<PAGE>
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 April 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 Identification No.)
incorporation or organization)
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 May 9, 2000, the Registrant had 6,031,173 shares of Common Stock, par
value $0.01 per share outstanding.
<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 April 1, 2000.......................................... 3
Condensed Statements of Income for the Quarters Ended
April 3, 1999 and April 1, 2000............................ 4
Condensed Statement of Stockholders' Equity for the
Quarter Ended April 1, 2000................................ 5
Condensed Statements of Cash Flows for the Quarters Ended
April 3, 1999 and April 1, 2000............................ 6
Notes to Condensed Financial Statements...................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk.... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................ 13
Item 2. Changes in Securities and Use of Proceeds.................... 13
Item 3. Defaults upon Senior Securities.............................. 13
Item 4. Submission of Matters to a Vote of Security Holders.......... 13
Item 5. Other Information............................................ 13
Item 6. Exhibits and Reports on Form 8-K............................. 13
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
1-800 CONTACTS, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
January 1, April 1,
2000 2000
------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,329,088 $ 7,424,881
Inventories 15,980,169 14,562,797
Deferred income taxes 405,021 423,450
Other current assets 475,587 419,699
------------ ------------
Total current assets 21,189,865 22,830,827
PROPERTY AND EQUIPMENT, net 2,266,306 2,315,033
DEFERRED INCOME TAXES 116,136 129,942
INTANGIBLE ASSETS, net 1,394,945 1,319,311
OTHER ASSETS 86,320 341,718
------------ ------------
Total assets $ 25,053,572 $ 26,936,831
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of capital lease obligation $ 30,166 $ 20,371
Acquisition payable 300,000 300,000
Accounts payable 3,059,993 5,477,697
Accrued liabilities 2,192,756 3,123,416
Income taxes payable 447,143 980,084
Unearned revenue 322,805 470,108
------------ ------------
Total current liabilities 6,352,863 10,371,676
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock 64,306 64,306
Additional paid-in capital 23,057,197 23,171,884
Accumulated deficit (2,061,494) (248,945)
Treasury stock at cost (2,359,300) (6,422,090)
------------ ------------
Total stockholders' equity 18,700,709 16,565,155
------------ ------------
Total liabilities and stockholders' equity $ 25,053,572 $ 26,936,831
============ ============
</TABLE>
The accompanying notes to condensed financial statements
are an integral part of these condensed statements.
3
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1-800 CONTACTS, INC.
CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------
April 3, April 1,
1999 2000
------------ ------------
<S> <C> <C>
NET SALES $ 22,304,257 $ 31,419,004
COST OF GOODS SOLD 13,909,147 18,532,597
------------ ------------
Gross profit 8,395,110 12,886,407
------------ ------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Advertising expense 5,410,276 6,502,196
Other selling, general and administrative expenses 2,589,829 3,604,764
------------ ------------
Total selling, general and administrative expenses 8,000,105 10,106,960
------------ ------------
INCOME FROM OPERATIONS 395,005 2,779,447
OTHER INCOME, net 84,385 115,829
------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 479,390 2,895,276
PROVISION FOR INCOME TAXES (182,213) (1,082,727)
------------ ------------
NET INCOME $ 297,177 $ 1,812,549
============ ============
PER SHARE INFORMATION:
Basic and diluted net income per common share $ 0.05 $ 0.29
============ ============
</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 Quarter Ended April 1, 2000
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Additional Treasury Stock
-------------------- Paid-in Accumulated ------------------------
Shares Amount Capital Deficit Shares Amount Total
--------- -------- ------------ ------------ -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 2000 6,430,568 $ 64,306 $ 23,057,197 $ (2,061,494) (170,825) $ (2,359,300) $ 18,700,709
Purchase of treasury shares - - - - (158,000) (4,280,588) (4,280,588)
Exercise of common stock options - - (67,334) - 17,994 217,798 150,464
Income tax benefit from common
stock options exercised - - 182,021 - - - 182,021
Net income - - - 1,812,549 - - 1,812,549
--------- -------- ------------ ------------ -------- ------------ ------------
BALANCE, April 1, 2000 6,430,568 $ 64,306 $ 23,171,884 $ (248,945) (310,831) $ (6,422,090) $ 16,565,155
========= ======== ============ ============ ======== ============ ============
</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>
Quarter Ended
--------------------------------
