<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the Transition Period from ________ to ________
COMMISSION FILE NO. 0-22623
OCULAR SCIENCES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-2985696
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
475 ECCLES AVENUE
SOUTH SAN FRANCISCO, CALIFORNIA 94080
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(650) 583-1400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ].
As of October 26, 2000, there were outstanding 23,277,725 shares of the
Registrant's Common Stock, par value $0.001 per share.
<PAGE> 2
OCULAR SCIENCES, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets -
September 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Income -
Three Months and Nine Months Ended September 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows - Nine
Months Ended September 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 8
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 21
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21
SIGNATURES 22
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
OCULAR SCIENCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS - (UNAUDITED)
(In thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 45,231 $ 10,053
Restricted cash 394 429
Short-term investments 18,009 28,389
Accounts receivable, less allowance for sales returns and doubtful
accounts of $1,610 and $1,674 for 2000 and 1999, respectively 28,456 34,556
Inventories 21,262 15,728
Loans to officers and employees 225 113
Prepaid expenses and other current assets 13,558 15,043
--------- ---------
Total Current Assets 127,135 104,311
Property and equipment, net 115,908 102,591
Intangible assets, net 7,969 7,617
Long-term investments 6,037 7,630
Other assets 166 166
--------- ---------
Total Assets $ 257,215 $ 222,315
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 5,509 $ 7,191
Accrued liabilities 29,344 23,065
Current portion of long-term debt 1,171 1,214
--------- ---------
Total Current Liabilities 36,024 31,470
Deferred income taxes 4,688 5,008
Long-term debt, less current portion 1,545 2,228
--------- ---------
Total Liabilities 42,257 38,706
--------- ---------
Stockholders' Equity:
Common stock, $0.001 par value; 80,000,000
shares authorized; 23,257,875 and 22,953,985 shares
issued and outstanding for 2000 and 1999, respectively 23 23
Additional paid-in capital 81,780 81,249
Retained earnings 135,262 103,160
Accumulated other comprehensive income (loss) (2,107) (823)
--------- ---------
Total Stockholders' Equity 214,958 183,609
--------- ---------
Total Liabilities and Stockholders' Equity $ 257,215 $ 222,315
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
OCULAR SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - (UNAUDITED)
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 47,790 $ 49,475 $ 134,186 $ 130,402
Cost of sales 19,660 17,921 54,949 46,247
------------ ------------ ------------ ------------
Gross profit 28,130 31,554 79,237 84,155
Selling and marketing expenses 12,659 12,139 35,175 32,758
General and administrative expenses 5,226 5,391 16,057 15,511
Research and development expenses 1,297 1,223 3,288 2,641
------------ ------------ ------------ ------------
Income from operations 8,948 12,801 24,717 33,245
Interest expense (78) (74) (453) (213)
Interest income 1,049 608 2,314 1,714
Other income (expense) (191) 202 20,631 (4)
------------ ------------ ------------ ------------
Income before taxes 9,728 13,537 47,209 34,742
Income taxes (2,238) (3,113) (15,109) (8,349)
============ ============ ============ ============
Net income $ 7,490 $ 10,424 $ 32,100 $ 26,393
============ ============ ============ ============
Net income per share data:
Net income per share (basic) $ 0.32 $ 0.45 $ 1.39 $ 1.16
============ ============ ============ ============
Net income per share (diluted) $ 0.32 $ 0.45 $ 1.37 $ 1.13
============ ============ ============ ============
Weighted average common
shares outstanding 23,242,364 22,933,623 23,120,459 22,790,938
Weighted average shares of stock
options under the treasury
stock method 108,079 420,621 272,771 642,855
------------ ------------ ------------ ------------
Total weighted average common
and dilutive potential
common shares outstanding 23,350,443 23,354,244 23,393,230 23,433,793
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
OCULAR SCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 32,100 $ 26,393
Adjustments to reconcile net income to net cash provided
By operating activities:
Depreciation and amortization 8,860 5,880
Income tax benefits from stock options exercised - 1,848
Provision for sales returns and doubtful accounts 793 170
Provision for excess and obsolete inventory 818 745
Provision for damaged and scrap products 386 576
Exchange loss (gain) 106 (39)
Deferred income taxes - (936)
Changes in operating assets and liabilities:
Accounts receivable 4,666 (6,233)
Inventories (7,440) (2,904)
Prepaid expenses, other current and non-current assets 1,138 (1,409)
Accounts payable (1,462) (772)
Accrued liabilities 5,755 3,587
Income taxes payable 943 2,503
-------- --------
Net cash provided by operating activities 46,663 29,409
-------- --------
Cash flows from investing activities:
Purchase of property and equipment (22,263) (34,477)
Purchase of short and long-term investments (21,607) (26,756)
Sales and maturities of short and long-term investments 33,501 19,510
Payment for Australian Acquisition, net of cash acquired - (497)
(Deposits to) payments from restricted cash (6) 47
-------- --------
Net cash used in investing activities (10,375) (42,173)
-------- --------
Cash flows from financing activities:
Repayment of long-term debt (700) (295)
Repurchase of common stock under stock repurchase plan (227) -
Proceeds from issuance of common stock 757 2,208
-------- --------
Net cash provided by (used in) financing activities (170) 1,913
-------- --------
Effect of exchange rate changes on cash and cash equivalents (940) 15
-------- --------
Net increase (decrease) in cash and cash equivalents 35,178 (10,836)
Cash and cash equivalents at beginning of period 10,053 26,520
-------- --------
Cash and cash equivalents at end of period $ 45,231 $ 15,684
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
OCULAR SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PREPARATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not contain all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements have been
prepared on the same basis as the audited consolidated financial statements and
include all adjustments, consisting only of normal recurring adjustments,
necessary for the fair presentation of the Company's financial condition as of
September 30, 2000 and the results of its operations and comprehensive income
for the three and nine month periods ended September 30, 2000 and 1999, and its
cash flows for the nine month periods ended September 30, 2000 and 1999. These
unaudited condensed consolidated financial statements should be read in
conjunction with the Company's audited consolidated financial statements as of
December 31, 1999 and 1998 and for each of the years in the three-year period
ended December 31, 1999, including notes thereto, included in the Company's
Annual Report on Form 10-K. Operating results for the three and nine month
periods ended September 30, 2000 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2000.
