##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q  x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 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
(State or other jurisdiction of
incorporation or organization)
    
    94-2985696
(I.R.S. Employer
Identification No.)1855 Gateway Boulevard, Suite 700
    
    94520Concord, California
(Address of principal executive offices)
    
    (Zip Code)
 (925) 969-7000
(Registrants telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES 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 July 28, 2004, there were outstanding 25,157,814 shares of the
registrants Common Stock, par value $0.001 per share.




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OCULAR SCIENCES, INC. INDEX PagePART I-
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)Condensed Consolidated Balance Sheets  June 30, 2004 and December 31, 2003
    
    
    3Condensed Consolidated Statements of Income  Three months and six months ended June 30, 2004 and 2003
    
    
    4Condensed Consolidated Statements of Cash Flows  Six months ended June 30, 2004 and 2003
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    21Item 4.
    
    Controls and Procedures
    
    
    23PART II-
    
    OTHER INFORMATION
    
    
    24Item 1.
    
    Legal Proceedings
    
    
    24Item 2.
    
    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    24Item 3.
    
    Defaults Upon Senior Securities
    
    
    24Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    25Item 5.
    
    Other Information
    
    
    25Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    26Signatures and Certifications
    
    
    27EXHIBIT 10.1EXHIBIT 31.1EXHIBIT 32.1
 2






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PART I  FINANCIAL INFORMATION 
 Item 1. Financial Statements OCULAR SCIENCES, INC. 
 Condensed Consolidated Balance Sheets
 June 30,
    
    December 31,2004
    
    2003(unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    50,721
    
    
    $
    34,187Accounts receivable, less allowance for sales returns and doubtful
accounts of $3,516 and $3,596 for 2004 and 2003, respectively
    
    
    58,170
    
    
    
    57,906Inventories
    
    
    69,191
    
    
    
    70,646Prepaid expenses and other current assets
    
    
    23,756
    
    
    
    36,804Total current assets
    
    
    201,838
    
    
    
    199,543Property and equipment, net
    
    
    143,014
    
    
    
    134,903Intangible assets, net
    
    
    57,289
    
    
    
    60,330Loans to officers and employees
    
    
    283
    
    
    
    437Other assets
    
    
    4,185
    
    
    
    4,095Total assets
    
    $
    406,609
    
    
    $
    399,308LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    10,547
    
    
    $
    9,076Accrued liabilities
    
    
    58,457
    
    
    
    69,044Current portion of long-term debt
    
    
    398
    
    
    
    411Total current liabilities
    
    
    69,402
    
    
    
    78,531Deferred income taxes
    
    
    192
    
    
    
    988Other liabilities
    
    
    670
    
    
    
    1,067Long-term debt, less current portion
    
    
    2,190
    
    
    
    16,877Total liabilities
    
    
    72,454
    
    
    
    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; 25,135,458
and 24,373,871 shares issued and outstanding for 2004 and 2003,
respectively
    
    
    25
    
    
    
    24Additional paid-in capital
    
    
    119,252
    
    
    
    101,093Retained earnings
    
    
    198,004
    
    
    
    182,391Accumulated other comprehensive income
    
    
    16,874
    
    
    
    18,337Total stockholders equity
    
    
    334,155
    
    
    
    301,845Total liabilities and stockholders equity
    
    $
    406,609
    
    
    $
    399,308
 Note: The condensed consolidated balance sheet at December 31, 2003 has been
derived from the Companys audited consolidated financial statements at that
date, but does not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. See accompanying notes to condensed consolidated financial statements. 3




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##### Table of Contents



OCULAR SCIENCES, INC. 
 Condensed Consolidated Statements of Income  (unaudited)
 Three months ended
    
    Six months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net sales
    
    $
    83,270
    
    
    $
    76,117
    
    
    $
    163,893
    
    
    $
    146,808Cost of sales
    
    
    33,883
    
    
    
    36,278
    
    
    
    69,311
    
    
    
    69,492Gross profit
    
    
    49,387
    
    
    
    39,839
    
    
    
    94,582
    
    
    
    77,316Selling and marketing expenses
    
    
    24,218
    
    
    
    21,108
    
    
    
    47,976
    
    
    
    41,481General and administrative expenses
    
    
    8,223
    
    
    
    7,494
    
    
    
    15,634
    
    
    
    14,370Research and development expenses
    
    
    2,159
    
    
    
    1,432
    
    
    
    4,408
    
    
    
    3,148Restructuring and related expenses
    
    
    2,099
    
    
    
    3,807
    
    
    
    5,173
    
    
    
    4,993Income from operations
    
    
    12,688
    
    
    
    5,998
    
    
    
    21,391
    
    
    
    13,324Interest expense
    
    
    (98
    )
    
    
    (126
    )
    
    
    (258
    )
    
    
    (318
    )Interest income
    
    
    117
    
    
    
    83
    
    
    
    259
    
    
    
    154Other income/(expense), net
    
    
    123
    
    
    
    561
    
    
    
    (572
    )
    
    
    707Income before taxes
    
    
    12,830
    
    
    
    6,516
    
    
    
    20,820
    
    
    
    13,867Provision for income taxes
    
    
    3,209
    
    
    
    2,311
    
    
    
    5,207
    
    
    
    3,744Net income
    
    $
    9,621
    
    
    $
    4,205
    
    
    $
    15,613
    
    
    $
    10,123Net income per share data:Net income per share (basic)
    
