<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 September 30, 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
-------------
1-800 CONTACTS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 87-0571643
-------------------------------------------- ---------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
66 E. Wadsworth Park Drive, 3/rd/ Floor
Draper, UT 84020
-------------------------------------------- ---------------------------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
(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 November 7, 2000, the Registrant had 11,570,147 shares of Common
Stock, par value $0.01 per share outstanding.
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<PAGE>
1-800 CONTACTS, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of January 1, 2000 and September 30, 2000................................................ 3
Condensed Statements of Income for the Quarter and Three Quarters Ended October 2, 1999 and September 30, 2000....... 4
Condensed Statement of Stockholders' Equity for the Three Quarters Ended September 30, 2000.......................... 5
Condensed Statements of Cash Flows for the Three Quarters Ended October 2, 1999 and September 30, 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..................................................................................... 16
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
1-800 CONTACTS, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
January 1, September 30,
2000 2000
------------ -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,329,088 $ 143,205
Inventories 15,980,169 20,007,498
Prepaid income taxes 100,000 647,598
Deferred income taxes 405,021 679,255
Other current assets 375,587 592,646
-------------- -------------
Total current assets 21,189,865 22,070,202
PROPERTY AND EQUIPMENT, net 2,266,306 2,582,712
DEFERRED INCOME TAXES 116,136 202,260
INTANGIBLE ASSETS, net 1,394,945 1,147,426
OTHER ASSETS 86,320 301,011
-------------- -------------
Total assets $ 25,053,572 $ 26,303,611
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ - $ 2,468,544
Current portion of capital lease obligation 30,166 -
Acquisition payable 300,000 -
Accounts payable 3,059,993 8,253,843
Accrued liabilities 2,192,756 3,760,391
Income taxes payable 447,143 433,295
Unearned revenue 322,805 534,042
-------------- -------------
Total current liabilities 6,352,863 15,450,115
-------------- -------------
STOCKHOLDERS' EQUITY:
Common stock 128,611 128,611
Additional paid-in capital 22,992,892 23,757,592
Retained earnings (accumulated deficit) (2,061,494) 5,367,979
Treasury stock at cost (2,359,300) (18,400,686)
-------------- -------------
Total stockholders' equity 18,700,709 10,853,496
-------------- -------------
Total liabilities and stockholders' equity $ 25,053,572 $ 26,303,611
============== =============
</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 Three Quarters Ended
------------------------------- -----------------------------
October 2, September 30, October 2, September 30,
1999 2000 1999 2000
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
NET SALES $ 26,889,818 $ 40,724,366 $ 73,154,131 $107,851,541
COST OF GOODS SOLD 15,953,417 24,365,987 44,517,247 64,145,681
------------ ------------ ------------ ------------
Gross profit 10,936,401 16,358,379 28,636,884 43,705,860
------------ ------------ ------------ ------------
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES:
Advertising expense 6,493,585 7,947,936 16,292,915 20,258,398
Other selling, general and
administrative expenses 3,119,890 4,189,393 8,735,881 11,618,288
------------ ------------ ------------ ------------
Total selling, general and
administrative expenses 9,613,475 12,137,329 25,028,796 31,876,686
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 1,322,926 4,221,050 3,608,088 11,829,174
OTHER INCOME (EXPENSE), net (247,376) 26,475 (76,497) 259,799
------------ ------------ ------------ ------------
INCOME BEFORE PROVISION
FOR INCOME TAXES 1,075,550 4,247,525 3,531,591 12,088,973
PROVISION FOR INCOME TAXES (50,000) (1,660,363) (742,679) (4,659,500)
------------ ------------ ------------ ------------
NET INCOME $ 1,025,550 $ 2,587,162 $ 2,788,912 $ 7,429,473
============ ============ ============ ============
PER SHARE INFORMATION:
Basic net income per common share $ 0.08 $ 0.22 $ 0.22 $ 0.62
============ ============ ============ ============
Diluted net income per common share $ 0.08 $ 0.22 $ 0.22 $ 0.61
============ ============ ============ ============
</TABLE>
The accompanying notes to condensed financial statements
are an integral part of these condensed statements.