April 3, April 1,
1999 2000
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 297,177 $ 1,812,549
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 156,905 261,877
Gain on sale of property and equipment - (2,650)
Deferred income taxes 182,213 (32,235)
Changes in operating assets and liabilities:
Inventories 166,657 1,417,372
Other current assets 195,751 55,888
Deferred advertising costs 175,631 -
Accounts payable 4,956,689 2,417,704
Accrued liabilities 726,840 930,660
Income taxes payable - 714,962
Unearned revenue 259,431 147,303
----------- -----------
Net cash provided by operating activities 7,117,294 7,723,430
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (443,202) (224,970)
Proceeds from sale of property and equipment - 2,650
Purchase of intangible assets (19,600) (10,000)
Equity investment - (220,000)
Deposits (2,579) (35,398)
----------- -----------
Net cash used in investing activities (465,381) (487,718)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock repurchases (1,860,005) (4,280,588)
Proceeds from exercise of common stock options 50,741 150,464
Principal payments on capital lease obligation (8,821) (9,795)
----------- -----------
Net cash used in financing activities (1,818,085) (4,139,919)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,833,828 3,095,793
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,762,220 4,329,088
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,596,048 $ 7,424,881
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 3,320 $ 705
Cash paid for income taxes - 300,000
</TABLE>
The accompanying notes to condensed financial statements
are an integral part of these condensed statements.
6
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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 April 3, 1999 Quarter Ended April 1, 2000
----------------------------------------- -----------------------------------------
Per-Share Per-Share
Net Income Shares Amount Net Income Shares Amount
---------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $297,177 6,381,547 $0.05 $1,812,549 6,181,206 $0.29
Effect of stock options 37,995 97,351
---------- --------- --------- ---------- --------- ---------
Diluted EPS $297,177 6,419,542 $0.05 $1,812,549 6,278,557 $0.29
========== ========= ========= ========== ========= =========
</TABLE>
NOTE 3. COMMON STOCK TRANSACTIONS
During the quarter ended April 1, 2000, the Company repurchased a
total of 158,000 shares of its common stock for a total cost of $4,280,588.
On February 17, 2000, the Company's Board of Directors authorized an
additional repurchase of up to 500,000 shares of its common stock, bringing the
total authorization to 1,000,000 shares. A purchase of the full 1,000,000
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 April 1,
2000, the Company had repurchased 358,000 shares for a total cost of
$6,892,249. Subsequent to April 1, 2000, the Company repurchased 94,300 shares
for a total cost of $2,969,673.
7
<PAGE>
During the quarter ended April 1, 2000, employees exercised stock
options to purchase 17,994 shares of common stock for a total of $150,464.
In February 2000, the Company granted nonqualified stock options to
purchase 98,798 shares of common stock at $28 per share to employees and
directors of the Company. The options vest equally over a four year period and
expire in ten years.
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. 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 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.
8
<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 $22.3 million in the first
quarter of fiscal 1999 to $31.4 million in the first quarter of fiscal 2000.
Internet sales have grown from an insignificant amount in fiscal 1996 to
approximately $18.7 million in fiscal 1999 and from $2.5 million in the first
quarter of fiscal 1999 to $9.2 million in the first quarter of fiscal 2000.
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.
Results of Operations
The following table presents the Company's results of operations expressed
as a percentage of net sales for the periods indicated:
Quarter Ended
--------------------
April 3, April 1,
1999 2000
-------- --------
Net sales 100.0% 100.0%
Cost of goods sold 62.4 59.0
-------- --------
Gross profit 37.6 41.0
-------- --------
Advertising expense 24.3 20.7
Other selling, general and administrative expenses 11.6 11.5
-------- --------
Total selling, general and administrative expenses 35.9 32.2
-------- --------
Income from operations 1.7 8.8
Other income, net 0.4 0.4
-------- --------
Income before provision for income taxes 2.1 9.2
Provision for income taxes (0.8) (3.4)
-------- --------
Net income 1.3% 5.8%
======== ========
9
<PAGE>
Net sales. Net sales for the quarter ended April 1, 2000 increased 41% to
$31.4 million from $22.3 million for the quarter ended April 3, 1999. The
Company is realizing the benefits of repeat sales from a growing customer base.
