##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended March 31, 2004 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Transition
Period from
to Commission File No. 0-22623 OCULAR SCIENCES, INC. Exact name of registrant as specified in its charter)
 Delaware
    
    94-2985696(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)1855 Gateway Boulevard, Suite 700
    
    94520Concord, California
    
    (Zip Code)(Address of principal executive offices)
 (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 x NO o. Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES x NO o. As of April 22, 2004 there were outstanding 24,632,502 shares of the
registrants Common Stock, par value $0.001 per share.




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OCULAR SCIENCES, INC. INDEX PagePART I -
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)Condensed Consolidated Balance Sheets  March 31, 2004 and December 31, 2003
    
    
    3Condensed Consolidated Statements of Income  Three months ended March 31, 2004 and 2003
    
    
    4Condensed Consolidated Statements of Cash Flows  Three months ended March 31, 2004 and 2003
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    19Item 4.
    
    Controls and Procedures
    
    
    20PART II -
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    21Item 2.
    
    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    21Item 3.
    
    Defaults Upon Senior Securities
    
    
    21Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    21Item 5.
    
    Other Information
    
    
    21Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    21Signatures and Certifications
    
    
    23Exhibit 31.1Exhibit 32.1
  2




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PART I  FINANCIAL INFORMATION 
 ITEM 1. Financial Statements OCULAR SCIENCES, INC. 
 Condensed Consolidated Balance Sheets  (Unaudited)
  March 31,
    
    December 31,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalents
    
    $
    49,757
    
    
    $
    34,187Accounts
receivable, less allowance for sales returns and doubtful accounts
of $3,671 and $3,596 for 2004 and 2003, respectively
    
    
    56,028
    
    
    
    57,906Inventories
    
    
    69,223
    
    
    
    70,646Prepaid expenses and other current assets
    
    
    24,529
    
    
    
    36,804Total current assets
    
    
    199,537
    
    
    
    199,543Property and equipment, net
    
    
    136,032
    
    
    
    134,903Intangible assets, net
    
    
    58,706
    
    
    
    60,330Loans to officers and employees
    
    
    360
    
    
    
    437Other assets
    
    
    4,232
    
    
    
    4,095Total assets
    
    $
    398,867
    
    
    $
    399,308LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    10,632
    
    
    $
    9,076Accrued liabilities
    
    
    58,143
    
    
    
    69,044Short-term debt
    
    
    11,040
    
    
    
    Current portion of long-term debt
    
    
    422
    
    
    
    411Total current liabilities
    
    
    80,237
    
    
    
    78,531Deferred income taxes
    
    
    241
    
    
    
    988Other liabilities
    
    
    676
    
    
    
    1,067Long-term debt, less current portion
    
    
    2,269
    
    
    
    16,877Total liabilities
    
    
    83,423
    
    
    
    97,463Commitments and ContingenciesStockholders 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; 24,632,502
and
24,373,871 shares issued and outstanding for 2004 and 2003, respectively
    
    
    25
    
    
    
    24Additional paid-in capital
    
    
    107,390
    
    
    
    101,093Retained earnings
    
    
    188,383
    
    
    
    182,391Accumulated other comprehensive income
    
    
    19,646
    
    
    
    18,337Total stockholders equity
    
    
    315,444
    
    
    
    301,845Total liabilities and stockholders equity
    
    $
    398,867
    
    
    $
    399,308
 Note: The condensed consolidated balance sheet at December 31, 2003 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. 3




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##### Table of Contents



OCULAR SCIENCES, INC. 
 Condensed Consolidated Statements of Income  (unaudited)
  Three months endedMarch 31,2004
    
    2003Net sales
    
    $
    80,623
    
    
    $
    70,691Cost of sales
    
    
    35,428
    
    
    
    33,214Gross profit
    
    
    45,195
    
    
    
    37,477Selling and marketing expenses
    
    
    23,758
    
    
    
    20,373General and administrative expenses
    
    
    7,411
    
    
    
    6,876Research and development expenses
    
    
    2,249
    
    
    
    1,716Restructuring and related expenses
    
    
    3,074
    
    
    
    1,186Income from operations
    
    
    8,703
    
    
    
    7,326Interest expense
    
    
    (160
    )
    
    
    (192
    )Interest income
    
    
    142
    
    
    
    71Other income (expense), net
    
    
    (695
    )
    
    
    146Income before taxes
    
    
    7,990
    
    
    
    7,351Provision for income
taxes
    
    
    1,998
    
    
    
    1,433Net income
    
    $
    5,992
    
    
    $
    5,918Net income per share data:Net income per share (basic)
    
    $
    0.24
    
    
    $
    0.25Net income per share (diluted)
    
    $
    0.24
    
    
    $
    0.25Weighted average common shares outstanding
    
    
    24,505,950
    
    
    
    23,811,887Weighted average dilutive potential common
shares under the treasury stock method
    
    
    895,551
    
    
    
    100,650Total
weighted average common and dilutive potential
common shares outstanding
    
    
    25,401,501
    
    
    
    23,912,537
 See accompanying notes to condensed consolidated financial statements. 4




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OCULAR SCIENCES, INC. 
 Condensed Consolidated Statements of Cash Flows  (unaudited)
  Three Months ended March 31,2004
    
    2003Cash flows from operating activities:Net income
    
    $
    5,992
    
    
    $
    5,918Adjustments
to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    6,695
    
    
    
    6,261Amortization of loans to officers
    
    
    77
    
    
    
    92Income tax benefits from stock options exercised
    
    
    1,764
    
    
    
    Provision for sales returns and doubtful accounts
    
    
    75
    
    
    
    424Exchange
loss (gain)
    
