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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
475 ECCLES AVENUE
SOUTH SAN FRANCISCO, CALIFORNIA 94080
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (650) 583-1400
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $0.001 PER SHARE
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the common stock held by non-affiliates of
the Registrant, based upon the closing sale price of the Registrant's Common
Stock on March 1, 2001 ($17.375) as reported on the Nasdaq National Market was
$405,050,951.88.
As of March 1, 2001, Registrant had outstanding 23,312,285 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference the Registrant's Proxy Statement for its
Annual Meeting of Stockholders which the Registrant anticipates will be filed no
later than 120 days after the end of its fiscal year pursuant to Regulation 14A.
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This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
and Section 27A of the Securities Act of 1933, as amended, such as statements
regarding the Company's future performance and plans and results of operations.
You can identify forward-looking statements by the use of forward-looking
terminology such as "believes," "expects," "may," "will," "should," "seeks,"
"approximately," "intends," "plans," "pro forma," "estimates" or "anticipates"
or the negative of these words and phrases or similar words or phrases. You can
also identify forward-looking statements by discussions of strategy, plans or
intentions. Forward-looking statements involve numerous risks and uncertainties
and you should not rely upon them as predictions of future events. There is no
assurance that the events or circumstances reflected in forward-looking
statements will be achieved or will occur. Forward-looking statements are
necessarily dependent on assumptions, data, or methods that may be incorrect or
imprecise and the Company may not be able to realize them. The following factors
that could cause actual results and future events to differ materially from
those set forth or contemplated in the forward-looking statements include risks
associated with the integration of the Ocular Sciences and Essilor Contact Lens
businesses, the impact of competitive products and pricing, product demand both
domestically and overseas, higher than expected sales force turnover, slower
then expected training periods for new sales force hires, extended manufacturing
difficulties, supply interruptions, currency fluctuations and the other risks
discussed in the sections entitled "Item 1, Business -- Risk Factors," "Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in this Annual Report on Form 10-K. The Company
cautions you not to place undue reliance on forward-looking statements, which
reflect the Company's analysis only and speak as of the date of this report or
as of the dates indicated in the statements. Further, the Company undertakes no
obligation to revise any of these forward-looking statements.
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PART I
ITEM 1. BUSINESS
Ocular Sciences, Inc. (the "Company") is a growing manufacturer and
marketer of soft contact lenses. The Company manufactures a broad line of soft
contact lenses marketed for annual and disposable replacement regimens. The
Company believes that its lens designs provide wearers with a higher level of
comfort and greater ease of handling than those of its leading competitors. The
Company's manufacturing technologies permit consistent, cost-effective
reproduction of these designs, allowing the Company to offer its lenses at
competitive prices. In addition, the Company has implemented marketing
strategies designed to assist eyecare practitioners, both in independent
practice and in retail chains, in retaining their patients and monitoring their
patients' ocular health. These strategies provide a significant incentive for
practitioners to prescribe the Company's lenses. Furthermore, the Company has
continuously focused on lowering its non-manufacturing costs, or
"cost-to-serve," enabling it to increase its profitability and its flexibility
to reduce prices. To minimize its cost-to-serve, the Company utilizes a
telemarketing sales force supplemented by an outside sales force in key United
States markets and directs its marketing efforts toward eyecare practitioners
rather than consumers.
The Company believes that practitioners can increase their patient
retention and provide better ongoing patient care by providing
competitively-priced, high-quality products that are differentiated by brand
from those offered by competing distribution channels. Accordingly, the Company
has successfully implemented a strategy to address the needs of eyecare
practitioners. The Company markets its lenses solely to eyecare practitioners,
both in private practice and in retail optical chains, rather than to consumers.
The Company believes that focusing on the eyecare practitioner, who
significantly influences the selection of the brand of contact lenses worn by
the patient, is critical to its ability to market contact lenses successfully.
The Company does not sell to mail-order companies, pharmacies or other
distribution channels that do not provide the regular eye examinations necessary
to maintain overall ocular health.
Over the past six years, the Company has established itself as a leader in
the spherical annual replacement segment of the United States market. With the
introduction of lenses marketed for weekly disposable replacement regimens in
1993, the company's market share and unit sales steadily increased through 1999.
In 2000, the Company's market share eroded slightly due to the loss of trained
sales personnel whose jobs would be eliminated in the Wesley Jessen merger.
Since its introduction, unit sales of lenses marketed for disposable replacement
regimens have increased significantly each year and represents the dominant
proportion of the Company's overall unit sales. Over the same period, the
overall average selling price for all of the Company's lenses has declined, but
has been somewhat offset by lower unit production costs gained through improved
manufacturing and packaging processes. Annual revenues continue to increase year
to year, primarily from the Company's international sales efforts, while net
income continues to improve each year, most recently, with the Wesley Jessen
termination fee representing most of the increased net income in 2000.
INDUSTRY OVERVIEW
The soft contact lens industry is characterized by increasing lens
consumption, declining unit prices and intense competition among the eyecare
practitioners and retail chains that fit, prescribe and sell contact lenses.
Industry analysts estimate that approximately 50% of the world's population
needs some type of vision correction. According to estimates by industry
analysts, in the United States alone, over 138 million people require some form
of vision correction and approximately 28 million people, or an estimated 20% of
those requiring vision correction, wear contact lenses, making the United States
the world's largest market for contact lenses. While contact lenses have been
available for decades, the advent of soft lenses in 1971 changed the industry
substantially and stimulated significant penetration of the eyeglass market by
reducing the discomfort of earlier rigid lenses.
The first soft contact lenses were generally prescribed for replacement
every one to two years. Although they were significantly more comfortable than
hard contact lenses, they required an extensive cleaning routine.
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Even with this cleaning program, these lenses often became progressively less
comfortable to wear over time. Additionally, the long replacement schedule of
the lenses increased the likelihood of ocular health problems if the wearer did
not follow the required cleaning program. In response to these and other
factors, soft contact lenses marketed for disposable replacement regimens were
introduced in 1988. These replacement regimens, in which lenses are to be
replaced daily, weekly or monthly, have spurred a rapid increase in contact lens
consumption in the United States. While contact lenses marketed for disposable
replacement regimens are often made from the same or similar polymers and can
have the same or similar designs as lenses marketed for annual replacement
regimens, they are generally produced at substantially higher volumes, sold in
larger quantities and packaged in less expensive materials. These factors allow
the lenses to be sold at substantially reduced unit prices, making more frequent
lens replacement economically feasible for the consumer.
Largely as a result of this increased frequency of lens replacement, the
number of soft contact lenses sold in the United States has increased at an
estimated compound annual growth rate of approximately 8% from 1996 through
2000. This increase in unit sales has provided increased manufacturing economies
of scale that, together with increased competition in distribution channels, has
led to significant reductions in average retail prices per unit. The Company
believes that this, in turn, has led to further increases in lens consumption.
Despite the decline in per unit prices, as wearers switch to more frequent
replacement regimens, their annual expenditures for lenses increases. The
Company believes that the United States market for contact lenses will continue
to grow, although at a slower rate, as wearers continue to shift towards more
frequent lens replacement regimens. In addition, according to industry studies,
while the United States represents a large portion of the worldwide contact lens
unit sales, market growth rates outside of the United States now exceed those in
the United States. The Company believes that international contact lens sales
will continue to grow as low-priced contact lenses become increasingly available
in many international markets.
Most contact lenses are purchased from optometrists, either in private
practice or in retail chains, and from ophthalmologists in private practice. The
typical eyecare practitioner in both the private practice and retail chain
channels depends heavily on sales of products, such as contact lenses and
eyeglasses. The Company estimates the typical optometric practice or retail
optical chain realizes approximately two-thirds of its revenue from sales of
corrective products, such as contact lenses and eyeglasses, and approximately
one-third of its revenue from professional services such as eye examinations.
Since the need for vision correction is chronic, repeat sales of contact lenses
can provide the practitioner with a recurring, predictable revenue base.
While the introduction of disposable lens replacement regimens has led to
growth in the contact lens market, it has placed additional competitive pressure
on practitioners. Traditionally, patients purchased new lenses annually in
connection with their eye examinations. Today, a patient is still required to
see an eyecare practitioner initially to be fitted for contact lenses and to
receive a prescription. After the initial fitting, however, while the patient
may see the practitioner annually to monitor eye health, he or she may purchase
new contact lenses to refill the prescription three or four or even more times
per year. Most patients select contact lenses based on the recommendation of
their eyecare practitioners. Accordingly, practitioners have influence on the
brands of contact lenses worn by their patients. In addition, because contact
lens prescriptions are generally brand-specific, patients typically continue to
purchase the same brand for their prescription refills. However, the prescribing
practitioner risks losing the recurring sales represented by prescription
refills as nationally advertised lens brands are available through virtually
every possible channel of distribution, including mail-order and e-commerce
companies and pharmacies.
The Company believes that practitioners can increase their patient
retention and provide better ongoing patient care by providing
competitively-priced, high-quality products that are differentiated by brand
from those offered by competing distribution channels. As a result, the Company
believes that there exist significant opportunities for manufacturers of contact
lenses that can effectively address these needs. Moreover, the Company believes
that the increased frequency of lens purchases resulting from the shift to ever
shorter disposable replacement regimens can provide significant recurring
revenues for manufacturers that are able to produce and distribute large
quantities of high-quality lenses on a cost-effective basis.
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STRATEGY
The Company has designed and implemented a business strategy based on the
needs of eyecare practitioners. The principal elements of the Company's strategy
include:
Produce Superior Performing Products. The Company believes that its
advanced dry cast molding process and sophisticated lens designs increase
wearers' comfort and improve shape retention of lenses, making them easier
for wearers to handle. In addition, the Company's lenses are designed and
manufactured to provide fitting characteristics similar to competitors'
lenses. In general, this interchangeability enables the practitioner to
switch a patient to the Company's lenses without extensive refitting. These
advantages enable the Company to market its lenses to eyecare practitioners
for both existing, as well as new, contact lens wearers.
Emphasize Low-Cost, High Volume, Efficient Manufacturing. With the
growth of the high-volume disposable market segment, low-cost, high volume,
scaleable manufacturing has become increasingly important. The Company's
dry cast molding technology allows it to manufacture high-quality lenses
efficiently. As a result, the Company has been able to reduce its per unit
production costs while increasing its production volumes. The Company
continues to implement highly automated production lines in its United
Kingdom manufacturing facility and an expanded Puerto Rican manufacturing
facility. The Company believes that the increased unit volumes resulting
from the growing disposable replacement market and this continued
investment in automation and capacity will enable it to further reduce per
unit production costs and increase production volumes.
Employ Brand Segmentation by Channel. The high-volume use of lenses
marketed for disposable replacement regimens has resulted in increased
mass-market advertising of competing products and intensified competition
across distribution channels. Unlike its larger competitors, which promote
nationally advertised consumer brands across multiple distribution
channels, the Company advertises and promotes its lenses marketed for
disposable replacement regimens under specific brand names for the private
practice channel and other brand names for the retail chain channel. The
Company also provides private label brands for its larger customers.
Branding by distribution channel creates brand exclusivity and allows
practitioners to differentiate lenses sold by them from those sold through
competing channels, providing them with a greater ability to retain their
patients' prescription refill business. The Company believes that, as a
result, its channel-specific branding has become increasingly valuable to
eyecare practitioners. By promoting the repeat purchase of lenses from the
prescribing practitioner, the Company believes that its marketing
strategies increase patient satisfaction and thereby encourage long-term
loyalty to its products, while also motivating practitioners to prescribe
its lenses.
Minimize Cost-to-Serve. A substantial portion of the Company's costs
consists of the costs associated with processing orders and selling and
marketing its products. The Company focuses on lowering these
non-manufacturing costs, or "cost-to-serve," in order to increase its
profitability and its flexibility to reduce prices. The Company's primary
means of minimizing cost-to-serve are its continued use of telemarketing,
supplemented by an outside direct sales organization in key United States
markets and advertising targeted to practitioners rather than to consumers.
The Company believes this strategy lowers the cost of an average sales call
versus that of its competitors who rely solely on field sales
representatives. Rather than market products to consumers through expensive
mass-media campaigns, the Company further controls its operating expenses
by directing its marketing solely to the eyecare practitioners who
prescribe contact lenses. In addition, the Company continues to invest in
increased automation in its distribution operations in order to maintain
its low cost-to-serve.
Expand Internationally. The Company believes that many international
markets for soft contact lenses will grow at faster rates than the United
States market, driven largely by increased availability of low-priced
lenses marketed for disposable replacement regimens in developed markets
such as Europe, Japan and Canada and by increased disposable income in
emerging markets in Asia and Latin America.
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However, many markets outside the United States do not have the level of
demand necessary for local manufacturers to achieve the economies of scale
required for low-cost lens production. The Company's primary international
growth strategy has been to establish strategic distribution and marketing
relationships with regional optical companies, such as Seiko Contactlens,
Inc. ("Seiko") in Japan, to capitalize on their existing market presence,
customer relationships and local infrastructure. In February 2001, the
Company announced it had entered into a definitive agreement to purchase
the contact lens business of Essilor International (Compagnie Generale
d'Optique) S.A. providing enhanced sales and distribution channels in
Europe, new product lines and additional research and development
expertise. The Company has also established distribution relationships with
other soft contact lens distributors in a number of other countries
throughout the world.
Focus Marketing on Eyecare Practitioners. The Company's sales and
marketing efforts are directed at eyecare practitioners because they can
influence the brand of lenses the patient purchases. The Company advertises
and promotes its products solely to practitioners. In addition, the Company
does not sell its lenses to mail-order or e-commerce companies, pharmacies
and other distribution channels that do not provide the eyecare services
necessary to confirm lens fit and monitor ocular health. By bar-coding each
unit shipped for disposable replacement regimens, the Company can identify
diversion of its lenses to non-eyecare practitioner distribution channels.
The Company structures its branding and marketing strategies so that the
patient will be more likely to refill prescriptions from the practitioner
or retail chain from whom the patient received the initial prescription.
The Company believes this system assists eyecare practitioners to retain
patient reorders and improves practitioners' ability to monitor their
patients' ongoing ocular health, thereby providing a significant incentive
for practitioners to prescribe the Company's lenses.
PRODUCTS
The Company manufactures a broad line of soft contact lenses that it
believes provide superior performance to other leading products at competitive
prices. Soft contact lens performance is defined primarily by comfort (how the
lens feels on the eye), handling (ease of placement and removal), acuity of
vision and physiological response. These qualities, in turn, are determined
primarily by lens design and the manufacturing process. The Company's lenses
incorporate sophisticated designs, including extremely thin edges, a
lenticulated carrier and a low-edge apex, that provide a high level of comfort,
enhanced shape retention and ease of handling. The Company's dry cast molding
process further improves handling and comfort by consistently and accurately
reproducing these designs. In addition, the Company's lenses are designed and
manufactured to provide fitting characteristics similar to those of competitors'
lenses. In general, these characteristics enable the practitioner to switch a
patient to the Company's lenses without extensive refitting time. The Company
believes that this, together with its lenses' performance and price, allows
practitioners to easily prescribe the Company's lenses to existing, as well as
new, contact lens wearers.
The Company's contact lenses are made from flexible polymers containing
38%, 55% or 60% water. The Company offers different brands for different
replacement regimens, from daily, weekly, monthly and annual replacement
regimes. A wearer's replacement regimen is generally based on the recommendation
of the patient's eyecare practitioner, who typically prescribes a lens brand
targeted to that regimen and who advises the wearer on the appropriate lens care
procedures for that regimen. However, the wearer may actually replace their
lenses on a more or less frequent basis. Given the basic functional similarity
of lenses marketed for different replacement regimens, many of the Company's
lenses marketed for annual and disposable replacement regimens are made from the
same or similar polymers and have the same or similar design specifications.
Most of the Company's lenses contain a light blue bulk-applied visibility tint
that enables the wearer to see and handle the lenses more easily, although some
of the Company's more expensive lenses marketed for annual replacement contain a
more expensive, individually applied masked tint that improves handling and is
less noticeable in the eye. Some of the Company's lenses are also untinted. In
addition, most of the Company's lenses marketed in the United States and Europe
contain an ultraviolet absorber, which was introduced in the United States in
1999. With different replacement regimens, the Company offers lenses having
different design parameters, diameters and base curves to enable practitioners
to fit their patients
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better. The Company's lenses marketed for disposable and annual replacement
regimens are generally packaged in different quantities and priced differently.
See "-- Risk Factors -- Risk of Trade Practice Litigation; Changes in Trade
Practices."
Within different replacement regimens, the Company offers daily-wear
lenses, to be removed, cleaned and disinfected each night, and extended-wear
lenses that may be worn continuously, night and day, for up to seven days. In
addition, within each replacement regimen, the Company offers lenses having
different design parameters, diameters and base curves to enable practitioners
to fit their patients better.
Disposable Replacement Regimens
Lenses marketed for disposable replacement regimens accounted for 95.7% of
the Company's unit volume in 2000.
Weekly Replacement Regimens. The Company entered the growing weekly
disposable segment of the soft contact lens market with a 38% water content lens
in September 1993. The Company's introduction of a 55% water content lens in the
first quarter of 1995 provided a product directly competitive with one of the
market leaders, Acuvue. These lenses are marketed for replacement every one to
two weeks. The Company believes that its 55% water lenses marketed for weekly
replacement can provide handling and comfort superior to that provided by
Acuvue, at a competitive price. The design and water content of the 55% water
lens permit a high level of oxygen transmissibility and provide increased
comfort for overnight wear. A May 1998 independent study comparing the Company's
55% water lens marketed for weekly replacement to a wide variety of competing
contact lens brands, including Acuvue, found that a substantial majority of the
289 patients studied preferred the Company's lens for ease of use and comfort.
This study reported that overall, 86% of these patients preferred the Company's
lens over their habitual lens. In mid-1999, Johnson & Johnson introduced the
Acuvue 2 lens (which is marketed in addition to the Acuvue lens), a 20% thicker
lens which exhibits improved handling characteristics as compared to the Acuvue
lens but also results in a 20% reduction in oxygen transmission to the cornea.
The Company believes that its lenses marketed for weekly replacement regimens
have demonstrated strong market acceptance, gaining United States market share
steadily since their introduction and reaching approximately 17% of total unit
sales in the weekly disposable market segment in the United States by the fourth
quarter of 2000. The Company sells its lenses marketed for weekly disposal to
independent practitioners under the Hydron Biomedics and certain other private
label brands and to retail chains under the UltraFlex 7/14 brand and private
label brands. The Company packages its lenses for weekly replacement in boxes,
each containing six identical blister-packed lenses. In 2000, the Company
introduced the Hydrogenics 60 UV, a new lens marketed for weekly replacement
regimens, which will be sold only to independent practitioners. The Company
anticipates this new product will further enhance its branding strategy by
segmenting the distribution channels with dedicated products.
Monthly Replacement Regimens (Planned Replacement Lenses). The Company's
lenses marketed for monthly replacement regimens are sold under the Hydron
ProActive 55, Edge III ProActive, UltraFlex, SmartChoice and private label
brands. These lenses are marketed for replacement every one to three months.
This replacement regimen provides a lower cost alternative to weekly
replacement.
Daily Replacement Regimens. In 1999, the Company introduced a low-priced
lens marketed for daily replacement in Japan and Europe. The Company believes
that there may be substantial demand for the convenience of a lens for
single-day wear. Certain of the Company's competitors, including the Vistakon
division of Johnson & Johnson ("Johnson & Johnson"), the Ciba Vision division of
Novartis ("Ciba") and Bausch & Lomb, Inc. ("Bausch & Lomb"), have introduced,
and the Company understands that certain others plan to introduce, lower-priced
lenses marketed for daily replacement in the United States. The Company intends
to evaluate the market response to competitors' offerings, as well as the
response to its own lenses marketed for daily disposal in Europe and Japan,
before introducing its own lens marketed for daily disposal in the United
States. In addition, because of the substantially greater volume requirements
and lower selling prices of these lenses, the Company does not intend to offer
lenses for this replacement regimen in the United States until it has
significantly increased its manufacturing capacity and decreased its per unit
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production costs. See "-- Risk Factors -- Intense Competition" and "-- Risk
Factors -- Manufacturing Capacity Constraints; Risks Associated with Expansion
and Automation of Manufacturing Operations."
Annual Replacement Regimens
The Company is a leading provider of soft lenses marketed for annual
replacement regimens in the United States. Lenses marketed for annual
replacement regimens accounted for 1.6% of the Company's unit volume in 2000.
These lenses must be cleaned nightly, with an additional weekly enzymatic
cleaning to reduce protein accumulation. Patients generally wear these lenses
until they become dirty or uncomfortable (usually a year for 38% water products
and about nine months for 55% water products). The Company markets its lenses
for annual replacement regimens primarily under three brand names, Edge III,
UltraFlex and Hydron. These product lines include a number of lens designs to
allow practitioners to choose the lens that best meets their patients' needs.
Under both the Edge III and UltraFlex brands, the Company offers a low-priced,
daily-wear product, a thinner product, a product that is both thinner and larger
in diameter and a product that may be utilized as an extended-wear lens. The
Company packages its lenses marketed for annual replacement regimens in
single-lens vials or blister packs.
Specialty Lenses
Specialty lenses accounted for less than 1.0% of the Company's unit volume
in 2000. Toric lenses are designed to correct vision for people with
astigmatism, which is characterized by an irregularly shaped cornea. The Company
offers daily-wear toric lenses under the Ultra T brand that are manufactured for
the Company by a third party. The Company plans to launch a weekly disposable
toric lens in 2001. Bifocal contact lenses can help to correct presbyopia, or
age-related difficulty in focusing on near objects. The Company offers daily-
wear bifocal lenses under the Echelon brand that are cast-molded by the Company.
In addition, the Company produces its Versa-Scribe tinted lenses, sold in blue,
aqua and green, to enhance the color of the eye.
SALES AND MARKETING
The Company sells its products worldwide. In order to maintain a low
cost-to-serve, the Company has primarily utilized an inside sales force since
its inception in its South San Francisco and United Kingdom facilities. In 2000,
the Company supplemented this sales force with an outside sales force targeted
to the top 20 United States markets. The inside sales force relies on
telemarketing to sell the Company's products to practitioners, both in
independent practice and retail chains. With over 40,000 practitioners in the
United States, the Company believes that this market can be reached effectively
and frequently through telemarketing, mailings, trade journals and trade shows,
at a relatively low cost. The Company believes that this sales strategy combines
telemarketing efficiency with the close in-person contact of a field sales
representative.