4
<PAGE>
1-800 CONTACTS, INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
For the Three Quarters Ended September 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
Retained
Additional Earnings
Common Stock Paid-in (Accumulated) Treasury Stock
--------------------- -------------------------
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 - - - - (1,084,000) (16,841,448) (16,841,448)
Exercise of common stock options - - (380,620) - 132,041 800,062 419,442
Income tax benefit from common
stock options exercised - - 1,145,320 - - - 1,145,320
Net income - - - 7,429,473 - - 7,429,473
---------- --------- ----------- ------------ ---------- ------------ -------------
BALANCE, September 30, 2000 12,861,136 $ 128,611 $23,757,592 $ 5,367,979 (1,293,609) $(18,400,686) $ 10,853,496
========== ========= =========== ============ ========== ============ =============
</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>
Three Quarters Ended
---------------------------------
October 2, September 30,
1999 2000
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,788,912 $ 7,429,473
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 679,428 821,373
Loss (gain) on sale of property and equipment 941 (2,650)
Deferred income taxes 642,679 (360,358)
Changes in operating assets and liabilities:
Inventories (5,046,984) (4,027,329)
Prepaid income taxes (50,000) (547,598)
Other current assets 184,405 (217,059)
Deferred advertising costs 175,631 -
Accounts payable 3,560,543 5,193,850
Accrued liabilities 1,424,196 1,567,635
Income taxes payable 100,000 1,131,472
Unearned revenue 169,305 211,237
----------- -----------
Net cash provided by operating activities 4,629,056 11,200,046
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (869,953) (880,260)
Proceeds from sale of property and equipment - 2,650
Purchase of intangible assets (638,388) (10,000)
Equity investment - (220,000)
Deposits 6,756 5,309
----------- -----------
Net cash used in investing activities (1,501,585) (1,102,301)
----------- -----------
</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>
Three Quarters Ended
---------------------------------
October 2, September 30,
1999 2000
----------- ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock repurchases (2,405,911) (16,841,448)
Proceeds from exercise of common stock options 131,662 419,442
Net borrowings on line of credit - 2,468,544
Principal payments on capital lease obligation (27,170) (30,166)
Payment of acquisition payable - (300,000)
----------- ------------
Net cash used in financing activities (2,301,419) (14,283,628)
----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 826,052 (4,185,883)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,762,220 4,329,088
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,588,272 $ 143,205
=========== ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 31,384 $ 1,999
Cash paid for income taxes 50,000 4,435,984
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the period ended October 2, 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 September 30, 2000, these amounts had been paid in full.
During the three quarters ended September 30, 2000, the Company recorded a
$1,145,320 tax benefit, resulting from common stock options exercised, as an
increase in additional paid-in capital.
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 October 2, 1999 Quarter Ended September 30, 2000
------------------------------------------- --------------------------------------------
Per-Share Per-Share
Net Income Shares Amount Net Income Shares Amount
------------- ------------- ------------ ------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $1,025,550 12,547,102 $ 0.08 $ 2,587,162 11,584,136 $ 0.22
Effect of stock options 169,774 290,471
------------- ------------- ------------ ------------- -------------- ------------
Diluted EPS $1,025,550 12,716,876 $ 0.08 $ 2,587,162 11,874,607 $ 0.22
============= ============= ============ ============= ============== ============
<CAPTION>
Three Quarters Ended October 2, 1999 Three Quarters Ended September 30, 2000
------------------------------------------- -------------------------------------------
Per-Share Per-Share
Net Income Shares Amount Net Income Shares Amount
------------- ------------- ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $2,788,912 12,623,848 $ 0.22 $ 7,429,473 11,969,867 $ 0.62
Effect of stock options 135,398 231,134
------------- ------------- ------------ ------------ -------------- ------------
Diluted EPS $2,788,912 12,759,246 $ 0.22 $ 7,429,473 12,201,001 $ 0.61
============= ============= ============ ============ ============== ============
</TABLE>
8
<PAGE>
NOTE 3. COMMON STOCK TRANSACTIONS
During the three quarters ended September 30, 2000, the Company
repurchased a total of 1,084,000 shares of its common stock for a total cost of
$16,841,448.