    
    668
    
    
    
    (304
    )Deferred income taxes
    
    
    (747
    )
    
    
    (82
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    1,803
    
    
    
    3,048Inventories
    
    
    1,423
    
    
    
    (3,909
    )Prepaid expenses, other current and non-current assets
    
    
    13,441
    
    
    
    (1,569
    )Accounts payable
    
    
    1,556
    
    
    
    (618
    )Accrued and other liabilities
    
    
    (11,292
    )
    
    
    2,261Net cash provided by operating activities
    
    
    21,455
    
    
    
    11,522Cash flows from investing activities:Purchases of property and equipment
    
    
    (7,871
    )
    
    
    (6,153
    )Net cash used in investing activities
    
    
    (7,871
    )
    
    
    (6,153
    )Cash flows from financing activities:Proceeds from issuance of debt
    
    
    25,100
    
    
    
    12,500Repayment of debt
    
    
    (28,760
    )
    
    
    (16,598
    )Proceeds from issuance of common stock
    
    
    4,535
    
    
    
    10Net cash provided by (used in) financing activities
    
    
    875
    
    
    
    (4,088
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    1,111
    
    
    
    468Net increase in cash and cash equivalents
    
    
    15,570
    
    
    
    1,749Cash and cash equivalents at the beginning of year
    
    
    34,187
    
    
    
    11,414Cash and cash equivalents at the end of the period
    
    $
    49,757
    
    
    $
    13,163Supplemental cash flow disclosures:Cash paid during the period for:Interest
    
    $
    211
    
    
    $
    196Taxes
    
    $
    2,440
    
    
    $
    707
 See accompanying notes to condensed consolidated financial statements. 5




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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 as
of and for the year ended December 31, 2003 and, in the opinion of management,
include all adjustments, consisting only of normal recurring adjustments,
necessary for the fair presentation of the companys financial condition as of
March 31, 2004 and the results of the companys operations and cash flows for
the three month periods ended March 31, 2004 and 2003. These unaudited
condensed consolidated financial statements should be read in conjunction with
the companys audited consolidated financial statements as of December 31, 2003
and 2002 and for each of the three years ended December 31, 2003, including
notes thereto, included in the companys Annual Report on Form 10-K for the
year ended December 31, 2003. Operating results for the three-month ended March
31, 2004 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2004. Certain prior year amounts have been reclassified to conform to current year
presentation. All amounts, unless otherwise indicated, are in U.S. dollars. Note 2  New Accounting Standards In January 2003, the FASB issued FIN No. 46, Consolidation of Variable
Interest Entities, which requires variable interest entities, previously
referred to as special-purpose entities or off-balance sheet structures, to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the entitys activities or is entitled to receive a majority of
the entitys returns or both. The consolidation provisions of FIN No. 46 apply
immediately to variable interest entities created after January 31, 2003 and to
existing entities in the first fiscal year or interim period beginning after
December 15, 2003 and have not had an impact on the Companys consolidated
financial statements. Note 3  Balance Sheet Items Inventories consisted of the following (in thousands): March 31,
    
    December 31,2004
    
    2003Raw materials
    
    $
    7,262
    
    
    $
    7,232Work in process
    
    
    2,235
    
    
    
    2,607Finished goods
    
    
    59,726
    
    
    
    60,807$
    69,223
    
    
    $
    70,646
 Prepaid expenses and other current assets consisted of the following (in
thousands): March 31,
    
    December 31,2004
    
    2003Refundable and deferred income taxes
    
    $
    15,889
    
    
    $
    16,518Value added taxes receivable
    
    
    2,853
    
    
    
    15,023Other prepaid expenses and current assets
    
    
    5,787
    
    
    
    5,263$
    24,529
    
    
    $
    36,804
 6




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Accrued liabilities consisted of the following (in thousands): March 31,
    
    December 31,2004
    
    2003Accrued expenses and interest
    
    $
    24,504
    
    
    $
    31,943Restructuring and acquisition accruals
    
    
    17,049
    
    
    
    19,292Accrued cooperative merchandising allowances
    
    
    6,992
    
    
    
    7,070Income taxes payable
    
    
    9,598
    
    
    
    10,739$
    58,143
    
    
    $
    69,044
 Note 4  Comprehensive Income Comprehensive income consisted of the following (in thousands): Three months endedMarch 31,2004
    
    2003Net Income
    
    $
    5,992
    
    
    $
    5,918Foreign Currency:Translation Adjustment, net of taxes
    
    
    1,119
    
    
    
    114Unrealized gain on cash flow hedge, net of taxes
    
    
    190
    
    
    
    Comprehensive Income
    
    $
    7,301
    
    
    $
    6,032
 Note 5  Goodwill and Other Intangible Assets Goodwill and other intangible assets (gross) consisted of the following (in
thousands): March 31,
    
    December 31,2004
    
    2003Goodwill
    
    $
    44,257
    
    
    $
    45,537Intangible assets subject to amortization
    
    
    24,452
    
    
    
    23,858Intangible assets not subject to amortization
    
    
    3,630
    
    
    
    3,630$
    72,339
    
    
    $
    73,025
 Accumulated amortization consisted of the following (in thousands): March 31,
    
    December 31,2004
    
    2003Goodwill
    
    $
    2,138
    
    
    $
    2,132Intangible assets subject to amortization
    
    
    11,020
    
    
    
    10,088Intangible assets not subject to amortization
    
    
    475
    
    
    
    475$
    13,633
    
    
    $
    12,695
 Goodwill and other intangible assets, net of accumulated amortization,
consisted of the following (in thousands): 7




