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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 September 30, 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 November 1, 2004,
there were outstanding 25,940,405 shares of the registrants Common Stock, par
value $0.001 per share.




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OCULAR SCIENCES, INC. INDEX  
 PagePART
I  FINANCIAL INFORMATION
    
    
    3Item 1. Financial Statements (Unaudited)
    
    
    3Condensed Consolidated Balance Sheets  September 30, 2004 and December 31, 2003
    
    
    3Condensed Consolidated Statements of Income  Three months and nine months ended September 30, 2004 and 2003
    
    
    4Condensed Consolidated Statements of Cash Flows  Nine months ended September 30, 2004 and 2003
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    21Item 4. Controls and Procedures
    
    
    22PART
II  OTHER INFORMATION
    
    
    23Item 1. Legal Proceedings
    
    
    23Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds
    
    
    24Item 3. Defaults Upon Senior Securities
    
    
    24Item 4. Submission of Matters to a Vote of Security Holders
    
    
    24Item 5. Other Information
    
    
    24Item 6.Exhibits
    
    
    24Signatures
    
    
    25EXHIBIT 10.1EXHIBIT 10.2EXHIBIT 10.3EXHIBIT 31.1EXHIBIT 32.1
  2




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PART I  FINANCIAL INFORMATION 
 Item 1. Financial Statements OCULAR SCIENCES, INC. 
 Condensed Consolidated Balance Sheets
  September 30,
    
    December 31 ,2004
    
    2003(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    60,509
    
    
    $
    34,187Accounts receivable, less allowance for sales returns and doubtful
accounts of $4,470 and $3,596 for 2004 and 2003, respectively
    
    
    61,392
    
    
    
    57,906Inventories
    
    
    66,978
    
    
    
    70,646Prepaid expenses and other current assets
    
    
    24,069
    
    
    
    36,804Total current assets
    
    
    212,948
    
    
    
    199,543Property and equipment, net
    
    
    155,704
    
    
    
    134,903Intangible assets, net
    
    
    57,500
    
    
    
    60,330Loans to officers and employees
    
    
    200
    
    
    
    437Other assets
    
    
    4,207
    
    
    
    4,095Total assets
    
    $
    430,559
    
    
    $
    399,308LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    10,898
    
    
    $
    9,076Accrued liabilities
    
    
    50,000
    
    
    
    69,044Current portion of long-term debt
    
    
    342
    
    
    
    411Total current liabilities
    
    
    61,240
    
    
    
    78,531Deferred income taxes
    
    
    185
    
    
    
    988Other liabilities
    
    
    685
    
    
    
    1,067Long-term debt, less current portion
    
    
    2,147
    
    
    
    16,877Total liabilities
    
    
    64,257
    
    
    
    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; 25,913,005
and 24,373,871 shares issued and outstanding for 2004 and 2003,
respectively
    
    
    26
    
    
    
    24Additional paid-in capital
    
    
    140,823
    
    
    
    101,093Retained earnings
    
    
    207,570
    
    
    
    182,391Accumulated other comprehensive income
    
    
    17,883
    
    
    
    18,337Total stockholders equity
    
    
    366,302
    
    
    
    301,845Total liabilities and stockholders equity
    
    $
    430,559
    
    
    $
    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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OCULAR SCIENCES, INC. 
 Condensed Consolidated Statements of Income  (unaudited)
  Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net sales
    
    $
    87,729
    
    
    $
    82,587
    
    
    $
    251,622
    
    
    $
    229,395Cost of sales
    
    
    35,446
    
    
    
    37,825
    
    
    
    104,757
    
    
    
    107,317Gross profit
    
    
    52,283
    
    
    
    44,762
    
    
    
    146,865
    
    
    
    122,078Selling and marketing expenses
    
    
    24,340
    
    
    
    21,383
    
    
    
    72,316
    
    
    
    62,864General and administrative expenses
    
    
    7,453
    
    
    
    7,266
    
    
    
    23,087
    
    
    
    21,636Research and development expenses
    
    
    2,225
    
    
    
    1,842
    
    
    
    6,633
    
    
    
    4,990Restructuring and related expenses
    
    
    1,691
    
    
    
    2,440
    
    
    
    6,864
    
    
    
    7,433Merger and related expenses
    
    
    3,777
    
    
    
    
    
    
    
    3,777
    
    
    
    Income from operations
    
    
    12,797
    
    
    
    11,831
    
    
    
    34,188
    
    
    
    25,155Interest expense
    
    
    (97
    )
    
    
    (239
    )
    
    
    (355
    )
    
    
    (557
    )Interest income
    
    
    133
    
    
    
    208
    
    
    
    392
    
    
    
    362Other income/(expense), net
    
    
    (80
    )
    
    
    884
    
    
    
    (652
    )
    
    
    1,591Income before taxes
    
    
    12,753
    
    
    
    12,684
    
    
    
    33,573
    
    
    
    26,551Provision for income taxes
    
    
    3,187
    
    
    
    3,424
    
    
    
    8,394
    
    
    
    7,168Net income
    
    $
    9,566
    
    
    $
    9,260
    
    
    $
    25,179
    
    
    $
    19,383Net income per share data:Net income per share (basic)
    
    $
    0.38
    
    
    $
    0.39
    
    
    $
    1.01
    
    
    $
    0.81Net income per share (diluted)
    
    $
    0.35
    
    
    $
    0.38
    
    
    $
    0.96
    
    
    $
    0.80Weighted average common shares outstanding
    
    
    25,434,205
    
    
    
    23,891,129
    
    
    
    24,929,860
    
    
    
    23,841,682Weighted average dilutive potential common shares
under the treasury stock method
    
    
    1,582,594
    
    
    
    558,019
    
    
    
    1,389,074
    
    
    
    301,108Total weighted average common and dilutive potential
common shares outstanding
    
    
    27,016,799
    
    
    
    24,449,148
    
    
    
    26,318,934
    
    
    
    24,142,790
 See accompanying notes to condensed consolidated financial statements. 4




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OCULAR SCIENCES, INC. 
 Condensed Consolidated Statements of Cash Flows  (unaudited)
  Nine months endedSeptember 30,2004
    
    2003Cash flows from operating activities:Net income
    
    $
    25,179
    
    
    $
    19,383Adjustments to reconcile net income to net cash provided by operating
activities:Depreciation and amortization
    
    
    20,869
    
    
    
    18,816Amortization of loans to officers
    
    
    237
    
    
    
    276Income tax benefits from stock options exercised
    
    
    8,770
    
    
    