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 September
30, 2000, the Company had repurchased 1,484,000 shares for a total cost of
$19,453,109.
During the three quarters ended September 30, 2000, employees exercised
stock options to purchase 132,041 shares of common stock for a total of
$419,442.
During the three quarters ended September 30, 2000, the Company granted
nonqualified stock options to purchase 286,396 shares of common stock to a
consultant, employees and directors of the Company. The exercise prices of the
options range from $14.00 to $43.75. 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. 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. LINE OF CREDIT
The Company has a revolving credit facility that 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 September 30, 2000). As of
September 30, 2000, the Company's outstanding borrowings on the credit facility
were $2,468,544. The credit facility expires April 30, 2001. The credit facility
is secured by substantially all of the Company's assets and contains financial
covenants customary for this type of financing. As of September 30, 2000, the
Company was in compliance with these covenants.
NOTE 7. 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
9
<PAGE>
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. The
case has been assigned to Judge Ronald M. Sohigian who has heard arguments. The
judge is presently considering the motions.
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
implementation of this agreement begins November 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 $73.2 million in the first
three quarters of fiscal 1999 to $107.9 million in the first three 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 $12.4 million in the
first three quarters of fiscal 1999 to $38.1 million in the first three quarters
of fiscal 2000.
On July 24, 2000, the Company effected a two-for-one stock split. All
share and per share information in this Form 10-Q has been adjusted
retroactively 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 Three Quarters Ended
------------------------------ ------------------------------
October 2, September 30, October 2, September 30,
1999 2000 1999 2000
------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 59.3 59.8 60.9 59.5
------------ ---------- ---------- ---------
Gross profit 40.7 40.2 39.1 40.5
------------ ---------- ---------- ---------
Advertising expense 24.2 19.5 22.3 18.7
Other selling, general and administrative expenses 11.6 10.3 11.9 10.8
------------ ---------- ---------- ---------
Total selling, general and administrative expenses 35.8 29.8 34.2 29.5
------------ ---------- ---------- ---------
Income from operations 4.9 10.4 4.9 11.0
Other income (expense), net (0.9) 0.0 (0.1) 0.2
------------ ---------- ---------- ---------
Income before provision for income taxes 4.0 10.4 4.8 11.2
Provision for income taxes (0.2) (4.1) (1.0) (4.3)
------------ ---------- ---------- ---------
Net income 3.8% 6.3% 3.8% 6.9%
============ ========== ========== =========
</TABLE>
Net sales. Net sales for the quarter ended September 30, 2000 increased
51% to $40.7 million from $26.9 million for the quarter ended October 2, 1999.
For the three quarters ended September 30, 2000, net sales increased 47% to
$107.9 million from $73.2 million for the three quarters ended October 2, 1999.
The Company is realizing the benefits of repeat sales from a growing customer
base. The Company added over 165,000 new customers during the third quarter of
fiscal 2000. Repeat sales for the third quarter of fiscal 2000 increased 68% to
$25.3 million, or 62% of net sales, from $15.1 million, or 56% of net sales, for
the third quarter of fiscal 1999. Repeat sales for the first three quarters of
fiscal 2000 increased 70% to $65.6 million, or 61% of net sales, from $38.5
million, or 53% of net sales, for the first three quarters of fiscal 1999. The
Company also believes that this increase in net sales reflects some of the
benefits of the nearly $70 million it has invested in its national advertising
campaign over the last several years and its commitment to customer service. 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 third quarter of fiscal 2000 were $16.2
million, or 40% of net sales, as compared to $5.8 million, or 22% of net sales,
for the third quarter of fiscal 1999. For the first three quarters of fiscal
2000, Internet sales were $38.1 million, or 35% of net sales, as compared to
$12.4 million, or 17% of net sales, for the same period in fiscal 1999. Although
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 decreased to
40.2% for the quarter ended September 30, 2000 from 40.7% for the quarter ended
October 2, 1999. For the three quarters ended September 30, 2000, gross profit
as a percentage of net sales increased to 40.5% from 39.1% for the three
quarters ended October 2, 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. The Company also
believes that enhanced inventory management techniques have also had a positive
impact on gross profit. These factors are offset by the increase in Internet
sales as a percentage of net sales since Internet orders generate lower gross
profit because the Company offers free shipping on those orders.
