10-Q 1 f67282e10-q.txt FORM 10-Q FOR QUARTERLY PERIOD ENDED SEPT.30, 2000 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. 2 OCULAR SCIENCES, INC. INDEX
Page ---- 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
2 3 PART I - FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS OCULAR SCIENCES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS - (UNAUDITED) (In thousands, except share data)
September 30, December 31, 2000 1999 ------------- ------------ 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 ========= =========
See accompanying notes to condensed consolidated financial statements. 3 4 OCULAR SCIENCES, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME - (UNAUDITED) (In thousands, except share and per share data)
Three months ended Nine months ended September 30, September 30, ------------------------------ ------------------------------ 2000 1999 2000 1999 ------------ ------------ ------------ ------------ 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 ============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements. 4 5 OCULAR SCIENCES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED) (In thousands)
Nine months ended September 30, ------------------------- 2000 1999 -------- -------- 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 ======== ========
See accompanying notes to condensed consolidated financial statements. 5 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):
September 30, December 31, 2000 1999 ------------- ------------ Raw materials $ 3,407 $ 3,906 Work in process 3,243 1,344 Finished goods 14,612 10,478 ------- ------- $21,262 $15,728 ======= =======
NOTE 3 - PREPAID EXPENSES AND OTHER CURRENT ASSETS AND ACCRUED LIABILITIES Prepaid expenses and other current assets consisted of the following (in thousands):
September 30, December 31, 2000 1999 ------------- ------------ 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 ======= =======
6 7 Accrued liabilities consisted of the following (in thousands):
September 30, December 31, 2000 1999 ------------- ------------ 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 ======= =======
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 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
Three Months Ended September 30, --------------------------------- 2000 1999 % Change ----------- ----------- -------- 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% =========== ===========
Nine Months Ended September 30, ----------------------------------- 2000 1999 % Change ------------- ------------ -------- 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% ============ ============
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 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
Three Months Ended September 30, ----------------------------------- 2000 1999 % Change ------------- ------------- -------- Gross profit $ 28,130,000 $ 31,554,000 -10.9% As a percentage of net sales 58.9% 63.8%
Nine Months Ended September 30, ----------------------------------- 2000 1999 % Change ------------- ------------- -------- Gross profit $ 79,237,000 $ 84,155,000 -5.8% As a percentage of net sales 59.1% 64.5%
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 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
Three Months Ended September 30, ----------------------------------- 2000 1999 % Change ------------- ------------- -------- Selling and marketing expenses $ 12,659,000 $ 12,139,000 4.3% As a percentage of net sales 26.5% 24.5%
Nine Months Ended September 30, ----------------------------------- 2000 1999 % Change ------------- ------------- -------- Selling and marketing expenses $ 35,175,000 $ 32,758,000 7.4% As a percentage of net sales 26.2% 25.1%
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 11 General and Administrative Expenses
Three Months Ended September 30, ----------------------------------- 2000 1999 % Change ------------- ------------- -------- General and administrative expenses $ 5,226,000 $ 5,391,000 (3.1%) As a percentage of net sales 10.9% 10.9%
Nine Months Ended September 30, ----------------------------------- 2000 1999 % Change ------------- ------------- -------- General and administrative expenses $ 16,057,000 $ 15,511,000 3.5% As a percentage of net sales 12.0% 11.9%
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
Three Months Ended September 30, ----------------------------------- 2000 1999 % Change ------------- ------------- -------- Research and development expenses $ 1,297,000 $ 1,223,000 6.1% As a percentage of net sales 2.7% 2.5%
Nine Months Ended September 30, ----------------------------------- 2000 1999 % Change ------------- ------------- -------- Research and development expenses $ 3,288,000 $ 2,641,000 24.5% As a percentage of net sales 2.5% 2.0%
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 12 Interest and Other Income, Net
Three Months Ended September 30, ----------------------------------- 2000 1999 % Change ------------- ------------- -------- Interest and other income, net $ 780,000 $ 736,000 6.0% As a percentage of net sales 1.6% 1.5%
Nine Months Ended September 30, ----------------------------------- 2000 1999 % Change ------------- ------------- -------- Interest and other income, net $ 22,492,000 $ 1,497,000 1402.5% As a percentage of net sales 16.8% 1.1%
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
Three Months Ended September 30, ----------------------------------- 2000 1999 % Change ------------- ------------- -------- Income taxes $2,238,000 $3,113,000 (28.1%) Effective tax rate 23.0% 23.0%
Nine Months Ended September 30, ----------------------------------- 2000 1999 % Change ------------- ------------- -------- Income taxes $15,109,000 $8,349,000 81.0% Effective tax rate 32.0% 24.0%
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 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. 13 14 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. 14 15 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. 15 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. 16 17 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. 17 18 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 18 19 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, 19 20 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. 20 21 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:
Exhibit Number Exhibit Title ------ ------------- 11.01 - Statement regarding computation of net income per share 27.01 - Financial Data Schedule
(b) Reports on Form 8-K The Company did not file a report on Form 8-K during the quarter ended September 30, 2000. 21 22 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 22 23 EXHIBIT INDEX
Exhibit Number ------ 11.01 - Statement regarding computation of net income per share 27.01 - Financial Data Schedule