SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

 

FORM 8-K/A

 

 

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

 

Date of Report (Date of earliest event reported): January 30, 2003

 

AMENDMENT NO. 1

 

 

1-800 CONTACTS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

0-23633

 

87-0571643

(State or other jurisdiction of
incorporation)

 

(Commission File
Number)

 

(I.R.S. Employer Identification No.)

 

66 E. Wadsworth Park Drive, 3rd Floor, Draper, UT

 

84020

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code:  (801) 924-9800

 

 

N/A

(Former name or former address, if changed since last report.)

 

 

 

Item 2.    Acquisition or Disposition of Assets

 

                This Form 8-K/A amends the Current Report on Form 8-K of 1-800 CONTACTS, INC. dated January 30, 2003 regarding the acquisition of certain assets and the assumption of certain liabilities of Lens Express LLC and Camelot Ventures/CJ, L.L.C. d/b/a Lens 1st, formerly K&D Distributors, Ltd. d/b/a Lens 1st. The sole purpose of this amendment is to provide the financial statements of the businesses acquired as required by Item 7(a) and the pro forma financial information required by Item 7(b), which financial statements and information were excluded from the original filing in reliance on Items 7(a)(4) and 7(b)(2), respectively, of Form 8-K.

 

 

 

1-800 CONTACTS, INC.

 

INDEX

 

Item 7.    Financial Statements and Exhibits

(a)           Financial statements of business acquired:

 

Lens Express, Inc.

 

Independent Auditors’ Report (Deloitte & Touche LLP)

Balance Sheets as of October 31, 2002 and 2001

Statements of Operations for the Successor Periods for the years ended

October 31, 2002, 2001, and the period from June 16, 2000

to October 31, 2000, and Predecessor Period from November 1, 1999

to June 15, 2000

Statements of Shareholder’s Deficit for the Successor Periods for the years ended

October 31, 2002, 2001, and the period from June 16, 2000

to October 31, 2000, and Predecessor Period from November 1, 1999

to June 15, 2000

Statements of Cash Flows for the Successor Periods for the years ended

October 31, 2002, 2001, and the period from June 16, 2000

to October 31, 2000, and Predecessor Period from November 1, 1999

to June 15, 2000

Notes to Financial Statements

 

Camelot Ventures/CJ, LLC d/b/a Lens 1st

 

Report of Independent Accountants (PricewaterhouseCoopers LLP)

Statement of Financial Position as of December 31, 2002 and 2001

Statement of Operations for the Year Ended December 31, 2002 and for the Period

from Inception (June 8, 2001) through December 31, 2001

Statement of Members’ Equity for the Year Ended December 31, 2002 and for the
Period from Inception (June 8, 2001) through December 31, 2001

Statement of Cash Flows for the Year Ended December 31, 2002 and for the
Period from Inception (June 8, 2001) through December 31, 2001

Notes to Financial Statements

 

K&D Distributors, Ltd. d/b/a Lens 1st

 

Report of Independent Accountants (PricewaterhouseCoopers LLP)

Statement of Financial Position as of June 7, 2001

Statement of Operations for the Period from January 1, 2001 through June 7, 2001

Statement of Members’ Deficit for the Period from January 1, 2001 through June7, 2001

Statement of Cash Flows for the Period from January 1, 2001 through June 7, 2001

Notes to Financial Statements

 

 

1

 

K&D Distributors, Ltd. d/b/a Lens 1st

 

Report of Independent Accountants (Plante & Moran, PLLC)

Balance Sheet as of December 31, 2000

Statement of Operations and Members’ Equity (Deficit) for the Year Ended December 31, 2000

Statement of Cash Flows for the Year Ended December 31, 2000

Notes to Financial Statements

 

(b)                 Pro forma financial information:

 

Introduction to Pro Forma Financial Information

Unaudited Pro Forma Condensed Combined Balance Sheet
as of December 28, 2002

Unaudited Pro Forma Condensed Combined Statement of Operations
for the year ended December 28, 2002

Notes to Unaudited Pro Forma Condensed Combined Financial Statements

 

(c)                 Exhibits:

 

Exhibit 23.1            Consent of Deloitte & Touche

Exhibit 23.2            Consent of PriceWaterhouseCoopers

Exhibit 23.3            Consent of Plante & Moran

 

 

2

 

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 hereunto duly authorized.

 

 

 

 

1-800 CONTACTS, INC.

 

 

 

 

Date: April 15, 2003

 

By:

/s/ Jonathan C. Coon

 

 

Name:

Jonathan C. Coon

 

 

Title:

President and Chief Executive Officer

 

 

3

 

INDEPENDENT AUDITORS’ REPORT

 

 

To the Board of Directors and Shareholder
Lens Express, Inc.

 

We have audited the accompanying balance sheets of Lens Express, Inc. (the “Company”) as of October 31, 2002 and 2001, and the related statements of operations, shareholder’s deficit and cash flows for the successor periods for the years ended October 31, 2002, 2001, and the period from June 16, 2000 to October 31, 2000, and the predecessor period from November 1, 1999 to June 15, 2000.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generally accepted in the United States of America.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, such financial statements present fairly, in all material respects, the financial position of Lens Express, Inc. as of October 31, 2002 and 2001, and the results of its operations and its cash flows for the successor periods for the years ended October 31, 2002, 2001, and the period from June 16, 2000 to October 31, 2000, and the predecessor period from November 1, 1999 to June 15, 2000 in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 2 to the financial statements, the Company’s loss from operations, negative working capital, and failure to meet certain covenants related to its credit agreement raise substantial doubt about its ability to continue as a going concern.  Management’s plans in regard to these matters are also described in Note 2.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

As discussed in Note 9, on November 25, 2002, the net assets of the Company were purchased by Lens Express, LLC.  On January 30, 2003, the net assets of the Company were subsequently purchased, along with an unrelated entity, by 1-800 Contacts, Inc., a publicly held company.

