QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2002
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 (State or other jurisdiction of incorporation or organization) |
94-2985696 (I.R.S. Employer Identification No.) |
1855 Gateway Boulevard, Suite 700
Concord, California 94520
(Address of principal executive offices, including zip code)
(925) 969-7000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES NO .
As of July 29, 2002, there were outstanding 23,676,756 shares of the registrant’s Common Stock, par value $0.001 per share.
OCULAR SCIENCES, INC.
INDEX
| Page | ||||
| PART I — FINANCIAL INFORMATION | ||||
| Item 1. | Financial Statements (Unaudited) | |||
|
Condensed Consolidated Balance Sheets – June 30, 2002 and December 31, 2001 |
3 | |||
|
Condensed Consolidated Statements of Income – Three and Six Months Ended June 30, 2002 and 2001 |
4 | |||
|
Condensed Consolidated Statements of Cash Flows – Six Months Ended June 30, 2002 and 2001 |
5 | |||
| Notes to Condensed Consolidated Financial Statements | 6 | |||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
14 | ||
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 23 | ||
| PART II — OTHER INFORMATION | ||||
| Item 4. | Submission of Matters to a Vote of Security Holders | 24 | ||
| Signatures | 25 | |||
PART I – FINANCIAL INFORMATION
ITEM 1. Financial Statements
OCULAR SCIENCES, INC.
Condensed Consolidated Balance Sheets – (unaudited)
(In thousands, except share and per share data)
| June 30, | December 31, | |||||||||
| 2002 | 2001* | |||||||||
ASSETS |
||||||||||
Current Assets: |
||||||||||
Cash and cash equivalents |
$ | 18,769 | $ | 7,789 | ||||||
Accounts receivable, less allowance for sales returns and doubtful
accounts of $2,530 and $2,389 for 2002 and 2001, respectively |
49,061 | 46,696 | ||||||||
Inventories |
61,796 | 46,772 | ||||||||
Prepaid expenses and other current assets |
22,009 | 24,721 | ||||||||
Total Current Assets |
151,635 | 125,978 | ||||||||
Property and equipment, net |
139,321 | 128,157 | ||||||||
Goodwill and other intangible assets, net |
60,313 | 45,765 | ||||||||
Loans to officers and employees |
1,140 | 1,505 | ||||||||
Long-term investments |
357 | 280 | ||||||||
Other assets |
2,485 | 2,652 | ||||||||
Total Assets |
$ | 355,251 | $ | 304,337 | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||||
Current Liabilities: |
||||||||||
Accounts payable |
$ | 12,207 | $ | 14,474 | ||||||
Accrued liabilities |
52,457 | 34,155 | ||||||||
Current portion of long-term debt |
399 | 12,660 | ||||||||
Total Current Liabilities |
65,063 | 61,289 | ||||||||
Deferred income taxes |
5,008 | 4,394 | ||||||||
Other liabilities |
4,726 | 5,375 | ||||||||
Long-term debt, less current portion |
28,188 | 3,388 | ||||||||
Total Liabilities |
102,985 | 74,446 | ||||||||
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;
23,676,256 and 23,457,185 shares issued and outstanding
for 2002 and 2001, respectively |
24 | 24 | ||||||||
Additional paid-in capital |
88,919 | 85,025 | ||||||||
Retained earnings |
167,793 | 148,624 | ||||||||
Accumulated other comprehensive loss |
(4,470 | ) | (3,782 | ) | ||||||
Total Stockholders’ Equity |
252,266 | 229,891 | ||||||||
Total Liabilities and Stockholders’ Equity |
$ | 355,251 | $ | 304,337 | ||||||
| * | The consolidated balance sheet at December 31, 2001 has been derived from the Company’s audited consolidated financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. |
See accompanying notes to condensed consolidated financial statements.
OCULAR SCIENCES, INC.
Condensed Consolidated Statements of Income – (unaudited)
(In thousands, except share and per share data)
| Three months ended | Six months ended | |||||||||||||||||
| June 30, | June 30, | |||||||||||||||||
| 2002 | 2001 | 2002 | 2001 | |||||||||||||||
Net sales |
$ | 65,677 | $ | 55,142 | $ | 126,488 | $ | 105,193 | ||||||||||
Cost of sales |
29,137 | 23,006 | 56,467 | 44,659 | ||||||||||||||
Gross profit |
36,540 | 32,136 | 70,021 | 60,534 | ||||||||||||||
Selling and marketing expenses |
14,676 | 11,451 | 24,813 | 20,094 | ||||||||||||||
General and administrative expenses |
10,199 | 9,467 | 20,231 | 17,464 | ||||||||||||||
Research and development expenses |
1,346 | 1,699 | 2,364 | 3,240 | ||||||||||||||
Acquired in-process
research and development |
— | — | — | 4,150 | ||||||||||||||
Income from operations |
10,319 | 9,519 | 22,613 | 15,586 | ||||||||||||||
Interest expense |
(272 | ) | (89 | ) | (613 | ) | (206 | ) | ||||||||||
Interest income |
258 | 105 | 284 | 702 | ||||||||||||||
Other income (expense) |
763 | 9 | 1,093 | (41 | ) | |||||||||||||
Income
before provision for income taxes |
11,068 | 9,544 | 23,377 | 16,041 | ||||||||||||||
Provision
for income taxes |
(1,992 | ) | (2,491 | ) | (4,208 | ) | (4,171 | ) | ||||||||||
Net income |
$ | 9,076 | $ | 7,053 | $ | 19,169 | $ | 11,870 | ||||||||||
Net income per share: |
||||||||||||||||||
Basic |
$ | 0.38 | $ | 0.30 | $ | 0.81 | $ | 0.51 | ||||||||||
Diluted |
$ | 0.37 | $ | 0.29 | $ | 0.78 | $ | 0.50 | ||||||||||
Weighted average common
shares outstanding |
23,602,259 | 23,349,945 | 23,550,901 | 23,330,614 | ||||||||||||||
Weighted average shares of stock
options under the treasury
stock method |
1,017,594 | 704,545 | 984,013 | 488,854 | ||||||||||||||
Total weighted average common
and dilutive potential
common
shares outstanding |
24,619,853 | 24,054,490 | 24,534,914 | 23,819,468 | ||||||||||||||
See accompanying notes to condensed consolidated financial statements.
OCULAR SCIENCES, INC.