    $
    0.39
    
    
    $
    0.18
    
    
    $
    0.63
    
    
    $
    0.43Net income per share (diluted)
    
    $
    0.37
    
    
    $
    0.17
    
    
    $
    0.61
    
    
    $
    0.42Weighted average common shares
outstanding
    
    
    24,840,602
    
    
    
    23,821,160
    
    
    
    24,671,735
    
    
    
    23,816,549Weighted average dilutive
potential common shares under the
treasury stock method
    
    
    984,134
    
    
    
    313,214
    
    
    
    937,318
    
    
    
    197,879Total weighted average common and
dilutive potential common shares
outstanding
    
    
    25,824,736
    
    
    
    24,134,374
    
    
    
    25,609,053
    
    
    
    24,014,428
 See accompanying notes to condensed consolidated financial statements. 4




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OCULAR SCIENCES, INC. 
 Condensed Consolidated Statements of Cash Flows  (unaudited)
 Six months ended June 30,2004
    
    2003Cash flows from operating activities:Net income
    
    $
    15,613
    
    
    $
    10,123Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation and amortization
    
    
    13,846
    
    
    
    12,592Amortization of loans to officers
    
    
    154
    
    
    
    184Income tax benefits from stock options exercised
    
    
    3,092
    
    
    
    10Provision (recovery) for sales returns and doubtful
accounts, net
    
    
    (81
    )
    
    
    523Exchange loss (gain)
    
    
    517
    
    
    
    (617
    )Deferred income taxes
    
    
    (947
    )
    
    
    117Changes in operating assets and liabilities:Accounts receivable
    
    
    (184
    )
    
    
    2,411Inventories
    
    
    1,454
    
    
    
    (4,770
    )Prepaid expenses, other current and non-current assets
    
    
    14,667
    
    
    
    845Accounts payable
    
    
    1,471
    
    
    
    374Accrued and other liabilities
    
    
    (10,982
    )
    
    
    6,205Net cash provided by operating activities
    
    
    38,620
    
    
    
    27,997Cash flows from investing activities:Purchases of property and equipment
    
    
    (22,988
    )
    
    
    (13,503
    )Net cash used in investing activities
    
    
    (22,988
    )
    
    
    (13,503
    )Cash flows from financing activities:Proceeds from issuance of debt
    
    
    25,115
    
    
    
    32,000Repayment of debt
    
    
    (39,134
    )
    
    
    (41,681
    )Proceeds from issuance of common stock
    
    
    14,891
    
    
    
    414Net cash provided by (used in) financing activities
    
    
    872
    
    
    
    (9,267
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    30
    
    
    
    1,248Net increase in cash and cash equivalents
    
    
    16,534
    
    
    
    6,475Cash and cash equivalents at the beginning of year
    
    
    34,187
    
    
    
    11,414Cash and cash equivalents at the end of the period
    
    $
    50,721
    
    
    $
    17,889Supplemental cash flow disclosures:Cash paid during the period for:Interest
    
    $
    314
    
    
    $
    346Taxes
    
    $
    4,522
    
    
    $
    2,446
 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
June 30, 2004 and the results of the Companys operations for the three and six
month periods ended June 30, 2004 and 2003, and cash flows for the six month
periods ended June 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 six months ended June 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  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 3  Balance Sheet Items Inventories consisted of the following (in thousands): June 30,
    
    December 31,2004
    
    2003Raw materials
    
    $
    7,022
    
    
    $
    7,232Work in process
    
    
    2,734
    
    
    
    2,607Finished goods
    
    
    59,435
    
    
    
    60,807$
    69,191
    
    
    $
    70,646
 Prepaid expenses and other current assets consisted of the following (in
thousands): June 30,
    
    December 31,2004
    
    2003Refundable income taxes
    
    $
    10,666
    
    
    $
    11,690Deferred income taxes
    
    
    4,979
    
    
    
    4,828Value added taxes receivable
    
    
    2,923
    
    
    
    15,023Other prepaid expenses and current assets
    
    
    5,188
    
    
    
    5,263$
    23,756
    
    
    $
    36,804
 6




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##### Table of Contents



Accrued liabilities consisted of the following (in thousands): June 30,
    
    December 31,2004
    
    2003Accrued expenses and interest
    
    $
    28,351
    
    
    $
    31,943Restructuring and acquisition accruals
    
    
    13,947
    
    
    
    19,292Accrued cooperative merchandising allowances
    
    
    6,886
    
    
    
    7,070Income taxes payable
    
    
    9,273
    
    
    
    10,739$
    58,457
    
    
    $
    69,044
 Note 4  Comprehensive Income Comprehensive income consisted of the following (in thousands): Three months ended
    
    Six months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net income
    
    $
    9,621
    
    
    $
    4,205
    
    
    $
    15,613
    
    
    $
    10,123Foreign currency:Translation adjustment, net of taxes
    
    
    (2,851
    )
    
    
    5,307
    
    
    
    (1,732
    )
    
    
    5,421Unrealized gain on cash flow hedge, net of taxes
    
    
    79
    
    
    
    
    
    
    
    269
    
    
    
    Comprehensive income
    
    $
    6,849
    
    
    $
    9,512
    
    
    $
    14,150
    
    
    $
    15,544
 Note 5  Goodwill and Other Intangible Assets Goodwill and other intangible assets (gross) consisted of the following (in
thousands): June 30,
    
