<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
___________________________
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended July 1, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ___________________.
Commission file number: 0-23633
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1-800 CONTACTS, INC.
(Exact name of registrant as specified in its charter)
Delaware 87-0571643
---------------------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
66 E. Wadsworth Park Drive, 3rd Floor
Draper, UT 84020
---------------------------------------------- -----------------------------
(Address of principal executive offices) (Zip Code)
(801) 924-9800
-----------------------------------------------
(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.
[X] Yes [ ] No
As of August 8, 2000, the Registrant had 11,625,026 shares of Common Stock,
par value $0.01 per share outstanding.
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<PAGE>
1-800 CONTACTS, INC.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of January 1, 2000
and July 1, 2000.............................................. 3
Condensed Statements of Income for the Quarter and
Two Quarters Ended July 3, 1999 and July 1, 2000.............. 4
Condensed Statement of Stockholders' Equity for the
Two Quarters Ended July 1, 2000............................... 5
Condensed Statements of Cash Flows for the Two Quarters Ended
July 3, 1999 and July 1, 2000................................. 6
Notes to Condensed Financial Statements......................... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 11
Item 3. Quantitative and Qualitative Disclosure About Market Risk....... 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 16
Item 2. Changes in Securities and Use of Proceeds....................... 16
Item 3. Defaults upon Senior Securities................................. 16
Item 4. Submission of Matters to a Vote of Security Holders............. 16
Item 5. Other Information............................................... 16
Item 6. Exhibits and Reports on Form 8-K................................ 17
<PAGE>
PART I. FINANCIAL INFORMATION
Item. 1. Financial Statements
1-800 CONTACTS, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
January 1, July 1,
2000 2000
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,329,088 $ 406,655
Inventories 15,980,169 16,850,591
Deferred income taxes 405,021 477,643
Other current assets 475,587 462,929
----------- -----------
Total current assets 21,189,865 18,197,818
PROPERTY AND EQUIPMENT, net 2,266,306 2,426,266
DEFERRED INCOME TAXES 116,136 167,177
INTANGIBLE ASSETS, net 1,394,945 1,233,369
OTHER ASSETS 86,320 312,218
----------- -----------
Total assets $25,053,572 $22,336,848
=========== ===========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of capital lease obligation $ 30,166 $ 10,318
Acquisition payable 300,000 -
Accounts payable 3,059,993 7,334,902
Accrued liabilities 2,192,756 3,565,002
Income taxes payable 447,143 1,100,246
Unearned revenue 322,805 624,836
----------- -----------
Total current liabilities 6,352,863 12,635,304
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock 128,611 128,611
Additional paid-in capital 22,992,892 23,152,149
Retained earnings (accumulated deficit) (2,061,494) 2,780,817
Treasury stock at cost (2,359,300) (16,360,033)
----------- -----------
Total stockholders' equity 18,700,709 9,701,544
----------- -----------
Total liabilities and stockholders' equity $25,053,572 $22,336,848
=========== ===========
</TABLE>
The accompanying notes to condensed financial statements
are an integral part of these condensed statements.
3
<PAGE>
1-800 CONTACTS, INC.
CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended Two Quarters Ended
---------------------------- ----------------------------
July 3, July 1, July 3, July 1,
1999 2000 1999 2000
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES $23,960,056 $35,708,171 $46,264,313 $67,127,175
COST OF GOODS SOLD 14,654,683 21,247,097 28,563,830 39,779,694
----------- ----------- ----------- -----------
Gross profit 9,305,373 14,461,074 17,700,483 27,347,481
----------- ----------- ----------- -----------
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES:
Advertising expense 4,389,054 5,808,266 9,799,330 12,310,462
Other selling, general and
administrative expenses 3,026,162 3,824,131 5,615,991 7,428,895
----------- ----------- ----------- -----------
Total selling, general and
administrative expenses 7,415,216 9,632,397 15,415,321 19,739,357
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 1,890,157 4,828,677 2,285,162 7,608,124
OTHER INCOME, net 86,494 117,495 170,879 233,324
----------- ----------- ----------- -----------
INCOME BEFORE PROVISION
FOR INCOME TAXES 1,976,651 4,946,172 2,456,041 7,841,448
PROVISION FOR INCOME TAXES (510,466) (1,916,410) (692,679) (2,999,137)
----------- ----------- ----------- -----------
NET INCOME $ 1,466,185 $ 3,029,762 $ 1,763,362 $ 4,842,311
=========== =========== =========== ===========
PER SHARE INFORMATION:
Basic net income per common share $ 0.12 $ 0.25 $ 0.14 $ 0.40
=========== =========== =========== ===========
Diluted net income per common share $ 0.12 $ 0.25 $ 0.14 $ 0.39
=========== =========== =========== ===========
</TABLE>
The accompanying notes to condensed financial statements
are an integral part of these condensed statements.