Condensed Consolidated Statements of Cash Flows – (unaudited)
(In thousands)
| Six months ended June 30, | ||||||||||||
| 2002 | 2001 | |||||||||||
Cash flows from operating activities: |
||||||||||||
Net income |
$ | 19,169 | $ | 11,870 | ||||||||
Adjustments to reconcile net income to net cash provided
by operating activities: |
||||||||||||
Depreciation and amortization |
10,349 | 8,699 | ||||||||||
Income tax benefits from stock options exercised |
658 | 23 | ||||||||||
Provision for sales returns and doubtful accounts |
(106 | ) | 42 | |||||||||
Provision for excess and obsolete inventory |
732 | 843 | ||||||||||
(Gain)
loss on sale of property and equipment |
— | 38 | ||||||||||
Exchange (gain) loss |
(1,189 | ) | 98 | |||||||||
Acquired in-process research and development |
— | 4,150 | ||||||||||
Deferred income taxes |
901 | (1,301 | ) | |||||||||
Changes in operating assets and liabilities,
net of effects of acquisitions: |
||||||||||||
Accounts receivable |
(9,564 | ) | (5,335 | ) | ||||||||
Inventories |
(9,466 | ) | (11,506 | ) | ||||||||
Prepaid expenses, other current and non-current assets |
2,759 | (2,577 | ) | |||||||||
Accounts payable |
(2,267 | ) | 5,691 | |||||||||
Accrued liabilities |
4,753 | 2,113 | ||||||||||
Income taxes refundable |
(153 | ) | (1,260 | ) | ||||||||
Net cash provided by operating activities |
16,576 | 11,588 | ||||||||||
Cash flows from investing activities: |
||||||||||||
Purchase of property and equipment |
(20,640 | ) | (15,066 | ) | ||||||||
Purchase of short and long-term investments |
(79 | ) | — | |||||||||
Sales and maturities of short and long-term investments |
— | 10,614 | ||||||||||
Loans to officers and employees |
— | (500 | ) | |||||||||
Payment for acquisition, net of cash acquired |
— | (48,272 | ) | |||||||||
Net cash used in investing activities |
(20,719 | ) | (53,224 | ) | ||||||||
Cash flows from financing activities: |
||||||||||||
Repayment of long-term debt |
(26,222 | ) | (819 | ) | ||||||||
Proceeds from issuance of long-term debt |
39,000 | — | ||||||||||
Repayment of capital lease obligations |
(239 | ) | (234 | ) | ||||||||
Proceeds from issuance of common stock |
3,236 | 722 | ||||||||||
Net cash provided by (used in) financing activities |
15,775 | (331 | ) | |||||||||
Effect of exchange rate changes on cash and cash equivalents |
(652 | ) | (964 | ) | ||||||||
Net increase (decrease) in cash and cash equivalents |
10,980 | (42,931 | ) | |||||||||
Cash and cash equivalents at beginning of period |
7,789 | 55,109 | ||||||||||
Cash and cash equivalents at end of period |
$ | 18,769 | $ | 12,178 | ||||||||
Supplementary cash flow information: |
||||||||||||
Cash paid during the period for: |
||||||||||||
Interest |
$ | 496 | $ | 200 | ||||||||
Taxes |
$ | 4,890 | $ | 5,431 | ||||||||
Supplementary disclosure of non-cash investing and financing activities: |
||||||||||||
Reduction
to liabilities assumed and goodwill in connection with the Essilor
acquisition |
$ | 974 | $ | — | ||||||||
Acquisition
of assets of Seiko Contactlens, Inc. (see Note 8 of notes to
condensed consolidated financial statements) |
$ | 21,686 | $ | — | ||||||||
See accompanying notes to condensed consolidated financial statements.
OCULAR SCIENCES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 — Basis of Preparation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not contain all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements at and for the year ended December 31, 2001 and, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of our financial condition as of June 30, 2002 and the results of our operations and comprehensive income for the three and six-month periods ended June 30, 2002 and 2001, respectively, and our cash flows for the six-month periods ended June 30, 2002 and 2001. These unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements as of December 31, 2001 and 2000 and for each of the years in the three year period ended December 31, 2001, including notes thereto, included in our Annual Report on Form 10-K for the year ended December 31, 2001. Operating results for the six month period ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002.
All amounts, unless otherwise indicated are in U.S. dollars.
Note 2 – New Accounting Standards
The Financial Accounting Standards Board’s Emerging Issues Task Force (EITF) issued EITF 00-14, “Accounting for Certain Sales Incentives”, effective January 1, 2002. EITF 00-14 requires that costs related to consumer coupons be classified as a reduction of sales. We reclassified as deductions in net sales approximately $401,000 and $574,000 of expenses which were previously classified as selling and marketing expenses in the three and six months ended June 30, 2001, respectively.
The EITF also issued EITF 00-25, “Vendor Income Statement Characterization of Consideration to a Purchaser of the Vendor’s Products or Services”, effective January 1, 2002. EITF 00-25 requires that certain of our customer promotional incentive payments, primarily cooperative merchandising allowances, be classified as a reduction of sales. We reclassified as deductions in net sales approximately $6.1 million and $12.6 million of customer promotional incentives that were previously classified as selling and marketing expenses in the three and six months ended June 30, 2001, respectively.
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement applies to legal obligations associated with retirement of long-lived assets that result from the acquisition, construction, development or normal use of the asset. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. We are currently evaluating the impact of SFAS No. 143 on our financial statements and related disclosures.
On January 1, 2002, we adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.
SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The implementation of SFAS No. 144 did not have a material impact on our consolidated financial statements.
The FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” in June, 2002. SFAS No. 146 addresses accounting and reporting for costs associated with exit and disposal activities and supercedes EITF No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, as defined by the Statement. Under EITF 94-3, an exit cost was recognized at the date an entity committed to an exit plan. Additionally, SFAS No. 146 provides that exit and disposal costs should be measured at fair value and that the associated liability will be adjusted for changes in estimated cash flows. The provisions of SFAS No. 146 are effective for exit and disposal activities initiated after December 31, 2002.
Note 3 – Balance Sheet Items
Inventories consisted of the following (in thousands):
| June 30, | December 31, | |||||||
| 2002 | 2001 | |||||||
Raw materials |
$ | 6,261 | $ | 6,313 | ||||
Work in process |
3,787 | 3,866 | ||||||
Finished goods |
51,748 | 36,593 | ||||||
| $ | 61,796 | $ | 46,772 | |||||
Prepaid expenses and other current assets consisted of the following (in thousands):
| June 30, | December 31, | |||||||
| 2002 | 2001 | |||||||
Refundable taxes |
$ | — | $ | 7,426 | ||||
Deferred income taxes |
7,982 | 8,269 | ||||||
Value added taxes receivable |
2,830 | 2,803 | ||||||
Prepaid insurance |
1,352 | 2,472 | ||||||
Prepaid expenses |
3,862 | 1,329 | ||||||
Other current assets |
5,983 | 2,422 | ||||||
| $ | 22,009 | $ | 24,721 | |||||
Accrued liabilities consisted of the following (in thousands):
| June 30, | December 31, | |||||||
| 2002 | 2001 | |||||||
Accrued expenses |
$ | 29,559 | $ | 20,466 | ||||
Accrued restructuring expense |
6,767 | 7,871 | ||||||
Accrued cooperative merchandising allowances |
9,114 | 5,318 | ||||||
Accrued
value added taxes payable |
6,670 | — | ||||||
Income taxes payable |
347 | 500 | ||||||
| $ | 52,457 | $ | 34,155 | |||||
Note 4 — Goodwill and Other Intangible Assets
In July 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 142 provides guidance on how to account for goodwill and certain intangible assets after an acquisition is completed. The most substantive change is that goodwill and other indefinite life intangible assets can no longer be amortized but instead should be periodically tested for impairment. Therefore, we no longer amortize goodwill and certain other intangible assets, principally assembled workforce.