In recruiting both its inside and outside sales personnel, the Company
seeks well-educated candidates who it believes will be capable of both
discussing technical information and developing relationships with
practitioners. As part of a continuing effort to ensure the motivation,
professionalism and effectiveness of its sales representatives, the Company
provides each sales representative with substantial training in a program that
was developed by the Company and has been used since its inception. This program
typically includes two weeks of initial training and at least two hours a week
of continuing instruction. This training emphasizes telemarketing sales
techniques, the development of personal relationships with customers and the
technical aspects of contact lens fitting and design. Each salesperson is
assisted by a computer database that maintains each practitioner's profile,
monitors ongoing activities and orders, allows sales personnel to enter
information for follow-up calls and highlights dates for return calls.
The Company also utilizes distributors that resell the Company's contact
lenses primarily to independent practitioners. The Company believes that by
using distributors, it increases the availability of its lenses to many
practitioners who prefer to utilize a single source for several brands of lenses
and manages the costs involved in numerous small orders. In addition, the
Company utilizes advertising targeted to practitioners, such as direct-mail and
advertisements in professional journals, to generate leads for its inside sales
force. The
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Company also provides customers with merchandising allowances and has developed
a variety of promotional programs to offer lenses at significantly reduced
prices in order to encourage trial of its products.
As a matter of policy, the Company does not sell lenses to mail-order and
e-commerce companies as it would be inconsistent with its strategy of focusing
on the practitioner and because they do not provide the regular eye examinations
necessary to check the fit of the lenses and monitor overall ocular health. To
control the distribution of its lenses marketed for disposable replacement
regimens, the Company places serialized bar-codes on each disposable product box
and blister pack and routinely monitors product availability at these companies.
The Company has a policy of terminating the supply of lenses marketed for
disposable replacement regimens to its customers who are found to have diverted
products to this distribution channel. See "-- Risk Factors -- Risk of Trade
Practice Litigation; Changes in Trade Practices."
In 2000, the Company sold its products to approximately 15,000 independent
practitioner accounts and approximately 90 retail chains. The Company's
customers in each of the past three years have included the top 20 United States
optical retailers. Fifteen of these 20 retailers, as well as key international
corporate accounts that have selected the Company's lenses for their private
label. The Company's ten largest customers in 2000 represented approximately 30%
of the Company's net sales for the year.
Product Branding. The Company has developed many different trademarked
brands for its lenses marketed for disposable replacement regimens. Certain
brands are offered only to independent practitioners. Other brands are offered
only to retail chains. In addition, private label brands are offered to certain
high-volume customers that wish to develop their own brand recognition and
loyalty, and private practitioners (or groups of private practitioners) meeting
certain volume criteria can similarly purchase "semi-exclusive" brands that are
not widely offered to other practitioners in their local market. The Company
believes that this approach differentiates the Company from its leading
competitors, which typically rely heavily on expensive consumer advertising and
promotion of national brands to generate brand awareness and demand. With the
same nationally advertised and promoted brands of lenses marketed for disposable
replacement regimens available in a number of major distribution channels, often
including mail-order, e-commerce companies and pharmacies, patients can bypass
their original eyecare provider when purchasing replacement lenses. By marketing
its lenses under different brands, segmented by distribution channel, the
Company believes that it can assist eyecare professionals in retaining their
patients and improve a patient's long-term eyecare. See "-- Risk Factors -- Risk
of Trade Practice Litigation; Changes in Trade Practices."
International Markets. The Company anticipates that many international
markets for soft contact lenses will grow at faster rates than the United States
market, driven by increased availability of low-priced lenses in developed
markets such as Europe, Japan and Canada and by increased disposable income in
emerging markets in Asia and Latin America. However, many markets outside the
United States do not have the volume of demand necessary for local manufacturers
to achieve the economies of scale required for low cost lens production. As a
result, the Company's international strategy is to enter into strategic
distribution and marketing relationships with established regional optical
companies. The Company offers these companies lower cost lenses afforded by its
volume production efficiencies and the marketing benefits of a private label
brand, and they provide the Company with the benefits of their existing market
presence, customer relationships and local infrastructure. The Company believes
that this strategy permits it to target growing international markets
effectively. See "-- Risk Factors -- Risks Relating to International Operations;
Need to Increase Sales in International Markets" and Note 17 of Notes to
Consolidated Financial Statements. The following summarizes the Company's
international sales operations:
Europe. To expand its penetration of this growing market, the Company has
developed strategic partnerships with a number of regional and local contact
lens distributors. In these relationships, the Company's contact lenses marketed
for disposable replacement regimens are sold under their brand names on a
non-exclusive basis throughout Europe. The Company also currently has
distribution relationships in Europe and the Middle East serving a number of
countries, as well as an inside sales organization based in Southampton, England
that uses telemarketing and other sales methods in the United Kingdom similar to
those used by the Company in the United States.
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Canada. The Company has a direct selling organization based in Ontario that
uses field sales representatives as well as direct mail, journal promotion and
cooperative merchandising allowance programs similar to those used by the
Company in the United States. The Company also utilizes a small number of
Canadian distributors to resell its products, primarily to independent eyecare
practitioners.
Latin America. Although the Company expects unit growth in the disposable
segment of this emerging market, it also believes that unit sales of lenses
marketed for annual replacement regimens will grow at a much faster pace than in
North America or Europe because of the lower level of consumer disposable
income. To expand the Company's penetration of this growing market, the Company
has entered into a number of non-exclusive distribution arrangements in Latin
America.
Asia Pacific Region. The Company believes that the growth of unit sales in
this market will be driven primarily by sales of contact lenses marketed for
disposable replacement regimens, particularly in Japan. Unit sales of lenses
marketed for annual replacement regimens in East Asia are also expected to grow
at a faster rate than in North America or Europe due to comparatively low levels
of consumer disposable income. The Company has established distribution
relationships with a number of soft contact lens distributors in many countries
throughout Asia. In 1999, the Company acquired two optical goods distributors in
Australia, one of which was the Company's pre-existing distributor.
DISTRIBUTION
The Company believes its distribution operations provide its customers with
rapid and reliable deliveries of its products in a cost-effective manner.
Because the Company's customers place both small orders for individual patients
and large inventory stocking orders, the Company's fulfillment system has the
flexibility to receive, fill and ship orders as small as a single lens and as
large as tens of thousands of lenses. Customers may place orders by toll-free
telephone call or by facsimile. Certain of the Company's larger customers use
the Company's electronic data interchange ("EDI") services to place orders and
receive order acknowledgments, invoices, inventory status reports and customized
pricing information online, improving efficiency and timeliness for both the
Company and the customer. If the product is in stock, customer orders received
by 2:00 p.m. local time are generally shipped the same day.
The Company maintains its primary warehouse and distribution facilities in
South San Francisco, California; Romsey, United Kingdom; and Markham, Ontario.
The largest and most sophisticated of these distribution centers is the South
San Francisco location, which primarily serves customers in the United States,
Asia Pacific and Latin America. Customers in Europe are primarily served from
the Romsey, United Kingdom facility and customers in Canada are primarily served
from the Markham, Ontario facility.
To further reduce its cost-to-serve and improve customer service, the
Company has implemented a highly computerized and automated retrieval system at
its South San Francisco facility. This system incorporates advanced handling
processes such as automatic dispensing, automated conveyors and radio frequency
dispatch. These processes are integrated by software that, in turn, is
integrated into the Company's order entry system, allowing orders to be
downloaded, stocking locations determined and fulfillment instructions delivered
automatically.
MANUFACTURING
Substantially all of the Company's products are manufactured in facilities
in Juana Diaz, Puerto Rico and in Chandlers Ford, United Kingdom. The Company
produces its lenses primarily through a manufacturing process known as dry cast
molding. This process uses a single use, two-part plastic mold that is
manufactured by injection-molding machines utilizing high-precision optical
tooling that is also made by the Company. A liquid monomer mixture is dispensed
into the mold and polymerized to form a finished dry lens. The mold containing
the polymerized lens can be inventoried for an extended period under proper
conditions. The dry lens, once removed from the mold, is immersed in a fluid
bath to extract unreacted monomer and to be hydrated and is then inspected,
packaged and sterilized. Each of the Puerto Rico and United Kingdom plants can
generally hydrate dry lenses manufactured by the other. These capabilities
substantially increase the efficiency and flexibility of the Company's
manufacturing operations.
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The Company's dry cast molding process enables the Company to reproduce
consistently the sophisticated designs of its lenses, including the lenticulated
carrier and low-edge apex that provide enhanced shape retention and superior
handling characteristics. In addition, the Company believes that this process
allows the reproduction of lenses that are designed to provide fitting
characteristics similar to those of leading competitors' lenses, regardless of
their manufacturing process. The Company also believes that the dry cast molding
process provides advantages over certain alternate production methods in yield,
throughput efficiency and performance. For example, each dry lens in the
Company's cast molding process emerges from the mold completely finished,
eliminating the need for additional polishing. This cast molding process reduces
manufacturing steps and facilitates automated handling and inspection. The
Company relies on a non-exclusive, perpetual, irrevocable patent license for a
significant element of its dry cast molding technology. See "-- Trademarks,
Trade Secrets and Patent Licenses." In addition to dry cast molding, certain of
the Company's competitors utilize wet cast molding, latheing or spin-casting
processes.
The Company believes that dry cast molding is a highly scaleable process,
which makes it well suited to address the high-volume requirements of the
growing disposable replacement market. The disposable replacement market,
however, is relatively price-sensitive, and lenses marketed for disposable
replacement regimens generally have significantly lower selling prices than
lenses marketed for annual replacement regimens. The Company believes that its
ability to compete effectively in this growing market will depend on its ability
to continue to reduce its per unit production costs while increasing
manufacturing capacity and maintaining the high quality of its products.
The Company believes that reducing its manufacturing costs requires
increased automation to further improve manufacturing efficiencies and yields,
improved packaging designs that utilize lower cost materials and larger
production volumes to take advantage of economies of scale. While the Company
has implemented a number of cost reduction measures, such as blister packaging,
hot water extraction, automatic de-molding and in-monomer tinting over the past
several years, the most significant improvements are expected to come from the
ongoing implementation of additional production lines incorporating a new
automated process based on the Company's current dry cast molding technology.
During the year, the Company expanded its Puerto Rican manufacturing facility
and completed the construction on a new 119,000 square feet manufacturing
facility in Juana Diaz in Puerto Rico. This FDA-approved facility has been
producing product for the U.S. market for over a year.
The Company's success will depend in part upon its ability to increase its
production volume on a timely basis while maintaining product quality, reducing
per unit production costs and complying with the FDA's quality system (including
Good Manufacturing Practices or GMP) regulations. There can be no assurance that
the Company will not encounter difficulties in expanding and automating its
manufacturing facilities and increasing production, including problems involving
production yields, quality control, construction delays and shortages of
qualified personnel. The Company's failure to reduce per unit production costs
and maintain product quality could have a material adverse effect on the
Company's business, financial condition and results of operations. See "-- Risk
Factors -- Manufacturing Capacity Constraints; Risks of Expansion and Automation
of Manufacturing Operations" and "-- Risk Factors -- Risks Associated with
Interruption of Manufacturing Operations."
INFORMATION SYSTEMS
The Company believes that its information systems are an integral component
of its strategy to minimize its cost-to-serve and improve customer service. Many
aspects of the Company's business, including its manufacturing, sales and
marketing, distribution and accounting functions have been integrated to
facilitate the Company's future growth. See "-- Risk Factors -- Uncertain
Ability to Manage Growth; Risks Associated with Management Information Systems."
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are focused primarily on the
development of automated manufacturing processes to increase the efficiency and
capacity of its manufacturing operations. See
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"-- Manufacturing." In addition, the Company is engaged in development of new
soft contact lens products and additional features. The Company's product
development efforts are currently focused on the development of a new toric
product to be introduced in March 2001, colored and other specialty lenses to be
marketed for disposable replacement regimens. During the years ended December
31, 2000, 1999 and 1998, expenditures for research and development (including
obtaining regulatory approvals) were approximately $4.0 million, $2.9 million
and $2.2 million, respectively. See "-- Risk Factors -- Risk of New Products and
Technological Change."
TRADEMARKS, TRADE SECRETS AND PATENT LICENSES
The Company believes that its trademarks are among its most valuable assets
and has numerous trademark registrations in the United States, Europe and other
foreign countries. The Company's channel-specific branding strategy is dependent
on the Company's strategic use of its trademark portfolio, as the trademark for
each product brand is generally registered. The Company licenses the Hydron
trademarks under a license agreement that prohibits the use of those trademarks
outside of the Americas.
The Company has obtained non-exclusive licenses from third parties to
patents for certain contact lens designs and manufacturing technologies used in
the production of its products. The Company has obtained a perpetual, fully
paid, worldwide, non-exclusive, irrevocable license to certain patents and
patent applications covering technology that is significant in the Company's dry
cast molding processes. See "-- Risk Factors -- Intense Competition." The
Company has filed patent applications on certain aspects of its new automated
manufacturing process and new toric product. The Company has also obtained
non-exclusive, fully paid, perpetual, worldwide licenses to use certain
technology relating to the tinting of lenses and to manufacture a monomer used
to produce certain of its lenses. In addition, the Company licenses technology
used in manufacturing its toric and bifocal contact lenses under non-exclusive
license agreements that limit the sales of products manufactured using the
licensed technology to the Americas.
In addition to trademarks and patent licenses, the Company believes it owns
certain trade secrets, copyrights, know-how and other intellectual property.
COMPETITION
The market for soft contact lenses is intensely competitive and is
characterized by decreasing prices for many products. As the number of wearers
of soft contact lenses in the United States has not grown significantly in
recent years, increased market penetration by the Company will require wearers
of competing products to switch to the Company's products. The Company's
products compete with products offered by a number of larger companies including
Johnson & Johnson, Ciba/Wesley Jessen, Bausch & Lomb and Cooper. Many of the
Company's competitors have substantially greater financial, manufacturing,
marketing and technical resources, greater market penetration and larger
manufacturing volumes than the Company. Among other things, these advantages may
afford the Company's competitors greater ability to manufacture large volumes of
lenses, reduce product prices and influence customer buying decisions. The
Company believes that certain of its competitors are expanding, or are planning
to expand, their manufacturing capacity, and are implementing new, more
automated manufacturing processes, in order to support anticipated increases in
volume. As many of the costs involved in producing contact lenses are relatively
fixed, if a manufacturer can increase its volume, it can generally reduce its
per unit costs and thereby increase its flexibility to reduce prices. The
Company's competitors could also reduce prices to increase sales volumes so as
to utilize their capacity, or for other reasons. Price reductions by competitors
could make the Company's products less competitive, and there can be no
assurance that the Company would be able to either match the competitor's
pricing plan or reduce its prices in response. The Company's 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 continue
decreasing 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. See "-- Risk Factors -- Intense Competition" and
"-- Risk Factors -- Manufacturing Capacity Constraints; Risks Associated with
Expansion and Automation of Manufacturing Operations."
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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 line 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's ability to compete effectively in
the disposable lens market will depend in large part upon the Company's ability
to expand its production capacity and reduce its per unit production costs.
Soft contact lens manufacturers have generally sought to differentiate
themselves from their competitors on the basis of product performance,
marketing, distribution channels and price. In addition, the Company believes
that its manufacturing process technology, lens designs and marketing strategies
differentiate it from its leading competitors. Since the purchase of contact
lenses requires a prescription in the United States, the Company also competes
on the basis of its relationships and reputation with eyecare practitioners.
There can be no assurance that the Company will be able to continue to so
distinguish its products or that competitors will not adopt technologies, lens
designs or marketing strategies that are similar to those used by the Company.
Any such action by competitors could have a material adverse effect on the
Company's business, results of operations and financial condition. The Company
also encounters competition from manufacturers of eyeglasses and from
alternative technologies, such as surgical refractive procedures (including new
refractive laser procedures such as PRK, or photorefractive keratectomy, and
LASIK, or laser in situ keratomileusis). If surgical refractive procedures
become increasingly accepted as an effective and safe technique for permanent
vision correction, they could substantially reduce the demand for contact lenses
by enabling patients to avoid the ongoing cost and inconvenience of contact
lenses. Accordingly, there can be no assurance that these procedures, or other
alternative technologies that may be developed in the future, will not cause a
substantial decline in the number of contact lens wearers and thus have a
material adverse effect on the Company's business, financial condition and
results of operations. See "-- Risk Factors -- Intense Competition" and "-- Risk
Factors -- Risk of New Products and Technological Change."
GOVERNMENT REGULATION
The U.S. Federal Food, Drug and Cosmetic Act (the "FDC Act"), other
statutes, regulations of the U.S. Food and Drug Administration (the "FDA") and
other agencies as well as state laws govern the preclinical and clinical
testing, manufacture, labeling, distribution, sale, marketing, advertising and
promotion of medical devices such as contact lenses. Noncompliance with
applicable regulations can result in, among other things, fines, injunctions,
product recall or product seizures, operating restrictions (including suspension
of production and distribution), refusal of the FDA to grant approval of a
Pre-Market Approval Application ("PMA") or clearance of a Section 510(k)
Pre-Market Notification (a "510(k) Notification"), withdrawal of previously
granted marketing approvals or clearances, and criminal prosecution. Sales of
the Company's products outside the United States are subject to regulatory
requirements that, while generally comparable to those in the United States,
vary widely from country to country.
FDA Regulation. For purposes of the applicable statutes and regulations,
the Company's products are treated as "medical devices." With exceptions for
certain medical devices first marketed before May 28, 1976, prior to their
commercial sale in the United States, medical devices must be cleared by the
FDA, exempted from the requirement of FDA clearance, or approved by the FDA. In
general, the regulatory process can be lengthy, expensive and uncertain, and
securing FDA clearances or approvals may require the submission of extensive
clinical data together with other supporting information to the FDA.
In the United States, medical devices are classified as Class I, II or III,
on the basis of the controls deemed by the FDA to be necessary to reasonably
ensure their safety and effectiveness. Class I devices are subject to general
controls (e.g., labeling and adherence to FDA-mandated quality system (including
current GMP) requirements and, in some cases, 510(k) notification), and Class II
devices are subject to general controls including, in most cases, 510(k)
notification and special controls (e.g., performance standards). Generally,
Class III devices are those that must receive premarket approval by the FDA to
ensure their safety and effectiveness (e.g., life-sustaining, life-supporting
and implantable devices) and also include most devices that were not on the
market before May 28, 1976 ("new medical devices") and for which the FDA has not
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made a finding of "substantial equivalence" based on a 510(k). Class III devices
usually require clinical testing and FDA approval prior to marketing and
distribution.
The Company's daily-wear products have been classified as Class II devices
subject to the 510(k) pre-market notification process, while the Company's
extended-wear products have been classified as Class III devices subject to the
PMA requirements. Regulation of the Company's daily-wear products under the pre-
market notification process requires that new product introductions in this
category be preceded by FDA clearance of a 510(k) pre-market notification
containing information which establishes the new product as substantially
equivalent to a legally marketed Class I or II medical device or to a legally
marketed Class III device that does not itself require an approved PMA prior to
marketing ("predicate device"). A 510(k) must contain information to support a
claim of substantial equivalence, and this information may include laboratory
test results or the results of clinical studies of the device in humans. The FDA
may determine that a device is not "substantially equivalent" to a predicate
device or that additional information is needed before a substantial equivalence
determination can be made. The premarket notification process generally takes
five to twelve months without clinical data, or twelve to eighteen months or
more if clinical data are required to be included in the notifications but it
may take longer, and 510(k) clearance may never be obtained. The range of
clinical data required to be included in a 510(k), if any, or a PMA application
varies depending on the nature of the new product or product modification.
Generally, the 510(k) notifications filed by the Company do not require clinical
data, and, if clinical data are required, the necessary clinical trials are
short-term. If the Company is unable to establish to the FDA's satisfaction that
a new product is substantially equivalent to a predicate device, extensive
preclinical and clinical testing will be required, additional costs will be
incurred, and FDA approval of a PMA for the product will be required prior to
market entry. Such approval, which cannot be assured in a timely manner or at
all, generally takes at least eighteen to twenty-four months, and can take
substantially longer.
Regulation of the Company's extended-wear products as Class III devices
requires that the Company submit a PMA to the FDA and obtain its approval of the
application prior to marketing such products in the United States. A PMA must be
supported by valid scientific evidence that typically includes extensive data,
including data from preclinical testing and human clinical trials to demonstrate
the safety and effectiveness of the device. The FDA ordinarily requires the
performance of at least two independent, statistically significant human
clinical trials that must demonstrate the safety and effectiveness of the device
in order to obtain FDA approval of the PMA. If the device presents a
"significant risk," the sponsor of the trial (usually the manufacturer or the
distributor of the device) is required to file an investigational device
exemption ("IDE") application with the FDA prior to commencing human clinical
trials. The IDE application must be supported by data, typically including the
results of animal and laboratory testing. If the IDE application is approved by
the FDA and the study protocol is approved by one or more appropriate
institutional review boards ("IRBs"), human clinical trials may begin at a
specific number of investigational sites with a specific number of patients, as
approved by the FDA. If the device presents a "nonsignificant risk" to the
patient, a sponsor may begin the human clinical trials after obtaining approval
of the study protocol by one or more appropriate IRBs, but FDA approval of an
IDE is not necessary unless the FDA notifies the sponsor that an IDE application
is required. An IDE supplement must be submitted to, and approved by, the FDA
before a sponsor or an investigator may make a change to the investigational
plan that may affect its scientific soundness or the rights, safety or welfare
of human subjects. The FDA has the authority to re-evaluate, alter, suspend or
terminate clinical testing based on its assessment of data collected throughout
the trials.
The PMA must also contain the results of all relevant bench tests,
laboratory and animal studies, a complete description of the device and its
components, and a detailed description of the methods, facilities and controls
used to manufacture the device. In addition, the submission must include the
proposed labeling and promotional labeling. Once the FDA accepts a PMA
submission for filing, the FDA begins an in-depth review of the PMA. An FDA
review of a PMA generally takes from twelve to eighteen months from the date the
PMA is accepted for filing, but may take significantly longer if the FDA
requests additional information and if the sponsor files any major amendments to
the PMA. The review time is often significantly extended by the FDA's request
for clarification of information already provided in the submission. Toward the
end of the PMA
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review process, the FDA generally will conduct an inspection of the
manufacturer's facilities to ensure that the facilities are in compliance with
the quality system (including current GMP) requirements.
If the FDA's evaluations of both the PMA and the manufacturing facilities
are favorable, the FDA will issue either an approval letter (order) or an
"approvable letter" containing a number of conditions that must be met in order
to secure approval of a PMA. When and if those conditions have been fulfilled to
the satisfaction of the FDA, the agency will issue an order approving the PMA
and authorizing commercial marketing of the device for certain indications. If
the FDA's evaluation of the PMA or manufacturing facilities is not favorable,
the FDA will deny approval of the PMA or issue a "not approvable letter." The
FDA may also determine that additional preclinical testing or human clinical
trials are necessary, in which case approval of the PMA could be delayed for
several years while additional testing or trials are conducted and submitted in
an amendment to the PMA. The PMA process can be expensive, uncertain and
lengthy, and a number of devices for which FDA approval has been sought by other
companies have never been approved for marketing.