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March 31,
    
    December 31,2004
    
    2003Goodwill
    
    $
    42,119
    
    
    $
    43,405Intangible assets subject to amortization
    
    
    13,432
    
    
    
    13,770Intangible assets not subject to amortization
    
    
    3,155
    
    
    
    3,155$
    58,706
    
    
    $
    60,330
 The total weighted average amortization period of intangible assets subject to
amortization is approximately 11 years. 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
$0.6 million and $0.5 million for the three-months ended March 31, 2004 and
2003, respectively. Amortization expense for each of the five succeeding fiscal years will amount
to approximately (in thousands): AmortizationYear ending December 31,
    
    expense2004
    
    $
    2,3002005
    
    
    2,2002006
    
    
    2,2002007
    
    
    1,4002008
    
    
    1,200Total
    
    $
    9,300
 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 61,000 and 3,046,374 shares of the companys common stock
were not included in the computation of diluted earnings per share because
their exercise prices were greater than the average market price of the
companys common stock of $29.09 and $13.66 per share for the three months
ended March 31, 2004 and 2003 respectively. 8




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Note 7  Acquisitions Acquisition of the Contact Lens Business of Essilor On February 12, 2001, the company acquired the contact lens business of Essilor
International (Compagnie Generale dOptique) S. A. (Essilor). The company
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. The primary reasons for this acquisition
were to expand the companys presence in Europe and to increase its breadth of
product offerings. 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 of
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accrual as ofDecember 31,
    
    
    
    
    
    Accrual
    
    Translation
    
    March 31,2003
    
    Payments
    
    Adjustment
    
    Adjustments
    
    2004Severance costs
    
    $
    3,809
    
    
    $
    (273
    )
    
    $
    181
    
    
    $
    (90
    )
    
    $
    3,627Facility costs
    
    
    655
    
    
    
    (65
    )
    
    
    
    
    
    
    (15
    )
    
    
    575Equipment and dismantling costs
    
    
    334
    
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    
    326Miscellaneous costs
    
    
    17
    
    
    
    (17
    )
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    4,815
    
    
    $
    (355
    )
    
    $
    181
    
    
    $
    (113
    )
    
    $
    4,528
 Management began formulating the plans to exit certain activities and
facilities of the acquired Essilor operations at the time of the acquisition
and expect to complete the activities in 2005. Management had initially
contemplated completing the plan by mid-2003. Due to circumstances not existing
at the time the plan was formulated, management will not be able to complete
the Plan until 2005. However, the actions contemplated under the terms of the
original plan remain the same actions that will be completed in 2004 and 2005. Acquisition of Assets of Seiko Contactlens, Inc. On March 11, 2002, the company entered into an agreement to acquire certain
assets of Seiko Contactlens, Inc. (Seiko). The purchase was completed on
April 1, 2002. Included in the liabilities assumed are accruals for costs associated with
exiting certain activities and facilities of the acquired Seiko 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 activities and facilities. Details of the severance and exit
costs paid and charged against the accrual are presented in the following table
(in thousands): Accrual as ofAccrual as of
    
    
    
    
    
    Translation
    
    Goodwill
    
    March 31,December 31, 2003
    
    Payments
    
    Adjustments
    
    Adjustment
    
    2004Facility and other exit costs
    
    $
    1,858
    
    
    $
    (149
    )
    
    $
    17
    
    
    $
    (1,112
    )
    
    $
    614Total
    
    $
    1,858
    
    
    $
    (149
    )
    
    $
    17
    
    
    $
    (1,112
    )
    
    $
    614
 Management began formulating the plans to exit certain activities and
facilities of the acquired Seiko operations at the time of the acquisition and
expects to complete all actions under such plans by December 31, 2004. In
March 2004, the Company completed the transition of certain functions and,
accordingly, reduced the accrual for the difference between the estimated cost
originally accrued and the actual cost to be paid. The Company recorded the
difference of $1.1 million as a reduction in the accrual and a reduction in the
associated goodwill resulting from the acquisition. 9




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Note 8  Restructuring and related expenses During the fourth quarter of 2002, the Company accelerated the implementation
of its second-generation manufacturing process throughout our high-volume
product lines. Given the lower labor and space requirements of these processes,
the Company will consolidate its manufacturing operations into a smaller total
plant structure. The initiative will allow the Company to meet volume
production goals in substantially less space with lower manufacturing overhead.
The Company believes that this initiative will result in an annual cost savings
of $40 million beginning in 2005. The Company expects the initiative to be
completed in late 2004. The Company expects to incur total restructuring and
related expenses of $53 to $56 million in connection with this
initiative, of which approximately $48 million has been incurred
through March  31, 2004. Thus the Company expects to incur an
additional $5 to $8 million during the remainder of 2004.
Approximately $26 million of the total expenses are expected to be non-cash. As a result of this
initiative, the Company recorded restructuring and related charges of
approximately $34.5 million in the fourth quarter of 2002. These
charges
were recorded in accordance with the terms of SFAS 121, Accounting for the
Impairment of Long-Live Assets and for Long-Lived Assets to be Disposed Of and
EITF 94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including certain costs incurred in a
restructuring). Of the $34.5 million, approximately $24.7 million related to
impairment of property and equipment, $4.7 million related to employee
severance and benefit costs, $4.4 million related to leased facilities that
will be abandoned within one year and the remaining $0.7 million relates to
costs, such as professional fees related to the initiative. The Company
recorded additional restructuring and related charges of approximately $10.9 million during
2003. Of the $10.9 million, approximately $7.1 million related to severance and
other salary related and benefit costs, and $3.8 million related to other
costs. During the first quarter of
2004, the Company recorded restructuring and related expenses
of $3.1 million. Of the $3.1 million, approximately $1.9 million related to
severance and other salary and related benefit costs, $0.8 million related to
impairment of property and equipment and $0.4 million related to other costs. Of the $48.4 million of
restructuring and related charges incurred since the inception of
the restructuring initiative, $12.6 million of cash has been spent. The Company
anticipates spending an additional $12-$18 million in cash related to the
restructuring initiative in the rest of 2004. For leased facilities that will be abandoned and subleased, the lease costs
represent future lease payments subsequent to abandonment less estimated
sublease income. For owned property and equipment, the impairment loss
recognized was based on the estimated fair value of the equipment. The following table summarizes the restructuring and related expense accrual
activity during the three month period ending March 31, 2004 (in thousands): Severance/salary
    