    December 31,2004
    
    2003Goodwill
    
    $
    43,486
    
    
    $
    45,537Intangible assets subject to amortization
    
    
    24,199
    
    
    
    23,858Intangible assets not subject to amortization
    
    
    3,634
    
    
    
    3,630$
    71,319
    
    
    $
    73,025
 Accumulated amortization consisted of the following (in thousands): June 30,
    
    December 31,2004
    
    2003Goodwill
    
    $
    2,112
    
    
    $
    2,132Intangible assets subject to amortization
    
    
    11,443
    
    
    
    10,088Intangible assets not subject to amortization
    
    
    475
    
    
    
    475$
    14,030
    
    
    $
    12,695
 Goodwill and other intangible assets, net of accumulated amortization,
consisted of the following (in thousands): June 30,
    
    December 31,2004
    
    2003Goodwill
    
    $
    41,374
    
    
    $
    43,405Intangible assets subject to amortization
    
    
    12,756
    
    
    
    13,770Intangible assets not subject to amortization
    
    
    3,159
    
    
    
    3,155$
    57,289
    
    
    $
    60,330
 7




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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 June 30, 2004 and
2003, respectively, and approximately $1.3 million and $1.0 million for the six
months ended June 30, 2004 and 2003, respectively. Amortization expense for each of the five succeeding fiscal years will amount
to approximately (in thousands): AmortizationYear ending December 31,
    
    expense2004
    
    $
    2,3002005
    
    
    2,2002006
    
    
    2,2002007
    
    
    1,4002008
    
    
    1,200Total
    
    $
    9,300
 Note 6  Net Income Per Share In accordance with SFAS No. 128, Earnings Per Share, basic earnings per share
is calculated using the weighted average number of common shares outstanding
during the period. Diluted earnings per share is calculated using the weighted
average number of common shares and dilutive potential common shares
outstanding during the period. Dilutive potential common shares represent
shares issuable upon the exercise of outstanding options and are calculated
using the treasury stock method. Options to purchase 0 and 2,631,391 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 $32.22 and $17.22 per share for the three months ended June 30,
2004 and 2003, respectively. Options to purchase 1,200 and 2,863,431 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 $30.66 and $15.47 per share for
the six months ended June 30, 2004 and 2003, respectively. Note 7  Acquisitions Acquisition of the Contact Lens Business of Essilor On February 12, 2001, the Company acquired the contact lens business of Essilor
International (Compagnie Generale dOptique) S. A. (Essilor). The Company
acquired Essilors sales and distribution assets of the contact lens business
in Europe and the United States and manufacturing facilities in France, the
United Kingdom, and the United States. The primary reasons for this
acquisition were to expand the Companys presence in Europe and to increase its
breadth of product offerings. Included in the liabilities assumed are accruals for costs associated with
exiting certain activities and facilities of the acquired Essilor operations
that were considered duplicative. This includes accruals for severance costs
related to workforce reductions across all functions and exit costs associated
with exiting certain facilities, dismantling equipment and other miscellaneous
exit costs. Details of the exit costs and severance costs paid and charged
against the accrual are presented in the following table (in thousands): Accrual as of
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accrual as ofDecember 31,
    
    
    
    
    
    Accrual
    
    Translation
    
    June 30,2003
    
    Payments
    
    Adjustment
    
    Adjustments
    
    2004Severance costs
    
    $
    3,809
    
    
    $
    (973
    )
    
    $
    179
    
    
    $
    (100
    )
    
    $
    2,915Facility costs
    
    
    655
    
    
    
    (130
    )
    
    
    
    
    
    
    (17
    )
    
    
    508Equipment and dismantling costs
    
    
    334
    
    
    
    (27
    )
    
    
    
    
    
    
    (10
    )
    
    
    297Miscellaneous costs
    
    
    17
    
    
    
    (17
    )
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    4,815
    
    
    $
    (1,147
    )
    
    $
    179
    
    
    $
    (127
    )
    
    $
    3,720
 8




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Management began formulating the plans to exit certain activities and
facilities of the acquired Essilor operations at the time of the acquisition
and expect to complete the activities in 2005. Management had initially
contemplated completing the plan by mid-2003. Due to circumstances not
existing at the time the plan was formulated, management will not be able to
complete the Plan until 2005. However, the actions contemplated under the
terms of the original plan remain the same actions that will be completed in
2004 and 2005. Acquisition of Assets of Seiko Contactlens, Inc. On March 11, 2002, the Company entered into an agreement to acquire certain
assets of Seiko Contactlens, Inc. (Seiko). The purchase was completed on
April 1, 2002. Included in the liabilities assumed are accruals for costs associated with
exiting certain activities and facilities of the acquired Seiko operations that
were considered duplicative. This includes accruals for severance costs
related to workforce reductions across all functions and exit costs associated
with exiting certain activities and facilities. Details of the severance and
exit costs paid and charged against the accrual are presented in the following
table (in thousands): Accrual as of
    
    
    
    
    
    Translation
    
    Goodwill
    
    Accrual as ofDecember 31, 2003
    
    Payments
    
    Adjustments
    
    Adjustment
    
    June 30, 2004Facility and other exit costs
    
    $
    1,858
    
    
    $
    (533
    )
    
    $
    (5
    )
    
    $
    (1,059
    )
    
    $
    261Total
    
    $
    1,858
    
    
    $
    (533
    )
    
    $
    (5
    )
    
    $
    (1,059
    )
    