NOTE 2 - INVENTORIES
Inventories consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Raw materials $ 3,407 $ 3,906
Work in process 3,243 1,344
Finished goods 14,612 10,478
------- -------
$21,262 $15,728
======= =======
</TABLE>
NOTE 3 - PREPAID EXPENSES AND OTHER CURRENT ASSETS AND ACCRUED LIABILITIES
Prepaid expenses and other current assets consisted of the following (in
thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Refundable taxes $ 5,728 $ 6,530
Deferred income taxes 4,033 4,115
Prepaid expenses 2,445 1,918
Other current assets 1,532 2,480
------- -------
$13,558 $15,043
======= =======
</TABLE>
6
<PAGE> 7
Accrued liabilities consisted of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Accrued expenses $16,596 $11,050
Accrued cooperative merchandising allowances 6,733 8,510
Accrued value added taxes 4,007 2,371
Deferred income taxes 452 512
Income taxes payable 1,556 622
------- -------
$29,344 $23,065
======= =======
</TABLE>
NOTE 4 - COMPREHENSIVE INCOME
Comprehensive income for the three months ended September 30, 2000 is
$7,109,000 compared with $10,444,000 for the same period a year ago. For the
nine months ended September 30, 2000, Comprehensive income was $30,817,000
compared with $26,359,000 for the same period a year ago. Comprehensive income
includes net income, foreign currency translation gains(losses) and net
unrealized gains(losses) on investments.
NOTE 5 - RELATED PARTY AGREEMENTS
On June 7, 2000, the Company has entered into an agreement with Edgar
Cummins, a member of its Board of Directors, pursuant to which Mr. Cummins will
be paid a fee if the Company enters into certain strategic business
transactions. The amount of the fee is 3/8% of the aggregate value of the
transaction. The agreement also provides for Mr. Cummins to be paid up to
$45,000 plus expenses for his services.
The Company has also entered into a separate consulting agreement with
Mr. Cummins to act as the Company's interim Chief Financial Officer, pursuant to
which he is to be paid $4,500 per week.
NOTE 6 - SHARE REPURCHASE PLAN
On July 27, 2000, the Company announced the approval by the Board of
Directors of a two million share repurchase program. Under the repurchase plan,
shares may be repurchased, subject to market and business conditions, at
management's discretion on the open market. To the extent that management elects
to repurchase shares, a significant use of cash resources could be effected. As
of September 30, 2000, the Company has purchased 20,200 shares on the open
market.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
unaudited condensed consolidated financial statements and notes thereto included
in Part I - Item 1 of this Quarterly Report and the audited consolidated
financial statements and notes thereto and Management's Discussion and Analysis
of Financial Condition and Results of Operations contained in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999.
Except for the historical information contained herein, the matters
discussed in this Form 10-Q are forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A
of the Securities Act of 1933, as amended. These forward-looking statements
involve risks and uncertainties. Among the important additional factors that
could cause actual results to differ materially from those forward-looking
statements are the impact of competitive products and pricing, product demand,
higher than expected sales force turnover, slower than expected training periods
for new sales force hires, the Company's inability to attract new senior
management talent, extended manufacturing difficulties, supply interruptions,
currency fluctuations and other factors detailed below, including in the section
labeled "Factors That May Affect Future Results," and from time to time in the
Company's other reports filed with the Securities and Exchange Commission. The
actual results that the Company achieves may differ materially from any
forward-looking statements due to such risks and uncertainties. Various
sentences within this Form 10-Q contain such forward-looking statements, and
words such as "believes", "anticipates", "expects", "future", "intends",
"would", "may" and similar expressions are intended to identify forward-looking
statements, although they are not the exclusive means of identifying such
statements. The Company undertakes no obligation to revise any of these
forward-looking statements to reflect events or circumstances after the date
hereof.
RESULTS OF OPERATIONS
Net Sales
<TABLE>
<CAPTION>
Three Months Ended September 30,
---------------------------------
2000 1999 % Change
----------- ----------- --------
<S> <C> <C> <C>
U.S $32,905,000 $36,245,000 -9.2%
As a percentage of net sales 68.9% 73.3%
International $14,885,000 $13,230,000 12.5%
As a percentage of net sales 31.1% 26.7%
----------- -----------
Net sales $47,790,000 $49,475,000 -3.4%
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------
2000 1999 % Change
------------- ------------ --------
<S> <C> <C> <C>
U.S $ 93,698,000 $ 96,238,000 -2.6%
As a percentage of net sales 69.8% 73.8%
International $ 40,488,000 $ 34,164,000 18.5%
As a percentage of net sales 30.2% 26.2%
------------ ------------
Net sales $134,186,000 $130,402,000 2.9%
============ ============
</TABLE>
Net sales represent gross sales less allowances for returns, trial sets
and prompt payment discounts. The Company recognizes sales upon shipment of
products to its customers. Discounts and allowances for sales returns are
accrued at the time sales are recognized. The decline in net sales for the
quarter ended September 30, 2000 compared to the quarter ended September 30,
1999 was affected by
8
<PAGE> 9
a softening in domestic demand for non-specialty spherical contact lenses.