 

Deloitte & Touche

 

 

March 26, 2003

 

 

4

 

LENS EXPRESS, INC.

 

BALANCE SHEETS

OCTOBER 31, 2002 AND 2001

 

 

 

2002

 

2001

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

321,829

 

$

215,459

 

Accounts receivable (net of allowance for doubtful accounts of $255,324 and $263,410, respectively)

 

252,984

 

244,793

 

Inventory

 

1,540,947

 

2,800,286

 

Prepaid expenses and other current assets

 

119,584

 

102,623

 

 

 

 

 

 

 

Total current assets

 

2,235,344

 

3,363,161

 

 

 

 

 

 

 

FIXED ASSETS - Net

 

651,200

 

1,089,703

 

 

 

 

 

 

 

CUSTOMER LIST - Net

 

1,944

 

6,878

 

 

 

 

 

 

 

DUE FROM AFFILIATES

 

7,283

 

210,294

 

 

 

 

 

 

 

DEFERRED FINANCING FEES - Net

 

328,706

 

422,622

 

 

 

 

 

 

 

OTHER ASSETS - Net

 

—

 

22,045

 

 

 

 

 

 

 

TOTAL ASSETS

 

$

3,224,477

 

$

5,114,703

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDER’S DEFICIT

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Current portion of long-term debt

 

$

18,993,359

 

$

18,022,656

 

Accounts payable and accrued expenses

 

4,998,140

 

4,527,799

 

Current portion of deferred membership revenue

 

881,418

 

684,140

 

 

 

 

 

 

 

Total current liabilities

 

24,872,917

 

23,234,595

 

 

 

 

 

 

 

DEFERRED MEMBERSHIP REVENUE

 

1,049,005

 

1,117,453

 

 

 

 

 

 

 

Total liabilities

 

25,921,922

 

24,352,048

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDER’S DEFICIT:

 

 

 

 

 

Common stock, $.01 par value, authorized 1,000 shares, issued and outstanding 200 shares, in 2002 and 2001

 

2

 

2

 

Additional paid-in capital

 

17,149,998

 

17,149,998

 

Accumulated deficit

 

(39,847,445

)

(36,387,345

)

 

 

 

 

 

 

Total shareholder’s deficit

 

(22,697,445

)

(19,237,345

)

 

 

 

 

 

 

TOTAL LIABILITIES AND SHAREHOLDER’S DEFICIT

 

$

3,224,477

 

$

5,114,703

 

 

See notes to financial statements.

 

 

5

 

LENS EXPRESS, INC.

 

STATEMENTS OF OPERATIONS

SUCCESSOR PERIODS FOR THE YEARS ENDED OCTOBER 31, 2002, 2001,
AND THE PERIOD FROM JUNE 16, 2000 TO OCTOBER 31, 2000,
AND PREDECESSOR PERIOD FROM NOVEMBER 1, 1999 TO JUNE 15, 2000

 

 

 

Successor
2002

 

Successor
2001

 

Successor
Period  from
June 16, 2000 to
October 31,
2000

 

Predecessor
Period from
November 1,
1999 to
June 15, 2000

 

 

 

 

 

 

 

 

 

 

 

SALES - Net

 

$

34,341,621

 

$

40,221,252

 

$

20,125,500

 

$

28,463,364

 

 

 

 

 

 

 

 

 

 

 

COST OF SALES

 

20,094,440

 

23,291,397

 

12,505,853

 

14,635,274

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

14,247,181

 

16,929,855

 

7,619,647

 

13,828,090

 

 

 

 

 

 

 

 

 

 

 

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

 

16,425,869

 

20,553,463

 

8,296,896

 

10,995,080

 

 

 

 

 

 

 

 

 

 

 

GOODWILL IMPAIRMENT

 

—

 

30,296,305

 

—

 

—

 

 

 

 

 

 

 

 

 

 

 

(LOSS) INCOME FROM OPERATIONS

 

(2,178,688

)

(33,919,913

)

(677,249

)

2,833,010

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE

 

1,282,998

 

2,222,262

 

890,156

 

13,139

 

 

 

 

 

 

 

 

 

 

 

INTEREST INCOME

 

1,586

 

72,612

 

62,411

 

378,907

 

 

 

 

 

 

 

 

 

 

 

(LOSS) INCOME  BEFORE INCOME TAXES

 

(3,460,100

)

(36,069,563

)

(1,504,994

)

3,198,778

 

 

 

 

 

 

 

 

 

 

 

INCOME TAX (BENEFIT) EXPENSE

 

—

 

(595,249

)

(591,963

)

1,257,120

 

 

 

 

 

 

 

 

 

 

 

NET (LOSS) INCOME

 

$

(3,460,100

)

$

(35,474,314

)

$

(913,031

)

$

1,941,658

 

 

6

 

LENS EXPRESS, INC.