    $
    261
 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 8  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 $50.5
million has been incurred through June 30, 2004. Thus, the Company expects to
incur an additional $5 to $6 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. During the three months ended June 30, 2004, we recorded restructuring and
related expenses of $2.1 million, consisting of $1.6 million related to
severance and other salary related and benefit costs and $0.5 million related
to other costs. For the year-to-date ended June 30, 2004, total restructuring
and related expenses were $5.2 million, consisting of $3.5 million related to
severance and other salary related and benefit costs, $0.8 million related to
impairment of property and equipment and $0.9 million related to other costs. 9




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Of the $50.5 million of restructuring and related charges incurred since the
inception of the restructuring initiative, $16.5 million of cash has been
spent. We anticipate spending an additional $15 to $16 million in cash related
to the restructuring initiative during the remainder of 2004. For leased facilities that will be abandoned and subleased, the lease costs
represent future lease payments subsequent to abandonment less estimated
sublease income. For owned property and equipment, the impairment loss
recognized was based on the estimated fair value of the equipment. The following table summarizes the restructuring and related expense accrual
activity during the six month period ending June 30, 2004 (in thousands): Severance/salary
    
    Leaserelated and
    
    Payment ofBenefits costs
    
    Facilities
    
    Other
    
    TotalBalance of accrual at December 31, 2003
    
    $
    7,651
    
    
    $
    4,448
    
    
    $
    520
    
    
    $
    12,619Additions
    
    
    3,521
    
    
    
    
    
    
    
    896
    
    
    
    4,417Payments
    
    
    (5,689
    )
    
    
    (339
    )
    
    
    (1,248
    )
    
    
    (7,276
    )Translation adjustment
    
    
    134
    
    
    
    67
    
    
    
    5
    
    
    
    206Balance of accrual at June 30, 2004
    
    $
    5,617
    
    
    $
    4,176
    
    
    $
    173
    
    
    $
    9,966
 Note 9  Credit Facility On April 16, 2002, we completed a $50 million credit facility with two banks.
Revolving loans under this facility mature on April 16, 2005, and bear interest
at 0.50% below one of the banks prime rate or 1.00% to 1.50% above the
euro-dollar rate depending on the Companys ratio of total funded debt to
earnings before interest and taxes plus non-cash charges. The facility provides
an option to convert any outstanding revolving loans (not to exceed $40
million) at the maturity date to a four-year term loan. The term loan, once
repaid, may not be reborrowed. This credit agreement contains covenants, which,
among other things, requires us to maintain certain financial ratios.
Borrowings under this agreement are secured by a pledge of 100% of the
outstanding common stock of Ocular Sciences Puerto Rico and Sunsoft, Inc. and
65% of the outstanding common stock of its Barbados and Canadian subsidiaries.
As of June 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 June 30,
2004, we were in compliance with these covenants and there was no outstanding
balance under this credit agreement. Note 10  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 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. 10




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##### Table of Contents



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 June 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 six months of 2004 (in thousands): December 31, 2003
    
    $
    (448
    )Net change on cash flow hedges
    
    
    272Reclassification of loss to interest
    
    
    19Reclassification of gain to Cost of Sales
    
    
    (22
    )June 30, 2004
    
    $
    (179
    )
 We anticipate reclassifying $39,000 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 June 30, 2004 are
presented (in thousands) in the table below. Weighted average forward rates
are quoted using market conventions. WeightedNet Notional
    
    AverageAmount
    
    RateCash Flow Hedges:Euro Sold
    
    
    4,949
    
    
    
    1.1900GBP Purchases
    
    
    170
    
    
    
    1.8080Balance Sheet Hedges:Euro Sold
    
    
    30,654
    
    
    
    1.1900
 11




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##### Table of Contents



Note 11  Subsequent Events 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. Pursuant to the terms of the definitive agreement related to the proposed
merger with Cooper, we are obligated to pay a $35.0 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 alternate acquisition under certain circumstances. Cooper
is under a similar obligation to us. 12




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto included in Part
I  Item 1 of this Quarterly Report and the audited consolidated financial
statements and notes thereto and Managements Discussion and Analysis of
Financial Condition and Results of Operations contained in our Annual Report on
Form 10-K for the year ended December 31, 2003. This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
and Section 27A of the Securities Act of 1933, as amended. Such statements
relate to our future performance and plans, results of operations, capital
expenditures, acquisitions, restructuring and operating improvements and costs.
You can identify forward-looking statements by the use of forward-looking
terminology such as believes, expects, may, will, should, seeks,
approximately, intends, plans, pro forma, estimates or anticipates
or the negative of these words and phrases or similar words or phrases. You
can also identify forward-looking statements by discussions of strategy, plans
or intentions. Forward-looking statements involve numerous risks and
uncertainties and you should not rely upon them as predictions of future
events. There is no assurance that the events or circumstances reflected in
forward-looking statements will be achieved or will occur. Forward-looking statements are necessarily dependent on assumptions, data, or
methods that may be incorrect or imprecise and we may not be able to realize
them. Factors that could cause actual results and future events to differ
materially from those set forth or contemplated in the forward-looking
statements include risks associated with 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. Unless the
context otherwise requires, the terms we, us, and our refer to Ocular
Sciences, Inc. and its subsidiaries. Overview Our net sales increased 9.4% (5.1% using constant foreign currency exchange
rates) and 11.6% (5.6% using constant foreign currency exchange rates) for the
three and six months ending June 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 six months ending June 30, 2004,
60% and 61%, respectively, of our sales were generated outside the United
States, compared to 56% and 55%, respectively, in the same periods of 2003.
For some products, such as daily and toric disposable lenses, our sales are
currently constrained by our manufacturing capacity. Gross profit percentage increased to 59.3% and 57.7% for the three and six
months ending June 30, 2004, respectively, from 52.3% and 52.7% in the same
periods of 2003, primarily due to lower production costs. We are beginning to
see 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 six months ending June 30, 2004 over the same
periods in 2003. Research and development and selling and marketing expenses
increased in the first half of 2004 as we continue to invest in new product
development, additional marketing programs associated with new product
introductions and increases in the size of our sales force. 13