We have completed the first step of SFAS No. 142 transitional goodwill impairment test and have determined that as of January 1, 2002 our goodwill had not been impaired. In the future, we will perform the annual impairment test required by SFAS No. 142 in the fourth quarter of each fiscal year.
Goodwill and other intangible assets (gross) consisted of the following (in thousands):
| June 30, | December 31, | |||||||
| 2002 | 2001 | |||||||
Goodwill |
$ | 43,020 | $ | 31,965 | ||||
Intangible assets subject to
amortization |
22,083 | 17,916 | ||||||
Intangible assets not subject to
amortization |
3,630 | 3,630 | ||||||
| $ | 68,733 | $ | 53,511 | |||||
Accumulated amortization consisted of the following (in thousands):
| June 30, | December 31, | |||||||
| 2002 | 2001 | |||||||
Goodwill
|
$ | 2,067 | $ | 2,067 | ||||
Intangible assets subject to amortization |
5,878 | 5,204 | ||||||
Intangible assets not subject to amortization |
475 | 475 | ||||||
| $ | 8,420 | $ | 7,746 | |||||
Goodwill and other intangible assets, net of accumulated depreciation, consisted of the following (in thousands):
| June 30, | December 31, | |||||||
| 2002 | 2001 | |||||||
Goodwill |
$ | 40,953 | $ | 29,898 | ||||
Intangible assets subject to
amortization |
16,205 | 12,712 | ||||||
Intangible assets not subject to
amortization |
3,155 | 3,155 | ||||||
| $ | 60,313 | $ | 45,765 | |||||
Intangible assets subject to amortization consist primarily of marketing rights, patents, customer lists, core technology and trade names. Amortization expense for intangible assets subject to amortization amounted to approximately $331,000 and $516,000 for the three and six months ended June 30, 2002, respectively and approximately $250,000 and $334,000 for the three and six months ended June 30, 2001, respectively.
Amortization expense for the five succeeding fiscal years will amount to approximately (in thousands):
| Amortization | ||||
| Year ending December 31, | expense | |||
2003 |
$ | 2,000 | ||
2004 |
2,000 | |||
2005 |
2,000 | |||
2006 |
1,900 | |||
2007 |
1,900 | |||
Total |
$ | 9,800 | ||
As required under SFAS No. 142, we have ceased to amortize goodwill and assembled workforce beginning January 1, 2002. As of June 30, 2002, unamortized goodwill and assembled workforce was approximately $44 million. This reduction in amortization effective January 1, 2002 may affect the comparability of current period results of operations with prior periods. The following table discloses what reported net income, including income tax effects, and basic and diluted net income per share would have been in all periods presented exclusive of amortization expense (in thousands, except for per share amounts):
| Three months ended | Six months ended | ||||||||||||||||
| June 30, | June 30, | ||||||||||||||||
| Net income: | 2002 | 2001 | 2002 | 2001 | |||||||||||||
Reported net income: |
$ | 9,076 | $ | 7,053 | $ | 19,169 | $ | 11,870 | |||||||||
Add back: Goodwill amortization |
— | 369 | — | 614 | |||||||||||||
Add back: Assembled workforce amortization |
— | 96 | — | 161 | |||||||||||||
Adjusted net income: |
$ | 9,076 | $ | 7,518 | $ | 19,169 | $ | 12,645 | |||||||||
| Three months ended | Six months ended | ||||||||||||||||
| June 30, | June 30, | ||||||||||||||||
| Basic net income per share: | 2002 | 2001 | 2002 | 2001 | |||||||||||||
Reported net income: |
$ | 0.38 | $ | 0.30 | $ | 0.81 | $ | 0.51 | |||||||||
Goodwill amortization |
— | .02 | — | .03 | |||||||||||||
Assembled workforce amortization |
— | — | — | — | |||||||||||||
Adjusted net income: |
$ | 0.38 | $ | 0.32 | $ | 0.81 | $ | 0.54 | |||||||||
| Three months ended | Six months ended | ||||||||||||||||
| June 30, | June 30, | ||||||||||||||||
| Diluted net income per share: | 2002 | 2001 | 2002 | 2001 | |||||||||||||
Reported net income: |
$ | 0.37 | $ | 0.29 | $ | 0.78 | $ | 0.50 | |||||||||
Goodwill amortization |
— | .02 | — | .03 | |||||||||||||
Assembled workforce amortization |
— | — | — | — | |||||||||||||
Adjusted net income: |
$ | 0.37 | $ | 0.31 | $ | 0.78 | $ | 0.53 | |||||||||
Note 5 — Comprehensive Income
Comprehensive income consisted of (in thousands):
| Three months ended | Six months ended | ||||||||||||||||
| June 30, | June 30, | ||||||||||||||||
| 2002 | 2001 | 2002 | 2001 | ||||||||||||||
Net income |
$ | 9,076 | $ | 7,053 | $ | 19,169 | $ | 11,870 | |||||||||
Foreign currency translation adjustment |
905 | (61 | ) | (686 | ) | (898 | ) | ||||||||||
Net unrealized losses on investments |
— | (39 | ) | (2 | ) | (17 | ) | ||||||||||
Other comprehensive gain (loss) |
905 | (100 | ) | (688 | ) | (915 | ) | ||||||||||
Comprehensive income |
$ | 9,981 | $ | 6,953 | $ | 18,481 | $ | 10,955 | |||||||||
Note 6 — Net Income Per Share
In accordance with SFAS No. 128, “Earnings Per Share,” basic earnings per share is calculated using the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated using the weighted average number of common shares and dilutive potential common shares outstanding during the period. Dilutive potential common shares represent shares issuable upon the exercise of outstanding options and are calculated using the treasury stock method.
Options to purchase 126,300 and 212,700 shares of our common stock for the three and six months ended June 30, 2002, respectively, were not included in the computation of diluted earnings per share because their exercise prices were greater than the average market price of our common stock of $27.55 and $26.85 per share, respectively. Options to purchase 925,180 and 1,373,290 shares of our common stock for the three and six months ended June 30, 2001, respectively, were not included in the computation of diluted earnings per share because their exercise prices were greater than the average market price of our common stock of $20.87 and $18.21 per share, respectively.