Even if 510(k) clearance or PMA approval is obtained, this clearance or
approval can be withdrawn by the FDA due to the failure to comply with
regulatory requirements or the occurrence of unforeseen problems following
initial clearance or approval. Modifications to existing 510(k)-cleared devices,
including changes in design, material, or manufacturing process that could
significantly affect safety or effectiveness, require submission and clearance
of new 510(k) notifications as do significant changes in labeling, e.g., a
change in indications for use. Modifications to a device that is the subject of
an approved PMA, its labeling, or manufacturing process ordinarily require
approval by the FDA of PMA supplements or new PMAs. Supplements to a PMA
typically require the submission of similar information as is required for an
initial PMA, except that the supplement is generally limited to that information
needed to support the proposed change from the product covered by the original
PMA. The approval of supplemental PMAs requires approximately one to two years.
All of the products currently marketed by the Company have received 510(k)
clearance or PMA approval. The Company anticipates that its contemplated lens to
be marketed for daily disposal will be regulated as a Class II medical device,
requiring submission and clearance of a 510(k), and that its planned
ultraviolet-absorbing extended-wear lens will be regulated as a Class III
medical device, requiring submission and approval of a PMA supplement. There can
be no assurance that these planned products or any other future products will
receive FDA marketing clearance or approval on a timely basis or at all, or that
its new daily wear lens will not be subjected to the PMA process. The Company
has made minor modifications to its lenses which it believes do not require the
submission and clearance of new 510(k) notifications or the submission and
approval of PMA supplements. There can be no assurance, however, that the FDA
will agree with any of the Company's determinations not to submit new 510(k)
notifications or PMA supplements for these changes, that the FDA will not
require the Company to cease sales and distribution while seeking clearances of
510(k) notifications or approvals of PMA supplements for the changes, or that
such clearances and approvals, if required, will be obtained in a timely manner
or at all.
The FDC Act requires that medical devices, including contact lenses, be
manufactured in accordance with the FDA's quality system ("QS") regulation,
which includes, among other things, the FDA's GMP requirements. This regulation
requires, among other things, that (i) the manufacturing process be regulated,
controlled and documented by the use of written procedures, and (ii) the ability
to produce devices which meet the manufacturer's specifications be validated by
extensive and detailed testing of every aspect of the process. The regulation
also requires (i) investigation of any deficiencies in the manufacturing process
or in the products produced, (ii) purchasing controls, (iii) detailed
record-keeping including the maintenance of service records and (iv)
pre-production design controls. Manufacturing facilities are subject to FDA
inspection on a periodic basis to monitor compliance with QS (including current
GMP) requirements. If violations of the applicable regulations are noted during
FDA inspections of manufacturing facilities, the FDA can prohibit further
manufacturing, distribution and sale of the devices until the violations are
cured. The Company believes that its facilities are in compliance with the FDA's
QS regulations and that the planned automation of its manufacturing facilities
will not require clearance or approval.
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In March 1996, the Company received a warning letter from the FDA regarding
certain procedures used in manufacturing products at its facilities in Santa
Isabel, Puerto Rico. The Company took steps to address the FDA's concerns, and
after reinspecting the facilities, the FDA notified the Company that its
concerns were satisfactorily addressed. In February and March 1998, the FDA
again inspected the Company's Santa Isabel facilities in Puerto Rico for
compliance with quality system (including GMP) requirements and received a
summary of certain deficiencies observed by the FDA inspector, primarily related
to complaint handling. In July 1999, the FDA conducted a final inspection of the
Company's Santa Isabel facilities and concluded that the facility was compliance
with quality systems including GMP. In December 1999, the Company's received PMA
approval from the FDA, for its new manufacturing facility in Juana Diaz, Puerto
Rico.
The Company is also required to register as a medical device manufacturer
and to list its products with the FDA. Devices marketed in the United States are
subject to pervasive and continuing regulatory oversight by the FDA and other
agencies, and the Company is subject to periodic inspection and record-keeping
requirements. As a medical device manufacturer, the Company is further required
to comply with FDA requirements regarding the reporting of allegations of death
or serious injury associated with the use of its medical devices, as well as
product malfunctions that would likely cause or contribute to death or serious
injury if the malfunction were to recur. Other FDA requirements govern product
labeling and prohibit a manufacturer from marketing a device with a cleared
510(k) or an approved PMA for an uncleared or unapproved indication. Failure to
comply with applicable regulatory requirements can result in a wide variety of
severe administrative, civil, and criminal sanctions and penalties. See "-- Risk
Factors -- Risks of Regulatory Action."
International Regulation. Sales of medical devices outside the United
States are subject to foreign regulatory requirements that vary widely from
country to country. These laws and regulations range from simple product
registration requirements in some countries to complex clearance and production
controls such as those described previously. As a result, the processes and time
periods required to obtain foreign marketing approval may be longer or shorter
than those necessary to obtain FDA approval. These differences may affect the
efficiency and timeliness of international market introduction of the Company's
products, and there can be no assurance that the Company will be able to obtain
regulatory approvals or clearances for its products in foreign countries.
Medical devices sold or marketed in the European Union ("EU") are subject
to the EU's medical devices directive. Under this directive, CE mark
certification procedures became available for medical devices, and the
successful completion of such procedures would allow certified devices to be
marketed in all EU countries. In order to obtain the right to affix the CE mark
to its products, medical device companies must obtain certification that its
processes meet European quality standards and establish that the product is
considered safe and fit for its intended purpose. Medical devices other than
active implants and in vitro diagnostic products may not be sold in EU countries
unless they display the CE mark. Although member countries must accept for
marketing medical devices bearing a CE marking without imposing further
requirements related to product safety and performance, each country may require
the use of its own language or labels and instructions for use.
The Company may also have to obtain additional approvals from foreign
regulatory authorities in order to sell its products in non-EU countries. Some
countries have historically permitted human studies earlier in the product
development cycle than regulations in the United States permit. Other countries,
such as Japan, have requirements similar to those of the United States. This
disparity in the regulation of medical devices may result in more rapid product
clearance in certain countries than in the United States, while approvals in
countries such as Japan may require longer periods than in the United States.
Other Regulation. The Company is also subject to numerous federal, state
and local laws relating to such matters as safe working conditions,
manufacturing practices, environmental protection, fire hazard control and
disposal of hazardous or potentially hazardous substances. There can be no
assurance that the Company will not be required to incur significant costs to
comply with such laws and regulations in the future or that compliance with such
laws or regulations will not have a material adverse effect upon the Company's
ability to do business.
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EMPLOYEES
As of December 31, 2000, the Company had 2,556 full-time employees,
including 366 in the United States, 907 in the United Kingdom, 1,232 in Puerto
Rico, 33 in Canada, 10 in Australia and 6 in Hungary. Of the Company's full-time
employees, 166 are engaged in sales and marketing, 2,169 in manufacturing, 111
in distribution, 31 in process development and 79 in finance and administration.
The Company also utilizes a number of part-time employees in its manufacturing
and distribution operations to supplement its full-time workforce. None of the
Company's employees is represented by a labor union or is the subject of a
collective bargaining agreement with respect to their employment by the Company.
The Company has never experienced a work stoppage and believes that its employee
relations are good. See "-- Risk Factors -- Dependence on Key Personnel."
RECENT DEVELOPMENTS
On December 22, 2000, the Company signed a definitive agreement with
Paris-based Essilor International (Compagnie Generale d'Optique) S. A. to
acquire Essilor's contact lens business for cash. The Company acquired all sales
and distribution assets of Essilor's contact lens business in Europe and
manufacturing facilities in France, the United Kingdom and Albuquerque, New
Mexico. This acquisition provides enhanced sales and distribution channels in
Europe, new product lines and additional research and development expertise. The
sale was completed on February 12, 2001, which was approved by the Board of
Directors of both companies for approximately $47 million.
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RISK FACTORS
This Form 10-K contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed or implied in such forward-looking statements due to such
risks and uncertainties. Factors that may cause such a difference include, but
are not limited to, those discussed below, in the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this Form 10-K.
INTENSE COMPETITION. The market for soft contact lenses is intensely
competitive and is characterized by decreasing prices for many products. As the
number of wearers of soft contact lenses in the United States has not grown
significantly in recent years, increased United States market penetration by the
Company will require wearers of competing products to switch to the Company's
products. The Company's products compete with products offered by a number of
larger companies including Johnson & Johnson, Ciba/Wesley Jessen, Bausch & Lomb,
and Cooper. Many of the Company's competitors have substantially greater
financial, manufacturing, marketing and technical resources, greater market
penetration and larger manufacturing volumes than the Company. Among other
things, these advantages may afford the Company's competitors greater ability to
manufacture large volumes of lenses, reduce product prices and influence
customer buying decisions. The Company believes that certain of its competitors
are expanding, or are planning to expand their manufacturing capacity, and are
implementing new more automated manufacturing processes, in order to support
anticipated increases in volume. As many of the costs involved in producing
contact lenses are relatively fixed, if a manufacturer can increase its volume,
it can generally reduce its per unit costs and thereby increase its flexibility
to reduce prices. The Company's competitors could also reduce prices to increase
sales volumes so as to utilize their capacity, or for other reasons. Price
reductions by competitors could make the Company's products less competitive,
and there can be no assurance that the Company would be able to either match the
competitor's pricing plan or reduce its prices in response. The Company's
ability to respond to competitive pressures by decreasing its prices without
adversely affecting its gross margins and operating results will depend on its
ability to decrease its costs per lens. Any significant decrease in the
Company's costs per lens will depend, in part, on the Company's ability to
increase its sales volume and production capacity. There can be no assurance
that the Company will be able to continue to increase its sales volume or reduce
it per unit production costs. In response to competition, the Company may also
increase cooperative merchandising allowances or otherwise increase spending,
which may adversely affect its business, financial condition and results of
operations. The failure of the Company to respond to competitive pressures, and
particularly price competition, in a timely manner could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "-- Manufacturing Capacity Constraints; Risks Associated with Expansion and
Automation of Manufacturing Operations."
The market for contact lenses is shifting from lenses marketed for annual
replacement regimens to lenses marketed for disposable replacement regimens. The
weekly disposable replacement market is particularly competitive and
price-sensitive and is currently dominated by the Acuvue product produced by
Johnson & Johnson. The Company has introduced a lens marketed for daily disposal
in Japan, Europe.and is evaluating the introduction of such a lens in the U.S.
The Company's ability to enter and to compete effectively in the daily market
will depend in large part upon the Company's ability to expand its production
capacity and reduce its per unit production costs.
The Company believes that its manufacturing process technology, lens
designs and marketing strategies differentiate it from its leading competitors.
However, there can be no assurance that competitors will not adopt technologies,
lens designs or marketing strategies that are similar to those used by the
Company. Any such action by competitors could have a material adverse effect on
the Company's business, results of operations and financial condition.
The Company also encounters competition from manufacturers of eyeglasses
and from alternative technologies, such as surgical refractive procedures
(including new refractive laser procedures such as PRK, or photo refractive
keratectomy, and LASIK, or laser in situ keratomileusis). If surgical refractive
procedures become increasingly accepted as an effective and safe technique for
permanent vision correction, they could substantially reduce the demand for
contact lenses by enabling patients to avoid the ongoing cost and
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inconvenience of contact lenses. Accordingly, there can be no assurance that
these procedures, or other alternative technologies that may be developed in the
future, will not cause a substantial decline in the number of contact lens
wearers and thus have a material adverse effect on the Company's business,
financial condition and results of operations.
MANUFACTURING CAPACITY CONSTRAINTS; RISKS ASSOCIATED WITH EXPANSION AND
AUTOMATION OF MANUFACTURING OPERATIONS. The Company's success will depend upon
its ability to increase its production volume on a timely basis while
maintaining product quality and lowering per unit production costs.
Manufacturers often encounter difficulties in increasing production volumes,
including problems involving delays, quality control and shortages of qualified
personnel. The Company is currently operating close to, or in certain cases at,
capacity, and while incremental increases in capacity are implemented by the
Company in the ordinary course, the Company expects to need more significant
increases in capacity in the foreseeable future.
To this end, the Company is currently adding new, highly automated
production technology at its facilities in the United Kingdom and Puerto Rico to
increase its manufacturing capacity and reduce its per unit manufacturing costs.
However, there can be no assurance that the Company will be able to implement
this automated technology on a timely basis or that the automated technology
will operate as efficiently as expected. The Company has encountered delays in
implementing the initial phases of this automated technology and there can be no
assurance that it will not encounter significant delays and difficulties in the
future as the Company intends to add additional lines. For example, suppliers
could miss their equipment delivery schedules, new production lines and facility
could improve less rapidly than expected, if at all, or the equipment or
processes could require longer design time than anticipated, or redesigning
after installation. The delays in implementing the initial phases of the
automated lines, had caused the Company difficulties in meeting customer demand
in certain of its products, which resulted in an order backlogs in 2000, and the
delay of the introduction of new products. Further delays may increase the
Company's level of backorders and impact the Company's ability to meet revenue
projections. The new production technology will involve processes and equipment
with which the Company and its personnel are not experienced. Difficulties
experienced by the Company in automating its manufacturing process could impair
the Company's ability to reduce its per unit production costs and to compete in
the weekly and daily disposable replacement market and, accordingly, could have
a material adverse effect on the Company's business, financial condition and
results of operations.
The Company currently expects that through the end of 2001, it will invest
approximately $42 million in capital expenditures on automated production lines
in the United Kingdom and Puerto Rico and other items 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.
RISK OF TRADE PRACTICE LITIGATION; CHANGES IN TRADE PRACTICES. The contact
lens industry has been the subject of a number of class action and government
lawsuits and government investigations in recent years. In December 1996, over
twenty states sued three of the Company's largest competitors, as well as
certain eyecare practitioners and trade organizations. The lawsuit alleges among
other things, a conspiracy among such persons to violate antitrust laws by
refusing to sell contact lenses to mail order and other non-practitioner contact
lens providers, so as to reduce competition in the contact lens industry. A
similar lawsuit was filed by the State of Florida in 1994 and several similar
class action lawsuits were also filed in 1994. Several of the defendants have
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 and coupons 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
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available to consumers. In August 1997, such competitor also settled an
investigation by 17 states into similar matters by agreeing to certain
restrictions on its future contact lens marketing practices and making certain
payments to each of the states. In October 1996, a class action lawsuit was
brought against another of the Company's largest competitors in the Superior
Court of New Jersey-Camden (the "New Jersey Lawsuit"). This suit alleges that
the defendant engaged in fraudulent and deceptive practices in the marketing and
sale of contact lenses by selling interchangeable contact lenses, under
different brand names and for different replacement regimens, at different
prices. The suit was certified as a national class action in December 1997.
Although the Company has not been named in any of the foregoing lawsuits,
the Company from time to time receives claims or threats similar to those
brought against its competitors, and in one circumstance a suit was filed
against the Company making allegations similar to those made in the Alabama and
New Jersey Lawsuits, which suit was dismissed without prejudice for
non-substantive reasons. There can be no assurance that the Company will not
face similar actions relating to its marketing and pricing practices or other
claims or lawsuits in the future. The defense of any such action, lawsuit or
claim could result in substantial expense to the Company and significant
diversion of attention and effort by the Company's management personnel. There
can be no assurance that any such lawsuit would be settled or decided in a
manner favorable to the Company, and a settlement or adverse decision in any
such action, lawsuit or claim could have a material adverse effect on the
Company's business, financial condition and results of operations.
In addition to the foregoing lawsuits, there is substantial federal and
state governmental regulation related to the prescribing of contact lenses.
These regulations relate to who is permitted to prescribe and fit contact
lenses, the prescriber's obligation to provide prescriptions to its patients,
the length of time a prescription is valid, the ability or obligation of
prescribers to prescribe lenses by brand rather than by generic equivalent or
specification, and other matters. Although these regulations primarily affect
contact lens prescribers, and not manufacturers or distributors of lenses such
as the Company, changes in these regulations, or their interpretation or
enforcement, could adversely affect the effectiveness of the Company's marketing
strategy to eyecare practitioners, most notably the effectiveness of the
Company's channel-specific and private label branding strategies. Additionally,
given the Company's strategic emphasis on focusing its marketing efforts on
eyecare practitioners, the Company may be more vulnerable than its competitors
to changes in current trade practices. Finally, although cost controls or other
requirements imposed by third party health-care payors such as insurers and
health maintenance organizations have not historically had a significant effect
on contact lens prices or distribution practices, this could change in the
future, and could adversely affect the Company's business, financial condition
and results of operations. Adverse regulatory or other decisions affecting
eyecare practitioners, or material changes in the selling and prescribing
practices for contact lenses, could have a material adverse effect on the
Company's business, financial condition and results of operations.
FLUCTUATIONS IN OPERATING RESULTS; DECREASING AVERAGE SALES PRICES. The
Company's quarterly operating results have varied significantly in the past and
are likely to vary significantly in the future based upon a number of factors.
The Company's quarterly results can be affected significantly by pricing changes
by the Company or its competitors, the Company's ability to increase
manufacturing capacity efficiently and to reduce per unit manufacturing costs,
the time and costs involved in expanding existing distribution channels and
establishing new distribution channels, discretionary marketing and promotional
expenditures such as cooperative merchandising allowances paid to the Company's
customers, timing of the introduction of new products by the Company or its
competitors, inventory shortages, timing of regulatory approvals and other
factors. The Company's customers generally do not have long-term commitments to
purchase products and products are generally shipped as orders are received.
Consequently, quarterly sales and operating results depend primarily on the
volume and timing of orders received during the quarter, which may be difficult
to forecast. A significant portion of the Company's operating expenses is
relatively fixed, and planned expenditures are based on sales forecasts. If
sales levels fall below expectations, operating results could be materially
adversely affected. In particular, the affect on net income may be
proportionately greater than net sales because only a portion of the Company's
expenses varies with net sales in the short term. In response to competition,
the Company may reduce prices, increase cooperative merchandising allowances or
otherwise increase marketing expenditures, and such responses may adversely
affect the Company's business, financial condition and results of operations.
Due to the foregoing factors, the Company believes that period-to-period
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comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance. Further, it is
likely that in some future quarter the Company's net sales or operating results
will be below the expectations of public market analysts and investors. In such
event, the price of the Company's Common Stock would likely be materially
adversely affected.
The Company expects that the overall average selling price that it realizes
across its products will decline over time because of (i) shifts in the
Company's product mix from lenses marketed for annual replacement regimens to
lenses marketed for disposable replacement regimens, and (ii) increases in
products sold internationally through distributors at prices lower than direct
sales prices.
The Company does not expect there will be significant growth in its sales
of lenses marketed for annual or monthly replacement. Accordingly, the Company
will need to continue to reduce its per unit production costs through increased
automation, increased volume and reduced packaging costs in order to improve or
maintain, its gross margins.
RISKS RELATING TO INTERNATIONAL OPERATIONS; NEED TO INCREASE SALES IN
INTERNATIONAL MARKETS. In 1998, 1999 and 2000, the Company's international sales
represented approximately 21%, 27% and 31%, respectively, of the Company's net
sales. In addition, a significant portion of the Company's products are
manufactured in the United Kingdom. As a result, the Company's business is
subject to the risks generally associated with doing business abroad, such as
foreign consumer preferences, changes in currency exchange rates, increase
government regulations, longer accounts receivable payment cycles, and foreign
tax laws or tariffs. These factors, among others, could materially adversely
affect the Company's ability to sell its products in international markets. The
regulation of medical devices in a number of jurisdictions, particularly in the
European Union, continues to develop, and there can be no assurance that new
laws or regulations will not have a material adverse effect on the Company's
business, financial condition and results of operations.
A portion of the Company's sales and expenditures are collected or paid in
currencies other than the United States 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. The Company's ability to integrate the newly
acquired contact lens business of Essilor International (Compagnie Generale
d'Optique) S.A. is dependent on the use of existing direct sales channels, and
there can be no assurance that the Company will be successful in this
integration. In addition, the Company will not be able to market and sell its
products in certain international markets until it obtains regulatory approval.
The failure of the Company to increase its international sales substantially
could have a material adverse effect on the Company's business, financial
condition and results of operations.
UNCERTAIN ABILITY TO MANAGE GROWTH; RISKS ASSOCIATED WITH IMPLEMENTATION OF
NEW MANAGEMENT INFORMATION. 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.
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There also can be no assurance that the Company's competitors do not have or
will not develop new products and technologies that could render the Company's
products less competitive or obsolete. 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, financial condition and results of operation would be materially
adversely affected. See "-- Manufacturing."
RISKS OF REGULATORY ACTION. The Company's products and manufacturing
facilities are subject to stringent regulation by the FDA and by various
governmental agencies for the states and localities in which the Company's
products are manufactured and/or sold, as well as by governmental agencies in
certain foreign countries in which the Company's products are manufactured
and/or sold. Pursuant to the FDC Act and the regulations promulgated thereunder,
the FDA regulates the pre-clinical and clinical testing, manufacture, labeling,
distribution, sale, marketing, advertising and promotion of medical devices such
as contact lenses. The process of obtaining FDA and other required regulatory
clearances or approvals can be lengthy, expensive and uncertain. Failure to
comply with applicable regulatory requirements can result in, among other
things, fines, suspensions or withdrawals of regulatory clearances or approvals,
product recalls, operating restrictions (including suspension of production,
distribution, sales and marketing), product seizures and criminal prosecution of
a company and its officers and employees. In addition, governmental regulations
may be established that could prevent or delay regulatory clearances or approval
of the Company's products. Delays in receiving necessary United States or
foreign regulatory clearances or approvals, failure to receive clearances or
approvals, or the loss of previously received clearances or approvals could have
a material adverse effect on the Company's business, financial condition and
results of operations.
In general, the FDC Act requires that a new medical device be cleared by
the FDA prior to introducing such product to the United States market through
the submission of a 510(k) notification; exempted from the requirement of such
clearance; or approved by the FDA prior to introducing such product to the
market through the submission of a PMA. The process of obtaining clearance of a
510(k) notification typically takes five to twelve months without clinical data,
or twelve to eighteen months or more if clinical data are required to be
included in the notification, but it may take longer, and 510(k) clearance may
never be obtained. Approval through the PMA process, which likewise may never be
obtained, generally takes at least eighteen to twenty-four months and can take
substantially longer, is more expensive and requires the submission of extensive
preclinical and clinical data and manufacturing information, among other things.
The soft contact lenses currently marketed by the Company have received FDA
clearance through the 510(k) process or approval through the PMA process. In
addition, the Company has made modifications to its products that the Company
believes do not require the submission of new 510(k) notifications or PMA
supplements. There can be no assurance, however, that the FDA will agree with
any of the Company's determinations not to submit new 510(k) notifications or
PMA supplements for these changes, that the FDA will not require the Company to
cease sales and distribution while seeking clearances of 510(k) notifications
and approvals of PMA supplements for the changes, or that such clearances and
approvals, if required, will be obtained in a timely manner or at all. In
addition, there can be no assurance that any future products developed by the
Company or any modifications to current products will not require additional
clearances or approvals from the FDA, or that such approvals, if necessary, will
be obtained in a timely manner or at all.