Repeat sales for the first quarter of fiscal 2000 increased 70% to $18.2
million, or approximately 58% of net sales, from $10.7 million, or approximately
48% of net sales, for the first quarter of fiscal 1999. The Company also
believes that this increase in net sales reflects some of the benefits of its
national advertising campaign and enhancements to its website. Internet sales
for first quarter of fiscal 2000 were $9.2 million, or approximately 29% of net
sales, as compared to $2.5 million, or approximately 11% of net sales, for the
first quarter of 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 41%
for the quarter ended April 1, 2000 from 37.6% for the quarter ended April 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 April 1,
2000 increased $1.1 million, or 20%, from the quarter ended April 3, 1999. As a
percentage of net sales, advertising expense decreased to 20.7% for the first
quarter of fiscal 2000 from 24.3% for the first quarter of fiscal 1999. The
Company plans to increase advertising spending in fiscal 2000 by approximately
15% to 20% from its fiscal 1999 spending. However, if opportunities present
themselves, the Company may increase advertising spending above currently
planned levels.
Other selling, general and administrative expenses. Other selling, general
and administrative expenses for the quarter ended April 1, 2000 increased $1.0
million, or 39%, from the quarter ended April 3, 1999. As a percentage of net
sales, other selling, general and administrative expenses decreased slightly to
11.5% for the first quarter of fiscal 2000 from 11.6% for the first quarter of
fiscal 1999.
Other income, net. Other income, which consists primarily of interest
income, increased to approximately $116,000 for the quarter ended April 1, 2000
from approximately $84,000 for the quarter ended April 3, 1999. Interest income
has increased largely due to rising interest rates.
Income taxes. The Company's effective tax rate for the quarters ended
April 1, 2000 and April 3, 1999 was approximately 37.4% and 38.0%, respectively.
As of April 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%.
Liquidity and Capital Resources
For the quarters ended April 1, 2000 and April 3, 1999, net cash provided
by operating activities was approximately $7.7 million and $7.1 million,
respectively. In the 2000 period, cash was provided primarily by net income and
increases in accounts payable, accrued liabilities, and income taxes payable as
well as a decrease in inventories. In the 1999 period, cash was provided
primarily by increases in accounts payable and accrued liabilities. 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 $488,000 and $465,000 for investing
activities in the quarters ended April 1, 2000 and April 3, 1999, respectively.
The majority of these amounts relate to capital expenditures for infrastructure
improvements. Capital expenditures for the fiscal 2000 period were
approximately $260,000 (including approximately $35,000 in deposits). 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 $443,000 million. 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. The Company anticipates
additional capital expenditures for infrastructure as it continues to expand and
improve operating facilities,
10
<PAGE>
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 April 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 April 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 mail companies that will
require the Company to pay approximately $4.2 million for direct mail services
through December 31, 2000.
During the quarters ended April 1, 2000 and April 3, 1999, the Company used
approximately $4.1 million and $1.8 million for financing activities. During the
fiscal 2000 period, the Company repurchased a total of 158,000 shares of its
common stock for a total cost of $4,280,588. During the fiscal 1999 period, the
Company repurchased a total of 155,000 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.
On October 13, 1998, the Company's Board of Directors authorized a
repurchase of up to 500,000 shares of its common stock. On February 17, 2000,
the Company's Board of Directors authorized an additional repurchase of up to
500,000 shares of its common stock, bringing the total authorization to
1,000,000 shares. A purchase of the full 1,000,000 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 April 1, 2000, the
Company had repurchased 358,000 shares for a total cost of $6,892,249.
Subsequent to April 1, 2000, the Company repurchased 94,300 shares for a total
cost of $2,969,673. 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 (9.5 percent as of April 1, 2000). As of April 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.
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
11
<PAGE>
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.
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;
12
<PAGE>
. 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.
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 April 1, 2000, the Company did not hold any
market risk sensitive instruments and had no outstanding debt other than a
capital lease obligation of $20,371. 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
None.
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.
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 April 1, 2000.
13
<PAGE>
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: May 16, 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
14
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