    112Provision for sales returns and doubtful accounts, net
    
    
    874
    
    
    
    452Loss (gain) resulting from the impact of changing foreign exchange
rates on certain intercompany loan balances
    
    
    645
    
    
    
    (1,223
    )Loss on disposal of property and equipment
    
    
    1,300
    
    
    
    Deferred income taxes
    
    
    (803
    )
    
    
    142Changes in operating assets and liabilities:Accounts receivable
    
    
    (4,360
    )
    
    
    1,845Inventories
    
    
    3,668
    
    
    
    1,495Value added tax receivable
    
    
    12,668
    
    
    
    715Prepaid expenses, other current and non-current assets
    
    
    1,356
    
    
    
    575Accounts payable
    
    
    1,822
    
    
    
    (1,213
    )Restructuring and acquisition accruals
    
    
    (8,196
    )
    
    
    (1,638
    )Accrued and other liabilities
    
    
    (734
    )
    
    
    6,680Income taxes payable
    
    
    (10,496
    )
    
    
    2,134Net cash provided by operating activities
    
    
    52,799
    
    
    
    48,551Cash flows from investing activities:Purchases of property and equipment
    
    
    (43,271
    )
    
    
    (18,987
    )Net cash used in investing activities
    
    
    (43,271
    )
    
    
    (18,987
    )Cash flows from financing activities:Proceeds from issuance of debt
    
    
    25,115
    
    
    
    57,000Repayment of debt
    
    
    (39,134
    )
    
    
    (67,776
    )Proceeds from issuance of common stock
    
    
    30,908
    
    
    
    2,667Net cash provided by (used in) financing activities
    
    
    16,889
    
    
    
    (8,109
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (95
    )
    
    
    4,152Net increase in cash and cash equivalents
    
    
    26,322
    
    
    
    25,607Cash and cash equivalents at the beginning of year
    
    
    34,187
    
    
    
    11,414Cash and cash equivalents at the end of the period
    
    $
    60,509
    
    
    $
    37,021Supplemental cash flow disclosures:Cash paid during the period for:Interest
    
    $
    412
    
    
    $
    625Taxes
    
    $
    10,524
    
    
    $
    5,173
 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
September 30, 2004 and the results of the Companys operations for the three
and nine month periods ended September 30, 2004 and 2003, and cash flows for
the nine month period ended September 30, 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 nine months
ended September 30, 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  Merger On July 28, 2004, the Company entered into a definitive agreement to be
acquired by The Cooper Companies, Inc. (Cooper) in a stock and cash
transaction. Cooper manufactures and markets specialty healthcare products
through its CooperVision and CooperSurgical units. Pursuant to the definitive
agreement and subject to the terms and conditions set forth therein, the
Company will be merged with and into a direct wholly owned subsidiary of
Cooper. Under the definitive agreement, upon completion of the proposed
merger, Cooper has agreed to issue to Company stockholders 0.3879 shares of
its common stock and pay $22.00 in cash, without interest, for each share of
our common stock then held. Shares of Cooper common stock will be issued with
associated preferred stock purchase rights. After careful consideration, the
Companys board of directors has unanimously determined that adoption of the
definitive agreement is advisable and that the proposed merger is fair and in
the best interests of Company stockholders, and recommended that Company
stockholders approve and adopt the definitive agreement and approve the
proposed merger. After careful consideration, the Cooper board of directors
has unanimously determined that the issuance of Cooper common stock in the
proposed merger is advisable and in the best interests of Cooper stockholders,
and recommended that Cooper stockholders vote in favor of issuing Cooper
common stock in connection with the proposed merger. The close of business on
October 4, 2004 was set as the record date for the determination of
stockholders entitled to vote on the matters presented at the respective
special meetings of stockholders of the Company and Cooper, which are both
scheduled to be held on November 16, 2004. On October 13, 2004, the Securities
and Exchange Commission declared effective Coopers registration statement on
Form S-4 containing the joint proxy statement/prospectus that was mailed to
Company and Cooper stockholders on or about October 15, 2004. The Company expects this transaction will close around the end of 2004.
However, the Company cannot predict the exact timing of completion of the
proposed merger because it is subject to regulatory approvals and other
conditions. There may be a substantial period of time between the approval of
the respective merger proposals to be voted on by Company and Cooper
stockholders at their respective special meetings and the effectiveness of the
proposed merger. In particular, the U.S. Federal Trade Commission has requested
additional information and documents related to the merger from the Company and
Cooper, and the proposed merger continues to remain subject to the review of
the U.S. Federal Trade Commission and several state attorneys general who have
access to the merger documents, which review may not be completed by the end of
2004. The Company is subject to a number of risks while the proposed merger is
pending, including risks of disruption of the ongoing business operations of
the Company, the potential loss of key employees and of employee productivity,
potential disruption of customer relationships and potential revenue declines
as a result of uncertainty on the part of customers and potential customers. If
the proposed merger is significantly delayed, or is not completed, 6




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because one of the conditions is not satisfied or otherwise, the
likelihood and effect of these risks could be significantly increased,
and could have a material adverse effect on the Companys business. Pursuant to the terms of the definitive agreement related to the
proposed merger with Cooper, the Company is obligated to pay a
termination fee and reimburse certain of Coopers expenses if the
definitive agreement is terminated because of certain types of events,
such as failure by the Companys board of directors to support the
proposed merger in certain ways or failure by our stockholders to
approve the proposed merger following our involvement in an alternate
acquisition under certain circumstances. Cooper is under a similar
obligation to the Company. On October 18, 2004, the parties to the
definitive agreement amended the definitive agreement to reduce the
termination fee from $35.0 million to $30.8 million in order to
facilitate the potential settlement of the Bamboo Partners litigation
described under Note 12. In connection with the proposed merger with Cooper, the Company has
incurred legal, accounting and other professional fees and employee
retention bonus expenses for the three-month period ended September
30, 2004 totaling S3.8 million. The Company expects to incur additional
costs in the fourth quarter related to the proposed transaction;
however, the exact amount of such costs cannot be reasonably estimated. Note 3  New Accounting Standards In December 2003, the Financial Accounting Standards Board (FASB) issued
Financial Interpretation No. (FIN) 46R, a revision to FIN 46,
Consolidation of Variable Interest Entities, which addresses how a
business enterprise should evaluate whether it has a controlling
financial interest in an entity through means other than voting rights
and accordingly should consolidate the entity, FIN 46R clarifies some of
the provisions of FIN 46 and exempts certain entities from its
requirements. FIN 46R is effective at the end of the first interim period
ending after March 15, 2004. The statement has not had a material impact
on our consolidated financial statements. Note 4  Balance Sheet Items Inventories consisted of the
following (in thousands): September 30,
    