 

STATEMENTS OF SHAREHOLDER’S (DEFICIT) EQUITY

SUCCESSOR PERIODS FOR THE YEARS ENDED OCTOBER 31, 2002, 2001,
AND THE PERIOD FROM JUNE 16, 2000 TO OCTOBER 31, 2000,
AND PREDECESSOR PERIOD FROM NOVEMBER 1, 1999 TO JUNE 15, 2000

 

 

 

 

 

Additional
Paid-in
Capital

 

(Accumulated
Deficit)
Retained
Earnings

 

Total
Shareholder’s
(Deficit) Equity

 

 

Common Stock

Shares

 

Amount

PREDECESSOR

 

 

 

 

 

 

 

 

 

 

 

BALANCE,
NOVEMBER 1, 1999

 

100,000

 

$

1,000

 

$

179,816

 

$

4,743,452

 

$

4,924,268

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net lncome

 

—

 

—

 

—

 

1,941,658

 

1,941,658

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE,
JULY 15, 2000

 

100,000

 

1,000

 

179,816

 

6,685,110

 

6,865,926

 

 

 

 

 

 

 

 

 

 

 

 

 

SUCCESSOR

 

 

 

 

 

 

 

 

 

 

 

Net Effect of Recapitalization Upon Acquisition of Lens Express, Inc.

 

(99,800

)

(998

)

16,970,182

 

(6,685,110

)

10,284,074

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net Loss

 

—

 

—

 

—

 

(913,031

)

(913,031

)

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE,
OCTOBER 31, 2000

 

200

 

2

 

17,149,998

 

(913,031

)

16,236,969

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

Net Loss

 

—

 

—

 

—

 

(35,474,314

)

(35,474,314

)

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE,
OCTOBER 31, 2001

 

200

 

2

 

17,149,998

 

(36,387,345

)

(19,237,345

)

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

Net Loss

 

—

 

—

 

—

 

(3,460,100

)

(3,460,100

)

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE,
OCTOBER 31, 2002

 

200

 

2

 

$

17,149,998

 

$

(39,847,445

)

$

(22,697,445

)

 

7

 

LENS EXPRESS, INC.

 

STATEMENTS OF CASH FLOWS

SUCCESSOR PERIODS FOR THE YEARS ENDED OCTOBER 31, 2002, 2001,
AND THE PERIOD FROM JUNE 16, 2000 TO OCTOBER 31, 2000,
AND PREDECESSOR PERIOD FROM NOVEMBER 1, 1999 TO JUNE 15, 2000

 

 

 

Successor
2002

 

Successor
2001

 

Successor
Period from
June 16, 2000 to
October 31, 2000

 

Predecessor
Period  from
June 16, 2000  to
October 31, 2001

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(3,460,100

)

$

(35,474,314

)

$

(913,031

)

$

1,941,658

 

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

889,494

 

2,631,785

 

1,034,752

 

637,046

 

Goodwill impairment

 

—

 

30,296,305

 

—

 

—

 

Deferred income taxes

 

—

 

241,448

 

(214,000

)

—

 

Gain on sale of fixed assets

 

—

 

(45,000

)

—

 

—

 

Changes in assets and liabilities excluding acquisitions of businesses:

 

 

 

 

 

 

 

 

 

Accounts receivable

 

(8,191

)

939,421

 

(327,731

)

(291,360

)

Inventory

 

1,259,339

 

923,370

 

193,956

 

(1,819

)

Prepaid expenses and other current assets

 

(16,961

)

147,397

 

(18,661

)

(75,768

)

Income taxes

 

—

 

10,500

 

(37,948

)

(43,853

)

Other assets

 

22,045

 

—

 

50,573

 

—

 

Accounts payable and accrued expenses

 

470,341

 

1,172,632

 

848,611

 

1,437,032

 

Due from affiliates

 

203,011

 

314,328

 

—

 

(5,544,143

)

Deferred Revenue

 

128,830

 

1,067,937

 

733,656

 

(1,085,762

)

 

 

 

 

 

 

 

 

 

 

Net cash (used in) provided by operating activities

 

(512,192

)

2,225,809

 

1,350,177

 

(3,026,969

)

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES -

 

 

 

 

 

 

 

 

 

Capital expenditures

 

(352,141

)

(562,211

)

(137,992

)

(278,942

)

Acquisition of business, net of cash

 

—

 

—

 

(33,103,063

)

—

 

Acquisition of customer list

 

—

 

—

 

(15,011

)

—

 

Proceeds from sale of equipment

 

—

 

45,000

 

—

 

—

 

Investments in Affiliates

 

—

 

—

 

(524,623

)

—

 

 

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

(352,141

)

(517,211

)

(33,780,689

)

(278,942

)

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Proceeds from the Sale of Common Stock

 

—

 

—

 

13,550,000

 

—

 

Net borrowings (repayments) of term loan

 

—

 

(1,975,781

)

17,123,437

 

—

 

Net borrowings of revolver

 

970,703

 

500,000

 

2,375,000

 

—

 

Deferred Financing Fees

 

—

 

—

 

(551,756

)

—

 

Repayment of capital lease obligations

 

—

 

(46,674

)

(36,853

)

(72,434

)

Notes payable - affiliates

 

—

 

(1,000,000

)

1,000,000

 

—

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) financing activities

 

970,703

 

(2,522,455

)

33,459,828

 

(72,434

)

 

 

 

 

 

 

 

 

 

 

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

106,370

 

(813,857

)

1,029,316

 

(3,378,345

)

 

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

215,459

 

1,029,316

 

—

 

4,471,345

 

 

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

321,829

 

$

215,459

 

$

1,029,316

 

$

1,093,000

 

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

811,385

 

2,752,769

 

759,841

 

—

 

Cash paid for income taxes, net of (refunds)

 

—

 

—

 

—

 

—

 

 

See notes to financial statements.