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##### Table of Contents



Recent Events 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. 14




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##### Table of Contents



Critical Accounting Policies Our critical accounting policies are as follows:  
    
    revenue recognition;
    
    estimating valuation allowances;
    
    accounting for income taxes;
    
    valuation of long-lived and intangible assets and goodwill;
    
    estimates inherent in purchase accounting; and
    
    stock based compensation. Revenue Recognition Revenue is recognized based on the terms of sale with the customer, generally
upon product shipment. We have established programs that, under specified
conditions, enable our customers to return product. We establish reserves for
estimated returns and allowances at the time revenues are recognized. In
addition, accruals for customer discounts and rebates are recorded when
revenues are recognized. Amounts billed to customers in sale transactions
related to shipping and handling are classified as revenue. The process of
establishing reserves requires significant management judgment. In the event
that actual results differ from these estimates or we adjust these estimates in
future periods, our financial position and results of operations could be
materially impacted. Estimating Valuation Allowances The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. We specifically analyze the aging of accounts receivable and historical bad
debts, customer concentrations, customer credit-worthiness, current economic
trends, changes in customer payment terms and sales returns when evaluating the
adequacy of the allowance for doubtful accounts and sales returns in any
accounting period. We sell our products to a diverse group of optometrists,
optical retailers, optical product distributors and ophthalmologists, and
therefore the concentration of credit risk with respect to accounts receivable
is limited due to the large number and diversity of customers across broad
geographic areas. Accounts receivable from customers are uncollateralized. To
reduce credit risk, we perform ongoing credit evaluations of significant
customers respective financial conditions. We establish an allowance for
doubtful accounts based upon factors surrounding the credit risk of specific
customers, historical trends and other information. We assess the need for reserves on inventory generally based on forward
projections of sales of products that are updated periodically. Inventories are
recorded at the lower of cost (first-in, first-out method) or market. Cost
includes material, labor and applicable factory overhead. The reported value
of our inventory includes saleable products, promotional products, raw
materials and componentry that will be sold or used in future periods.
Provision for potentially obsolete or slow moving inventory is made based upon
our analysis of inventory levels and forecasted sales. Once inventory is
reserved a new cost basis is established and the reserve can only be relieved
by the subsequent sale or disposal of the inventory. Material differences may result in the amount and timing of revenue and /or
expenses for any period if different judgments had been made or different
estimates utilized. Accounting for Income Taxes Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax effects
attributable to differences between financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in 15




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##### Table of Contents



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 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. We are presently under examination by tax
authorities in the United States and certain other tax jurisdictions
in which we operate. Certain of these examinations in the United
States are expected to be complete by the end of 2004. These
examinations can be expected to result in a claim for payment of
additional taxes, and in the event that the amount claimed is material,
it is likely that we would contest the claim through appropriate
proceedings. These proceedings can be both costly and time-consuming,
and the outcome of these proceedings is subject to inherent
uncertainties. In the event we are not successful in any such
proceedings, our financial position and results of operations could
be materially impacted. Valuation of Long-Lived and Intangible Assets and Goodwill We periodically review long-lived assets and certain identifiable intangible
assets for impairment in accordance with 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. 16




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##### Table of Contents



Stock-Based Compensation We account for stock-based compensation using methods prescribed in Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. We have adopted the disclosure-only
provisions of SFAS No. 123 Accounting for Stock-Based Compensation. In accordance with SFAS No. 123, as amended by SFAS No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure, we have provided, below,
the pro forma disclosures of the effect on net income and earnings per share as
if SFAS No. 123 had been applied in measuring compensation expense for all
periods presented. The following table illustrates, pursuant to SFAS No. 123, as amended by SFAS
No. 148, the effect on net income and related net income per share for the
three and six months ended June 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
    
    Six months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net Income:As reported
    
    $
    9,621
    
    
    $
    4,205
    
    
    $
    15,613
    
    
    $
    10,123Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax
effects
    
    
    470
    
    
    
    699
    
    
    
    1,090
    
    
    
    1,372Pro forma
    
    $
    9,151
    
    
    $
    3,506
    
    
    $
    14,523
    
    
    $
    8,751Net Income per common share (basic):As reported
    
    $
    0.39
    
    
    $
    0.18
    
    
    $
    0.63
    
    
    $
    0.43Pro forma
    
    
    0.37
    
    
    
    0.15
    
    
    
    0.59
    
    
    
    0.37Net Income per common share (diluted):As reported
    
    $
    0.37
    
    
    $
    0.17
    
    
    $
    0.61
    
    
    $
    0.42Pro forma
    
    
    0.35
    
    
    
    0.15
    
    
    
    0.57
    
    
    
    0.36
 New Accounting Pronouncements Adopted See Note 2 to Notes to Condensed Consolidated Financial Statements which are
incorporated herein by reference. 17