    December 31,2004
    
    2003Raw materials
    
    $
    7,625
    
    
    $
    7,232Work in process
    
    
    3,035
    
    
    
    2,607Finished goods
    
    
    56,318
    
    
    
    60,807$
    66,978
    
    
    $
    70,646
 Prepaid expenses and other
current assets consisted of the following (in thousands): September 30,
    
    December 31,2004
    
    2003Refundable income taxes
    
    $
    10,556
    
    
    $
    11,690Deferred income taxes
    
    
    4,828
    
    
    
    4,828Value added taxes receivable
    
    
    2,355
    
    
    
    15,023Other prepaid expenses and current assets
    
    
    6,330
    
    
    
    5,263$
    24,069
    
    
    $
    36,804
 Accrued liabilities consisted of the following (in thousands): September 30,
    
    December 31,2004
    
    2003Accrued salaries and benefits
    
    $
    13,908
    
    
    $
    13,431Forward hedge contract liability
    
    
    1,235
    
    
    
    3,887Accrued facility expense
    
    
    1,521
    
    
    
    1,314Accrued expenses
    
    
    14,093
    
    
    
    13,311Restructuring and acquisition accruals
    
    
    11,096
    
    
    
    19,292Accrued cooperative merchandising allowances
    
    
    7,904
    
    
    
    7,070Income taxes payable
    
    
    243
    
    
    
    10,739$
    50,000
    
    
    $
    69,044
 7




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Note 5 
Comprehensive Income

Comprehensive income consisted of the following (in thousands): Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income
    
    $
    9,566
    
    
    $
    9,260
    
    
    $
    25,179
    
    
    $
    19,383Foreign currency:Translation adjustment, net of taxes
    
    
    1,043
    
    
    
    3,097
    
    
    
    (689
    )
    
    
    8,518Unrealized gain (loss) on cash flow hedge, net of taxes
    
    
    (34
    )
    
    
    
    
    
    
    235
    
    
    
    Comprehensive income
    
    $
    10,575
    
    
    $
    12,357
    
    
    $
    24,725
    
    
    $
    27,901
 Note 6  Goodwill and Other Intangible Assets Goodwill and other intangible assets (gross) consisted of the following (in thousands): September 30,
    
    December 31,2004
    
    2003Goodwill
    
    $
    44,128
    
    
    $
    45,537Intangible assets subject to amortization
    
    
    24,335
    
    
    
    23,858Intangible assets not subject to amortization
    
    
    3,630
    
    
    
    3,630$
    72,093
    
    
    $
    73,025
 The change in goodwill and intangible assets (gross) during the
first nine months of 2004 was due solely to changes in foreign currency exchange rates. Accumulated amortization consisted of the following (in thousands): September 30,
    
    December 31,2004
    
    2003Goodwill
    
    $
    2,122
    
    
    $
    2,132Intangible assets subject to amortization
    
    
    11,996
    
    
    
    10,088Intangible assets not subject to amortization
    
    
    475
    
    
    
    475$
    14,593
    
    
    $
    12,695
 Goodwill and other intangible assets, net of accumulated amortization, consisted of the following (in thousands): September 30,
    
    December 31,2004
    
    2003Goodwill
    
    $
    42,006
    
    
    $
    43,405Intangible assets subject to amortization
    
    
    12,339
    
    
    
    13,770Intangible assets not subject to amortization
    
    
    3,155
    
    
    
    3,155$
    57,500
    
    
    $
    60,330
 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 $0.7 million and $0.5 million for the three months ended September 30, 2004 and 2003, respectively, and
approximately $2.0 million and $1.6 million for the nine months ended September 30, 2004 and 2003, respectively. Amortization expense for each of the live 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
 8




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Note 7  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 45,652 and 1,294,755 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 $42.86 and $21.38 per share for the three
months ended September 30, 2004 and 2003, respectively. Options to purchase
21,606 and 2,304,680 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 $34.81 and $17.48 per share for the nine months ended September 30,
2004 and 2003, respectively. Note 8  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
    
    September 30,2003
    
    Payments
    
    Adjustment
    
    Adjustments
    
    2004Severance costs
    
    $
    3,809
    
    
    $
    (977
    )
    
    $
    183
    
    
    $
    (43
    )
    
    $
    2,972Facility costs
    
    
    655
    
    
    
    (152
    )
    
    
    
    
    
    
    (7
    )
    
    
    496Equipment and dismantling costs
    
    
    334
    
    
    
    (31
    )
    
    
    
    
    
    
    (4
    )
    
    
    299Miscellaneous costs
    
    
    17
    
    
    
    (17
    )
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    4,815
    
    
    $
    (1,177
    )
    
    $
    183
    
    
    $
    (54
    )
    
    $
    3,767
 At the time of the acquisition, plans were developed to exit certain
activities and facilities of the acquired Essilor operations that were
considered duplicative. These plans included severance costs related to
workforce reductions across all functions and exit costs associated with
exiting certain facilities, dismantling equipment and other exit-related
costs. Included in these plans were activities to: (1) reduce excess
manufacturing headcount at the Ligny facility to levels we deemed more
appropriate to support expected demand in the European market; and (2)
replace the distribution facilities at the Ligny facility, along with the
Companys other distribution centers throughout continental Europe, with a
new consolidated distribution center in continental Europe. The
Company anticipated
at the time of the acquisition that the activities contemplated by these
plans would be completed within approximately two years. During 2001 and 2002, initial workforce reductions were made under these
plans. However, in the fourth quarter of 2002, further headcount reductions
at the Ligny facility were delayed because resources that had been focused
on these reductions were shifted to the implementation of the
initiative described in Note 9, as this initiative had
significant strategic implications to the Company. This initiative
began in the fourth quarter of
2002 and is expected to be completed by the end of 2004, thereby delaying the completion of the
Ligny facility workforce reductions. In December
2003, management approached the French work council with the Companys final
manufacturing staff reduction plan, as required under French employment law.
This plan was accepted in March 2004 and final manufacturing staff
reductions were subsequently completed. 9