However, net sales increased by 2.9% for the nine months ended September 30,
2000 as compared to the nine months ended September 30, 1999 and was primarily
attributable to an increase in international sales of 18.5%. With a softening of
domestic demand and significant increases in international sales, total U.S.
sales as a proportion of total sales declined by 4.0% for the nine months ending
September 30, 2000 as compared to the same period last year. Also contributing
to the decline in total domestic sales for the third quarter of 2000 was the
impact of a relatively inexperienced sales force hired to fill the vacant sales
positions that opened in the first half of the year. The Company's South San
Francisco based sales force experienced a higher than anticipated attrition due
to the prolonged uncertainty of Wesley Jessen VisionCare, Inc.'s ("Wessley
Jensen") proposed merger with the Company (the "Proposed Merger") in the second
quarter of 2000 and the inability to effectively recruit replacements. As a
result, the Company's sales organization was significantly understaffed. Since
the termination of the Proposed Merger, the Company has augmented its South San
Francisco-based telemarketing sales force with a new telemarketing sales group
in Phoenix, Arizona which is expected to experience lower turnover, and
initiated the hiring by yearend 2000 of 20 field sales representatives to
augment the domestic sales effort.
Unit sales growth of the Company's lenses marketed for disposable
replacement regimens increased 11.2% and 14.6% for the three and nine months
ending September 30, 1999 and September 30, 2000. A significant portion of unit
growth came from international sales, which grew faster than domestic sales (due
primarily to the impact of the Proposed Merger) and increased sales of lenses
marketed for daily and weekly disposable regimens in Europe and Asia. Unit sales
growth of the Company's international sales increased 34.2% and 35.3% from the
quarter and nine months ending September 30, 2000 and September 30, 1999.
The Company's overall average selling price declined 12.1% from the
quarter ended September 30, 2000 to the quarter ended September 30, 1999
primarily as a result of the greater proportion of sales to international
distributors at lower prices than domestic sales and sales of lower priced daily
disposable lenses. For the nine months ending September 30, 2000 and September
30, 1999, these same factors resulted in an 8.9% decline in the overall average
selling prices of the Company's lenses. The Company expects that the overall
average selling price that it realizes across its products will continue to
decline over time because of (i) shifts in the Company's product mix from lenses
marketed for annual replacement regimens to lenses marketed for disposable
replacement regimens, particularly lenses marketed for daily disposal, and (ii)
increases in products sold internationally to distributors at prices lower than
direct sales prices in the U.S.
Gross Profit
<TABLE>
<CAPTION>
Three Months Ended September 30,
-----------------------------------
2000 1999 % Change
------------- ------------- --------
<S> <C> <C> <C>
Gross profit $ 28,130,000 $ 31,554,000 -10.9%
As a percentage of net sales 58.9% 63.8%
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------
2000 1999 % Change
------------- ------------- --------
<S> <C> <C> <C>
Gross profit $ 79,237,000 $ 84,155,000 -5.8%
As a percentage of net sales 59.1% 64.5%
</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 and percentage decrease in
gross profit from the quarter and nine months ended September 30, 1999 compared
to the quarter and nine months ended September 30, 2000 was due to reductions in
the Company's average selling prices, as discussed in "Net Sales," and higher
production costs. Additionally, the decrease in net sales substantially reduced
gross profit between the quarters compared.
9
<PAGE> 10
The higher production costs in the quarter were due to increased
overhead costs and limited production volume from the Company's new
manufacturing facility in Juana Diaz, Puerto Rico, which commenced commercial
production for the U.S. when it received FDA approval in December 1999. The
Company expects per unit cost reductions as production volume increases as more
production lines are implemented in this new P.R. facility. Additionally, the
Company is in the process of adding new, automated production equipment at both
its U.K. and P.R. facilities, which are designed to further reduce its per unit
cost of production over time, although such cost reductions may not be seen
until future periods. The first automated line was FDA validated in the U.K. in
mid-January 2000. The Company expects that the initial production volume from
this first automated line and subsequent lines will continue to be somewhat
limited, and that the full reduction in production cost per unit will not be
achieved until these automated lines have been operating 12 to 15 months. See
"Factors That May Affect Future Results -- Manufacturing Capacity Constraints;
Risks Associated with Expansion and Automation of Manufacturing Operations."
As the Company expects that its overall average selling price will
continue to decline over time due to product and geographic mix shift, as
discussed above in "Net Sales", the Company will need to continue to reduce its
per unit production costs through increased automation, increased volume and
reduced packaging costs in order to improve, or even to maintain, its gross
margin percentage. The Company believes that the decline in average selling
price, as sales of lower average selling price lenses marketed for daily
replacement regimens increase, will exceed the rate of decline in production
cost in the near term, and accordingly, the Company expects its gross profit
margin percentage to be lower for the remainder of the year. See "Factors That
May Affect Future Results -- Fluctuations in Operating Results; Decreasing
Average Sales Prices."
Selling and Marketing Expenses
<TABLE>
<CAPTION>
Three Months Ended September 30,
-----------------------------------
2000 1999 % Change
------------- ------------- --------
<S> <C> <C> <C>
Selling and marketing expenses $ 12,659,000 $ 12,139,000 4.3%
As a percentage of net sales 26.5% 24.5%
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------
2000 1999 % Change
------------- ------------- --------
<S> <C> <C> <C>
Selling and marketing expenses $ 35,175,000 $ 32,758,000 7.4%
As a percentage of net sales 26.2% 25.1%
</TABLE>
Selling and marketing expenses are comprised primarily of cooperative
merchandising allowances, sample diagnostic products provided to eyecare
practitioners without charge, salaries, commissions and benefits for selling and
marketing personnel and postage and freight charges not billed to customers.
Cooperative merchandising allowances are reimbursements to encourage the fitting
and wearing of the Company's lenses marketed for disposable replacement
regimens. Such activities may include, but are not limited to advertising,
in-office promotion, displays and mailings. These allowances are limited to a
percentage of purchases of lenses marketed for disposable replacement regimens
from the Company. The increase in sales and marketing expenses in dollar and as
a percentage of net sales from the quarter and nine months ended September 30,
1999 to the quarter and nine months ended September 30, 2000 resulted primarily
from cooperative merchandising allowances, additional sales and marketing
expenses related to the Company's newly acquired Australian distributor and
one-time sales force retention costs. With the anticipated addition of
approximately 20 field sales representatives in preparation for the launch of
the new disposable toric lens for astigmatism to be fully introduced in the
first quarter of 2001, the Company expects selling and marketing expenses will
grow in absolute dollars, and as a percentage of sales, with the introduction of
this new product line.