Note 7 — Acquisition of the Contact Lens Business from Essilor International S. A.
On February 12, 2001, we acquired the contact lens business of Essilor International (Compagnie Generale d’Optique) S. A. (“Essilor”). We acquired Essilor’s sales and distribution assets of the contact lens business in Europe and the United States and manufacturing facilities in France, the United Kingdom and the United States.
We have accounted for the acquisition using the purchase method. Accordingly, the operating results of Essilor are included in our operating results from February 1, 2001.
The $48,590,000 purchase price for the assets acquired and liabilities assumed was comprised of $44,476,000 in cash and $4,114,000 in acquisition costs. There were no contingent payments, pre-acquisition contingencies or other commitments specified in the acquisition agreement.
The purchase price has been allocated as follows (in thousands):
Goodwill |
$ | 29,647 | ||
Inventory |
6,532 | |||
Accounts receivable |
6,127 | |||
Property and equipment |
5,627 | |||
In-process research and development |
4,150 | |||
Assembled workforce |
3,630 | |||
Core technology |
3,490 | |||
Customer list |
2,700 | |||
Trade names |
1,650 | |||
Other assets |
649 | |||
Liabilities assumed |
(15,612 | ) | ||
| $ | 48,590 | |||
Included in the liabilities assumed are accruals for costs associated with exiting certain activities and facilities of the acquired Essilor operations that were considered duplicative. This includes accruals for severance costs related to workforce reductions across all functions and exit costs associated with exiting certain facilities, dismantling equipment and other miscellaneous exit costs. Details of the exit costs and severance costs paid and charged against the accrual are presented in the following table (in thousands):
| Accrual as | Accrual as | Accrual as | ||||||||||||||||||||||||||
| of | Translation | of | Translation | of | ||||||||||||||||||||||||
| February 12, 2001 | Payments | Adjustments | December 31, 2001 | Payments | Adjustments | June 30, 2002 | ||||||||||||||||||||||
Severance costs |
$ | 7,145 | $ | (501 | ) | $ | 59 | $ | 6,703 | $ | (1,337 | ) | $ | 231 | $ | 5,597 | ||||||||||||
Facility
costs |
1,566 | (755 | ) | — | 811 | (44 | ) | 36 | 803 | |||||||||||||||||||
Equipment and
dismantling costs |
250 | — | — | 250 | (4 | ) | 15 | 261 | ||||||||||||||||||||
Miscellaneous costs |
107 | — | — | 107 | (3 | ) | 2 | 106 | ||||||||||||||||||||
Total |
$ | 9,068 | $ | (1,256 | ) | $ | 59 | $ | 7871 | $ | (1,388 | ) | $ | 284 | $ | 6,767 | ||||||||||||
Management began formulating the plans to exit certain activities and facilities of the acquired Essilor operations at the time of the acquisition and expects to complete all actions under such plans by June 30, 2003.
The purchase price was more than the fair value of the net assets acquired of approximately $18,943,000, resulting in goodwill of approximately $29,647,000. Subsequent to December 31, 2001, goodwill and assembled workforce have not been subject to amortization due to their infinite lives. Customer lists, existing technology and trade names are included as components of intangible assets and are being amortized on a straight-line basis over their useful lives as listed in the table below:
| Useful | ||||
| Intangible Assets | Life | |||
Core technology |
10 years | |||
Trade names |
12 years | |||
Customer lists |
15 years | |||
The total weighted average amortization period of intangible assets subject to amortization is approximately 12 years.
As a result of the acquisition, we recorded acquired in-process research and development totaling $4,150,000. This charge relates to Essilor’s Fully Molded Toric Lenses and Photochromic Lenses, all of which were under development on the date of the acquisition.
These projects under development were valued on the premise of fair market value in continued use employing a version of the income approach referred to as the discounted cash flow approach. This methodology is based on discounting to present value, at an appropriate risk-adjusted discount rate, both the expenditures to be made to complete the development efforts and the operating cash flows which the applications are projected to generate, less a return on the assets necessary to generate the operating cash flows.
From these projected revenues, we deducted costs of sales, operating costs, royalties and taxes to determine net cash flows. We estimated the percentage of completion of the development efforts for each product by comparing the estimated costs incurred and portions of the development accomplished prior to the acquisition date, to the total estimated costs and total development efforts required to fully develop these products. This percentage was calculated for each product and was then applied to the net cash flows that each product was projected to generate. These net cash flows were then discounted to present values using appropriate risk-adjusted discount rates in order to arrive at discounted fair values for each product.
The following table reflects unaudited pro forma combined results of operations of the Company and Essilor on the basis that the acquisition had taken place on January 1, 2001 (in thousands, except per share data):
| Six months ended | |||||
| June 30, 2001 | |||||
Net sales |
$ | 109,392 | |||
Net income |
$ | 12,304 | |||
Net income per share: |
|||||
Basic |
$ | 0.53 | |||
Diluted |
$ | 0.52 | |||
Note 8 — Acquisition of Assets of Seiko Contactlens, Inc.
On March 11, 2002, we entered into an agreement to acquire certain assets of Seiko Contactlens, Inc. (“Seiko”). The purchase was completed on April 1, 2002. As part of the acquisition, we hired 74 Seiko sales and administrative personnel. Seiko had been our distributor in Japan.
We have accounted for the acquisition under the purchase method of accounting and accordingly the operating results of Seiko have been included in our operating results from April 1, 2002.
The purchase price consisted of (in thousands):
Exchange
of accounts receivable |
$ | 11,215 | ||
Cash |
8,823 | |||
Acquisition costs |
1,648 | |||
| $ | 21,686 | |||
As of June 30, 2002, the cash component of the purchase price was classified as accrued liability as the cash was not transferred to Seiko until August 1, 2002. The accounts receivable represents amounts owed from Seiko and exchanged as part of the acquisition.
We have preliminarily evaluated the assets and liabilities acquired and have allocated the $21.7 million purchase price based on this evaluation, which is subject to change. The preliminary purchase price allocation consisted of (in thousands):
Goodwill |
$ | 11,172 | ||
Customer lists |
3,540 | |||
Favorable contracts |
330 | |||
Inventory |
6,290 | |||
Accounts receivable |
3,910 | |||
Liabilities
assumed |
(3,556 | ) | ||
| $ | 21,686 | |||
Goodwill has not been subject to amortization due to its infinite life. Customer lists and favorable contracts are included as components of intangible assets and are being amortized on a straight-line basis over their useful lives as listed in the table below:
| Useful | ||||
| Intangible Assets | Life | |||
Customer lists |
10 years | |||
Favorable contracts |
3 years | |||
The total weighted average amortization period of intangible assets subject to amortization is approximately 8 years.