The Company's manufacturing facilities are subject to periodic GMP and
other inspections by the FDA. Any actions required by the FDA as a result of any
recent or future inspections could involve significant costs
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or disruption to the Company's operations, which could have a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, noncompliance with quality system (including GMP) requirements
could result in the cessation or reduction of the Company's production volume,
which would have a material adverse effect on the Company's business, financial
condition and results of operations.
Sales of medical devices outside the United States are subject to foreign
regulatory requirements that vary widely from country to country. These laws and
regulations range from simple product registration requirements in some
countries to complex clearance and production controls in others. Some countries
have historically permitted human studies earlier in the product development
cycle than regulations in the United States permit. Other countries have
requirements similar to those of the United States. This disparity in the
regulation of medical devices may result in more rapid product clearance in
certain countries than in the United States, while approvals in countries such
as Japan may require longer periods than in the United States. These differences
may also affect the efficiency and timeliness of international market
introduction of the Company's products, and there can be no assurance that the
Company will be able to obtain regulatory approvals or clearances for its
products in foreign countries in a timely manner or at all. See "-- Government
Regulation."
DEPENDENCE ON KEY PERSONNEL. The Company is dependent upon certain key
management and technical personnel. The Company's future success will depend in
part upon its ability to attract and retain highly qualified personnel. The
Company competes for such personnel with other companies, academic institutions,
government entities and other organizations. There can be no assurance that the
Company will be successful in retaining or hiring qualified personnel. The loss
of any of the Company's senior management or other key research, clinical,
regulatory, or sales and marketing personnel, particularly to competitors, could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "-- Employees".
INFLUENCE BY EXISTING STOCKHOLDERS. Directors, officers and principal
stockholders of the Company, in the aggregate, beneficially own approximately
27.3% of the Company's outstanding Common Stock. As a result, these
stockholders, acting together, possess significant voting influence over the
election of the Company's Board of Directors and the approval of significant
corporate transactions, among other matters. Such influence could have the
effect of delaying, deferring or preventing a change in control of the Company.
See "Item 12 -- Security Ownership of Certain Beneficial Owners and Management."
CERTAIN ANTI-TAKEOVER PROVISIONS. The Company's Board of Directors has the
authority to issue up to 4,000,000 shares of Preferred Stock and to determine
the price, rights, preferences, privileges and restrictions, including voting
rights, of those shares without any further vote or action by the stockholders.
The rights of the holders of Common Stock are subject to, and may be adversely
affected by, the rights of the holders of any Preferred Stock that may be issued
in the future. The issuance of Preferred Stock, while providing flexibility in
connection with possible financing or acquisitions or other corporate purposes,
could have the effect of making it more difficult for a third party to acquire a
majority of the outstanding voting stock of the Company. The Company has no
current plans to issue shares of Preferred Stock. The Company's Bylaws and
indemnity agreements provide that the Company will indemnify officers and
directors against losses they may incur in legal proceedings resulting from
their service to the Company. Further, the Company's charter documents contain a
provision eliminating the ability of the Company's stockholders to take action
by written consent. This provision is designed to reduce the vulnerability of
the Company to an unsolicited acquisition proposal and to render the use of
stockholder written consents unavailable as a tactic in a proxy fight. However,
such provision could have the effect of discouraging others from making tender
offers for the Company's shares, thereby inhibiting increases in the market
price of the Company's shares that could result from actual or rumored takeover
attempts. Such provision also may have the effect of preventing changes in the
management of the Company. In addition, Section 203 of the Delaware General
Corporation Law, to which the Company is subject, restricts certain business
combinations with any "interested stockholder" as defined by such statute. This
statute may delay, defer or prevent a change in control of the Company.
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VOLATILITY OF STOCK PRICE. The market price of Company's Common Stock is,
and is likely to continue to be, volatile and may be significantly affected by
factors such as actual or anticipated fluctuations in the Company's operating
results or those of its competitors, competitive factors, trade practice
litigation, new products offered by the Company or its competitors, developments
with respect to patents or proprietary rights, conditions and trends in its
industry and other related industries, regulatory actions, adoption of new
accounting standards, changes in financial estimates by securities analysts,
general market conditions and other factors. In addition, the stock market has
from time to time experienced significant price and volume fluctuations that may
adversely affect the market price of the Company's Common Stock. In the past,
following periods of volatility in the market price of a particular company's
securities, securities class action litigation has often been brought against
that company. Such litigation, if brought against the Company, could result in
substantial costs and a diversion of management's attention and resources. See
"Item 5 -- Market of Registrant's Common Equity and Related Stock Holder
Matters."
RISKS OF INABILITY TO EFFECTIVELY PROTECT INTELLECTUAL PROPERTY. The
Company is highly dependent upon its intellectual property. The Company believes
that its trademarks are among its most valuable assets and has numerous
trademark registrations in the United States, Europe and other foreign
countries. While the Company believes that there are currently no pending
challenges to the use or registration of any of the Company's material
trademarks, it cannot assure you, however, that the Company's trademarks do not
or will not violate the proprietary rights of others, that they would be upheld
if challenged or that the Company would, in such an event, not be prevented from
using its trademarks, any of which could have a material adverse effect on the
Company and its business.
The Company has obtained non-exclusive licenses from third parties to
patents for certain contact lens designs and manufacturing technologies used in
the production of its products, including its dry cast molding processes. The
Company has also obtained non-exclusive, fully paid, perpetual, worldwide
licenses to use certain technology relating to the tinting of lenses and to
manufacture a monomer used to produce certain of its lenses. In addition, the
Company licenses technology used in manufacturing its toric and bifocal contact
lenses under non-exclusive license agreements that limit the sales of products
manufactured using the licensed technology to the Americas. The Company cannot
assure you that if it desires or is required to renew these licenses or to
obtain additional licenses to patents or proprietary rights of others, that any
such licenses will be available on terms acceptable to the Company, if at all.
In addition, the Company has filed patent applications on certain aspects
of its new automated manufacturing process and new toric product. The Company
cannot assure you that it will be successful in obtaining additional necessary
patent and license rights, that the patents it has obtained, or any patents it
may obtain as a result of pending patent applications, will provide any
competitive advantages for its products, that those patents will not be
successfully challenged, invalidated or circumvented in the future or that
competitors have not already applied for or obtained or will not seek to apply
for and obtain, patents that will prevent, limit or interfere with the Company's
ability to make, use and sell its products. Patent applications are maintained
in secrecy for a period after filing and the Company may not be aware of all of
the patents and patent applications potentially adverse to its interests.
In addition to trademarks and patent licenses, the Company owns certain
trade secrets, copyrights, know-how and other intellectual property. The Company
seeks to protect these assets, in part, by entering into confidentiality
agreements with certain of its business partners, consultants and vendors. There
can be no assurance that these agreements will not be breached, that the Company
will have adequate remedies for any such breach or that the Company's trade
secrets and other intellectual property will not otherwise become known or be
independently developed by others and thereby become unprotected. Furthermore,
no assurance can be given that competitors will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's proprietary technology or that the Company can
meaningfully protect its rights in un-patented proprietary technology.
The defense and prosecution of intellectual property suits and related
administrative proceedings are both costly and time-consuming. Litigation may be
necessary to enforce the Company's intellectual property rights, to protect its
trade secret or know-how or to determine the enforceability, scope and validity
of the proprietary
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rights of others. There can be no assurance that the prosecution and defense of
the Company's intellectual property will be successful or that the Company will
be able to secure adequate intellectual property protections in the future. If
the outcome of any such litigation or interference proceedings is adverse to the
Company, it could subject the Company to significant liabilities to third
parties or require the Company to license disputed rights from third parties or
cease using such technology, which would have a material adverse effect on the
Company's business, financial condition, results of operations and future growth
prospects. The protection of intellectual property in certain foreign countries
is particularly uncertain. Adverse determinations in a judicial or
administrative proceeding or failure to obtain necessary licenses could prevent
the Company from manufacturing and selling its products, and such events would
have a material adverse effect on the Company's business, financial condition
and results of operations.
DEPENDENCE ON KEY SUPPLIERS. The Company depends on several key suppliers
for some of its product components. If the supply of materials from a key
supplier were interrupted, replacement or alternative sources might not be
readily obtainable due to the regulatory requirements applicable to the
Company's manufacturing operations. In addition, a new or supplemental filing
with applicable regulatory authorities may require clearance prior to the
Company marketing a product containing new material. This clearance process may
take a substantial period of time and prove costly, and the Company cannot
assure you that it would be able to obtain the necessary regulatory approval for
the new material to be used in its products on a timely basis, if at all. The
supply disruptions could materially adversely affect the Company's business,
financial condition, results of operations and future growth prospects.
RISKS ASSOCIATED WITH REVENUES CONCENTRATED IN THE HEALTH CARE INDUSTRY AND
EXPOSURE TO REGULATORY AND ECONOMIC CHANGES IN THAT INDUSTRY. The Company's
products are sold to practitioners in the health care industry. As a result, the
Company's ability to collect accounts receivable from eyecare practitioners may
be compromised by regulatory or economic changes in the health care industry.
The inability of the Company to collect accounts receivable would have a
material adverse effect on its revenues.
RISKS ASSOCIATED WITH GOVERNMENT REGULATION OF THE HEALTH CARE
INDUSTRY. The Company's success depends to a significant extent upon the success
of its customers in the retail optical industry. These customers are subject to
a variety of federal, state and local laws, regulations and ordinances,
including those regarding advertising, location and design of stores, products
sold and qualifications and practices of the industry. The state and local legal
requirements vary widely among jurisdictions and are subject to frequent change.
Furthermore, numerous health-care related legislative proposals have been made
in recent years in the United States Congress and in various state legislatures.
The potential impact of these proposals with respect to the business of the
Company's customers is uncertain, and there is no assurance that the proposals,
if adopted, would not have a material adverse impact on the Company.
There is substantial United States federal and state governmental
regulation related to the prescribing of contact lenses. These regulations
relate to who is permitted to prescribe and fit contact lenses, the prescriber's
obligation to provide prescriptions to its patients, the length of time a
prescription is valid, the ability or obligation of prescribers to prescribe
lenses by brand rather than by generic equivalent or specification, and other
matters. Although these regulations primarily affect contact lens prescribers,
and not manufacturers or distributors of lenses such as the Company, changes in
these regulations, or their interpretation or enforcement, could adversely
affect the effectiveness of the Company's marketing strategy to eyecare
practitioners, most notably the effectiveness of the Company's channel-specific
and private label branding strategies. Additionally, given the Company's
strategic emphasis on focusing its marketing efforts on eyecare practitioners
rather than consumers, the Company may be more vulnerable than its competitors
to changes in current trade practices. Adverse regulatory or other decisions
affecting eyecare practitioners, or material changes in the selling and
prescribing practices for contact lenses, could have a material adverse affect
on the Company's business, operating results and financial condition.
RISKS OF PRODUCT LIABILITY AND INSUFFICIENT PRODUCT LIABILITY
INSURANCE. The Company has in the past been, and continues to be, subject to
product liability claims and lawsuits. Because contact lenses are medical
devices, the Company faces an inherent risk of exposure to product liability
claims in the event that the use of its products results in personal injury. The
Company also faces the possibility that defects in the design or
25
26
manufacture of its products might necessitate a product recall. From time to
time, the Company has received, and may continue to receive, complaints of
significant patient discomfort, including corneal scarring and complications,
while using the Company's contact lenses. In certain cases, the reasons for the
problems have never been established. In addition, on two occasions, in 1995 and
1997, the Company has recalled limited volumes of certain of its product because
certain labels on the vial or blister did not match the enclosed lens. Also in
1999, the Company recalled a substantial volume of certain of its products
because of an incorrect sterility seal on the product blister. Although the
Company has not experienced material losses to date due to product liability
claims or product recalls, there can be no assurance that the Company will not
experience such losses in the future. A successful product liability claim
brought against the Company in excess of its insurance coverage, if any, may
require the Company to pay substantial amounts. This could adversely affect the
Company's results of operations and its need for and the timing of additional
financing. In addition, although the Company believes it currently maintains
sufficient product liability insurance coverage, if the Company is unable to
obtain or maintain sufficient insurance coverage on reasonable terms or to
otherwise protect against potential product liability claims, it may be unable
to market its products.
ITEM 2. PROPERTIES
The Company's principal administrative, sales, marketing, customer service,
packaging and distribution facility is located in South San Francisco,
California. In December 2000, the Company entered into a seven year lease of
office space to move its Corporate Headquarters to Concord, California. Sales,
Marketing, Finance and Administrative departments will be affected by this move.
The Company's principal manufacturing facilities are located near Southampton,
United Kingdom, and in Juana Diaz, Puerto Rico. The Company also maintains sales
offices in Canada, Australia, Hungary and the United Kingdom.
The Company's Puerto Rico facility is currently operating at or near
capacity (based on a single production shift per work day). As part of the
Company's plan to increase its manufacturing capacity, it expanded its Puerto
Rican manufacturing facilities to include a substantially larger new facility
which is being leased to the Company by the Puerto Rico Industrial Development
Company. The Company has relocated most of its manufacturing operations to this
new facility. See "Item 1 -- Business -- Manufacturing" and "Item 1 -- Risk
Factors -- Manufacturing Capacity Constraints; Risks Associated with Expansion
and Automation of Manufacturing Operations."
The following table describes the Company's principal facilities as of
December 31, 2000:
APPROXIMATE OWNED/
LOCATION FUNCTION SQUARE FEET LEASED
-------- -------- ----------- ------
South San Francisco, Corporate Headquarters/Sales/ 152,145 Leased
California(1)..................... Distribution
Concord, California(2).............. New Corporate Headquarters 19,828 Leased
Eastleigh, United Kingdom(3)........ Manufacturing 66,000 Leased
Eastleigh, United Kingdom(4)........ Warehouse 10,000 Leased
Eastleigh, United Kingdom(5)........ Pilot Facility 20,989 Leased
Romsey, United Kingdom(6)........... Sales/Distribution 34,160 Leased
Nursling, United Kingdom(7)......... Warehouse 4,400 Leased
Santa Isabel, Puerto Rico(8)........ Manufacturing 13,000 Leased
Juana Diaz, Puerto Rico(9).......... Manufacturing 119,348 Leased
Markham, Ontario(10)................ Sales/Marketing/Distribution Warehouse 14,005 Leased
Melbourne, Australia(11)............ Sales/Distribution 1,531 Leased
Budapest, Hungary(12)............... Sales/Distribution 775 Leased
- - ---------------
(1) The Company's lease for this facility expires on October 30, 2002, and the
Company has an option to extend the lease until 2007 and to lease an
additional 30,000 square feet.
(2) The Company's lease for this facility expires on January 28, 2008, and the
Company has an option to extend the lease until 2013.
26
27
(3) The Company's lease for this facility expires on December 23, 2010.
(4) The Company occupies this facility under a three-month rolling lease.
(5) The Company's lease for this facility expires on December 23, 2010.
(6) Represents two separate buildings. One is leased under a lease that expires
August 18, 2007, and the Company has an option to break the lease from
August 18, 2003. The second building's lease expires on December 31, 2012.
(7) The Company's lease for this facility expires on March 21, 2011.
(8) The Company's lease for this facility expires December 31, 2001.
(9) Under an agreement effective June 1998, Ocular Sciences Puerto Rico managed
on Puerto Rico Industrial Development Company's ("PRIDCO") behalf the
construction of a new manufacturing facility. The new facility was leased
by Ocular Sciences Puerto Rico. The lease commenced on March 1, 2000, the
first day of the month following the completion, inspection and acceptance
of the constructed building, for a period of ten years. This transaction
will be accounted for as a financed purchase of the building (see Note 9 of
Notes to Consolidated Financial Statements).
(10) The Company's lease for this facility expires September 30, 2010.
(11) The Company occupies this facility on a month-to-month lease.
(12) Represents two offices. One office is leased under a lease that expires on
January 6, 2002, and the other office is leased under a month-to-month
lease.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 28, 2000 the Company held its annual meeting of stockholders at
which the stockholders met to elect six directors of the Company and amend the
Company's 1997 Directors Stock Option Plan to increase the number of shares of
Common Stock available under the plan by 100,000 shares. With respect to the
election of directors, for John D. Fruth, 15,839,258 votes were cast in favor of
election, 125,109 votes were cast against election and there were no
abstentions; for Edgar J. Cummins, 15,839,258 votes were cast in favor of
election, 125,109 votes were cast against election and there were no
abstentions; for Terence M. Fruth, 15,694,658 votes were cast in favor of
election, 269,709 votes were cast against election and there were no
abstentions; for William R. Grant, 15,879,258 votes were cast in favor of
election, 85,109 votes were cast against election and there were no abstentions;
for Terrance Gregg 15,839,258 votes were cast in favor of election, 125,109
votes were cast against election and there were no abstentions; and for Francis
R. Tunney, Jr. 15,879,258 votes were cast in favor of election, 85,109 votes
were cast against election and there were no abstentions. With respect to the
amendment to the 1997 Directors Stock Option Plan, 15,054,549 votes were cast in
favor of the motion, 472,168 votes were cast against the motion and 437,650
votes abstained.
27
28
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCK HOLDER
MATTERS
PRICE RANGE OF COMMON STOCK
The Common Stock of the Company began trading publicly on the Nasdaq
National Market on August 5, 1997 under the symbol "OCLR." Prior to that date,
there was no public market for the Common Stock. The following table sets forth
for the periods indicated the high and low sale prices of the Company's Common
Stock on the Nasdaq National Market.
HIGH LOW
-------- --------
YEAR ENDED DECEMBER 31, 2000:
Fourth Quarter....................................... $13.2500 $11.6250
Third Quarter........................................ $12.9375 $10.5000
Second Quarter....................................... $17.2500 $11.7500
First Quarter........................................ $21.5625 $13.8750
YEAR ENDED DECEMBER 31, 1999:
Fourth Quarter....................................... $20.6250 $15.2500
Third Quarter........................................ $20.0625 $16.4375
Second Quarter....................................... $34.8750 $14.7500
First Quarter........................................ $28.6875 $20.0000
YEAR ENDED DECEMBER 31, 1998:
Fourth Quarter....................................... $27.2500 $17.8750
Third Quarter........................................ $34.2500 $17.6875
Second Quarter....................................... $26.6250 $35.0000
First Quarter........................................ $31.8750 $22.6250
As of March 1, 2001, there were approximately 142 holders of record of the
Company's Common Stock although the Company believes that there are a larger
number of beneficial owners.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock, and the payment of cash dividends on its Common Stock is prohibited under
the Company's Amended and Restated Credit Agreement with Comerica
Bank -- California (the "Comerica Credit Agreement"). The Company currently
expects to retain all future earnings for use in the operation and expansion of
its business and does not anticipate paying any cash dividends on its capital
stock in the foreseeable future.
28
29
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's consolidated financial statements and the notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere in this Form 10-K. The selected data
presented below under the captions "Consolidated Statement of Income" and
"Consolidated Balance Sheet Data" for, and as of the end of, each of the years
in the five-year period ended December 31, 2000 are derived from the
consolidated financial statements of the Company.
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- -------
($U.S. IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF INCOME DATA:
Net sales................................ $176,970 $175,998 $151,908 $118,605 $90,509
Cost of sales............................ 72,932 63,375 48,307 41,066 36,553
-------- -------- -------- -------- -------
Gross profit........................... 104,038 112,623 103,601 77,539 53,956
Selling and marketing expenses........... 46,164 44,291 40,445 27,139 18,101
General and administrative expenses...... 21,027 19,681 19,117 18,085 17,332
Research and development expenses........ 4,039 2,908 2,234 2,385 1,088
-------- -------- -------- -------- -------
Income from operations................. 32,808 45,743 41,805 29,930 17,435
Interest expense......................... (596) (279) (308) (1,387) (3,216)
Interest income.......................... 3,403 2,390 2,870 939 132
Other income (expense), net.............. 20,477 (73) (1,134) (6) (186)
-------- -------- -------- -------- -------
Income before taxes.................... 56,092 47,781 43,233 29,476 14,165
Income taxes............................. (17,151) (11,348) (12,670) (8,843) (3,989)
-------- -------- -------- -------- -------
Net income............................. 38,941 36,433 30,563 20,633 10,176
Preferred stock dividends................ -- -- -- (49) (82)
-------- -------- -------- -------- -------
Net income applicable to common
stockholders........................... $ 38,941 $ 36,433 $ 30,563 $ 20,584 $10,094
======== ======== ======== ======== =======
Net income per share (basic)(1).......... $ 1.68 $ 1.60 $ 1.37 $ 1.10 $ 0.61
======== ======== ======== ======== =======
Net income per share (diluted)(1)........ $ 1.66 $ 1.55 $ 1.31 $ 0.98 $ 0.52
======== ======== ======== ======== =======
Shares used in computing net income per
share (basic)(1)....................... 23,164 22,831 22,293 18,722 16,445
======== ======== ======== ======== =======
Shares used in computing net income per
share (diluted)(1)..................... 23,422 23,445 23,276 21,107 19,439
======== ======== ======== ======== =======
OTHER DATA:
Lenses marketed for disposable
replacement regimens as a percentage of
total lenses sold (unit volume)........ 95.7% 96.3% 93.7% 89.6% 83.5%
Depreciation and amortization............ $ 12,155 $ 8,526 $ 5,950 $ 6,863 $ 4,904
Capital expenditures..................... 28,373 46,395 32,706 16,156 12,256
AS OF DECEMBER 31,
---------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- -------
($U.S. IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents, restricted cash
and short-term and long-term
investments............................ $ 66,740 $ 46,501 $ 57,249 $ 47,429 $ 5,541
Working capital.......................... 102,314 73,353 70,578 60,914 15,118
Total assets............................. 264,830 222,315 176,570 132,835 63,503
Total debt............................... 5,728 3,442 3,464 3,879 22,740
Stockholders' equity..................... 221,714 183,609 142,949 106,104 23,889
- - ---------------
(1) For an explanation of the determination of the number of shares used in
computing net income per share (basic and diluted) see Note 2 of Notes to
Consolidated Financial Statements.