    Leaserelated and
    
    Payment ofBenefits costs
    
    Facilities
    
    Other
    
    TotalBalance of accrual at December 31, 2003
    
    $
    7,651
    
    
    $
    4,448
    
    
    $
    520
    
    
    $
    12,619Additions
    
    
    1,899
    
    
    
    
    
    
    
    419
    
    
    
    2,318Payments
    
    
    (2,532
    )
    
    
    (160
    )
    
    
    (689
    )
    
    
    (3,381
    )Translation Adjustment
    
    
    218
    
    
    
    127
    
    
    
    6
    
    
    
    351Balance of accrual at March 31, 2004
    
    $
    7,236
    
    
    $
    4,415
    
    
    $
    256
    
    
    $
    11,907
 10




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Note 9  Credit Facility On April 16, 2002, we completed a $50 million credit facility with two banks.
Revolving loans under this facility mature on April 16, 2005, and bear interest
at 0.50% below one of the banks prime rate or 1.00% to 1.50% above the
euro-dollar rate depending on the companys ratio of total funded debt to
earnings before interest and taxes plus non-cash charges. The facility 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, requires us to maintain certain financial ratios.
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 its Barbados and Canadian subsidiaries.
As of March 31, 2004, we were in compliance with our covenants and there was no
outstanding balance under this credit facility. On December 29, 2003, our subsidiary, Ocular Sciences K.K. (Japan) completed a
new unsecured 1.5 billion Yen credit facility with one bank, guaranteed by
Ocular Sciences, Inc. Revolving loans under this facility mature on December
26, 2004, and bear interest on the outstanding principal amount thereof at a
rate per annum equal to the applicable adjusted Euroyen Rate for the Interest
Period plus 0.95%. This credit agreement contains covenants, which, among
other things, require us to maintain certain financial ratios that are
substantially the same as those in our $50 million revolving credit facility.
As of March 31, 2004, we were in compliance with these covenants and there was
1.15 billion Yen ($11.0 million) outstanding under this credit agreement. Note 10  Foreign Currency Forward Contracts The Company operates multiple foreign subsidiaries that manufacture and/or sell
its products worldwide. As a result, the Companys earnings, cash flows and
financial position are exposed to foreign currency risk from
foreign-currency-denominated receivables and payables, forecasted sales
transactions, and net investment in certain foreign operations. To address
increasing international growth and related currency risks, the Company
implemented a foreign currency exposure management policy in October 2003. The
Companys policy is to enter into foreign exchange forward contracts to
mitigate the impact of currency fluctuations on both existing foreign currency
asset and liability balances as well as to reduce the risk to earnings and cash
flows associated with anticipated foreign currency transactions. The gains and
losses on the foreign exchange forwards are intended to partially offset the
transaction gains and losses recognized in earnings. The Company does not enter
into foreign exchange forward contracts for speculative purposes. Under
Statement of Financial Accounting Standard No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS 133) all derivatives are recorded on
the balance sheet at fair value. Changes in the fair value of derivatives that
do not qualify, or are not effective as hedges, must be recognized currently in
earnings. Cash Flow Hedging In fiscal year 2003, the Company began designating and documenting foreign
exchange forward contracts related to forecasted transactions as cash flow
hedges. The Company calculates hedge effectiveness, excluding time value, at
least quarterly. The change in the fair value of the derivative on a spot to
spot basis is compared to the spot to spot change in the anticipated
transaction, with the effective portion recorded in Other Comprehensive Income
(OCI) until the anticipated transaction is recognized in income. The Company
records any ineffectiveness, including the excluded time value of the hedge, in
other income (expense) on its consolidated statement of income, which was
immaterial in the first quarter of 2004. In the event it becomes probable that
a hedged anticipated transaction will not occur the gains or losses on the
related cash flow hedges will immediately be reclassified from OCI to other
income (expense). At March 31, 2004, all outstanding cash flow hedging
derivatives had a maturity of less than 12 months. The following table summarizes the impact of cash flow hedges on OCI in the
first three months of 2004 (in thousands): 11




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December 31, 2003
    
    $
    (448
    )Net change on cash flow hedges
    
    
    228Reclassification of loss to interest
    
    
    8Reclassification of gain to Cost of Sales
    
    
    (47
    )March 31, 2004
    
    $
    (259
    )
 We anticipate reclassifying $55,000 of the loss to earnings within 12 months. Balance Sheet Hedging The Company manages the foreign currency risk associated with foreign currency
denominated assets and liabilities using foreign exchange forward contracts
with maturities of less than 12 months. Changes in fair value of these
derivatives are recognized currently in other income and expense and
substantially offset the remeasurement gains and losses associated with the
foreign currency denominated assets and liabilities. The Companys outstanding net foreign exchange forward contracts as of March
31, 2004 are presented (in thousands) in the table below. Weighted average
forward rates are quoted using market conventions. WeightedNet Notional
    
    AverageAmount
    
    RateCash Flow Hedges:Euro Sold
    
    
    6,783
    
    
    