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With respect to the Ligny distribution center, as noted above, the acquisition
exit plan was to close this center and utilize a central continental European
warehouse which would service both acquired Essilor and Company products.
However, during the execution of this exit plan, it was determined that the
European information systems purchased from Essilor were inadequate to
reliably support the high number of individual stock keeping units (skus) of
the combined entity. As a result, in late 2002 the Company commenced a process
of selecting a capable software system and began implementing the new system
in late 2003. We cannot close the distribution facilities at the Ligny
facility, or relocate their activities, until the new system is fully
functional. We expect this will occur in mid-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 of
    
    
    
    
    
    Translation
    
    Goodwill
    
    Accrual as ofDecember 31, 2003
    
    Payments
    
    Adjustments
    
    Adjustments
    
    September 30, 2004Facility and other exit costs
    
    $
    1,858
    
    
    $
    (556
    )
    
    $
    (6
    )
    
    $
    (1,053
    )
    
    $
    243Total
    
    $
    1,858
    
    
    $
    (556
    )
    
    $
    (6
    )
    
    $
    (1,053
    )
    
    $
    243
 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. Note 9  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 approximately $56 million
in connection with this initiative, of which approximately $52.2 million has
been incurred through September 30, 2004. Thus, the Company expects to incur
an additional $4 million of restructuring and related expenses 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. 10




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During the three months ended
September 30, 2004, we recorded
restructuring and related expenses of $1.7 million, consisting of
$0.6 million related to severance and other salary related and
benefit costs and $1.1 million related to other costs. For the nine
months ended September 30, 2004, total restructuring and related
expenses were $6.9 million, consisting of $4.1 million related to
severance and other salary related and benefit costs, $0.8 million
related to impairment of property and equipment and $2.0 million
related to other costs. Of the $52.2 million of restructuring and related charges incurred
since the inception of the restructuring initiative, $21.1 million of
cash has been spent. We anticipate spending an additional $7 million
in cash related to the restructuring initiative during the remainder
of 2004 and in subsequent years. 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 nine month period ended September 30,
2004 (in thousands): Severance/salary
    
    Leaserelated and
    
    PaymentBenefits costs
    
    of Facilities
    
    Other
    
    TotalBalance of accrual at December 31, 2003
    
    $
    7,651
    
    
    $
    4,448
    
    
    $
    520
    
    
    $
    12,619Additions
    
    
    4,138
    
    
    
    
    
    
    
    1,969
    
    
    
    6,107Payments
    
    
    (8,558
    )
    
    
    (952
    )
    
    
    (2,321
    )
    
    
    (11,831
    )Translation adjustment
    
    
    127
    
    
    
    60
    
    
    
    4
    
    
    
    191Balance of accrual at September 30, 2004
    
    $
    3,358
    
    
    $
    3,556
    
    
    $
    172
    
    
    $
    7,086
 Note 10  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 September 30, 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 September 30, 2004, we were in compliance with these
covenants and there was no outstanding balance under this credit
agreement. Note 11  Foreign Currency Forward Contracts 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 11




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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 and Expense in our Consolidated Statement of Income. 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 and Expense. At September 30, 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 nine months of 2004 (in thousands): December 31 ,2003
    
    $
    (448
    )Net change on cash flow hedges
    
    
    221Reclassification of loss to interest
    
    
    36Reclassification of gain to Cost of Sales
    
    
    (22
    )September 30, 2004
    
    $
    (213
    )
 We anticipate declassifying $5,000 of the loss to the Statement of Income 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 September 30, 2004 are
presented (in thousands) in the table below. Weighted average forward
rates are quoted using market conventions. Net Notional
    
    WeightedAmount
    
    Average RateCash flow Hedges:Euro Sold
    
    
    4,515
    
    
    
    1.2049GBP Purchases (JPY functional)
    
    
    1,471
    
    
    
    194.8426Balance Sheet Hedges:Euro Sold
    
    
    29,290
    
    
    
    1.2049
 Note 12  Subsequent Events Bamboo Partners LLC v.
Fruth et al. On or about September 27,2004, a putative class action lawsuit was filed in
the Superior Court in the State of California in the County of Contra Costa
against the Company, its directors and Cooper. The case is captioned Bamboo
Partners LLC v. Fruth et al., Civil Action No. C 04-0749. The complaint
alleges that, among other things, the Companys directors breached their
fiduciary duties of loyalty and due care by deciding to sell the Company to
Cooper without undertaking sufficient effort to obtain the best offer possible
for stockholders, by including provisions in the definitive agreement which
the plaintiff alleges effectively prevent a superior bid from succeeding, and
by including provisions, such as the acceleration of stock options and
indemnification of directors, which benefit the directors. The complaint
further alleges that the consideration to be paid in the proposed merger is
unfair and inadequate, and that the Companys directors breached their duty of
full and fair disclosure to the Companys public stockholders in connection
with the proposed merger. The complaint also alleges that Cooper aided and
abetted the alleged breaches of fiduciary duty of the Companys 12