4
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1-800 CONTACTS, INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
For the Two Quarters Ended July 1, 2000
(Unaudited)
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings Treasury Stock
---------------------- Paid-in (Accumulated) -------------------------
Shares Amount Capital (Deficit) Shares Amount Total
---------- --------- ------------ ------------ ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 2000 12,861,136 $ 128,611 $ 22,992,892 $ (2,061,494) (341,650) $ (2,359,300) $ 18,700,709
Purchase of treasury shares - - - - (984,000) (14,323,948) (14,323,948)
Exercise of common stock options - - (112,940) - 53,378 323,215 210,275
Income tax benefit from common
stock options exercised - - 272,197 - - - 272,197
Net income - - - 4,842,311 - - 4,842,311
---------- --------- ------------ ------------ ---------- ------------ -------------
BALANCE, July 1, 2000 12,861,136 $ 128,611 $ 23,152,149 $ 2,780,817 (1,272,272) $(16,360,033) $ 9,701,544
========== ========= ============ ============ ========== ============ =============
</TABLE>
The accompanying notes to condensed financial statements
are an integral part of these condensed statements.
5
<PAGE>
1-800 CONTACTS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Two Quarters Ended
--------------------------------
July 3, July 1,
1999 2000
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,763,362 $ 4,842,311
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 434,546 525,375
Gain on sale of property and equipment - (2,650)
Deferred income taxes 642,679 (123,663)
Changes in operating assets and liabilities:
Inventories (4,006,684) (870,422)
Other current assets (33,755) 12,658
Deferred advertising costs 175,631 -
Accounts payable 4,951,176 4,274,909
Accrued liabilities 1,423,583 1,372,246
Income taxes payable 50,000 925,300
Unearned revenue 296,170 302,031
----------- -----------
Net cash provided by operating activities 5,696,708 11,258,095
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (655,398) (513,759)
Proceeds from sale of property and equipment - 2,650
Purchase of intangible assets (638,388) (10,000)
Equity investment - (220,000)
Deposits 5,236 (5,898)
----------- -----------
Net cash used in investing activities (1,288,550) (747,007)
----------- -----------
</TABLE>
The accompanying notes to condensed financial statements
are an integral part of these condensed statements.
6
<PAGE>
1-800 CONTACTS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Two Quarters Ended
--------------------------------
July 3, July 1,
1999 2000
----------- ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock offering costs (45,521) -
Common stock repurchases (1,860,005) (14,323,948)
Proceeds from exercise of common stock options 77,204 210,275
Principal payments on capital lease obligation (17,876) (19,848)
Payment of acquisition payable - (300,000)
----------- ------------
Net cash used in financing activities (1,846,198) (14,433,521)
----------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,561,960 (3,922,433)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,762,220 4,329,088
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,324,180 $ 406,655
=========== ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 4,720 $ 1,152
Cash paid for income taxes - 2,097,500
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the period ended July 3, 1999, the Company acquired certain intangible
assets for $1.2 million in cash to be paid as follows: $600,000 on the closing
date, $300,000 six months after the closing date and $300,000 one year after the
closing date. As of July 1, 2000, these amounts had been paid in full.
The accompanying notes to condensed financial statements
are an integral part of these condensed statements.
7
<PAGE>
1-800 CONTACTS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. PRESENTATION OF CONDENSED FINANCIAL STATEMENTS
The accompanying condensed financial statements have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. These condensed financial statements reflect all adjustments
(consisting only of normal recurring adjustments), which in the opinion of
management, are necessary to present fairly the results of operations of the
Company for the periods presented. It is suggested that these condensed
financial statements be read in conjunction with the audited financial
statements and the notes thereto included in the Company's Annual Report to
Shareholders on Form 10-K.