29
30
TWO YEAR QUARTERLY FINANCIAL DATA
(UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
($U.S. IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL 2000
Net sales................................... $43,442 $42,953 $47,790 $42,785
Gross profit................................ 26,475 24,631 28,130 24,802
Operating income............................ 9,035 6,733 8,948 8,091
Net income.................................. 7,133 17,477 7,490 6,840
Net income per share (basic)................ $ .31 $ .76 $ .32 $ .30
Net income per share (diluted).............. $ .31 $ .75 $ .32 $ .29
FISCAL 1999
Net sales................................... $37,009 $43,919 $49,475 $45,595
Gross profit................................ 24,677 27,924 31,554 28,468
Operating income............................ 8,785 11,659 12,801 12,498
Net income.................................. 6,655 9,314 10,424 10,040
Net income per share (basic)................ $ .29 $ .41 $ .45 $ .44
Net income per share (diluted).............. $ .29 $ .40 $ .45 $ .43
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this Report contain forward-looking
statements which involve risks and uncertainties. The Company's actual results
may differ materially from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed in "Item 1-- Risk Factors."
OVERVIEW
Since the Company was incorporated in 1985, its strategy has been to market
high-quality contact lenses to eyecare practitioners at competitive prices using
a low cost-to-serve operating structure. The Company continues to maintain this
worldwide strategy. The contact lens industry and the Company's business are
characterized by increasing unit sales and declining average selling prices,
resulting primarily from a world-wide shift in demand from lenses marketed for
annual replacement regimens to lenses marketed for disposable replacement
regimens. Since the Company launched its first lens marketed for weekly
replacement regimens, in the summer of 1993 through 2000, the Company has seen
increased net sales each year. The Company's share of the market for lenses
marketed for weekly disposable replacement regimens eroded slightly in 2000
resulting in a market share for the fourth quarter of 2000 of 17.0% compared to
19.3% in the same quarter of 1999. In 2000, lenses marketed for disposable
replacement regimens accounted for 95.7% of the Company's unit volume and 89.7%
of net sales, as compared to 96.3% and 89.7%, respectively, for the comparable
period in 1999. See "Item 1 -- Risk Factors."
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31
RESULTS OF OPERATIONS
All results of operations data in the following tables is presented U.S.
dollars in thousands.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Net Sales
YEARS ENDED DECEMBER 31,
--------------------------------
2000 % CHANGE 1999
-------- -------- --------
U.S. ............................................... $121,700 (5.7)% $129,066
International....................................... 55,270 17.8% 46,932
-------- --------
Net sales........................................... $176,970 0.6% $175,998
======== ========
As a percentage of net sales
U.S. ............................................. 68.8% 73.3%
International..................................... 31.2% 26.7%
Net Sales represents gross sales less allowances for returns, trial set and
prompt payment discounts. The Company recognizes sales upon shipment of products
to its customers. Discounts and allowances for sales returns are accrued at the
time sales are recognized. Net sales increased from 1999 to 2000 from $176.0
million to $177.0 million and consisted primarily in the Company's lenses
marketed for daily, weekly and monthly replacement regimens. Unit sales growth
of the Company's lenses marketed for disposable replacement regimens increased
14.7% from 1999 to 2000. A significant portion of such growth came from
international sales, which grew 18.0% while domestic sales declined 6% in 2000.
As expected, intense competition for market share in the U.S., the impact of the
proposed merger with Wesley Jessen, capacity constraints and a slowly growing
U.S market for soft contact lenses contributed to the decline in U.S. sales for
the year. International sales were driven by the continued growth of the
European and Japanese market and the Company's expanding presence in these
markets. See "Item 1 -- Risk Factors -- Manufacturing Capacity Constraints;
Risks Associated with Expansion and Automation of Manufacturing Operations."
The Company's overall average selling price decreased 10.9% from 1999 to
2000, primarily as a result of the increase in sales of lenses marketed in
international markets through distributors, which have lower average selling
prices, and the intense price competition on the Company's daily and weekly
disposable products. The Company expects that the overall average selling price
that it realizes across its products will continue to decline over time because
of (i) shifts in the Company's product mix from lenses marketed for annual
replacement regimens to lenses marketed for disposable replacement regimens,
particularly lenses marketed for daily disposal, and (ii) increases in products
sold internationally to distributors at prices lower than direct sales prices in
the United States.
Gross Profit
YEARS ENDED DECEMBER 31,
--------------------------------
2000 % CHANGE 1999
-------- -------- --------
Gross profit........................................ $104,038 (7.6)% $112,623
As a percentage of net sales........................ 58.8% 64.0%
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. Gross profit in dollars and as a
percentage of sales in 2000 both decreased from the comparable period in 1999
due to reductions in the Company's average selling prices, as discussed in "Net
Sales". This was partially offset by lower production costs resulting from the
implementation of certain manufacturing process improvements and increases in
manufacturing volume. The Company expects cost reductions resulting from
improvements in the Company's current production processes will continue in the
future. Specifically, the Company is in the process of adding new automated
production lines at its United Kingdom and Puerto Rico facilities, which are
designed to further reduce its per unit cost of production over time, although
such cost reductions may not be seen until future periods. As the Company
expects that its overall average selling price will continue to decline
31
32
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,
may exceed the rate of decline in production cost in the near term and
accordingly, the Company would expect continued pressure on its gross profit
margins in the future for its products. See "Item 1 -- Risk
Factors -- Fluctuations in Operating Results; Decreasing Average Sales Prices."
Selling and Marketing Expenses
YEARS ENDED DECEMBER 31,
------------------------------
2000 % CHANGE 1999
------- -------- -------
Selling and marketing expenses........................ $46,164 4.2% $44,291
As a percentage of net sales.......................... 26.1% 25.2%
Selling and marketing expenses are comprised primarily of cooperative
merchandising allowances, sample diagnostic products provided to eye-care
practitioners without charge, salaries, commissions and benefits for selling and
marketing personnel and postage and freight charges not billed to customers.
Cooperative merchandising allowances are reimbursements to encourage the fitting
and wearing of the Company's lenses marketed for disposable replacement
regimens. Such activities may include, but are not limited to advertising,
in-office promotion, displays and mailings. These allowances are limited to a
percentage of purchases of lenses marketed for disposable replacement regimens
from the Company. The increase in dollars and percentage terms from 1999 to 2000
resulted primarily from increases in expenditures related to cooperative
merchandising allowances, outbound freight, promotional programs, the addition
of the Phoenix sales office, the hiring of outside sales representatives for the
20 largest U.S. markets and one-time sales force retention costs. The Company
believes selling and marketing expenses, particularly cooperative merchandising
allowances and costs associated with its outside sales force, will grow in
dollars and as a percentage of sales.
General and Administrative Expenses
YEARS ENDED DECEMBER 31,
------------------------------
2000 % CHANGE 1999
------- -------- -------
General and administrative expenses................... $21,027 6.8% $19,681
As a percentage of net sales.......................... 11.9% 11.2%
General and administrative expenses are comprised primarily of salaries and
benefits for distribution, general and administrative personnel, professional
services, consultants' fees, and non-manufacturing depreciation and facilities
costs. The increase in dollar and percentage terms was due primarily to employee
retention costs, higher consulting fees, telephone charges associated with the
Company's new management software, bad debt expenses, increased infrastructure
costs at the Canadian and United Kingdom facilities and other one-time
professional fees.
Research and Development Expenses
YEARS ENDED DECEMBER 31,
----------------------------
2000 % CHANGE 1999
------ -------- ------
Research and development expenses....................... $4,039 38.9% $2,908
As a percentage of net sales............................ 2.3% 1.7%
Research and development expenses are comprised primarily of consulting
costs for research and development personnel and in-house labor related to
manufacturing process and new product development. The increase in dollars and
percentage terms from 1999 to 2000 was primarily due to expenditures related to
activities in connection with new product development, including the completion
of the Company's new disposable Toric product, which will be launched in March
2001. Research and development expenses may fluctuate based on the timing of new
product development projects.
32
33
Interest and Other Income, Net
YEARS ENDED DECEMBER 31,
-----------------------------
2000 % CHANGE 1999
------- -------- ------
Interest and other income, net......................... $23,284 1,042.5% $2,038
As a percentage of net sales........................... 13.2% 1.2%
The increase in the dollar amount of interest and other income, net from
1999 to 2000 resulted primarily from the proposed merger termination fee of
$25.0 million less associated merger-related expenses of $4.2 million and
interest income from the investment of these funds. Offsetting this income is
interest expense associated with the quarterly payments on the construction loan
for the Juana Diaz Puerto Rico manufacturing facility.
Income Taxes
YEARS ENDED DECEMBER 31,
------------------------------
2000 % CHANGE 1999
------- -------- -------
Income taxes.......................................... $17,151 51.1% $11,348
Effective tax rate.................................... 30.6% 23.8%
The Company's higher effective tax rate for 2000 was entirely attributable
to the U.S. taxation of the $25.0 million proposed merger termination fee. The
company continues to receive a partial exemption from U.S. taxation with respect
to earnings of the Company's Puerto Rican operations. In addition, the increase
in the Company's foreign earnings, as a proportion to total earnings, have
increased the amount of earnings taxed at the lower tax rates. The Company
anticipates that it will continue to benefit from the increase in foreign
earnings and the favorable effect of the Puerto Rico 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.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Net Sales
YEARS ENDED DECEMBER 31,
--------------------------------
1999 % CHANGE 1998
-------- -------- --------
U.S................................................. $129,066 7.8% $119,716
International....................................... 46,932 45.8% 32,192
-------- --------
Net sales........................................... $175,998 15.9% $151,908
======== ========
As a percentage of net sales
U.S............................................... 73.3% 78.8%
International..................................... 26.7% 21.2%
Net Sales represents gross sales less allowances for returns, trial set and
prompt payment discounts. The Company recognizes sales upon shipment of products
to its customers. Discounts and allowances for sales returns are accrued at the
time sales are recognized. The growth in net sales dollars from 1998 to 1999 of
$24.1 million or 15.9% was primarily from increased sales of the Company's
lenses marketed for daily and weekly replacement regimens. Unit sales growth of
the Company's lenses marketed for disposable replacement regimens increased
52.9% from 1998 to 1999. A significant portion of such growth came from
international sales, which grew faster than domestic sales due to the Company's
new product launches in Japan and Europe. Unit growth of the Company's
international sales increased 120.0% from 1998 to 1999. The Company was
experiencing backorders on certain of its products which had been caused by
delays in the implementation of automated production lines in the United
Kingdom. See "Item 1 -- Risk Factors -- Manufacturing Capacity Constraints;
Risks Associated with Expansion and Automation of Manufacturing Operations."
33
34
The Company's overall average selling price decreased 22% from 1998 to
1999, primarily as a result of the increase in sales of lenses marketed for
daily disposable regimens, which have lower average selling prices, and the 1998
price reductions on the Company's weekly disposable products. The price
reductions on the Company's lenses marketed for weekly replacement took place
during the second half of 1998 in response to price changes by the Company's
largest competitor, and were offset in part by reductions in cooperative
merchandising allowances described in "Selling and Marketing Expenses", below.
Gross Profit
YEARS ENDED DECEMBER 31,
--------------------------------
1999 % CHANGE 1998
-------- -------- --------
Gross profit........................................ $112,623 8.7% $103,601
As a percentage of net sales........................ 64.0% 68.2%
Cost of sales is comprised primarily of the labor, overhead and material
costs of production and packaging, freight and duty, inventory reserves, and
amortization of certain intangible assets. The dollar increase in gross profit
from 1998 to 1999 was due primarily to increased net sales. Gross profit as a
percentage of sales in 1999 decreased from the comparable periods in 1998 due to
reductions to the Company's average selling prices, as discussed in "Net Sales",
which were partially offset by lower production costs resulting from the
implementation of certain process improvements and increases in manufacturing
volume. The Company is in the process of adding automated production lines at
its United Kingdom and Puerto Rico facilities, which are designed to further
reduce its per unit cost of production over time, although such cost reductions
may not be seen until future periods. The first automated line was FDA validated
in the United Kingdom in mid-January 2000, and is now producing product for
sale. See "Item 1 -- Risk Factors -- Manufacturing Capacity Constraints; Risks
Associated With Expansion and Automation of Manufacturing Operations."
As the Company expects that its overall average selling price will continue
to decline over time due to product and geographic mix shift, 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 See "Item 1 -- Risk
Factors -- Fluctuations in Operating Results; Decreasing Average Sales Prices."
Selling and Marketing Expenses
YEARS ENDED DECEMBER 31,
------------------------------
1999 % CHANGE 1998
------- -------- -------
Selling and marketing expenses........................ $44,291 9.5% $40,445
As a percentage of net sales.......................... 25.2% 26.6%
Selling and marketing expenses are comprised primarily of cooperative
merchandising allowances, sample diagnostic products provided to eye-care
practitioners without charge, salaries, commissions and benefits for selling and
marketing personnel and postage and freight charges not billed to customers.
Cooperative merchandising allowances are reimbursements to encourage the fitting
and wearing of the Company's lenses marketed for disposable replacement
regimens. Such activities may include, but are not limited to advertising,
in-office promotion, displays and mailings. These allowances are limited to a
percentage of purchases of lenses marketed for disposable replacement regimens
from the Company. The increase in dollars from 1998 to 1999 resulted primarily
from increases in expenditures related to cooperative merchandising allowances,
outbound freight, promotional programs, the size of the U.S. sales force, and
royalties which are due on certain United Kingdom sales. partially offset in
part by lower sample diagnostic expenditures. The decrease in 1999 selling and
marketing expenses as a percentage of net sales is due to a reduction in the
amount of cooperative merchandising allowances paid in 1999 on a per unit basis
compared to 1998, due to the 1998 price reductions discussed in "Net Sales".
34
35
General and Administrative Expenses
YEARS ENDED DECEMBER 31,
------------------------------
1999 % CHANGE 1998
------- -------- -------
General and administrative expenses................... $19,681 3.0% $19,117
As a percentage of net sales.......................... 11.2% 12.6%
General and administrative expenses are comprised primarily of salaries and
benefits for distribution, general and administrative personnel, professional
services, consultants' fees, and non-manufacturing depreciation and facilities
costs. The dollar increase was due primarily to increased depreciation related
primarily to new computer hardware and software, general and administrative
expenses related to the new Australian subsidiary acquired in July 1999,
additional infrastructure related to the United Kingdom distribution facility
and implementation of a new operating structure in the first quarter of 1999.
These increases were almost completely offset by reduced 1999 provisions for
management bonuses, which are paid at the discretion of the Board of Directors,
and doubtful accounts receivable. Additionally, included in the expense for 1998
is a charge of $586,000 related to a custom-built packaging machine which failed
factory acceptance tests and Company specifications. However, in the fourth
quarter of 1999, the Company recovered $324,000 from the vendor for this
packaging machine and has recorded this recovery in its 1999 results. The
decrease in general and administrative expenses as a percentage of net sales was
primarily due to the lower 1999 provisions for management bonuses and doubtful
accounts and the one-time packaging equipment provisions and reversals, as
discussed earlier.
Research and Development Expenses
YEARS ENDED DECEMBER 31,
----------------------------
1999 % CHANGE 1998
------ -------- ------
Research and development expenses....................... $2,908 30.2% $2,234
As a percentage of net sales............................ 1.7% 1.5%
Research and development expenses are comprised primarily of consulting
costs for research and development personnel and in-house labor related to
manufacturing process and new product development. The increase in dollars from
1998 to 1999 was primarily due to expenditures related to activities in
connection with new product development and the hiring of the new Vice President
of Research and Development in accordance with the Company's initiative to
invest in new product development. Research and development expenses may
fluctuate based on the timing of new product development projects.
Interest and Other Income, Net
YEARS ENDED DECEMBER 31,
----------------------------
1999 % CHANGE 1998
------ -------- ------
Interest and other income, net.......................... $2,038 42.7% $1,428
As a percentage of net sales............................ 1.2% 0.9%
The increase in the dollar amount of interest and other income, net from
1998 to 1999 resulted primarily from increase in foreign currency exchange
gains, partially offset by a reduction in interest income due to lower interest
rates on lower invested balances.
Income Taxes
YEARS ENDED DECEMBER 31,
------------------------------
1999 % CHANGE 1998
------- -------- -------
Income taxes.......................................... $11,348 (10.4)% $12,670
Effective tax rate.................................... 23.8% 29.3%
The Company's lower effective tax rate for 1999 was a result of an increase
in the earnings from the Company's Puerto Rican operations, which are partially
exempt from U.S. taxation, the implementation of a new operating structure in
March of 1999, which increased the Company's foreign earnings that are taxed at
35
36
lower tax rates, and other tax strategies. Additionally, earnings attributable
to the Company's Puerto Rican operations are partially exempt from U.S.
taxation. The Company anticipates that it will continue to benefit from the
favorable effect of this Puerto Rican partial exemption through 2001, with
limited exemption during the transition period from 2002 through 2006, when the
benefit will expire under the current provisions of the Internal Revenue Code.
RECENTLY ISSUED 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 June 15, 2000.
In 2000, the Company did not use derivative instruments or participate in
any hedging activities. The Company does not expect a material impact from
implementation of SFAS No. 133 on its financial position, results of operations
and cash flows should these instruments be used in the future.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at December 31, 2000 of $55.1 million increased
from a December 31, 1999 balance of $10.1 million. Working capital increased
from $73.4 million at December 31, 1999 to $102.3 million at December 31, 2000.
The increase in cash and cash equivalents was due primarily to cash provided by
operating activities, maturities of short and long-term instruments and the $25
million proposed merger termination fee with Wesley Jessen offset by the
purchases of property and equipment. Working capital increased primarily by the
cash received from the termination of the proposed merger less associated
merger-related expenses. The Company had $11.6 million in short and long-term
investments as of December 31, 2000, compared to $36.0 million as of December
31, 1999. The Company matured many of its short and long-term investments in
anticipation of the acquisition of the contact lens business of Essilor
International. The remaining short and long term investments may be easily
liquidated at minimal cost.
Net cash provided by operating activities was $47.4 million, $35.0 million
and $40.5 million in 2000, 1999 and 1998, respectively, primarily representing
net income of $38.9 million, $36.4 million and $30.6 million, respectively, and
adjusted for depreciation and amortization charges of $12.4 million, $8.5
million and $6.0 million, respectively. These operating cash flows were reduced
by net increases to inventories and accounts payable and offset by reductions in
accounts receivables, prepaid expenses and accrued liabilities.
Net cash used in investing activities in 2000, 1999 and 1998 was $3.6
million, $53.2 million and $42.6 million, respectively. In 1999, the Company
used $46.4 million to purchase property and equipment, $6.3 million to purchase
net short and long-term investments, and $498,000 to acquire two companies in
Australia. In 2000, the Company used $27.2 million to purchase property and
equipment and $1.2 million in purchases of patents but was offset by $37.6
million in sales of short and long-term investments. Purchases of property and
equipment were lower than in past years due to delays caused by the proposed
merger with Wesley Jessen. Sales of short and long-term investments were made in
anticipation of the acquisition of the contact lens business of Essilor
International.
Net cash provided by financing activities in 2000, 1999 and 1998 was $2.5
million, $1.8 million and $1.5 million, respectively. In each of these years,
net cash was used primarily for repayments of long-term debt. Net cash provided
in 1998 and 1999 was primarily from proceeds from issuance of common stock from
36
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employee stock option exercises. In 2000, net cash provided was primarily from
proceeds from capital lease obligations associated with the new Juana Diaz
manufacturing facility in Puerto Rico.
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 a 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
December 31, 2000, there were no revolving loans outstanding under the Comerica
Credit Agreement. In addition, the Comerica Credit Agreement originally provided
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 December 31, 2000, there were $1.8 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 stock of the Company's Barbados and Canadian subsidiaries. In
addition, the Company and Ocular Sciences Puerto Rico have each guaranteed the
other's borrowings under the Comerica Credit Agreement.
The Company is obligated to make minimum base payments on noncancelable
operating leases of $777,000, $500,000 and $432,000 in 2001, 2002 and 2003,
respectively. The Company currently expects to make capital expenditures of
approximately $42.0 million in 2001 related to the implementation of new
automated production lines 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 lines based on market
conditions and demand for its products. See "Item 1 -- Risk Factors --
Manufacturing Capacity Constraints; Risks Associated With Expansion and
Automation of Manufacturing Operations."
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 December 31, 2000, the Company has purchased 62,500 shares on the open
market.
The Company believes that its current cash and cash equivalents, further
borrowings available under its credit facilities and its anticipated net cash
flow from operations, will be sufficient to meet its anticipated cash needs for
working capital, contractual commitments and capital expenditures for the
foreseeable future.
EURO CONVERSION
On January 1, 1999, eleven of the fifteen member countries of the European
Economic and Monetary Union ("EMU") established fixed conversion rates through
the European Central Bank between existing local currencies and one common
currency, the Euro. For a three and a half-year transition period, non-cash
transactions may be denominated in either the Euro or in the old national
currencies. After July 1, 2002, the Euro will be the sole legal tender for EMU
countries. The Company's United Kingdom subsidiary did not conduct any
transactions in the Euro as of December 31, 2000, although invoices are produced
with the Euro converted amount as reference. The Company has not experienced,
nor does it anticipate any future material impact from the Euro conversion on
its financial information systems nor its financial condition and results of
operations.
SUBSEQUENT EVENTS
On December 22, 2000, the Company signed a definitive agreement with
Paris-based Essilor International (Compagnie Generale d'Optique) S.A. to acquire
Essilor's contact lens business for cash. The
37
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Company acquired all sales and distribution assets of Essilor's contact lens
business in Europe and manufacturing facilities in France, United Kingdom and
Albuquerque, New Mexico. This acquisition provides enhanced sales and
distribution channels in Europe, new product lines and additional research and
development expertise. The sale was completed on February 12, 2001, which was
approved by the Board of Directors of both Companies for approximately $47
million.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
The Company's investments consist of interest-bearing investment-grade
instruments that meet high quality standards consistent with the Company's
investment policy. The Company's investment policy requires that the portfolio's
average maturity shall not exceed one year, and the maximum maturity of any
investment shall not exceed three years. Since its average maturities of its
investment portfolio is short-term, as dictated by the Company's investment
policy, the Company believes that the impact of the fluctuation in interest rate
to the carrying value is not material (see Note 4 to the Consolidated Financial
Statements). In addition, the Company does not hold derivative financial
instruments in its investment portfolio, nor does the Company utilize
risk-sensitive market instruments, positions or transactions in any material
fashion.
The Company has long-term debt outstanding, which is carried at cost (see
Note 9 to the Consolidated Financial Statements), with an interest rate which is
referenced to market rates. Interest rate changes generally do not affect the
fair value of variable rate debt instruments, but do impact future earnings and
cash flows. Holding debt levels constant, a one percentage point increase in
interest rates would decrease earnings and cash flows for variable rate debt by
approximately $18,000.