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directors. The complaint seeks, among other things, an injunction against the
transaction, a rescission of the transaction if it is consummated and
unspecified damages, as well as fees and costs. The plaintiffs also filed an
application for expedited discovery. On October 12, 2004, the parties agreed to a potential settlement of the case.
In connection with the potential settlement, Cooper and the Company provided
additional disclosures in their joint proxy statement/prospectus, dated
October 12, 2004, and on October 18, 2004, the parties to the definitive
agreement amended the definitive agreement to decrease the termination fee
payable under certain circumstances from $35.0 million to $30.8 million. The potential settlement contemplated by the parties would also provide for the
payment by the Company of the fees and costs of the plaintiffs counsel, up to
a negotiated limit, subject to the courts approval. The settlement would not
involve any admissions of breaches of fiduciary duty or other wrongdoing by the
Company, any of its officers or directors, or Cooper. The settlement and
payment of the plaintiffs counsels fees would be conditioned upon, among
other things, consummation of the proposed merger. Any final settlement
agreement signed by the parties must be approved by the Superior Court in the
County of Contra Costa, California. While the Company expects to diligently
negotiate the terms of a final settlement agreement, there can be no assurance
that a settlement agreement will be signed or consummated. However,
Ocular does not believe that this lawsuit will have a material effect
on the Company in such event. Bausch & Lomb
Incorporated Litigation On October 5, 2004,
Bausch & Lomb Incorporated (Bausch & Lomb) filed
a lawsuit against us in the U.S. District Court for the Western
District of New York alleging that our Biomedics® toric soft
contact lens and its private label equivalents infringe Bausch &
Lombs U.S. Patent No. 6,113,236 relating to toric contact
lenses having optimized thickness profiles. The complaint seeks an
award of damages, including multiple damages, attorneys fees
and costs and an injunction preventing the alleged infringement.
Discovery has not yet commenced as of the date of this report, but
based on an initial review of the complaint and the patent, as well
as other relevant information, we believe this lawsuit is without
merit and plan to conduct a vigorous defense. However, 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. An adverse outcome in this litigation could subject us to
significant liabilities, require us to license disputed rights from
Bausch & Lomb,
 require us to redesign products or cease using such technology.  Any of these consequences could have a material adverse effect on us. Internal Revenue Service
Audit The Internal Revenue Service has been auditing Oculars income tax returns for
the years 1999, 2000 and 2001, and on October 1, 2004 Ocular received a notice
from the IRS claiming approximately $44.8 million of additional taxes for
these years, plus unspecified interest, and approximately $12.7 million in
related penalties. The notice was sent the day before the statute of
limitations for 1999, which had previously been extended for one year, would
have otherwise expired and Ocular believes that the IRS may not have fully
reviewed the facts before making its assessment of additional taxes for these
years. The notice relates primarily to transfer pricing and related issues and
states that if all or part of the proposed adjustments are not sustained, the
IRS would claim, in lieu of such adjustments, approximately $11.0 million of
additional taxes for 1999 through 2001 based on certain anti-deferral rules
under Subpart F of the Internal Revenue Code. Ocular believes that the IRSs position misapplies the law and is incorrect.
The amount of taxes paid for these years was supported by pricing studies
prepared by a multinational tax advisor, and Ocular believes that its
intercompany transactions, and resulting tax payments, reflected pricing terms
that were and are consistent with industry practice for transactions with
third parties. Ocular intends to vigorously contest the IRSs claims, and
Ocular believes that the ultimate outcome of this matter will not have a
material adverse effect on the Company. Accordingly, the Company does not believe
that an adverse outcome of this contingency is either probable or estimable and has not recorded any amounts at September 30, 2004. The Company continues to be subject to the examination of its income tax
returns by the Internal Revenue Service and other tax authorities, and we
cannot assure that the outcomes from these examinations will not have a
material adverse effect on the Companys operating results and financial
condition. Moreover, the Companys future effective tax rates could be
adversely affected by earnings being higher than anticipated in countries
where the Company has higher statutory rates or lower than anticipated in
countries where it has lower statutory rates, by changes in valuation of its
deferred tax assets and liabilities, or by changes in tax laws or
interpretations thereof. 13




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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. We cannot assure you 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 our recently-announced agreement to
be acquired by The Cooper Companies, Inc., the overall economic environment,
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, 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. Except as required by law, we do not undertake to update
or revise any forward-looking statement, whether as a result of new
information, future events or otherwise. Unless
the context otherwise requires, the terms we, us, and our refer to
Ocular Sciences, Inc. and its subsidiaries. Overview Our net sales increased 6.2% (1.6% using constant foreign currency exchange
rates) and 9.7% (4.2% using constant foreign currency exchange rates) for the
three and nine months ended September 30, 2004, respectively, over the same
periods in 2003. 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. For the three and nine months ended
September 30, 2004, 59% and 60%, respectively, of our sales were generated
outside the United States, compared to 57% and 56%, respectively, in the same
periods of 2003. For some products, such as daily and toric disposable lenses,
our sales during the quarter were constrained by our manufacturing capacity. Gross profit percentage increased to 59.6% and 58.4% for the three and nine
months ended September 30, 2004, respectively, from 54.2% and 53.2% in the
same periods of 2003, primarily due to lower production costs. We are
continuing to realize the benefits of our manufacturing 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 and increasing
production volume, most significantly by implementing new highly automated
manufacturing facilities. General and administrative expenses were relatively constant as a percentage
of net sales for the three and nine months ended September 30, 2004 over the
same periods in 2003. Research and development and selling and marketing
expenses increased as we continue to invest in new product development,
additional marketing programs associated with new product introductions and
increased the size of our sales force. Recent Events Merger with The Cooper
Companies, Inc. On July 28, 2004, we
entered into a definitive agreement to be acquired by The Cooper
Companies, Inc. (Cooper) in a stock and cash transaction.
Cooper manufactures and markets specialty healthcare products through
its CooperVision and CooperSurgical units. Pursuant to the definitive
agreement and subject to the terms and conditions set forth therein,
we will be merged with and into a direct wholly owned subsidiary of
Cooper. Under the definitive agreement, upon completion of the merger,
Cooper has agreed to issue to our stockholders 0.3879 shares of
its common stock and pay $22.00 in cash, without interest, for each
share of our common stock then held. Shares of Cooper common stock
will be issued with associated preferred stock purchase rights. We
expect this transaction will close around the end of 2004, subject
to customary conditions, including obtaining necessary regulatory
approval, absence of material breaches of the agreement and of
material adverse changes in the companies businesses, and approval
by both companies stockholders. We cannot assure you that the merger
will be completed when expected, or at all. We are subject to a
number of risks while the merger is pending, include risks of
disruption of our ongoing business operations, the potential loss of
key employees and of employee productivity, potential disruption of
customer relationships and potential revenue declines as a result of
uncertainty on the part of customers and potential customers. If the
merger is significantly delayed, or is not completed, because one of
the conditions is not satisfied or otherwise, the likelihood and
effect of these risks could be significantly increased, and could
have a material adverse effect on our business. For a description of
the proposed merger, please refer to the definitive proxy statement
dated October 15, 2004, which is on file with the SEC and is
available through the SECs website at www.sec.gov. 14




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Internal Revenue Service Audit The Internal Revenue Service has been auditing Oculars income tax returns for
the years 1999, 2000 and 2001, and on October 1, 2004 Ocular received a notice
from the IRS claiming approximately $44.8 million of additional taxes for
these years, plus unspecified interest, and approximately $12.7 million in
related penalties. The notice was sent the day before the statute of
limitations for 1999, which had previously been extended for one year, would
have otherwise expired and Ocular believes that the IRS may not have fully
reviewed the facts before making its assessment of additional taxes for these
years. The notice relates primarily to transfer pricing and related issues and
states that if all or part of the proposed adjustments are not sustained, the
IRS would claim, in lieu of such adjustments, approximately $11.0 million of
additional taxes for 1999 through 2001 based on certain anti-deferral rules
under Subpart F of the Internal Revenue Code. Ocular believes that the IRSs position misapplies the law and is incorrect.
The amount of taxes paid for these years was supported by pricing studies
prepared by a multinational tax advisor, and Ocular believes that its
intercompany transactions, and resulting tax payments, reflected pricing terms
that were and are consistent with industry practice for transactions with
third parties. Ocular intends to vigorously contest the IRSs claims, and
Ocular believes that the ultimate outcome of this matter will not have a
material adverse effect on the Company. The Company continues to be subject to the examination of its income tax
returns by the Internal Revenue Service and other tax authorities, and we
cannot assure that the outcomes from these examinations will not have a
material adverse effect on the Companys operating results and financial
condition. Moreover, the Companys future effective tax rates could be
adversely affected by earnings being higher than anticipated in countries
where the Company has higher statutory rates or lower than anticipated in
countries where it has lower statutory rates, by changes in valuation of its
deferred tax assets and liabilities, or by changes in tax laws or
interpretations thereof. Critical Accounting Policies Our critical accounting policies are as follows:  
    
    revenue recognition;
    
    estimating valuation allowances; 15




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
    
    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 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 practices 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, 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 16