The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the full year.
NOTE 2. NET INCOME PER COMMON SHARE
Basic net income per common share ("Basic EPS") excludes dilution and is
computed by dividing net income by the weighted-average number of common shares
outstanding during the period. Diluted net income per common share ("Diluted
EPS") reflects the potential dilution that could occur if stock options or other
common stock equivalents were exercised or converted into common stock. The
computation of Diluted EPS does not assume exercise or conversion of securities
that would have an antidilutive effect on net income per common share.
The following is a reconciliation of the numerator and denominator used to
calculate Basic and Diluted EPS:
<TABLE>
<CAPTION>
Quarter Ended July 3, 1999 Quarter Ended July 1, 2000
--------------------------------------------------- ---------------------------------------------------
Per-Share Per-Share
Net Income Shares Amount Net Income Shares Amount
--------------- -------------- ---------------- -------------- -------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $1,466,185 12,561,348 $0.12 $3,029,762 11,963,053 $0.25
Effect of stock
options 160,432 208,230
--------------- -------------- ---------------- -------------- -------------- -----------------
Diluted EPS $1,466,185 12,721,780 $0.12 $3,029,762 12,171,283 $0.25
=============== ============== ================ ============== ============== =================
Two Quarters Ended July 3, 1999 Two Quarters Ended July 1, 2000
--------------------------------------------------- ---------------------------------------------------
Per-Share Per-Share
Net Income Shares Amount Net Income Shares Amount
--------------- -------------- ---------------- -------------- -------------- -----------------
Basic EPS $1,763,362 12,662,222 $0.14 $4,842,311 12,162,733 $0.40
Effect of stock
options 118,212 201,266
--------------- -------------- ---------------- -------------- -------------- -----------------
Diluted EPS $1,763,362 12,780,434 $0.14 $4,842,311 12,363,999 $0.39
=============== ============== ================ ============== ============== =================
</TABLE>
8
<PAGE>
NOTE 3. COMMON STOCK TRANSACTIONS
During the two quarters ended July 1, 2000, the Company repurchased a total
of 984,000 shares of its common stock for a total cost of $14,323,948.
On February 17, 2000, the Company's Board of Directors authorized an
additional repurchase of up to 1,000,000 shares of its common stock, bringing
the total authorization to 2,000,000 shares. A purchase of the full 2,000,000
shares would equal approximately 15.6 percent of the total shares issued. The
repurchase of common stock is subject to market conditions and is accomplished
through periodic purchases at prevailing prices on the open market, by block
purchases or in privately negotiated transactions. The repurchased shares will
be retained as treasury stock to be used for corporate purposes. As of July 1,
2000, the Company had repurchased 1,384,000 shares for a total cost of
$16,935,609.
During the two quarters ended July 1, 2000, employees exercised stock
options to purchase 53,378 shares of common stock for a total of $210,275.
In February 2000, the Company granted nonqualified stock options to
purchase 197,596 shares of common stock at $14 per share to employees and
directors of the Company. The options vest equally over a four year period and
expire in ten years.
In June 2000, the Company granted nonqualified stock options to purchase
18,800 shares of common stock to a consultant and employees of the Company. The
exercise prices of the options range from $16.94 to $22.69. The options vest
equally over a four year period and expire in ten years.
Subsequent to July 1, 2000, employees exercised stock options to purchase
36,162 shares of common stock for a total of $114,295.
NOTE 4. RELATED PARTY TRANSACTIONS
In March 2000, the Company made a $220,000 investment in an entity in which
a member of the Company's Board of Directors holds a significant ownership
interest and serves as an officer and director.
NOTE 5. STOCK SPLIT
On July 7, 2000, the Company's Board of Directors approved a two-for-one
stock split, to be effected in the form of a stock dividend. The record date
for the stock split was July 24, 2000, and the payment date was August 1, 2000.
This stock split has been retroactively reflected in the accompanying condensed
financial statements for all periods presented.