10
<PAGE> 11
General and Administrative Expenses
<TABLE>
<CAPTION>
Three Months Ended September 30,
-----------------------------------
2000 1999 % Change
------------- ------------- --------
<S> <C> <C> <C>
General and administrative expenses $ 5,226,000 $ 5,391,000 (3.1%)
As a percentage of net sales 10.9% 10.9%
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------
2000 1999 % Change
------------- ------------- --------
<S> <C> <C> <C>
General and administrative expenses $ 16,057,000 $ 15,511,000 3.5%
As a percentage of net sales 12.0% 11.9%
</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. For the quarter ending September 30, 2000 and September 30,
1999, general and administrative expenses as a percentage of sales remained
stable at 10.9%. For the nine months ending September 30, 2000 and September 30,
1999, general and administrative expenses increased in dollar terms primarily
due to several one-time charges, as well as, other Proposed Merger-related
expenses. For the nine months ending September 30, 2000, the Company's general
and administrative expenses as a percentage of sales were consistent with the
comparable nine-month period in 1999. The Company believes that when net sales
grow, its general and administrative expenses will increase in absolute dollars,
but will decrease as a percentage of net sales on an annualized basis.
Research and Development Expenses
<TABLE>
<CAPTION>
Three Months Ended September 30,
-----------------------------------
2000 1999 % Change
------------- ------------- --------
<S> <C> <C> <C>
Research and development expenses $ 1,297,000 $ 1,223,000 6.1%
As a percentage of net sales 2.7% 2.5%
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------
2000 1999 % Change
------------- ------------- --------
<S> <C> <C> <C>
Research and development expenses $ 3,288,000 $ 2,641,000 24.5%
As a percentage of net sales 2.5% 2.0%
</TABLE>
Research and development expenses are comprised primarily of consulting
costs for research and development personnel, in-house labor related to the
manufacturing process and new product development. For the quarter and nine
months ending September 30, 2000, research and development expenses increased in
dollars and as a percentage of revenue due to activities related to new product
development and the hiring of a Vice-President of Research and Development.
Research and development expenses may fluctuate based on the timing of new
product development projects.
11
<PAGE> 12
Interest and Other Income, Net
<TABLE>
<CAPTION>
Three Months Ended September 30,
-----------------------------------
2000 1999 % Change
------------- ------------- --------
<S> <C> <C> <C>
Interest and other income, net $ 780,000 $ 736,000 6.0%
As a percentage of net sales 1.6% 1.5%
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------
2000 1999 % Change
------------- ------------- --------
<S> <C> <C> <C>
Interest and other income, net $ 22,492,000 $ 1,497,000 1402.5%
As a percentage of net sales 16.8% 1.1%
</TABLE>
The increase in interest and other income for the quarter ended September 30,
2000 compared to the quarter ended September 30, 1999 grew slightly in dollar
and in percentage terms as a result of the interest earned on the Proposed
Merger termination fee. The increase in interest and other income for the nine
months ended September 30, 2000 compared to the same period last year was
primarily from the Proposed Merger termination fee from Wesley Jessen of $25.0
million less Proposed Merger-related expenses of $4.2 million that was received
in the second quarter of 2000.
Income Taxes
<TABLE>
<CAPTION>
Three Months Ended September 30,
-----------------------------------
2000 1999 % Change
------------- ------------- --------
<S> <C> <C> <C>
Income taxes $2,238,000 $3,113,000 (28.1%)
Effective tax rate 23.0% 23.0%
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------
2000 1999 % Change
------------- ------------- --------
<S> <C> <C> <C>
Income taxes $15,109,000 $8,349,000 81.0%
Effective tax rate 32.0% 24.0%
</TABLE>
The Company's effective tax rate for the quarter ending September 30,
2000 to the quarter ending September 30, 1999 has remained unchanged at 23.0%.
However, the increase in the Company's effective tax rate for the nine months
ending September 30, 2000 to 32.0%, as compared to 24.0% for the same nine
months in 1999, is attributable to the U.S. taxation of the $25 million Proposed
Merger termination fee receive in May of this year. The Company continues to
receive a partial exemption from U.S. taxation with respect to earnings of the
Company's Puerto Rican operations. As the Company's foreign earnings increase,
that portion will continue to be taxed at the lower tax rates. The Company
anticipates that it will continue to benefit from the favorable effect of the
Puerto Rican partial exemption through 2001, with limited exemption during the
transition period from 2002 through 2006, when the benefit will expire under the
current provisions of the Internal Revenue Code.
12
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, the Company had cash and cash equivalents of
$45.2 million compared to cash and cash equivalents of $10.0 million at December
31, 1999. The increase in cash and cash equivalents was primarily attributable
to cash provided by operating activities, maturities of short and long-term
investments and the $25 million Proposed Merger termination fee partially offset
by purchases of property and equipment. Working capital increased from $72.8
million at December 31, 1999 to $91.1 million at September 30, 2000. The
increase in working capital was primarily due to cash received from the
termination of the Proposed Merger less associated Proposed Merger-related
expenses. In the first nine months of 2000, net cash provided by operating
activities of $46.7 million was derived principally from net income of $32.1
million, depreciation and amortization charges of $8.9 million, provisions for
product returns, doubtful accounts, excess and obsolete inventory, damaged and
scrap products, and exchange gain of $2.1 million in the aggregate, and a net
increase from operating assets and liabilities of $3.6 million.
Net cash used in investing activities in the first nine months of 2000
was $10.4 million, related to $22.3 million of purchases of property and
equipment offset with $11.9 million net sales and maturities of short and
long-term investments. The Company anticipates that capital expenditures will be
approximately $30.0 to $35.0 million in 2000 (including the $22.3 million in the
first nine months) as the Company continues to invest in the implementation and
development of automated production equipment at its manufacturing facilities.