    1.2556GBPPurchases
    
    
    2,562
    
    
    
    1.8191JPY Sold
    
    
    267,296
    
    
    
    106.08Balance Sheet Hedges:Euro Sold
    
    
    40,187
    
    
    
    1.2556
 
 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, 2003. 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, restructuring 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 12




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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 product returns, higher than expected employee turnover, potential difficulties in
implementing second generation manufacturing processes or in obtaining
anticipated cost reductions, 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,
2003, 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. Overview Our net sales increased 14.0% in the first quarter of 2004 over the
same period in 2003 (6.3% using constant foreign currency exchange
rates). This increase reflects our continued growth in sales
in Europe and Japan, primarily driven by higher sales of our daily and bi-weekly
disposable products and toric lenses. In the first quarter of 2004, 61% of
our sales were generated outside the United States, compared to 54% in the same
period of 2003. For some products, such as daily and toric disposable lenses,
our sales are currently constrained by our manufacturing capacity. Gross profit percentage increased to 56.1% in the first quarter of 2004 from
53.0% in the same period of 2003, primarily due to lower production costs. We
are beginning to see the benefits of our restructuring activities in our gross
margins. In order to maintain or increase our gross profits, we are
continuously focused on controlling and reducing our costs, most significantly
by implementing new highly automated manufacturing facilities. General and administrative expenses were relatively constant as a percentage of
net sales from the first quarter of 2003. We did however increase our research
and development and selling and marketing expenses in the first quarter of 2004
as we continue to invest in new product development, additional marketing
programs associated with new product introductions and increases in the size of
our sales force.  Critical Accounting Policies Our critical accounting policies are as follows:  
    
    revenue recognition;  
    
    estimating valuation allowances;  
    
    accounting for income taxes;  
    
    valuation of long-lived and intangible assets and goodwill;  
    
    estimates inherent in purchase accounting; and  
    
    stock based compensation. 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 reserves 13




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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. The process of
establishing reserves requires significant management judgment. 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. Estimating Valuation Allowances The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amount 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
reporting period. We specifically analyze the aging of accounts receivable and historical bad
debts, customer concentrations, customer credit-worthiness, current economic
trends, 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. We sell our 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. To
reduce credit risk, we perform ongoing credit evaluations of significant
customers respective financial conditions. We establish an allowance for
doubtful accounts based upon factors surrounding the credit risk of specific
customers, historical trends and other information. We assess the need for reserves on inventory generally based on forward
projections of sales of products that are updated periodically. Inventories are
recorded at the lower of cost (first-in, first-out method) or market. Cost
includes material, labor and applicable factory overhead. The reported value of
our inventory includes saleable products, promotional products, raw materials
and componentry that will be sold or used in future periods. Provision for
potentially obsolete or slow moving inventory is made based upon our analysis
of inventory levels and forecasted sales. Once inventory is reserved a new cost basis is established and the reserve can only be
relieved by the subsequent sale or disposal of the inventory. Material differences may result in the amount and timing of revenue and /or
expenses for any period if different judgments had been made or different
estimates utilized. 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 effects
attributable to differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. 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 is recognized in income in the period that
includes the enactment date. In preparing our consolidated financial statements, we are required to estimate
our income taxes in each of the jurisdictions in which we operate. This is a
complex process due to the multiple tax jurisdictions within which we operate
and the overall complexity of our corporate structure. This process involves
estimating actual current tax liability together with assessing temporary
differences resulting from differing treatment of items 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
and deferred tax assets and liabilities. We are presently under routine
examination by local tax authorities in several of the tax jurisdictions we
operate in, including the United States. As a result of these examinations, or
in the event 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 14




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We periodically review long-lived assets and certain identifiable intangible
assets for impairment in accordance with Statement of Financial Accounting
Standards (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 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 this process. In January 2002, SFAS No. 142 became effective and as a result, we ceased to
amortize goodwill and assembled workforce beginning January 1, 2002. As of
December 31, 2003, unamortized goodwill and assembled workforce was
approximately $47 million. In lieu of amortization, we were required to perform
an annual impairment review. During the fourth quarter of 2003, we performed
our annual impairment test and concluded that there is no impairment of our
goodwill. In the future, we will perform the annual impairment test required by
SFAS No. 142 in the fourth quarter of each year. We cannot assure you 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 value of the assets
purchased and liabilities assumed. In our recording of the acquisitions 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. Stock-Based Compensation We account for stock-based compensation using methods prescribed in Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. We have adopted the disclosure-only
provisions of SFAS No. 123 Accounting for Stock-Based Compensation. In accordance with SFAS No. 123, as amended by SFAS No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure, we have provided, below,
the pro forma disclosures of the effect on net income and earnings per share as
if SFAS No. 123 had been applied in measuring compensation expense for all
periods presented. The following table illustrates, pursuant to SFAS No. 123, as amended by SFAS
No. 148, the effect on net income and related net income per share for the
three months ended March 31, 2004 and 2003, had compensation cost for
stock-based compensation plans been determined based upon the fair value method
prescribed under SFAS No. 123: Three months endedMarch 31,2004
    
    2003Net Income:As reported
    
    $
    5,992
    
    
    $
    5,918Total stock-based employee compensation expense determined under
fair value based method for all awards, net of related tax effects
    
    
    620
    
    
    
    673Pro forma
    
    $
    5,372
    
    
    $
    5,245Net Income per common share (basic):As reported
    
    $
    0.24
    
    
    $
    0.25
 15




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Three months endedMarch 31,2004
    
    2003Pro forma
    
    
    0.22
    
    
    
