuming no conversion of outstanding
options). In addition, each share of the Company's outstanding stock options
will be converted at the same exchange ratio, into options to purchase shares of
Wesley Jessen common stock. Based upon the number of Company's outstanding
options as of the close of business on March 17, 2000, approximately 3.9 million
outstanding stock options will be converted into 2.8 million options to purchase
common shares of the combined companies. The closing of he Merger is subject to
the satisfaction of certain closing conditions contained in the agreement and
plan of merger, including regulatory approvals and approvals of the Company's
and Wesley Jessen's stockholders, and therefore there can be no assurance if and
when the Merger will close.
Subsequent to the announcement of the Merger, on March 23, 2000, Bausch &
Lomb, Inc. ("Bausch & Lomb") announced it has made an offer to buy Wesley
Jessen. Bausch & Lomb, one of the Company's competitors, has stated publicly
that it is not interested in acquiring the Company as a part of any acquisition
of Wesley Jessen or otherwise.
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RISK FACTORS
This Form 10-K contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed or implied in such forward-looking statements due to such
risks and uncertainties. Factors that may cause such a difference include, but
are not limited to, those discussed below, in the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this Form 10-K.
Intense Competition. The market for soft contact lenses is intensely
competitive and is characterized by decreasing prices for many products. As the
number of wearers of soft contact lenses in the U.S. has not grown significantly
in recent years, increased U.S. market penetration by the Company will require
wearers of competing products to switch to the Company's products. The Company's
products compete with products offered by a number of larger companies including
Johnson & Johnson, Ciba, Bausch & Lomb, Wesley Jessen and 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. The
Company believes that certain of its competitors are expanding, or are planning
to expand their manufacturing capacity, and are implementing new more automated
manufacturing processes, in order to support anticipated increases in volume. As
many of the costs involved in producing contact lenses are relatively fixed, if
a manufacturer can increase its volume, it can generally reduce its per unit
costs and thereby increase its flexibility to reduce prices. For example, Bausch
& Lomb plans to introduce 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 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 largest competitor reduced and
restructured its U.S. prices during 1998, which changes were matched by the
Company in most respects in the same year. 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 has introduced a lens marketed for
daily disposal in Japan and Europe in early 1999, 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 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 to those used by the
Company. Any such action by competitors could have a material adverse effect on
the Company's business, results of
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<PAGE> 22
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, 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 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 as the Company intends to add additional lines. For example, suppliers
could miss their equipment delivery schedules, new production lines and facility
could improve less rapidly than expected, if at all, or the equipment or
processes could require longer design time than anticipated, or redesigning
after installation. 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 $4.5 million at the end of 1999,
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 $47 million in capital expenditures on automated production lines
in the United Kingdom and Puerto Rico and expects to continue to invest in
additional automated production lines after this period. The Company intends to
finance these capital expenditures with net cash provided by operating
activities, existing cash balances and borrowings under its credit facilities.
The Company is currently experiencing space constraints at its Puerto Rican
facility. The Company is in the process of relocating its Puerto Rican
manufacturing operations to a substantially larger new facility that has been
constructed to the Company's specifications and leased to the Company by the
Puerto Rico Industrial Development Company. Relocation costs will be expensed as
incurred, however the Company does
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not expect these costs to be material. 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 occupancy will be
phased in over eighteen months thereafter. The Company's 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, in equipping the new manufacturing
facility in Puerto Rico or in commencing production on the new lines at the new
facility. 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.
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 regulations, or their
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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. 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 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 1999, the Company's international sales
represented approximately 21%, 21% 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
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there can be no assurance that new laws or regulations will not have a material
adverse effect on the Company's business, financial condition and results of
operations.
A portion of the Company's sales and expenditures are collected or paid in
currencies other than the U.S. dollar. Therefore, the Company's operating
results are affected by fluctuations in foreign currency exchange rates. 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 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. Additionally, although the Company believes that it has not
experienced any problems as a result of the Year 2000 date change, there can be
no assurance that problems will not arise in the future in the systems of the
Company, or its suppliers or customers. See "-- Item 7 -- Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Year
2000."
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 and Ciba have 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, Johnson & Johnson
and Bausch & Lomb, have developed a toric lens marketed for weekly disposal
which is expected to be launched within the next few months. 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 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
23
<PAGE> 26
production for an extended period, the Company's business, financial condition
and results of operation would be materially adversely affected. See
"-- Manufacturing."
Risks of Regulatory Action. 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. Pursuant to the FDC Act, and the regulations promulgated
thereunder, the FDA regulates the preclinical and clinical testing, manufacture,
labeling, distribution, sale, marketing, advertising and promotion of medical
devices such as contact lenses. The process of obtaining FDA and other required
regulatory clearances or approvals can be lengthy, expensive and uncertain.
Failure to comply with applicable regulatory requirements can result in, among
other things, fines, suspensions or withdrawals of regulatory clearances or
approvals, product recalls, operating restrictions (including suspension of
production, distribution, sales and marketing), product seizures and criminal
prosecution of a company and its officers and employees. In addition,
governmental regulations may be established that could prevent or delay
regulatory clearances or approval of the Company's products. Delays in receiving
necessary U.S. or foreign regulatory clearances or approvals, failure to receive
clearances or approvals, or the loss of previously received clearances or
approvals could have a material adverse effect on the Company's business,
financial condition and results of operations.
In general, the FDC Act requires that a new medical device be cleared by
the FDA prior to introducing such product to the U.S. market through the
submission of a 510(k) notification; exempted from the requirement of such
clearance; or approved by the FDA prior to introducing such product to the
market through the submission of a PMA. The process of obtaining clearance of a
510(k) notification typically takes five to twelve months without clinical data,
or twelve to eighteen months or more if clinical data are required to be
included in the notification, but it may take longer, and 510(k) clearance may
never be obtained. Approval through the PMA process, which likewise may never be
obtained, generally takes at least eighteen to twenty-four months and can take
substantially longer, is more expensive and requires the submission of extensive
preclinical and clinical data and manufacturing information, among other things.
The soft contact lenses currently marketed by the Company have received FDA
clearance through the 510(k) process or approval through the PMA process. In
addition, the Company has made modifications to its products that the Company
believes do not require the submission of new 510(k) notifications or PMA
supplements. There can be no assurance, however, that the FDA will agree with
any of the Company's determinations not to submit new 510(k) notifications or
PMA supplements for these changes, that the FDA will not require the Company to
cease sales and distribution while seeking clearances of 510(k) notifications
and approvals of PMA supplements for the changes, or that such clearances and
approvals, if required, will be obtained in a timely manner or at all. In
addition, there can be no assurance that any future products developed by the
Company or any modifications to current products will not require additional
clearances or approvals from the FDA, or that such approvals, if necessary, will
be obtained in a timely manner or at all.
The Company's manufacturing facilities are subject to periodic GMP and
other inspections by the FDA. In March 1996, the Company received a warning
letter from the FDA regarding certain procedures used in manufacturing products
at its facilities in Puerto Rico. The Company took steps to address the FDA's
concerns, and, after reinspecting the facilities, the FDA notified the Company
that its concerns were satisfactorily addressed. In February and March 1998, the
FDA again inspected the Company's facilities in Puerto Rico for compliance with
quality system (including GMP) requirements. The Company has received a summary
of certain deficiencies observed by the FDA inspector, primarily related to
complaint handling. The Company is addressing these concerns and believes that
its response will be satisfactory to the FDA. However, there can be no assurance
that the FDA will accept the Company's responses or that the Company will be
found in compliance with quality system (including GMP) requirements in this
inspection and in future inspections by regulatory authorities. Any actions
required by the FDA as a result of its recent inspection or future inspections
could involve significant costs or disruption to the Company's operations, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, noncompliance with quality
system (including GMP) requirements could result in the cessation or reduction
of the Company's production volume, which would have a material adverse effect
on the Company's business, financial condition and results of operations.
24
<PAGE> 27
Sales of medical devices outside the U.S. are subject to foreign regulatory
requirements that vary widely from country to country. These laws and
regulations range from simple product registration requirements in some
countries to complex clearance and production controls in others. Some countries
have historically permitted human studies earlier in the product development
cycle than regulations in the United States permit. Other countries have
requirements similar to those of the United States. This disparity in the
regulation of medical devices may result in more rapid product clearance in
certain countries than in the United States, while approvals in countries such
as Japan may require longer periods than in the United States. These differences
may also affect the efficiency and timeliness of international market
introduction of the Company's products, and there can be no assurance that the
Company will be able to obtain regulatory approvals or clearances for its
products in foreign countries in a timely manner or at all. See "-- Government
Regulation."
Dependence on Key Personnel. 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 loss of any of the Company's senior management or other
key research, clinical, regulatory, or sales and marketing personnel,
particularly to competitors, could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"-- Employees" and "Item 10 -- Directors and Executive Officers of the
Registrants."
Influence by Existing Stockholders. Directors, officers and principal
stockholders of the Company, in the aggregate, beneficially own approximately
27.3% of the Company's outstanding Common Stock. 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.
See "Item 12 -- Security Ownership of Certain Beneficial Owners and Management."
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.
Volatility of Stock Price. The market price of Company's Common Stock is,
and is likely to continue to be, volatile and may be significantly affected by
factors such as actual or anticipated fluctuations in the Company's operating
results or those of its competitors, competitive factors, trade practice
litigation, new products offered by the Company or its competitors, developments
with respect to patents or proprietary rights, conditions and trends in its
industry and other related industries, regulatory actions, adoption of new
accounting standards, changes in financial estimates by securities analysts,
general market conditions and other factors. In addition, the stock market has
from time to time experienced significant price and volume
25
<PAGE> 28
fluctuations that may adversely affect the market price of the Company's Common
Stock. In the past, following periods of volatility in the market price of a
particular company's securities, securities class action litigation has often
been brought against that company. Such litigation, if brought against the
Company, could result in substantial costs and a diversion of management's
attention and resources. See "Item 5 -- Market of Registrant's Common Equity and
Related Stock Holder Matters."
ITEM 2. PROPERTIES
The Company's principal administrative, sales, marketing, customer service,
packaging and distribution facility is located in South San Francisco,
California. The Company's principal manufacturing facilities are located near
Southampton, United Kingdom, and in Juana Diaz and Santa Isabel, Puerto Rico.
The Company also maintains sales offices in Canada, Australia, Hungary and the
United Kingdom.
Rapid growth in sales volumes has required that the Company increase its
capacity by adding manufacturing space. The Company's first United Kingdom
manufacturing facility was established in 1988 and operated by Precision Lens
Laboratories Ltd. ("PLL") until 1992, when it was acquired by the Company. The
Company opened its second United Kingdom manufacturing facility in 1996. The
Company's Puerto Rican manufacturing facility was acquired in late 1992 as part
of the American Hydron acquisition. See "Item 7 -- Management's Discussion and
Analysis of Financial Conditions and Results of Operations -- Overview." This
facility is currently operating at or near capacity (based on a single
production shift per work day). As part of the Company's plan to increase its
manufacturing capacity, it expanded its Puerto Rican manufacturing facilities to
include a substantially larger new facility which is being leased to the Company
by the Puerto Rico Industrial Development Company. Construction of this new
facility was completed during the fourth quarter of 1999, and the Company is in
the process of relocating its manufacturing operations to this new facility. The
Company currently expects that occupancy will be phased in over eighteen months.
See "Item 1 -- Business -- Manufacturing" and "Item 1 -- Risk
Factors -- Manufacturing Capacity Constraints; Risks Associated with Expansion
and Automation of Manufacturing Operations."
The following table describes the Company's principal facilities as of
December 31, 1999:
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION FUNCTION SQUARE FEET OWNED/LEASED
-------- -------- ----------- ------------
<S> <C> <C> <C>
South San Francisco, California(1)............ Corporate 152,145 Leased
Headquarters/Sales/
Distribution
Eastleigh, United Kingdom(2).................. Manufacturing 66,000 Leased
Eastleigh, United Kingdom(3).................. Warehouse 10,000 Leased
Eastleigh, United Kingdom(4).................. Pilot Facility 20,989 Leased
Romsey, United Kingdom(5)..................... Sales/Distribution 34,160 Leased
Nursling, United Kingdom(6)................... Warehouse 13,400 Leased
Santa Isabel, Puerto Rico(7).................. Manufacturing 22,913 Leased
Juana Diaz, Puerto Rico(8).................... Manufacturing 119,348 Leased
Markham, Ontario(9)........................... Sales/Marketing 4,217 Leased
Markham, Ontario(10).......................... Distribution/Warehouse 2,940 Leased
Melbourne, Australia(11)...................... Sales/Distribution 1,531 Leased
Budapest, Hungary(12)......................... Sales/Distribution 775 Leased
</TABLE>
- ---------------
(1) The Company's lease for this facility expires on October 30, 2002, and the
Company has an option to extend the lease until 2007 and to lease an
additional 30,000 square feet.
(2) The Company's lease for this facility expires on December 23, 2010.
(3) The Company occupies this facility under a three-month rolling lease.
(4) The Company's lease for this facility expires on December 23, 2000.
26
<PAGE> 29
(5) Represents two separate buildings. One is leased under a lease that expires
August 18, 2007, and the Company has an option to break the lease from
August 18, 2003. The second building is leased under a lease that expires
December 31, 2012.
(6) Represents two separate buildings. One is leased under a lease that expires
March 21, 2011, and is sub-let under a sublease that expires March 21,
2011. The lease on the second building expired on January 31, 2000.
(7) Represents two separate buildings. Both buildings are leased under leases
that expire December 31, 2000.
(8) The Company completed construction of this new facility during the fourth
quarter of 1999. Under an agreement effective June 1998, Ocular Sciences
Puerto Rico managed on Puerto Rico Industrial Development Company's
("PRIDCO") behalf the construction of this new facility that will be leased
by Ocular Sciences Puerto Rico as its manufacturing facility, upon
completion of construction. The lease commences the first day of the month
following completion, inspection and acceptance of the constructed
building, for a period of ten years. This transaction will be accounted for
as a financed purchase of the building (see Note 9 of Notes to Consolidated
Financial Statements).
(9) The Company's lease for this facility expires October 31, 2007, and the
Company has an option to extend the lease to 2012.
(10) The Company's lease for this facility expires October 31, 2000 and the
Company has an option to extend the lease to 2001.
(11) The Company occupies this facility on a month-to-month lease.
(12) Represents two offices. One office is leased under a lease that expires on
January 6, 2002, and the other office is leased under a month-to-month
lease.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
27
<PAGE> 30
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCK HOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
The Common Stock of the Company began trading publicly on the Nasdaq
National Market on August 5, 1997 under the symbol "OCLR." Prior to that date,
there was no public market for the Common Stock. The following table sets forth
for the periods indicated the high and low sale prices of the Company's Common
Stock as reported by Nasdaq.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1999:
Fourth Quarter............................................ $20.625 $ 15.25
Third Quarter............................................. $20.0625 $ 16.4375
Second Quarter............................................ $34.875 $ 14.75
First Quarter............................................. $28.6875 $ 20.00
YEAR ENDED DECEMBER 31, 1998:
Fourth Quarter............................................ $29.50 $ 16.00
Third Quarter............................................. $34.875 $ 17.687
Second Quarter............................................ $35.125 $ 25.50
First Quarter............................................. $32.375 $ 22.00
</TABLE>
As of March 1, 2000, there were approximately 101 holders of record of the
Company's Common Stock, although the Company believes that there are a larger
number of beneficial owners.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock, and the payment of cash dividends on its Common Stock is prohibited under
the Company's Amended and Restated Credit Agreement with Comerica
Bank -- California (the "Comerica Credit Agreement"). The Company currently
expects to retain all future earnings for use in the operation and expansion of
its business and does not anticipate paying any cash dividends on its capital
stock in the foreseeable future.
28
<PAGE> 31
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's consolidated financial statements and the notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere in this Form 10-K. The selected data
presented below under the captions "Consolidated Statement of Income" and
"Consolidated Balance Sheet Data" for, and as of the end of, each of the years
in the five-year period ended December 31, 1999 are derived from the
consolidated financial statements of the Company.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF INCOME DATA:
Net sales.................................. $175,998 $151,908 $118,605 $90,509 $68,087
Cost of sales.............................. 63,375 48,307 41,066 36,553 26,820
-------- -------- -------- ------- -------
Gross profit............................. 112,623 103,601 77,539 53,956 41,267
Selling and marketing expenses............. 44,291 40,445 27,139 18,101 11,728
Research and development expenses.......... 2,908 2,234 2,385 1,088 986
General and administrative expenses........ 19,681 19,117 18,085 17,332 13,301
-------- -------- -------- ------- -------
Income from operations................... 45,743 41,805 29,930 17,435 15,252
Interest expense........................... (279) (308) (1,387) (3,216) (3,024)
Interest income............................ 2,390 2,870 939 132 280
Other (expense) income, net................ (73) (1,134) (6) (186) 151
-------- -------- -------- ------- -------
Income before taxes...................... 47,781 43,233 29,476 14,165 12,659
Income taxes............................... (11,348) (12,670) (8,843) (3,989) (3,869)
-------- -------- -------- ------- -------
Net income............................... 36,433 30,563 20,633 10,176 8,790
Preferred stock dividends.................. -- -- (49) (82) (82)
-------- -------- -------- ------- -------
Net income applicable to common
stockholders............................. $ 36,433 $ 30,563 $ 20,584 $10,094 $ 8,708
======== ======== ======== ======= =======
Net income per share (basic)(1)............ $ 1.60 $ 1.37 $ 1.10 $ 0.61 $ 0.55
======== ======== ======== ======= =======
Net income per share (diluted)(1).......... $ 1.55 $ 1.31 $ 0.98 $ 0.52 $ 0.46
======== ======== ======== ======= =======
Shares used in computing net income per
share (basic)(1)......................... 22,831 22,293 18,722 16,445 15,791
======== ======== ======== ======= =======
Shares used in computing net income per
share (diluted)(1)....................... 23,445 23,276 21,107 19,439 19,194
======== ======== ======== ======= =======
OTHER DATA:
Lenses marketed for disposable replacement
regimens as a percentage of total lenses
sold..................................... 96.3% 93.7% 89.6% 83.5% 73.4%
Depreciation and amortization.............. $ 8,526 $ 5,950 $ 6,863 $ 4,904 $ 2,578
Capital expenditures....................... 46,395 32,706 16,156 12,256 13,558
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents, restricted cash and
short-term and long-term investments..... $ 46,501 $ 57,249 $ 47,429 $ 5,541 $ 5,346
Working capital............................ 72,841 70,578 60,914 15,118 11,913
Total assets............................... 222,315 176,570 132,835 63,503 50,874
Total debt................................. 3,442 3,464 3,879 22,740 22,911
Stockholders' equity....................... 183,609 142,949 106,104 23,889 13,292
</TABLE>
- ---------------
(1) For an explanation of the determination of the number of shares used in
computing net income per share (basic and diluted) see Note 2 of Notes to
Consolidated Financial Statements.
29
<PAGE> 32
TWO YEAR QUARTERLY FINANCIAL DATA
(UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
FISCAL 1999
Net sales........................................... $37,009 $43,919 $49,475 $45,595
Gross profit........................................ 24,677 27,924 31,554 28,468
Operating income.................................... 8,785 11,659 12,801 12,498
Net income.......................................... 6,655 9,314 10,424 10,040
Net income per share (basic)........................ $ .29 $ .41 $ .45 $ .44
Net income per share (diluted)...................... $ .29 $ .40 $ .45 $ .43
FISCAL 1998
Net sales........................................... $32,171 $38,019 $41,701 $40,017
Gross profit........................................ 22,030 26,334 28,648 26,589
Operating income.................................... 8,033 10,079 12,081 11,612
Net income.......................................... 5,844 7,390 8,825 8,504
Net income per share (basic)........................ $ .27 $ .33 $ .39 $ .38
Net income per share (diluted)...................... $ .25 $ .32 $ .38 $ .37
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
OVERVIEW
Since the Company was incorporated in 1985, its strategy has been to market
high-quality contact lenses to eyecare practitioners at competitive prices using
a low cost-to-serve operating structure. The Company continues to maintain this
worldwide strategy. 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 2.7% from 1998 to 1999 as compared to 3.1% from
1997 to 1998. Since the Company launched its first lens marketed for weekly
replacement regimens, in the summer of 1993, the Company has increased both its
share in this growing market, as well as its net sales. The Company's share of
the market for lenses marketed for weekly disposable replacement regimens in the
fourth quarter of 1999 was 19.3% compared to 15.9% in the same quarter of 1998.
In 1999, lenses marketed for disposable replacement regimens accounted for 96.3%
of the Company's unit volume and 89.7% of net sales, as compared to 93.7% and
84.7%, respectively, for the comparable period in 1998. See "Item 1 -- Risk
Factors."
The Company launched a UV inhibited lens at the end of the fourth quarter
of 1999, and a new weekly disposable lens for the private practitioner in
January 2000. International growth rates continue in excess of the U.S. market,
spurred primarily by sales of the Company's lenses marketed for daily disposal
in Japan and Europe. Strong fourth quarter demand and capacity constraints
resulted in order backlog of approximately $4.5 million at year-end. The
capacity constraints were caused by the delay in implementing the Company's new
highly automated manufacturing lines at its U.K. facility and the later than
planned FDA approval of its new Puerto Rico manufacturing facility. See "Item
1 -- Risk Factors -- Manufacturing Capacity Constraints; Risks Associated with
Expansion and Automation of Manufacturing Operations."
30
<PAGE> 33
RESULTS OF OPERATIONS
All results of operations data in the following tables is presented in
thousands.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Net Sales
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1999 % CHANGE 1998
-------- -------- --------
<S> <C> <C> <C>
U.S. ............................................... $129,066 7.8% $119,716
International....................................... 46,932 45.8% 32,192
-------- --------
Net sales........................................... $175,998 15.9% $151,908
======== ========
As a percentage of net sales
U.S. ............................................. 73.3% 78.8%
International..................................... 26.7% 21.2%
</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 dollars from 1998 to 1999 of
$24.1 million or 15.9% was primarily from 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
52.9% from 1998 to 1999. 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. Unit growth of the Company's
international sales increased 120.0% from 1998 to 1999. The Company is currently
experiencing backorders on certain of its products which has been caused by
delays in the implementation of new automated production lines in the United
Kingdom. See "Item 1 -- Risk Factors -- Manufacturing Capacity Constraints;
Risks Associated with Expansion and Automation of Manufacturing Operations."
The Company's overall average selling price decreased 22% from 1998 to
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 price
reductions on the Company's lenses marketed for weekly replacement took place
during the second half of 1998 in response to price changes by the Company's
largest competitor, and were offset in part by reductions in cooperative
merchandising allowances described in "Selling and Marketing Expenses", below.
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.
Historically, the Company's first quarter net sales have been lower than its
fourth quarter net sales, and the Company expects that it's net sales for the
quarter ending March 31, 2000 will be lower than its net sales for the quarter
ended December 31, 1999.
Gross Profit
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1999 % CHANGE 1998
-------- -------- --------
<S> <C> <C> <C>
Gross profit........................................ $112,623 8.7% $103,601
As a percentage of net sales........................ 64.0% 68.2%
</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 1998 to 1999 was due primarily to increased net sales. Gross profit as a
percentage of sales in 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. The Company expects cost
31
<PAGE> 34
reductions resulting from improvements in the Company's current production
process to be less significant in the future. However, the Company is in the
process of adding new, automated production lines at its United Kingdom and
Puerto Rico 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, and is now producing product for sale. 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 from FDA validation. See "Item 1 -- Risk Factors -- 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 two quarters. See "Item
1 -- Risk Factors -- Fluctuations in Operating Results; Decreasing Average Sales
Prices."
Selling and Marketing Expenses
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 % CHANGE 1998
------- -------- -------
<S> <C> <C> <C>
Selling and marketing expenses........................ $44,291 9.5% $40,445
As a percentage of net sales.......................... 25.2% 26.6%
</TABLE>
Selling and marketing expenses are comprised primarily of cooperative
merchandising allowances, sample diagnostic products provided to eye-care
practitioners without charge, salaries, commissions and benefits for selling and
marketing personnel and postage and freight charges not billed to customers.
Cooperative merchandising allowances are reimbursements to encourage the fitting
and wearing of the Company's lenses marketed for disposable replacement
regimens. Such activities may include, but are not limited to advertising,
in-office promotion, displays and mailings. These allowances are limited to a
percentage of purchases of lenses marketed for disposable replacement regimens
from the Company. The increase in dollars from 1998 to 1999 resulted primarily
from increases in expenditures related to cooperative merchandising allowances,
outbound freight, promotional programs, the size of the U.S. sales force, and
royalties which are due on certain U.K. sales (see Note 18 of Notes to
Consolidated Financial Statements), partially offset in part by lower sample
diagnostic expenditures. The decrease in 1999 selling and marketing expenses as
a percentage of net sales is due to a reduction in the amount of cooperative
merchandising allowances paid in 1999 on a per unit basis compared to 1998, due
to the 1998 price reductions discussed in "Net Sales". 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>
YEARS ENDED DECEMBER 31,
------------------------------
1999 % CHANGE 1998
------- -------- -------
<S> <C> <C> <C>
General and administrative expenses................... $19,681 3.0% $19,117
As a percentage of net sales.......................... 11.2% 12.6%
</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. The dollar increase was due primarily to increased depreciation related
primarily to new computer hardware and software, 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 a new operating structure in the first quarter of 1999. These
increases were almost completely offset by reduced 1999 provisions for
management bonuses, which are paid at the discretion of the
32
<PAGE> 35
Board of Directors, and doubtful accounts receivable. Additionally, included in
the expense for 1998 is a charge of $586,000 related to a custom-built packaging
machine which failed factory acceptance tests and Company specifications.
However, in the fourth quarter of 1999, the Company recovered $324,000 from the
vendor for this packaging machine and has recorded this recovery in its 1999
results. The decrease in general and administrative expenses as a percentage of
net sales was primarily due to the lower 1999 provisions for management bonuses
and doubtful accounts and the one-time packaging equipment provisions and
reversals, as discussed earlier. 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.
Research and Development Expenses
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1999 % CHANGE 1998
------ -------- ------
<S> <C> <C> <C>
Research and development expenses....................... $2,908 30.2% $2,234
As a percentage of net sales............................ 1.7% 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 in dollars from
1998 to 1999 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>
YEARS ENDED DECEMBER 31,
----------------------------
1999 % CHANGE 1998
------ -------- ------
<S> <C> <C> <C>
Interest and other income, net.......................... $2,038 42.7% $1,428
As a percentage of net sales............................ 1.2% 0.9%
</TABLE>
The increase in the dollar amount of interest and other income, net from
1998 to 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.