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income taxes and deferred tax assets and liabilities. 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. The Company continues to be subject to the examination of its income tax
returns by the Internal Revenue Service and other tax authorities, and we
cannot assure that the outcomes from these examinations will not have a
material adverse effect on the Companys operating results and financial
condition. Moreover, the Companys future effective tax rates could be
adversely affected by earnings being higher than anticipated in countries
where the Company has higher statutory rates or lower than anticipated in
countries where it has lower statutory rates, by changes in valuation of
its deferred tax assets and liabilities, or by changes in tax laws or
interpretations thereof. 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 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 the intrinsic value method
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 and nine months ended September 30, 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 ended
    
    Nine months endedSeptember 30,
    
    September 30.2004
    
    2003
    
    2004
    
    2003Net Income:As reported
    
    $
    9,566
    
    
    $
    9,260
    
    
    $
    25,179
    
    
    $
    19,383Total
stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects
    
    
    534
    
    
    
    709
    
    
    
    1,624
    
    
    
    2,081
 17




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##### Table of Contents



Pro forma
    
    $
    9,032
    
    
    $
    8,551
    
    
    $
    23,555
    
    
    $
    17,302Net Income per common share (basic):As reported
    
    $
    0.38
    
    
    $
    0.39
    
    
    $
    1.01
    
    
    $
    0.81Pro forma
    
    
    0.36
    
    
    
    0.36
    
    
    
    0.94
    
    
    
    0.73Net Income per common share (diluted):As reported
    
    $
    0.35
    
    
    $
    0.38
    
    
    $
    0.96
    
    
    $
    0.80Pro forma
    
    
    0.33
    
    
    
    0.35
    
    
    
    0.89
    
    
    
    0.72
 New Accounting
Pronouncements Adopted See Note 3 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
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net sales
    
    
    . 100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    40.4
    
    
    
    45.8
    
    
    
    41.6
    
    
    
    46.8Gross profit
    
    
    59.6
    
    
    
    54.2
    
    
    
    58.4
    
    
    
    53.2Selling and marketing expenses
    
    
    27.8
    
    
    
    25.9
    
    
    
    28.8
    
    
    
    27.4General and administrative expenses
    
    
    8.5
    
    
    
    8.8
    
    
    
    9.2
    
    
    
    9.4Research and development expenses
    
    
    2.5
    
    
    
    2.2
    
    
    
    2.6
    
    
    
    2.2Restructuring and related expenses
    
    
    1.9
    
    
    
    3.0
    
    
    
    2.7
    
    
    
    3.2Merger and related expenses
    
    
    4.3
    
    
    
    
    
    
    
    1.5
    
    
    
    Income from operations
    
    
    14.6
    
    
    
    14.3
    
    
    
    13.6
    
    
    
    11.0Interest and other income/(expense), net
    
    
    (0.1
    )
    
    
    1.0
    
    
    
    (0.3
    )
    
    
    0.6Income before taxes
    
    
    14.5
    
    
    
    15.4
    
    
    
    13.3
    
    
    
    11.6Provision for income taxes
    
    
    3.6
    
    
    
    4.1
    
    
    
    3.3
    
    
    
    3.1Net income
    
    
    10.9
    %
    
    
    11.2
    %
    
    
    10.0
    %
    
    
    8.4
    %
 Net Sales Net sales increased $5.1 million, or 6.2% (1.6% using constant
currency exchange rates), to $87.7 million for the three months
ended September 30, 2004, compared to $82.6 million for the
corresponding period in 2003. For the nine months ended September
30, 2004, net sales increased $22.2 million, or 9.7% (4.2% using
constant currency exchange rates), to $251.6 million compared to
$229.4 million for the corresponding period in 2003. The increase
in the three month and nine month periods was primarily due to
continued growth in sales of disposable toric lenses worldwide, and
in sales of daily lenses in international markets. U.S. sales were $36.0 million and $100.7 million for the three and
nine months ended September 30, 2004, a 1.1% increase and 0.6%
decrease over the same periods last year, respectively. These
results are primarily due to a continued decline in sales of our
conventional reusable product line and lower sales of disposable
spheres as we believe customers are reducing their inventories of
our older sphere product as a result of our launch of our new
sphere product, offset by growth in sales of disposable toric
lenses. International sales were $51.8 million and $150.9 million for the
three and nine months ended September 30, 2004, compared to $47.0
million and $128.0 million for the corresponding periods in 2003.
This represents an increase of 10.1% and 17.8% over the three and
nine months ended September 30, 2003 (2.0% and 8.0% using constant
currency exchange rates). The increase in international net sales
was due to 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 $52.3 million and $146.9 million for the three and
nine months ended September 30, 2004, compared to $44.8 million and
$122.1 million for the corresponding periods in 2003, respectively.
Gross profit, as a percentage of net sales, was 59.6% and 58.4% for
the three and nine months ended September 30, 2004, compared to
54.2% and 53.2% for the corresponding periods in 18