NOTE 6. LEGAL MATTERS
On July 14, 1998, Craig S. Steinberg, O.D., a professional corporation
d.b.a. City Eyes Optometry Center, filed a purported class action on behalf of
all California optometrists against the Company and its directors in Los Angeles
County Superior Court. The complaint alleged three separate causes of action
for unfair competition: (i) selling contact lenses to California residents
without being registered, (ii) selling contact lenses to California residents
without verifying the prescription and (iii) failing to disclose in its
advertising that it sells "sample" lenses not intended for sale to the public.
The complaint requested various forms of relief, including damages of an
unspecified amount, attorney's fees and a permanent injunction. The Company
removed the action to the United States District Court for the Central District
of California. Plaintiff and another California optometrist, Ellis Miles,
(collectively "plaintiffs") filed a First Amended Complaint ("FAC") against the
Company and its directors on or about September 3, 1998 purporting to sue on
behalf of the public under California's unfair competition statute rather than
as a class action on behalf of optometrists. Although the substantive claims
for unfair competition remain the same, the FAC seeks injunctive relief and
restitution rather than damages. Plaintiffs also dismissed the Company's
directors as defendants, leaving the Company as the only remaining defendant.
The Company has filed
9
<PAGE>
its Answer to the FAC and intends to vigorously defend itself in this action.
The parties agreed to remand the case to Los Angeles County Superior Court based
upon plaintiffs' stipulation that they no longer seek monetary relief on behalf
of themselves or other optometrists. The Court remanded the case to Los Angeles
County Superior Court in August 1999.
On April 7, 1999 the Kansas Board of Examiners in Optometry commenced a
civil action against the Company. The action was filed in the District Court of
Shawnee County, Kansas, Division 6. The complaint was amended on May 28, 1999.
The amended complaint alleges that on "one or more occasions" the Company sold
contact lenses in the state of Kansas without receipt or verification of a
prescription. The amended complaint seeks the issuance of an order enjoining
the Company from further engaging in the alleged activity. The amended complaint
does not seek monetary damages. In response to the amended complaint, the
Company has retained counsel and intends to vigorously defend itself in this
action. The Company has filed an answer to the amended complaint. In addition,
the Company has filed a motion for summary judgment, asking the court to dismiss
the action and enter judgment in its favor.
On or about November 2, 1999, the Company received a complaint from the
Texas Optometry Board seeking injunctive relief and civil penalties against the
Company for alleged violation of the Texas Optometry Act. The complaint alleges
that the Company (1) failed to state explicitly in its advertisements that a
written prescription is required to purchase contact lenses and (2) dispensed
contact lenses without such a prescription. Just prior to becoming aware of the
complaint, the Company had discussed and resolved these very issues with the
Texas Department of Health ("TDH"), the regulatory authority in Texas for
sellers of contact lenses like the Company. The Company entered into a written
settlement agreement with the TDH effective February 29, 2000. The Company has
filed an answer to the complaint and plans to vigorously defend this action
should the Texas Optometry Board still choose to pursue it.
From time to time the Company is involved in other legal matters generally
incidental to its business.
It is the opinion of management, after discussion with legal counsel, that
the ultimate dispositions of these matters will not have a material impact on
the financial condition, liquidity or results of operations of the Company.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company is a leading direct marketer of replacement contact lenses.
The Company was formed in February 1995 and is the successor to the mail order
business founded by the Company's Vice President of Sales in March 1991. Since
its formation, the Company's net sales have grown rapidly, from $3.6 million in
fiscal 1996 to $98.5 million in fiscal 1999 and from $46.3 million in the first
two quarters of fiscal 1999 to $67.1 million in the first two quarters of fiscal
2000. Internet sales have grown from an insignificant amount in fiscal 1996 to
approximately $18.7 million in fiscal 1999 and from $6.6 million in the first
two quarters of fiscal 1999 to $21.9 million in the first two quarters of fiscal
2000.
On July 7, 2000, the Company's Board of Directors approved a two-for-one
stock split, to be effected in the form of a stock dividend. The record date
for the stock split was July 24, 2000, and the payment date was August 1, 2000.
All share and per share information in this Form 10-Q has been adjusted to give
effect to this stock split.
The Company's fiscal year consists of a 52/53 week period ending on the
Saturday nearest to December 31.