Income Taxes
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 % CHANGE 1998
------- -------- -------
<S> <C> <C> <C>
Income taxes.......................................... $11,348 (10.4)% $12,670
Effective tax rate.................................... 23.8% 29.3%
</TABLE>
The Company's lower effective tax rate for 1999 was a result of an increase
in the earnings from the Company's Puerto Rican operations, which are partially
exempt from U.S. taxation, 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.
33
<PAGE> 36
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net Sales
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1998 % CHANGE 1997
-------- -------- --------
<S> <C> <C> <C>
U.S. ............................................... $119,716 27.8% $ 93,711
International....................................... 32,192 29.3% 24,894
-------- --------
Net sales........................................... $151,908 28.1% $118,605
======== ========
As a percentage of net sales
U.S................................................. 78.8% 79.0%
International....................................... 21.2% 21.0%
</TABLE>
Net sales increased 28.1% to $151.9 million in 1998 from $118.6 million in
1997. This growth resulted from increased sales of the Company's lenses marketed
for weekly disposable replacement regimens in both the U.S. and international
markets. Unit sales of the Company's lenses marketed for weekly disposable
replacement regimens increased 58.7% from 1997 to 1998. International sales
revenue growth continued to be strong, with revenue growth of 29.3% and unit
growth of 63.9% from 1997 to 1998. In 1998, 93.7% of all lenses sold by the
Company were marketed for use in disposable replacement regimens, compared to
89.6% in 1997. The Company's overall average selling price declined
approximately 14.2% from 1997 to 1998, primarily as a result of a continued
shift in product mix towards sales of lower priced products for weekly
disposable replacement regimens, price reductions on the weekly disposable
products in the U.S., and geographic mix towards lower priced international
distributors. The price reductions on the Company's lenses marketed for weekly
replacement took place during the second half of 1998 in response to price
changes by the Company's largest competitor, and were offset in part by
reductions in cooperative merchandising allowances described in "Selling and
Marketing Expenses", below.
Gross Profit
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1998 % CHANGE 1997
-------- -------- -------
<S> <C> <C> <C>
Gross profit......................................... $103,601 33.6% $77,539
As a percentage of net sales......................... 68.2% 65.4%
</TABLE>
Gross profit increased 33.6% to $103.6 million, or 68.2% of net sales in
1998, from $77.5 million, or 65.4% of net sales, in 1997. The increase in gross
profit from 1997 to 1998 was due primarily to increased net sales, and to
decreases in per unit production costs resulting from the implementation of
certain process improvements and increases in manufacturing volume.
In the fourth quarter of 1997, the Company finalized plans to change the
packaging component of its manufacturing process in late 1998, resulting in an
$824,000 write-down in 1997 of certain of its manufacturing assets to estimated
fair value and a corresponding $824,000 increase in cost of sales. See Note 6 of
Notes to Consolidated Financial Statements.
Selling and Marketing Expenses
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1998 % CHANGE 1997
------- -------- -------
<S> <C> <C> <C>
Selling and marketing expenses........................ $40,445 49.0% $27,139
As a percentage of net sales.......................... 26.6% 22.9%
</TABLE>
Selling and marketing expenses increased 49.0% to $40.4 million, or to
26.6% of net sales, in 1998 from $27.1 million, or 22.9% of net sales, in 1997.
The increase, both in absolute dollars and as a percentage of net sales from
1997 to 1998 resulted primarily from an increase in cooperative merchandising
allowances, increases in the size of the U.S. sales force and increases in
royalties which are due on certain U.K. sales. See Note 18 of Notes to
Consolidated Financial Statements. The increase in cooperative merchandising
34
<PAGE> 37
allowances was primarily attributable to the 58.7% unit growth in lenses
marketed for weekly disposable replacement regimens as well as the growth in
sales to the optical retail channel which tends to carry a higher level of these
allowances. In connection with the price reductions discussed in "Net Sales",
the Company realized a reduction of its cooperative merchandising allowances of
14% in the fourth quarter of 1998 compared to the third quarter of 1998.
General and Administrative Expenses
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1998 % CHANGE 1997
------- -------- -------
<S> <C> <C> <C>
General and administrative expenses................... $19,117 5.7% $18,085
As a percentage of net sales.......................... 12.6% 15.2%
</TABLE>
General and administrative expenses increased 5.7% to $19.1 million in 1998
from $18.1 million in 1997, but declined as a percentage of net sales from 15.2%
to 12.6%. Included in the 1998 expense, is a charge of $586,000 related to a
custom-built packaging machine which failed factory acceptance tests and Company
specifications. The Company did not take delivery of this custom-built machine
nor used it in its production. This amount represented cumulative payments to
the vendor, which had been recorded in construction in progress and subsequently
charged to general and administrative expense. See Note 6 of Notes to
Consolidated Financial Statements. Without this one-time expense, general and
administrative expenses would have increased 2.5% from 1997 to 1998. The
increase in absolute dollars was due primarily to the additional infrastructure
related to the requirements of being a publicly held company, partially offset
by provisions for sales and use taxes recorded in 1997. The decrease in general
and administrative expenses as a percentage of net sales resulted primarily from
expenses growing at a slower rate than revenues, automation of the Company's
distribution centers and the leverage from utilizing the infrastructures of the
Company's international partners rather than establishing direct operations
overseas. For example, worldwide unit sales increased 49.8% from 1997 to 1998
while worldwide distribution expenses increased only 8.1% during this period.
Research and Development Expenses
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1998 % CHANGE 1997
------ -------- ------
<S> <C> <C> <C>
Research and development expenses....................... $2,234 (6.3)% $2,385
As a percentage of net sales............................ 1.5% 2.0%
</TABLE>
The decrease in research and development expenses from 1997 to 1998, both
in dollars and as a percentage of revenue, was primarily due to the fact that
the Company completed the research and development phase related to its new
automated production technology during the third quarter of 1998 and commenced
installation and validation of equipment utilizing this technology. Installation
and validation expenditures are capitalized rather than expensed.
Interest and Other Income (Expenses), Net
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1998 % CHANGE 1997
------ -------- -----
<S> <C> <C> <C>
Interest and other income (expenses), net............... $1,428 414.5% $(454)
As a percentage of net sales............................ 0.9% (0.4)%
</TABLE>
Interest and other income (expenses), net increased 414.5% to $1.4 million,
or to 0.9% of net sales, in 1998 from an expense of $454,000, or 0.4% of net
sales, in 1997. This increase primarily resulted from a reduction in interest
expense as the aggregate amount of the Company's borrowings was reduced
following its initial public offering in August 1997 and an increase in interest
earned as a result of the investment of a portion of the net proceeds from the
Company's initial public offering.
35
<PAGE> 38
Income Taxes
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1998 % CHANGE 1997
------- -------- ------
<S> <C> <C> <C>
Income taxes........................................... $12,670 43.3% $8,843
Effective tax rate..................................... 29.3% 30.0%
</TABLE>
Income taxes were $12.7 million in 1998 and $8.8 million in 1997. The
Company's effective tax rate decreased from 30% in 1997 to 29.3% in 1998 as a
result of an increase in the earnings from the Company's Puerto Rican
operations, which are partially exempt from U.S. taxation. The Company
anticipates that it will continue to benefit from the favorable effect of this
partial exemption through 2001, 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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133") which will be effective for
all fiscal quarters of fiscal years beginning after June 15, 1999. SFAS No. 133
establishes accounting and reporting standards for derivatives instruments and
for hedging activities. The statement requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The statement generally
provides for matching the timing of gain or loss recognition on the hedging
instrument with the recognition of (a) the changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk or (b) the
earnings effect of the hedged forecasted transaction. In June 1999, the FASB
issued SFAS No. 137, which defers the implementation of SFAS No. 133. SFAS No.
133 will be effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. The Company anticipates that adoption of this Statement will not
have a material effect on the Company's financial position or results of
operations.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at December 31, 1999 of $10.1 million decreased
from a December 31, 1998 balance of $26.5 million. Working capital increased
from $70.6 million at December 31, 1998 to $72.8 million at December 31, 1999.
The decrease in cash and cash equivalents was due primarily to the purchase of
property and equipment and net purchases of short and long-term investments in
excess of cash generated from operations. The slight increase in working capital
was due primarily to the increase in short-term investments and accounts
receivable, offset by a decrease in cash and cash equivalents. The Company had
$30.2 million in short and long-term investments as of December 31, 1998,
compared to $36.0 million as of December 31, 1999. The Company's short and
long-term investments may be easily liquidated at minimal cost.
From January 1, 1997 to December 31, 1999, the Company's cash flows from
operating activities and the Company's initial public offering have been
sufficient to fund substantially all of the Company's cash requirements. Over
this three-year period, the Company generated cash-based earnings (net income
plus depreciation and amortization) of $109.0 million. This operating cash,
along with the proceeds from the initial public offering of $53.7 million, were
primarily used to purchase property, plant and equipment of $95.3 million, to
purchase intangible assets of $8.8 million as part of the litigation settlement
in 1996 (see Note 18 of Notes to Consolidated Financial Statements), to make net
short and long-term investments of $36.6 million and to effect net repayment of
long-term debt of $19.8 million.
Net cash provided by operating activities was $35.0 million, $40.5 million
and $32.5 million in 1999, 1998 and 1997, respectively, primarily representing
net income of $36.4 million, $30.6 million and $20.6 million, respectively,
increased for depreciation and amortization of $8.5 million, $6.0 million and
$6.9 million, respectively, and income tax benefits from stock options exercised
of $1.9 million, $4.5 million, and $7.9 million, respectively. These operating
cash flows were reduced by net increases to accounts receivable, inventories,
prepaid expenses and other assets, partially offset by increases in accrued
liabilities and accounts payable.
36
<PAGE> 39
Net cash used in investing activities in 1999, 1998 and 1997 was $53.2
million, $42.6 million and $43.4 million, respectively. In 1997, the Company
used $16.1 million to purchase property and equipment, $8.8 million to purchase
intangible assets as part of the litigation settlement in 1996 (see Note 18 of
Notes to Consolidated Financial Statements) and $19.1 million to purchase short
and long-term investments. In 1998, the Company doubled its investment in
property and equipment to $32.7 million, as the Company continued to invest in
the development and implementation of automated production technology at its
manufacturing facilities and the development and construction of the new Puerto
Rican manufacturing facility, and used $32.1 million to purchase short and
long-term investments. In 1999, the Company used $46.4 million to purchase
property and equipment, $6.3 million to purchase net short and long-term
investments, and $498,000 to acquire two companies in Australia.
Net cash provided by financing activities in 1999, 1998 and 1997 was $1.8
million, $1.5 million and $35.2 million, respectively. In each of these years,
net cash was used primarily for repayments of long-term debt. Net cash provided
by financing activities in 1997 was due primarily to net proceeds to the Company
from its August 1997 initial public offering of $53.7 million. Net cash provided
in 1998 and 1999 was primarily from proceeds from issuance of common stock from
employee stock option exercises.
In addition to cash, cash equivalents and short and long-term investments,
the Company has a credit facility with Comerica Bank -- California. Under the
Comerica Credit Agreement, the Company and its subsidiary Ocular Sciences Puerto
Rico, Inc. ("Ocular Sciences Puerto Rico") can borrow up to an aggregate of
$30.0 million. The Comerica Credit Agreement provides for up to $20.0 million of
revolving credit loans to the Company and up to $10.0 million of term loans to
Ocular Sciences Puerto Rico. Revolving credit borrowings under the Comerica
Credit Agreement bear interest at the bank's base rate or at 1.00% to 1.25%
above the eurodollar rate, and term loans bear interest at the bank's base rate
or at 1.25% to 1.50% above the eurodollar rate, in each case with the applicable
margin over the eurodollar rate depending on the Company's ratio of debt to
tangible net worth. As of December 31, 1999, 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 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 9 of Notes to 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 is obligated to make minimum base payments on noncancelable
operating leases of $717,000, $429,000 and $77,000 in 2000, 2001 and 2002,
respectively, and has existing commitments to make capital expenditures of $7.8
million. The Company currently expects to make capital expenditures of
approximately $62.1 million in 2000 (including the $7.8 million), primarily
related to the development and implementation of automated production lines at
its manufacturing facilities and the development and construction of a new
Puerto Rican manufacturing facility. However, the amount of capital expenditures
may increase or decrease, as the Company may accelerate or delay the
implementation of the automated production lines based on market conditions and
demand for its products. See "Item 1 -- Risk Factors -- Manufacturing Capacity
Constraints; Risks Associated With Expansion and Automation of Manufacturing
Operations."
37
<PAGE> 40
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.
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European
Economic and Monetary Union ("EMU") established fixed conversion rates through
the European Central Bank between existing local currencies and one common
currency, the Euro. For a three and a half-year transition period, non-cash
transactions may be denominated in either the Euro or in the old national
currencies. After July 1, 2002, the Euro will be the sole legal tender for EMU
countries. In 1999, although the Company's U.K. subsidiary did not conduct any
transactions in the Euro, the Company does have one customer and vendors that
operate in two of the EMU countries. The Company has not experienced, nor does
it anticipate any future material impact from the Euro conversion on its
financial information systems nor its financial condition and results of
operations.
YEAR 2000
The Company successfully completed the final phase of its worldwide
conversion to a new business information control system on December 1, 1999. The
Company has not experienced any significant business disruptions as a result of
year 2000 issues nor incurred material expenditures. The Company will continue
to monitor its internal operating systems as well as third parties with whom the
Company does business, to identify and address any potential risk situations
related to year 2000. There can be no assurances that the Company's internal
operating systems will continue to perform without significant business
disruption, or that the Company will not be adversely affected by disruptions at
its suppliers and service providers in the future.
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
providing for the statutory merger of the Company and Wesley Jessen upon the
satisfaction of stockholder and regulatory approval, and other closing
conditions (the "Merger"). The Merger has been structured to qualify for tax
deferred treatment and to be accounted for as a pooling of interests for
accounting purposes. Under the terms of the agreement, at the closing date each
outstanding share of the Company's common stock will be converted into 0.7211
shares of Wesley Jessen common stock. Based upon the number of shares
outstanding as of the close of business on March 17, 2000, the former
stockholders of the Company would own approximately 48% of the outstanding
common stock of the combined companies (assuming no conversion of outstanding
options). In addition, each share of the Company's outstanding stock options
will be converted at the same exchange ratio, into options to purchase shares of
Wesley Jessen common stock. Based upon the number of Company's outstanding
options as of the close of business on March 17, 2000, approximately 3.9 million
outstanding stock options will be converted into 2.8 million options to purchase
common shares of the combined companies. The closing of he Merger is subject to
the satisfaction of certain closing conditions contained in the agreement and
plan of merger, including regulatory approvals and approvals of the Company's
and Wesley Jessen's stockholders, and therefore there can be no assurance if and
when the Merger will close.
Upon the completion of this merger, 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, for certain
consulting services 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. Based on
the closing trading price of Wesley Jessen's common stock on March 17, 2000, the
aggregate value of the transaction would be approximately $454 million, which
would entitle Mr. Cummins to be paid approximately $1.7 million by the Company
under the terms of the letter agreement.
38
<PAGE> 41
Subsequent to the announcement of the Merger, on March 23, 2000, Bausch &
Lomb, Inc. ("Bausch & Lomb") announced it has made an offer to buy Wesley
Jessen. Bausch & Lomb, one of the Company's competitors, has stated publicly
that it is not interested in acquiring the Company as a part of any acquisition
of Wesley Jessen or otherwise.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
The Company's investments consist of interest-bearing investment-grade
instruments that meet high quality standards consistent with the Company's
investment policy. The Company's investment policy requires that the portfolio's
average maturity shall not exceed one year, and the maximum maturity of any
investment shall not exceed three years. Since its average maturities of its
investment portfolio is short-term, as dictated by the Company's investment
policy, the Company believes that the impact of the fluctuation in interest rate
to the carrying value is not material (see Note 4 to the Consolidated Financial
Statements). In addition, the Company does not hold derivative financial
instruments in its investment portfolio, nor does the Company utilize
risk-sensitive market instruments, positions or transactions in any material
fashion.
The Company has long-term debt outstanding, which is carried at cost (see
Note 9 to the Consolidated Financial Statements), with an interest rate which is
referenced to market rates. Interest rate changes generally do not affect the
fair value of variable rate debt instruments, but do impact future earnings and
cash flows. Holding debt levels constant, a one percentage point increase in
interest rates would decrease earnings and cash flows for variable rate debt by
approximately $24,000.
IMPACT OF FOREIGN CURRENCY RATE CHANGES
The Company operates two foreign subsidiaries that manufacture and sell its
products primarily in the United Kingdom and to a lesser extent in Canada.
Therefore, its earnings, cash flows and financial position are exposed to
foreign currency risk from foreign-currency-denominated receivables and
payables, forecasted sales transactions, as well as net investment in certain
foreign operations. The Company's foreign currency transactional exposures exist
primarily with the U.K. pound and Canadian dollar. The Pound Sterling and
Canadian dollar exchange rates fluctuated approximately 5% to 4%, respectively
during 1999, from its highest to lowest point. As a result of this fluctuation,
the Company recorded an exchange gain of $62,000 in 1999. During 1999, the
Company did not engage in foreign currency hedging activities.
39
<PAGE> 42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
OCULAR SCIENCES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 10,053 $ 26,520
Restricted cash........................................... 429 486
Short-term investments.................................... 28,389 19,036
Accounts receivable, less allowance for sales returns and
doubtful accounts of $1,674 and $2,085 for 1999 and
1998, respectively..................................... 34,556 25,126
Inventories............................................... 15,728 12,460
Loans to officers and employees........................... 113 263
Prepaid expenses and other current assets................. 15,043 11,133
-------- --------
Total current assets.............................. 104,311 95,024
Property and equipment, net............................... 102,591 62,966
Intangible assets, net.................................... 7,617 7,216
Long-term investments..................................... 7,630 11,207
Other assets.............................................. 166 157
-------- --------
Total assets...................................... $222,315 $176,570
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 7,191 $ 6,003
Accrued liabilities....................................... 23,065 17,514
Current portion of long-term debt......................... 1,214 929
-------- --------
Total current liabilities......................... 31,470 24,446
Deferred income taxes..................................... 5,008 6,640
Long-term debt, less current portion...................... 2,228 2,535
-------- --------
Total liabilities................................. 38,706 33,621
-------- --------
Commitments and contingencies
Stockholders' Equity:
Common Stock, $0.001 par value; 80,000,000 shares
authorized; 22,953,985 and 22,588,118 shares issued and
outstanding for 1999 and 1998, respectively............ 23 23
Additional paid-in capital................................ 81,249 76,741
Retained earnings......................................... 103,160 66,727
Accumulated other comprehensive income.................... (823) (542)
-------- --------
Total stockholders' equity........................ 183,609 142,949
-------- --------
Total liabilities and stockholders' equity........ $222,315 $176,570
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE> 43
OCULAR SCIENCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net sales........................................... $ 175,998 $ 151,908 $ 118,605
Cost of sales....................................... 63,375 48,307 41,066
----------- ----------- -----------
Gross profit...................................... 112,623 103,601 77,539
Selling and marketing expenses...................... 44,291 40,445 27,139
General and administrative expenses................. 19,681 19,117 18,085
Research and development expenses................... 2,908 2,234 2,385
----------- ----------- -----------
Income from operations............................ 45,743 41,805 29,930
Interest expense.................................... (279) (308) (1,387)
Interest income..................................... 2,390 2,870 939
Other expense, net.................................. (73) (1,134) (6)
----------- ----------- -----------
Income before taxes............................... 47,781 43,233 29,476
Income taxes........................................ (11,348) (12,670) (8,843)
----------- ----------- -----------
Net income........................................ 36,433 30,563 20,633
Preferred stock dividends........................... -- -- (49)
----------- ----------- -----------
Net income applicable to common stockholders...... $ 36,433 $ 30,563 $ 20,584
=========== =========== ===========
Net income per share data:
Net income per share (basic)...................... $ 1.60 $ 1.37 $ 1.10
=========== =========== ===========
Net income per share (diluted).................... $ 1.55 $ 1.31 $ 0.98
=========== =========== ===========
Weighted average common shares outstanding........ 22,830,561 22,292,632 18,721,749
Weighted average dilutive potential common shares
under the treasury stock method................ 613,943 983,456 2,385,691
----------- ----------- -----------
Total weighted average common and dilutive
potential common shares outstanding..... 23,444,504 23,276,088 21,107,440
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
41
<PAGE> 44
OCULAR SCIENCES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL OTHER TOTAL
----------------- ------------------- PAID-IN RETAINED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS INCOME (LOSS) EQUITY
-------- ------ ---------- ------ ---------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES AS OF DECEMBER 31,
1996.......................... 118,168 $ 1 16,539,570 $16 $ 8,360 $ 15,580 $ (68) $ 23,889
Exercise of employee stock
options..................... -- -- 1,359,600 1 494 -- -- 495
Directors' compensation....... -- -- 2,660 -- 22 -- -- 22
Conversion of preferred stock
to common stock............. (118,168) (1) 236,336 1 -- -- -- --
Sale of common stock in
initial public offering, net
of issuance costs of
$1,545...................... -- -- 3,600,000 4 53,693 -- -- 53,697
Income tax benefits from stock
options exercised........... -- -- -- -- 7,869 -- -- 7,869
Comprehensive income:
Net income.................. -- -- -- -- -- 20,633 -- 20,633
Other comprehensive income
(loss).................... -- -- -- -- -- -- (452) (452)
--------
Comprehensive income.......... -- -- -- -- -- -- -- 20,181
Preferred stock dividends..... -- -- -- -- -- (49) -- (49)
-------- --- ---------- --- ------- -------- ----- --------
BALANCES AS OF DECEMBER 31,
1997.......................... -- -- 21,738,166 22 70,438 36,164 (520) 106,104
Exercise of employee stock
options..................... -- -- 819,952 1 1,701 -- -- 1,702
Sale of common stock in
secondary public offering,
net of issuance costs of
$645........................ -- -- 30,000 -- 139 -- -- 139
Comprehensive income:
Net income.................. -- -- -- -- -- 30,563 -- 30,563
Other comprehensive income
(loss).................... -- -- -- -- -- -- (22) (22)
--------
Comprehensive income.......... -- -- -- -- -- -- -- 30,541
Income tax benefits from stock
options exercised........... -- -- -- -- 4,463 -- -- 4,463
-------- --- ---------- --- ------- -------- ----- --------
BALANCES AS OF DECEMBER 31,
1998.......................... -- -- 22,588,118 23 76,741 66,727 (542) 142,949
Exercise of employee stock
options..................... -- -- 365,867 -- 2,247 -- -- 2,247
Income tax benefits from stock
options exercised........... -- -- -- -- 1,895 -- -- 1,895
Comprehensive income:
Net income.................. -- -- -- -- -- 36,433 -- 36,433
Other comprehensive income
(loss).................... -- -- -- -- -- -- (281) (281)
--------
Comprehensive income.......... -- -- -- -- -- -- -- 36,152
Stock options issued in
connection with Australia
acquisition................. -- -- -- -- 366 -- -- 366
-------- --- ---------- --- ------- -------- ----- --------
BALANCES AS OF DECEMBER 31,
1999.......................... -- $-- 22,953,985 $23 $81,249 $103,160 $(823) $183,609
-------- --- ---------- --- ------- -------- ----- --------
</TABLE>
See accompanying notes to consolidated financial statements.
42
<PAGE> 45
OCULAR SCIENCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 36,433 $ 30,563 $ 20,633
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 8,526 5,950 6,863
Amortization of loan to officer......................... 150 150 38
Income tax benefits from stock options exercised........ 1,895 4,463 7,869
Provision for sales returns and doubtful accounts....... 12 880 968
Provision for excess and obsolete inventory............. 702 1,129 893
Provision for damaged and scrap products................ 783 744 729
Provision for (recovery of) equipment obsolescence...... (324) 586 824
Loss (gain) on sale of property and equipment........... 7 10 (165)
Exchange loss (gain).................................... (62) 913 9
Deferred income taxes................................... (535) (157) 1,014
Changes in operating assets and liabilities:
Accounts receivable..................................... (9,315) (7,330) (3,859)
Inventories............................................. (4,664) (1,497) (1,792)
Prepaid expenses, other current and non-current
assets................................................. (4,170) (1,844) (3,474)
Accounts payable........................................ 720 2,310 (269)
Accrued liabilities..................................... 5,332 2,765 2,899
Income and other taxes payable.......................... (511) 867 (664)
-------- -------- --------
Net cash provided by operating activities........... 34,979 40,502 32,516
-------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment........................ (46,395) (32,706) (16,156)
Purchase of short-term and long-term investments.......... (33,644) (32,122) (19,059)
Purchase of marketing rights and license agreement........ -- -- (8,817)
Loans to officers and employees........................... (1,150) (185) (930)
Collection of loans to officers and employees............. 1,150 1,113 3
Sales and maturities of short-term and long-term
investments............................................. 27,328 20,937 --
Payment for Australian acquisitions, net of cash
acquired................................................ (498) -- --
Proceeds from liquidation of property and equipment....... -- 368 308
(Deposits to) payments from restricted cash............... 44 (21) 1,217
-------- -------- --------
Net cash used in investing activities............... (53,165) (42,616) (43,434)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt.................. -- -- 5,951
Repayment of long-term debt............................... (480) (390) (24,867)
Proceeds from initial public offering, net................ -- -- 53,697
Proceeds from secondary public offering, net.............. -- 139 --
Preferred stock dividends................................. -- -- (63)
Proceeds from issuance of common stock.................... 2,247 1,701 517
-------- -------- --------
Net cash provided by financing activities........... 1,767 1,450 35,235
-------- -------- --------
Effect of exchange rate changes on cash and cash
equivalents............................................... (48) (711) (217)
-------- -------- --------
Net (decrease) increase in cash and cash
equivalents......................................... (16,467) (1,375) 24,100
Cash and cash equivalents at beginning of year.............. 26,520 27,895 3,795
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 10,053 $ 26,520 $ 27,895
======== ======== ========
Supplemental cash flow disclosures: Cash paid during the
year for:
Interest................................................ $ 272 $ 312 $ 1,439
Income taxes............................................ $ 7,512 $ 7,936 $ 2,911
Non-cash financing activities:
Fixed Assets acquired by capital lease obligations...... $ 456 $ -- $ --
</TABLE>
See accompanying notes to consolidated financial statements.
43
<PAGE> 46
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
NOTE 1. NATURE OF BUSINESS
Formation and Business of the Company
O.S.I. Corporation ("the Company") was incorporated in California in 1985.
On July 31, 1997, the Company effected a reincorporation into the state of
Delaware and changed its name to Ocular Sciences, Inc. The Company is engaged in
the design, manufacture and distribution of contact lenses and conducts business
under the name of Ocular Sciences/American Hydron.