Note 9 – New Credit Facility
On April 16, 2002, we completed a new $50 million credit facility, $40 million of which is provided by Comerica Bank and $10 million of which is provided by The Northern Trust Company. Revolving loans under this facility mature on April 16, 2005, and bear interest at 0.50% below Comerica’s prime rate or 1.00% to 1.50% above the eurodollar rate depending on our ratio of total funded debt to earnings before interest and taxes plus non-cash charges. The loan provides an option to convert any outstanding revolving loans not to exceed $40 million at the maturity date to a four-year term loan. The term loan, once repaid, may not be reborrowed. This credit agreement contains covenants, which, among other things, require us to maintain certain financial ratios. As of June 30, 2002, there were $25 million of revolving loans outstanding under this credit agreement and the interest rate was 2.95% and 4.25% on loan balances of $19.5 million and $5.5 million, respectively. This revolving loan is included in long-term liabilities in the accompanying balance sheet as of June 30, 2002 based on our ability and intent to defer payment beyond June 30, 2003. Borrowings under this agreement are secured by a pledge of 100% of the outstanding common stock of Ocular Sciences Puerto Rico and Sunsoft, Inc. and 65% of the outstanding common stock of our Barbados and Canadian subsidiaries.
Note 10 – 1997 Directors Stock Option Plan
In April 2002, our stockholders approved an amendment to increase the number of shares of common stock authorized and reserved for issuance under the 1997 Directors Stock Option Plan by 300,000 (from 400,000 to 700,000 shares).
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in Part I — Item 1 of this Quarterly Report and the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2001.
This Quarterly Report on Form 10-Q 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 statements relate to our future performance and plans, results of operations, capital expenditures, acquisitions and operating improvements and costs. 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 we may not be able to realize them. 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 overall economic environment, the integration of the Essilor and Seiko Contactlens businesses, the impact of competitive products and pricing, product demand both domestically and overseas, market receptiveness to various product launches, higher than expected employee turnover, extended manufacturing difficulties, customer bad debts, currency fluctuations, other risks of doing business internationally and the other risks detailed in the sections entitled “Item 1, Business — Risk Factors,” and “Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2001, and from time to time our other reports filed with the Securities and Exchange Commission. We caution you not to place undue reliance on forward-looking statements, which reflect our analysis only and speak as of the date of this report or as of the dates indicated in the statements. Unless the context otherwise requires, the terms “we”, “us”, and “our” refer to Ocular Sciences, Inc. and its subsidiaries.
ACQUISITIONS
On February 12, 2001, we acquired the contact lens business of Paris-based Essilor International (Compagnie Generale d’Optique) S.A. (“Essilor”). We acquired, among other things, the sales and distribution assets of the contact lens business in Europe and the United States and a number of manufacturing facilities in France, the United Kingdom and the United States. We accounted for the acquisition using the purchase method. Accordingly, the operating results of Essilor are included in our operating results from February 1, 2001. The $48,590,000 purchase price for the acquired assets was comprised of $44,476,000 in cash and $4,114,000 in acquisition costs. Acquired in-process research and development costs of $4,150,000 were expensed in the year ended December 31, 2001, as it was determined that the technology had no alternative uses. There were no contingent payments, pre-acquisition contingencies or other commitments specified in the acquisition agreement.
On March 11, 2002, we entered into an agreement to acquire certain assets of Seiko Contactlens, Inc. (“Seiko”) for $21,686,000. The purchase was completed on April 1, 2002. Seiko had been our distributor in Japan. We have accounted for the acquisition under the purchase method of accounting and accordingly the operating results of Seiko has been included in our operating results from April 1, 2002. The $21,686,000 purchase price was comprised of an exchange of accounts receivable of $11,215,000, a payable to Seiko of $8,823,000 (subsequently paid on August 1, 2002) and acquisition costs of $1,648,000. There were no contingent payments, pre-acquisition contingencies or other commitments specified in the acquisition agreement.
Critical Accounting Policies
The Company’s critical accounting policies are as follows:
| • | revenue recognition; | ||
| • | estimating valuation allowances and accrued liabilities; | ||
| • | accounting for income taxes; | ||
| • | valuation of long-lived and intangible assets and goodwill; and | ||
| • | estimates inherent in purchase accounting. |
Revenue Recognition
Revenue is recognized based on the terms of sale with the customer, generally upon product shipment. We have established programs that, under specified conditions, enable our customers to return product. We establish liabilities for estimated returns and allowances at the time revenues are recognized. In addition, accruals for customer discounts and rebates are recorded when revenues are recognized. Amounts billed to customers in sale transactions related to shipping and handling are classified as revenue. In December 1999, the Securities and Exchange Commission (the “SEC”) issued Staff Accounting Bulletin (SAB) No. 101, “Revenue Recognition in Financial Statements”, which summarizes certain of the SEC’s views in applying generally accepted accounting principles for revenue recognition in financial statements. Our revenue recognition policies complied with the guidance contained in SAB No. 101.
Estimating Valuation Allowances and Accrued Liabilities
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amount of assets 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.
Management specifically analyzes the aging of accounts receivable and also analyzes historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in customer payment terms and sales returns when evaluating the adequacy of the allowance for doubtful accounts and sales returns in any accounting period. Material differences may result in the amount and timing of revenue and or expenses for any period if management made different judgments or utilized different estimates.
We assess the need for reserves on inventory based on monthly forward projections of sales of products that are updated monthly. 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. Once inventory is reserved, the reserve can only be relieved by the subsequent sale or disposal of the inventory.
Accounting for Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates recognized in income in the period that includes the enactment date.
In preparing our condensed consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating actual current tax liability together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheet. Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities. In the event that actual results differ from these estimates or we adjust these estimates in future periods, our financial position and results of operations could be materially impacted.
Valuation of Long-Lived and Intangible Assets and Goodwill
We periodically review long-lived assets and certain identifiable intangible assets for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets”. Goodwill and certain intangible assets, which are not subject to amortization, are periodically reviewed for impairment in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets ”.
For assets to be held and used, including acquired intangibles, we initiate our review whenever events or changes in circumstances indicate that the carrying amount of goodwill and intangible assets may not be recoverable. Recoverability of an asset is measured by comparison of its carrying amount to the expected future undiscounted cash flows (without interest charges) that the asset is expected to generate. Any impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair market value. Significant management judgment is required in the forecasting of future operating results which are used in the preparation of projected discounted cash flows and should different conditions prevail, material write downs of net intangible assets and/or goodwill could occur. It is reasonably possible that the estimates of anticipated future gross revenue, the remaining estimated economic life of the products and technologies, or both, could differ from those used to assess the recoverability of these costs and result in a write-down of the carrying amount or a shortened life of acquired intangibles in the future.