The Company expenses all advertising costs when the advertising first takes
place. As a result, quarter-to-quarter comparisons are impacted within and
between quarters by the timing of television, radio and Internet advertisements
and by the mailing of the Company's printed advertisements. The volume of
mailings and other advertising may vary in different quarters and from year to
year depending on the Company's assessment of prevailing market opportunities.
The sale and delivery of contact lenses are governed by both federal and
state laws and regulations. The Company sells to customers in all 50 states,
and each sale is likely to be subject to the laws of the state where the
customer is located. The Company's operating practice is to attempt to obtain a
valid prescription from each of its customers or his/her eye care practitioner.
If the customer does not have a copy of his/her prescription, the Company
attempts to contact the customer's doctor to obtain a copy of or verify the
customer's prescription. If the Company is unable to obtain a copy of or verify
the customer's prescription, it is the Company's practice to complete the sale
and ship the lenses to the customer based on the prescription information
provided by the customer. The Company retains copies of the written
prescriptions that it receives and maintains records of its communications with
the customer's prescriber.
11
<PAGE>
Results of Operations
The following table presents the Company's results of operations expressed
as a percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
Quarter Ended Two Quarters Ended
--------------------------------- --------------------------------
July 3, July 1, July 3, July 1,
1999 2000 1999 2000
-------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 61.2 59.5 61.7 59.3
-------------- -------------- --------------- ---------------
Gross profit 38.8 40.5 38.3 40.7
-------------- -------------- --------------- ---------------
Advertising expense 18.3 16.3 21.2 18.3
Other selling, general and administrative expenses 12.6 10.7 12.1 11.1
-------------- -------------- --------------- ---------------
Total selling, general and administrative expenses 30.9 27.0 33.3 29.4
-------------- -------------- --------------- ---------------
Income from operations 7.9 13.5 5.0 11.3
Other income, net 0.3 0.3 0.3 0.4
-------------- -------------- --------------- ---------------
Income before provision for income taxes 8.2 13.8 5.3 11.7
Provision for income taxes (2.1) (5.3) (1.5) (4.5)
-------------- -------------- --------------- ---------------
Net income 6.1% 8.5% 3.8% 7.2%
============== ============== =============== ===============
</TABLE>
Net sales. Net sales for the quarter ended July 1, 2000 increased 49% to
$35.7 million from $24.0 million for the quarter ended July 3, 1999. For the
two quarters ended July 1, 2000, net sales increased 45% to $67.1 million from
$46.3 million for the two quarters ended July 3, 1999. The Company is realizing
the benefits of repeat sales from a growing customer base. The Company added
about 150,000 new customers during the second quarter of fiscal 2000. Repeat
sales for the second quarter of fiscal 2000 increased 74% to $22.1 million, or
62% of net sales, from $12.7 million, or 53% of net sales, for the second
quarter of fiscal 1999. Repeat sales for the first two quarters of fiscal 2000
increased 74% to $40.3 million, or 60% of net sales, from $23.4 million, or 51%
of net sales, for the first two quarters of fiscal 1999. The Company also
believes that this increase in net sales reflects some of the benefits of the
more than $60 million it has invested in its national advertising campaign over
the last several years. In addition to refining its marketing efforts to its
customer base, the Company has also enhanced its website and has increased the
exposure of its website in its advertising. Internet sales for the second
quarter of fiscal 2000 were $12.6 million, or 35% of net sales, as compared to
$4.1 million, or 17% of net sales, for the second quarter of fiscal 1999. For
the first two quarters of fiscal 2000, Internet sales were $21.9 million, or 33%
of net sales, as compared to $6.6 million, or 14% of net sales, for the same
period in fiscal 1999. Although the Company believes that sales will increase in
fiscal 2000 as compared to fiscal 1999, the Company expects the rate of growth
in net sales to decrease.
Gross profit. Gross profit as a percentage of net sales increased to 40.5%
for the quarter ended July 1, 2000 from 38.8% for the quarter ended July 3,
1999. For the two quarters ended July 1, 2000, gross profit as a percentage of
net sales increased to 40.7% from 38.3% for the two quarters ended July 3, 1999.