    0.22Net Income per common share (diluted):As reported
    
    $
    0.24
    
    
    $
    0.25Pro forma
    
    
    0.21
    
    
    
    0.22
 New Accounting Pronouncements Adopted See Note 2 to Notes to Condensed Consolidated Financial Statements which are
incorporated herein by reference. Results of Operations The following table summarizes certain items on the consolidated statements of
income as a percentage of net sales: Three months ended March 31,2004
    
    2003Net sales
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    43.9
    
    
    
    47.0Gross
profit
    
    
    56.1
    
    
    
    53.0Selling and marketing expenses
    
    
    29.5
    
    
    
    28.8General and administrative expenses
    
    
    9.2
    
    
    
    9.7Research and development expenses
    
    
    2.8
    
    
    
    2.4Restructuring and related expenses
    
    
    3.8
    
    
    
    1.7Income from operations
    
    
    10.8
    
    
    
    10.4Interest and other income, net
    
    
    (0.9
    )
    
    
    Income before taxes
    
    
    9.9
    
    
    
    10.4Provision for income taxes
    
    
    2.5
    
    
    
    2.0Net income
    
    
    7.4
    %
    
    
    8.4
    %
 Net Sales Net sales were $80.6 million in the first quarter of 2004, an increase of 14.0%
from the first quarter of 2003 (6.3% using constant currency exchange rates).
The increase in first quarter of 2004 was primarily due to continued growth in
international markets and in worldwide sales of disposable toric and daily
lenses. U.S. sales were $31.1 million in the first quarter of 2004, a 3.4% decrease
from the first quarter of 2003. This decrease is primarily due to a continued
decline in sales of our conventional reusable product line and lower sales of disposable spheres as we believe customers began
reducing their inventories in advance of our second quarter launch of a new sphere product. International sales were $49.5 million, an increase of 28.7% from the first
quarter of 2003 (14.2% using constant currency exchange rates). The increase
in international net sales was due primarily to strong growth in unit sales in
the European and Japanese markets and to the weakening of the U.S dollar
against foreign currencies. Gross Profit Gross profit was $45.2 million and $37.5 million in the first quarter of 2004
and 2003, respectively. Gross profit, as a percentage of net sales, was 56.1%
and 53.0% for the first quarter of 2004 and 2003, respectively. The improvement
in the 2004 gross profit percentage reflects the benefits from our
manufacturing transition program. Selling and Marketing Expenses Sales and marketing expenses were $23.8 million in the first quarter of 2004,
an increase of 16.6% from the first quarter of 2003. As a percentage of net
sales, selling and marketing expenses were 29.5% and 28.8% in the first
quarter of 2004 and 2003, respectively. The increase in sales and marketing
expenses were due primarily to higher distribution costs due to increased unit
sales volume, increased marketing expenditures related to new product 16




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launches and promotional programs, and increases in the size of our direct sales force. We expect our sales and marketing expenses,
in absolute dollars and as a percentage of net sales, to continue to increase
in the next several quarters as we launch new products in both the United
States and International markets. General and Administrative Expenses General and administrative expenses were $7.4 million in the first quarter of
2004, an increase of 7.8% from the first quarter of 2003. As a percentage of
net sales, general and administrative expenses were 9.2% and 9.7% for the first
quarter of 2004 and 2003, respectively. The increase in general and
administrative expenses in the first quarter of 2004 was primarily due to
higher professional services expenses. Research and Development Expenses Research and development expenses were $2.2 million, an increase of 31.1% from
the first quarter of 2003. As a percentage of net sales, research and
development expenses were 2.8% and 2.4% in the first quarter of 2004 and 2003,
respectively. The increase in research and development expense in the first
quarter of 2004 is primarily due to new product development and our continuing manufacturing process development efforts.
We expect our research and development
expenses, in absolute dollars and as a percentage of net sales, to continue to
grow in 2004. Restructuring and Related Expenses During the fourth quarter of 2002, we accelerated the implementation of our
second-generation manufacturing process throughout our high-volume product
lines. Given the lower labor and space requirements of these processes, we are
consolidating our manufacturing operations into a smaller total plant
structure. The initiative will allow us to meet volume production goals in
substantially less space with lower manufacturing overhead. We believe that
this initiative will result in an annual cost savings of $40 million beginning
in 2005. We expect the initiative to be completed in 2004. The Company expects to incur total restructuring and related expenses of
$53 to $56 million in connection with this initiative, of which approximately $48 million has been incurred through March 31, 2004.
Thus the Company expects to incur an additional $5 to $8 million during the remainder of 2004. Approximately $26 million of the
total expenses are expected to be non-cash. As a result of this initiative, we recorded a restructuring charge of
approximately $34.5 million in the fourth quarter of 2002. These charges were recorded in accordance with the terms of SFAS 121, Accounting for the
Impairment of Long-Live Assets and for Long-Lived Assets to be Disposed Of and
EITF 94-3, Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including certain costs incurred in a
restructuring). Of the $34.5 million, approximately $24.7 million related to
impairment of property and equipment, $4.7 million related to employee
severance and benefit costs, $4.4 million related to leased facilities that
will be abandoned within one year and the remaining $0.7 million relates to
costs, such as professional fees related to the initiative. We recorded
additional restructuring and related charges of approximately $10.9 million during 2003,
consisting of $7.1 million related to severance and other salary related and
benefit costs, and $3.8 million related to other costs. During the first quarter of 2004, we recorded restructuring and related
expenses of $3.1 million, consisting of $1.9 million related to severance and
other salary related and benefit costs, $0.8 million related to impairment of
property and equipment and $0.4 million related to other costs. Of the $48.4 million of restructuring and related charges incurred since the inception of
the restructuring initiative, $12.6 million of cash has been spent. We
anticipate spending an additional $12-$18 million in cash related to the
restructuring initiative during the remainder of 2004. For leased facilities that will be abandoned and subleased, the lease costs
represent future lease payments subsequent to abandonment less estimated
sublease income. For owned property and equipment, the impairment loss
recognized was based on the estimated fair value of the equipment. Other Income (Expense) Other income (expense) primarily consists of net foreign exchange gains and
losses. 17