The Initial Public Offering
On August 8, 1997, the Company closed its initial public offering of
8,280,000 shares of its Common Stock at an initial public offering price of
$16.50 per share. Of the 8,280,000 shares, 3,600,000 shares were sold by the
Company and the remaining 4,680,000 were sold by certain selling shareholders.
The net proceeds to the Company were $53.7 million, after deducting underwriting
discounts and commissions and other offering expenses payable by the Company.
The Company utilized $11.6 million of the proceeds to repay all of the debt
outstanding under the Company's Credit Agreement with Comerica
Bank -- California, $2.9 million of the proceeds to repay subordinated debt owed
to the Company's Chief Executive Officer, $6.7 million of the proceeds as final
payment pursuant to the settlement agreement of certain U.K. litigation (Note
18) and the remaining $32.5 million of the proceeds to purchase and install
machinery and equipment and to fund the construction of plant, building and
facilities.
The Secondary Public Offering
On March 19, 1998, the Company completed a secondary offering in which
5,343,381 shares of its Common Stock were sold to the public at a price of
$27.50 per share (including shares sold pursuant to the underwriters'
over-allotment option). The shares sold consisted of 30,000 shares sold by the
Company and 5,313,381 shares sold by selling stockholders. The Company incurred
aggregate expenses of $645,000 in connection with the secondary offering
(excluding underwriting discounts and commissions paid by the Company and the
selling stockholders).
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, Ocular Sciences UK Limited,
Ocular Sciences Limited ("OSL") (formerly Precision Lens Laboratories Ltd.),
Ocular Sciences Puerto Rico, Inc., Ocular Sciences Canada Corporation, Precision
Lens Manufacturing and Technology, Inc., Ocular Sciences Australia, Ocular
Sciences Hungary and Ocular Sciences Cayman Islands Corporation. All significant
intercompany balances and transactions have been eliminated in consolidation.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from these estimates.
Reclassifications
Certain amounts have been reclassified to conform to the fiscal 1999
presentation.
44
<PAGE> 47
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
Cash and Cash Equivalents
Cash equivalents consist of commercial paper, money market funds, United
States government debt securities and certificates of deposits with original
maturities of three months or less.
Financial Instruments
All of the Company's short-term and long-term investments are classified as
"available-for-sale" and recorded at fair value, under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." The amortized costs of
available-for-sale debt securities are adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization is included in net
investment income. Unrealized gains and losses, net of tax, are reported as a
component of other comprehensive income. Realized gains and losses, and declines
in value judged to be other than temporary on available-for-sale securities, are
included in other (expense) income, net. The cost of securities sold is based on
the specific identification method. Interest and dividends on securities
classified as available-for-sale are included in interest income.
Restricted Cash
Restricted cash consists of cash held in an escrow account related to
leased facilities occupied by the Company's United Kingdom subsidiary.
Inventories
Inventories are recorded at the lower of cost (first-in, first-out method)
or market. Cost includes material, labor and applicable factory overhead.
Provision for potentially obsolete or slow moving inventory is made based upon
management's analysis of inventory levels and forecasted sales.
Revenue Recognition
The Company recognizes sales upon shipment of products to its customers.
Allowances for sales returns and discounts are accrued at the time sales are
recognized.
Cooperative Merchandise Allowances
The Company offers a cooperative merchandise program to certain of its
customers whereby the Company reimburses these customers for items such as
advertising, displays and mailings that are intended to encourage the fitting
and wearing of the Company's lenses marketed for disposable replacement
regimens. The Company records the provisions for cooperative merchandising at
the time of sale to the customers and as a component of selling and marketing
expenses.
Advertising Costs
Advertising and promotion costs are expensed as incurred.
Foreign Currencies
The functional currencies of the Company's United Kingdom, Canadian and
Hungarian subsidiaries are the respective local currencies. Accordingly, the
subsidiaries translate all asset and liability accounts at current exchange
rates in effect at the balance sheet date and statement of income accounts at
average exchange rates during the period. Translation adjustments arising from
differences in exchange rates from period to period are included in the
consolidated financial statements as a component of other comprehensive income.
45
<PAGE> 48
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
Concentration of Credit Risk
The Company sells its products to a diverse group of optometrists, optical
retailers, optical product distributors and ophthalmologists, and therefore the
concentration of credit risk with respect to accounts receivable is limited due
to the large number and diversity of customers across broad geographic areas.
Accounts receivable from customers are uncollateralized. As of December 31,
1999, approximately 20% of accounts receivable and 10% of consolidated net sales
were concentrated in one customer, while, as of December 31, 1998, approximately
19% of accounts receivable and 11% of consolidated net sales were concentrated
in one customer. To reduce credit risk, the Company performs ongoing credit
evaluations of its significant customers' respective financial conditions. The
Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends and other
information.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line or units-of-production method over the respective estimated useful
lives of the assets as follows: equipment and machinery, 3 to 7 years; furniture
and fixtures, 3 to 7 years; vehicles, 4 to 7 years; buildings, 10 to 14 years;
and leasehold improvements, over the shorter of the respective lease terms or
the respective estimated useful lives of the leasehold improvements. Normal
repairs and maintenance are expensed as incurred. Expenditures which materially
increase values, change capacities or extend useful lives are capitalized.
Long-Lived Assets, Including Intangible Assets
The Company accounts for long-lived assets under SFAS No. 121, "Accounting
for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of assets may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment loss to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. The Company estimates fair value based on the best information available,
making judgments and projections as considered necessary.
Marketing rights, trademarks, goodwill, licenses and covenants not to
compete are carried at cost less accumulated amortization, which is calculated
on a straight-line basis over the estimated useful lives of the respective
assets, which are typically five to fifteen years.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, deferred income taxes are
recognized for tax consequences in future years of differences between the tax
bases of assets and liabilities and their financial reporting amounts at each
balance sheet date based on enacted tax laws and statutory tax rates expected to
apply in the periods in which the differences are expected to affect taxable
income.
Earnings Per Share
The Company adopted SFAS No. 128, "Earnings per Share". Basic earnings per
common share is calculated by dividing net income by the weighted average number
of common shares outstanding during the
46
<PAGE> 49
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
year. Diluted earnings per common share is calculated by adjusting outstanding
shares, assuming conversion of all potentially dilutive stock options.
Basic earnings per share under SFAS No. 128 were computed using the
weighted average number of shares outstanding of 22,830,561 in 1999, 22,292,632
in 1998 and 18,721,749 in 1997. Differences in the weighted average number of
shares outstanding for purposes of computing diluted earnings per share were due
to the inclusion of the dilutive effect of stock options previously granted of
613,943 in 1999, 983,456 in 1998 and 2,385,691 in 1997. Options to purchase
shares of 1,549,160 in 1999, 1,411,900 in 1998 and 496,900 in 1997 were not
included in the computation of diluted earnings per share because the options
exercise price was greater than the average market price of the common shares
and therefore, the effect would be anti-dilutive. For the year ended December
31, 1999, the weighted average exercise price of the anti-dilutive options was
$26.06.
In the year ended December 31, 1997, conversion of the shares of Series A
Preferred Stock into 236,336 shares of common stock was included in the weighted
average dilutive potential common shares outstanding figures during the period
prior to the conversion and the related common shares issued upon conversion are
included for the period after the date of the conversion. All prior period net
income per share data was restated by the Company upon adoption of SFAS No. 128.
Stock-Based Compensation
The Company follows the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," and has elected to continue to account for
stock-based compensation using methods prescribed in Accounting Principles Board
("ABP") Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations.
The Company follows the practice of recording amounts received upon the
exercise of options by crediting common stock and additional paid-in capital.
The Company realizes an income tax benefit from the exercise and early
disposition of certain stock options and the exercise of other stock options.
The benefit results in a decrease in current income taxes payable and an
increase in additional paid-in capital.
Segment Information
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
effective in the year ending December 31, 1998. The standard establishes
requirements for reporting information about operating segments and disclosures
relating to products and services, geographic areas and major customers.
Operating segments are components of an enterprise about which separate
financial information is available and which is used regularly by its chief
decision maker in allocation of resources. The Company adopted SFAS No. 131
effective for the year ended December 31, 1998 and operates in a single
operating segment and follows the requirements of SFAS No. 131.
New Accounting Standards
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes accounting and
reporting standards for derivatives instruments and for hedging activities. The
statement requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The statement generally provides for matching the timing of gain
or loss recognition on the hedging instrument with the recognition of (a) the
changes in the fair value of the hedged asset or liability that are attributable
to the hedged risk or (b) the earnings effect of the hedged forecasted
transaction. In June 1999, the FASB issued SFAS No. 137,
47
<PAGE> 50
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
which defers the implementation of SFAS 133 to be effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. The Company anticipates
that adoption of this Statement will not have a material effect on the financial
position or results of operations of the Company.
NOTE 3. ACCUMULATED OTHER COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income", which establishes new rules for the reporting and display
of comprehensive income and its components. The adoption of SFAS No. 130 had no
impact on the Company's financial position or results of operations. Accumulated
other comprehensive income or loss includes primarily foreign currency
translation adjustment and unrealized gains and losses on investments. There
were no realized gains (losses) in 1997, 1998 and 1999. The following table
reflects the changes in accumulated balances of other comprehensive income (in
thousands):
<TABLE>
<CAPTION>
FOREIGN ACCUMULATED
CURRENCY UNREALIZED OTHER
TRANSLATION GAINS/(LOSSES) COMPREHENSIVE
ADJUSTMENT ON SECURITIES INCOME (LOSS)
----------- -------------- -------------
<S> <C> <C> <C>
Balance at December 31, 1996.................. $ (68) $ -- $ (68)
Current year change......................... (463) 11 (452)
----- ----- -----
Balance at December 31, 1997.................. (531) 11 (520)
Current year change......................... (10) (12) (22)
----- ----- -----
Balance at December 31, 1998.................. $(541) $ (1) $(542)
Current year change......................... (123) (158) (281)
----- ----- -----
Balance at December 31, 1999.................. $(664) $(159) $(823)
----- ----- -----
</TABLE>
NOTE 4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's short-term and long-term investments in marketable equity
securities are carried at fair value, based on quoted market prices for these or
similar investments. The carrying amounts reported in the balance sheets for
cash, receivables, related party loans, accounts payable, accrued liabilities
and short-term debt approximates fair values due to their short-term maturities.
Long-term debt is carried at cost, which approximates fair value as the interest
rate on the debt is referenced to market rates.
As of December 31, 1999, short-term investments, due in one year or less,
and long-term investments, due in one to three years, amounted to approximately
$28,389,000 and $7,630,000, respectively. Short-term and long-term investments
have been classified as available-for-sale and consisted of the following (in
thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
---------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Tax-exempt municipal funds...................... $11,494 $1 $ (21) $11,474
United States government debt securities........ 7,995 -- (40) 7,955
Foreign debt securities......................... -- -- -- --
Corporate notes................................. 16,689 -- (99) 16,590
------- -- ----- -------
$36,178 $1 $(160) $36,019
======= == ===== =======
</TABLE>
48
<PAGE> 51
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
---------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Tax-exempt municipal funds...................... $20,781 $23 $ (24) $20,780
United States government debt securities........ 1,001 -- -- 1,001
Foreign debt securities......................... 2,005 1 -- 2,006
Corporate notes................................. 6,457 2 (3) 6,456
------- --- ------ -------
$30,244 $26 $ (27) $30,243
======= === ====== =======
</TABLE>
The Company's available-for-sale securities are carried at market value
and, as of December 31, 1999, and 1998 included unrealized losses of
approximately $158,000 and $700, respectively, net of tax. There were no
realized gains (losses) on sales of investments in 1999 and 1998.
NOTE 5. INVENTORIES
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Raw materials............................................ $ 3,906 $ 2,867
Work in process.......................................... 1,344 1,252
Finished goods........................................... 10,478 8,341
------- -------
$15,728 $12,460
======= =======
</TABLE>
NOTE 6. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Equipment and machinery................................ $ 39,864 $ 25,814
Furniture and fixtures................................. 3,356 2,800
Vehicles............................................... 216 138
Building and leasehold improvements.................... 29,786 9,665
Construction in progress............................... 54,673 42,847
-------- --------
127,895 81,264
Less accumulated depreciation and amortization......... (25,304) (18,298)
-------- --------
$102,591 $ 62,966
======== ========
</TABLE>
In the fourth quarter of 1997, the Company finalized plans to change the
packaging component of its manufacturing process which was implemented in late
1998, which rendered certain of the Company's existing manufacturing equipment
obsolete. In accordance with SFAS No. 121, the Company recorded a pretax charge
to cost of sales of $824,000 in 1997 related to this impairment loss and reduced
the carrying amount of this asset by a corresponding amount. The amount of
impairment loss is the excess of the carrying amount of the impaired asset over
the fair value of the asset. The fair value was determined by computing the
present value of estimated expected cash flows using a discount rate
commensurate with the risks involved.
In the second quarter of 1998, the Company recorded a charge of $586,000
related to a custom-built packaging machine that failed the factory acceptance
test and Company specifications. The Company did not
49
<PAGE> 52
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
take delivery of this custom-built machine nor used it in its production. This
amount represents cumulative payments to the vendor, which was recorded in
construction in progress and charged to general and administrative expenses. In
the fourth quarter of 1999, the Company won a settlement action against the
vendor in the amount of approximately $324,000.
NOTE 7. INTANGIBLE ASSETS, NET
Intangible assets, net consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Marketing rights, trademarks, goodwill, licenses and
covenants not to compete............................... $10,260 $ 8,921
Less accumulated amortization............................ (2,643) (1,705)
------- -------
$ 7,617 $ 7,216
======= =======
</TABLE>
NOTE 8. PREPAID EXPENSES AND OTHER CURRENT ASSETS AND ACCRUED LIABILITIES
Prepaid expenses and other current assets consisted of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Refundable taxes......................................... $ 6,530 $ 3,948
Deferred income taxes.................................... 4,115 4,638
Prepaid expenses......................................... 1,918 1,632
Other current assets..................................... 2,480 915
------- -------
$15,043 $11,133
======= =======
</TABLE>
Accrued liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Accrued expenses......................................... $11,050 $10,354
Accrued cooperative merchandising allowances............. 8,510 5,854
Accrued value added taxes................................ 2,371 158
Deferred income taxes.................................... 512 --
Income taxes payable..................................... 622 1,148
------- -------
$23,065 $17,514
======= =======
</TABLE>
50
<PAGE> 53
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
NOTE 9. LONG-TERM DEBT
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1999 1998
------- ------
<S> <C> <C>
Term loan to a bank, principal payments due quarterly from
July 31, 2000 through October 31, 2004, bearing interest
at the bank's Eurodollar rate plus 1.25%.................. $ 2,304 $2,218
Capital lease obligations, bearing an effective interest
rate of 10.76%, 10.54%, and 10.19%, respectively, for
1999, 1998 and 1997, secured by certain equipment......... 1,138 1,246
------- ------
Total long-term debt.............................. 3,442 3,464
Less current portion of long-term debt...................... (1,214) (929)
------- ------
$ 2,228 $2,535
======= ======
</TABLE>
On November 7, 1997 the Company amended its credit agreement (the "Amended
Credit Agreement"). On August 5, 1998, the interest rate options were modified
and the interest rates were reduced by 0.25%, prospectively. Under the new
agreement, the Company and its subsidiary, Ocular Sciences Puerto Rico, Inc.
("Ocular Sciences Puerto Rico") can borrow up to an aggregate of $30,000,000.
The Amended Credit Agreement provides for a revolving line of credit of up to
$20,000,000 to the Company and up to $10,000,000 of term loans to Ocular
Sciences Puerto Rico. On October 14,1999, the Company amended this credit
agreement whereby the conversion date of the term loan was extended to May 1,
2000.
Under the revised terms of the Amended Credit Agreement, the revolving line
of credit has two interest rate options -- interest at the bank's base rate or
at 1.00% to 1.25% above the rate at which deposits in eurodollars are offered to
the bank by other prime banks in the eurodollar market, with the applicable
margin over the eurodollar rate depending on the Company's ratio of debt to
tangible net worth. The Company pays commitment fees of 0.250% on the revolving
line of credit, with percentages varying based on the Company's ratio of debt to
tangible net worth. Loans under the revolving line of credit are due in full on
June 30, 2000. The Company may elect to prepay any principal due under the
revolving line of credit but would be required to reimburse the lending bank for
any breakage costs with respect to prepayment of any eurodollar rate loan prior
to the end of an applicable interest period. At December 31, 1999 and 1998, the
Company had no borrowings under the revolving line of credit and thus the full
$20,000,000 remained available.
Under the term loan facility, $10,000,000 is available to finance the
construction and development of Ocular Sciences Puerto Rico's new manufacturing
facility. The term loan provides for three interest rate options -- interest at
the bank's base rate, interest at 1.25% to 1.50% above the rate at which
deposits in eurodollars are offered to the bank by other prime banks in the
eurodollar market, or interest at 1.25% to 1.50% above the negotiated rate,
defined as the lending bank's cost of funds (after reserve requirements) plus
its FDIC insurance rate. The negotiated rate option is available only after May
1, 2000. There are no commitment fees on the term loan. On May 1, 2000, the then
outstanding term loan will become payable in eighteen quarterly principal
installments beginning July 31, 2000, $300,000 each quarter with any balance to
be paid on October 31, 2004. The Company may elect to prepay the principal due
under the term loan but would be required to reimburse the lending bank for any
breakage costs with respect to prepayment of any eurodollar rate loan prior to
the end of an applicable interest period. The balances outstanding under the
term loan was $2,304,000 and $2,218,000 as of December 31, 1999 and 1998,
respectively. The effective interest rate of the term loan as of December 31,
1999 and 1998 was 6.9375% and 6.5625%, respectively.
Borrowings by the Company under the Amended Credit Agreement are guaranteed
by Ocular Sciences Puerto Rico, and borrowings by Ocular Sciences Puerto Rico,
under the Amended Credit Agreement are
51
<PAGE> 54
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
guaranteed by the Company. Borrowings under the Amended Credit Agreement are
secured by a pledge of 100% of the outstanding common stock of Ocular Sciences
Puerto Rico and 65% of the outstanding capital stock of the Company's United
Kingdom and Canadian subsidiaries. The Company is also required under the
Amended Credit Agreement to maintain minimum ratios of debt to tangible net
worth, and of current assets to current liabilities, and a minimum tangible net
worth, and the Amended Credit Agreement places certain limitations on debts,
liens, contingent obligations, investments and cash dividends on common stock.
The Long-term debt, including current portion, is due in aggregate annual
installments of: $1,214,000 in 2000, $1,562,000 in 2001, and $666,000 in 2002.
Financing
In February 1999, Ocular Sciences Puerto Rico finalized an agreement,
effective June 1998, with the Puerto Rico Industrial Development Company
("PRIDCO"), to manage on PRIDCO's behalf the construction of a new building in
Puerto Rico that will be leased by Ocular Sciences Puerto Rico as its
manufacturing facility, upon completion of construction. Ocular Sciences Puerto
Rico initially financed the building construction as well as the leasehold
improvements with existing cash and plans to borrow against the remaining
balance available under its term loan with a major bank upon completion of
construction. Under the agreement, PRIDCO will reimburse Ocular Sciences Puerto
Rico for up to a maximum of $4,720,000 for certain structural construction costs
of the facility at the end of the construction project, as specified in the
agreement. Annual rental payments of approximately $489,000 would be due to
PRIDCO to commence the first day of the following month, after completion,
inspection and acceptance of the constructed building, for a period of ten
years. This transaction will be accounted for as a financed purchase of the
building.
NOTE 10. LEASES
The future minimum annual lease payments under noncancelable lease
obligations with an initial term in excess of one year, as of December 31, 1999,
are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITALIZED OPERATING
LEASES LEASES
----------- ---------
<S> <C> <C>
Year Ending December 31,
2000................................................. $ 717 $ 2,232
2001................................................. 429 2,072
2002................................................. 77 1,010
2003................................................. -- 949
2004................................................. -- 938
Thereafter........................................... -- 3,377
------ -------
Total minimum lease payments........................... $1,223 $10,578
=======
Imputed interest....................................... (85)
------
Present value of minimum lease payments................ 1,138
Current portion........................................ (649)
------
Long-term capitalized lease obligations................ $ 489
======
</TABLE>
Rent expense on operating leases for the Company's offices, warehouse
facilities and certain equipment was approximately $3,013,000, $2,584,000 and
$2,301,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
52
<PAGE> 55
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
The Company leases a portion of its machinery and equipment under long-term
capital leases, and has the option to purchase these assets for fair market
value at the termination of the lease. Included in property and equipment, net
are the following leased assets (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Equipment and machinery.................................. $ 2,865 $ 2,415
Furniture and fixtures................................... 142 142
Vehicles................................................. 51 52
------- -------
3,058 2,609
Less accumulated depreciation and amortization........... (1,528) (1,100)
------- -------
$ 1,530 $ 1,509
======= =======
</TABLE>
Depreciation and amortization expense on machinery and equipment and
vehicles under long-term capital leases was approximately $400,000, $395,000 and
$478,000 for the years ended December 31, 1999, 1998 and 1997.
NOTE 11. STOCK SPLIT
On August 4, 1997, the Company effected a two-for-one stock split of the
Company's common stock. All applicable share and per share amounts have been
retroactively adjusted to reflect the stock split.
NOTE 12. PREFERRED STOCK AND ACCRUED DIVIDENDS
Each share of preferred stock outstanding at December 31, 1996
automatically converted into two shares of common stock upon the consummation of
the Company's initial public offering. Cumulative dividends were paid on a
quarterly basis from January 1995 to August 1997.
NOTE 13. COMMON STOCK
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.
Stock-based Compensation Plans
The Company has the following stock-based compensation plans:
(i) 1989 Stock Option Plan
The 1989 Stock Option Plan provided for the grant to employees,
directors and consultants of incentive stock options, exercisable at a
price not less than the fair market value of the shares on the grant date,
or for non-qualified options, exercisable at a price not less than 85% of
the fair market value of the shares on the date of grant. The options
generally were granted for a six year-term and vested over a five year
period. This plan was terminated upon the effective date of the Company's
initial public offering on August 4, 1997. Any authorized shares not issued
or subject to outstanding grants under this plan on August 4, 1997 and any
shares that are issuable upon exercise of options granted pursuant to this
plan that expire or become unexercisable for any reason without having been
exercised in full will be available for future grant and issuance under the
1997 Equity Incentive Plan. As of December 31, 1999, options to purchase a
total of 568,530 shares are outstanding under this plan.
53
<PAGE> 56
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(ii) 1992 Officers and Directors Stock Option Plan
The 1992 Officers and Directors Stock Option Plan provided for the
grant of incentive stock options exercisable at a price not less than the
fair market value of the Company's common stock on the grant date or
nonqualified stock options exercisable at a price not less than 85% of the
fair market value of the Company's common stock on the grant date. A total
of 1,280,000 shares of common stock were reserved for issuance under this
plan. In 1992 the Company's Chief Executive Officer was granted an option
to purchase the 1,280,000 shares of common stock reserved under this plan.
This option was exercised, in full, during 1997 at an exercise price of
$0.29365 per share. This Plan was terminated upon the effective date of the
Company's initial public offering.
(iii) 1997 Equity Incentive Plan
The 1997 Equity Incentive Plan provides for grants of incentive stock
options to employees (including officers and employee directors) and
nonqualified stock options to employees, officers, directors, consultants,
independent contractors and advisors of the Company. The exercise price of
all incentive stock options must be no less than the fair market value of
the Company's Common Stock on the date of grant and the exercise price of
all nonqualified stock options must be at a price not less than 85% of such
fair market value. The options generally are granted for a ten-year term
and vest over a five-year period. Any authorized shares not issued or
subject to outstanding grants under the 1989 Plan on August 4, 1997 and any
shares that are issuable upon exercise of options granted pursuant to the
1989 Plan that expire or become unexercisable for any reason without having
been exercised in full are available for future grant and issuance under
the 1997 Equity Incentive Plan. As of December 31, 1999, a total of
3,337,432 shares of common stock were reserved for issuance under this
plan.
(iv) 1997 Directors Stock Option Plan
The 1997 Directors Stock Option Plan provides for grants of
nonqualified stock options to certain non-employee directors of the
Company. The exercise price per share of all options granted under the plan
must be equal to the fair market value of the Company's common stock on the
date of grant. The options generally are granted for a ten-year term and
vest over a three-year period. As of December 31, 1999, a total of 300,000
shares of common stock were reserved for issuance under this plan.
(v) 1997 Employee Stock Purchase Plan
The 1997 Employee Stock Purchase Plan (the "Purchase Plan") permits
employees to purchase common stock at a price equal to 85% of fair market
value of the Company's common stock. A total of 400,000 shares of common
stock are reserved for issuance under the Purchase Plan. The Purchase Plan
was not effective as of December 31, 1999 and accordingly, no shares of
common stock have been purchased under the Purchase Plan.
54
<PAGE> 57
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
A summary of stock option transactions under the plans indicated at (i),
(iii) and (iv) follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
RANGE OF NUMBER OF EXERCISED
EXERCISE PRICES OPTIONS PRICE
---------------- --------- ---------
<S> <C> <C> <C>
Outstanding as of December 31, 1996.......... $ 0.27 to $ 7.36 1,804,304 $ 2.58
Exercised.................................. 0.27 to 8.09 (79,600) 1.50
Granted.................................... 8.09 to 25.38 575,150 19.74
Canceled................................... 1.47 to 14.00 (80,400) 3.61
---------------- --------- ------
Outstanding as of December 31, 1997.......... $ 0.27 to $25.38 2,219,454 $ 7.03
Exercised.................................. 0.27 to 26.38 (819,952) 2.08
Granted.................................... 17.69 to 31.75 1,667,200 26.31
Canceled................................... 1.47 to 29.63 (161,778) 20.69
---------------- --------- ------
Outstanding as of December 31, 1998.......... $ 1.47 to $31.75 2,904,924 $18.73
Exercised.................................. 1.47 to 27.00 (365,867) 6.14
Granted.................................... 15.00 to 34.69 1,796,100 18.71
Canceled................................... 1.47 to 34.69 (404,647) 25.09
---------------- --------- ------
Outstanding as of December 31, 1999.......... $ 1.47 to $34.69 3,930,510 $19.24
================ ========= ======
Total number of shares exercisable
at December 31, 1999............. $ 1.47 to $29.15 830,450 $14.95
================ ========= ======
</TABLE>
The weighted average grant date fair value of the options granted in 1999,
1998 and 1997 was $7.81, $9.45, and $5.80, respectively. At December 31, 1999,
230,819 options were available for grant.