 

8

 

LENS EXPRESS, INC.

 

NOTES TO FINANCIAL STATEMENTS
THE SUCCESSOR PERIODS FOR THE YEARS ENDED OCTOBER 31, 2002, 2001 AND THE PERIOD FROM JUNE 16, 2000 TO OCTOBER 31, 2000, AND PREDECESSER PERIOD FROM NOVEMBER 1, 1999 TO June 15, 2000

 

1.                   NATURE OF OPERATIONS

 

Lens Express, Inc. (the “Company”) is a wholesale and retail distributor of contact lenses, ophthalmic lenses, sunglasses, and related eye products throughout the United States.  Prior to November 25, 2002, the Company, along with Wise Optical Vision Group, Inc (the “Affiliate”) were subsidiaries of Strategic Optical Holdings, Inc., (the “Parent”).  The Company was formed through the purchase of The Ultimate Contact, Inc, on March 3, 2000, and the subsequent purchase of Lens Express, Inc. on June 16, 2000 by the Ultimate Contact, Inc.  The surviving entity was named Lens Express, Inc.

 

The Parent acquired The Ultimate Contact, Inc. for $2,850,000 in cash and 1,239 shares of the Company’s common stock having a value of approximately $150,000.  In connection with the acquisition, the Company incurred expenses of $96,712, which were allocated to the purchase price.  The Ultimate Contact, Inc. was a wholesale and retail distributor of contact lenses throughout the United States.  The acquisition was accounted for as a purchase.  The aggregate purchase price was allocated to the underlying assets and liabilities based on their respective estimated fair values at the date of acquisition.  The excess of purchase price over the fair value of the net assets acquired (“goodwill”) was $3,039,721 and is being amortized over 20 years.  The results of the acquired business were included in the Company’s statement of operations beginning March 4, 2000.

 

The net assets and business of the Company were acquired by The Ultimate Contact, Inc. on June 16, 2000 for $29,726,263 in net cash and 21,563 shares of the Parent’s common stock having a value of approximately $3,450,000.  In conjunction with the acquisition, the Parent incurred expenses of $430,088, which were allocated to the purchase price.  The acquisition was accounted for as a purchase.  The aggregate purchase price was allocated to the underlying assets and liabilities based on their respective estimated fair values at the date of acquisition.  The excess of purchase price over the fair value of the net assets acquired (“goodwill”) was $29,540,822 and is being amortized over 20 years.  As disclosed in Note 2, as of October 31, 2001, the Company determined that goodwill was impaired, based on the current estimated market value of the Company.  An impairment charge of $30,296,305 was recorded to write off the remaining unamortized goodwill.

 

As disclosed in Note 9, the net assets of the Company were purchased by Lens Express, LLC on November 25, 2002, and subsequently sold, along with an unrelated entity, to 1-800 Contacts, Inc. on January 30, 2003.

 

2.                   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation - The accompanying financial statements represent the financial position of the Company as of October 31, 2002 and 2001, and the results of its operations for the successor

 

9

 

periods for the years ended October 31, 2002, 2001, and the period from June 16, 2000 to October 31, 2000, and the predecessor period from November 1, 1999 to June 15, 2000.

 

The Company’s financial statements have been presented on a going-concern basis, which contemplates realization of assets and satisfaction of liabilities in the normal course of business.  The Company incurred net losses of $3,460,100, and $35,474,314 during the successor periods for the years ended October 31, 2002 and 2001, respectively, had negative working capital as of October 31, 2002 and 2001, and has an accumulated deficit of $39,847,445 as of October 31, 2002.  As a result of noncompliance and expected future noncompliance with certain debt covenants, on October 25, 2001, the Company entered into a forbearance agreement with a bank to prevent its outstanding debt from becoming immediately due and payable.  This forbearance agreement expired on December 31, 2001, and the Company entered into a new forbearance agreement, which expired on March 31, 2002.  The Company is currently not operating under any forbearance agreement with the bank, and has not made interest or principal payments since August and January 2002, respectively.  The Company’s lender has requested that management either recapitalize or sell the Company.  As disclosed in Note 9, the assets of the Company were purchased by Lens Express, LLC on November 25, 2002, and subsequently sold, along with an unrelated entity, to 1-800 Contacts, Inc. on January 31, 2003.

 

Cash Equivalents - The Company considers all highly liquid debt instruments purchased with maturity of three months or less to be cash equivalents.  The Company’s cash equivalents are not insured by the Federal Deposit Insurance Corporation and are subject to investment risk.

 

Use of Estimates - The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the years.  Actual results could differ from those estimates.

 

Income Taxes - The Company uses the asset and liability approach in determining its accounting for income taxes.  Under this approach, deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and those recognized for tax purposes.  The Company’s income tax accounts are presented in the financial statements as if it were a stand alone entity for all periods presented.