In January 2002, Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” became effective and as a result, we have ceased to amortize goodwill and assembled workforce beginning January 1, 2002. As of June 30, 2002, unamortized goodwill and assembled workforce was approximately $44 million. In lieu of amortization, we are required to perform an initial impairment review of goodwill in 2002 and an annual impairment review thereafter. We have completed the first step of SFAS No. 142 transitional goodwill impairment test and have determined that as of January 1, 2002 our goodwill had not been impaired. In the future, we will perform the annual impairment test required by SFAS No. 142 in the fourth quarter of each fiscal year.
There can be no assurance that a material impairment charge will not be recorded in the future.
Estimates Inherent in Purchase Accounting
Purchase accounting requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair market value of the assets purchased and liabilities assumed. In our recording of the acquisition of the assets of Essilor and Seiko Contactlens, values were assigned to identifiable intangible assets based on management’s forecasts and projections that include assumptions related to future revenues and cash flows generated from the acquired assets.
The allocation of Essilor’s purchase price to in-process research and development of $4.2 million represented the estimated fair value based on risk-adjusted cash flows related to the incomplete research and development projects. At February 12, 2001, the development of these projects had not reached technological feasibility and the research and development in progress had no alternative uses. Accordingly, these costs were expensed in the statement of operations for the year ended December 31, 2001.
New Accounting Pronouncements Adopted
See Note 2 and Note 4 to Notes to Condensed Consolidated Financial Statements which are incorporated herein by reference.
Results of Operations
Net Sales
| Three Months Ended June 30, | ||||||||||||
| 2002 | 2001 | % Change | ||||||||||
U.S. |
$ | 32,279,000 | $ | 31,542,000 | 2.3 | % | ||||||
As a percentage of net sales |
49.1 | % | 57.2 | % | ||||||||
International |
$ | 33,398,000 | $ | 23,600,000 | 41.5 | % | ||||||
As a percentage of net sales |
50.9 | % | 42.8 | % | ||||||||
Net sales |
$ | 65,677,000 | $ | 55,142,000 | 19.1 | % | ||||||
| Six Months Ended June 30, | ||||||||||||
| 2002 | 2001 | % Change | ||||||||||
U.S. |
$ | 65,489,000 | $ | 61,339,000 | 6.8 | % | ||||||
As a percentage of net sales |
51.8 | % | 58.3 | % | ||||||||
International |
$ | 60,999,000 | $ | 43,854,000 | 39.1 | % | ||||||
As a percentage of net sales |
48.2 | % | 41.7 | % | ||||||||
Net sales |
$ | 126,488,000 | $ | 105,193,000 | 20.2 | % | ||||||
Net sales were $65.7 million and $126.5 million for the three and six months ended June 30, 2002 compared to $55.1 million and $105.2 million for the three and six months ended June 30, 2001, representing increases of 19.1% and 20.2%, respectively. The increase in net sales for the three months ended June 30, 2002 compared to the three months ended June 30, 2001 was due primarily to the added revenues generated by the Seiko Contactlens acquisition, growing sales of our new toric and color disposable lenses and growth in international sales of disposable lenses marketed for daily, weekly and monthly replacement regimens. The increase in net sales for the six months ended June 30, 2002 compared to the six months ended June 30, 2001 was due primarily to the same reasons mentioned above as well as the additional month of revenues in 2002 from products acquired as part of the Essilor acquisition.
U.S. sales were $32.3 million and $65.5 million for the three and six months ended June 30, 2002, compared to $31.5 million and $61.3 million for the three and six months ended June 30, 2001, representing increases of 2.3% and 6.8%, respectively. The increase in U.S. net sales for the three and six months ended June 30, 2002 compared to the three and six months ended June 30, 2001 was due primarily to the increase in sales of newly introduced toric and colored lenses.
International sales were $33.4 million and $61.0 million for the three and six months ended June 30, 2002, compared to $23.6 million and $43.9 million for the three and six months ended June 30, 2001, representing increases of 41.5% and 39.1%, respectively. The increase in international net sales was due primarily to the strengthening of our position in the international marketplace, the increased breadth of our product offerings, better inventory availability, additional distribution channels in Europe and our increased distribution network in the Japanese marketplace as a result of the Seiko acquisition. In addition, the effect of exchange rates positively impacted our revenues by approximately $600,000 in the quarter ended June 30, 2002 as compared to the quarter ended June 30, 2001. The net effect of exchange rates did not materially impact our revenues for the six months ended June 30, 2002 as compared to the six months ended June 30, 2001.
Gross Profit
| Three Months Ended June 30, | ||||||||||||
| 2002 | 2001 | % Change | ||||||||||
Gross profit |
$ | 36,540,000 | $ | 32,136,000 | 13.7 | % | ||||||
As a percentage of net sales |
55.6 | % | 58.3 | % | ||||||||
| Six Months Ended June 30, | ||||||||||||
| 2002 | 2001 | % Change | ||||||||||
Gross profit |
$ | 70,021,000 | $ | 60,534,000 | 15.7 | % | ||||||
As a percentage of net sales |
55.4 | % | 57.5 | % | ||||||||
Gross profit was $36.5 million and $70.0 million for the three and six months ended June 30, 2002, compared to $32.1 million and $60.5 million for the three and six months ended June 30, 2001, representing increases of 13.7% and 15.7%, respectively. As a percentage of sales, gross profit was 55.6% and 55.4% in the three and six months ended June 30, 2002 compared to 58.3% and 57.5% in the three and six months ended June 30, 2001. The increase in dollar terms was primarily due to our growth in sales as discussed above. The decline as a percentage of net sales was primarily due to unfavorable product and geographic mix. This is mostly a result of an increase in sales of daily disposable products at gross margins lower than other products.
We expect cost reductions resulting from improvements in our current production processes to continue in the future. Specifically, we are in the process of adding new automated production lines at our United Kingdom and Puerto Rico facilities, which are designed to further reduce our per unit cost of production over time, although such cost reductions may not be realized until future periods.
Selling and Marketing Expenses
| Three Months Ended June 30, | ||||||||||||
| 2002 | 2001 | % Change | ||||||||||
Selling and marketing expenses |
$ | 14,676,000 | $ | 11,451,000 | 28.2 | % | ||||||
As a percentage of net sales |
22.3 | % | 20.8 | % | ||||||||
| Six Months Ended June 30, | ||||||||||||
| 2002 | 2001 | % Change | ||||||||||
Selling and marketing expenses |
$ | 24,813,000 | $ | 20,094,000 | 23.5 | % | ||||||
As a percentage of net sales |
19.6 | % | 19.1 | % | ||||||||
Sales and marketing expenses were $14.7 million and $24.8 million for the three and six months ended June 30, 2002 as compared to $11.5 million and $20.1 million for the three and six months ended June 30, 2001, representing increases of 28.2% and 23.5%, respectively. As a percentage of net sales, selling and marketing expenses were 22.3% and 19.6% in the three and six months ended June 30, 2002 compared to 20.8% and 19.1% in the three and six months ended June 30, 2001. The increase in sales and marketing expenses were due primarily to the additional sales expenses in Japan, increases in expenditures related to new product launches in the United States and Canada and promotional programs.