Pursuant to SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company is required to disclose the pro forma effects on net income and net
income per share as if the Company had elected to use the fair value approach to
account for all of its employee stock-based compensation plans. Had compensation
cost for the Company's plans been determined in a manner consistent with the
fair value approach enumerated in SFAS No. 123, the Company's pro forma net
income and pro forma net income per share for the years ended December 31, 1999,
1998 and 1997, would have been reduced to the pro forma amounts indicated below
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Pro forma net income:
As reported......................................... $36,433 $30,563 $20,633
Adjusted pro forma.................................. 33,193 28,873 20,487
Net income per common share (basic):
As reported......................................... $ 1.60 $ 1.37 $ 1.10
Adjusted pro forma.................................. 1.45 1.30 1.09
Net income per common share (diluted):
As reported......................................... $ 1.55 $ 1.31 $ 0.98
Adjusted pro forma.................................. 1.42 1.24 0.97
</TABLE>
55
<PAGE> 58
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
In 1999, 1998 and 1997, the Company calculated the fair value of options
using the Black-Scholes option-pricing model. The assumptions used were as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Weighted-average risk free interest rate........... 5.21% 5.31% 5.94%
Expected life (years).............................. 3 3 3
Volatility......................................... 55.0% 45.0% 35.3%
Dividend yield..................................... -- -- --
</TABLE>
The following table summarizes information about stock options outstanding
as of December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- --------------------------
NUMBER WEIGHTED-AVERAGE NUMBER WEIGHTED-
OF REMAINING WEIGHTED-AVERAGE OF AVERAGE
RANGE OF EXERCISE PRICES OPTIONS CONTRACTUAL LIFE EXERCISE PRICE OPTIONS EXERCISE PRICE
------------------------ --------- ---------------- ---------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.47 - 8.09.................. 546,430 1.6 $ 3.89 344,070 $ 3.01
$14.00 - 34.69.................. 3,384,080 8.3 21.72 486,380 23.39
--------- --- ------ ------- ------
$ 1.47 - 34.69.................. 3,930,510 7.4 $19.24 830,450 $14.95
========= === ====== ======= ======
</TABLE>
NOTE 14. RETIREMENT SAVINGS PLAN
In October 1998, the Company established a defined-contribution savings
plan under Section 401K of the Internal Revenue Code. This savings plan allows
eligible U.S. employees to contribute up to 15% of their compensation on a
pre-tax basis. The Company matches 50% of the first four percent of the
employees' contribution. Such matching Company contributions are vested
incrementally over five years. All of the Company's subsidiaries have similar
retirement savings plans in the respective countries. The charge to operating
income for the Company's matching contribution was approximately $837,000 and
$520,000 in 1999 and 1998, respectively.
NOTE 15. INCOME TAXES
Deferred taxes are provided, where warranted, to reflect the future tax
consequences of differences between the financial reporting and tax reporting of
various assets and liabilities; these differences will be either taxable or
deductible when the related assets and liabilities are recovered or settled. The
income tax benefits related to the exercise of stock options reduces taxes
currently payable and is credited to additional paid-in capital. Such amounts
approximated $1,895,000, $4,463,000 and $7,869,000 for 1999, 1998 and 1997,
respectively.
Income before income tax expense includes the following components (in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
United States................................. $35,040 $40,220 $28,580
Foreign....................................... 12,741 3,013 896
------- ------- -------
Total............................... $47,781 $43,233 $29,476
======= ======= =======
</TABLE>
56
<PAGE> 59
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
Income tax expense (benefit) for the years ended December 31, 1999, 1998
and 1997, consisted of (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------- ---------------------------- ---------------------------
CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL
------- -------- ------- ------- -------- ------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Federal.............. $ 9,733 $(1,960) $ 7,773 $ 8,509 $(209) $ 8,300 $5,866 $(231) $5,635
State................ 2,675 (145) 2,530 2,048 17 2,065 1,729 (402) 1,327
Foreign.............. (460) 1,505 1,045 2,270 35 2,305 963 918 1,881
------- ------- ------- ------- ----- ------- ------ ----- ------
$11,948 $ (600) $11,348 $12,827 $(157) $12,670 $8,558 $ 285 $8,843
======= ======= ======= ======= ===== ======= ====== ===== ======
</TABLE>
The total income tax expense differed from the amount computed by applying
the federal statutory income tax rate of 35% to income before taxes as a result
of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Computed tax expense at federal statutory rate........ $16,723 $15,132 $10,317
Foreign tax rate differential......................... (1,008) 214 44
Puerto Rico possessions tax credit.................... (5,298) (3,999) (2,554)
State taxes........................................... 1,510 1,366 719
Amortization of goodwill.............................. -- -- 124
Other permanent differences........................... (579) (43) 193
------- ------- -------
$11,348 $12,670 $ 8,843
======= ======= =======
</TABLE>
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and deferred tax liabilities are as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 870 $ 1,312
Accounts receivable, principally due to allowance for
doubtful accounts...................................... 223 800
Inventories, principally due to reserves and additional
costs capitalized for tax purposes..................... 2,071 2,401
State taxes............................................... 783 717
Other accrued liabilities................................. 652 442
------- -------
Total gross deferred tax assets................... 4,599 5,672
Deferred tax liabilities:
Investment in subsidiaries................................ -- (438)
Puerto Rico tollgate tax.................................. (1,171) (716)
Puerto Rico profit split and basis difference............. (267) (907)
Other basis differences................................... (334) (2,059)
Depreciation of property and equipment.................... (4,232) (3,554)
------- -------
Total gross deferred tax liability................ (6,004) (7,674)
------- -------
Total net deferred tax liability.................. $(1,405) $(2,002)
======= =======
</TABLE>
As of December 31, 1999, deferred taxes were not provided on approximately
$11,442,000 of cumulative foreign unremitted earnings, which are expected to
remain invested indefinitely. Applicable foreign income taxes have been provided
for. Although it is not practical to estimate the amount of additional tax which
might
57
<PAGE> 60
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
be payable on the foreign unremitted earnings, credits for foreign income taxes
paid will be available at tax rates substantially equal to any U.S. tax
liability. For tax purposes, the Company had available, as of December 31, 1999,
foreign net operating loss carry forwards of approximately $2,900,000, which
have an indefinite life.
NOTE 16. RELATED PARTY TRANSACTIONS
In 1996, the Company operated under three agreements with a related party
and certain stockholders which had been originally entered into on September 30,
1992. In February 1997, all of these agreements were terminated as a part of a
litigation settlement (see Note 18). There were no royalties paid, lenses sold
or consulting services provided under these agreements in 1997. A summary of
these agreements are as follows:
(i) A non-exclusive patent license agreement, which granted the
Company the right to manufacture, use and sell products and processes
covered by patents and patent applications owned by certain former
stockholders of OSL, some of whom were stockholders of the Company prior to
the initial public offering. The agreement required the Company to pay
royalties to the patent owners of $0.50 per lens, with a minimum $1,000,000
per royalty year (from July 1 to June 30).
(ii) A purchase and supply agreement with Aspect Vision Care Ltd.
("AVCL"), an entity affiliated with certain stockholders of the Company.
The agreement provided that the Company would sell lenses to AVCL at a
purchase price equal to the Company's direct and indirect costs of
processing lenses, plus 20%.
(iii) Consulting agreements with two stockholders that called for an
aggregate of approximately $7,000 per month to be paid for consulting
services rendered.
As of December 31, 1996, the Company had a $2,895,000 long-term junior
subordinated note payable due to the Company's Chief Executive Officer bearing
interest at the prime rate plus 3% (11.25% as of December 31, 1996). An
agreement was signed by the Chief Executive Officer on October 30, 1996 that
provided for subordination of this junior subordinated note to debt outstanding
to a major commercial bank (see Note 9). This note was amended on June 1, 1997
whereby provisions of the subordination were removed and all principal and
unpaid interest was payable to him on November 1, 1997. The Chief Executive
Officer had advanced the Company funds periodically, prior to 1993, to meet
certain short-term operating cash requirements. Accrued interest on this debt
totaled $54,000 as of December 31, 1996. The debt was repaid in full during
1997. The Chief Executive Officer had the right to exercise stock options held
by reducing the principal balance owed on the note payable in lieu of providing
cash payments upon exercise. The Chief Executive Officer exercised options to
purchase 1,280,000 shares of Common Stock with an exercise price of $0.29365 per
share during 1997.
In April 1997, the Company loaned a total of $892,195 to certain employees
of the Company, of which $550,923 was loaned to the Company's Vice President,
U.S. Sales under a full-recourse promissory note. Total accrued interest at
December 31, 1997 included in loans to officers and employees amounted to
$35,128, of which $23,456 related to this officer's loan. All the loans, except
for the loan to this officer, were non-recourse but were secured by a total of
228,846 shares of the Company's Common Stock, 102,212 of which have been pledged
by the officer. The interest rate on these loans was 6%, payable on or before
the earliest to occur of the one year anniversary of each loan, respectively,
termination of employment, liquidation or dissolution of the Company or, under
certain circumstances, merger or consolidation of the Company. The principal and
related interest on these loans were repaid to the Company in the third quarter
of 1998.
Under an employment agreement, the Company extended a $450,000 loan to the
Company's President and Chief Operating Officer in January 1998 in connection
with his purchase of a new residence (the "Loan"). The Loan is interest free and
is secured by a purchase money second deed of trust on the new
58
<PAGE> 61
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
residence and by a security interest in certain stock options granted to the
Company's President and Chief Operating Officer to purchase 300,000 shares of
the Company's Common Stock and any securities issuable upon exercise of such
options. The Loan is due and payable in full on the earlier of (i) October 15,
2002; (ii) six (6) months after the Company's President and Chief Operating
Officer's voluntary resignation or termination by the Company for Cause (as
defined in the employment agreement); or (iii) upon the Company's President and
Chief Operating Officer's agreement to sell, convey, transfer, or dispose of, or
further encumber the new residence. Under the terms of the employment agreement,
the Company has agreed to forgive the Loan in its entirety (and return any
payments received in connection therewith), in the event that the Company's
President and Chief Operating Officer remains continuously employed with the
Company from October 15, 1997 through October 15, 2000. The Company has also
agreed to forgive 50% of the loan in the event that the President and Chief
Operating Officer is terminated by the Company by written notice without cause.
The Company is amortizing the loan amount to compensation expense over the
three-year period.
A director of the Company, who is also the brother of the Chief Executive
Officer, is a partner in a law firm, which has provided legal services to the
Company since its formation. The Company made payments for legal services of
approximately $15,000, $27,000 and $77,000 in the years ended December 31, 1999,
1998 and 1997, respectively.
On April 12 and 13, 1999, the Company loaned $399,000 and $751,000 to Dan
Kunst and Greg Lichtwardt, respectively. Mr. Kunst is the Company's Vice
President of Sales and Marketing and a director of the Company and Mr.
Lichtwardt is the Company's Vice President of Finance, Chief Financial Officer
and Treasurer. The loan principal was repaid to the Company by Mr. Kunst and Mr.
Lichtwardt in May 1999. The interest rate on the loans was 8% per year.
59
<PAGE> 62
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
NOTE 17. ENTERPRISE WIDE DISCLOSURES
The Company, which operates in a single operating segment, designs,
manufactures and distributes contact lenses. Sales to one major customer
amounted to approximately 10%, 11%, and 8% of total net sales for the years
ended December 31, 1999, 1998 and 1997, respectively. United States export sales
approximated 3.5%, 3.0% and 2.8% of net sales for the years ended December 31,
1999, 1998 and 1997, respectively. The geographic presentation of net sales is
based on the origin of the sale. The "Other" category consists of geographic
presentations of Canada and Australia. The geographic distributions of the
Company's net sales, income from operations, and identifiable net assets are as
follows (in thousands):
<TABLE>
<CAPTION>
UNITED
UNITED STATES KINGDOM BARBADOS OTHER ELIMINATIONS CONSOLIDATED
------------- ------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999
Sales to unaffiliated
customers.................. $135,196 $30,220 $ -- $10,582 $ -- $175,998
Intercompany sales........... 49,980 37,951 48,921 -- (136,852) --
-------- ------- ------- ------- --------- --------
Total net sales.............. $185,176 $68,171 $48,921 $10,582 $(136,852) $175,998
======== ======= ======= ======= ========= ========
Income from operations....... $ 28,666 $ 4,658 $ 4,993 $ 329 $ 7,097 $ 45,743
======== ======= ======= ======= ========= ========
Total identifiable assets.... $154,582 $75,103 $38,312 $ 5,195 $ (50,877) $222,315
======== ======= ======= ======= ========= ========
December 31, 1998
Sales to unaffiliated
customers.................. $123,907 $19,164 $ -- $ 8,837 $ -- $151,908
Intercompany sales........... 35,972 18,847 -- -- (54,819) --
-------- ------- ------- ------- --------- --------
Total net sales.............. $159,879 $38,011 $ -- $ 8,837 $ (54,819) $151,908
======== ======= ======= ======= ========= ========
Income from operations....... $ 38,932 $ 2,771 $ -- $ 1,089 $ (987) $ 41,805
======== ======= ======= ======= ========= ========
Total identifiable assets.... $147,221 $54,227 $ -- $ 2,663 $ (27,541) $176,570
======== ======= ======= ======= ========= ========
December 31, 1997
Sales to unaffiliated
customers.................. $ 97,011 $12,321 $ -- $ 9,273 $ -- $118,605
Intercompany sales........... 32,492 19,918 -- -- (52,410) --
-------- ------- ------- ------- --------- --------
Total net sales.............. $129,503 $32,239 $ -- $ 9,273 $ (52,410) $118,605
======== ======= ======= ======= ========= ========
Income from operations....... $ 27,844 $ 4,037 $ -- $ (528) $ (1,423) $ 29,930
======== ======= ======= ======= ========= ========
Total identifiable assets.... $122,941 $33,628 $ -- $ 2,875 $ (26,609) $132,835
======== ======= ======= ======= ========= ========
</TABLE>
NOTE 18. LITIGATION
In 1994, litigation was commenced by the Company and OSL, its United
Kingdom subsidiary, against former employees and a former director of OSL, its
United Kingdom distributor (AVCL) and certain related parties. The claims by the
Company were essentially for misappropriation of intellectual property, breach
of contract and nonpayment of accounts. In a related matter, there was also a
patent infringement action against OSL, which involved the validity of a certain
molding patent that was licensed by OSL from certain of the defendants. The
Company also brought an action in federal court in California against certain of
the same individuals who were sued in the United Kingdom. The California action
was essentially one for breach of employment, breach of contract and violation
of securities laws.
In November 1996, judgment was rendered in the United Kingdom actions. In
February 1997, prior to the determination of any costs or damages by the United
Kingdom courts, the parties to the above litigations entered into a settlement
agreement for total monetary consideration of $10,000,000. The settlement
agreement provided for, among other things, (i) a mutual release and termination
of all pending litigation; (ii) the replacement of the September 30, 1992 patent
license agreement (See Note 16) with a new, fully paid-up, non-exclusive, patent
license, that did not contain any restrictions on the Company's ability to sell
contact lenses to other contact lens manufacturers; (iii) the termination of the
Company's obligation to supply
60
<PAGE> 63
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
contact lenses under the September 30, 1992 purchase and supply agreement (See
Note 16); and (iv) the termination of a limitation on the Company's right to
sell certain contact lenses directly into the United Kingdom and a limitation on
AVCL's right to sell certain contact lenses in North and South America. The
Company paid $3,333,000 to the defendants upon consummation of the settlement
agreement and an additional $6,667,000 upon the closing of the Company's initial
public offering in August, 1997.
The Company engaged a third party valuation firm to value the United
Kingdom marketing rights and the prepaid patent license agreement acquired as a
result of the settlement agreement and assigned values to the liabilities
identified as a result of the court judgment. The Company then allocated the
$10,000,000 of consideration to the liabilities identified and the intangible
assets acquired on a pro rata basis. As a result of this allocation and in
accordance with APB Opinion No. 17, "Intangible Assets," the Company allocated
$8,800,000 of the consideration to the United Kingdom marketing rights and the
prepaid patent license agreement acquired. The Company has assigned an estimated
useful life of 10 years to the United Kingdom marketing rights and the prepaid
patent license agreement. The Company incurred legal expenses, which were
included in general and administrative expenses in 1997 of $56,000 related to
this litigation.
Various other legal actions arising in the normal course of business have
been brought against the Company and certain of its subsidiaries. Management
believes that the ultimate resolution of these actions will not have a material
adverse effect on the Company's financial position or results of operations.
NOTE 19. OTHER COMMITMENTS
Commitments for the remodeling of existing facilities, construction of new
facilities and purchase of capital equipment over the next year were
approximately $7,799,000 and $13,068,000, respectively, as of December 31, 1999
and 1998.
NOTE 20. 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. $498,000 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.
NOTE 21. SUBSEQUENT EVENTS
On March 20, 2000, Wesley Jessen VisionCare, Inc. ("Wesley Jessen") and the
Company announced the signing of a definitive agreement and plan of merger
providing for the statutory merger of the Company and Wesley Jessen upon the
satisfaction of stockholder and regulatory approval, and other closing
conditions (the "Merger"). The Merger has been structured to qualify for tax
deferred treatment and to be accounted for as a pooling of interests for
accounting purposes. Under the terms of the agreement, at the closing date each
61
<PAGE> 64
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
outstanding share of the Company's common stock will be converted into 0.7211
shares of Wesley Jessen common stock. Based upon the number of shares
outstanding as of the close of business on March 17, 2000, the former
stockholders of the Company would own approximately 48% of the outstanding
common stock of the combined companies (assuming no conversion of outstanding
options). In addition, each share of the Company's outstanding stock options
will be converted at the same exchange ratio, into options to purchase shares of
Wesley Jessen common stock. Based upon the number of Company's outstanding
options as of the close of business on March 17, 2000, approximately 3.9 million
outstanding stock options will be converted into 2.8 million options to purchase
common shares of the combined companies. The closing of the Merger is subject to
the satisfaction of certain closing conditions contained in the agreement and
plan of merger, including regulatory approvals and approvals of the Company's
and Wesley Jessen's stockholders, and therefore there can be no assurance if and
when the Merger will close.
Upon the completion of this merger, 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, for certain
consulting services 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. Based on
the closing trading price of Wesley Jessen's common stock on March 17, 2000, the
aggregate value of the transaction would be approximately $454 million, which
would entitle Mr. Cummins to be paid approximately $1.7 million by the Company
under the terms of the letter agreement.
Subsequent to the announcement of the Merger, on March 23, 2000, Bausch &
Lomb, Inc. ("Bausch & Lomb") announced it has made an offer to buy Wesley
Jessen. Bausch & Lomb, one of the Company's competitors, has stated publicly
that it is not interested in acquiring the Company as a part of any acquisition
of Wesley Jessen or otherwise.
62
<PAGE> 65
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Ocular Sciences, Inc.:
We have audited the accompanying consolidated balance sheets of Ocular
Sciences, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the years in the three-year period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Ocular
Sciences, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
KPMG LLP
San Francisco, California
February 2, 2000
63
<PAGE> 66
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not Applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The names of the members of the Board of Directors, and certain information
about them as of December 31, 1999, are set forth below:
<TABLE>
<CAPTION>
DIRECTOR
NAME OF NOMINEE AGE PRINCIPAL OCCUPATION SINCE
--------------- --- -------------------- --------
<S> <C> <C> <C>
John D. Fruth........... 56 Chairman of the Board of Directors of the Company 1985
Norwick B.H. 50 Chief Executive Officer and President of the Company 1997
Goodspeed.............
Daniel J. Kunst......... 47 Vice President, Sales and Marketing of the Company 1987
Edgar J. Cummins(1)..... 56 Healthcare consultant 1992
Terence M. Fruth........ 61 Partner of the law firm of Fruth & Anthony, P.A 1992
William R. Grant(1)..... 74 Chairman of Galen Associates 1992
Francis R. Tunney, 52 Corporate Vice President-Administration, General 1996
Jr.(1)................ Counsel and Corporate Secretary of Allergan, Inc.
Terrance H. Gregg....... 51 President and Chief Operations Officer of MiniMed, 1999
Inc.
</TABLE>
- ---------------
(1) Member of the Audit Committee and the Compensation Committee
John D. Fruth founded the Company in 1985 and was the Chairman of the Board
and Chief Executive Officer since its inception until May 1999 when Mr. Fruth
resigned as Chief Executive Officer. He continues to serve as the Chairman of
the Board. He was also President of the Company from 1985 to October 1997. Prior
to joining the Company, Mr. Fruth worked in the regulatory affairs department,
and served as President, contact lens division, of CooperVision, Inc., a contact
lens manufacturer, from 1976 to 1983. From 1972 to 1976, Mr. Fruth worked in
sales and marketing management positions at Bausch & Lomb, Inc., a company that
manufactures and markets health-care products, including contact lenses. John D.
Fruth is the brother of Terence M. Fruth.
Norwick B.H. Goodspeed is the Chief Executive Officer and President of the
Company and a member of the Board. Mr. Goodspeed was appointed Chief Executive
Officer of the Company in May 1999 and has been a President and member of the
Board since October 1997. From 1993 to October 1997, Mr. Goodspeed was the
President and Chief Executive Officer of McGaw, Inc., a manufacturer of
intravenous solutions and related equipment and a subsidiary of IVAX Corp. From
1991 to 1993, Mr. Goodspeed was Senior Vice President, Sales and Marketing of
McGaw, Inc. From 1988 to 1991, he was the President and Chief Executive Officer
of Vical, Inc., a gene therapy company.
Daniel J. Kunst has been Vice President, Sales and Marketing, of the
Company since August 1995. Mr. Kunst has also been a member of the Board since
October 1987 and served as Executive Vice President and Chief Operating Officer
of the Company from 1987 to February 1992. From November 1994 to May 1995, Mr.
Kunst served as Chief Executive Officer of NeoLens, Inc., an optical products
company. From January 1993 to October 1994, Mr. Kunst was President, Chief
Executive Officer and a director of Cymed, Inc., a manufacturer and marketer of
medical devices. From March 1992 to January 1993, he worked as an independent
consultant to ophthalmic companies. Additionally, from 1990 to 1995, Mr. Kunst
was a member of the board of directors of VISX, Inc., a manufacturer of
ophthalmic lasers. From 1979 to 1987, Mr. Kunst held various management
positions with CooperVision, Inc., including President, Professional Resources
Division; Senior Vice President, Ophthalmic Products Division; and Vice
President, Sales and Marketing, Revo Sunglass Division.
64
<PAGE> 67
Edgar J. Cummins has been a member of the Board since October 1992. Mr.
Cummins is currently principally occupied as an independent healthcare
consultant. From May 1995 to January 1998, Mr. Cummins served as Chief Financial
Officer of Chiron Vision Corporation, an ophthalmic surgical company. Chiron
Vision Corporation was acquired by Bausch & Lomb, Inc. in December 1997. From
1986 to May 1995, he was Chief Financial Officer of Allergan, Inc. ("Allergan").
Prior to his service with Allergan, Mr. Cummins held various senior financial
positions with American Hospital Supply Corporation, a health-care and medical
products company, and Baxter Travenol Laboratories, Inc., a medical products
company, over a period of seven years. Prior to that, he spent five years as a
financial consultant for Arthur Young & Company, a certified public accounting
firm.
Terence M. Fruth has been Corporate Secretary and a member of the Board
since August 1992. Since 1985, Mr. Fruth has been a partner, Vice President and
Corporate Secretary of Fruth & Anthony, P.A., a Minneapolis-based law firm
specializing in commercial litigation. Mr. Fruth has been practicing law for 30
years. Mr. Fruth is a member of both the Minnesota State and American Bar
Associations. Terence M. Fruth is the brother of John D. Fruth.
William R. Grant has been a member of the Board since October 1992. Since
1989, he has been the Chairman of Galen Associates, a venture capital firm
specializing in emerging health-care companies. From 1987 to 1989, Mr. Grant
served as Chairman of New York Life International Investment, and from 1979 to
1987, he was the Chairman and President of MacKay-Shields Financial Corporation.
Prior to 1979, Mr. Grant had 25 years' experience with Smith Barney, Harris
Upham & Co., Inc., where he served as President and from 1976 to 1978, Vice
Chairman. Mr. Grant currently serves as Vice Chairman of SmithKline Beecham plc
and serves on the boards of directors of Allergan, Inc.; MiniMed, Inc., a
company that specializes in drug delivery devices and systems; Seagull Energy
Corporation, an oil and gas company; and Witco Corporation, a specialty
chemicals company.
Francis R. Tunney, Jr. has been a member of the Board since October 1996.
Mr. Tunney has been Corporate Vice President -- Administration, General Counsel
and Corporate Secretary of Allergan since February 1991. Mr. Tunney is also the
current acting Chief Financial Officer of Allergan. From 1989 to 1991, Mr.
Tunney was Senior Vice President, General Counsel and Corporate Secretary of
Allergan. Mr. Tunney joined Allergan in 1985 as Associate General Counsel and
from 1986 to 1989 served as Allergan's General Counsel. From 1979 to 1985, Mr.
Tunney held several positions at SmithKline Beecham plc, including counsel for
its Medical Device and Diagnostics Division, acting general manager for its
Medical Ultrasound Division and senior international attorney within its
corporate law department.
Terrance H. Gregg has been a member of the Board since November, 1999.
Since October 1994, Mr. Gregg served as the President and Chief Operating
Officer of MiniMed, Inc., a medical device manufacturer. Mr. Gregg has served as
a director for Hemotherapies since August 1998, for MiniMed, Inc. since August
1998 and for Vasogen since September 1999.
Directors are elected at each annual meeting of stockholders to serve until
the next annual meeting of stockholders, or until their successors are duly
elected and qualified or until their earlier resignation, removal or death.
Executive officers are chosen by, and serve at the discretion of, the Board.
The Company incorporated under the name O.S.I. Corporation in California in
1985, and was reincorporated in Delaware in July 1997. Unless the context
otherwise requires, references herein to the Company include its California
predecessor.
65
<PAGE> 68
EXECUTIVE OFFICERS
The executive officers of the Company, and certain information about them
as of December 31, 1999, are set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John D. Fruth......................... 56 Chairman of the Board of Directors
Norwick B.H. Goodspeed................ 50 Chief Executive Officer, President and Director
Daniel J. Kunst....................... 47 Vice President, Sales and Marketing and Director
Gregory E. Lichtwardt................. 45 Vice President, Finance, Chief Financial Officer and
Treasurer
John Lilley........................... 52 Vice President, Manufacturing
</TABLE>
- ---------------
For information regarding the positions and offices with the Company held
by Messrs. Fruth, Goodspeed and Kunst, please refer to the discussion above
regarding "Directors".