 

Inventory - Inventory consists of finished goods and is valued at the lower of cost or market, on an average cost basis.

 

Fixed Assets - Computer hardware and software, equipment, and furniture and fixtures are stated at cost and are being depreciated on a straight-line basis over their estimated useful lives.

 

Leasehold improvements are stated at cost and are being amortized on the straight-line method over the lesser of the estimated useful lives of the related assets or lease term.

 

A summary of the lives used in computing depreciation is as follows:

 

Computer hardware and software

 

3-5 years

 

Equipment, furniture and fixtures

 

5-7 years

 

 

10

 

Impairment of Long-Lived Assets - The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset.  If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.  Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

 

Goodwill - Goodwill represents the excess of the cost of businesses acquired over the fair market value of identifiable net assets at the dates of acquisition.  Goodwill is amortized on a straight-line basis over 20 years.  As of October 31, 2001, the Company determined that goodwill was impaired based on the current estimated market value of the Company (Note 9).  An impairment charge of $30,296,305 was recorded to write-off the remaining unamortized goodwill.  There is no remaining goodwill recorded on the Company’s books.

 

Deferred Financing Fees - Deferred financing fees represents loan origination costs of $551,756 net of amortization, as a result of entering into a credit agreement in 2000 (Note 2).  The costs are amortized over six years, which represents the life of the agreement.  Accumulated amortization of deferred financing fees was $223,050 and $129,134 at October 31, 2002 and 2001, respectively.

 

Accounts Payable – As of October 31, 2002 and 2001, accounts payable amounted to $2,670,405 and $1,959,298, respectively.

 

Delivery, Shipping and Handling Costs - The Company accounts for its shipping and handling costs within selling, general and administrative expenses.  For the successor periods for the years ended October 31, 2002, 2001, and the period from June 16, 2000 to October 31, 2000, and the predecessor period from November 1, 1999 to June 15, 2000, the Company incurred total costs of $1,648,352, $2,139,694, and $821,101, and $1,366,504, respectively.  Shipping and handling costs, which are billed to customers, are recorded as revenue.

 

Customer List – An acquired customer list has been capitalized and is being amortized on the straight-line method over its estimated useful lives of 3 years.  The aggregate accumulated amortization of this item was $13,056 and $8,122 at October 31, 2002 and 2001, respectively.

 

Concentration of Credit Risk - The Company from time to time has cash in financial institutions in excess of insured limits.  In assessing its risk, the Company’s policy is to maintain funds only with reputable financial institutions.

 

Revenue Recognition - Revenue related to the sale of product is recognized when goods are shipped.  Revenues are recorded net of any applicable discounts and returns.  In addition to revenue derived from the sale of product, the Company receives cash in advance from customers in exchange for the customer’s participation in membership programs for one, three- and five-year periods.  The membership program entitles members to certain benefits during the membership period including participation in a discount program, fixed pricing on product, and access to a physicians referral network.  The Company records cash received for membership programs as deferred membership revenue and recognizes these amounts in income on a straight-line basis over the lives of the individual memberships.

 

11

 

Recent Accounting Pronouncements – Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations, issued by the Financial Accounting Standards Board (“FASB”) in July 2001, requires all business combinations initiated after June 30, 2001 to be accounted for under the purchase method.  SFAS 141 also sets forth guidelines for applying the purchase method of accounting in the determination of intangible assets, including goodwill acquired in a business combination, and expands financial disclosures concerning business combinations consummated after June 30, 2001.  The application of SFAS 141 did not affect previously reported amounts included in goodwill or other intangible assets.

 

SFAS No. 142, Goodwill and Other Intangible Assets, issued by FASB in July 2001, requires that an intangible asset that is acquired shall be initially recognized and measured based on its fair value.  The statement also provides that goodwill should not be amortized, but shall be tested for impairment annually, or more frequently if circumstances indicate potential impairment, through a comparison of fair value to its carrying amount.  The Company evaluated its existing goodwill and other intangible assets, under SFAS 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of, as of October 31, 2001, which resulted in a write-off of all remaining goodwill as of that date.

 

SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, addresses financial accounting and reporting for the impairment or disposal of long-lived assets.  This statement supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of Accounting Principles Board (“APB”) Opinion No. 30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business.  This Statement retains the requirements of Statement 121 to recognize an impairment loss only if the carrying amount of a long-lived asset is not recoverable from its undiscounted cash flows and measure and impairment loss as the difference between the carrying amount and fair value of the asset.   This Statement also establishes criteria beyond that previously specified in Statement 121 to determine when a long-lived asset is held for sale.  Management believes that adoption of this statement will not have a material effect on the Company’s financial statements.

 

SFAS No. 145, Rescission of SFAS No. 4, 44 and 64, Amendment of SFAS No.13 and Technical Corrections, is effective for all fiscal years beginning after January 1, 2003.  This statement requires that the reporting of gains and losses from the early extinguishment of debt as extraordinary items will only be required if they meet the specific criteria for extraordinary items included in Accounting Principles Board Opinion No. 30, Reporting the Results of Operations.  Management believes that adoption of this statement will not have a material effect on the Company’s financial statements.