However, the amount of capital expenditures may increase or decrease, as the
Company may accelerate or delay the implementation of the automated production
equipment based on market conditions and demand for its products. See "Factors
That May Affect Future Results -- Manufacturing Capacity Constraints; Risks
Associated With Expansion and Automation of Manufacturing Operations."
Net cash used in financing activities in the first nine months of 2000
was $170,000. In comparison, in the first nine months of 1999 net cash used in
financing activities was $1,913,000. The significant decrease was due to the
reduction in proceeds from the issuances of common stock and an increase in
repayments of long-term debt.
On July 27, 2000, the Company announced the approval by the Board of
Directors of a two million share repurchase program. Under the repurchase plan,
shares may be repurchased, subject to market and business conditions, at
management's discretion on the open market. To the extent that management elects
to repurchase shares, a significant use of cash resources could be effected. As
of October 25, 2000, the Company has purchased 53,000 shares on the open market.
In addition to cash, cash equivalents and short and long-term
investments, the Company has a credit facility with Comerica Bank - California.
The Comerica Credit Agreement provides for up to $20.0 million of revolving
loans to the Company, which mature on June 30, 2002. Loans bear interest at
Comerica Bank's base rate or at margin of 1.00% to 1.25% above the bank's
eurodollar rate depending on the Company's ratio of total liabilities to
tangible net worth. At September 30, 2000, there were no revolving loans
outstanding under the Comerica Credit Agreement. In addition, the Comerica
Credit Agreement originally provided for up to $10.0 million of term loans to
Ocular Sciences Puerto Rico, Inc. ("Ocular Sciences Puerto Rico") which bear
interest at the bank's base rate or at a margin of 1.25% to 1.50% above the
bank's eurodollar rate or negotiated rate depending on the Company's ratio of
total liabilities to tangible net worth. As of September 30, 2000, there were
$2.1 million in term loans outstanding under the Comerica Credit Agreement.
Principal installments of $300,000 are due quarterly and all outstanding
principal and unpaid interest is due and payable on July 31, 2002. The Comerica
Credit Agreement contains covenants, which among other things requires the
Company to maintain certain financial ratios. Borrowings under the Comerica
Credit Agreement is 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.
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The Company believes that its current cash and cash equivalents and
short and long-term investments, further borrowings available under its credit
facilities and its anticipated net cash flow from operations, will be sufficient
to meet its anticipated cash needs for working capital, contractual commitments
and capital expenditures for the foreseeable future.
NEW ACCOUNTING PRONOUNCEMENTS
In September 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133
establishes accounting and reporting standards for derivative 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. SFAS No. 133 was to be
effective for all fiscal quarters of fiscal years beginning after September 15,
1999. In September 1999, the FASB issued SFAS No. 137, which defers the
implementation of SFAS No. 133. SFAS No. 133, as amended by SFAS No. 137 and
SFAS No. 138, will be effective for all fiscal quarters of fiscal years
beginning after September 15, 2000.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements". SAB No. 101 expresses the views of the SEC staff in applying
accounting principles generally accepted in the United States to certain revenue
recognition issues. In March 2000, the SEC issued SAB 101A to defer the
effective date of implementation of SAB No. 101. In September 2000, the SEC
issued SAB 101B to defer further the effective date of implementation of SAB 101
with earlier application encouraged. As a result of the last amendment, SAB 101
shall be effective for the Company in its fourth fiscal quarter of 2000.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 ("FIN No. 44"), "Accounting for Certain Transactions
involving Stock Compensation". This Interpretation clarifies the application of
APB Opinion No. 25, "Accounting for Stock Issued to Employees". This
Interpretation was effective for July 1, 2000 and was adopted by the Company as
of this date, but certain conclusions in this Interpretation covered specific
events that occur after either December 15, 1998, or January 12, 2000. To the
extent that this Interpretation covers events occurring during the period after
December 15, 1998, or January 12, 2000, but before the effective date of July 1,
2000, the effects of applying this Interpretation are recognized on a
prospective basis.
In July 2000, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board reached a consensus on EITF Issue 00-10 "Accounting
for Shipping and Handling Fees and Costs" (EITF Issue 00-10). This consensus
requires that all amounts billed to a customer in a sale transaction related to
shipping and handling, if any, represent revenue and should be classified as
revenue. The Company classifies shipping charges received from customers as
revenue. The Company classifies inbound and outbound shipping costs as cost of
sales. The Company does not impose separate handling charges on customers and
classifies costs attributable to receiving, inspecting and warehousing
inventories and picking, packaging and preparing customers' orders for shipment
as operating expenses. EITF Issue 00-10 is to be applied no later than the
required implementation date for SAB 101 as discussed above.
The Company does not expect a material impact from implementation of
SFAS No. 133, SAB No. 101, FIN No. 44 and EITF Issue 00-10 on its financial
position, results of operations and cash flows.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Company's future operating results may differ materially from the
results discussed in, or implied by, forward-looking statements made by the
Company. Factors that may cause such differences include, but are not limited
to, those discussed below and elsewhere in this Report.
Proposed Merger with Wesley Jessen. On March 20, 2000, the Company and
Wesley Jessen entered into an Agreement and Plan of Merger providing for the
Proposed Merger. On March 23, 2000, Bausch & Lomb, Inc. ("Bausch & Lomb") made
an unsolicited offer to acquire Wesley Jessen in a transaction that would not
include the Company. Wesley Jessen rejected the Bausch & Lomb offer, and Bausch
& Lomb initiated a tender offer for shares of Wesley Jessen. On May 30, 2000,
CIBA Vision Corporation, the eye care unit of Novartis AG, and Wesley Jessen
jointly announced a definitive agreement whereby CIBA Vision will acquire Wesley
Jessen. The agreement was unanimously approved by Wesley Jessen's Board of
Directors.
On June 2, 2000, the Company announced that it received a $25.0 million
cash "break-up fee" from Wesley Jessen as a result of the termination of the
previously announced Proposed Merger between the two companies.