Gregory E. Lichtwardt has been Vice President, Finance, and Chief Financial
Officer of the Company since April 1993 and Treasurer since May 1997. Prior to
joining the Company, from November 1990 to April 1993, Mr. Lichtwardt was Vice
President, Finance, of the Humphrey Instruments Division of Allergan, a
health-care company focused on specialty pharmaceutical products. From February
1989 to November 1990, he served as Director of Operations, Accounting and
Planning, of Allergan's Optical Division. From December 1986 to January 1989, he
was Corporate Controller of AST Research, Inc., a personal computer
manufacturing company, and from June 1980 to December 1986, Mr. Lichtwardt held
financial positions within several different divisions of American Hospital
Supply Corporation, a health-care and medical products company.
John Lilley has been Vice President, Manufacturing, of the Company since
June 1996. From 1990 to June 1996, Dr. Lilley served as Manufacturing Director
of Bespak plc, an English company that manufactures precision plastic
injection-molded components for the pharmaceutical industry. From 1989 to 1990,
he was Operations Director of Birkby Plastics, a division of the Plessey
Plastics Group, which manufactures plastic injection-molded components for the
automotive and computer industries.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16 of the Securities Exchange Act of 1934, as amended, requires the
Company's directors and executive officers, and persons who own more than 10% of
the Company's Common Stock ("10% Stockholders"), to file with the Securities and
Exchange Commission (the "SEC") initial reports of ownership on a Form 3 and
reports of changes in ownership on a Form 4 or Form 5. Such persons are required
by SEC regulation to furnish the Company with copies of all Section 16(a) forms
that they file.
Based solely on its review of the copies of such forms furnished to the
Company and written representations from the executive officers and directors,
the Company believes that all Section 16(a) filing requirements applicable to
its executive officers, directors and 10% Stockholders were met during fiscal
1999.
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<PAGE> 69
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth compensation awarded to or earned for
services rendered in all capacities to the Company by the Company's Named
Executive Officers during fiscal 1997, 1998 and 1999. This information includes
the dollar values of base salaries and bonus awards, the number of shares
subject to stock options granted and certain other compensation, whether paid or
deferred.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
----------------------------------------------------- SECURITIES
FISCAL OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY($)(1) BONUS($)(2) COMPENSATION($) OPTIONS(#)
--------------------------- ------ ------------ ----------- --------------- ------------
<S> <C> <C> <C> <C> <C>
John D. Fruth......................... 1999 200,000 -- 2,774(3) 50,000
Chairman of the Board 1998 395,000 227,125 7,023(3) 220,000
and Chief Executive Officer(3) 1997 357,462 192,500 3,939(3) --
Norwick B.H. Goodspeed................ 1999 370,000 -- 204,758(4) 112,000
Chief Executive Officer and 1998 300,000 207,000 156,947(4) --
President(4) 1997 49,615 -- 111,250(4) 300,000
Gregory E. Lichtwardt................. 1999 218,000 38,150 677,832(5) 60,000
Vice President, Finance, 1998 204,000 97,110 261,982(5) 66,000
Chief Financial Officer and 1997 190,513 97,428 235(5) --
Treasurer(5)
Daniel J. Kunst....................... 1999 214,000 37,450 2,295(6) 60,000
Vice President, Sales and
Marketing(6) 1998 200,000 95,500 1,855(6) 36,000
1997 186,406 82,829 426(6) --
John Lilley........................... 1999 205,537 102,189 632,872(7) 60,000
Vice President, Manufacturing(7) 1998 195,417 104,835 252,782(7) 30,000
1997 169,000 73,811 63,415(7) --
</TABLE>
- ---------------
(1) For Fiscal Year 1999, 1998 and 1997, represents salaries earned in 1999,
1998 and 1997, respectively, regardless of when paid.
(2) For Fiscal Year 1999, 1998 and 1997, represents bonuses earned in 1999, 1998
and 1997, respectively, regardless of when paid.
(3) Mr. Fruth resigned as the Chief Executive Officer in May 1999. For Fiscal
Year 1999, represents premiums paid by the Company with respect to term life
insurance for Mr. Fruth's benefit in the amount of $774 and the Company's
401K contribution match in the amount of $2,000. For Fiscal Year 1998,
represents premiums paid by the Company with respect to term life insurance
for Mr. Fruth's benefit in the amount of $2,250, automobile expenses paid by
the Company for his benefit in the amount of $2,038 and the Company's 401K
contribution match in the amount of $2,735. For Fiscal Year 1997, represents
premiums paid by the Company with respect to term life insurance for Mr.
Fruth's benefit in the amount of $864 and automobile expenses paid by the
Company for his benefit in the amount of $3,075.
(4) Mr. Goodspeed was appointed the Chief Executive Officer in May 1999. For
Fiscal Year 1999, represents premiums paid by the Company with respect to
term life insurance for Mr. Goodspeed's benefit in the amount of $883,
$150,000 amortization of the portion of certain loans to Mr. Goodspeed, a
gain on the Company's options exercised in the amount of $51,875, and the
Company's 401K contribution match in the amount of $2,000. For Fiscal Year
1998, represents premiums paid by the Company with respect to term life
insurance for Mr. Goodspeed's benefit in the amount of $870, $4,001 of
additional relocation costs paid, $150,000 amortization of the portion of
certain loans to Mr. Goodspeed and the Company's 401K contribution match in
the amount of $2,076. For Fiscal Year 1997, includes $80,000 of accrued
relocation costs and $31,250 amortization of the portion of certain loans to
Mr. Goodspeed. Mr. Goodspeed joined the Company as President and Chief
Operating Officer in October 1997, and serves in those capacities under the
terms of an employment agreement. His current annual salary is $370,000. See
"Employment Agreements."
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<PAGE> 70
(5) For Fiscal Year 1999, represents premiums paid by the Company with respect
to term life insurance for Mr. Lichtwardt's benefit in the amount of $302,
the Company's 401K contribution match in the amount of $2,000 and gains on
Company options exercised in the amount of $675,530. For Fiscal Year 1998,
represents premiums paid by the Company with respect to term life insurance
for Mr. Lichtwardt's benefit in the amount of $257, a gain on Company
options exercised in the amount of $260,313 and the Company's 401K
contribution match in the amount of $1,412. For Fiscal Year 1997, represents
premiums paid by the Company with respect to life insurance for the benefit
of Mr. Lichtwardt.
(6) For Fiscal Year 1999, represents premiums paid by the Company with respect
to term life insurance for Mr. Kunst's benefit in the amount of $295 and the
Company's 401K contribution match in the amount of $2,000. For Fiscal Year
1998, represents premiums paid by the Company with respect to term life
insurance for Mr. Kunst's benefit in the amount of $470 and the Company's
401K contribution match in the amount of $1,385. For Fiscal Year 1997,
represents premiums paid by the Company with respect to life insurance for
the benefit of Mr. Kunst.
(7) For Fiscal Year 1999, represents a $51,384 contribution by the Company to a
pension plan for the benefit of Dr. Lilley, a $13,842 reimbursement for
automobile expenses, $13,246 paid by the Company for insurance for the
benefit of Dr. Lilley and gains on Company options exercised in the amount
of $554,400. For Fiscal Year 1998, represents a $48,854 contribution by the
Company to a pension plan for the benefit of Dr. Lilley, a $8,439
reimbursement for automobile expenses, $12,789 paid by the Company for
insurance for the benefit of Dr. Lilley and gains on Company options
exercised in the amount of $182,700. For Fiscal Year 1997, represents a
$42,108 contribution by the Company to a pension plan for the benefit of Dr.
Lilley, a $10,437 reimbursement for automobile expenses and $10,870 paid by
the Company for insurance for the benefit of Dr. Lilley. Dr. Lilley serves
as the Company's Vice President, Manufacturing under the terms of an
employment agreement. See "Employment Agreements."
OPTION GRANTS IN FISCAL 1999
The following table sets forth information regarding option grants during
1999 to each of the Named Executive Officers. In accordance with the rules of
the Securities and Exchange Commission, the table sets forth the hypothetical
gains or "option spreads" that would exist for the options at the end of their
respective six-year terms. These gains are based on assumed rates of annual
compound stock price appreciation of 5% and 10% from the date the option was
granted to the end of the option term.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
INDIVIDUAL GRANTS % OF
----------------------------------------------------------- ANNUAL RATES
NUMBER OF TOTAL OPTIONS OF STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES IN OPTION TERM(4)
OPTIONS FISCAL EXERCISE PRICE EXPIRATION ---------------------
NAME GRANTED(#)(1) YEAR(2) PER SHARE(3) DATE 5% 10%
---- ------------- ------------- -------------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
John D. Fruth................... 50,000 2.88% $ 20.25 2/04/09 $636,756 $1,613,664
Norwick B.H. Goodspeed.......... 30,000 1.73% $ 20.25 2/04/09 $382,053 $ 968,199
82,000 4.72% $17.375 6/29/09 $896,018 $2,270,684
Gregory E. Lichtwardt........... 15,000 0.86% $ 20.25 2/04/09 $191,027 $ 484,099
45,000 2.59% $17.375 6/29/09 $491,717 $1,246,107
Daniel J. Kunst................. 15,000 0.86% $ 20.25 2/04/09 $191,026 $ 484,099
45,000 2.59% $17.375 6/29/09 $494,716 $1,246,107
John Lilley..................... 15,000 0.86% $ 20.25 2/04/09 $191,027 $ 484,099
45,000 2.59% $17.375 6/29/09 $491,717 $1,246,107
</TABLE>
- ---------------
(1) The options that expire on June 29, 2009 vest over a five-year period, with
20% of the options vesting upon the completion of each year of service. The
options that expire on February 4, 2009 vest over a three-year period, with
33.33% of the options vesting upon the completion of each year of service.
(2) The Company granted options to purchase 1,736,100 shares of Common Stock to
employees during 1999.
68
<PAGE> 71
(3) The exercise price may be paid in cash, in shares of the Company's common
stock valued at fair market value on the exercise date or through a cashless
exercise procedure involving a same-day sale of the purchased shares.
(4) The 5% and 10% assumed annual compound rates of stock price appreciation are
mandated by the rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of future Common Stock
prices.
AGGREGATED OPTION EXERCISES IN 1999 AND FISCAL YEAR END OPTION VALUES
The following table sets forth information regarding the exercise of stock
options by the Named Executive Officers during 1999 and stock options held as of
December 31, 1999 by the Named Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES AT FISCAL YEAR END(#) AT FISCAL YEAR END(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISES(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John D. Fruth............... -- $ -- -- 50,000 $ -- $ --
Norwick B.H. Goodspeed...... 5,000 $ 51,875 115,000 292,000 $ -- $123,000
Gregory E. Lichtwardt....... 28,406 $675,530 13,200 112,800 $ -- $ 67,500
Daniel J. Kunst............. -- $ -- $47,200 108,800 $633,600 $384,300
John Lilley................. 20,000 $572,213 24,000 116,000 $249,210 $510,540
</TABLE>
- ---------------
(1) Based on the closing price of the Company's Common Stock at December 31,
1999 ($18.875 per share) less the exercise price payable for such shares.
DIRECTOR COMPENSATION
The Company does not pay cash compensation to its directors, other than
reimbursement for reasonable expenses in attending meetings of the Board. The
non-employee members of the Board are compensated under the Company's 1997
Directors Stock Option Plan (the "Directors Plan").
In June 1997, the Board adopted and the stockholders approved the Directors
Plan and reserved a total of 300,000 shares of the Company's Common Stock for
issuance thereunder. Only members of the Board who are not employees of the
Company, or any parent, subsidiary or affiliate of the Company, are eligible to
participate in the Directors Plan. On August 4, 1997, the effective date of the
Company's initial public offering, each eligible director (Terence M. Fruth,
William R. Grant, Francis R. Tunney and Edgar J. Cummins) was granted an option
to purchase 30,000 shares at an exercise price of $16.50 per share. Each
eligible director who thereafter becomes a member of the Board is automatically
granted an option to purchase 30,000 shares upon joining the Board. In addition,
each eligible director is automatically granted an option to purchase 15,000
shares on each anniversary date of such director's initial option grant under
the Directors Plan if such director has served continuously as a member of the
Board since the date such director was first granted an option under the
Directors Plan. On August 4, 1998, each non-employee Director was granted an
option to purchase 15,000 shares of the Company's Common Stock at the exercise
price of $28.75 per share. On August 4, 1999, each non-employee Director was
granted another option to purchase 15,000 shares of the Company's Common Stock
at an exercise prices of $19.375 per share. On November 16, 1999, Mr. Gregg was
an option to purchase 30,000 shares of Company Common Stock at an exercise price
per share of $18.00. As of December 31, 1999, options to purchase a total of
270,000 shares of Common Stock have been granted under the Directors Plan. All
options granted under the Directors Plan vest as to 1/36 of the shares subject
to the option per month commencing the month following the month of the date of
grant, for so long as the optionee continues as a member of the Board or as a
consultant to the Company. The exercise price of all options granted under the
Directors Plan is and will be the fair market value of the Common Stock on the
date of grant.
69
<PAGE> 72
EMPLOYMENT AGREEMENTS
In October 1997, Norwick B.H. Goodspeed joined the Company as its President
and Chief Operating Officer pursuant to the terms of an employment agreement
dated October 15, 1997. Under the employment agreement, the Company agreed to
employ Mr. Goodspeed as its President and Chief Operating Officer at an initial
annual base salary of $300,000. Mr. Goodspeed was paid a bonus of $87,292 and
$207,000 for 1999 and 1998, respectively, and is eligible to receive a bonus of
up to 50% of his annual salary for each year thereafter. In addition, Mr.
Goodspeed has received an option to purchase 300,000 shares of the Company's
Common Stock at an exercise price of $24.25 per share, vesting 20% per year over
five years so long as Mr. Goodspeed is employed by the Company. The Company has
also agreed to pay certain relocation costs and other costs associated with the
sale of Mr. Goodspeed's prior residence in southern California, up to a maximum
of $159,000. To date, the Company has paid $84,000 of such relocation costs. The
employment agreement further provides that Mr. Goodspeed's employment will
continue for a term of three years unless and until terminated by either the
Company or Mr. Goodspeed.
Under Mr. Goodspeed's employment agreement, the Company extended a $450,000
loan to Mr. Goodspeed in January 1998 in connection with his purchase of a new
residence in the San Francisco area (the "Loan"). The Loan is interest free and
is secured by a purchase money second deed of trust on the new residence and by
a security interest in certain stock options granted to Mr. Goodspeed to
purchase 300,000 shares of the Company's Common Stock and any securities
issuable upon exercise of such options. The Loan is due and payable in full on
the earlier of (i) October 15, 2002; (ii) six months after Mr. Goodspeed's
voluntary resignation or termination by the Company for Cause (as defined in Mr.
Goodspeed's employment agreement); or (iii) Mr. Goodspeed's agreement to sell,
convey, transfer, dispose of, or further encumber the new residence. Under the
terms of the employment agreement, the Company has agreed to forgive the Loan in
its entirety (and return any payments received in connection therewith), in the
event that Mr. Goodspeed remains continuously employed with the Company from
October 15, 1997 through October 15, 2000. The Company has also agreed to
forgive 50% of the Loan in the event that Mr. Goodspeed is terminated by the
Company without Cause.
Pursuant to the terms of an employment agreement dated March 1996, the
Company employed Dr. John Lilley as its Vice President, Manufacturing at an
initial annual salary of L95,000. Under the employment agreement, Dr. Lilley is
eligible to receive a bonus of up to 40% of his annual salary at the discretion
of the Company based on the achievement of manufacturing goals and objectives
established by the Company at the start of each fiscal year. In 1996, Dr. Lilley
also received an option to purchase 80,000 shares of the Company's Common Stock
at an exercise price of $5.03 per share. Under Dr. Lilley's employment
agreement, his employment will continue unless and until either the Company or
Dr. Lilley serves on the other 12 months' notice of termination, provided that
the Company has the right to terminate his employment upon his 65th birthday.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of Messrs. Cummins, Grant and Tunney.
There were no interlocking relationships between the Board or Compensation
Committee and the board of directors or compensation committee of any other
company, nor has any such interlocking relationship existed in the past. For a
description of transactions between the Company and members of the Compensation
Committee and entities affiliated with such members, see the discussion under
"Item 13 -- Certain Relationships and Related Transactions".
On March 20, 2000, Wesley Jessen VisionCare, Inc. ("Wesley Jessen") and the
Company announced the signing of a definitive agreement and plan of merger
providing for the statutory merger of the Company and Wesley Jessen upon the
satisfaction of stockholder and regulatory approval, and other closing
conditions (the "Merger"). See "-- Item 1 -- Business -- Recent Developments"
and "-- Item 8 -- Note 21 of Notes to Consolidated Financial Statements."
70
<PAGE> 73
Upon the completion of this merger, 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, for certain
consulting services 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. Based on
the closing trading price of Wesley Jessen's common stock on March 17, 2000, the
aggregate value of the transaction would be approximately $454 million, which
would entitle Mr. Cummins to be paid approximately $1.7 million by the Company
under the terms of the letter agreement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of March 1, 2000,
with respect to the beneficial ownership of the Company's Common Stock by (i)
each stockholder known by the Company to be the beneficial owner of more than 5%
of the Company's Common Stock, (ii) each director and nominee, (iii) the Chief
Executive Officer of the Company and each of the Company's four most highly
compensated executive officers (other than the Chief Executive Officer) who were
serving as executive officers at the end of fiscal 1999 (together, the "Named
Executive Officers") and (iv) all current directors and executive officers as a
group.
<TABLE>
<CAPTION>
SHARES PERCENT OF
5% STOCKHOLDERS, DIRECTORS AND BENEFICIALLY OUTSTANDING
NAMED EXECUTIVE OFFICERS OWNED(1) COMMON STOCK(1)
------------------------------ ------------ ---------------
<S> <C> <C>
John D. Fruth(2)......................................... 5,016,665 21.8%
Snyder Capital Management, L.P. and affiliates(3)........ 2,350,800 10.2%
FMR Corp.(4)............................................. 1,756,900 7.6%
William R. Grant(5)...................................... 826,468 3.6%
Galen Partners, L.P. and affiliates(6)................... 763,893 3.3%
Francis R. Tunney, Jr.(7)................................ 48,515 *
Gregory E. Lichtwardt(8)................................. 95,285 *
Terence M. Fruth(9)...................................... 139,943 *
Daniel J. Kunst(10)...................................... 60,850 *
John Lilley(11).......................................... 51,999 *
Edgar J. Cummins(12)..................................... 40,801 *
Norwick B.H. Goodspeed(13)............................... 124,999 *
Terrance Gregg(14)....................................... 1,000 *
All directors and executive officers as a group (11 6,406,525 27.3%
persons)(15)...........................................
</TABLE>
- ---------------
* Less than 1% of the Company's outstanding Common Stock
(1) Percentage ownership is based on 22,996,495 shares outstanding as of March
1, 2000. Unless otherwise indicated below, the persons and entities named
in the table have sole voting and sole investment power with respect to all
shares beneficially owned, subject to community property laws where
applicable. Shares of Common Stock subject to options that are currently
exercisable or will become exercisable within 60 days of March 1, 2000 are
deemed to be outstanding and to be beneficially owned by the person holding
such options for the purpose of computing the percentage ownership of such
person but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person.
(2) Represents 5,000,000 shares held of record by Mr. Fruth and 16,665 shares
of Common Stock that may be acquired by Mr. Fruth upon exercise of stock
options that are currently exercisable or will become exercisable within 60
days of March 1, 2000. The address for Mr. Fruth is c/o Ocular Sciences,
Inc., 475 Eccles Ave., South San Francisco, California 94080.
(3) Information regarding Snyder Capital Management, L.P. ("SCMLP") and its
affiliates is derived from Schedule 13G filed by SCMLP and Snyder Capital
Management, Inc. ("SCMI") with the Commission on August 10, 1999. The
shares reported as beneficially owned by SCMLP may also be deemed to be
beneficially owned by SCMI, the sole general partner of SCMLP, and Nvest
Companies,
71
<PAGE> 74
L.P., which wholly owns SCMLP and SCMI. The address for SCMLP and SCMI is
350 California Street, Suite 1460, San Francisco, California 94104.
(4) Information regarding FMR Corp. ("FMR") is derived from Schedule 13G filed
by FMR with the Commission on February 14, 2000. Of the shares reported as
beneficially owned by FMR, 1,634,600 shares may be deemed beneficially
owned by Fidelity Management & Research Company, a wholly-owned subsidiary
of FMR ("Fidelity"), and 122,300 shares may be deemed beneficially owned by
Fidelity Management Trust Company, a wholly-owned subsidiary of FMR
("FMT"). Additionally, 1,608,908 of the shares deemed beneficially owned by
FMR are beneficially owned by Fidelity Low-Priced Stock Fund, an investment
company for which FMR acts as investment advisor. Edward C. Johnson, 3d and
Abigail P. Johnson, each individuals who may be deemed to form a
controlling group with respect to FMR, may also be deemed to beneficially
own the shares reported as beneficially owned by FMR. FMR's address is 82
Devonshire Street, Boston, Massachusetts 02109.
(5) Shares owned represent 763,893 shares held of record by Galen Partners,
L.P. and its affiliates, 62,575 shares of Common Stock and 38,329 shares of
Common Stock that may be acquired upon exercise of stock options that are
currently exercisable or will become exercisable within 60 days of March 1,
2000.
(6) Information regarding Galen Partners, L.P. and its affiliates is derived
from Schedule 13G filed by Galen Partners, L.P. with the Commission on May
13, 1999. Shares owned represent 682,584 shares held of record by Galen
Partners, L.P., 70,299 shares held of record by Galen Partners
International, L.P. and 11,010 shares held of record by Galen Associates,
but do not include 62,575 shares of Common Stock and 38,329 shares of
Common Stock that may be acquired by William R. Grant (a director of the
Company) upon exercise of stock options that are currently exercisable or
will become exercisable within 60 days of March 1, 2000. Mr. Grant, Bruce
F. Wesson and Rebound Investments, Inc. are the general partners of BGW
Partners, L.P., the general partner of Galen Partners, L.P. and Galen
Partners International, L.P. and thus may be deemed to have voting and
investment power with respect to these shares. The address for these
individuals and entities is c/o Galen Associates, 610 Fifth Avenue, New
York, New York 10020.
(7) Represents 186 shares held of record by Mr. Tunney, Jr. and 48,329 shares
of Common Stock that may be acquired by Mr. Tunney upon exercise of stock
options that are currently exercisable or will become exercisable within 60
days of March 1, 2000.
(8) Represents 63,886 shares held of record by Mr. Lichtwardt and 31,399 shares
of Common Stock that may be acquired by Mr. Lichtwardt upon exercise of
stock options that are currently exercisable or will become exercisable
within 60 days of March 1, 2000.
(9) Represents 101,614 shares of record held by Mr. Fruth and 38,329 shares of
Common Stock that may be acquired by Mr. Fruth upon exercise of stock
options that are currently exercisable or will become exercisable within 60
days of March 1, 2000.
(10) Represents 40,725 shares held of record by Mr. Kunst, 700 shares held in
Mr. Kunst's IRA, 25 shares held in an IRA for Mr. Kunst's wife which are
deemed beneficially owned by Mr. Kunst and 19,400 shares of Common Stock
that may be acquired by Mr. Kunst upon exercise of stock options that are
currently exercisable or will become exercisable within 60 days of March 1,
2000.
(11) Represents 1,000 shares held of record by Mr. Lilley and 50,999 shares of
Common Stock that may be acquired upon exercise of stock options that are
currently exercisable or will become exercisable within 60 days of March 1,
2000.
(12) Represents 2,472 shares of record held by Mr. Cummins and 38,329 shares of
Common Stock that may be acquired by Mr. Cummins upon exercise of stock
options that are currently exercisable or will become exercisable within 60
days of March 1, 2000.
(13) Represents 124,999 shares of Common Stock that may be acquired by Mr.
Goodspeed upon exercise of stock options that are currently exercisable or
will become exercisable within 60 days of March 1, 2000.
(14) Represents shares held of record by Mr. Gregg.
(15) Includes the shares described in notes (2), (5), (7), (8), (9), (10), (11),
(12), (13) and (14).
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<PAGE> 75
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the Company's Fiscal Year ending December 31, 1999 and through the
present, there has not been, nor is there currently proposed, any transaction or
series of similar transactions to which the Company or any of its subsidiaries
was or is to be a party in which the amount involved exceeds $60,000 and in
which any director, executive officer, holder of more than 5% of the Common
Stock of the Company or any member of the immediate family of any of the
foregoing persons had or will have a direct or indirect material interest other
than (i) compensation agreements and related loans, which are described under
the caption "Management-Employment Agreements," and (ii) the transactions
described below.
MERGER AGREEMENT AND RELATED CONSULTING SERVICES
On March 20, 2000, Wesley Jessen VisionCare, Inc. ("Wesley Jessen") and the
Company announced the signing of a definitive agreement and plan of merger
providing for the statutory merger of the Company and Wesley Jessen upon the
satisfaction of stockholder and regulatory approval, and other closing
conditions (the "Merger"). See "-- Item 1 -- Business -- Recent Developments"
and "-- Item 8 -- Note 21 of Notes to Consolidated Financial Statements."
Upon the completion of this merger, 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, for certain
consulting services 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. Based on
the closing trading price of Wesley Jessen's common stock on March 17, 2000, the
aggregate value of the transaction would be approximately $454 million, which
would entitle Mr. Cummins to be paid approximately $1.7 million by the Company
under the terms of the letter agreement.
PAYMENTS TO DIRECTOR
Fruth & Anthony, a law firm in which Terence M. Fruth, a director of the
Company and the brother of John D. Fruth, the Chief Executive Officer of the
Company, is a partner, has provided legal services to the Company since its
formation. The Company made payments of $15,000 in 1999 to Fruth & Anthony for
such legal services.
LOANS TO OFFICERS AND DIRECTORS
On April 12 and 13, 1999, the Company loaned $399,000 and $751,000 to Dan
Kunst and Greg Lichtwardt, respectively. Mr. Kunst is the Company's Vice
President of Sales and Marketing and a director of the Company and Mr.
Lichtwardt is the Company's Vice President of Finance, Chief Financial Officer
and Treasurer. The loan principal and related interest was repaid to the Company
by Mr. Kunst and Mr. Lichtwardt in May 1999. The interest rate on the loans was
8% per year.
73
<PAGE> 76
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(A) The following documents are filed as part of this Report:
(1) Financial Statements. The following Consolidated Financial
Statements of Ocular Sciences, Inc. are incorporated by reference from Part
II, Item 8 of this Form 10-K:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheets -- December 31, 1999 and 1998... 40
Consolidated Statements of Income -- Years Ended December
31, 1999, 1998 and 1997................................... 41
Consolidated Statements of Stockholders' Equity -- Years
Ended December 31, 1999, 1998 and 1997.................... 42
Consolidated Statements of Cash Flows -- Years Ended
December 31, 1999, 1998 and 1997.......................... 43
Notes to Consolidated Financial Statements.................. 44
Report of KPMG LLP.......................................... 63
</TABLE>
(2) Financial Statement Schedule. The following financial statement
schedule of Ocular Sciences, Inc. for the years ended December 31, 1999,
1998 and 1997 is filed as part of this Report and should be read in
conjunction with the Consolidated Financial Statements of Ocular Sciences,
Inc.