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##### Table of Contents



Results of Operations The following table summarizes certain items on the consolidated statements of
income as a percentage of net sales: Three months ended
    
    Six months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales
    
    
    40.7
    
    
    
    47.7
    
    
    
    42.3
    
    
    
    47.3Gross profit
    
    
    59.3
    
    
    
    52.3
    
    
    
    57.7
    
    
    
    52.7Selling and marketing expenses
    
    
    29.1
    
    
    
    27.7
    
    
    
    29.3
    
    
    
    28.3General and administrative expenses
    
    
    9.9
    
    
    
    9.8
    
    
    
    9.5
    
    
    
    9.8Research and development expenses
    
    
    2.6
    
    
    
    1.9
    
    
    
    2.7
    
    
    
    2.1Restructuring and related expenses
    
    
    2.5
    
    
    
    5.0
    

    
    
    3.1
    
    
    
    3.4Income from operations
    
    
    15.2
    
    
    
    7.9
    
    
    
    13.1
    
    
    
    9.1Interest and other income, net
    
    
    (0.2
    )
    
    
    (0.7
    )
    
    
    0.4
    
    
    
    (0.3
    )Income before taxes
    
    
    15.4
    
    
    
    8.6
    
    
    
    12.7
    
    
    
    9.4Provision for income taxes
    
    
    3.8
    
    
    
    3.1
    
    
    
    3.2
    
    
    
    2.5Net income
    
    
    11.6
    %
    
    
    5.5
    %
    
    
    9.5
    %
    
    
    6.9
    %
 Net Sales Net sales increased $7.2 million, or 9.4% (5.1% using constant currency
exchange rates), to $83.3 million for the three months ended June 30, 2004,
compared to $76.1 million for the corresponding period in 2003. For the six
months ended June 30, 2004, net sales increased $17.1 million, or 11.6% (5.6%
using constant currency exchange rates), to $163.9 million compared to $146.8
million for the corresponding period in 2003. The increase in the three month
and six 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 $33.6 million and $64.7 million for the three and six months
ended June 30, 2004, a 0.3% increase and 1.5% decrease over the same periods
last year. 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 $49.7 million and $99.2 million for the three and six
months ended June 30, 2004, compared to $42.6 million and $81.1 million for the
corresponding periods in 2003. This represents an increase of 16.7% and 22.3%
over the three and six months ended June 30, 2003 (9.3% and 11.6% using
constant currency exchange rates). The increase in international net sales was
due primarily to strong growth in unit sales in the European and Japanese
markets and to the weakening of the U.S. dollar against foreign currencies. Gross Profit Gross profit was $49.4 million and $94.6 million for the three and six months
ended June 30, 2004, compared to $39.8 million and $77.3 million for the
corresponding periods in 2003, respectively. Gross profit, as a percentage of
net sales, was 59.3% and 57.7% for the three and six months ended June 30,
2004, compared to 52.3% and 52.7% for the corresponding periods in 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. 18




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##### Table of Contents



Selling and Marketing Expenses Selling and marketing expenses were $24.2 million and $48.0 million for the
three and six months ended June 30, 2004, compared to $21.1 million and $41.5
million for the corresponding periods in 2003, respectively. This represents
an increase of 14.7% and 15.7% for the three and six months ended June 30,
2004, compared to the corresponding periods in 2003, respectively. As a
percentage of net sales, selling and marketing expenses were 29.1% and 29.3%
for the three and six months ended June 30, 2004, compared to 27.7% and 28.3%
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 second
half of 2004 as we launch new products in both the United States and
International markets. General and Administrative Expenses General and administrative expenses were $8.2 million and $15.6 million for the
three and six months ended June 30, 2004, compared to $7.5 million and $14.4
million for the corresponding periods in 2003, respectively. As a percentage
of net sales, general and administrative expenses were 9.9% and 9.5% for the
three and six months ended June 30, 2004, respectively, compared to 9.8% for
both of the corresponding periods in 2003. The dollar increase in general and
administrative expenses for the three and six months ended June 30, 2004 was
primarily due to higher professional services expenses, primarily related to
the Companys ongoing Sarbanes-Oxley Act compliance program. Research and Development Expenses Research and development expenses were $2.2 million and $4.4 million for the
three and six months ended June 30, 2004, compared to $1.4 million and $3.1
million for the corresponding periods in 2003, respectively. This represents
an increase of 50.8% and 40.0% for the three and six months ended June 30,
2004, compared to the corresponding periods in 2003, respectively. As a
percentage of net sales, research and development expenses were 2.6% and 2.7%
for the three and six months ended June 30, 2004, compared to 1.9% and 2.1% for
the corresponding periods in 2003, respectively. The increase in research and
development expense for the three and six months ended June 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 second half 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 $50.5
million has been incurred through June 30, 2004. Thus, the Company expects to
incur an additional $5 to $6 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. During the three months ended June 30, 2004, we recorded restructuring and
related expenses of $2.1 million, consisting of $1.6 million related to
severance and other salary related and benefit costs and $0.5 million related
to other costs. For the year-to-date ended June 30, 2004, total restructuring
and related expenses were $5.2 million, consisting of $3.5 million related to
severance and other salary related and benefit costs, $0.8 million related to
impairment of property and equipment and $0.9 million related to other 19