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Results for the second quarter and third quarter were impacted by an
eight-week period of operational turmoil and prolonged uncertainty that resulted
when Bausch & Lomb interrupted the Proposed Merger with Wesley Jessen. Among the
negative impacts has been the loss of certain key management personnel, the loss
of key sales personnel, a loss of momentum in the market and the specter of
increased competition from the newly combined entity, all of which may have a
negative impact on the operations of the Company in future periods.
Intense Competition. The market for soft contact lenses is intensely
competitive and is characterized by decreasing prices for many products. The
Company's products compete with products offered by a number of larger companies
including Johnson & Johnson, Ciba ("Ciba"), Bausch & Lomb and The Cooper
Companies, Inc. Many of the Company's competitors have substantially greater
financial, manufacturing, marketing and technical resources, greater market
penetration and larger manufacturing volumes than the Company. Among other
things, these advantages may afford the Company's competitors greater ability to
manufacture large volumes of lenses, reduce product prices and influence
customer buying decisions. For example, Bausch & Lomb has introduced of a new
weekly disposable lens, which they claim is produced from a low-cost
manufacturing platform. 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. The Company's competitors could also reduce prices to increase
sales volumes as necessary to utilize their capacity, or for other reasons.
Price reductions by competitors could make the Company's products less
competitive, and there can be no assurance that the Company would be able to
either match the competitor's pricing plan or reduce its prices in response. The
Company's ability to respond to competitive pressures by decreasing its prices
without adversely affecting its gross margins and operating results will depend
on its ability to decrease its costs per lens. 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 "Manufacturing Capacity Constraints; Risks Associated with Expansion and
Automation of Manufacturing Operations."
The market for contact lenses is shifting from lenses marketed for
annual replacement regimens to lenses marketed for disposable replacement
regimens. The weekly disposable replacement market is particularly competitive
and price-sensitive and is currently dominated by the Acuvue product produced by
Johnson & Johnson. The Company believes that the per unit production costs of
Johnson & Johnson and certain of the Company's other competitors are currently
lower than those of the Company. The Company introduced a lens marketed for
daily disposal in Japan and Europe in early 1999. The Company's ability to enter
and to compete effectively in the daily market will depend in large part upon
the Company's ability to expand its production capacity and reduce its per unit
production costs. Additionally, over the past 18 months the growth rate of U.S.
market demand has continued to decline. Should such trend worsen, it could have
a material adverse effect on the Company's business, financial condition and
results of operations.
The Company believes that its manufacturing process technology, lens
designs and marketing strategies differentiate it from its leading competitors.
However, there can be no assurance that competitors will not adopt technologies,
lens designs or marketing strategies that are similar or superior to those used
by the Company. Any such action by competitors could have a material adverse
effect on the Company's business, results of operations and financial condition.
In this regard, Cooper's acquisition of Aspect Vision Care Ltd. in December 1997
has given them the ability to market in the U.S. a new line of contact lenses
for weekly and monthly replacement regimens that utilize a manufacturing molding
process technology that is based in part on technology also licensed to and used
by the Company. Additionally, Johnson & Johnson has recently introduced a new
lens marketed for weekly replacement, referred to as Acuvue 2, which Johnson &
Johnson claims has superior comfort and handling than their original Acuvue
lens, and Bausch & Lomb has introduced a weekly disposable lens.
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<PAGE> 16
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 LASIK or laser in situ
keratomileusis). If surgical refractive procedures become increasingly accepted
as an effective and safe technique for permanent vision correction, they could
reduce the demand for contact lenses. Accordingly, there can be no assurance
that these procedures, or other alternative technologies that may be developed
in the future, will not cause a substantial decline in the number of contact
lens wearers and thus have a material adverse effect on the Company's business,
financial condition and results of operations.
Manufacturing Capacity Constraints; Risks Associated with Expansion and
Automation of Manufacturing Operations. The Company's success will depend upon
its ability to increase its production volume on a timely basis while
maintaining product quality and lowering per unit production costs.
Manufacturers often encounter difficulties in increasing production volumes,
including problems involving delays, quality control and shortages of qualified
personnel. The Company is currently operating close to, or in certain cases at,
capacity, and while incremental increases in capacity are implemented by the
Company in the ordinary course, the Company expects to need more significant
increases in capacity in the foreseeable future.
To this end, the Company continues to add new, highly automated
production technology at its facilities in the United Kingdom and Puerto Rico to
increase its manufacturing capacity and reduce its per unit manufacturing costs.
However, there can be no assurance that the Company will be able to implement
this automated technology on a timely basis or that the automated technology
will operate as efficiently as expected. The Company has encountered delays in
implementing the initial lines of this automated technology and there can be no
assurance that it will not encounter significant delays and difficulties in the
future as the Company intends to add additional lines. For example, suppliers
could miss their equipment delivery schedules, new automated equipment could
improve less rapidly than expected, if at all, or the equipment or processes
could require longer design time than anticipated, or redesigning after
installation. The delays in implementing the first automated line, have caused
the Company difficulties in meeting customer demand in certain of its products,
which resulted in backlogs 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 2000, it will
invest approximately $30.0 to $35.0 million in capital expenditures on automated
production equipment in the United Kingdom and Puerto Rico facilities and
expects to continue to invest in additional automated production lines after
this period. The Company intends to finance these capital expenditures with net
cash provided by operating activities, existing cash balances and borrowings
under its credit facilities.
The Company relocated its Puerto Rican manufacturing operations to a
substantially larger new facility that has been constructed to the Company's
specifications and leased to the Company by the Puerto Rico Industrial
Development Company. Relocation costs will be expensed as incurred. The facility
has been inspected by the U.S. Food and Drug Administration and approval has
been obtained to manufacture extended wear lenses. The Company'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, or in equipping the new
manufacturing facility in Puerto Rico. Any such difficulties or delays would
limit the Company's ability to compete in the weekly and daily disposable
replacement regimen markets and, accordingly, could have a material adverse
effect on the Company's business, financial condition and results of operations.