<TABLE>
<CAPTION>
SCHEDULE PAGE
-------- ----
<S> <C>
II. Valuation and Qualifying Accounts....................... 77
Report of KPMG LLP.......................................... 80
</TABLE>
Other financial statement schedules are omitted because the information
called for is not required or is shown either in the Consolidated Financial
Statements or the Notes thereto.
(B) Reports on Form 8-K:
None.
(C) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
2.01.. Form of Agreement and Plan of Merger by and between O.S.I.
Corporation, a California corporation, and Registrant+
3.01.. Registrant's Certificate of Incorporation+
3.03.. Form of Registrant's Restated Certificate of Incorporation+
3.04.. Registrant's Bylaws+
4.01.. Registration Rights Agreement dated as of October 30, 1992
by and among the Registrant and the other parties listed on
the signature pages thereto+
</TABLE>
<TABLE>
<CAPTION>
4.02 Amendment to Registration Rights Agreement and Shareholders' Agreement dated as of
February 27, 1997 by and among the Registrant and the other parties listed on the signature
pages thereto+
<C> <S>
10.01... Registrant's 1989 Stock Option Plan adopted July 21, 1989, as amended November 30, 1994+*
10.02... Registrant's 1997 Equity Incentive Plan+*
10.03... Registrant's 1997 Directors Stock Option Plan+*
10.04... Registrant's 1997 Employee Stock Purchase Plan+*
10.05... Form of Indemnity Agreement entered into by Registrant with each of its directors and
executive officers+*
</TABLE>
74
<PAGE> 77
<TABLE>
<CAPTION>
10.06 Settlement Agreement and Release dated as of February 27, 1997 between Aspect Vision Care
Ltd., New Focus Health Care Ltd., Geoffrey Galley, Anthony Galley, Barrie Bevis, Albert
Morland, Ivor Atkinson and Wilfred Booker, Sciences Ltd., O.S.I. Corporation and John Fruth+#
<C> <S>
10.07... Amendment to Settlement Agreement and Release dated as of February 27, 1997 between the
parties to the Settlement Agreement and Contact Lens Technologies Ltd+
10.08... Patent License Agreement dated February 27, 1997 by and between Ocular Sciences Ltd. and
certain persons referred to therein as the Patent Owners+
10.09... Employment Agreement dated March 27, 1996 by between John Lilley and O.S.I. Corporation+*
10.10... Lease for 475 - 479 Eccles Avenue dated May 18, 1995, between Stanley D. McDonald, Norman H.
Scherdt, Herbert A. West and McDonald Ltd. as "Landlord" and O.S.I. Corporation as "Tenant"+
10.11... Lease for Santa Isabel, Puerto Rico Kingdom dated September 14, 1984, between The Puerto Rico
Industrial Development Company as "Landlord" and O.S.I. Puerto Rico Corporation as "Tenant,"
as amended+
10.12... Counterpart Underlease of Distribution Depot dated November 30, 1995 among Boots the Chemist
Limited as "Landlord," Ocular Sciences Limited as "Tenant" and O.S.I. Corporation as
"Guarantor"+
10.13... Amended and Restated Credit Agreement among Ocular Sciences, Inc., Ocular Sciences Puerto
Rico, Inc. and Comerica Bank -- California dated November 7, 1997 and exhibits thereto[X]
10.14... Amendment Number Two to Amended and Restated Credit Agreement among Ocular Sciences, Inc.,
Ocular Sciences Puerto Rico, Inc. and Comerica Bank -- California, dated April 27, 1999[Z]
10.15... Amendment Number Three to Amended and Restated Credit Agreement among Ocular Sciences, Inc.,
Ocular Sciences Puerto Rico, Inc. and Comerica Bank -- California, dated June 28, 1999[Z]
10.16... 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[A]
10.17... Inter-Company Loan Agreement among Ocular Sciences, Inc., and Precision Lens Manufacturing
and Technology, Inc., dated March 1, 1999[Z]
10.18... Amended and Restated Inter-Company Loan Agreement among Ocular Sciences, Inc., and Precision
Lens Manufacturing and Technology, Inc., dated June 1, 1999
10.19... Employment Agreement dated October 15, 1997 between Norwick Goodspeed and the Company[X]*
10.20... Lease of Unit 10 The Quadrangle Abbey Park Industrial Estate Romsey Hampshire dated August
19, 1997 between Ocular Sciences Limited and The Royal Bank of Scotland plc[X]
10.21... Construction and Lease Contract dated June 29, 1998 between Ocular Sciences Puerto Rico, Inc.
and Puerto Rico Industrial Development Company [Y]
10.22... First Amendment to Lease for 475 - 479 Eccles Avenue dated January 25, 1999, between Stanley
D. McDonald, Mary Lee Scheidt, Herbert A. West, and McDonald Ltd. as "Landlord" and O.S.I.
Corporation as "Tenant"
</TABLE>
<TABLE>
<CAPTION>
10.23 Lease of Unit One School Lane Chandlers Ford Industrial Estate Chandlers Ford Hampshire dated
May 20, 1999 between Ocular Sciences UK Limited, Ocular Sciences, Inc. and Le Gallais' Real
Estates (Overseas) Limited
<C> <S>
10.24... Consulting agreement between Ed Cummins and Ocular Sciences, Inc.
10.25... Agreement and Plan of Merger dated March 19, 2000, among Wesley Jessen VisionCare Inc., and
OSI Acquisition Corp. and Ocular Sciences, Inc.[B]
</TABLE>
75
<PAGE> 78
<TABLE>
<CAPTION>
21.01 List of Subsidiaries
<C> <S>
23.02... Consent of KPMG LLP, Independent Certified Public
Accountants
24.01... Power of Attorney (see page 78 of this Form 10-K))
27.01... Financial Data Schedule
</TABLE>
- ---------------
<TABLE>
<C> <S>
# Confidential treatment has been requested from the
Securities and Exchange Commission with respect to certain
portions of this exhibit. Omitted portions have been filed
separately with the Commission.
+ Incorporated by reference from the Company's registration
statement on Form S-1, file no. 333-27421.
[X] Incorporated by reference from the Company's registration
statement on Form S-1, file no. 333-46669.
[ Y ] Incorporated by reference from the Company's 1998 Form 10-K,
filed with the SEC on March 30, 1999.
[ Z ] Incorporated by reference from the Company's Form 10-Q,
filed with the SEC on August 13, 1999.
[ A ] Incorporated by reference from the Company's Form 10-Q,
filed with the SEC on November 15, 1999.
[ B ] Incorporated by reference from the Company's Form 13D, filed
with the SEC on March 29, 2000.
</TABLE>
76
<PAGE> 79
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999
Allowance for sales returns and
doubtful accounts receivable.... 2,085 12 -- (423)(1) 1,674
Provision for excess and obsolete
inventory....................... 2,652 702 -- (663)(2) 2,691
YEAR ENDED DECEMBER 31, 1998
Allowance for sales returns and
doubtful accounts receivable.... 1,655 880 -- (450)(1) 2,085
Provision for excess and obsolete
inventory....................... 2,171 1,129 -- (648)(2) 2,652
YEAR ENDED DECEMBER 31, 1997
Allowance for sales returns and
doubtful accounts receivable.... 1,451 968 -- (764)(1) 1,655
Provision for excess and obsolete
inventory....................... 2,242 893 -- (964)(2) 2,171
</TABLE>
- ---------------
(1) Uncollectible accounts written off, net of recoveries.
(2) Discontinued, expired, damaged and scrap inventory.
77
<PAGE> 80
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Report on Form 10-K to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of South San Francisco, State of
California, on the 30th day of March, 2000.
OCULAR SCIENCES, INC.
By: /s/ GREGORY E. LICHTWARDT
------------------------------------
Gregory E. Lichtwardt
Vice President, Finance and
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each individual whose signature
appears below constitutes and appoints John D. Fruth and Gregory E. Lichtwardt,
and each of them, his true and lawful attorneys-in-fact and agents, with full
power of substitution, for him and in his or her name, place and stead, in any
and all capacities to sign any and all amendments to this Report on Form 10-K,
and to file the same, with all exhibits thereto and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or his, her or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof
In accordance with the requirements of the Securities Act, this Report on
Form 10-K was signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
PRINCIPAL EXECUTIVE OFFICER:
/s/ NORWICK B.H. GOODSPEED Chief Executive Officer March 30, 2000
- ----------------------------------------------------------- and President
Norwick B.H. Goodspeed
PRINCIPAL FINANCIAL AND PRINCIPAL ACCOUNTING OFFICER:
/s/ GREGORY E. LICHTWARDT Vice President, Finance March 30, 2000
- ----------------------------------------------------------- and Chief Financial
Gregory E. Lichtwardt Officer
DIRECTORS:
/s/ JOHN D. FRUTH Chairman of the Board of March 30, 2000
- ----------------------------------------------------------- Directors
John D. Fruth
/s/ EDGAR J. CUMMINS Director March 30, 2000
- -----------------------------------------------------------
Edgar J. Cummins
/s/ TERENCE M. FRUTH Director March 30, 2000
- -----------------------------------------------------------
Terence M. Fruth
</TABLE>
78
<PAGE> 81
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ WILLIAM R. GRANT Director March 30, 2000
- -----------------------------------------------------------
William R. Grant
/s/ TERRANCE GREGG Director March 30, 2000
- -----------------------------------------------------------
Terrance Gregg
/s/ DANIEL J. KUNST Director March 30, 2000
- -----------------------------------------------------------
Daniel J. Kunst
/s/ FRANCIS R. TUNNEY, JR. Director March 30, 2000
- -----------------------------------------------------------
Francis R. Tunney, Jr.
</TABLE>
79
<PAGE> 82
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Ocular Sciences, Inc.:
Under date of February 2, 2000 we reported on the consolidated balance
sheets of Ocular Sciences, Inc. and subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the years in the three-year period ended December 31,
1999. In connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule included in this Form 10-K. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG LLP
San Francisco, California
February 2, 2000
80
<PAGE> 83
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.18 Amended and Restated Inter-Company Loan Agreement among
Ocular Sciences, Inc., and Precision Lens Manufacturing and
Technology, Inc., dated June 1, 1999
10.22 First Amendment to Lease for 475 - 479 Eccles Avenue dated
January 25, 1999, between Stanley D. McDonald, Mary Lee
Scheidt, Herbert A. West, and McDonald Ltd. as "Landlord"
and O.S.I. Corporation as "Tenant"
10.23 Lease of Unit One School Lane Chandlers Ford Industrial
Estate Chandlers Ford Hampshire dated May 26, 1999 between
Ocular Sciences UK Limited, Ocular Sciences, Inc. and Le
Gallais' Real Estates (Overseas) Limited
10.24 Consulting agreement between Ed Cummins and Ocular Sciences,
Inc.
21.01 List of Subsidiaries
23.02 Consent of KPMG LLP, Independent Certified Public
Accountants
27.01 Financial Data Schedule
</TABLE>
81
<PAGE> 1
EXHIBIT 10.18
AMENDED AND RESTATED INTER-COMPANY LOAN AGREEMENT
This Amended and Restated Inter-Company Loan Agreement (this "AGREEMENT")
is made and entered into effective as of June 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"), and
replaces and supersedes in its entirety that certain Inter-Company Loan
Agreement dated as of March 1, 1999 (the "ORIGINAL DATE") by and between OSI and
PLMT.
RECITALS
WHEREAS, on March 1, 1999 PLMT entered into an Inter-Company Loan Agreement
providing for the loan of up to $20,000,000 from OSI to PLMT and PLMT executed
and delivered to OSI a Revolving Promissory Note in the principal sum of
$20,000,000 (the "ORIGINAL NOTE");
WHEREAS, PLMT now wishes to borrow up to an additional $70,000,000 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 up to an aggregate of
$90,000,000 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 Replacement 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 Original Date and ending on the Maturity Date.
<PAGE> 2
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 1.5 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.
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 Ninety Million
Dollars (US$90,000,000). 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
"REPLACEMENT 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 Replacement 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
Replacement 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 Replacement Note, in
a principal amount equal to then aggregate principal amount of all Loans
outstanding
<PAGE> 3
under such Replacement Note plus accrued interest thereon, and will bear
interest from such date forward at the rate specified in such Replacement Note,
and no further Loans will be made by OSI to PLMT under such Replacement 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 Replacement 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 Replacement Note, in a principal amount equal to the amount to
which the OSI Loan Facility is so reduced and all other terms of the Replacement
Note shall remain unchanged.
2.5 PAYMENT OF AMOUNTS OWING; OFFSET. Upon the earliest to occur of
the Payment Date set forth in the Replacement 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 Replacement 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.
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
Replacement Note:
<PAGE> 4
(a) PLMT fails to pay any principal or any accrued interest under
any Replacement Note or any Loan when the same is due and payable, or fails to
pay any amount of principal or accrued interest due under the Replacement 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;
(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 OSI's rights under this Agreement and the Replacement Note;
and
(b) OSI may declare the entire principal amount of and all
accrued interest on the Replacement 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
<PAGE> 5
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. MISCELLANEOUS.
6.1 ENTIRE AGREEMENT. This Agreement and the Replacement Note 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. The Replacement Note replaces and supersedes in its entirety the
Original Note, which is deemed canceled.
6.2 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.
6.3 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.
6.4 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.
6.5 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
To PLMT:
-------
c/o KPMG
Chartered Accountants
<PAGE> 6
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.
6.6 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.
6.7 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.
6.8 SUCCESSORS AND ASSIGNS. This Agreement, and its rights and
obligations hereunder, may be transferred and assigned by OSI to any entity
which is controlled by, which controls, or is under common control with OSI. 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 this Agreement may not be transferred, assigned or
delegated by PLMT, whether by voluntary assignment or operation of law, without
the prior written consent of OSI.
6.9 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.
<PAGE> 7
IN WITNESS WHEREOF, the parties have duly executed and delivered this
Agreement as of the Effective Date.
<TABLE>
<CAPTION>
OCULAR SCIENCES, INC. PRECISION LENS MANUFACTURING & TECHNOLOGY, INC.
<S> <C>
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, Barbados
</TABLE>
ATTACHMENTS:
Exhibit A - PLMT Revolving Promissory Note - $90,000,000
[SIGNATURE PAGE TO
AMENDED AND RESTATED INTER-COMPANY LOAN AGREEMENT]
<PAGE> 1
EXHIBIT 10.22
FIRST AMENDMENT TO LEASE
This First Amendment to Lease is made as of the 25th day of January, 1999 by
and between Stanley D. McDonald, Mary Lee Scheidt (successor-in-interest to
Norman H. Scheidt), Herbert A. West, and McDonald, LTD., a Washington limited
partnership ("Landlord") and Ocular Sciences, Inc., successor-in-interest to
O.S.I. Corporation ("Tenant").
RECITALS
1. WHEREAS, Landlord and Tenant are the parties to a Lease dated May 18,
1995, by which Landlord let to Tenant the Premises located at 475 Eccles
Avenue, South San Francisco, California, outlined on Exhibit B of the
Lease.
2. WHEREAS, parties desire to amend the Lease effective April 1, 1999 on the
terms and conditions set forth below:
AGREEMENT
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants and agreements herein
contained and other good and valuable consideration the receipt and sufficiency
of which are hereby acknowledged, Landlord and Tenant agree as follows:
1. The Premises shall be increased 31,941 square feet ("Additional Space")
for a total of 152,145 square feet as shown on Exhibit A attached hereto.
2. Tenant's Proportionate share shall be increased to 100%.
3. The Base Rent amount on the Renal Schedule shall be amended as follows:
Year 4 $80,673.84/month
Year 5 $83,260.98/month
Year 6 $85,848.12/month
Year 7 $88,437.79/month
4. Tenant accepts the Additional Space in an "as is" condition, with the
Landlord providing no tenant improvements.
5. Except as herein modified or amended, the provisions, conditions, and
terms of the Lease shall remain unchanged and in full force and effect.
<PAGE> 2
IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Amendment as of
the day and year first written above.
LANDLORD:
Stanley D. McDonald Herbert A. West
/s/ STANLEY D. MCDONALD /s/ HERBERT A. WEST
NAME: Stanley D. McDonald NAME: Herbert A. West
TITLE: TITLE: Partner
----------------------
DATE: DATE: 2-5-99
-----------------------
Mary Lee Scheidt McDonald, LTD
/s/ MARY LEE SCHEIDT /s/ STANLEY D. MCDONALD
NAME: Mary Lee Scheidt NAME: Stanley D. McDonald
TITLE: Trustee TITLE:
--------------------
DATE: DATE:
----------------------- ---------------------
TENANT:
Ocular Sciences, Inc.
/s/ GREGORY E. LICHTWARDT
NAME: Gregory E. Lichtwardt
TITLE: Vice President, CFO
DATE: 1-28-99
<PAGE> 1
Exhibit 10.23
DATED 20th May, 1999.
LE GALLAIS' REAL ESTATES (0VERSEAS) LIMITED)
AND
OCULAR SCIENCES UK LIMITED
AND
OCULAR SCIENCES INC.
LEASE
RELATING TO
PREMISES AT UNIT ONE
(FORMER HENDY POWER PRODUCTS UNIT)
SCHOOL LANE CHANDLERS FORD INDUSTRIAL ESTATE
CHANDLERS FORD
HAMPSHIRE
Burton Woolf & Turk
22-24 Ely Place
London
ECIN GTE
DX: 0004 Chancery Lane
Tel: 0171 831 6478
Fax: 0171 405 4181
Ref: 5574/CMS/KH
<PAGE> 2
THIS LEASE is made the 20th day of May One thousand nine hundred and
ninety-nine BETWEEN the parties specified in Item 1.1 of Clause 1 of this Lease
WITNESSETH THAT:
Clause 1 PARTICULARS
1.1 THE LANDLORD
LE GALLAIS' REAL ESTATES (OVERSEAS) LIMITED whose registered office is
at 60 Bath Street St Helier Jersey Channel Islands
THE TENANT
OCULAR SCIENCES UK LIMITED whose registered office is at Reliant Close
Chandlers Ford Hampshire SO53 4ND
THE GUARANTOR
OCULAR SCIENCES INC of 475 Eccles Avenue South San Francisco California
CA 94080 in the United States of America whose address for service in
England and Wales is at Reliant Close Chandlers Ford aforesaid
1.2 THE PREMISES
Unit One (Former Hendy Power Products Unit) School Lane Chandlers Ford
Hampshire which premises are for the purpose of identification only
shown edged red on the Plan annexed hereto
1.3 THE TERM
A term commencing on the 18th May 1999 and expiring on the 23rd day of
December 2010
1.4 THE RENT
ONE HUNDRED AND TWENTY-TWO THOUSAND POUNDS (L.122,000.00) per annum plus
Value Added Tax at the current rate until the
<PAGE> 3
First Review Date and thereafter 'The Rent' shall mean the revised rent
ascertained in accordance with the provisions of Schedule (1) hereto and
the Rent shall by payable by equal quarterly payments in advance on the
usual quarter days in each year with the first payment being for the
period from the date hereof to the next following quarter day to be made
on the date hereof
1.5 THE USE: Uses falling within Classes B1 B2 and/or B8 of the
Schedule to the Town and Country Planning (Use Classes) order
1987
1.6 THE RESTRICTIONS
The covenants and matters contained or referred to in the registered
freehold title number HP253048
Clause 2 INTERPRETATION
In this Lease (including any Schedule) where the context admits:-
2.1 "the Particulars" means the Particulars as set out in Clause 1 of this
Lease and references to numbered items of the Particulars are references
to the numbered sub-clauses of that Clause
2.2 "the Landlord" means the person named as the Landlord in item 1.1 of the
Particulars and includes any other person for the time being entitled to
the immediate reversion expectant on the determination of the term
granted by this Lease
2.3 "the Tenant" means the person named as the Tenant in item 1.1 of the
Particulars and includes the successors in title to the term created by
this Lease
2.4 "the Guarantor" means the person (if any) named as the Guarantor in item
1.1 of the Particulars
<PAGE> 4
2.5 "the Premises" means the premises as is described in item 1.2 of the
Particulars and includes all Landlord's fixtures and fittings in or
forming part of the Premises and all additions to the Premises and all
pipes sewers conduits cables wires and other conducting media now or
hereafter in or about the same and exclusively serving the same
2.6 "The First Review Date" means the 23rd day of December 2004 and the Next
Review Date means the 23rd December 2009 and any other date from time
to time specified under Schedule {1}-4
2.7 "this Lease" means this Lease and includes any Schedule hereto any
license granted pursuant to this Lease and any deed of variation of the
provisions hereof and any deed or instrument supplemental hereto
2.8 "Term" means the Term specified in item 1.3 of the Particulars and
shall include where appropriate any extension thereof or of the tenancy
hereby created whether by agreement of the Landlord and Tenant or by or
pursuant to any statute for the time being in force
2.9 "Termination of the Term" means the determination of the Term whether
by the effluxion of time re-entry or otherwise under the provisions
hereof by notice by surrender by operation law or otherwise or by any
other means or cause whatsoever
2.10 "the Rent" means the sum specified as the Rent in item 1.4 of the
Particulars
2.11 "Insured Risks" means fire lighting explosion storm tempest flood
aircraft or articles dropped from aircraft (other than hostile
aircraft) riot civil commotion bursting and overflowing of water pipes
tanks and apparatus impact by road vehicles and subsidence heave and
slip and such other risks as the Landlord in its reasonable discretion
may require that the Tenant shall insure against
<PAGE> 5
pursuant to the covenant on the Tenant's part in that respect contained in
herein
2.12 "the Landlord's Surveyor" shall mean (at the Landlord's absolute
discretion) a chartered surveyor in the employment of the Landlord or a
surveyor or firm of surveyors appointed by the Landlord from time to time
for the purposes mentioned in this Lease
2.13 "Person" includes a company corporation or other body legally capable of
holding land
2.14 "Prescribed Rate" means four per cent (4%) per annum above Lloyds Bank
PLC's Base Rate (or any rate of interest published by Lloyds Bank PLC as a
substitute for the aforesaid Base Rate for the purposes of this provision
and any other provision by virtue of which rates of interest are to be
calculated) in force at the date of commencement of the period in respect
of which any payment of interest accrues due under this Lease
2.15 "the Planning Acts" means the Town & Country Planning Act 1990 the Planning
(Listed Buildings and Conservation Areas) Act 1990 and the Planning
(Hazardous Substances) Act 1990 and the Planning (Consequential Provisions)
Act 1990 and all statutes referred to therein and all statutes regulations
and orders included by virtue of Clause 2.19
2.16 "the Agreement" means the agreement for the grant of this Lease dated 29
day of January 1999 made between the Landlord(1) and the Tenant(2)
2.17 "the Works" means the works contained or referred to in the Schedule of
Works annexed to the Agreement
2.18 Reference to any right exercisable by the Landlord or any right exercisable
by the Tenant in common with the Landlord is to be construed as including
where
<PAGE> 6
appropriate reference to the exercise of the right by and all persons
authorised by the Landlord in common with all other persons having a like
right
2.19 the masculine includes the feminine and the singular the plural and vice
versa
2.20 Obligations undertaken by more than a single person are joint and several
obligations
2.21 Any reference to an Act of Parliament shall include any modification
extension or re-enactment thereof for the time being in force and shall
include all instruments orders regulations permissions and directions for
the time being made issued or given thereunder or drawing validity
therefrom
2.22 Any covenant by the Tenant not to do an act or thing shall be construed as
if it were a covenant not to do or knowingly permit or suffer such act or
thing
2.23 Rights excepted reserved or granted to the Landlord shall be construed as
excepted reserved or granted to the Landlord and all persons authorised by
the Landlord.
2.24 The clause headings herein are for reference only and shall not be deemed
to form part of this Lease nor shall they affect the construction thereof
Clause 3 DEMISE
3.1. THE LANDLORD LETS with full title guarantee the Premises to the Tenant
TOGETHER with the rights set out in the Second Schedule hereto EXCEPT AND
RESERVED the rights specified in the Third Schedule hereto for the TERM
specified in item 1.3 of the Particulars THE TENANT PAYING yearly and
proportionately for any fraction of a year the Rent at the times and in
the manner specified in items 1.4 of the Particulars
Clause 4 TENANT'S COVENANTS
THE TENANT COVENANTS WITH THE LANDLORD as follows:-
<PAGE> 7
4.1 To pay the Rent at the times and in the manner described in item 1.4 of
the Particulars such payment if required by the Landlord to be made by
Banker's Order or Credit Transfer to such bank and account as the
Landlord shall from time to time nominate
4.2 To pay all existing and future rates taxes assessments impositions and
outgoings assessed or imposed on or in respect of the Premises (whether
assessed or imposed on the Landlord or the Tenant) PROVIDED THAT if the
Premises shall have been left unoccupied during the whole or part of
the period of three months immediately preceding the Termination of the
Term and there is in force in the rating district within which the
Premises are situated any legislation making payable any general void
or other rates for unoccupied premises for any period the Tenant shall
upon the Termination of the Term pay to the Landlord a sum equal to the
general rats for the said period of three months or for the proportion
of such period during which the Premises shall have been left
unoccupied
4.3 If any rent or other sums payable by the Tenant to the Landlord under
this Lease shall be due but unpaid for seven (7) days to pay on demand
to the Landlord (if the Landlord shall so require) interest at the
Prescribed Rate from time to time (after as well as before any
judgment of the Courts) on such money from the due date until payment
PROVIDED THAT this sub-clause shall not prejudice any other right or
remedy in respect of such money
4.