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costs. Of the $50.5 million of restructuring and related charges incurred since the
inception of the restructuring initiative, $16.5 million of cash has been
spent. We anticipate spending an additional $15 to $16 million in cash related to
the restructuring initiative during the remainder of 2004. For leased facilities that will be abandoned and subleased, the lease costs
represent future lease payments subsequent to abandonment less estimated
sublease income. For owned property and equipment, the impairment loss
recognized was based on the estimated fair value of the equipment. Other Income (Expense) Other income (expense) primarily consists of net foreign exchange gains and
losses. Provision for Income Taxes Income taxes were $3.2 million and $5.2 million for the three and six months
ended June 30, 2004, compared to $2.3 million and $3.7 million for the
corresponding periods in 2003, respectively. The effective tax rate prior to
restructuring and related expenses, for both three and six months ended June
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
June 30, 2004 were $50.7 million, an increase from
the December 31, 2003 balance of $34.2 million. The increase in cash and cash
equivalents in the first six months of 2004 was primarily due to cash flow
from operations of $38.6 million, which consisted primarily of net income,
adjusted for non-cash depreciation and amortization, and a $12 million decrease
in prepaid value added taxes (VAT), partially offset by reductions in accrued
liabilities. Financing activities provided approximately $0.9 million,
principally through proceeds from issuance of common stock pursuant to
exercises of employee stock options of $14.9 million, offset by $14.0 million
of net debt repayment. Approximately $23.0 million of cash was spent on
capital expenditures. We currently expect to incur an additional $15 to $20
million in capital expenditures during the remainder of 2004. Additionally, we
anticipate spending an additional $15 to $16 million in cash related to the
restructuring initiative in the remainder of 2004. The following table summarizes our contractual cash obligations as of June 30,
2004 (in thousands): OperatingDebt
    **
    
    
    Leases2004*
    
    $
    241
    
    
    $
    4,1182005
    
    
    321
    
    
    
    7,2872006
    
    
    349
    
    
    
    4,9902007
    
    
    378
    
    
    
    3,8872008
    
    
    411
    
    
    
    2,2952009
    
    
    446
    
    
    
    1,724Thereafter
    
    
    442
    
    
    
    4,214$
    2,588
    
    
    $
    28,515
 *Represents commitments for the remaining six months of 2004 ** Debt consists of capital lease obligations. 20




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The $28.5 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 June 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 June 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 $35.0 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 Market Risk We have debt outstanding (which we carry at cost) with an interest rate that is
referenced to market rates. Interest rate changes generally do not affect the
fair value of variable rate debt instruments, but do impact future earnings and
cash flows. Holding debt levels constant, a one-percentage point increase in
interest rates would decrease our annual pre-tax earnings and cash flows by
approximately $110,000, based on our outstanding debt as of June 30, 2004. Impact of Foreign Currency Rate Changes We operate multiple foreign subsidiaries that manufacture and/or sell our
products worldwide. As a result, our earnings, cash flows and financial
position are exposed to foreign currency risk from foreign currency denominated
receivables and payables, sales transactions, and net investment in certain
foreign operations. To address increasing international growth and related
currency risks, we implemented a foreign currency exposure management policy in
October 2003. Our policy is to enter into foreign exchange forward contracts to
mitigate the impact of currency fluctuations on both existing foreign currency
asset and liability balances as well as to reduce the risk to earnings and cash
flows associated with anticipated foreign currency transactions, including
certain intercompany equipment sale and leaseback transactions. The gains and
losses on the foreign exchange forward contracts are intended to partially
offset the transaction gains and losses recognized in earnings. We do not
enter into foreign exchange forward contracts for speculative purposes. Under
Statement of Financial Accounting Standard No. 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS 133) all derivatives are recorded on
the balance sheet at fair value. Changes in the fair value of derivatives that
do not qualify, or are not effective as hedges, must be recognized currently in
earnings. 21




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##### Table of Contents



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 June 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 six months of 2004 (in thousands): December 31, 2003
    
    $
    (448
    )Net change on cash flow hedges
    
    
    272Reclassification of loss to interest
    
    
    19Reclassification of gain to Cost of Sales
    
    
    (22
    )June 30, 2004
    
    $
    (179
    )
 We anticipate reclassifying $39,000 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 June 30, 2004 are
presented (in thousands) in the table below. Weighted average forward rates
are quoted using market conventions. WeightedNet Notional
    
    AverageAmount
    
    RateCash Flow Hedges:Euro Sold
    
    
    4,949
    
    
    
    1.1900GBP Purchases
    
    
    170
    
    
    
    1.8080Balance Sheet Hedges:Euro Sold
    
    
    30,654
    
    
    
    1.1900
 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. 22




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Item 4. Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SECs rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and
procedures, management recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. We carried out an evaluation, under the supervision and with the participation
of our management, including our Chief Executive Officer and our Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of June 30, 2004. Based on the foregoing,
our Chief Executive Officer and Chief Financial Officer concluded that, as of
such date, our disclosure controls and procedures were effective for that
purpose. There have been no significant changes in our internal controls over financial
reporting or in other factors that could significantly affect the internal
controls subsequent to the date we completed our evaluation. 23