Advertising expense. Advertising expense for the quarter ended
September 30, 2000 increased $1.5 million, or 22%, from the quarter ended
October 2, 1999. As a percentage of net sales, advertising expense decreased to
19.5% for the third quarter of fiscal 2000 from 24.2% for the third quarter of
fiscal 1999. For the three quarters ended September 30, 2000, advertising
expense increased $4.0 million, or 24%, from the three quarters ended October 2,
1999. As a percentage of net sales, advertising expense decreased to 18.7% for
the first three
12
<PAGE>
quarters of fiscal 2000 from 22.3% for the first three 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.
Other selling, general and administrative expenses. Other selling,
general and administrative expenses for the quarter ended September 30, 2000
increased $1.1 million, or 34%, from the quarter ended October 2, 1999. For the
three quarters ended September 30, 2000, other selling, general and
administrative expenses increased $2.9 million, or 33%, from the three quarters
ended October 2, 1999. As a percentage of net sales, other selling, general and
administrative expenses decreased to 10.3% for the third quarter of fiscal 2000
from 11.6% for the third quarter of fiscal 1999. For the three quarters ended
September 30, 2000, other selling, general and administrative expenses as a
percentage of net sales decreased to 10.8% from 11.9% for the first three
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, some
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 (expense), net. Other income (expense) increased to
approximately $26,000 and $260,000 for the quarter and three quarters ended
September 30, 2000, respectively, from approximately ($247,000) and ($76,000)
for the quarter and three quarters ended October 2, 1999, respectively. During
the third quarter of fiscal 1999, the Company expensed approximately $293,000 in
costs related to the Company's cancelled common stock offering.
Income taxes. The Company's effective tax rate for the quarter and
three quarters ended September 30, 2000 was 39.1% and 38.5%, respectively. For
the quarter and three quarters ended October 2, 1999, the Company's effective
tax rate was 4.6% and 21.0%, respectively, which reflects a reduction in the
valuation allowance as a result of utilizing some tax operating loss
carryforwards. As of September 30, 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 three quarters ended September 30, 2000 and October 2, 1999,
net cash provided by operating activities was approximately $11.2 million and
$4.6 million, respectively. In the fiscal 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 fiscal
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 $1.1 million and $1.5 million for
investing activities in the three quarters ended September 30, 2000 and October
2, 1999, respectively. The majority of these amounts relate to capital
expenditures for infrastructure improvements. Capital expenditures for the
fiscal 2000 period were approximately $880,000. 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 $870,000. 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.
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As of September 30, 2000, the Company had entered into commitments to
purchase approximately $13.8 million of broadcast advertising from October 2000
through September 2001. The Company can cancel approximately $3.6 million of the
total 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 from January
1, 2000 through December 31, 2000.
During the three quarters ended September 30, 2000 and October 2, 1999,
the Company used approximately $14.3 million and $2.3 million for financing
activities. During the fiscal 2000 period, the Company repurchased a total of
1,084,000 shares of its common stock for a total cost of $16,841,448. During the
fiscal 1999 period, the Company repurchased a total of 360,000 shares of its
common stock for a total cost of $2,405,911. 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 and had net borrowings on its
revolving credit facility of approximately $2.5 million.
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 September
30, 2000, the Company had repurchased 1,484,000 shares for a total cost of
$19,453,109. 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 September 30, 2000). As of
September 30, 2000, the Company's outstanding borrowings on the credit facility
were $2,468,544. 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 2001. 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"
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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;
. 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 sales of all 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
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. Changing technology could adversely affect the operation of the Company's
website.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to changes in interest rates primarily related
to its revolving credit facility. As of September 30, 2000, the Company's
outstanding borrowings on the credit facility were $2,468,544. The credit
facility bears interest at a variable rate.
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 September 30, 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: November 14, 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
17