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Provision for Income Taxes Income taxes were $2.0 million and $1.4 million for the first quarter of 2004
and 2003, respectively. Our effective tax rates were 25.0% and 19.5% for the
first quarter of 2004 and 2003, respectively. The effective tax rate prior to
restructuring and related expenses, for the first quarter of 2004 was 22.0%. We
expect the effective tax rate prior to restructuring and related expenses to
continue to be 22.0% for the rest of 2004. Liquidity and Capital Resources Our capital requirements have generally been funded from operations, cash and
investments on hand, and debt borrowings. Our cash and cash equivalents are
invested in a diversified portfolio of financial instruments, including money
market instruments and government or government agency securities and other
debt securities issued by financial institutions and other issuers with strong
credit ratings. By policy, the amount of credit exposure to any one institution
is limited. Sources and Uses of Cash Cash and cash equivalents at March 31, 2004 were $49.8 million, increased from
the December 31, 2003 balance of $34.2 million. The increase in cash and cash equivalents
in the first three months of 2004 was
primarily due to cash flow from operations of $21.5 million, which consisted
primarily of net income, adjusted for non-cash depreciation and amortization,
and a $12 million decrease in prepaid value added taxes (VAT), partially offset by
reductions in accrued liabilities. Financing activities provided approximately
$0.9 million, principally through proceeds from issuance of common stock
pursuant to exercises of employee stock options of $4.5 million, offset by $3.6
million of net debt repayment. Approximately $7.9 million of cash was spent on
capital expenditures. We currently expect to incur an additional $30- $35
million in capital expenditures during the remainder of 2004. Additionally, we
anticipate spending an additional $12-$18 million in cash related to the
restructuring initiative in the remainder of 2004. The following table summarizes our contractual cash obligations as of March 31,
2004 (in thousands): OperatingDebt**
    
    Leases2004*
    
    
    $11,384
    
    
    
    $5,7352005
    
    
    321
    
    
    
    7,2452006
    
    
    349
    
    
    
    4,9462007
    
    
    378
    
    
    
    3,8922008
    
    
    411
    
    
    
    2,3232009
    
    
    446
    
    
    
    1,752Thereafter
    
    
    442
    
    
    
    4,279$
    13,731
    
    
    $
    30,172
 *Represents commitments for the remaining nine months of 2004 ** Debt consists of capital lease obligations and outstanding borrowings under our Japanese
credit facility. The $30.1 million in future operating lease obligations includes approximately
$4 million accrued in conjunction
with our restructuring activities. On April 16, 2002, we completed a $50 million credit facility with two banks.
Revolving loans under this facility mature on April 16, 2005, and bear interest
at 0.50% below one of the banks prime rate or 1.00% to 1.50% above 18




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the
euro-dollar rate depending on the companys ratio of total funded debt to
earnings before interest and taxes plus non-cash charges. The facility 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, requires us to maintain certain financial ratios.
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 its Barbados and Canadian subsidiaries.
As of March 31, 2004, we were in compliance with our covenants and there was no
outstanding balance under this credit facility. On December 29, 2003, our subsidiary, Ocular Sciences K.K. (Japan) completed a
new unsecured 1.5 billion Yen credit facility with one bank, guaranteed by
Ocular Sciences, Inc. Revolving loans under this facility mature on December
26, 2004, and bear interest on the outstanding principal amount thereof at a
rate per annum equal to the applicable adjusted Euroyen Rate for the Interest
Period plus 0.95%. This credit agreement contains covenants, which, among
other things, require us to maintain certain financial ratios that are
substantially the same as those in our $50 million revolving credit facility.
As of March 31, 2004, we were in compliance with these covenants and there was
1.15 billion Yen ($11.0 million) outstanding under this credit agreement. 
 Item 3. Quantitative And Qualitative Disclosures About Market Risk Market Risk We have debt outstanding (which we carry at cost) with an interest rate that 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 our annual pre-tax earnings and cash flows by
approximately $110,000, based on our outstanding debt as of March 31, 2004. Impact of Foreign Currency Rate Changes 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, sales transactions, and net investment in certain
foreign operations. To address increasing international growth and related
currency risks, we implemented a foreign currency exposure management policy in
October 2003. Our policy is to enter into foreign exchange forward contracts to
mitigate the impact of currency fluctuations on both existing foreign currency
asset and liability balances as well as to reduce the risk to earnings and cash
flows associated with anticipated foreign currency transactions, including
certain intercompany equipment sale and leaseback transactions. The gains and
losses on the foreign exchange forward contracts are intended to partially
offset the transaction gains and losses recognized in earnings. We do not enter
into foreign exchange forward contracts for speculative purposes. Under
Statement of Financial Accounting Standard No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS 133) all derivatives are recorded on
the balance sheet at fair value. Changes in the fair value of derivatives that
do not qualify, or are not effective as hedges, must be recognized currently in
earnings. Cash Flow Hedging In fiscal year 2003, we began designating and documenting foreign exchange
forward contracts related to forecasted transactions as cash flow hedges. We
calculate hedge effectiveness, excluding time value, at least quarterly. The
change in the fair value of the derivative on a spot to spot basis is compared
to the spot to spot change in the anticipated transaction, with the effective
portion recorded in Other Comprehensive Income (OCI) until the anticipated
transaction is recognized in income. We record any ineffectiveness, including
the excluded time value of
the hedge in other income (expense) in our consolidated statement of
operations. In the event it becomes probable that a hedged anticipated
transaction will not occur the gains or losses on the related cash flow hedges
will immediately be reclassified from OCI to other income (expense). At March
31, 2004, all outstanding cash flow hedging derivatives had a maturity of less
than 12 months. 19