 

SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, is effective for all fiscal years beginning after January 1, 2003.  This statement nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to an Activity (Including Certain Costs Incurred in a Restructuring).  This statement requires that the reporting of costs associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred.  Management believes that adoption of this statement will not have a material effect on the Company’s financial statements.

 

12

 

FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others - an interpretation of FASB Statements No. 5, 57, and 107 and rescission of FASB interpretation No. 34 (“FIN 45”), was issued in November 2002.  FIN 45 elaborates on the disclosures to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued.  It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee.  The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor’s fiscal year-end.  The disclosure requirements in this Interpretation are effective for financial statements for periods ending after December 15, 2002. Management believes that adoption of this statement will not have a material effect on the Company’s financial statements.

 

FASB Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”), was issued in January 2003.  FIN 46 clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, and applies immediately to any variable interest entities created after January 31, 2003 and to variable interest entities in which an interest is obtained after that date. This Interpretation is applicable for the Company on December 31, 2004, for interests acquired in variable interest entities prior to February 1, 2003. Management believes that adoption of this statement will not have a material effect on the Company’s financial statements.

 

3.                   FIXED ASSETS

 

As of October 31, 2002 and 2001, fixed assets consisted of the following:

 

 

 

2002

 

2001

 

 

 

 

 

 

 

Computer hardware and software

 

$

1,040,765

 

$

2,150,388

 

Equipment, furniture and fixtures

 

107,324

 

99,976

 

Leasehold improvements

 

74,255

 

57,288

 

 

 

 

 

 

 

 

 

1,222,344

 

2,307,652

 

 

 

 

 

 

 

Less accumulated depreciation and amortization

 

(571,144

)

(1,217,949

)

 

 

 

 

 

 

Fixed assets - net

 

$

651,200

 

$

1,089,703

 

 

Depreciation expense for the successor periods for the years ended October 31, 2002, 2001, and the period from June 16, 2000 to October 31, 2000, and the predecessor period from November 1, 1999 to June 15, 2000 was $788,700, $908,846, $492,667, and $296,033, respectively.

 

4.                   BANK DEBT

 

Effective with the Parent’s acquisition of the Company, the Company, along with the Parent and Affiliate, entered into a new credit agreement with a bank that refinanced the original facility. This agreement holds the Company, Parent and Affiliate jointly and severally liable for the debt under the agreement. The new credit agreement includes a $32,000,000 term loan, maturing on June 16, 2006.  Under the credit agreement, the term loan bears interest at a rate equal to (1) the greater of the prime rate or the Federal Funds rate plus .5%, plus .5% to 2%, or (2) LIBOR plus 1.75% to 3.25%

 

13

 

(subject to the provisions of the agreement.)  The weighted average interest rates for the successor periods for the years ended October 31, 2002, 2001, and the period from June 16, 2000 to October 31, 2000, were 6.72%, 7.99%, and 6.48%, respectively.  The term loan was to be repaid as follows $4,605,000, $4,988,750, $6,140,000 $6,140,000 and $3,605,000 in each of the years ended October 2002, 2003, 2004, 2005 and 2006, respectively. The Company has made payments of $329,297, $1,975,781, and $0, for the successor periods for the years ended October 31, 2002, 2001, and the period from June 16, 2000 to October 31, 2000, respectively.  The Affiliate has made payments of $246,328, $2,477,969, and $328,438, for the years ended October 31, 2002, 2001, and 2000, respectively.  As of October 31, 2002 and 2001, the borrowings under the credit agreement for the Company were $14,818,359 and $15,147,656, respectively, which, because the Company is in default as discussed below, are classified as a current liability.  The Affiliate had borrowings of $10,084,766 and $10,331,094 as of October 31, 2002 and 2001, respectively.  Although the debt is jointly and severally due, the debt incurred by the affiliate has not been reflected in the accompanying balance sheet.

 

The credit agreement also included a revolver loan of $13,000,000, which matures on June 16, 2006.  Borrowings under the revolving loan are subject to limitations set forth in the agreement and bear interest at a rate equal to (1) the greater of the prime rate or the Federal Funds rate plus .5%, plus .25% to 1.75%, or (2) LIBOR plus 1.5% to 3.00% (subject to the provisions of the agreement.)  The weighted average interest rates for the successor periods for the years ended October 31, 2002, 2001, and the period from June 16, 2000 to October 31, 2000, were 6.22%, 6.8%, and 6.5%, respectively.  As of October 31, 2002 and 2001, the borrowings under the revolver for the Company were $4,175,000 and $2,875,000, respectively, which, because the Company is in default as discussed below, are classified as a current liability.  The Affiliate had borrowings of $3,575,000 and $1,600,000, at October 31, 2002 and 2001, respectively.  Although the debt is jointly and severally due, the debt incurred by the Affiliate has not been reflected in the accompanying balance sheet.

 

Under the terms of the credit agreement, the Company is required to meet certain financial covenants including interest coverage, leverage, and debt service ratios, as well as, adjusted net income thresholds, and nonfinancial covenants, as defined in the credit agreement.  As discussed in Note 2, the Company was not in compliance with certain covenants related to the credit agreement and was not operating under a forbearance agreement as of October 31, 2002.  The Company’s lender has asked the Company to either recapitalize or sell the Company (see Note 9).

 

The Company may, at its discretion, prepay any outstanding amounts prior to the maturity date without penalty.  The loans are secured by substantially all of the assets of the Company.