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Dependence on Key Personnel; Recent Resignations. The Company is
dependent upon a limited number of key management and technical personnel. The
Company's future success will depend in part upon its ability to attract and
retain highly qualified personnel. The Company competes for such personnel with
other companies, academic institutions, government entities and other
organizations. There can be no assurance that the Company will be successful in
retaining or hiring qualified personnel.
The uncertainty related to the Company's Proposed Merger with Wesley
Jessen had made it more difficult for the Company to hire employees and resulted
in the loss of some key personnel. Norwick Goodspeed, the Company's President
and Chief Executive Officer, and Greg Lichtwardt, the Company's Chief Financial
Officer, left the Company during the second quarter of this year. John Fruth,
the Company's founder, Chairman of the Board and ex-Chief Executive Officer,
replaced Mr. Goodspeed, and Ed Cummins, a member of the Company's Board of
Directors and ex-Chief Financial Officer of Allergan, Inc., replaced Mr.
Lichtwardt as Interim Chief Financial Officer for a limited period. Additional
key personnel who have left include John Lilly, Vice President of
Manufacturing, and Daniel Kunst, Vice President of Sales and Marketing. The loss
of any members of the Company's current management team, especially John Fruth,
or other key employees, could have a material adverse affect on the Company's
business, financial condition and results of operations.
Risk of Trade Practice Litigation; Changes in Trade Practices. In
recent years the contact lens industry has been the subject of a number of class
action and government lawsuits and government investigations. 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.
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In addition to the foregoing lawsuits, there is substantial federal and
state governmental regulation related to the prescribing of contact lenses.
These regulations relate to who is permitted to prescribe and fit contact
lenses, the prescriber's obligation to provide prescriptions to its patients,
the length of time a prescription is valid, the ability or obligation of
prescribers to prescribe lenses by brand rather than by generic equivalent or
specification, and other matters. Although these regulations primarily affect
contact lens prescribers, and not manufacturers or distributors of lenses such
as the Company, changes in these regulations, or their interpretation or
enforcement, could adversely affect the effectiveness of the Company's marketing
strategy to eyecare practitioners, most notably the effectiveness of the
Company's channel-specific and private label branding strategies. Additionally,
given the Company's strategic emphasis on focusing its marketing efforts on
eyecare practitioners, the Company may be more vulnerable than its competitors
to changes in current trade practices. Finally, although cost controls or other
requirements imposed by third party health-care payors such as insurers and
health maintenance organizations have not historically had a significant effect
on contact lens prices or distribution practices, this could change in the
future, and could adversely affect the Company's business, financial condition
and results of operations. Adverse regulatory or other decisions affecting
eyecare practitioners, or material changes in the selling and prescribing
practices for contact lenses, could have a material adverse effect on the
Company's business, financial condition and results of operations.
Fluctuations in Operating Results; Decreasing Average Sales Prices. The
Company's quarterly operating results have varied significantly in the past and
are likely to vary significantly in the future based upon a number of factors.
The Company's quarterly results can be affected significantly by pricing changes
by the Company or its competitors, the Company's ability to increase
manufacturing capacity efficiently and to reduce per unit manufacturing costs,
the time and costs involved in expanding existing distribution channels and
establishing new distribution channels, discretionary marketing and promotional
expenditures such as cooperative merchandising allowances paid to the Company's
customers, timing of the introduction of new products by the Company or its
competitors, inventory shortages, timing of regulatory approvals and other
factors. The Company's customers generally do not have long-term commitments to
purchase products and products are generally shipped as orders are received. A
significant portion of the Company's operating expenses is relatively fixed, and
planned expenditures are based on sales forecasts. If sales levels fall below
expectations, operating results could be materially adversely affected. In
particular, the affect on net income may be proportionately greater than net
sales because only a portion of the Company's expenses varies with net sales in
the short term. In response to competition, the Company may reduce prices,
increase cooperative merchandising allowances or otherwise increase marketing
expenditures, and such responses may adversely affect the Company's business,
financial condition and results of operations. Due to the foregoing factors, the
Company believes that period-to-period comparisons of its results of operations
are not necessarily meaningful and should not be relied upon as indications of
future performance. Further, it is likely that in some future quarter the
Company's net sales or operating results will be below the expectations of
public market analysts and investors. In such event, the price of the Company's
Common Stock would likely be materially adversely affected.
The Company expects that the overall average selling price that it
realizes across its products will decline over time because of (i) shifts in the
Company's product mix from lenses marketed for annual replacement regimens to
lenses marketed for daily and weekly disposable replacement regimens, (ii)
increases in products sold internationally through distributors at prices lower
than direct sales prices, and (iii) competitive pressures.
The Company does not expect 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 maintain,
or improve, its gross margins.
Risks Relating to International Operations; Need to Increase Sales in
International Markets. In 1998, 1999 and the first nine months of 2000, the
Company's international sales represented approximately 21%, 27% and 31%,
respectively, of the Company's total 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
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foreign consumer preferences, changes in currency exchange rates, longer
accounts receivable payment cycles, and foreign tax laws or tariffs. These
factors, among others, could materially adversely affect the Company's ability
to sell its products in international markets.
A portion of the Company's sales and expenditures are collected or paid
in currencies other than the U.S. dollar. Therefore, the Company's operating
results are affected by fluctuations in foreign currency exchange rates. The
Company does not generally hedge its currency risk, and accordingly there can be
no assurance that in the future exchange rate movements will not have a material
adverse effect on the Company's sales, gross profit, operating expenses or
foreign currency exchange gains and losses.
The Company's continued growth is dependent on the expansion of
international sales of its products. This expansion will involve operations in
markets with which the Company is not experienced and there can be no assurance
that the Company will be successful in capturing a significant portion of these
markets for contact lenses. In many of these markets the Company is dependent on
the efforts of distributors, and there can be no assurance that the distributors
will be successful or that they will maintain their relationship with the
Company. In the third quarter, Bausch & Lomb, Inc announced that they intended
to acquire a distributor in Germany that the Company currently uses to market
its products. Hence, the Company will need to seek other means for distribution
in that market. The failure of the Company to increase its international sales
substantially could have a material adverse effect on the Company's business,
financial condition and results of operations.