With the increase in sales, the Company continues to obtain inventory at lower
costs because of purchase volumes and more competitive pricing resulting from
access to more vendors. In addition, the Company believes that enhanced
inventory management techniques have also had a positive impact on gross profit.
Advertising Expense. Advertising expense for the quarter ended July 1,
2000 increased $1.4 million, or 32%, from the quarter ended July 3, 1999. As a
percentage of net sales, advertising expense decreased to 16.3% for the second
quarter of fiscal 2000 from 18.3% for the second quarter of fiscal 1999. For
the two quarters ended July 1, 2000, advertising expense increased $2.5 million,
or 26%, from the two quarters ended July 3, 1999. As a percentage of net sales,
advertising expense decreased to 18.3% for the first two quarters of fiscal 2000
from 21.2% for the first two quarters of fiscal 1999. The Company plans to
increase advertising spending in fiscal 2000 by approximately 25% from its
fiscal 1999 spending. However, if opportunities present themselves, the Company
may increase advertising spending above currently planned levels.
12
<PAGE>
Other selling, general and administrative expenses. Other selling, general
and administrative expenses for the quarter ended July 1, 2000 increased $0.8
million, or 26%, from the quarter ended July 3, 1999. For the two quarters
ended July 1, 2000, other selling, general and administrative expenses increased
$1.8 million, or 32%, from the two quarters ended July 3, 1999. As a percentage
of net sales, other selling, general and administrative expenses decreased to
10.7% for the second quarter of fiscal 2000 from 12.6% for the second quarter of
fiscal 1999. For the two quarters ended July 1, 2000, other selling, general
and administrative expenses as a percentage of net sales decreased to 11.1% from
12.1% for the first two quarters of fiscal 1999. With the continued growth in
net sales, the Company has been able to leverage the fixed portion of these
expenses. In addition, variable expenses such as wages and telephone expenses
have decreased as a percentage of sales largely due to the increase in the
percentage of net sales via the Internet and a decrease in telephone rates.
Other income, net. Other income, which consists primarily of interest
income, increased to approximately $117,000 and $233,000 for the quarter and two
quarters ended July 1, 2000, respectively, from approximately $86,000 and
$171,000 for the quarter and two quarters ended July 3, 1999, respectively.
Interest income has increased largely due to rising interest rates.
Income taxes. The Company's effective tax rate for the quarter and two
quarters ended July 1, 2000 was 38.7% and 38.2%, respectively. For the quarter
and two quarters ended July 3, 1999, the Company's effective tax rate was 25.8%
and 28.2%, respectively, which reflects changes in the valuation allowance as a
result of utilizing some tax operating loss carryforwards. As of July 1, 2000,
the Company had not provided a valuation allowance on deferred tax assets. The
Company's future effective tax rate will depend upon future taxable income. The
Company anticipates that its fiscal 2000 effective income tax rate will be
approximately 38.5%.
Liquidity and Capital Resources
For the two quarters ended July 1, 2000 and July 3, 1999, net cash provided
by operating activities was approximately $11.3 million and $5.7 million,
respectively. In the 2000 period, cash was provided primarily by net income and
increases in accounts payable, accrued liabilities and income taxes payable
offset by an increase in inventories. In the 1999 period, cash was provided
primarily by net income and increases in accounts payable and accrued
liabilities offset by an increase in inventories. In order to help ensure
sufficient supply of inventory, the Company generally carries a higher level of
inventory than if it were able to purchase directly from all contact lens
manufacturers.
The Company used approximately $747,000 and $1.3 million for investing
activities in the two quarters ended July 1, 2000 and July 3, 1999,
respectively. The majority of these amounts relate to capital expenditures for
infrastructure improvements. Capital expenditures for the fiscal 2000 period
were approximately $514,000. In addition, in March 2000, the Company made a
$220,000 investment in an entity in which a member of the Company's Board of
Directors holds a significant ownership interest and serves as an officer and
director. Capital expenditures for the fiscal 1999 period were approximately
$655,000. The Company began operations in its new distribution center in
February 1999. This new facility is several times the size of the prior
distribution center and is strategically located near the Salt Lake City, Utah
airport. In addition, on May 4, 1999, the Company acquired the assets of
Contact Lenses Online, Inc. ("CLO") for $1.2 million in cash, of which $600,000
was paid on the closing date. The assets acquired include the web address,
www.contactlenses.com, various telephone numbers and CLO's customer database.