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##### Table of Contents



Part II  OTHER INFORMATION 
 Item 1. Legal Proceedings On November 6, 2002, CIBA Vision Corporation and its subsidiary, Wesley Jessen
Corporation (Wesley Jessen) filed a lawsuit against us in the U.S. District
Court for the Northern District of California alleging that our color contact
lenses infringe patents owned by Wesley Jessen. The complaint seeks an award
of unspecified damages, including increased damages, attorneys fees and costs
and an injunction preventing the alleged infringement. We have filed an answer
to the complaint denying that we infringe any valid patent claims. This lawsuit
is currently in the discovery phase, and we expect that the court will conduct
a Markman hearing to construe the relevant patent claims in 2005. We believe
the lawsuit is without merit and that we have strong defenses to this complaint
and we intend to defend this action vigorously. The defense of intellectual property suits and related administrative
proceedings is both costly and time-consuming. The outcomes of intellectual
property lawsuits are subject to inherent uncertainties. Accordingly, we cannot
assure you that our defense of this lawsuit will be successful or that we will
not be subject to other intellectual property claims in the future. An adverse
outcome in any intellectual property litigation could subject us to significant
liabilities, require us to license disputed rights from third parties, require
us to redesign products or cease using such technology. Any of these
consequences could have a material adverse effect on us. 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities None. 
 Item 3. Defaults Upon Senior Securities None. 24




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Item 4. Submission of Matters to a Vote of Security Holders We held our Annual Meeting of Stockholders on May 21, 2004. The shareholders
voted on the following proposals, all of which were approved. A description of
each and a tabulation of votes are as follows:  1.
    
    To elect eight directors, each to serve until the next annual meeting
of stockholders or until his of her successor has been elected and
qualified or until his earlier resignation or removal.The stockholders votes with respect to the election of directors were as
follows: VotesAbstained orFor
    
    Against
    
    Withheld
    
    Broker Non-VotesJohn D. Fruth
    
    
    19,671,916
    
    
    
    
    
    
    
    3,550,146
    
    
    
    Edgar J. Cummins
    
    
    19,174,819
    
    
    
    
    
    
    
    4,047,243
    
    
    
    Stephen J. Fanning
    
    
    19,671,916
    
    
    
    
    
    
    
    3,550,146
    
    
    
    Terence M. Fruth
    
    
    19,671,916
    
    
    
    
    
    
    
    3,550,146
    
    
    
    William R. Grant
    
    
    22,781,082
    
    
    
    
    
    
    
    440,980
    
    
    
    Terrance H. Gregg
    
    
    23,044,482
    
    
    
    
    
    
    
    177,580
    
    
    
    Howard P. Liszt
    
    
    23,080,582
    
    
    
    
    
    
    
    141,480
    
    
    
    Mary Jo Potter
    
    
    23,080,582
    
    
    
    
    
    
    
    141,480
    
    
    
    
  2.
    
    To amend the Companys 1997 Equity Incentive Plan to increase the
number of shares of common stock that may be issued upon the exercise of
options granted thereunder by 1,500,000 shares (from 4,400,000 shares to
5,900,000 shares) and to extend the expiration date of the plan from
June 2007 to February 2014.The stockholders votes with respect to the amendment of the Companys
1997 Equity Incentive Plan were as follows: VotesFor
    
    Against
    
    Abstained or Withheld
    
    Broker Non-Votes12,166,434
    
    
    6,797,047
    
    
    
    2,687,828
    
    
    
    1,570,753
  3.
    
    To ratify the selection of KPMG LLP as our independent auditors for
the year ending, December 31, 2004.The stockholders votes with respect to the selection of KPMG LLP as our
independent auditors were as follows: VotesFor
    
    Against
    
    Abstained or Withheld
    
    Broker Non-Votes22,254,736
    
    
    955,719
    
    
    
    11,607
    
    
    
    
 
 Item 5. Other Information None. 25




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Item 6. Exhibits and Reports on Form 8-K (a) Exhibits  10.1
    
    Amended and restated 1997 Equity Incentive Plan31.1
    
    Rule 13a-14 (a)/15d-14 (a) Certifications dated August 6, 200432.1
    
    18 U.S.C. § 1350 Certifications dated August 6, 2004. The
certifications in this exhibit are being furnished solely to
accompany this report pursuant to 18 U.S.C. § 1350, and are not being
filed for purposes of Section 18 of Securities Exchange Act of 1934,
as amended, and are not to be incorporated by reference into any of
our filings, whether made before or after the date hereof, regardless
of any general incorporation language in such filing. (b) Reports on Form 8-K On May 4, 2004, we furnished a Current Report on Form 8-K regarding the press
release issued on the same day, announcing the Companys earnings for the
quarter ended March 31, 2004. On May 6, 2004, we filed a Current Report on Form 8-K in response to an inquiry
from Institutional Shareholder Services (ISS) requesting additional
information regarding the fees paid to the Companys independent public
accountants, KPMG LLP, reported in the Companys definitive proxy statement
dated April 22, 2004. On July 28, 2004, we furnished a Current Report on Form 8-K regarding the press
release issued on the same day, announcing the Companys earnings for the
quarter ended June 30, 2004. On July 28, 2004, we filed a Current Report on Form 8-K announcing our proposed
merger with The Cooper Companies, Inc., including as exhibits the press release
and agreement pertaining to this merger. 26




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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: August 6, 2004
    /s/ Steven M. NeilSteven M. NeilExecutive Vice-President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial and
Accounting Officer) 27




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Exhibit Index  10.1
    
    Amended and restated 1997 Equity Incentive Plan31.1
    
    Rule 13a-14 (a)/15d-14 (a) Certifications dated August 6, 200432.1
    
    18 U.S.C. § 1350 Certifications dated August 6, 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. 28