 

14

 

5.                   INCOME TAXES

 

The provision (benefit) for income taxes consisted of the following:

 

 

 

Current

 

Deferred

 

Total

 

 

 

 

 

 

 

 

 

Successor year ended October 31, 2002:

 

 

 

 

 

 

 

Federal

 

$

—

 

$

—

 

$

—

 

State and local

 

—

 

—

 

—

 

 

 

 

 

 

 

 

 

 

 

$

—

 

$

—

 

$

—

 

 

 

 

 

Current

 

Deferred

 

Total

 

 

 

 

 

 

 

 

 

Successor year ended October 31, 2001:

 

 

 

 

 

 

 

Federal

 

$

(836,697

)

$

222,830

 

$

(613,867

)

State and local

 

—

 

18,618

 

18,618

 

 

 

 

 

 

 

 

 

 

 

$

(836,697

)

$

241,448

 

$

(595,249

)

 

 

 

 

Current

 

Deferred

 

Total

 

 

 

 

 

 

 

 

 

Successor Period ended October 31, 2000:

 

 

 

 

 

 

 

Federal

 

$

(461,044

)

$

(83,561

)

$

(544,605

)

State and local

 

(40,376

)

(6,982

)

(47,358

)

 

 

 

 

 

 

 

 

 

 

$

(501,420

)

$

(90,543

)

$

(591,963

)

 

 

 

 

Current

 

Deferred

 

Total

 

 

 

 

 

 

 

 

 

Predecessor Period ended June 15, 2000:

 

 

 

 

 

 

 

Federal

 

$

1,295,820

 

$

(139,269

)

$

1,156,551

 

State and local

 

112,205

 

(11,636

)

100,569

 

 

 

 

 

 

 

 

 

 

 

$

1,408,025

 

$

(150,905

)

$

1,257,120

 

 

15

 

Income tax expense (benefit) differed from the amount computed by applying the applicable U.S. federal statutory graduated income tax rate of 34% to pretax income as a result of the following:

 

 

 

 

 

Successor
Period from
June 16, 2000
to October 31,
2000

 

Predecessor
Period from
November 1, 1999
to June 15,
2000

 

 

Successor year
ended October 31,

2002

 

2001

 

 

 

 

 

 

 

 

 

 

Pre tax book income

 

(34.0

)%

(34.0

)%

(34.0

)%

34.0

%

State taxes (net of federal benefit)

 

(1.8

)

(1.7

)

(2.0

)

2.0

 

Other

 

0.2

 

2.9

 

(3.3

)

3.3

 

Valuation allowance

 

35.6

 

31.2

 

—

 

—

 

 

 

 

 

 

 

 

 

 

 

Effective tax rate

 

0.0

%

(1.6

)%

(39.3

)%

39.3

%

 

The components of the net deferred tax asset in the Company’s balance sheets at October 31, 2002 and 2001 are as follows:

 

 

 

2002

 

2001

 

 

 

 

 

 

 

Deferred tax assets:

 

 

 

 

 

Reserves

 

$

603,164

 

$

962,018

 

Difference between book and tax basis of depreciable amortizable assets

 

9,039,620

 

9,678,526

 

Inventory

 

30,956

 

30,526

 

NOL carryforwards

 

2,896,957

 

680,366

 

 

 

 

 

 

 

Total deferred tax assets

 

12,570,697

 

11,351,436

 

 

 

 

 

 

 

Deferred tax liabilities:

 

 

 

 

 

Difference between book and tax basis of depreciable amortizable assets

 

(69,253

)

(81,020

)

 

 

 

 

 

 

Net deferred tax assets

 

(69,253

)

(81,020

)

 

 

 

 

 

 

Valuation allowance

 

(12,501,444

)

(11,270,416

)

 

 

 

 

 

 

Net deferred tax assets - after valuation allowance

 

$

—

 

$

—

 

 

A valuation allowance for the full amount of the net deferred asset was recorded at October 31, 2002 and 2001 and represents the portion of tax operating loss carryforwards and other items for which it is more likely than not that the benefit of such item will not be realized.  Such valuation allowance increased by approximately $1.2 million for the year ended October 31, 2002 and increased by approximately $11.3 million for the year ended October 31, 2001.

 

16

 

At October 31, 2002, the Company had approximately $7.8 million of net operating loss carryforwards for income tax purposes expiring from October 31, 2021 to October 31, 2022.

 

6.                   COMMITMENTS AND CONTINGENCIES

 

Rent - The Company is committed under noncancelable operating leases for equipment and office space through June 30, 2011.  The facility leases also provide for additional rent equal to the Company’s pro rata share of real estate taxes and other operating costs.

 

As of October 31, 2002, the minimum annual lease payments were as follows:

 

Years

 

 

 

 

 

 

 

2003

 

$

151,920

 

2004

 

178,130

 

2005

 

204,348

 

2006

 

230,556

 

2007

 

256,764

 

Thereafter

 

1,608,668

 

 

 

 

 

 

 

$

2,630,386

 

 

Rental expense for the successor periods for the years ended October 31, 2002, 2001, and the period from June 16, 2000 to October 31, 2000, and the predecessor period from November 1, 1999 to June 15, 2000 was $262,203, $251,638, $86,593, and $144,111, respectively.

 

Employment Agreements - The Company is party to employment agreements with certain executives, which provide for compensation and certain other benefits.  The agreements also provide for severance payments under certain circumstances.