IMPACT OF FOREIGN CURRENCY RATE CHANGES
The Company operates three foreign subsidiaries that manufacture and/or
sell its products primarily in the United Kingdom and to a lesser extent in
Australia and Canada. Therefore, its earnings, cash flows and financial position
are exposed to foreign currency risk from foreign-currency-denominated
receivables and payables, forecasted sales transactions, as well as net
investment in certain foreign operations. The Company's foreign currency
transactional exposures exist primarily with the United Kingdom pound and the
Canadian dollar. In 2000, the Company recorded an exchange gain of $207,000 and
continues to evaluate the use of foreign currency hedging opportunities.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
OCULAR SCIENCES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
DECEMBER 31,
--------------------
2000 1999
-------- --------
Current Assets:
Cash and cash equivalents................................. $ 55,109 $ 10,053
Restricted cash........................................... -- 429
Short-term investments.................................... 9,585 28,389
Accounts receivable, less allowance for sales returns and
doubtful accounts of $1,494 and $1,674 for 2000 and
1999, respectively..................................... 27,682 34,556
Inventories............................................... 27,748 15,728
Loans to officers and employees........................... -- 113
Prepaid expenses and other current assets................. 15,000 15,043
-------- --------
Total current assets.............................. 135,124 104,311
Property and equipment, net............................... 118,645 102,591
Intangible assets, net.................................... 7,819 7,617
Long-term investments..................................... 2,046 7,630
Other assets.............................................. 1,196 166
-------- --------
Total assets...................................... $264,830 $222,315
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 6,218 $ 7,191
Accrued liabilities....................................... 25,346 22,553
Current portion of long-term debt......................... 1,246 1,214
-------- --------
Total current liabilities......................... 32,810 30,958
Deferred income taxes..................................... 5,348 5,520
Other liabilities......................................... 476 --
Long-term debt, less current portion...................... 4,482 2,228
-------- --------
Total liabilities................................. 43,116 38,706
-------- --------
Commitments and contingencies
Stockholders' Equity:
Preferred Stock, $0.001 par value; 4,000,000 shares
authorized; none issued................................ -- --
Common Stock, $0.001 par value; 80,000,000 shares
authorized; 23,305,685 and 22,953,985 shares issued and
outstanding for 2000 and 1999, respectively............ 23 23
Additional paid-in capital................................ 82,379 81,249
Retained earnings......................................... 142,101 103,160
Accumulated other comprehensive income (loss)............. (2,058) (823)
Treasury Stock, 62,500 shares............................. (731) --
-------- --------
Total stockholders' equity........................ 221,714 183,609
-------- --------
Total liabilities and stockholders' equity........ $264,830 $222,315
======== ========
See accompanying notes to consolidated financial statements.
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OCULAR SCIENCES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
-----------------------------------------
2000 1999 1998
----------- ----------- -----------
Net sales........................................... $ 176,970 $ 175,998 $ 151,908
Cost of sales....................................... 72,932 63,375 48,307
----------- ----------- -----------
Gross profit...................................... 104,038 112,623 103,601
Selling and marketing expenses...................... 46,164 44,291 40,445
General and administrative expenses................. 21,027 19,681 19,117
Research and development expenses................... 4,039 2,908 2,234
----------- ----------- -----------
Income from operations............................ 32,808 45,743 41,805
Interest expense.................................... (596) (279) (308)
Interest income..................................... 3,403 2,390 2,870
Other income (expense), net......................... 20,477 (73) (1,134)
----------- ----------- -----------
Income before taxes............................... 56,092 47,781 43,233
Income taxes........................................ (17,151) (11,348) (12,670)
----------- ----------- -----------
Net income........................................ $ 38,941 $ 36,433 $ 30,563
=========== =========== ===========
Net income per share data:
Net income per share (basic)...................... $ 1.68 $ 1.60 $ 1.37
=========== =========== ===========
Net income per share (diluted).................... $ 1.66 $ 1.55 $ 1.31
=========== =========== ===========
Weighted average common shares outstanding........ 23,164,156 22,830,561 22,292,632
Weighted average dilutive potential common shares
under the treasury stock method................ 258,117 613,943 983,456
----------- ----------- -----------
Total weighted average common and dilutive
potential common shares outstanding..... 23,422,273 23,444,504 23,276,088
=========== =========== ===========
See accompanying notes to consolidated financial statements.
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OCULAR SCIENCES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ACCUMULATED
OTHER
COMMON STOCK ADDITIONAL COMPREHENSIVE TREASURY TOTAL
------------------- PAID-IN RETAINED INCOME STOCK STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS (LOSS) SHARES AMOUNT EQUITY
---------- ------ ---------- -------- ------------- -------- ------ -------------
BALANCES AS OF DECEMBER 31,
1998.......................... 21,738,166 $22 $70,438 $ 36,164 $ (520) -- -- $106,104
Exercise of employee stock
options..................... 819,952 1 1,701 -- -- -- 1,702
Issuance of common stock, net of
issuance costs................ 30,000 -- 139 -- -- 139
Comprehensive income:
Net income.................. -- -- -- 30,563 -- -- -- 30,563
Other comprehensive income
(loss).................... -- -- -- -- (22) -- -- (22)
--------
Comprehensive income.......... -- -- -- -- -- -- -- 30,541
Income tax benefits from stock
options exercised........... -- -- 4,463 -- -- -- -- 4,463
---------- --- ------- -------- ------- ------- ----- --------
BALANCES AS OF DECEMBER 31,
1999.......................... 22,588,118 23 76,741 66,727 (542) -- -- 142,949
Exercise of employee stock
options..................... 365,867 -- 2,247 -- -- -- -- 2,247
Income tax benefits from stock
options exercised........... -- -- 1,895 -- -- -- -- 1,895
Comprehensive income:
Net income.................. -- -- -- 36,433 -- -- -- 36,433
Other comprehensive income
(loss).................... -- -- -- -- (281) -- -- (281)
--------
Comprehensive income.......... -- -- -- -- -- -- -- 36,152
Stock options issued in
connection with Australia
acquisition................. -- -- 366 -- -- -- -- 366
---------- --- ------- -------- ------- ------- ----- --------
BALANCES AS OF DECEMBER 31,
2000.......................... 22,953,985 23 81,249 103,160 (823) -- 183,609
Exercise of employee stock
options..................... 351,700 -- 898 -- -- -- -- 898
Income tax benefits from stock
options exercised........... -- -- 232 -- -- -- -- 232
Comprehensive income:
Net income.................. -- -- -- 38,941 -- -- -- 38,941
Other comprehensive income
(loss).................... -- -- -- -- (1,235) -- -- (1,235)
--------
Comprehensive income.......... -- -- -- -- -- -- -- 37,706
Repurchase of common stock.... -- -- -- -- (62,500) (731) (731)
---------- --- ------- -------- ------- ------- ----- --------
BALANCES AS OF DECEMBER 31,
2000.......................... 23,305,685 $23 $82,379 $142,101 $(2,058) (62,500) $ 731) $221,714
========== === ======= ======== ======= ======= ===== ========
See accompanying notes to consolidated financial statements.
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OCULAR SCIENCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
Cash flows from operating activities:
Net income................................................ $ 38,941 $ 36,433 $ 30,563
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 12,370 8,526 5,950
Amortization of loan to officer......................... 50 150 150
Income tax benefits from stock options exercised........ 232 1,895 4,463
Provision for sales returns and doubtful accounts....... 831 12 880
Provision for excess and obsolete inventory............. 816 702 1,129
Provision for damaged and scrap products................ 818 783 744
Provision for (recovery of) equipment obsolescence...... -- (324) 586
Loss (gain) on sale of property and equipment........... -- 7 10
Exchange loss (gain).................................... 207 (62) 913
Deferred income taxes................................... (4,107) (535) (157)
Changes in operating assets and liabilities:
Accounts receivable..................................... 5,521 (9,315) (7,330)
Inventories............................................. (14,140) (4,664) (1,497)
Prepaid expenses, other current and non-current
assets................................................. 3,070 (4,170) (1,844)
Accounts payable........................................ (808) 720 2,310
Accrued liabilities..................................... 905 5,332 2,765
Income and other taxes payable.......................... 2,633 (511) 867
-------- -------- --------
Net cash provided by operating activities........... 47,339 34,979 40,502
-------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment...................... (27,223) (46,395) (32,706)
Purchase of intangible assets........................... (1,150) -- --
Purchase of short-term and long-term investments........ (13,280) (33,644) (32,122)
Loans to officers and employees......................... -- (1,150) (185)
Collection of loans to officers and employees........... 60 1,150 1,113
Sales and maturities of short-term and long-term
investments............................................ 37,639 27,328 20,937
Payment for Australian acquisitions, net of cash
acquired............................................... -- (498) --
Proceeds from liquidation of property and equipment..... -- -- 368
(Deposits to) payments from restricted cash............. 387 44 (21)
-------- -------- --------
Net cash used in investing activities............... (3,567) (53,165) (42,616)
-------- -------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt................ 60 -- --
Proceeds from Financing obligation...................... 3,410 -- --
Repayment of long-term debt............................. (1,162) (480) (390)
Proceeds from secondary public offering, net............ -- -- 139
Repurchase of common stock.............................. (731) -- --
Proceeds from issuance of common stock.................. 898 2,247 1,701
-------- -------- --------
Net cash provided by financing activities........... 2,473 1,767 1,450
-------- -------- --------
Effect of exchange rate changes on cash and cash
equivalents............................................... (1,192) (48) (711)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents......................................... 45,056 (16,467) (1,375)
Cash and cash equivalents at beginning of year.............. 10,053 26,520 27,895
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 55,109 $ 10,053 $ 26,520
======== ======== ========
Supplemental cash flow disclosures: Cash paid during the
year for:
Interest................................................ $ 447 $ 272 $ 312
Income taxes............................................ $ 18,261 $ 7,512 $ 7,936
Non-cash financing activities:
Fixed Assets acquired by capital lease obligations...... $ -- $ 456 $ --
See accompanying notes to consolidated financial statements.
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OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
NOTE 1. NATURE OF BUSINESS
Formation and Business of the Company
O.S.I. Corporation ("the Company") was incorporated in California in 1985.
On July 31, 1997, the Company effected a reincorporation into the state of
Delaware and changed its name to Ocular Sciences, Inc. The Company is engaged in
the design, manufacture and distribution of contact lenses and conducts business
under the name of Ocular Sciences/American Hydron.
The Initial Public Offering
On August 8, 1997, the Company closed its initial public offering of
8,280,000 shares of its Common Stock at an initial public offering price of
$16.50 per share. Of the 8,280,000 shares, 3,600,000 shares were sold by the
Company and the remaining 4,680,000 were sold by certain selling shareholders.
The net proceeds to the Company were $53.7 million, after deducting underwriting
discounts and commissions and other offering expenses payable by the Company.
The Company utilized $11.6 million of the proceeds to repay all of the debt
outstanding under the Company's Credit Agreement with Comerica
Bank -- California, $2.9 million of the proceeds to repay subordinated debt owed
to the Company's Chief Executive Officer, $6.7 million of the proceeds as final
payment pursuant to the settlement agreement of certain United Kingdom
litigation (Note 18) and the remaining $32.5 million of the proceeds to purchase
and install machinery and equipment and to fund the construction of plant,
building and facilities.
Public Offering
On March 19, 1998, the Company completed a secondary offering in which
5,343,381 shares of its Common Stock were sold to the public at a price of
$27.50 per share (including shares sold pursuant to the underwriters'
over-allotment option). The shares sold consisted of 30,000 shares sold by the
Company and 5,313,381 shares sold by selling stockholders. The Company incurred
aggregate expenses of $645,000 in connection with the secondary offering
(excluding underwriting discounts and commissions paid by the Company and the
selling stockholders).
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, Ocular Sciences UK Limited,
Ocular Sciences Limited ("OSL") (formerly Precision Lens Laboratories Ltd.),
Ocular Sciences Puerto Rico, Inc., Ocular Sciences Canada Corporation, Precision
Lens Manufacturing and Technology, Inc., Ocular Sciences Australia, Ocular
Sciences Hungary and Ocular Sciences Cayman Islands Corporation. All significant
intercompany balances and transactions have been eliminated in consolidation.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from these estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the fiscal
2000 presentation.
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OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Cash and Cash Equivalents
Cash equivalents consist of commercial paper, money market funds, United
States government debt securities and certificates of deposits with original
maturities of three months or less.
Financial Instruments
All of the Company's short-term and long-term investments are classified as
"available-for-sale" and recorded at fair value, under the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." The amortized costs of
available-for-sale debt securities are adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization is included in net
investment income. Unrealized gains and losses, net of tax, are reported as a
component of other comprehensive income. Realized gains and losses, and declines
in value judged to be other than temporary on available-for-sale securities, are
included in other (expense) income, net. The cost of securities sold is based on
the specific identification method. Interest and dividends on securities
classified as available-for-sale are included in interest income.
Restricted Cash
Restricted cash consists of cash held in an escrow account related to
leased facilities occupied by the Company's United Kingdom subsidiary.
Inventories
Inventories are recorded at the lower of cost (first-in, first-out method)
or market. Cost includes material, labor and applicable factory overhead.
Provision for potentially obsolete or slow moving inventory is made based upon
management's analysis of inventory levels and forecasted sales.
Revenue Recognition
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," 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
was effective for the Company in its fourth fiscal quarter of 2000. Consistent
with prior practice, the Company recognizes sales upon shipment of products to
its customers. Allowances for sales returns and discounts are accrued at the
time sales are recognized.
Shipping and Handling Costs
In October 2000, the Emerging Issues Task Force issued EITF 00-10,
"Accounting for Shipping and Handling Revenues and Costs", which requires fees
billed to customers associated with shipping and handling to be classified as
revenue, and costs associated with shipping and handling to be either classified
as cost of sales or disclosed in the notes to the financial statements. 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.
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OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Cooperative Merchandise Allowances
The Company offers a cooperative merchandise program to certain of its
customers whereby the Company reimburses these customers for items such as
advertising, displays and mailings that are intended to encourage the fitting
and wearing of the Company's lenses marketed for disposable replacement
regimens. The Company records the provisions for cooperative merchandising at
the time of sale to the customers and as a component of selling and marketing
expenses.
Advertising Costs
Advertising and promotion costs are expensed as incurred. The Company's
advertising and promotion costs was $392,000, $510,000 and $26,000 for the years
2000, 1999 and 1998, respectively.
Foreign Currencies
The functional currencies of the Company's United Kingdom, Canadian,
Australia and Hungarian subsidiaries are their respective local currencies.
Accordingly, the subsidiaries translate all asset and liability accounts at
current exchange rates in effect at the balance sheet date and statement of
income accounts at average exchange rates during the period. Translation
adjustments arising from differences in exchange rates from period to period are
included in the consolidated financial statements as a component of other
comprehensive income.
Concentration of Credit Risk
The Company sells its products to a diverse group of optometrists, optical
retailers, optical product distributors and ophthalmologists, and therefore the
concentration of credit risk with respect to accounts receivable is limited due
to the large number and diversity of customers across broad geographic areas.
Accounts receivable from customers are uncollateralized. As of December 31,
2000, approximately 14% of accounts receivable and 10% of consolidated net sales
were concentrated in one customer, while, as of December 31, 1999, approximately
20% of accounts receivable and 10% of consolidated net sales were concentrated
in one customer. To reduce credit risk, the Company performs ongoing credit
evaluations of its significant customers' respective financial conditions. The
Company establishes an allowance for doubtful accounts based upon factors
surrounding the credit risk of specific customers, historical trends and other
information.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line or units-of-production method over the respective estimated useful
lives of the assets as follows: equipment and machinery, 3 to 7 years; furniture
and fixtures, 3 to 7 years; vehicles, 4 to 7 years; buildings, 10 to 14 years;
and leasehold improvements, over the shorter of the respective lease terms or
the respective estimated useful lives of the leasehold improvements. Normal
repairs and maintenance are expensed as incurred. Expenditures which materially
increase values, change capacities or extend useful lives are capitalized.
Long-Lived Assets, Including Intangible Assets
The Company accounts for long-lived assets under SFAS No. 121, "Accounting
for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of assets may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be
45
46
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
generated by the asset. If such assets are considered to be impaired, the
impairment loss to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell. The Company estimates fair value based on the best information available,
making judgments and projections as considered necessary.
Marketing rights, trademarks, patents, goodwill, licenses and covenants
not-to-compete are carried at cost less accumulated amortization, which is
calculated on a straight-line basis over the estimated useful lives of the
respective assets, which are typically five to fifteen years.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, deferred income taxes are
recognized for tax consequences in future years of differences between the tax
bases of assets and liabilities and their financial reporting amounts at each
balance sheet date based on enacted tax laws and statutory tax rates expected to
apply in the periods in which the differences are expected to affect taxable
income.
Earnings Per Share
The Company adopted SFAS No. 128, "Earnings per Share". Basic earnings per
common share is calculated by dividing net income by the weighted average number
of common shares outstanding during the year. Diluted earnings per common share
is calculated by adjusting outstanding shares, assuming conversion of all
potentially dilutive stock options.
Basic earnings per share under SFAS No. 128 was computed using the weighted
average number of shares outstanding of 23,164,156 in 2000, 22,830,561 in 1999,
and 22,292,632 in 1998. Differences in the weighted average number of shares
outstanding for purposes of computing diluted earnings per share were due to the
inclusion of the dilutive effect of stock options previously granted of 258,117
in 2000, 613,943 in 1999 and 983,456 in 1998. Options to purchase shares of
3,376,710 in 2000, 1,549,160 in 1999 and 1,411,900 in 1998 were not included in
the computation of diluted earnings per share because the options exercise price
was greater than the average market price of the common shares and therefore,
the effect would be anti-dilutive. For the year ended December 31, 2000, the
weighted average exercise price of the anti-dilutive options was $21.42.
Stock-Based Compensation
The Company follows the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," and has elected to continue to account for
stock-based compensation using methods prescribed in Accounting Principles Board
("ABP") Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations.
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. The Company does not expect a material impact from
implementation of FIN No. 44 on its financial position, results of operations
and cash flows.
46
47
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
The Company follows the practice of recording amounts received upon the
exercise of options by crediting common stock and additional paid-in capital.
The Company realizes an income tax benefit from the exercise and early
disposition of certain stock options and the exercise of other stock options.
The benefit results in a decrease in current income taxes payable and an
increase in additional paid-in capital.
Segment Information
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" establishes requirements for reporting information about operating
segments and disclosures relating to products and services, geographic areas and
major customers. Operating segments are components of an enterprise about which
separate financial information is available and which is used regularly by its
chief decision maker in allocation of resources. The Company operates in a
single operating segment.
New Accounting Standards
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 June 30, 2000.
The Company does not expect a material impact from implementation of SFAS
No. 133 on its financial position, results of operations and cash flows.
NOTE 3. ACCUMULATED OTHER COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income", which establishes new rules for the reporting and display
of comprehensive income and its components. The adoption of SFAS No. 130 had no
impact on the Company's financial position or results of operations. Accumulated
other comprehensive income or loss includes primarily foreign currency
translation adjustment and unrealized gains and losses on investments. There
were no realized gains (losses) in 2000, 1999 and 1998.
47
48
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
The following table reflects the changes in accumulated balances of other
comprehensive income (in thousands):
ACCUMULATED
FOREIGN OTHER
CURRENCY UNREALIZED COMPREHENSIVE
TRANSLATION GAINS/(LOSSES) INCOME
ADJUSTMENT ON SECURITIES (LOSS)
----------- -------------- -------------
Balance at December 31, 1997................. $ (531) $ 11 $ (520)
Current year change........................ (10) (12) (22)
------- ----- -------
Balance at December 31, 1998................. (541) (1) (542)
Current year change........................ (123) (158) (281)
------- ----- -------
Balance at December 31, 1999................. (664) (159) (823)
------- ----- -------
Current year change........................ (1,412) 177 (1,235)
------- ----- -------
Balance at December 31, 2000................. $(2,076) $ 18 $(2,058)
------- ----- -------
NOTE 4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's short-term and long-term investments in marketable equity
securities are carried at fair value, based on quoted market prices for these or
similar investments. The carrying amounts reported in the balance sheets for
receivables, related party loans, accounts payable, accrued liabilities and
short-term debt approximates fair values due to their short-term maturities.
Long-term debt is carried at cost, which approximates fair value as the interest
rate on the debt is referenced to market rates.
As of December 31, 2000, short-term investments, due in one year or less,
and long-term investments, due in one to three years, amounted to approximately
$9,585,000 and $2,046,000, respectively. Short-term and long-term investments
have been classified as available-for-sale and consisted of the following (in
thousands):
AS OF DECEMBER 31, 2000
---------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
Tax-exempt municipal funds.............. $ 7,613 $21 $-- $ 7,634
United States government debt
securities............................ 3,000 -- (3) 2,997
Foreign debt securities................. -- -- -- --
Corporate notes......................... 1,000 -- -- 1,000
------- --- --- -------
$11,613 $21 $(3) $11,631
======= === === =======
AS OF DECEMBER 31, 1999
---------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
Tax-exempt municipal funds.............. $11,494 $ 1 $ (21) $11,474
United States government debt
securities............................ 7,995 -- (40) 7,955
Foreign debt securities................. -- -- -- --
Corporate notes......................... 16,689 -- (99) 16,590
------- --- ----- -------
$36,178 $ 1 $(160) $36,019
======= === ===== =======
The Company's available-for-sale securities are carried at market value
and, as of December 31, 2000 and 1999 included unrealized gains (losses) of
approximately $18,000 and $158,000, respectively, net of tax. There were no
realized gains (losses) on sales of investments in 2000 and 1999.