The Company anticipates additional capital expenditures for infrastructure as it
continues to expand and improve operating facilities, telecommunications systems
and management information systems in order to handle future growth. The
Company presently anticipates that capital expenditures in fiscal 2000 will be
approximately $1.4 million.
As of July 1, 2000, the Company had entered into commitments to purchase
approximately $15 million of broadcast advertising from October 1999 through
September 2000. The Company can cancel up to 50 percent of the total amount
committed. As of July 1, 2000, the Company has cancelled approximately $4
million of the amount committed. In addition, the Company has entered into
certain noncancelable commitments with cooperative
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mail companies that will require the Company to pay approximately $4.2 million
for direct mail services from January 1, 2000 through December 31, 2000.
During the two quarters ended July 1, 2000 and July 3, 1999, the Company
used approximately $14.4 million and $1.8 million for financing activities.
During the fiscal 2000 period, the Company repurchased a total of 984,000 shares
of its common stock for a total cost of $14,323,948. During the fiscal 1999
period, the Company repurchased a total of 310,000 shares of its common stock
for a total cost of $1,860,005. In both the fiscal 2000 and 1999 periods, these
repurchases were offset slightly by proceeds from the exercise of common stock
options. In fiscal 2000, the Company also made its final payment relating to
the 1999 purchase of CLO's assets.
On February 17, 2000, the Company's Board of Directors authorized an
additional repurchase of up to 1,000,000 shares of its common stock, bringing
the total authorization to 2,000,000 shares. A purchase of the full 2,000,000
shares would equal approximately 15.6 percent of the total shares issued. The
repurchase of common stock is subject to market conditions and is accomplished
through periodic purchases at prevailing prices on the open market, by block
purchases or in privately negotiated transactions. The repurchased shares will
be retained as treasury stock to be used for corporate purposes. As of July 1,
2000, the Company had repurchased 1,384,000 shares for a total cost of
$16,935,609. The repurchases were funded using cash on hand.
The Company has a revolving credit facility to provide for working capital
requirements and other corporate purposes. The credit facility provides for
borrowings equal to the lesser of $10.0 million or 50 percent of eligible
inventory and bears interest at a floating rate equal to the lender's prime
interest rate plus 0.5 percent (10.0 percent as of July 1, 2000). As of July 1,
2000, the Company had no outstanding borrowings under the credit facility. The
credit facility is secured by substantially all of the Company's assets and
contains financial covenants customary for this type of financing. The credit
facility expires April 30, 2001. As of July 1, 2000, the Company was not in
compliance with the credit facility's working capital covenant. The lender has
granted the Company a waiver and has subsequently modified the working capital
covenant.
The Company believes that its cash on hand, together with cash generated
from operations and the cash available through the credit facility, will be
sufficient to support current operations and future growth through fiscal 2000.
The Company may be required to seek additional sources of funds for accelerated
growth or continued growth after that point, and there can be no assurance that
such funds will be available on satisfactory terms. Failure to obtain such
financing could delay or prevent the Company's planned growth, which could
adversely affect the Company's business, financial condition and results of
operations.
As a result of state regulatory requirements, the Company's liquidity,
capital resources and results of operations may be negatively impacted in the
future if the Company incurs increased costs or fines, is prohibited from
selling its products in a particular state(s) or experiences losses of a
substantial portion of the Company's customers for whom the Company is unable to
obtain or verify a prescription due to the enforcement of requirements by state
regulatory agencies.
Forward-Looking Statements
Except for the historical information contained herein, the matters
discussed in this Form 10-Q are 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. These forward-looking statements
involve risks and uncertainties and often depend on assumptions, data or methods
that may be incorrect or imprecise. The Company's future operating results may
differ materially from the results discussed in, or implied by, forward-looking
statements made by the Company. Factors that may cause such differences
include, but are not limited to, those discussed below and the other risks
detailed in the Company's other reports filed with the Securities and Exchange
Commission. The words such as "believes," "anticipates," "expects," "future,"
"intends," "would," "may" and similar expressions are intended to identify
forward-looking statements. The Company undertakes no obligation to revise any
of these forward-looking statements to reflect events or circumstances after the
date hereof.