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2003, respectively. The improvement in the 2004 gross profit percentage
reflects the benefits from our manufacturing transition
program as we began to sell products, especially daily disposable products,
manufactured utilizing our second generation
manufacturing processes. Selling and Marketing
Expenses Selling and marketing expenses were $24.3 million and $72.3 million for the
three and nine months ended September 30, 2004, compared to $21.4 million and
$62.9 million for the corresponding periods in 2003, respectively. This
represents an increase of 13.8% and 15.0% for the three and nine months ended
September 30, 2004, compared to the corresponding periods in 2003,
respectively. As a percentage of net sales, selling and marketing expenses
were 27.8% and 28.8% for the three and nine months ended September 30,
2004, compared to 25.9% and 27.4% for the corresponding periods in 2003,
respectively. The increase in sales and marketing
expenses is due primarily to higher distribution costs due to increased unit
sales volume, increased marketing expenditures related to
new product 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 fourth quarter of 2004 as we launch new
products in both the United States and international markets. General and Administrative
Expenses General and administrative expenses were $7.5 million and $23.1 million for
the three and nine months ended September 30, 2004, compared to $7.3 million
and $21.6 million for the corresponding periods in 2003, respectively. As a
percentage of net sales, general and administrative expenses were 8.5% and
9.2% for the three and nine months ended September 30, 2004, respectively,
compared to 8.8% and 9.4% for the corresponding periods in 2003. The dollar
increase in general and administrative expenses for the three and nine months
ended September 30, 2004 was primarily due to higher professional services
expenses, primarily related to the Companys ongoing Sarbanes-Oxley Act
compliance program. We expect our general and administrative
expenses in absolute dollars to continue to grow during the fourth
quarter of 2004. Research and Development Expenses Research and development expenses were $2.2 million and $6.6 million for the
three and nine months ended September 30, 2004, compared to $1.8 million and
$5.0 million for the corresponding periods in 2003, respectively. This
represents an increase of 20.8% and 32.9% for the three and nine months ended
September 30, 2004, compared to the corresponding periods in 2003,
respectively. As a percentage of net sales, research and development expenses
were 2.5% and 2.6% for the three and nine months ended September 30,
2004, compared to 2.2% for each of the corresponding periods in 2003,
respectively. The increase in research and development
expense for the three and nine months ended September 30, 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 the fourth quarter of 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
approximately $56 million in connection with this initiative, of which
approximately $52.2 million has been incurred through
September 30, 2004. Thus, the Company expects to incur an additional $4 million
of restructuring and related expenses 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. 19




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During the three months ended September 30, 2004, we recorded restructuring and
related expenses of $1.7 million, consisting of $0.6 million related to
severance and other salary related and benefit costs and $1.1 million related
to other costs. For the nine months ended September 30, 2004, total
restructuring and related expenses were $6.9 million, consisting of $4.1
million related to severance and other salary related and benefit costs, $0.8
million related to impairment of property and equipment and $2.0 million
related to other costs. Of the $52.2 million of restructuring and related charges incurred since the
inception of the restructuring initiative, $21.1 million of cash has been
spent. We anticipate spending an additional $7 million in cash related to the
restructuring initiative during the remainder of 2004 and in subsequent years. 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. Merger and Related Expenses For the
three months ended September 30, 2004, we have incurred $3.8 million in merger
related expenses. These expenses are primarily related to legal, accounting
and banking fees and employee retention bonus expenses. Other Income (Expense) Other income (expense) primarily consists of net foreign exchange gains and
losses. Provision for Income Taxes Income taxes were $3.2 million and $8.4 million for the three and nine months
ended September 30, 2004, compared to $3.4 million and $7.2 million for the
corresponding periods in 2003, respectively. The effective tax rate prior to
restructuring and related expenses, for both the three and nine months ended
September 30, 2004 was 22.0%. We expect the effective tax rate prior to
restructuring and related expenses to continue to be approximately 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 September 30, 2004 were $60.5 million, an increase
of $26.3 million from the December 31, 2003 balance of $34.2 million. The
increase in cash and cash equivalents in the first nine months of 2004 was
primarily due to cash flow from operations of $52.8 million, which consisted
primarily of net income, adjusted for non-cash depreciation and amortization,
an income tax benefit from stock options exercised, and a decrease in prepaid
and other current and non-current assets primarily due to an
unusually large receipt of value
added taxes (VAT), partially offset by reductions in income and other taxes
payable due to regular tax payments made during the period, and reductions in
accrued and other liabilities primarily due to severance and other payments
made as part of the Companys manufacturing restructuring efforts. Financing
activities for the first nine months of 2004 provided approximately $16.9
million, principally through proceeds from issuance of common stock pursuant to
exercises of employee stock options of $30.9 million, offset by $14.0 million
of net debt repayment. Approximately $43.3 million of cash was spent on capital
expenditures for the first nine months of 2004. We currently expect to incur an
additional $7 million in capital expenditures during the remainder of 2004.
Additionally, we anticipate spending an additional $7 million in cash related
to the restructuring initiative in the remainder of 2004 and in subsequent years. 20




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##### Table of Contents



The following table
summarizes our contractual cash obligations as of September 30, 2004 (in thousands): OperatingDebt**
    
    Leases2004*
    
    $
    141
    
    
    $
    1,9232005
    
    
    321
    
    
    
    7,3062006
    
    
    349
    
    
    
    4,9262007
    
    
    379
    
    
    
    3,8382008
    
    
    411
    
    
    
    2,2972009
    
    
    446
    
    
    
    1,724Thereafter
    
    
    442
    
    
    
    4,205$
    2,489
    
    
    $
    26,219
 *Represents commitments for
the remaining three months of 2004. ** Debt consists of capital lease obligations. The $26.2 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 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 September 30,2004, 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 September 30, 2004, we were in compliance with these covenants and there
was no outstanding balance under this credit agreement. Pursuant to the terms of the definitive agreement related to the proposed
merger with Cooper, we are obligated to pay a $30.8 million fee and reimburse
certain of Coopers expenses if the definitive agreement is terminated because
of certain types of events, such as failure by our board of directors to
support the merger in certain ways or failure by our stockholders to approve
the merger following our involvement in an alternative acquisition under
certain circumstances. Cooper is under a similar obligation to us. 
 Item 3. Quantitative And Qualitative Disclosures About Market Risk 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 21




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##### Table of Contents



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 and Expense in our
Consolidated Statement of Income. 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 and Expense. At September 30, 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 nine
months of 2004 (in thousands): December 31, 2003
    
    $
    (448
    )Net change on cash flow hedges
    
    
    221Reclassification of loss to interest
    
    
    36Reclassification of gain to Cost of Sales
    
    
    (22
    )September 30, 2004
    
    $
    (213
    )
 We anticipate reclassifying
$5,000 of the loss to the Statement of Income  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 September 30,
2004 are presented (in thousands) in the table below. Weighted average
forward rates are quoted using market conventions. Net Notional
    
    WeightedAmount
    
    Average RateCash Flow Hedges:Euro Sold
    
    
    4,515
    
    
    
    1.2049GBP Purchases (JPY functional)
    
    
    1,471
    
    
    