Uncertain Ability to Manage Growth; Risks Associated with Implementation
of New Management Information Systems. The Company has experienced rapid growth
in recent years. Continued rapid growth may place significant strain on
management, operational infrastructure, working capital and financial and
management control systems. Growth in the Company's business has required, and
is expected to continue to require, significant personnel management and other
infrastructure resources. The Company's ability to manage any future growth
effectively will require it to attract, train, motivate and manage new employees
successfully, to integrate new employees into its overall operations and to
continue to improve its operational, financial and management information
systems.
Risk of New Products and Technological Change. The Company has not
historically allocated substantial resources to new product development, but
rather has leveraged or licensed the technology developments of others. Recently
the Company has begun investing more in new product development, however in
general the Company's expenditures in this area are significantly below those of
its competitors. There can be no assurance that the Company's investments in new
product development will be successful. There can also be no assurance that the
Company's competitors do not have or will not develop new products and
technologies that could render the Company's products less competitive. For
example, Bausch & Lomb has received FDA approval to market a contact lens based
on a new polymer for seven day continuous wear, and it has been reported that it
will seek approval for longer continuous wear. It has also been reported that
Ciba has a similar lens. Additionally, Bausch & Lomb launched a toric lens
marketed for weekly disposal in 1999 and Johnson & Johnson has recently launched
a toric lens marketed for weekly disposal. There can be no assurance that the
Company will be able to develop its own technology or utilize technology
developed by third parties in order to compete in these product areas. Any
failure by the Company to stay current with its competitors with regard to new
product offerings and technological changes and to offer products that provide
performance that is at least comparable to competing products could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Risks Associated with Interruption of Manufacturing Operations. The
Company manufactures substantially all of the products it sells. As a result,
any prolonged disruption in the operations of the Company's manufacturing
facilities, whether due to technical or labor difficulties, destruction of or
damage to any facility or other reasons, could have a material adverse effect on
the Company's business, financial condition and results of operations. In this
regard, one of the Company's principal two manufacturing facilities is located
in Puerto Rico and is thus exposed to the risks of damage from hurricanes. If
this facility were to be out of production for an extended period, the Company's
business,
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financial condition and results of operation would be materially adversely
affected.
Risks of Regulatory Action; Product Liability; Product Recall. The
Company's products and manufacturing facilities are subject to stringent
regulation by the FDA and by various governmental agencies for the states and
localities in which the Company's products are manufactured and/or sold, as well
as by governmental agencies in certain foreign countries in which the Company's
products are manufactured and/or sold. Failure to comply with such regulations
could result in delays in product introduction or manufacturing, fines,
withdrawals of regulatory clearances or approvals, product recalls or other
actions that could harm the Company. In addition, the Company has in the past
been and continues to be, subject to occasional product liability claims and
lawsuits. The Company also undertakes product recalls from time to time, and
while such recalls have not historically had a material adverse effect on the
Company, there can be no assurance that such will not occur in the future.
Influence by Existing Stockholders. As of October 10, 2000, officers,
directors and related principal stockholders of the Company, in the aggregate,
beneficially own approximately 23.8% 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, or facilitating a change in control that other stockholders might not
desire.
Certain Anti-Takeover Provisions. The Company's Board of Directors has
the authority to issue up to 4,000,000 shares of Preferred Stock and to
determine the price, rights, preferences, privileges and restrictions, including
voting rights, of those shares without any further vote or action by the
stockholders. The rights of the holders of Common Stock are subject to, and may
be adversely affected by, the rights of the holders of any Preferred Stock that
may be issued in the future. The issuance of Preferred Stock, while providing
flexibility in connection with possible financing or acquisitions or other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of the
Company. The Company has no current plans to issue shares of Preferred Stock.
The Company's Bylaws and indemnity agreements provide that the Company will
indemnify officers and directors against losses they may incur in legal
proceedings resulting from their service to the Company. Further, the Company's
charter documents contain a provision eliminating the ability of the Company's
stockholders to take action by written consent. This provision is designed to
reduce the vulnerability of the Company to an unsolicited acquisition proposal
and to render the use of stockholder written consents unavailable as a tactic in
a proxy fight. However, such provision could have the effect of discouraging
others from making tender offers for the Company's shares, thereby inhibiting
increases in the market price of the Company's shares that could result from
actual or rumored takeover attempts. Such provision also may have the effect of
preventing changes in the management of the Company. In addition, Section 203 of
the Delaware General Corporation Law, to which the Company is subject, restricts
certain business combinations with any "interested stockholder" as defined by
such statute. This statute may delay, defer or prevent a change in control of
the Company.
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ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
The Company has long-term debt outstanding, which is carried at cost,
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. As of September 30, 2000, the current
outstanding term loan equaled $2.1 million and is payable in quarterly
installments of $300,000, with any remaining balance to be paid on July 31,
2002. The commencement of the loan repayments will have an impact on future
earnings and cash flows and will reduce the Company's exposure to changes in
interest rates as the loan balance is reduced.
Unless otherwise noted above, there has been no additional material
change in the Company's assessment of its sensitivity to market risk since its
presentation set forth in Item 7A, "Quantitative and Qualitative Disclosures
About Market Risk" in its Annual Report on Form 10-K for the fiscal year ended
December 31, 1999.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed herewith:
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------ -------------
<S> <C>
11.01 - Statement regarding computation of net income per share
27.01 - Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
The Company did not file a report on Form 8-K during the quarter ended
September 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OCULAR SCIENCES, INC.
(Registrant)
Date: November 13, 2000 /s/ Edgar J. Cummins
----------------------------------
Edgar J. Cummins
Interim Chief Financial Officer
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number
------
<S> <C>
11.01 - Statement regarding computation of net income per share
27.01 - Financial Data Schedule
</TABLE>