4.4.1 Subject to clause 4.4.1.3 at all times to keep the Premises
including all parts of the roof main structure and foundations
thereof and all other parts thereof and the appurtenances
thereof including the doors plate
<PAGE> 8
glass and other windows fixtures fittings fastenings wires waste
water drain and other pipes and sanitary and water apparatus
therein and the painting papering and decoration thereof in good
and substantial repair and condition throughout the term (damage
by fire and such other risks against which the Landlord shall
have insured save where the insurance moneys shall be
irrecoverable in consequence of any act or default of the Tenant
only excepted) and to renew and replace from time to time all
Landlord's fixtures fittings and appurtenances in the Premises
which may become or be beyond repair at any time during or at the
expiration or sooner determination of the Term PROVIDED THAT:-
4.4.1.1 the Tenant shall not allow the Premises to fall below
the state of repair and condition as evidenced by the
Schedule of Condition to be prepared by the Tenant's
surveyor such Schedule to be prepared after the initial
completion of the Landlord's refurbishment works and
such Schedule shall be amended by the Tenant's Surveyor
to delete any items which are rectified to the Tenant's
Surveyor's satisfaction after the initial completion of
the refurbishment works
4.4.1.2 such Schedule of Condition shall be subject to the
approval of the Landlord's Surveyor (such approval not
to be unreasonably withheld or delayed) but if no such
approval has been given within 28 days (such time period
not being unreasonable) of the receipt by the Landlord's
Surveyor of the Schedule of Condition then either party
may apply to the President of the Royal Institute of
Chartered Surveyors for an independent
<PAGE> 9
surveyor to be appointed to settle the Schedule of
Condition and such independent surveyor shall act as an
expert and his decision shall be final and binding upon
the Landlord and the Tenant
4.4.1.3 the Tenant shall not be responsible for any defects
which appear in the Works within six (6) months of the
date of practical completion thereof and which the
Landlord is liable to have made good under clause 5.2
4.2.2 Completely to redecorate the exterior of the Premises in every
fourth year and in the last three months of the Term (however
determined) (but not if such redecoration has taken place within
the previous twelve months) preparing and painting those parts
previously or usually painted with at least two coats of good and
suitable paint with tints or colours on each occasion where it
differs from the previous tint or colour to be approved in
writing by the Landlord such approval not to be unreasonably
withheld or delayed
4.4.3 Completely to re-decorate the interior of the premises in every
fifth year and in the last three months of the Term (however
determined) (but not if such redecoration has taken place within
the last twelve months) preparing and painting those parts
previously or usually painted with at least two coats of good
and suitable paint with tints or colours on each occasion where
it differs from the previous tint or colour to be approved in
written by the Landlord such approval not to be unreasonably
withheld or delayed
<PAGE> 10
4.4.4 As often as may be necessary to clean and treat in an
appropriate manner to the approval of the Landlord's Surveyor
(acting reasonably) all materials surfaces and finishes of the
interior of the Premises and in particular all wood plastic metal
and stonework of the interior of the Premises not requiring
painting or polishing and to wash all surfaces requiring washing
4.4.5 At the end of Term to give up the Premises and the Landlord's
fixtures and fittings therein and to remove the Tenant's trade
fixtures and fittings from the Premises leaving the Premises
duly repaired and decorated in accordance with the provisions of
this sub-clause and clear of any furniture goods or refuse
PROVIDED THAT:-
4.4.5.1 All work referred to in this sub-clause shall be done
in a good and workmanlike manner and to the reasonable
satisfaction of the Landlord's Surveyor or architect
4.4.5.2 Painting in the last three months of the Term shall be
done in colours first approved in writing by the
Landlord such approval not to be unreasonably withheld
or delayed
4.4.5.3 Damage by any of the Insured Risks is excepted from
the Tenant's liability under this sub-clause unless
the whole or any part of the insurance money is
irrecoverable by reason of any act or default of the
Tenant or the Tenant's invitees reasonably expected to
be under the control of the Tenant
<PAGE> 11
4.4.5.4 The Tenant shall pay the Landlord's Surveyor's or
architect's reasonable fees incurred as a result of any
breach by the Tenant of this sub-clause
4.4.5.5 The Tenant shall make good any damage caused to the
Premises by any removal of the Tenant's fixtures
fittings furniture and effects
4.4.5.6 The Tenant shall pay a sum equivalent to the loss of
rent incurred by the Landlord during such period as is
reasonably required for the expeditious carrying out of
works after the end of the Term by reason of any breach
of this sub-clause
4.5
4.5.1 To keep the drains and pipes which solely serve the Premises clear
and unobstructed and not to do anything which causes an obstruction
in any drain or pipe in or serving the Premises
4.5.2 To take all reasonable precautions against frost damage to any pipes
or water apparatus in the Premises
4.6
4.6.1 To make good any defect in repair or decoration of the Premises for
which the Tenant is liable in accordance with the Tenant's covenants
and of which the Landlord has given notice in writing such making
good to be completed as quickly as reasonably practicable and in any
event to commence works within a period of two (2) months from the
date of the Landlord's notice or sooner if considered necessary by
the Landlord's Surveyor and to use reasonable endeavours to complete
such works within a reasonable time being no longer than four (4)
months after commencement of works
<PAGE> 12
4.6.2 If the Tenant shall not comply with sub-clause 4.6.1 hereof the
Landlord may (but shall not be obliged to) enter the Premises and
make good such defects and the proper expense of doing so
(including reasonable surveyors' or architects' fees) shall be
repaid by the Tenant on demand
4.7
4.7.1 To execute all works and to do all things on or in respect of the
Premises which are required by the Offices Shops and Railway
Premises Act 1963 the Fire Precautions Act 1971 the Health and
Safety at Work Act 1974 or any other present or future Act of
Parliament and which are or shall be directed or are necessary to
be done or executed upon or in respect of the Premises or any part
thereof or in respect of the user thereof by the owner lessee tenant
or occupier thereof and at all times to save harmless and to keep
indemnified the Landlord against all claims demands costs expenses
and liability in respect thereof
4.7.2 To comply with all requirements of current and future Acts of
Parliament orders byelaws or regulations as to the user of or
otherwise concerning the Premises
4.8 To permit the Landlord and the Landlord's agents and workmen on reasonable
prior notice (except in emergency when no notice shall be required) at
reasonable hours to enter the Premises for the purpose of:-
4.8.1 viewing and recording the condition of the Premises
4.8.2 repairing maintaining alerting or cleaning any part of any
adjoining or neighbouring premises of the Landlord
<PAGE> 13
4.8.3 repairing maintaining cleaning altering replacing or adding to any
pipes wires flues channels drains or apparatus which serve any
adjoining or nearby premises of the Landlord
4.8.4 complying with any of its obligations under this Lease or for any
other reasonable purpose connected with the management of the
Premises
PROVIDED that the Landlord shall make good as quickly as reasonably
practicable all damage to the Premises caused by such entry
4.9 During the last six months of the Term (unless negotiations have commenced
under the provisions of the Landlord and Tenant Act 1954 with regard to
the renewal of this lease) to allow a letting board or notice to be
displayed on the Premises and at any time during the whole of the Term to
allow a sale board or notice to be displayed on the Premises (but not so
that any board or notice unnecessarily obstructs the light to the
Premises) and to allow prospective tenants or purchasers to view the
Premises at all reasonable times on reasonable notice
4.10
4.10.1 Not to assign underlet mortgage charge or share or part with the
possession of part only of the Premises nor share the use or
occupation or part with possession of the Premises or any part
thereof nor permit any person deriving title from the Tenant to do
so (save by way of assignment or underletting of the whole as
hereinafter mentioned) PROVIDED always that the Tenant may part
with or share occupation of the whole or any part of the Premises
with a company that is a member of the same group as the Tenant
(within the meaning of Section 42 of the Landlord and Tenant Act
1954) for
<PAGE> 14
so long as both companies remain members of the same group and in
a manner that does not create a legal interest in the Premises
4.10.2 Not without the Landlord's prior written consent (which shall not
be unreasonably withheld or delayed) nor without first satisfying
and complying with the circumstances and conditions set out in
sub-clause 4.10.3 hereof (which are specified for the purposes of
the Landlord & Tenant Act 1927 Section 19A(1));
4.10.2.1 to assign or part with possession of the Premises
as a whole
4.10.3 The circumstances and conditions referred to in sub-clause 4.10.2
hereof are that:-
4.10.3.1 In the case of an assignment the assignee is a
Qualifying Person; and
4.10.3.2 Upon or before any assignment the Tenant enters
into a Deed of Covenant with the Landlord under
which the Tenant:-
4.10.3.2.1 Guarantees the performance by the proposed
assignee of all of the tenant covenants (as
defined in Section 28 of the Landlord & Tenant
(Covenants) Act 1995 ("the 1995 Act")) throughout
the period for which the proposed assignee is
bound by the tenant covenants
4.10.3.2.2 Is liable to the Landlord as principal debtor and
is not released even if the Landlord gives the
proposed assignee extra time to comply with any
<PAGE> 15
obligation or does not insist upon strict
compliance with the terms of this Lease
4.10.3.2.3 Agrees that in the event that this Lease is
disclaimed and if so required by the
Landlord he will accept the grant of a new
tenancy of the Premises on the same terms
and conditions as this Lease at the date of
disclaimer and for a term expiring on the
term expiry date of this Lease
4.10.3.3 If so required by the Landlord upon or before any
assignment the assignee shall join in the licence to
assign and shall covenant with the Landlord to pay the
rent reserved by this Lease and any damages accruing
to the Landlord by reason of any failure to observe
and perform the covenants and conditions on the part
of the Lessee herein contained and if reasonably
requested by the Landlord the assignee (if a private
limited company but not otherwise) shall obtain not
more than two guarantors acceptable to the Landlord
who covenant by way of indemnity and guarantee (and if
more than one jointly and severally) with the Landlord
that the assignee will pay the rents reserved by this
Lease and will observe and perform the Tenant's
Covenants in this Lease and that they will indemnify
the Landlord against any loss resulting from a default
by the assignee and if this Lease is disclaimed by a
<PAGE> 16
liquidator of the company the guarantors will if the
Landlord shall so require take from the Landlord a
lease of the Premises for the residue of the term
which would have remained had there been no such
disclaimer at the rent then being paid hereunder and
subject to the same covenants and conditions as in
this Lease such new lease to take effect from the date
of disclaimer and in such case the guarantors shall
pay the reasonable costs of such new Lease and execute
and deliver to the Landlord a counterpart thereof
4.10.4 "Qualifying Person" means an assignee who together with any
guarantors and other security for the performance by the
assignee of the Tenant's Covenants under this Lease (other
than any Authorised Guarantee Agreement described in
Section 16 of the 1995 Act) is in the reasonable opinion of
the Landlord no less likely to pay the rent than the Tenant
(and the Guarantor if any) were (or are) in aggregate
(after taking into account the value at the date of the
application for licence to assign or the value at the date
on which this Lease was granted or assigned to the Tenant
(whichever value is or was higher) of any other security
for the performance of the tenant covenants of this Lease
by the Tenant) and the Landlord shall adjudge such
likelihood by reference in particular to the financial
strength of the proposed tenant which shall be satisfactory
if the proposed tenant can show pre-tax profits equal to
three times the annual rent in the last three years'
accounts
<PAGE> 17
4.10.5 The Tenant must not sublet the whole of the Premises without
the consent of the Landlord such consent not to be
unreasonably withheld or delayed
4.10.6 The Tenant must not sublet the whole of the Premises unless
he obtains and produces to the Landlord before the grant of
the sublease an order of the appropriate court authorising
an agreement between the parties to the sublease excluding
the operation of the Landlord and Tenant Act 1954 sections
24-28 inclusive in relation to the tenancy created by it and
includes in the terms of the sublease a clause excluding the
operation of those sections from it
4.10.7 Every permitted sublease must be granted without a fine or
premium at a rent not less than the current rent payable
under this Lease in respect of the Premises to be approved
by the Landlord before the sublease (such approval not to be
unreasonably withheld or delayed) to be payable in advance
on the days on which the Rent is payable under this Lease
4.10.8 Every permitted sublease must contain provisions approved by
the Landlord (such approval not to be unreasonably withheld
or delayed) as follows:-
4.10.8.1 for the upwards only review of the rent reserved
by it on the basis set out in Schedule 1 THE RENT
AND RENT REVIEW and on the Review Dates
4.10.8.2 prohibiting the subtenant from doing or allowing
anything in relation to the Premises inconsistent
with or in breach of the provisions of this Lease,
<PAGE> 18
4.10.8.3 for re-entry by the sub-landlord on breach of any
covenant by the subtenant
4.10.8.4 imposing an absolute prohibition against all dealings
with the Premises other than assignment or charging of
the whole or underletting
4.10.8.5 prohibiting assignment or charging of the whole of the
Premises or underletting without the consent of the
Landlord under this Lease such consent not to be
unreasonably withheld or delayed
4.10.8.6 requiring the assignee on any assignment of the
sublease to enter into direct covenants with the
landlord to the same effect as those contained in
clause 4.10.9
4.10.8.7 requiring on each assignment of the sublease that the
assignor enters into an authorized guarantee agreement
in favour of the Landlord
4.10.8.8 prohibiting the subtenant from holding on trust for
another or permitting another to share or occupy the
whole or any part of the Premises save that the
subtenant may part with or share occupation of the
whole or any part of the Premises with a Company that
is a member of the same group as the Tenant (within the
meaning of Section 42 of the Landlord and Tenant act
1954) for so long as both companies remain members of
the same group and in a manner that does not create a
legal interest in the Premises
<PAGE> 19
4.10.8.9 imposing in relation to any permitted assignment or
charge the same obligations for registration with
the Landlord as are contained in this Lease in
relation to dispositions by Tenant and
4.10.8.10 excluding the provisions of sections 24-28 of the
1954 Act from the letting created by the sublease
4.10.9 Before any permitted subletting the Tenant must ensure that the
subtenant enters into a direct covenant with the Landlord that
while he is bound by the tenant covenants of the sublease and
while the subtenant is bound by an authorised guarantee
agreement the subtenant will observe and perform the tenant
covenants contained in this Lease - except the covenant to pay
the rent reserved by this Lease - and in that sublease
4.10.10 Upon every application for consent required by this
sub-clause to disclose to the Landlord such information as to
the terms of the proposed transaction as the Landlord shall
reasonably require
4.10.11 Within one month after its date to produce to the Landlord
every assignment or document evidencing a devolution of this
Lease or the Premises paying a reasonable fee therefor (being
not less than Twenty Five Pounds (L25.00)) for each such
registration and at the same time to provide the Landlord with
a certified copy of such assignment
4.11.
4.11.1 Not to make any structural alterations or additions
whatsoever to the Premises or the exterior thereof PROVIDED
THAT the Tenant may
<PAGE> 20
make non-structural alterations in the Premises with the
Landlord's prior written consent (such consent not to be
unreasonably withheld or delayed) and the Tenant covenants to
carry out any such alterations in a good and workman-like
manner using good materials suitable for the alterations
4.11.2 At the end of the Term if so required by the Landlord acting
reasonably substantially to reinstate the Premises to the same
condition as they were at the date of the grant of this Lease
such reinstatement to be carried out under the supervision and
to the reasonable satisfaction of the Landlord's Surveyor or
architect
4.12
4.12.1 Not without the Landlord's written consent such consent not to
be unreasonably withheld or delayed to place or display outside
the Premises or inside the Premises so as to be visible from the
outside any poster notice advertisement name or sign except the
name of the Tenant displayed in a position and in a manner first
approved in writing by the Landlord at the entrance to the
Premises and for the avoidance of doubt the Landlord confirms
its approval of all signs existing at the Premises at the date
hereof
4.12.2 Not to fix any aerial or other device to the exterior of the
Premises or in any way interfere with the exterior of the
Premises without first obtaining the Landlord's approval (such
approval not be unreasonably withheld or delayed)
4.13
4.13.1 To comply with all requirements and regulations of the
electricity supply authority as to the electrical installation
in the Premises
<PAGE> 21
4.13.2 Not without the Landlord's written consent (which shall not be
unreasonably withheld or delayed) to alter or extend the
electrical installation or wiring in the Premises
4.13.3 Not to use any apparatus which overloads the electrical
installation in the Premises or the Building
4.14 Not to do anything upon the Premises which is or may become a nuisance
damage or annoyance to the Landlord or to the tenant or occupier of any
adjoining or nearby premises
4.14.1 Not to use the whole or any part of the Premises:
4.14.1.1 for any illegal or immoral purpose
4.14.1.2 for any offensive noisy or dangerous trade business or
manufacture
4.14.1.3 for any purpose other than the Use
4.14.2 Not to allow any person to reside or sleep on the Premises
4.15
4.15.1 Not (by act or omission) to do anything which may invalidate any
insurance policy effected by the Tenant in respect of the
Premises or increase the premium for it
4.15.2 Without prejudice to the rights of the Landlord in respect of
any breach of sub-clause 4.15.1 of this Clause to repay to the
Landlord on demand all losses or damages suffered by the
Landlord by reason of any breach by the Tenant of the said
sub-clause 4.15.1
4.15.3 To notify the Landlord in writing within forty-eight (48) hours
of any outbreak of fire in the Premises or other event likely to
lead to a
<PAGE> 22
claim on the Tenant's insurance relating to the Premises
(of which the Tenant has knowledge)
4.15.4 At all times during the Term to comply with all
requirements and recommendations from time to time of
the appropriate authority in relation to fire
precautions affecting the Premises
4.16 Not to use (except in the case of fire or other emergency) or
obstruct the fire escapes in the Premises and to comply with the
Fire Authority's regulations relating to their use
4.17 Not to overload the floors or structure of the Premises and not
to bring any excessively heavy article into the Premises without
first obtaining the Landlord's written consent such consent not
to be unreasonably withheld or delayed
4.18 Not to play or use any musical instrument loudspeaker tape
recorder gramophone wireless television set or other equipment
which reproduces music or speech in the Premises so that it can
be heard outside the Premises or in adjoining premises
4.19 Not to keep any animal fish reptile or bird in the Premises
4.20
4.20.1 To supply the Landlord with a copy of any notice order
or proposal for a notice or order affecting the Premises
served on the Tenant by any competent authority (or
received by the Tenant from any undertenant or other
person) as soon as reasonably practicable after it is
received by the Tenant and without delay to take all
reasonable or necessary steps to comply with any such
notice or order
<PAGE> 23
4.20.2 At the request of the Landlord to make or join with the
Landlord in making such objections or representations
against or in respect of any such notice or order or
proposal for the same as the Landlord shall reasonably
require at the joint expense of the Landlord and the Tenant
provided such obligation or representation does not
conflict with the Tenant's interests
4.21
4.21.1 To comply with all requirements under the Planning Acts
which affect the Premises
4.21.2 Not without the Landlord's written consent such consent not
to be unreasonably withheld or delayed to make any
application for planning permission affecting the Premises
or to implement any such permission
4.22 To preserve so far as the Tenant is able all rights of light and other
easements enjoyed by the Premises and at all times to afford to the
Landlord such reasonable facilities and assistance as may enable the
Landlord to prevent anyone acquiring any right of light or other
easement over the Premises
4.23 To pay to the Landlord on an indemnity basis all reasonable costs
fees charges disbursements and expenses (including without prejudice
to the generality of the foregoing those payable to Counsel
Solicitors or Surveyors and Bailiffs) properly incurred by the
Landlord in relation or incidental to:
4.23.1 every application made by the Tenant for a consent or
license required or made necessary by the provisions of
this Lease whether the same be granted or refused or
proffered subject to any qualification or condition or
whether the application be withdrawn
<PAGE> 24
4.23.2 the preparation and service of a notice under Section 146 of
the Law of Property Act 1925 or incurred by or in proper
anticipation of proceedings under Section 146 or 147 of the Act
notwithstanding that forfeiture is avoided otherwise than by
relief granted by the Court
4.23.3 the recovery or attempted recovery of arrears of rent or other
sums lawfully due from the Tenant (including without prejudice
to the generality of the foregoing any reasonable bailiffs'
fees or commission of any description payable or incurred by
the Landlord) and
4.23.4 any steps taken in connection with the preparation and service
of a Schedule of Dilapidations during or within 3 months after
the expiration of the Term
4.24 At the end of the Term to give up all keys of the Premises to the
Landlord and to remove all lettering and signs put up by the Tenant in
the premises and to make good any damage caused by such removal
4.25 In addition to the rents fees and other payments payable by the Tenant
under this Lease to the Landlord or any other person or company upon
production of a valid VAT invoice to pay any Value Added Tax which is
now or becomes payable in respect of such rents fees and other payments
4.26 At all times during the Term to observe and perform the restrictions
(if any) specified in sub-clause 1.6 of the Particulars
4.27 To indemnify the Landlord from and against all losses any actions
proceedings claims damages costs expenses arising from any breach
non-observance or non-performance of the Tenant's covenants and
conditions contained in this Lease and sub-clause 1.6 of the Particulars
<PAGE> 25
Clause 5 LANDLORD'S COVENANTS
THE Landlord COVENANTS with the Tenant as follows:-
5.1 That the Tenant may enjoy the Premises peaceably and quietly during the
Term and any continuation thereof without any interruption or
disturbance by the Landlord or any person lawfully claiming under or in
trust for the Landlord
5.2 To procure that the contractor employed to carry out the Works shall
rectify (as soon as practicable and in any event fully in accordance
with the terms of the building contract for the Works made between the
Landlord (1) and such contractor (2)) any defects in the Works which
come to the Landlord's knowledge within six (6) months of the date of
practical completion of the Works
Clause 6 PROVISOS
THE Parties AGREE that the Lease is subject to the following provisos:-
6.1 If at any time during the Term:
6.1.1 the Rent (or any part thereof) shall be in arrears and unpaid
for twenty-one days after becoming payable (whether formally
demanded or not) or
6.1.2 there shall be any substantial breach non-performance or
non-observance by the Tenant or the Guarantor of any of the
covenants and conditions contained in this Lease or
6.1.3 in respect of a Tenant who is an individual then on an
application being made for an Interim Order or on a Bankruptcy
Petition being presented or if a Bankruptcy Order is made
against him or where a Tenant makes an individual voluntary
arrangement with his Creditors or in the case of the Tenant
being a company if the company goes into liquidation
<PAGE> 26
(whether compulsory or voluntary) but not a voluntary winding-up for
the amalgamation or reconstruction of a solvent company or if the
company has a Receiver Administrative Receiver or provisional
Liquidator appointed or if the company has a petition presented for
an Administration Order or a proposal made for a voluntary
arrangement or a scheme of arrangement
the Landlord may at any time thereafter (and notwithstanding the waiver of
any previous right of re-entry) re-enter the Premises or any part thereof
in the name of the whole and thereupon the Term shall absolutely cease and
determine but without prejudice to any rights or remedies which may then
have accrued to either party against the other in respect of any
antecedent breach (including the breach in relation to which re-entry is
made) of any of the covenants and conditions contained in this Lease
6.2 The Landlord shall be entitled to alter add to and execute works on other
parts of the Landlord's adjoining and nearby premises notwithstanding that
the access of light and air to the Premises may be interfered with and the
Landlord shall not be liable to pay any compensation by virtue of its
exercising these rights
6.3 The Landlord shall not be responsible to the Tenant or the Tenant's
licensees nor to any other person in the Premises for any:-
6.3.1 accident happening or injury suffered in the Premises or
6.3.2 damage to or loss of any goods or property sustained in the
Premises or
6.4.3 act omission or negligence of any employee of the Landlord
or Tenant
<PAGE> 27
6.4 If at the end of the tenancy any furniture or effects belonging to the
Tenant are left in the Premises for more than fourteen (14) days the
Landlord shall have power to sell the same as agent for and on behalf of
the Tenant and the Landlord shall pay or account to the Tenant on demand
for any proceeds of sale (but not any interest thereon) less any
reasonable costs of storage and sale reasonably incurred by the Landlord
and any other sums still remaining lawfully due to the Landlord under the
terms of this Lease
6.5 Subject to the provisions of Section 38(2) of the Landlord and Tenant Act
1954 neither the Tenant nor any assignee shall be entitled to any
compensation under Section 37 of that Act (or any corresponding provision
in any Act amending or replacing it) upon quitting the Premises or any
part of it
6.6 That no demand for or acceptance or receipt of any part of the Rent or
additional rent or any payment on account thereof shall operate as a
waiver by the Landlord of any right which the Landlord may have to forfeit
this Lease by reason of any breach of covenant by the Tenant
notwithstanding that the Landlord may know or be deemed to know of such
demand acceptance or receipt and the Tenant shall not in any proceedings
for forfeiture be entitled to rely on any such demand receipt or
acceptance as aforesaid as a defence
7.1 Tenant to Insure
The Tenant covenants with the Landlord to insure the Premises
(excluding any fixed equipment or machinery fixtures or fittings
installed by the Tenant) in the name of the Tenant and to the
procure that the Landlord's interest is noted on the policy
7.2 Details of the Insurance
Insurance shall be effected:
<PAGE> 28
7.2.1 in such insurance office or with such underwriters and
through such agency as the Landlord (acting reasonably) may
from time to time approve (such approval not to be
unreasonably withheld or delayed)
7.2.2 for the following sums:
7.2.2.1 such sums as the Landlord shall from time to time
be properly advised as being the full cost of
rebuilding and reinstatement including architects'
surveyors' and other professional fees payable
upon any applications for planning permission or
other permits or consents that may be required in
relation to the rebuilding or reinstatement of the
Premises the cost of shoring-up debris removal
demolition site clearance any works that may be
required by statute incidental expenses and
7.2.2.2 the loss of Rent payable under this lease from
time to time (having regard to any review of the
rent which may become due under this lease) for
three years
7.2.3 against damage or destruction by the Insured Risks to the
extent that such insurance may ordinarily be arranged for
properties such as the Premises with an insurer of repute
and subject to such excesses exclusions or limitations as
the insurer may require
<PAGE> 29
7.3 Suspension of Rent
7.3.1 If and whenever during the Term:
7.3.1.1 the Premises or any part of them are damaged or
destroyed by any of the Insured Risks except one
against which insurance may not ordinarily be
arranged with an insurer of repute for properties
such as the Premises unless the Tenant has in fact
insured against that risk so that the Premises or
any part of them are unfit for occupation or use
and
7.3.1.2 payment of the insurance money is not refused in
whole or in part by reason of any act or default
of the Tenant or anyone at the Premises expressly
or by implication with the Tenant's authority and
reasonably expected to be under the Tenant's
control the provisions of clause 7.4.2 shall have
effect
7.3.2 When the circumstances contemplated in clause 7.4.1 arise
the Rent or a fair proportion of it according to the nature
and the extent of the damage sustained shall cease to be
payable until the Premises or the affected part shall have
been rebuilt or reinstated so that the Premises or the
affected part are made fit for occupation or use or until
the expiration of three years from the destruction or damage