48
49
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
NOTE 5. INVENTORIES
Inventories consisted of the following (in thousands):
DECEMBER 31,
------------------
2000 1999
------- -------
Raw materials............................................ $ 4,396 $ 3,906
Work in process.......................................... 3,339 1,344
Finished goods........................................... 20,013 10,478
------- -------
$27,748 $15,728
======= =======
NOTE 6. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of the following (in thousands):
DECEMBER 31,
--------------------
2000 1999
-------- --------
Equipment and machinery..................................... $ 71,540 $ 39,864
Furniture and fixtures...................................... 3,698 3,356
Vehicles.................................................... 204 216
Building and leasehold improvements......................... 33,207 29,786
Construction in progress.................................... 46,502 54,673
-------- --------
155,151 127,895
Less accumulated depreciation and amortization.............. (36,506) (25,304)
-------- --------
$118,645 $102,591
======== ========
NOTE 7. INTANGIBLE ASSETS, NET
Intangible assets, net consisted of the following (in thousands):
DECEMBER 31,
------------------
2000 1999
------- -------
Marketing rights, trademarks, patent, goodwill, licenses and
covenants not to compete.................................. $11,415 $10,260
Less accumulated amortization............................... (3,596) (2,643)
------- -------
$ 7,819 $ 7,617
======= =======
NOTE 8. PREPAID EXPENSES AND OTHER CURRENT ASSETS AND ACCRUED LIABILITIES
Prepaid expenses and other current assets consisted of the following (in
thousands):
DECEMBER 31,
------------------
2000 1999
------- -------
Refundable taxes............................................ $ 621 $ 6,530
Deferred income taxes....................................... 8,289 4,115
Prepaid expenses............................................ 2,462 1,918
Other current assets........................................ 3,628 2,480
------- -------
$15,000 $15,043
======= =======
49
50
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Accrued liabilities consisted of the following (in thousands):
DECEMBER 31,
------------------
2000 1999
------- -------
Accrued expenses............................................ $15,187 $11,050
Accrued cooperative merchandising allowances................ 6,314 8,510
Accrued value added taxes................................... 594 2,371
Deferred income taxes....................................... -- --
Income taxes payable........................................ 3,251 622
------- -------
$25,346 $22,553
======= =======
NOTE 9. LONG-TERM DEBT
Long-term debt consisted of the following ($U.S. in thousands):
DECEMBER 1,
------------------
2000 1999
------- -------
Term loan to a bank, principal payments due quarterly from
July 31, 2000 through October 31, 2004, bearing interest
at the bank's Eurodollar rate plus 1.25%.................. $ 1,790 $ 2,304
Financing obligation due to PRIDCO with monthly payment of
$35,987 beginning in March 1, 2001 through February 1,
2010 bearing an effective interest at 4.32%............... 3,470 --
Capital lease obligations, bearing an effective interest
rate of 11.22%, 10.76%, and 10.54%, respectively, for
2000, 1999 and 1998, secured by certain equipment......... 469 1,138
------- -------
Total long-term debt.............................. 5,728 3,442
Less current portion of long-term debt...................... (1,246) (1,214)
------- -------
$ 4,482 $ 2,228
======= =======
The Company has a credit facility with Comerica Bank. 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 a 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 December 31,
2000, there were no revolving loans outstanding under the Comerica Credit
Agreement. In addition, the Comerica Credit Agreement originally provided 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 December 31, 2000, there were $1.8 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 are secured by a pledge of 100%
of the outstanding common stock of Ocular Sciences Puerto Rico and 65% of the
outstanding stock of the Company's Barbados and Canadian subsidiaries. In
addition, the Company and Ocular Sciences Puerto Rico have each guaranteed the
other's borrowings under the Comerica Credit Agreement.
The Long-term debt, including current portion, is due in aggregate annual
installments of: $1,246,000 in 2000, $1,525,000 in 2001, and $317,000 in 2002.
50
51
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Financing
In February 1999, Ocular Sciences Puerto Rico finalized an agreement,
effective June 1998, with the Puerto Rico Industrial Development Company
("PRIDCO"), to manage on PRIDCO's behalf the construction of a new building in
Puerto Rico that will be leased by Ocular Sciences Puerto Rico as its
manufacturing facility, upon completion of construction. Ocular Sciences Puerto
Rico initially financed the building construction as well as the leasehold
improvements with existing cash and plans to borrow against the remaining
balance available under its term loan with a major bank upon completion of
construction. Under the agreement, PRIDCO will reimburse Ocular Sciences Puerto
Rico for up to a maximum of $4,720,000 for certain structural construction costs
of the facility at the end of the construction project, as specified in the
agreement. Annual rental payments of approximately $489,000 would be due to
PRIDCO to commence the first day of the following month, after completion,
inspection and acceptance of the constructed building, for a period of ten
years. Ocular Sciences Puerto Rico received $3,470,000 from PRIDCO in November
2000. Monthly rental of $35,987 will be due beginning March 2001 for a period of
ten years. This transaction commenced on March 1, 2000 and has been accounted
for as a financed purchase of the building.
NOTE 10. LEASES
The future minimum annual lease payments under non-cancelable lease
obligations with an initial term in excess of one year, as of December 31, 2000,
are as follows ($U.S. in thousands):
CAPITALIZED OPERATING
LEASES LEASES
----------- ---------
Year Ending December 31,
2001...................................................... $ 777 $ 3,235
2002...................................................... 500 2,974
2003...................................................... 432 1,969
2004...................................................... 432 1,964
2005...................................................... 432 1,948
Thereafter................................................ 2,231 8,095
------ -------
Total minimum lease payments................................ $4,804 $20,185
=======
Imputed interest............................................ (866)
------
Present value of minimum lease payments..................... 3,938
Current portion............................................. (654)
------
Long-term capitalized lease obligations..................... $3,284
======
Rent expense on operating leases for the Company's offices, warehouse
facilities and certain equipment was approximately $2,359,000, $3,013,000, and
$2,584,000 for the years ended December 31, 2000, 1999, and 1998, respectively.
51
52
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
The Company leases a portion of its machinery and equipment under long-term
capital leases, and has the option to purchase these assets for fair market
value at the termination of the lease. Included in property and equipment, net
are the following leased assets ($U.S. in thousands):
DECEMBER 31,
------------------
2000 1999
------- -------
Equipment and machinery..................................... $ 2,814 $ 2,865
Furniture and fixtures...................................... 142 142
Vehicles.................................................... 23 51
Building and leasehold improvements......................... 13,981 --
------- -------
16,960 3,058
Less accumulated depreciation and amortization.............. (3,408) (1,528)
------- -------
$13,552 $ 1,530
======= =======
Building and Leasehold improvements increased primarily from the completion
of the Puerto Rico manufacturing facility. (See Note 9 to the Consolidated
Financial Statements). Depreciation and amortization expense on machinery and
equipment and vehicles under long-term capital leases was approximately
$1,939,000, $400,000 and $395,000 for the years ended December 31, 2000, 1999
and 1998.
NOTE 11. COMMON STOCK
Certain Anti-Takeover Provisions
The Company's Board of Directors has the authority to issue up to 4,000,000
shares of preferred stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
any further vote or action by the stockholders.
Share Repurchase Plan and Treasury Stock
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 December 31, 2000, the Company has purchased 62,500 shares on the open
market.
Stock-based Compensation Plans
The Company has the following stock-based compensation plans:
(i) 1989 Stock Option Plan
The 1989 Stock Option Plan provided for the grant to employees,
directors and consultants of incentive stock options, exercisable at a
price not less than the fair market value of the shares on the grant date,
or for non-qualified options, exercisable at a price not less than 85% of
the fair market value of the shares on the date of grant. The options
generally were granted for a six year-term and vested over a five year
period. This plan was terminated upon the effective date of the Company's
initial public offering on August 4, 1997. Any authorized shares not issued
or subject to outstanding grants under this plan on August 4, 1997 and any
shares that are issuable upon exercise of options granted pursuant to this
plan that expire or become unexercisable for any reason without having been
exercised in full will be available for future grant and issuance under the
1997 Equity Incentive Plan. As of December 31, 2000, options to purchase a
total of 176,120 shares are outstanding under this plan.
52
53
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(ii) 1997 Equity Incentive Plan
The 1997 Equity Incentive Plan provides for grants of incentive stock
options to employees (including officers and employee directors) and
nonqualified stock options to employees, officers, directors, consultants,
independent contractors and advisors of the Company. The exercise price of
all incentive stock options must be no less than the fair market value of
the Company's Common Stock on the date of grant and the exercise price of
all nonqualified stock options must be at a price not less than 85% of such
fair market value. The options generally are granted for a ten-year term
and vest over a five-year period. Any authorized shares not issued or
subject to outstanding grants under the 1989 Plan on August 4, 1997 and any
shares that are issuable upon exercise of options granted pursuant to the
1989 Plan that expire or become unexercisable for any reason without having
been exercised in full are available for future grant and issuance under
the 1997 Equity Incentive Plan. As of December 31, 2000, a total of
4,423,400 shares of common stock were reserved for issuance under this
plan.
(iii) 1997 Directors Stock Option Plan
The 1997 Directors Stock Option Plan provides for grants of
nonqualified stock options to certain non-employee directors of the
Company. The exercise price per share of all options granted under the plan
must be equal to the fair market value of the Company's common stock on the
date of grant. The options generally are granted for a ten-year term and
vest over a three-year period. As of December 31, 2000, a total of 400,000
shares of common stock were reserved for issuance under this plan.
A summary of stock option transactions under the plans indicated at (i),
(ii) and (iii) follows:
WEIGHTED
AVERAGE
RANGE OF NUMBER OF EXERCISE
EXERCISE PRICES OPTIONS PRICE
---------------- ---------- ---------
Outstanding as of December 31, 1997......... $ 0.27 to $25.38 2,219,454 $ 7.03
Exercised................................. 0.27 to 26.38 (819,952) 2.08
Granted................................... 17.69 to 31.75 1,667,200 26.31
Canceled.................................. 1.47 to 29.63 (161,778) 20.69
---------------- ---------- ------
Outstanding as of December 31, 1998......... $ 1.47 to $31.75 2,904,924 $18.73
Exercised................................. 1.47 to 27.00 (365,867) 6.14
Granted................................... 15.00 to 34.69 1,796,100 18.71
Canceled.................................. 1.47 to 34.69 (404,647) 25.09
---------------- ---------- ------
Outstanding as of December 31, 1999......... $ 1.47 to $34.69 3,930,510 $19.24
Exercised................................. 1.47 to 26.38 (351,700) 2.55
Granted................................... 10.75 to 19.63 919,100 12.55
Canceled.................................. 1.47 to 31.75 (1,120,200) 21.26
---------------- ---------- ------
Outstanding as of December 31, 2000......... $ 1.47 to $31.75 3,376,710 $18.49
================ ========== ======
Total number of shares exercisable
at December 31, 2000............ $ 3.04 to $34.69 960,077 $20.24
================ ========== ======
The weighted average grant date fair value of the options granted in 2000,
1999, and 1998 was $4.99, $7.81, and $9.45, respectively. At December 31, 2000,
532,919 options were available for grant.
Pursuant to SFAS No. 123, "Accounting for Stock-Based Compensation," the
Company is required to disclose the pro forma effects on net income and net
income per share as if the Company had elected to use the fair value approach to
account for all of its employee stock-based compensation plans. Had compensation
cost for the Company's plans been determined in a manner consistent with the
fair value approach enumerated
53
54
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
in SFAS No. 123, the Company's pro forma net income and pro forma net income per
share for the years ended December 31, 2000, 1999 and 1998, would have been
reduced to the pro forma amounts indicated below (in thousands):
DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
Pro forma net income:
As reported......................................... $38,941 $36,433 $30,563
Adjusted pro forma.................................. 35,721 33,193 28,873
Net income per common share (basic):
As reported......................................... $ 1.68 $ 1.60 $ 1.37
Adjusted pro forma.................................. 1.54 1.45 1.30
Net income per common share (diluted):
As reported......................................... $ 1.66 $ 1.55 $ 1.31
Adjusted pro forma.................................. 1.53 1.42 1.24
In 2000, 1999 and 1998, the Company calculated the fair value of options
using the Black-Scholes option-pricing model. The assumptions used were as
follows:
2000 1999 1998
---- ---- ----
Weighted-average risk free interest rate.................... 6.12% 5.21% 5.31%
Expected life (years)....................................... 3 3 3
Volatility.................................................. 50.0% 55.0% 45.0%
Dividend yield.............................................. -- -- --
The following table summarizes information about stock options outstanding
as of December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ------------------------
NUMBER WEIGHTED-AVERAGE NUMBER WEIGHTED-
OF REMAINING WEIGHTED-AVERAGE OF AVERAGE
RANGE OF EXERCISE PRICES OPTIONS CONTRACTUAL LIFE EXERCISE PRICE OPTIONS EXERCISE PRICE
- - ------------------------ --------- ---------------- ---------------- ------- --------------
$ 3.04 - 12.13 753,620 7.9 $10.35 112,900 $ 6.58
$12.19 - 34.69 2,611,190 7.9 20.83 846,577 22.07
--------- --- ------ ------- ------
$ 3.04 - 34.69 3,376,710 7.9 $18.49 959,477 $20.24
========= === ====== ======= ======
NOTE 12. RETIREMENT SAVINGS PLAN
In October 1998, the Company established a defined-contribution savings
plan under Section 401K of the Internal Revenue Code. This savings plan allows
eligible U.S. employees to contribute up to 15% of their compensation on a
pre-tax basis. The Company matches 50% of the first four percent of the
employees' contribution. Such matching Company contributions are vested
incrementally over five years. All of the Company's subsidiaries have similar
retirement savings plans in the respective countries. The charge to operating
income for the Company's matching contribution was approximately $983,000 in
2000, $837,000 in 1999 and $520,000 in 1998.
NOTE 13. INCOME TAXES
Deferred taxes are provided, where warranted, to reflect the future tax
consequences of differences between the financial reporting and tax reporting of
various assets and liabilities; these differences will be either taxable or
deductible when the related assets and liabilities are recovered or settled. The
income tax benefits related to the exercise of stock options reduces taxes
currently payable and is credited to additional
54
55
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
paid-in capital. Such amounts approximated $232,000, $1,895,000 and $4,463,000
for 2000, 1999 and 1998, respectively.
Income before income tax expense includes the following components (in
thousands):
2000 1999 1998
------- ------- -------
United States......................................... $37,746 $35,040 $40,220
Foreign............................................... 18,346 12,741 3,013
------- ------- -------
Total....................................... $56,092 $47,781 $43,233
======= ======= =======
Income tax expense (benefit) for the years ended December 31, 2000, 1999
and 1998, consisted of (in thousands):
2000 1999 1998
------------------------------ ------------------------------ ------------------------------
CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL CURRENT DEFERRED TOTAL
------- -------- ------- ------- -------- ------- ------- -------- -------
Federal.............. $17,147 $(3,545) $13,602 $ 9,733 $(1,960) $ 7,773 $ 8,509 $(209) $ 8,300
State................ 3,058 (293) 2,765 2,675 (145) 2,530 2,048 17 2,065
Foreign.............. 1,292 (508) 784 (460) 1,505 1,045 2,270 35 2,305
------- ------- ------- ------- ------- ------- ------- ----- -------
$21,497 $(4,346) $17,151 $11,948 $ (600) $11,348 $12,827 $(157) $12,670
======= ======= ======= ======= ======= ======= ======= ===== =======
The total income tax expense differed from the amount computed by applying
the federal statutory income tax rate of 35% to income before taxes as a result
of the following (in thousands):
YEAR ENDED DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
Computed tax expense at federal statutory rate........ $19,632 $16,723 $15,132
Foreign tax rate differential......................... (3,704) (1,008) 214
Puerto Rico possessions tax credit.................... (597) (5,298) (3,999)
State taxes........................................... 1,988 1,510 1,366
Amortization of goodwill.............................. -- -- --
Other permanent differences........................... (168) (579) (43)
------- ------- -------
$17,151 $11,348 $12,670
======= ======= =======
55
56
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
The tax effects of temporary differences that gave rise to significant
portions of the deferred tax assets and deferred tax liabilities are as follows
(in thousands):
DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
Deferred tax assets:
Net operating loss carryforwards.................... $ -- $ 870 $ 1,312
Accounts receivable, principally due to allowance
for doubtful accounts............................ 186 223 800
Inventories, principally due to reserves and
additional costs capitalized for tax purposes.... 4,006 2,071 2,401
State taxes......................................... 1,193 783 717
Other accrued liabilities........................... 2,904 652 442
------- ------- -------
Total gross deferred tax assets............. 8,289 4,599 5,672
Deferred tax liabilities:
Investment in subsidiaries.......................... -- -- (438)
Puerto Rico tollgate tax............................ (1,171) (1,171) (716)
Puerto Rico profit split and basis difference....... (267) (267) (907)
Other basis differences............................. (352) (334) (2,059)
Depreciation of property and equipment.............. (3,558) (4,232) (3554)
------- ------- -------
Total gross deferred tax liability.......... (5,348) (6,004) (7,674)
------- ------- -------
Total net deferred tax asset (liability).... $ 2,941 $(1,405) $(2,002)
======= ======= =======
As of December 31, 2000, deferred taxes were not provided on approximately
$37,162,000 of cumulative foreign unremitted earnings, which are expected to
remain invested indefinitely. Applicable foreign income taxes have been provided
for. Although it is not practical to estimate the amount of additional tax which
might be payable on the foreign unremitted earnings, credits for foreign income
taxes paid will be available at tax rates substantially equal to any U.S. tax
liability. For tax purposes, the Company did not have any available foreign net
operating loss carry forwards as of December 31, 2000.
NOTE 14. RELATED PARTY TRANSACTIONS
In April 1997, the Company loaned a total of $892,195 to certain employees
of the Company, of which $550,923 was loaned to the Company's Vice President,
U.S. Sales under a full-recourse promissory note. Total accrued interest at
December 31, 1997 included in loans to officers and employees amounted to
$35,128, of which $23,456 related to this officer's loan. All the loans, except
for the loan to this officer, were non-recourse but were secured by a total of
228,846 shares of the Company's Common Stock, 102,212 of which have been pledged
by the officer. The interest rate on these loans was 6%, payable on or before
the earliest to occur of the one year anniversary of each loan, respectively,
termination of employment, liquidation or dissolution of the Company or, under
certain circumstances, merger or consolidation of the Company. The principal and
related interest on these loans were repaid to the Company in 1998.
Under an employment agreement, the Company extended a $450,000 loan to the
Company's President and Chief Operating Officer in January 1998 in connection
with his purchase of a new residence (the "Loan"). The Loan was interest free
and was secured by a purchase money second deed of trust on the new residence
and by a security interest in certain stock options. The Loan was due and
payable in full on the earlier of (i) October 15, 2002; (ii) six (6) months
after the Company's President and Chief Operating Officer's voluntary
resignation or termination by the Company for Cause (as defined in the
employment agreement); or (iii) upon the Company's President and Chief Operating
Officer's agreement to sell, convey,
56
57
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
transfer, or dispose of, or further encumber the new residence. Under the terms
of the employment agreement, the Company agreed to forgive the Loan in its
entirety (and return any payments received in connection therewith), in the
event that the Company's President and Chief Operating Officer remains
continuously employed with the Company from October 15, 1997 through October 15,
2000. The Company also agreed to forgive 50% of the loan in the event that the
President and Chief Operating Officer was terminated by the Company by written
notice without cause. In May 2000, the Company terminated the employment of the
employee. In accordance with the terms of the note, $225,000 was forgiven and
the remiander was repaid in full in October 2000.
A director of the Company, who is also the brother of the Chief Executive
Officer, is a partner in a law firm, which has provided legal services to the
Company since its formation. The Company made payments for legal services of
approximately $42,000, $15,000 and $27,000 in the years ended December 31, 2000,
1999, and 1998, respectively.
In April 1999, the Company loaned $1,150,000 to two executive officers of
the Company. The loan principal, along with accrued interest of 8%, was repaid
to the Company.
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 until November 27, 2000, pursuant to which he was to be
paid $4,500 per week.
NOTE 15. ENTERPRISE WIDE DISCLOSURES
The Company, which operates in a single operating segment, designs,
manufactures and distributes contact lenses. Sales to one major customer
amounted to approximately 14%, 10% and 11% of total net sales for the years
ended December 31, 2000, 1999 and 1998, respectively. United States export sales
approximated 10.7%, 3.5%, and 3.0% of net sales for the years ended December 31,
2000, 1999, and 1998, respectively. The geographic presentation of net sales is
based on the origin of the sale. The "Other" category consists of
57
58
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
geographic presentations of Canada and Australia. The geographic distributions
of the Company's net sales, income from operations, and identifiable net assets
are as follows (in thousands):
UNITED UNITED
STATES KINGDOM BARBADOS OTHER ELIMINATIONS CONSOLIDATED
-------- ------- -------- ------- ------------ ------------
December 31, 2000
Sales to unaffiliated
customers..................... $140,642 $25,186 $ -- $11,142 $ -- $176,970
Intercompany sales............... 45,369 38,553 82,427 -- (166,349) --
-------- ------- ------- ------- --------- --------
Total net sales.................. $185,991 $63,739 $82,427 $11,142 $(166,349) $176,970
======== ======= ======= ======= ========= ========
Income from operations........... $ 2,855 $(4,585) $40,985 $ (403) $ (6,044) $ 32,808
======== ======= ======= ======= ========= ========
Total identifiable assets........ $190,614 $84,279 $39,512 $ 5,680 $ (55,255) $264,830
======== ======= ======= ======= ========= ========
December 31, 1999
Sales to unaffiliated
customers..................... $135,196 $30,220 $ -- $10,582 $ -- $175,998
Intercompany sales............... 49,980 37,951 48,921 -- (136,852) --
-------- ------- ------- ------- --------- --------
Total net sales.................. $185,176 $68,171 $48,921 $10,582 $(136,852) $175,998
======== ======= ======= ======= ========= ========
Income from operations........... $ 28,666 $ 4,658 $ 4,993 $ 329 $ 7,097 $ 45,743
======== ======= ======= ======= ========= ========
Total identifiable assets........ $154,582 $75,103 $38,312 $ 5,195 $ (50,877) $222,315
======== ======= ======= ======= ========= ========
December 31, 1998
Sales to unaffiliated
customers..................... $123,907 $19,164 $ -- $ 8,837 $ -- $151,908
Intercompany sales............... 35,972 18,847 -- -- (54,819) --
-------- ------- ------- ------- --------- --------
Total net sales.................. $159,879 $38,011 $ -- $ 8,837 $ (54,819) $151,908
======== ======= ======= ======= ========= ========
Income from operations........... $ 38,932 $ 2,771 $ -- $ 1,089 $ (987) $ 41,805
======== ======= ======= ======= ========= ========
Total identifiable assets........ $147,221 $54,227 $ -- $ 2,663 $ (27,541) $176,570
======== ======= ======= ======= ========= ========
NOTE 16. LITIGATION
In 1994, litigation was commenced by the Company and OSL, its United
Kingdom subsidiary, against former employees and a former director of OSL, its
United Kingdom distributor (AVCL) and certain related parties. The claims by the
Company were essentially for misappropriation of intellectual property, breach
of contract and nonpayment of accounts. In a related matter, there was also a
patent infringement action against OSL, which involved the validity of a certain
molding patent that was licensed by OSL from certain of the defendants. The
Company also brought an action in federal court in California against certain of
the same individuals who were sued in the United Kingdom. The California action
was essentially one for breach of employment, breach of contract and violation
of securities laws.
In November 1996, judgment was rendered in the United Kingdom actions. In
February 1997, prior to the determination of any costs or damages by the United
Kingdom courts, the parties to the above litigations entered into a settlement
agreement for total monetary consideration of $10,000,000. The settlement
agreement provided for, among other things, (i) a mutual release and termination
of all pending litigation; (ii) the replacement of the September 30, 1992 patent
license agreement (See Note 16) with a new, fully paid-up, non-exclusive, patent
license, that did not contain any restrictions on the Company's ability to sell
contact lenses to other contact lens manufacturers; (iii) the termination of the
Company's obligation to supply contact lenses under the September 30, 1992
purchase and supply agreement (See Note 16); and (iv) the termination of a
limitation on the Company's right to sell certain contact lenses directly into
the United Kingdom and a limitation on AVCL's right to sell certain contact
lenses in North and South America. The
58
59
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Company paid $3,333,000 to the defendants upon consummation of the settlement
agreement and an additional $6,667,000 upon the closing of the Company's initial
public offering in August, 1997.