    194.8426Balance Sheet Hedges:Euro Sold
    
    
    29,290
    
    
    
    1.2049
 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 (a) Disclosure Controls and
Procedures. Based on their evaluation of the Companys disclosure
controls and procedures (as defined in Securities Exchange Act of
1934 (Exchange Act) Rules 13a-15(e) and 15d-15(e)) as required by
paragraph (b) of Exchange Act Rules 13a-15 or 15d-15, the
Companys principal executive officer and principal
financial officer have concluded that these controls and procedures as of the end
of the period covered by this Quarterly Report on Form 10-Q were adequately designed to
ensure that the information required to be disclosed by the Company in reports it files or
submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules
and forms of the Securities and Exchange Commission. (b) Changes in Internal Control Over Financial Reporting.
No change in the Companys internal control over financial reporting identified in connection with the
evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or
15d-15 that occurred during the Companys third fiscal quarter has materially affected, or is reasonably likely to materially affect,
the Companys internal control over financial reporting. 22




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##### Table of Contents



Part II  OTHER INFORMATION 
 Item 1. Legal Proceedings Legal Proceedings Regarding our Intellectual Property 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 multiple damages, attorneys 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. The case is now in pretrial
discovery. A claim construction hearing was held on November 1,
2004 and the parties are awaiting the courts claim construction. We believe
the lawsuit is without merit and that we have strong defenses to this
complaint and we intend to defend this action vigorously. On October 5, 2004, Bausch & Lomb Incorporated (Bausch & Lomb) filed a
lawsuit against us in the U.S. District Court for the Western District of New
York alleging that our Biomedics® toric soft contact lens and its private
label equivalents infringe Bausch & Lombs U.S. Patent No. 6,113,236 relating
to toric contact lenses having optimized thickness profiles. The complaint
seeks an award of damages, including multiple damages, attorneys
fees and costs and an injunction preventing the alleged infringement.
Discovery has not yet commenced as of the date of this report, but based on an
initial review of the complaint and the patent, as well as other relevant
information, we believe this lawsuit is without merit and plan to conduct a
vigorous defense. 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 these lawsuits 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. Legal Proceeding Regarding the Merger On or about September 27, 2004,
a putative class action lawsuit was filed in
the Superior Court in the State of California in the County of Contra Costa
against the Company, its directors and Cooper. The case is captioned Bamboo
Partners LLC v. Fruth et al., Civil Action No. C 04-0749. The complaint
alleges that, among other things, the Companys directors breached their fiduciary
duties of loyalty and due care by deciding to sell the Company to Cooper
without undertaking sufficient effort to obtain the best offer possible for
stockholders, by including provisions in the definitive agreement
which the plaintiff alleges
effectively prevent a superior bid from succeeding, and by including
provisions, such as the acceleration of stock options and indemnification of
directors, which benefit the directors. The complaint further alleges that the
consideration to be paid in the proposed merger is unfair and inadequate, and
that the Companys directors breached their duty of full and fair
disclosure to the Companys
public stockholders in connection with the proposed merger. The complaint also
alleges that Cooper aided and abetted the alleged breaches of fiduciary duty
of the Companys directors. The complaint seeks, among other things, an injunction
against the transaction, a rescission of the transaction if it is consummated
and unspecified damages, as well as fees and costs. The plaintiffs also filed
an application for expedited discovery. On October 12, 2004, the parties agreed to a potential settlement of the case.
In connection with the potential settlement, Cooper and the Company provided additional
disclosures in their joint proxy statement/prospectus, dated October 12, 2004,
and on October 18, 2004, the parties to the definitive agreement amended the
definitive agreement to decrease the termination fee payable under certain
circumstances from $35.0 million to $30.8 million. The potential settlement
contemplated by the parties would also provide for the payment by the
Company of the fees and costs of the plaintiffs counsel, up to a
negotiated limit, subject to the courts approval. The settlement
would not involve any admissions of breaches of fiduciary duty or
other wrongdoing by the Company, any of its officers or directors, or
Cooper. The settlement and payment of the plaintiffs
counsels fees would be conditioned upon, among other things,
consummation of the proposed merger. Any final settlement agreement
signed by the parties must be approved by the Superior Court in the
County of Contra Costa, California. While the Company expects to
diligently negotiate the terms of a final settlement agreement, there
can be no assurance that a settlement agreement will be signed or
consummated. However, Ocular does not believe that this lawsuit will
have a material effect on the Company in such event. 23




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##### Table of Contents



Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds None. 
 Item 3. Defaults Upon
Senior Securities None. 
 Item 4. Submission of Matters to a Vote
of Security Holders None. 
 Item 5. Other
information On September 24, 2004,
we amended the employment agreement of Stephen J. Fanning, our
President and Chief Executive Officer, to extend its expiration date
from August 13, 2004 to the earlier of (i) the closing of
our proposed merger with The Cooper Companies, Inc., (ii) the
termination of the definitive agreement related to the proposed
merger, (iii) the termination of his employment agreement, or
(iv) April 30, 2005. 
 Item 6. Exhibits  Exhibit No.
    Exhibit
Description  10.1
    
    Consent and Agreement dated July 27, 2004 between the registrant and Wells Fargo HSBC Trade Bank N.A.10.2
    
    Fourth Amendment to the Credit Agreement, dated July 23, 2004, between the registrant and Comerica Bank.  10.3
    
    Letter Agreement dated September 24, 2004, between the
Registrant and Stephen J. Fanning.  31.1
    
    Rule 13a-14 (a)/15d-14 (a) Certifications dated November 9, 2004.  32.1
    
    18 U.S.C. § 1350 Certifications dated November 9, 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. 24




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. OCULAR SCIENCES, INC.(Registrant)Date: November 9, 2004
    
    /s/ Steven M. NeilSteven M. NeilExecutive Vice-President and Chief FinancialOfficer (Duly Authorized Officer and PrincipalFinancial and Accounting Officer)
 25




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##### Table of Contents



Exhibit No.
    Exhibit
Description  10.1
    
    Consent and Agreement dated July 27, 2004 between the registrant and Wells Fargo HSBC Trade Bank N.A.10.2
    
    Fourth Amendment to the Credit Agreement, dated July 23,
2004, between the registrant and Comerica Bank.  10.3
    
    Letter Agreement dated September 24, 2004, between the
Registrant and Stephen J. Fanning.  31.1
    
    Rule 13a-14 (a)/15d-14 (a) Certifications dated November 9, 2004.  32.1
    
    18 U.S.C. § 1350 Certifications dated November 9, 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.