General and Administrative Expenses
| Three Months Ended June 30, | ||||||||||||
| 2002 | 2001 | % Change | ||||||||||
General and administrative expenses |
$ | 10,199,000 | $ | 9,467,000 | 7.7 | % | ||||||
As a percentage of net sales |
15.5 | % | 17.2 | % | ||||||||
| Six Months Ended June 30, | ||||||||||||
| 2002 | 2001 | % Change | ||||||||||
General and administrative expenses |
$ | 20,231,000 | $ | 17,464,000 | 15.8 | % | ||||||
As a percentage of net sales |
16.0 | % | 16.6 | % | ||||||||
General and administrative expenses were $10.2 million and $20.2 million for the three and six months ended June 30, 2002 as compared to $9.5 million and $17.5 million for the three and six months ended June 30, 2001, representing increases of 7.7% and 15.8%, respectively. As a percentage of net sales, general and administrative expenses were 15.5% and 16.0% in the three and six months ended June 30, 2002 compared to 17.2% and 16.6% in the three and six months ended June 30, 2001. The decrease in general and administrative expenses in 2002 as a percent of sales was primarily due to the better leverage associated with the increased costs arising from the new entities acquired in the Essilor acquisition. We believe that when net sales increase, our general and administrative expenses will continue to increase in absolute dollars, but will continue to decrease as a percentage of net sales.
Research and Development Expenses
| Three Months Ended June 30, | ||||||||||||
| 2002 | 2001 | % Change | ||||||||||
Research and development expenses |
$ | 1,346,000 | $ | 1,699,000 | (20.8 | %) | ||||||
As a percentage of net sales |
2.0 | % | 3.1 | % | ||||||||
| Six Months Ended June 30, | ||||||||||||
| 2002 | 2001 | % Change | ||||||||||
Research and development expenses |
$ | 2,364,000 | $ | 3,240,000 | (27.0 | %) | ||||||
As a percentage of net sales |
1.9 | % | 3.1 | % | ||||||||
Research and development expenses were $1.3 million and $2.4 million for the three and six months ended June 30, 2002 as compared to $1.7 million and $3.2 million for the three and six months ended June 30, 2001, representing decreases of 20.8% and 27.0%, respectively. As a percentage of net sales, research and development expenses were 2.0% and 1.9% in the three and six months ended June 30, 2002 compared to 3.1% in the three and six months ended June 30, 2001. Research and development expenses decreased in dollars and as a percentage of net sales due primarily to the timing of new product development projects.
Interest and Other Income, Net
| Three Months Ended June 30, | ||||||||||||
| 2002 | 2001 | % Change | ||||||||||
Interest and other income, net |
$ | 749,000 | $ | 25,000 | 2896.0 | % | ||||||
As a percentage of net sales |
1.1 | % | 0.0 | % | ||||||||
| Six Months Ended June 30, | ||||||||||||
| 2002 | 2001 | % Change | ||||||||||
Interest and other income, net |
$ | 764,000 | $ | 455,000 | 67.9 | % | ||||||
As a percentage of net sales |
0.6 | % | 0.8 | % | ||||||||
Interest and other income was $749,000 and $764,000 for the three and six months ended June 30, 2002 as compared to $25,000 and $455,000 for the three and six months ended June 30, 2001, representing an increase of 2,896.0% and 67.9%, respectively.
The increase in interest and other income resulted primarily from the increase in net foreign exchange gains realized on foreign-denominated receivables and interest received on an income tax refund in the second quarter of 2002, offset partially by an increase in interest expense as a result of larger amounts of outstanding debt and a decrease in available cash balances arising from the acquisition of the Essilor contact lens business.
Provision for Income Taxes
| Three Months Ended June 30, | ||||||||||||
| 2002 | 2001 | % Change | ||||||||||
Provision
for income taxes |
$ | 1,992,000 | $ | 2,491,000 | (20.0 | %) | ||||||
Effective tax rate |
18.0 | % | 26.1 | % | ||||||||
| Six Months Ended June 30, | ||||||||||||
| 2002 | 2001 | % Change | ||||||||||
Provision
for income taxes |
$ | 4,208,000 | $ | 4,171,000 | 0.9 | % | ||||||
Effective tax rate |
18.0 | % | 26.0 | % | ||||||||
Income taxes were $2.0 million and $4.2 million for the three and six months ended June 30, 2002 as compared to $2.5 million and $4.2 million for the three and six months ended June 30, 2001, representing a decrease of 20.0% and increase of 0.9%, respectively.
Our effective tax rate decreased from 26.1% and 26.0% in the three and six months ended June 30, 2001, respectively, to 18.0% in the comparable 2002 periods primarily due to increases in sales and income in our offshore subsidiary, which has a lower effective tax rate. We continue to receive an industrial tax exemption from United States taxation with respect to the earnings of our Puerto Rican operations. We anticipate we will continue to benefit from the favorable effect of the Puerto Rican industrial tax exemption through 2002, with limited exemption during the transition period from 2002 through 2005, when the benefit will expire under the current provisions of the United States Internal Revenue Code.
Liquidity and Capital Resources
At June 30, 2002, we had working capital of $86.6 million, including cash and cash equivalents of $18.8 million compared to working capital of $64.7 million at December 31, 2001, including cash and cash equivalents of $7.8 million.
Cash provided by operating activities was $16.6 million for the six months ended June 30, 2002 compared to $11.6 million in the six months ended June 30, 2001. Cash provided by operating activities in the six months ended June 30, 2002 represented net income for the period ($19.2 million) adjusted for the non-cash impact of depreciation and amortization ($10.3 million), offset by the use of cash for operating assets and liabilities ($13.9 million), primarily inventories and accounts receivable. Cash provided by operating activities in the six months ended June 30, 2001 represented net income for the period ($11.9 million) adjusted for the non-cash impact of depreciation and amortization ($8.7 million) and acquired in-process research and development ($4.2 million), offset by the use of cash for operating assets and liabilities ($12.9 million).
Cash used in investing activities for the six months ended June 30, 2002 was $20.7 million, which primarily represented purchases of property and equipment ($20.6 million). Cash used in investing activities for the six months ended June 30, 2001 was $53.2 million, which represented the payment for the Essilor acquisition ($48.3 million), purchases of property and equipment ($15.1 million) offset against sales and maturities of investments ($10.6 million).