whichever period is the shorter (the amount of such
proportion and the period during which the Rent shall cease
to be payable to be determined in accordance with the
Arbitration Act 1996 by an arbitrator to be appointed by
agreement between the parties
<PAGE> 30
7.4 Reinstatement or Termination If Prevented from Reinstatement
7.4.1 If and whenever during the Term:
7.4.1.1 the Premises or any part of them are damaged or
destroyed by any of the Insured Risks except one against
which insurance may not ordinarily be arranged with an
insurer of repute for properties such as the Premises
unless the Tenant has in fact insured against that risk
and
7.4.1.2 the payment of the insurance money is not refused in
whole or in part by reason of any act or default of the
Tenant or anyone at the Premises expressly or by
implication with the Tenant's authority and reasonably
expected to be under the Tenant's control
the Tenant shall use all reasonable and commercial endeavours to
obtain all planning permissions and other permits and consents
that may be required under the Planning Acts or other statutes (if
any) to enable the Tenant to rebuild or reinstate ("the
Permissions")
7.4.2 Subject to the provisions of clauses 7.4.3 and 7.4.4 the Tenant
shall as soon as the Permissions have been obtained or as soon as
reasonably practicable where no Permissions are required apply all
money received by the Tenant in respect of such insurance (except
sums in respect of loss of Rent) in rebuilding or reinstating the
Premises so destroyed or damaged
<PAGE> 31
7.4.3 For the purposes of this clause the expression "Supervening
Events" means any one or more of the following circumstances:
7.4.3.1 the Tenant has failed despite using all reasonable and
commercial endeavours to obtain the Permissions
7.4.3.2 any of the Permissions have been granted subject to a
lawful condition with which in all the circumstances it
would be unreasonable and not financially viable to
expect the Tenant to comply
7.4.3.3 some defect or deficiency in the site upon which the
rebuilding or reinstatement is to take place would mean
that the same could only be undertaken at a cost that
would be unreasonable and not financially viable in all
the circumstances
7.4.3.4 the Tenant is unable to obtain access to the site for
the purposes of rebuilding or reinstating
7.4.3.5 the rebuilding or reinstating is prevented by war, act
of God, Government action or
7.4.3.6 any other circumstances beyond the control of the Tenant
7.4.4 The Tenant shall not be liable to rebuild or reinstate the
Premises if and for so long as such rebuilding or reinstating is
prevented by one or more of the Supervening Events
7.4.5 If upon the expiry of a period of three years commencing on the
date of the damage or destruction the Premises have not been
rebuilt or
<PAGE> 32
reinstated so as to be fit for the Tenant's occupation and use
either party may by notice served at any time within six months
of the expiry of such period invoke the provisions of clause
7.4.6
7.4.6 Upon service of a notice in accordance with clause 7.4.5
7.4.6.1 the Term will absolutely cease but without prejudice
to any rights or remedies that may have accrued to
either party against the other including (without
prejudice to the generality of the above) any right
that the Landlord might have against the Tenant for a
breach of the Tenant's covenants set out in clauses
7.4.1 and 7.4.2
7.4.6.2 all the money received in respect of insurance
effected by the Tenant pursuant to this clause shall
belong to the Landlord save that the Tenant shall be
entitled to deduct therefrom the reasonable and proper
costs to it of seeking to procure or obtain the
Permissions and the cost of clearing the site (if
actually cleared) and all works already undertaken in
reasonable contemplation of obtaining the Permissions
and reinstating the Premises
7.5 Tenant's Insurance Covenants
The Tenant agrees with the Landlord
7.5.1 to comply with all the requirements and recommendations of the
insurers
<PAGE> 33
7.5.2 not to do or omit anything that could cause any policy of
insurance on or in relation to the Premises to become void or
voidable wholly or in part nor (unless the Tenant shall have
previously notified the Landlord and have agreed to pay the
increased premium) anything by which additional insurance
premiums may become payable
7.5.3 to keep the Premises supplied with such fire fighting equipment
as the insurers and the fire authority may require and to
maintain such equipment to their satisfaction and in efficient
working order and at least once in every six months to cause any
fire fighting equipment to be inspected by a competent person
PROVIDED THAT this clause shall not oblige the Tenant to install
a sprinkler system or make or undertake any substantial works for
the prevention or extinguishment of fire
7.5.4 not to store or bring onto the Premises any article substance or
liquid of a specially combustible inflammable or explosive nature
and to comply with the requirements and recommendations of the
fire authority relating to the Premises PROVIDED ALWAYS that this
shall not prohibit the Tenant from storing on the Premises any
such articles or substances which it requires in connection with
its business provided that they shall be stored in an appropriate
container
7.5.5 not to obstruct the access to any fire equipment or the means of
escape from the Premises nor to lock any fire door while the
Premises are occupied
7.5.6 to give notice to the Landlord as soon as reasonably practicable
upon becoming aware of the happening of any event which might
affect any
<PAGE> 34
insurance policy on or relating to the Premises or upon the happening
of any event against which the Tenant may have insured under this
lease
7.5.7 if at any time the Tenant shall be entitled to the benefit of any
insurance relating to the Premises (which is not effected or
maintained in pursuance of any obligations contained in this lease) to
apply all money received by virtue of such insurance in making good
the loss or damage in respect of which such money shall have been
received
7.5.8 if and whenever during the Term the Premises or any part of them are
damaged or destroyed by an Insured Risk and the insurance money
under the policy of insurance effected by the Tenant pursuant to its
obligations contained in this lease is by reason of any act or
default of the Tenant or anyone at the Premises expressly or by
implication with the Tenant's control wholly or partially
irrecoverable as soon as reasonably practicable in every such case to
rebuild and reinstate to its own expense the Premises or the part
destroyed or damaged to the reasonable satisfaction of and under the
supervision of the Landlord's Surveyor the Tenant being allowed
towards the expense of so doing the amount (if any) actually received
in respect of destruction or damage under any such insurance policy
<PAGE> 35
7.5.10 The Tenant agrees with the Landlord in relation to the policy
of insurance effected by the Tenant pursuant to its obligations
in this lease:
7.5.10.1 on renewal in every year to produce to the Landlord
reasonable evidence of the terms of the policy and
the fact that the last premium has been paid
7.5.10.2 to procure (if requested in writing) that the
interest of the Landlord's mortgage is noted or is
endorsed on the policy
7.5.10.3 to notify the Landlord of any material change in the
risks covered by the policy from time to time
8. GUARANTOR'S COVENANTS
8.1
8.1.1
The Guarantor's covenants with the Landlord are given as sole or principal
debtor or covenant or with the landlord for the time being and with all his
successors in title without the need for any express assignment and the
Guarantor's obligations to the Landlord will last throughout the period during
which the original tenant is bound by the tenant covenants of this Lease and
for the avoidance of doubt shall last throughout any additional period during
which the original tenant is liable under an authorised guarantee agreement but
not further or otherwise
8.1.2 THE COVENANTS
The Guarantor covenants with the Landlord to observe the requirements of this
clause
<PAGE> 36
8.1.2.1 PAYMENT OF RENT AND PERFORMANCE OF THE LEASE
The Tenant must pay the Rent and VAT lawfully charged on them (subject to the
production of a valid VAT invoice) punctually and substantially observe and
perform the covenants and other terms of this Lease and if at any time during
the period while the Tenant is abound by the tenant covenants of this Lease the
Tenant defaults in paying the Rent or in substantially observing or performing
any of the covenants or other terms of this Lease then the Guarantor must pay
the Rent and substantially observe or perform the covenants or terms in respect
of which the Tenant is in default and make good to the Landlord on demand and
indemnify the Landlord against all losses resulting from such non-payment
non-performance or non-observance notwithstanding
(a) any time or indulgence granted by the Landlord to the Tenant or any
neglect or forbearance of the Landlord in enforcing the payment of the
Rent or the observance or performance of the covenants or other terms
of this Lease or any refusal by the Landlord to accept rent tendered by
or on behalf of the Tenant at a time when the Landlord is entitled - or
will after the service of a notice under the Law of Property Act of 1925
section 146 be entitled - to reenter the Premises
(b) that the terms of this Lease may have been varied by agreement between
the Landlord and the Tenant
(c) that the Tenant has surrendered part of the Premises - in which event
the liability of the Guarantor under this Lease is to continue in
respect of the part of the Premises not surrendered after making any
necessary apportionments under the Law of Property Act 1925 section 140
and
<PAGE> 37
(d) anything else by which but for this clause 8.1.2.1 the Guarantor would
be released
8.1.2.2 If at any time during the period while the Tenant is bound
by the tenant covenants of this Lease any trustee in
bankruptcy or liquidator of the Tenant disclaims this Lease
the Guarantor must if so required by written notice served
by the Landlord within 90 days of such disclaimer take from
the Landlord forthwith a lease of the Premises for the
residue of the Term as at the date of the disclaimer at the
Rent then payable under this Lease and subject to the same
covenants and terms as in this Lease - except that the
Guarantor need not ensure that any other person is made a
party to that lease as guarantor - the new lease to
commence on the date of the disclaimer The Guarantor must
pay the reasonable costs of the new lease and VAT lawfully
charged thereon and execute and deliver to the Landlord a
counterpart of the new lease
8.1.2.3 If this Lease is disclaimed and the Landlord does not
require the Guarantor to accept a new lease of the Premises
in accordance with clause 8.1.2.2 the Guarantor must pay to
the Landlord on demand an amount equal to the difference
between any money received by the Landlord for the use or
occupation of the Premises and the Rent in both cases for
the period commencing with the date of the disclaimer and
ending on whichever is the earlier of the date 5 months
after the disclaimer or the date if any upon which the
Premises are re-let and the end of the contractual term
8.1.2.4 If at any time during the period while the Tenant is bound
by an authorised guarantee agreement the Tenant defaults in
his obligations under that agreement the Guarantor must
make good to the Landlord on demand and indemnify the
Landlord against all losses resulting from that default
notwithstanding-
<PAGE> 38
8.1.2.4.1 any time or indulgence granted by the Landlord to the Tenant
or neglect or forbearance of the Landlord in enforcing the payment of
any sum or the observance or performance of the covenants of the
authorised guarantee agreement
8.1.2.4.2 that the terms of the authorised guarantee agreement may have
been varied by agreement between the landlord and the Tenant or anything
else by which but for this clause 8.1.2.4 the Guarantor would be
released
8.1.3
8.1.3.1
Any provision of this clause 8 rendered void by virtue of the Landlord and
Tenant (Covenants) Act 1995 section 25 is to be severed from all remaining
provisions and the remaining provisions are to be preserved
8.1.3.2
If any provision in this clause 8 extends beyond the limits permitted by the
Landlord and Tenant (Covenants) Act 1995 section 25 such provision is to be
varied so as not to extend beyond those limits
THE SCHEDULE (1): THE RENT AND RENT REVIEW
{1}-1 DEFINITIONS
For all purposes of this Schedule the terms defined in this paragraph {1}-1 have
the meanings specified:
<PAGE> 39
(1)-1.1 'THE ASSUMPTIONS'
'The Assumptions' means -
(1)-1.1.1 the assumption that no work has been carried out on the Premises
during the Term by the Tenant, his subtenants or their
predecessors in title or any occupiers that has diminished the
rental value of the Premises
(1)-1.1.2 the assumption that if the Premises have been destroyed or
damaged they have been fully rebuilt or reinstated,
(1)-1.1.3 the assumption that the covenants contained in this Lease on the
part of the Tenant have been fully performed and observed,
(1)-1.1.4 the assumption that the Premises are available to let by a
willing landlord to a willing tenant in the open market by one
lease ('the Hypothetical Lease') without a premium being paid by
either party and with vacant possession,
(1)-1.1.5 the assumption that the Premises have already been fitted out
and equipped by and at the expense of the incoming tenant so
that they are capable of being used by the incoming tenant from
the beginning of the Hypothetical Lease for all purposes
required by the incoming tenant that would be permitted under
this Lease,
(1)-1.1.6 the assumption that the Hypothetical Lease contains the same
terms as this Lease, except the amount of the Initial Rent and
any rent-free period allowed to the Tenant for fitting out the
Premises for his occupation and use at the commencement of the
Term, but including the provisions for rent review on the Review
Dates, and except as set out in paragraph (1)-1.1.7,
<PAGE> 40
(1)-1.1.7 the assumption that the term of the Hypothetical Lease is equal
in length to the term remaining unexpired at the relevant review
date and that such term begins on the relevant review date, that
the rent commences to be payable on that date, and that the years
during which the tenant covenants to decorate the Premises are at
the same intervals after the beginning of the term of the
Hypothetical Lease as those specified in this Lease
(1)-1.1.8 the assumption that every prospective willing landlord and
willing tenant is able to recover VAT in full
(1)-1.1.9 the [ ] floor area of the Premises is the
figure specified in the "Floor Area Memorandum" to be annexed to
this Lease and Counterpart thereof in accordance with the terms
of this Agreement
(1)-1.2 'THE DISREGARDS'
'The Disregards' means -
(1)-1.2.1 disregard of any effect on rent of the fact that the Tenant, his
subtenants, or their predecessors in title or any lawful occupier
have been in occupation of the Premises,
(1)-1.2.2 disregard of any goodwill attached to the Premises because the
business of the Tenant, his subtenants, or their predecessors in
title in their respective businesses is or was carried on there,
and
(1)-1.2.3 disregard of any increase in rental value of the Premises
attributable at the relevant review date to any improvement to
the Premises carried out, with consent where required, otherwise
than in pursuance of an obligation to the Landlord or his
predecessors in title either -
<PAGE> 41
(a) by the Tenant, his subtenants, or their predecessors in title or any
lawful occupier during the Term or during any period of occupation
before the Term, or
(b) by any tenant or subtenant of the Premises or any lawful occupier
before the commencement of the Term, provided that the Landlord or his
predecessors in title have not since the improvement was carried out
had vacant possession of the relevant part of the Premises, and
{1}-1.2.4 disregard of the taxable status of the Landlord or the Tenant for the
purpose of VAT
[1]-1.2.5 disregard of any rent obtained on any sub-letting of the Premises
where such rent is at a rate less than the current rent payable under
this Lease
(1)-1.3 'AN EXPERT'
References to 'an expert' are references to an independent valuer appointed by
agreement between the Landlord and the Tenant or, in the absence of agreement
within 14 days of one of them giving notice to the other of his nomination,
nominated by the President on the application of either party made not earlier
than 6 months before the relevant review date or at any time thereafter to
determine the rent under this schedule
{1}-1.4 'THE PRESIDENT'
'The President' means the President for the time being of the Royal Institution
of Chartered Surveyors or any person authorised by him to make appointments on
his behalf
<PAGE> 42
{1}-1.5 'A REVIEW PERIOD'
References to a 'Review Period' are references to the period beginning on any
review date and ending on either the day before the Next Review Date or the 23rd
December 2010 whichever is the first date to occur after the relevant review
date
{1}-2 ASCERTAINING THE RENT
{1}-2.1 THE RENT
Until the First Review Date the Rent is to be ONE HUNDRED AND TWENTY-TWO
THOUSAND POUNDS (L122,000.00) plus Value Added Tax at the current rate per annum
and thereafter for each successive Review Period a sum equal to the greater of
the rent payable under this Lease immediately before the relevant review date,
or, if payment of rent has been suspended as provided for in this Lease, the
rent that would have been payable had there been no such suspension, or the
revised rent ascertained in accordance with this Schedule
{1}-2.2 AGREEMENT OF THE RENT
Six months before each review date, time not being of the essence of the
contract, the Landlord and the Tenant must explore the possibility of open
negotiations with a view to reaching a written agreement as to the Rent for the
following review period and the Rent for that period may be agreed at any time
or, in the absence of agreement, is to be determined by an expert.
{1}-2.3 OPEN MARKET RENT
The sum to be determined by the expert must be the sum at which, acting as an
expert and not as an arbitrator or quasi-arbitrator, he decides the Premises
might reasonably be expected to be let in the open market at the relevant review
date making the Assumptions but disregarding the Disregards.
<PAGE> 43
{1}-2.4 CONDUCT OF THE DETERMINATION
{1}-2.4.1 FEES AND EXPENSES
The fees and expenses of the expert and any VAT payable on them, including the
cost of his appointment, are to be borne equally by the Landlord and by the
Tenant, who must otherwise each bear their own costs.
{1}-2.4.2 REPRESENTATIONS
An expert must afford each of the parties an opportunity to make written
representations to him and also an opportunity to make written
counter-representations on any representations made to him by the other party
but is not to be in any way limited or fettered by such representations and
counter-representations and is to be entitled to rely on his own judgment and
opinion.
{1}-2.4.3 REPLACEMENT OF AN EXPERT
If an expert dies or refuses to act or becomes incapable of acting or if he
fails to publish his determination within 4 months of the date on which he
accepted the appointment, either party may apply to the President to discharge
him and appoint another in his place.
{1}-2.5 MEMORANDA OF AGREEMENT
Whenever the Rent has been ascertained in accordance with this schedule,
memoranda to that effect must be signed by or on behalf of the Landlord and the
Tenant annexed to this document and its counterpart, and the Landlord and the
Tenant must bear their own costs in this respect.
{1}-3 PAYMENT OF THE RENT AS ASCERTAINED
<PAGE> 44
{1}-3.1 WHERE THE RENT IS NOT ASCERTAIN BY A REVIEW DATE
If the Rent payable during any review period has not been ascertain by the
relevant review date, then rent is to continue to be payable at the rate
previously payable, such payments being on account of the rent for that review
period.
{1}-3.2 WHERE A REVIEW DATE IS NOT A QUARTER DAY
If the Rent for any review period is ascertain on or before the relevant review
date but that date is not a quarter day, then the Tenant must pay to the
Landlord on that review date the difference between the Rent due for that
quarter and the Rent already paid for it.
{1}-3.3 BACK-PAYMENT WHERE REVIEW DELAYED
If the Rent payable during any review period has not been ascertained by the
relevant review date, then the Tenant must pay to the Landlord, within fourteen
(14) days of the date on which the Rent is agreed or the expert's determination
is received by him, any shortfall between the Rent that would have been paid
for that period had it been ascertain on or before the relevant review date
and the payments made by the Tenant on account and any VAT payable thereon, and
interest, at the base lending rate from time to time of Lloyds Bank plc, in
respect of each instalment of rent due on or after that review date on the
amount by which the instalment of the Rent that would have been paid had it
been ascertained exceeds the amount paid by the Tenant on account, the interest
to be payable for the period from the Relevant Review Date up to the date of
payment of the shortfall
{1}-4. EFFECT OF COUNTER-INFLATION PROVISIONS
If at any review date a statute prevents, restricts or modifies the Landlord's
rights either to review the Rent in accordance with this Lease or to recover
any increase in the Rent, then the Landlord may, when the restriction or
modification is removed,
<PAGE> 45
relaxed or varied -- without prejudice to his rights, if any, to cover any rent
the payment of which has only been deferred by statute -- on giving not less
than 1 month's nor more than 3 months' notice to the Tenant at any time within
6 months of the restriction or modification being removed, relaxed or varied,
require the Tenant to proceed with any review of the Rent that has been
prevented or to review the Rent further where the Landlord's right was
restricted or modified. The date of expiry of the notice is to be treated as a
review date -- provided that nothing in this paragraph is to be construed as
varying any subsequent review date. The Landlord may recover any increase in
the Rent with effect from the earliest date permitted by law.
SCHEDULE (2) - TENANT'S RIGHTS
The following rights and easements are granted out of the Landlord's adjoining
property and to the Tenant any undertenant and occupiers of the Premises and all
other persons authorised by the Tenant in common with all other persons
authorised by the Landlord or having the like rights and easements:
[2]-1 The free and uninterrupted use of all pipes wires flues channels
drains and apparatus which serve the Premises
[2]-2 The right to enter upon neighbouring premises within title HP253048 at
all reasonable times upon reasonable notice (except in case of
emergency when no notice shall be required) for the purpose of:-
(2)-2.1 inspecting maintaining cleansing repairing renewing and
replacing the said pipes wires flues channels drains and
apparatus and making connections thereto and
(2)-2.2 executing or permitting or suffering the execution of works
or alterations to the Premises
<PAGE> 46
(2) - 3 The right at all times of access to and egress from the Premises with
or without vehicles over the land cross-hatched blue on the Plan
provided that the Tenant shall not block such access at any time
(2) - 4 The right to support and shelter now or hereafter belonging to or
enjoyed by the Premises
SCHEDULE (3) - EXCEPTIONS AND RESERVATIONS
The following rights and easements are excepted and reserved out of the Premises
unto the Landlord and its tenants and the occupiers of any adjoining or
neighbouring land and/or premises and all other persons authorised by the
Landlord or having like rights and easements:
(3) - 1 The free and uninterrupted use of all pipes wires flues channels drains
and apparatus which are in the Premises and serve other premises
(3) - 2 The right to enter upon the Premises at all reasonable times upon
reasonable prior notice (except in case of emergency when no notice
shall be required) for the purpose of:-
(3) - 2.1 inspecting maintaining cleansing repairing renewing and
replacing the said pipes wires flues channels drains and
apparatus and making connections thereto the person or
persons exercising such rights making good any damage
caused to the Premises as soon as reasonably practicable
(3) - 2.2 executing or permitting or suffering the execution of works
or alterations to any premises adjoining the Premises in
such manner as the Landlord (acting reasonably) shall think
<PAGE> 47
fit the person or persons exercising such rights making good any damage
caused to the Premises as soon as reasonably practicable
{3}-3 All rights of light air and other easements and rights now or hereafter
belonging to or enjoyed by the Premises from or over any adjacent or
neighbouring land or building
{3}-4 The right to build or rebuild or alter any adjacent or neighbouring
land or building in any manner whatsoever and to let the same for any
purpose or otherwise deal therewith notwithstanding that the light or
air to the Premises is in any way diminished
{3}-5 The right to support and shelter and all other easements and rights now
or hereafter belonging to or enjoyed by all adjacent or neighbouring
land or building an interest wherein in possession or reversion is at
any time during the Term hereby granted vested in the Landlord
{3}-6 The right to enter upon the Premises at all reasonable times upon
reasonable prior notice for the purpose of execution or permitting or
suffering the execution of works required to complete any snagging
works required following the Landlord's refurbishments the person or
persons exercising such rights making good any damage caused to the
Premises as soon as reasonably practicable
{3}-7 The right of access to and egress from Unit 2 Power Products School
Lane over and across the land cross-hatched black on the Plan provided
that such access shall not be blocked at any time
<PAGE> 48
{3}-8 The right of emergency pedestrian escape from the rear of the
adjacent warehouse currently known as Unit 2 Power Products over such
roadways and footpaths as form part of the Premises
IN WITNESS whereof the parties hereto have duly executed this Lease the day and
year first before written
Common seal of Company
THE COMMON SEAL of [COMPANY SEAL]
LE GALLAIS' REAL ESTATES
(OVERSEAS) LIMITED was affixed
in the presence of:-
/s/ PETER LE GALLAIS
- ----------------------------------
Signature of Director
/s/ IAN LE GALLAIS
- ----------------------------------
Signature of Director
<PAGE> 1
EXHIBIT 10.24
Mr. Ed Cummins
939 Sandcastle
Corona del Mar, CA 92625
Dear Ed:
This letter will confirm that Ocular Sciences, Inc. (the "Company") has
retained you to assist it with identifying and consummating a possible
acquisition or business combination. You will provide such services to the
Company in this regard as the Company reasonably requests, including meeting
with principals and professionals involved in the transaction, preparing
analysis, and assisting in the structuring of the transaction.
As you are aware, the Company has previously entered into an agreement
with Morgan Stanley & Co. Incorporated dated December 16, 1998, as amended
August 31, 1999, to provide related services (the "Morgan Agreement").
This letter will confirm to you that if the Company enters into a
"Transaction", then you will be entitled to a fee of 3/8% of the "Aggregate
Value" of the Transaction, if the Transaction involves one other company, and
1/2% of the Aggregate Value of the Transaction if the Transaction involves more
than one other company in a substantial way. In no event will your total fee be
greater than 1/2% of the Aggregate Value of the Transaction. The terms
"Transaction" and "Aggregate Value" shall have the meanings set forth in the
Morgan Agreement. The minimum fee set forth in the Morgan Agreement shall not
apply to this relationship.
The Company will also reimburse you for your reasonable expenses incurred
in the performance of your services hereunder, as such expenses are incurred,
including travel costs, document production and document delivery, provided
that expenses in excess of $45,000 per month need to be approved by the Company
in advance.
You will maintain the confidentiality of all Company confidential
information and will only disclose such information with the approval of an
officer of the Company.
The Company will have no obligation to accept a proposed Transaction, and
may reject any and all proposals in its sole discretion. Additionally, the
Company may terminate your services at any time. If the Company terminates your
services, then you will be entitled to (i) payment for reimbursable expenses
incurred prior to the date of termination and (ii) the Transaction fee set
forth above for any Transaction consummated on or before November 18, 2000. If
the Company does not consummate a Transaction by November 18, 2000, then the
Company will pay you at such time, for your hours actually expended in
performing the services hereunder, at a rate of $300 per hour, up to a maximum
of $45,000 and your services will be terminated.
Ed, if the foregoing accurately reflects our agreement, please sign below
to so indicate.
Very truly yours,
/s/ JOHN FRUTH
----------------------------------
John Fruth, Chairman of the Board
Accepted and Agreed:
/s/ ED CUMMINS
- -----------------------
Ed Cummins
<PAGE> 1
Exhibit 21.01
LIST OF SUBSIDIARIES
ENTITY JURISDICTION OF INCORPORATION
- ------ -----------------------------
Ocular Sciences Puerto Rico, Inc. Delaware
Ocular Sciences Canada, Inc. Province of New Brunswick
Ocular Sciences UK Limited United Kingdom
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 Australia
Ocular Sciences Cayman Islands Cayman Islands
Corporation
<PAGE> 1
EXHIBIT 23.02
CONSENT OF KPMG LLP, INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Ocular Sciences, Inc.:
We consent to the incorporation by reference in the registration
statement (No. 333-32999) on Form S-8 of Ocular Sciences, Inc. of our reports
dated February 2, 2000, relating to the consolidated balance sheets of Ocular
Sciences, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the years in the three-year period ended December 31, 1999, and the
related schedule, which reports appear in the December 31, 1999 annual report on
Form 10-K of Ocular Sciences, Inc.
KPMG LLP
San Francisco, California
March 27, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1999 AND 1998 CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF
INCOME, STOCKHOLDERS' EQUITY AND CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
1999 AND 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 10,482 27,006
<SECURITIES> 28,389 19,036
<RECEIVABLES> 36,230 27,211
<ALLOWANCES> 1,674 2,085
<INVENTORY> 15,728 12,460
<CURRENT-ASSETS> 104,311 95,024
<PP&E> 127,895 81,264
<DEPRECIATION> 25,304 18,298
<TOTAL-ASSETS> 222,315 176,570
<CURRENT-LIABILITIES> 31,470 24,446
<BONDS> 0 0
0 0
0 0
<COMMON> 23 23
<OTHER-SE> 183,586 142,926
<TOTAL-LIABILITY-AND-EQUITY> 222,315 176,570
<SALES> 175,998 151,908
<TOTAL-REVENUES> 175,998 151,908
<CGS> 63,375 48,307
<TOTAL-COSTS> 66,880 61,796
<OTHER-EXPENSES> 73 1,134
<LOSS-PROVISION> 12 880
<INTEREST-EXPENSE> 279 308
<INCOME-PRETAX> 47,781 43,233
<INCOME-TAX> 11,348 12,670
<INCOME-CONTINUING> 36,433 30,563
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 36,433 30,563
<EPS-BASIC> 1.60 1.37
<EPS-DILUTED> 1.55 1.31
</TABLE>