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The following table summarizes the impact of cash flow hedges on OCI in the
first three months of 2004 (in thousands): December 31, 2003
    
    $
    (448
    )Net change on cash flow hedges
    
    
    228Reclassification of loss to interest
    
    
    8Reclassification of gain to Cost of Sales
    
    
    (47
    )March 31, 2004
    
    $
    (259
    )
 We anticipate reclassifying $55,000 of the loss to earnings within 12 months. Balance Sheet Hedging We manage the foreign currency risk associated with foreign currency
denominated assets and liabilities using foreign exchange forward contracts
with maturities of less than 12 months. Changes in fair value of these
derivatives are recognized in other income and expense and substantially offset
the remeasurement gains and losses associated with the foreign currency
denominated assets and liabilities. Our outstanding net foreign exchange forward contracts as of March 31, 2004 are
presented (in thousands) in the table below. Weighted average forward rates are
quoted using market conventions. WeightedNet Notional
    
    AverageAmount
    
    RateCash Flow Hedges:Euro Sold
    
    
    6,783
    
    
    
    1.2556GBP
Purchases
    
    
    2,562
    
    
    
    1.8191JPY
Sold
    
    
    267,296
    
    
    
    106.08Balance Sheet Hedges:Euro Sold
    
    
    40,187
    
    
    
    1.2556
 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 our
Annual Report on Form 10-K for the fiscal year ended December 31, 2003. 
 Item 4. Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SECs rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily was required to apply
its judgment in evaluating the cost-benefit relationship of possible controls
and procedures. We carried out an evaluation, under the supervision and with the participation
of our management, including our Chief Executive Officer and our Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of March 31, 2004. Based on the
foregoing, our Chief Executive Officer and
Chief Financial Officer concluded that, as of such date, our disclosure
controls and procedures were effective for that purpose. 20




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There have been no significant changes in our internal controls over financial
reporting or in other factors that could significantly affect the internal
controls subsequent to the date we completed our evaluation. 
 Part II  OTHER INFORMATION 
 Item 1. Legal Proceedings On November 6, 2002, CIBA Vision Corporation and its subsidiary, Wesley Jessen
Corporation (Wesley Jessen) filed a lawsuit against us in the U.S. District
Court for the Northern District of California alleging that our color contact
lenses infringe patents owned by Wesley Jessen. The complaint seeks an award of
damages, including unspecified punitive damages, attorneys fees and costs and
an injunction preventing the alleged infringement. We have filed an answer to
the complaint denying that we infringe any valid patent claims. This lawsuit is
currently in the discovery phase, and we expect that the court will conduct a
Markman hearing to construe the relevant patent claims in the second half of
2004. We believe the lawsuit is without merit and that we have strong defenses
to this complaint and we intend to defend this action vigorously. The defense of intellectual property suits and related administrative
proceedings is both costly and time-consuming. The outcomes of intellectual
property lawsuits are subject to inherent uncertainties. Accordingly, we cannot
assure you that our defense of this lawsuit will be successful or that we will
not be subject to other intellectual property claims in the future. An adverse
outcome in any intellectual property litigation could subject us to significant
liabilities, require us to license disputed rights from third parties, require
us to redesign products or cease using such technology. Any of these
consequences could have a material adverse effect on us. 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities None. 
 Item 3. Defaults Upon Senior Securities None. 
 Item 4. Submission of Matters to a Vote of Security Holders None. 
 Item 5. Other Information None. 
 Item 6. Exhibits and Reports on Form 8-K  (a)
    
    Exhibits  31.1
    
    Rule 13a-14 (a)/15d-14 (a) Certifications dated May 7, 200432.1
    
    18 U.S.C § 1350 Certifications dated May 7, 2004. The certifications
in this exhibit are being furnished solely to accompany this report
pursuant to 18 U.S.C § 1350, and are not being filed for purposes of
Section 18 of Securities Exchange Act of 1934, as amended, and are not
to be incorporated by reference into any of our filings, whether made
before or after the date hereof, regardless of any general incorporation
language in such filing.  (b)
    
    Reports on Form 8-K On February 19, 2004, we furnished a Current Report on Form 8-K regarding the
press release issued on the same day, announcing the Companys earnings for the
quarter ended December 31, 2003 21




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On May 4, 2004, we furnished a Current Report on Form 8-K regarding the press
release issued on the same day, announcing the Companys earnings for the
quarter ended March 31, 2004. 22




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. OCULAR SCIENCES, INC.
(Registrant)Date: May 10, 2004
    /s/ Steven M. NeilSteven M. NeilExecutive Vice-President and
Chief Financial Officer (Duly
Authorized Officer and Principal
Financial and Accounting Officer) 23




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Exhibit Index  31.1
    
    Rule 13a-14 (a)/15d-14 (a) Certifications dated May 10, 200432.1
    
    18 U.S.C § 1350 Certifications dated May 10, 2004. The certifications in
this exhibit are being furnished solely to accompany this report pursuant
to 18 U.S.C § 1350, and are not being filed for purposes of Section 18 of
Securities Exchange Act of 1934, as amended, and are not to be
incorporated by reference into any of our filings, whether made before or
after the date hereof, regardless of any general incorporation language in
such filing.