The Company engaged a third party valuation firm to value the United
Kingdom marketing rights and the prepaid patent license agreement acquired as a
result of the settlement agreement and assigned values to the liabilities
identified as a result of the court judgment. The Company then allocated the
$10,000,000 of consideration to the liabilities identified and the intangible
assets acquired on a pro rata basis. As a result of this allocation and in
accordance with APB Opinion No. 17, "Intangible Assets," the Company allocated
$8,800,000 of the consideration to the United Kingdom marketing rights and the
prepaid patent license agreement acquired. The Company has assigned an estimated
useful life of 10 years to the United Kingdom marketing rights and the prepaid
patent license agreement. The Company incurred legal expenses, which were
included in general and administrative expenses in 1997 of $56,000 related to
this litigation.
On March 23, 2000, the Company and certain of its directors were named in a
suit filed in California Superior Court, (Rand v. Ocular Sciences, Inc. et al.,
Case No. 310935, San Francisco County), by a shareholder seeking class action
status for breach of fiduciary duties. The complaint sought damages in an
unspecified amount and injunctive relief. During the second quarter of 2000,
this lawsuit was dismissed without prejudice.
On April 3, 2000, Bausch & Lomb, Inc. filed suit against Wesley Jessen, its
board of directors and the Company in the Court of Chancery of Delaware (Bausch
& Lomb, Inc. v. Wesley Jessen VisionCare, Inc. et al., Civil Action No. 17963,
New Castle County). Bausch & Lomb's complaint allege that the Company's Proposed
Merger agreement with Wesley Jessen was entered into in breach of the Wesley
Jessen board's fiduciary duties to act on a fully informed basis and to advance
the best interests of Wesley Jessen shareholders. It also allege that the
Company aided and abetted the Wesley Jessen board's purported breach of
fiduciary duties. On July 14, 2000, this action was dismissed without prejudice.
On April 19, 2000, the Company filed a lawsuit against Bausch & Lomb and
Dylan Acquisition, Inc., in California Superior Court, for intentional and
negligent interference with contractual relations and unfair competition (Ocular
Sciences, Inc. v. Bausch & Lomb, Inc. et al., Case No. 412625, San Mateo
County). This complaint sought preliminary and permanent injunctive relief
enjoining Bausch & Lomb and Dylan Acquisition, Inc., from tortiously interfering
with the Company's contractual relationship between Wesley Jessen, and damages
in an amount to be determined at trial. On July 13, 2000, this action was
dismissed without prejudice.
Various other legal actions arising in the normal course of business have
been brought against the Company and certain of its subsidiaries. Management
believes that the ultimate resolution of these actions will not have a material
adverse effect on the Company's financial position or results of operations.
NOTE 17. COMMITMENTS
Commitments for the remodeling of existing facilities, construction of new
facilities and purchase of capital equipment over the next year were
approximately $4,104,000 and $7,799,000, respectively, as of December 31, 2000
and 1999.
NOTE 18. ACQUISITIONS
On July 1, and August 2, 1999, the Company completed the acquisitions of
two companies in Australia. Both Companies are contact lens distributors selling
to Australian and New Zealand eyecare practitioners, both in private practice
and in retail optical chains. The purchase price of the first acquisition is 4.1
times the audited net earnings after taxes ("NEAT"), as defined in the
agreement, of the new Australian entity for the calendar year 2002. The
additional payments, if any, will be accounted for as additional goodwill. The
59
60
OCULAR SCIENCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Company paid approximately U.S. $498,000 in connection with both of these
acquisitions at closing. Additionally, 30,000 stock options were issued in
connection with these acquisitions and were valued at approximately $365,000
using the Black-Scholes option-pricing model. These options will vest over five
years. Both purchases were and will be funded with existing cash and cash
equivalents.
The Company has accounted for the acquisitions under the purchase method of
accounting and accordingly the operating results of both companies are included
in the Company's consolidated financial statements effective the date of
acquisition. The excess of the aggregate purchase price over the fair market
value of net assets acquired is allocated to goodwill and will be amortized on a
straight-line basis over 15 years. Neither of these acquisitions are considered
material to the Company's financial statements.
NOTE 19. WESLEY JESSEN MERGER
On March 20, 2000, Wesley Jessen VisionCare, Inc. ("Wesley Jessen") and the
Company announced the signing of a definitive agreement and plan of merger
providing for the statutory merger of the Company and Wesley Jessen upon the
satisfaction of stockholder and regulatory approval, and other closing
conditions (the "Merger"). The Merger has been structured to qualify for tax
deferred treatment and to be accounted for as a pooling of interests for
accounting purposes. Under the terms of the agreement, at the closing date each
outstanding share of the Company's common stock will be converted into 0.7211
shares of Wesley Jessen common stock. Based upon the number of shares
outstanding as of the close of business on March 17, 2000, the former
stockholders of the Company would own approximately 48% of the outstanding
common stock of the combined companies (assuming no conversion of outstanding
options). In addition, each share of the Company's outstanding stock options
will be converted at the same exchange ratio, into options to purchase shares of
Wesley Jessen common stock. Based upon the number of Company's outstanding
options as of the close of business on March 17, 2000, approximately 3.9 million
outstanding stock options will be converted into 2.8 million options to purchase
common shares of the combined companies. The closing of the Merger is subject to
the satisfaction of certain closing conditions contained in the agreement and
plan of merger, including regulatory approvals and approvals of the Company's
and Wesley Jessen's stockholders, and therefore there can be no assurance if and
when the Merger will close.
On May 30, 2000, Wesley Jessen VisionCare, Inc. ("Wesley Jessen")
terminated its definitive agreement and plan of merger (the "Proposed Merger")
with the Company as a result of the announced acquisition of Wesley Jessen by
CIBA Vision Corporation ("CIBA"), the eye care unit of Novartis AG. The Company
received a $25 million "break-up fee" as a result of the Wesley Jessen
termination of the Proposed Merger with the Company.
NOTE 20. SUBSEQUENT EVENTS
On December 22, 2000, the Company signed a definitive agreement with
Paris-based Essilor International (Compagnie Generale d'Optique) S. A. to
acquire Essilor's contact lens business for cash. The Company acquired all sales
and distribution assets of Essilor's contact lens business in Europe and
manufacturing facilities in France, United Kingdom and Albuquerque, New Mexico.
This acquisition provides enhanced sales and distribution channels in Europe,
new product lines and additional research and development expertise. The sale
was completed on February 12, 2001, which was approved by the Board of Directors
of both Companies for approximately $47 million.
60
61
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Ocular Sciences, Inc.:
We have audited the accompanying consolidated balance sheets of Ocular
Sciences, Inc. and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the years in the three-year period ended December 31, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Ocular
Sciences, Inc. and subsidiaries as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
San Francisco, California
February 2, 2001
61
62
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEMS 10, 11, 12 AND 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT,
EXECUTIVE COMPENSATION, SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT, AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 10, Item 11, Item 12, and Item 13 will be
contained in a definitive proxy statement for our Annual Meeting of Stockholders
which we anticipate will be filed no later than 120 days after the end of our
fiscal year pursuant to Regulation 14A and accordingly these items have been
omitted in accordance with General Instruction G(3) to Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
(1) Financial Statements and Schedules. The following Consolidated
Financial Statements of the Company are incorporated by reference from Part
II, Item 8 of this Form 10-K:
PAGE
----
Consolidated Balance Sheets -- December 31, 2000 and 1999... 39
Consolidated Statements of Income -- Years Ended December
31, 2000, 1999 and 1998................................... 40
Consolidated Statements of Stockholders' Equity -- Years
Ended December 31, 2000, 1999 and 1998.................... 41
Consolidated Statements of Cash Flows -- Years Ended
December 31, 2000, 1999 and 1998.......................... 42
Notes to Consolidated Financial Statements.................. 43
Report of KPMG LLP.......................................... 61
(2) Financial Statement Schedules. The following financial statement
schedule of the Company for the years ended December 31, 2000, 1999 and
1998 is filed as part of this Report and should be read in conjunction with
the Consolidated Financial Statements of the Company.
SCHEDULE PAGE
-------- ----
II. Valuation and Qualifying Accounts....................... 65
All Other financial statement schedules are omitted because the information
called for is not required or is shown either in the consolidated financial
statements or the notes thereto.
62
63
(3) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.01 Form of Agreement and Plan of Merger by and between O.S.I.
Corporation, a California corporation, and Registrant+
3.01 Registrant's Restated Certificate of Incorporation
3.02 Registrant's Bylaws+
4.01 Registration Rights Agreement dated as of October 30, 1992
by and among the Registrant and the other parties listed on
the signature pages thereto+
4.02 Amendment to Registration Rights Agreement and Shareholders'
Agreement dated as of February 27, 1997 by and among the
Registrant and the other parties listed on the signature
pages thereto+
10.01 Registrant's 1989 Stock Option Plan adopted July 21, 1989,
as amended November 30, 1994+*
10.02 Registrant's 1997 Equity Incentive Plan+*
10.03 Registrant's 1997 Amended and Restated Directors Stock
Option Plan
10.04 Registrant's 1997 Employee Stock Purchase Plan+*
10.05 Form of Indemnity Agreement entered into by Registrant with
each of its directors and executive officers+*
10.06 Settlement Agreement and Release dated as of February 27,
1997 between Aspect Vision Care Ltd., New Focus Health Care
Ltd., Geoffrey Galley, Anthony Galley, Barrie Bevis, Albert
Morland, Ivor Atkinson and Wilfred Booker, Sciences Ltd.,
O.S.I. Corporation and John Fruth+#
10.07 Amendment to Settlement Agreement and Release dated as of
February 27, 1997 between the parties to the Settlement
Agreement and Contact Lens Technologies Ltd+
10.08 Patent License Agreement dated February 27, 1997 by and
between Ocular Sciences Ltd. and certain persons referred to
therein as the Patent Owners+
10.09 Employment Agreement dated March 27, 1996 by between John
Lilley and O.S.I. Corporation+*
10.10 Lease for 475 -- 479 Eccles Avenue dated May 18, 1995,
between Stanley D. McDonald, Norman H. Scherdt, Herbert A.
West and McDonald Ltd. as "Landlord" and O.S.I. Corporation
as "Tenant'+
10.11 Lease for Santa Isabel, Puerto Rico Kingdom dated September
14, 1984, between The Puerto Rico Industrial Development
Company as "Landlord" and O.S.I. Puerto Rico Corporation as
"Tenant," as amended+
10.12 Counterpart Underlease of Distribution Depot dated November
30, 1995 among Boots the Chemist Limited as "Landlord,"
Ocular Sciences Limited as "Tenant" and O.S.I. Corporation
as "Guarantor'+
10.13 Amended and Restated Credit Agreement among Ocular Sciences,
Inc., Ocular Sciences Puerto Rico, Inc. and Comerica
Bank -- California dated November 7, 1997 and exhibits
thereto[X]
10.14 Amendment Number Two to Amended and Restated Credit
Agreement among Ocular Sciences, Inc., Ocular Sciences
Puerto Rico, Inc. and Comerica Bank -- California, dated
April 27, 1999[Z]
10.15 Amendment Number Three to Amended and Restated Credit
Agreement among Ocular Sciences, Inc., Ocular Sciences
Puerto Rico, Inc. and Comerica Bank -- California, dated
June 28, 1999[Z]
63
64
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.16 Amendment Number Four to Amended and Restated Credit
Agreement among Ocular Sciences, Inc., Ocular Sciences
Puerto Rico, Inc. and Comerica Bank -- California, dated
October 14, 1999[A]
10.18 Amended and Restated Inter-Company Loan Agreement among
Ocular Sciences, Inc., and Precision Lens Manufacturing and
Technology, Inc., dated June 1, 1999
10.19 Employment Agreement dated October 15, 1997 between Norwick
Goodspeed and the Company[X]*
10.20 Lease of Unit 10 The Quadrangle Abbey Park Industrial Estate
Romsey Hampshire dated August 19, 1997 between Ocular
Sciences Limited and The Royal Bank of Scotland plc[X]
10.21 Construction and Lease Contract dated June 29, 1998 between
Ocular Sciences Puerto Rico, Inc. and Puerto Rico Industrial
Development Company[Y]
10.22 First Amendment to Lease for 475 -- 479 Eccles Avenue dated
January 25, 1999, between Stanley D. McDonald, Mary Lee
Scheidt, Herbert A. West, and McDonald Ltd. as "Landlord"
and O.S.I. Corporation as "Tenant"[C]
10.23 Lease of Unit One School Lane Chandlers Ford Industrial
Estate Chandlers Ford Hampshire dated May 20, 1999 between
Ocular Sciences UK Limited, Ocular Sciences, Inc. and Le
Gallais' Real Estates (Overseas) Limited[C]
10.24 Consulting agreement between Ed Cummins and Ocular Sciences,
Inc.[D]
10.25 Agreement and Plan of Merger dated March 19, 2000, among
Wesley Jessen VisionCare Inc., and OSI Acquisition Corp. and
Ocular Sciences, Inc.[B]
21.01 List of Subsidiaries[C]
23.01 Consent of KPMG LLP, Independent Certified Public
Accountants
24.01 Power of Attorney (Included in Part IV of this Form 10-K)
- - ---------------
# Confidential treatment has been requested from the Securities and Exchange
Commission with respect to certain portions of this exhibit. Omitted
portions have been filed separately with the Commission.
+ Incorporated by reference from the Company's registration statement on
Form S-1, file no. 333-27421.
[X] Incorporated by reference from the Company's registration statement on Form
S-1, file no. 333-46669.
[Y] Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
[Z] Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the period ending June 30, 1999.
[A] Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the period ending September 30, 1999.
[B] Incorporated by reference from the Company's Form 13D, filed with the SEC
on March 29, 2000.
[C] Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1999.
[D] Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the period ending June 30, 2000.
(b) Reports on Form 8-K:
The Registrant filed a Current Report on Form 8-K on February 26, 2001, in
connection with its acquisition of the contact lens business of Paris-based
Essilor International (Compagnie Generale d' Optique) S.A.
64
65
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
---------- ---------- ---------- ---------- ----------
YEAR ENDED DECEMBER 31, 2000
Allowance for sales returns and
doubtful accounts receivable...... 1,674 1,396 -- (1,577)(1) 1,494
Provision for excess and obsolete
inventory......................... 2,691 1,385 -- (1,352)(2) 2,725
YEAR ENDED DECEMBER 31, 1999
Allowance for sales returns and
doubtful accounts receivable...... 2,085 12 -- (423)(1) 1,674
Provision for excess and obsolete
inventory......................... 2,652 702 -- (663)(2) 2,691
YEAR ENDED DECEMBER 31, 1998
Allowance for sales returns and
doubtful accounts receivable...... 1,655 880 -- (450)(1) 2,085
Provision for excess and obsolete
inventory......................... 2,171 1,129 -- (648)(2) 2,652
- - ---------------
(1) Uncollectible accounts written off, net of recoveries.
(2) Discontinued, expired, damaged and scrap inventory.
65
66
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Report on Form 10-K to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of South San Francisco, State of
California, on the 30th day of March, 2001.
OCULAR SCIENCES, INC.
By: /s/ SIDNEY B. LANDMAN
------------------------------------
Sidney B. Landman
Vice President, Finance, Chief
Financial Officer,
Secretary and Treasurer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each individual whose signature
appears below constitutes and appoints John D. Fruth, Sidney B. Landman, and
each of them, his true and lawful attorneys-in-fact and agents, with full power
of substitution, for him and in his or her name, place and stead, in any and all
capacities to sign any and all amendments to this Report on Form 10-K, and to
file the same, with all exhibits thereto and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or his, her or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof
In accordance with the requirements of the Securities Act, this Report on
Form 10-K was signed by the following persons in the capacities and on the dates
indicated.
NAME TITLE DATE
---- ----- ----
PRINCIPAL EXECUTIVE OFFICER:
/s/ JOHN D. FRUTH Chief Executive Officer, March 30, 2001
- - ----------------------------------------------------- President and Chairman of the
John D. Fruth Board of Directors
PRINCIPAL FINANCIAL AND PRINCIPAL ACCOUNTING OFFICER:
/s/ SIDNEY B. LANDMAN Vice President, Finance, March 30, 2001
- - ----------------------------------------------------- Chief Financial Officer,
Sidney B. Landman Secretary and Treasurer
DIRECTORS:
/s/ JOHN D. FRUTH Chief Executive Officer, March 30, 2001
- - ----------------------------------------------------- President and Chairman of the
John D. Fruth Board of Directors
/s/ EDGAR J. CUMMINS Director March 30, 2001
- - -----------------------------------------------------
Edgar J. Cummins
/s/ TERENCE M. FRUTH Director March 30, 2001
- - -----------------------------------------------------
Terence M. Fruth
66
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NAME TITLE DATE
---- ----- ----
/s/ WILLIAM R. GRANT Director March 30, 2001
- - -----------------------------------------------------
William R. Grant
/s/ TERRANCE GREGG Director March 30, 2001
- - -----------------------------------------------------
Terrance Gregg
/s/ FRANCIS R. TUNNEY, JR. Director March 30, 2001
- - -----------------------------------------------------
Francis R. Tunney, Jr.
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.01 Form of Agreement and Plan of Merger by and between O.S.I.
Corporation, a California corporation, and Registrant+
3.01 Registrant's Restated Certificate of Incorporation
3.02 Registrant's Bylaws+
4.01 Registration Rights Agreement dated as of October 30, 1992
by and among the Registrant and the other parties listed on
the signature pages thereto+
4.02 Amendment to Registration Rights Agreement and Shareholders'
Agreement dated as of February 27, 1997 by and among the
Registrant and the other parties listed on the signature
pages thereto+
10.01 Registrant's 1989 Stock Option Plan adopted July 21, 1989,
as amended November 30, 1994+*
10.02 Registrant's 1997 Equity Incentive Plan+*
10.03 Registrant's 1997 Amended and Restated Directors Stock
Option Plan
10.04 Registrant's 1997 Employee Stock Purchase Plan+*
10.05 Form of Indemnity Agreement entered into by Registrant with
each of its directors and executive officers+*
10.06 Settlement Agreement and Release dated as of February 27,
1997 between Aspect Vision Care Ltd., New Focus Health Care
Ltd., Geoffrey Galley, Anthony Galley, Barrie Bevis, Albert
Morland, Ivor Atkinson and Wilfred Booker, Sciences Ltd.,
O.S.I. Corporation and John Fruth+#
10.07 Amendment to Settlement Agreement and Release dated as of
February 27, 1997 between the parties to the Settlement
Agreement and Contact Lens Technologies Ltd+
10.08 Patent License Agreement dated February 27, 1997 by and
between Ocular Sciences Ltd. and certain persons referred to
therein as the Patent Owners+
10.09 Employment Agreement dated March 27, 1996 by between John
Lilley and O.S.I. Corporation+*
10.10 Lease for 475 -- 479 Eccles Avenue dated May 18, 1995,
between Stanley D. McDonald, Norman H. Scherdt, Herbert A.
West and McDonald Ltd. as "Landlord" and O.S.I. Corporation
as "Tenant'+
10.11 Lease for Santa Isabel, Puerto Rico Kingdom dated September
14, 1984, between The Puerto Rico Industrial Development
Company as "Landlord" and O.S.I. Puerto Rico Corporation as
"Tenant," as amended+
10.12 Counterpart Underlease of Distribution Depot dated November
30, 1995 among Boots the Chemist Limited as "Landlord,"
Ocular Sciences Limited as "Tenant" and O.S.I. Corporation
as "Guarantor'+
10.13 Amended and Restated Credit Agreement among Ocular Sciences,
Inc., Ocular Sciences Puerto Rico, Inc. and Comerica
Bank -- California dated November 7, 1997 and exhibits
thereto[X]
10.14 Amendment Number Two to Amended and Restated Credit
Agreement among Ocular Sciences, Inc., Ocular Sciences
Puerto Rico, Inc. and Comerica Bank -- California, dated
April 27, 1999[Z]
68
69
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.15 Amendment Number Three to Amended and Restated Credit
Agreement among Ocular Sciences, Inc., Ocular Sciences
Puerto Rico, Inc. and Comerica Bank -- California, dated
June 28, 1999[Z]
10.16 Amendment Number Four to Amended and Restated Credit
Agreement among Ocular Sciences, Inc., Ocular Sciences
Puerto Rico, Inc. and Comerica Bank -- California, dated
October 14, 1999[A]
10.18 Amended and Restated Inter-Company Loan Agreement among
Ocular Sciences, Inc., and Precision Lens Manufacturing and
Technology, Inc., dated June 1, 1999
10.19 Employment Agreement dated October 15, 1997 between Norwick
Goodspeed and the Company[X]*
10.20 Lease of Unit 10 The Quadrangle Abbey Park Industrial Estate
Romsey Hampshire dated August 19, 1997 between Ocular
Sciences Limited and The Royal Bank of Scotland plc[X]
10.21 Construction and Lease Contract dated June 29, 1998 between
Ocular Sciences Puerto Rico, Inc. and Puerto Rico Industrial
Development Company[Y]
10.22 First Amendment to Lease for 475 -- 479 Eccles Avenue dated
January 25, 1999, between Stanley D. McDonald, Mary Lee
Scheidt, Herbert A. West, and McDonald Ltd. as "Landlord"
and O.S.I. Corporation as "Tenant"[C]
10.23 Lease of Unit One School Lane Chandlers Ford Industrial
Estate Chandlers Ford Hampshire dated May 20, 1999 between
Ocular Sciences UK Limited, Ocular Sciences, Inc. and Le
Gallais' Real Estates (Overseas) Limited[C]
10.24 Consulting agreement between Ed Cummins and Ocular Sciences,
Inc.[D]
10.25 Agreement and Plan of Merger dated March 19, 2000, among
Wesley Jessen VisionCare Inc., and OSI Acquisition Corp. and
Ocular Sciences, Inc.[B]
21.01 List of Subsidiaries[C]
23.01 Consent of KPMG LLP, Independent Certified Public
Accountants
24.01 Power of Attorney (included in Part IV of this Form 10-K)
- - ---------------
# Confidential treatment has been requested from the Securities and Exchange
Commission with respect to certain portions of this exhibit. Omitted
portions have been filed separately with the Commission.
+ Incorporated by reference from the Company's registration statement on
Form S-1, file no. 333-27421.
[X] Incorporated by reference from the Company's registration statement on Form
S-1, file no. 333-46669.
[Y] Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1998.
[Z] Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the period ending June 30, 1999.
[A] Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the period ending September 30, 1999.
[B] Incorporated by reference from the Company's Form 13D, filed with the SEC
on March 29, 2000.
[C] Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1999.
[D] Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the period ending June 30, 2000.
69