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Factors That May Affect Future Results
. The Company's sales growth will not continue at historical rates and it may
encounter unforeseen difficulties in managing its future growth;
. A significant portion of the Company's sales do not comply with applicable
state laws and regulations governing the delivery and sale of contact lenses;
. Because the Company doesn't manufacture contact lenses, it cannot ensure that
the contact lenses it sells meet all federal regulatory requirements;
. It is possible that the FDA will consider certain of the contact lenses the
Company sells to be misbranded;
. The Company currently purchases a substantial portion of its products from
unauthorized distributors and is not an authorized distributor for the
majority of the products that it sells;
. The Company obtains a large percentage of its inventory from a limited number
of suppliers, with a single distributor accounting for 40%, 47% and 38% of
the Company's inventory purchases in fiscal years 1997, 1998 and 1999,
respectively;
. The Company's quarterly results are likely to vary based upon the level of
sales and marketing activity in any particular quarter;
. The Company is dependent on its telephone, Internet and management
information systems for the sale and distribution of contact lenses;
. The Company has limited operating history and, as a result, there is only
limited financial information and operating information available for a
potential investor to evaluate the Company;
. The retail sale of contact lenses is highly competitive; certain of the
Company's competitors are large, national optical chains that have greater
resources than the Company has;
. The demand for contact lenses could be substantially reduced if alternative
technologies to permanently correct vision gain in popularity;
. The Company does not have any property rights in the 1-800 CONTACTS telephone
number or the Internet addresses that it uses;
. Increases in the cost of shipping, postage or credit card processing could
harm the Company's business;
. The Company's business could be harmed if it is required to collect state
sales tax on the sale of products;
. The Company faces an inherent risk of exposure to product liability claims in
the event that the use of the products it sells results in personal injury;
. The Company conducts its operations through a single distribution facility;
. The Company's success is dependent, in part, on continued growth in use of
the Internet;
. Government regulation and legal uncertainties relating to the Internet and
online commerce could negatively impact the Company's business operations;
and
. Changing technology could adversely affect the operation of the Company's
website.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Based on its current operations, the Company believes it is not subject to
significant market risk. As of July 1, 2000, the Company did not hold any market
risk sensitive instruments and had no outstanding debt other than a capital
lease obligation of $10,318. In addition, all of the Company's transactions are
in U.S. dollars.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See notes to condensed financial statements.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of the stockholders of the Company was held on May 19,
2000. The stockholders approved the following matters:
. The election as directors of Stephen A. Yacktman and E. Dean Butler to
serve until the annual meeting of stockholders in 2003 and until their
respective successors are duly elected and qualified.
Votes cast for the above matter: 9,853,250 against: 10
The other directors of the Company include the following persons: (i)
Jonathan C. Coon and Jason S. Subotky, who are to serve until the
annual meeting of stockholders in 2001 and (ii) John F. Nichols and
Scott S. Tanner, who are to serve until the annual meeting of
stockholders in 2002.
. The appointment of Arthur Andersen LLP to serve as the Company's
independent public accountants for the Company's 2000 fiscal year.
Votes cast for the above matter: 9,850,750 abstaining: 2,510
Item 5. Other Information
From time to time the Company receives notices, inquiries or other
correspondence from states or its regulatory bodies charged with overseeing the
sale of contact lenses. The Company's practice is to review such notices with
legal counsel to determine the appropriate response on a case-by-case basis. It
is the opinion of management, after discussion with legal counsel, that the
Company is taking the appropriate steps to address the various notices received.
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Item 6. Exhibits and Reports on Form 8-K
(A) Exhibit Index
Exhibit No. Description of Exhibit
----------- ------------------------
27 Financial Data Schedule.
(B) No reports on Form 8-K were filed by the Registrant during the
quarter ended July 1, 2000.
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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.
1-800 CONTACTS, INC.
Dated: August 15, 2000 By: /s/ Jonathan C. Coon
-------------------------
Name: Jonathan C. Coon
Title: President and Chief Executive Officer
By: /s/ Scott S. Tanner
----------------------------
Name: Scott S. Tanner
Title: Chief Operating Officer and Chief Financial
Officer
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