In the six months ended June 30, 2002, cash provided by financing activities was $15.8 million and in the six months ended June 30, 2001, cash used in financing activities was $0.3 million. During the six months ended June 30, 2002, financing activities were primarily net borrowings under credit facilities of $12.8 million and proceeds from the exercise of employee stock options of $3.2 million. During the six months ended June 30, 2001, financing activities were primarily net payments under credit facilities and capital lease obligations of $1.1 million offset against proceeds from exercises of employee stock options of $0.7 million.
The effect of foreign currency exchange rate changes on cash were losses of $0.7 million in the six months ended June 30, 2002. The effect of foreign currency exchange rate changes on cash were losses of $1.0 million in the six months ended June 30, 2001.
These activities resulted in increases in cash and cash equivalents of $11.0 million in the six months ended June 30, 2002 and decreases in cash and cash equivalents of $42.9 million in the six months ended June 30, 2001.
In addition to cash, cash equivalents and short and long-term investments, we had a credit facility with Comerica Bank — California. The Comerica credit agreement provided for up to $20.0 million of revolving loans to us, which was retired on April 16, 2002 and replaced with a new credit facility. The interest on the loan was Comerica Bank’s base rate or a margin of 1.00% to 1.25% above the bank’s eurodollar rate depending on our ratio of total liabilities to tangible net worth. This credit facility was paid off in full in April 2002 with the completion of a new $50 million credit facility.
On April 16, 2002, we completed a new $50 million credit facility, $40 million of which is provided by Comerica Bank and $10 million of which is provided by The Northern Trust Company. Revolving loans under this facility mature on April 16, 2005, and bear interest at 0.50% below Comerica’s prime rate or 1.00% to 1.50% above the eurodollar rate depending on our ratio of total funded debt to earnings before interest and taxes plus non-cash charges. The loan provides an option to convert any outstanding revolving loans not to exceed $40 million at the maturity date to a four-year term loan. The term loan, once
repaid, may not be reborrowed. This credit agreement contains covenants, which, among other things, require us to maintain certain financial ratios. As of June 30, 2002, there were $25 million of revolving loans outstanding under this credit agreement and the interest rate was 2.95% and 4.25% on loan balances of $19.5 million and $5.5 million, respectively. This revolving loan is included in long-term liabilities on the accompanying balance sheet as of June 30, 2002 based on our ability and intent to defer payment beyond June 30, 2003. Borrowings under this agreement are secured by a pledge of 100% of the outstanding common stock of Ocular Sciences Puerto Rico and Sunsoft, Inc. and 65% of the outstanding common stock of our Barbados and Canadian subsidiaries.
We believe that our current cash and cash equivalents, borrowings available under our credit facilities and anticipated net cash flow from operations will be sufficient to meet our anticipated cash needs for working capital, contractual commitments and capital expenditures for the foreseeable future.
Item 3. Quantitative And Qualitative Disclosures About Market Risk
We have debt outstanding, which is carried at cost, with an interest rate referenced to market rates. Interest rate changes generally do not affect the fair value of variable rate debt instruments, but do impact future earnings and cash flows. As of June 30, 2002, we had $25 million in revolving loans outstanding under the new Comerica Bank credit agreement. See terms of loan agreement in “Liquidity and Capital Resource” section in Item 2. Holding debt levels constant, a one-percentage point increase in interest rates would decrease earnings and cash flows for variable rate debt by approximately $250,000 in the year ended December 31, 2002.
We operate multiple foreign subsidiaries that manufacture and / or sell our products worldwide. As a result, our earnings, cash flows and financial position are exposed to foreign currency risk from foreign-currency-denominated receivables and payables, forecasted sales transactions, and net investments in certain foreign operations. We have not normally engaged in foreign currency hedging activities, except for a forward contract covering Yen payments for the acquisition of the Seiko Contactlens, Inc. business. We continue to evaluate the potential use of such activities on a more regular basis.
Unless otherwise noted above, there has been no additional material change in our assessment of our sensitivity to market risk from the information set forth in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in its Annual Report on Form 10-K for the fiscal year ended December 31, 2001.
Part II – OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
We held our Annual Meeting of Stockholders on April 25, 2002. Three matters were voted upon. A description of each matter and a tabulation of votes are as follows:
| 1. | To elect seven (7) directors, each to serve until the next annual meeting of stockholders and until his successor has been elected and qualified or until his earlier resignation or removal. | |
| The stockholders’ votes with respect to the election of directors were as follows: |
| Votes | ||||||||||||||||
| Against | ||||||||||||||||
| or | Votes | Broker | ||||||||||||||
| For | Withheld | Abstained | Non-Votes | |||||||||||||
John D. Fruth |
20,000,957 | 329,355 | — | — | ||||||||||||
Edgar J. Cummins |
19,943,557 | 386,755 | — | — | ||||||||||||
Stephen J. Fanning |
18,849,557 | 1,480,755 | — | — | ||||||||||||
Terence M. Fruth |
20,000,957 | 329,355 | — | — | ||||||||||||
William R. Grant |
20,011,037 | 319,275 | — | — | ||||||||||||
Terrance H. Gregg |
20,011,137 | 319,175 | — | — | ||||||||||||
Francis R. Tunney, Jr. |
20,011,037 | 319,275 | — | — | ||||||||||||
| 2. | To amend our 1997 Directors Stock Option Plan to increase the number of shares of common stock that may be issued upon the exercise of options granted under the plan by 300,000 (from 400,000 shares to 700,000 shares). | |
| The stockholders’ votes with respect to the amendment of our 1997 Directors Stock Option Plan were as follows: |
| Votes | ||||||||||||
| Against | ||||||||||||
| or | Votes | Broker | ||||||||||
| For | Withheld | Abstained | Non-Votes | |||||||||
17,842,108 |
1,405,583 | 1,082,621 | — | |||||||||
| 3. | To ratify the selection of KPMG LLP as our independent auditors for the fiscal year ending December 31, 2002. | |
| The stockholders’ votes with respect to the selection of KPMG LLP as our independent auditors were as follows: |
| Votes | ||||||||||||
| Against | ||||||||||||
| or | Votes | Broker | ||||||||||
| For | Withheld | Abstained | Non-Votes | |||||||||
20,179,352 |
133,562 | 17,398 | — | |||||||||
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| OCULAR SCIENCES, INC. (Registrant) |
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| Date: August 14, 2002 | /s/ Sidney B. Landman Sidney B. Landman Vice-President Finance, Chief Financial Officer, Treasurer and Secretary (Duly Authorized Officer and Principal Financial and Accounting Officer) |
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