 

Litigation - On March 24, 2000, a lawsuit was filed against the Company, which alleged violations of federal and state unsolicited goods mailing statutes and state deceptive trade practices acts.  The suit, filed in the United States District Court for the Western District of Texas, was certified as a nationwide class action in February 2001.

 

The principal claim in the case is that the Company sent its customers unsolicited shipments of contact lenses and related products in violation of the statutes previously mentioned.  The Company maintains a program whereby if the customer so requests, new shipments of contact lenses are shipped to customers at requested intervals and the customers’ credit or debit cards are charged when the shipments are made.  The Company has sent these automatic shipments to approximately 210,000 customers since March 1998, the time when the claims in the lawsuit begin.  The complaint seeks reimbursement of all monies paid by recipients for those lens shipments as well as punitive damages and attorneys’ fees.

 

In March 2002, the Company settled the case by agreeing to issue credits to class members of either $5 or $37 based upon individual purchasing history.  Pursuant to an agreement between the Parent and Summit Technology, Inc. (the former owner of the Company), Summit Technology, Inc. will pay the majority of the plaintiff’s counsel fees as the Company will be responsible for issuing the

 

17

 

credits.  The Company had accrued $425,250 for this loss contingency as of October 31, 2001.  At October 31, 2002 there were no remaining reserves.

 

7.                   PROFIT SHARING PLAN

 

The Company maintains a defined contribution plan covering all of its eligible employees.  The plan provides for a Company match determined at the start of the plan year.  Expenses for the plan for the successor periods for the years ended October 31, 2002, 2001, and the period from June 16, 2000 to October 31, 2000, and the predecessor period from November 1, 1999 to June 15, 2000 were $50,911, $48,068, $21,621, and $35,983, respectively.

 

8.                   RELATED PARTY

 

The Company paid $246,729 to the Affiliate for management fees for the years ended October 31, 2002.

 

9.                   SUBSEQUENT EVENT

 

On November 25, 2002, the net assets of the Company were purchased by Lens Express, LLC for $7,000,000 in cash.  All assets and liabilities of Lens Express, LLC, and an unrelated company, were subsequently purchased by 1-800 Contacts, Inc. on January 30, 2003.

 

* * * * * *

 

18

 

Camelot Ventures/CJ, LLC
d/b/a Lens 1st

 

Report on Audit of Financial Statements

For the Year Ended December 31, 2002 and the
Period from June 8, 2001 through
December 31, 2001

 

19

 

Report of Independent Accountants

 

To the Board of Directors and

Members’ of Camelot Ventures/CJ LLC

 

In our opinion, the accompanying statement of financial position and the related statements of operations, of member’s equity and of cash flows present fairly, in all material respects, the financial position of Camelot Ventures/CJ, LLC d/b/a Lens 1st at December 31, 2002 and 2001, and the results of its operations and its cash flows for the year ended December 31, 2002 and for the period June 8, 2001 (inception) to December 31, 2001 in conformity with accounting principles generally accepted in the United States of America.  These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits.  We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

 

PricewaterhouseCoopers LLP

 

 

March 14, 2003

 

20

 

Camelot Ventures/CJ, LLC d/b/a Lens 1st

Statement of Financial Position

December 31, 2002 and 2001

 

 

 

2002

 

2001

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash

 

$

14,743

 

$

—

 

Accounts receivable, net of allowance of $12,000 as of December 31, 2002

 

239,240

 

155,166

 

Accounts receivable from affiliates

 

149,968

 

30,417

 

Due from escrow

 

—

 

125,000

 

Inventory

 

1,562,659

 

1,598,420

 

Prepaid expense

 

112,354

 

161,279

 

Intangible assets, net

 

—

 

187,500

 

Total current assets

 

2,078,964

 

2,257,782

 

 

 

 

 

 

 

Property and equipment, net

 

641,348

 

602,612

 

Intangible assets, net

 

682,714

 

1,460,741

 

Goodwill

 

2,908,579

 

2,908,579

 

 

 

 

 

 

 

Total assets

 

$

6,311,605

 

$

7,229,714

 

 

 

 

 

 

 

Liabilities and Members’ Equity

 

 

 

 

 

Current liabilities

 

 

 

 

 

Outstanding checks in excess of bank balance

 

$

137,317

 

$

308,096

 

Revolving line of credit

 

2,553,933

 

2,537,404

 

Current portion of term loan

 

400,000

 

—

 

Accounts payable

 

814,327

 

748,004

 

Accrued liabilities

 

376,099

 

331,095

 

Accrued interest

 

29,325

 

62,380

 

Unearned revenue

 

91,514

 

57,737

 

Total current liabilities

 

4,402,515

 

4,044,716

 

 

 

 

 

 

 

Term loan

 

1,600,000

 

2,000,000

 

Total liabilities

 

6,002,515

 

6,044,716

 

 

 

 

 

 

 

Members’ equity

 

 

 

 

 

13,306,730 and 11,000,000 membership units authorized, 11,185,862 and 8,500,000 issued and outstanding, respectively

 

309,090

 

1,184,998

 

 

 

 

 

 

 

Total liabilities and members’ equity

 

$

6,311,605

 

$

7,229,714

 

 

The accompanying notes are an integral part of these financial statements.

 

21

 

Camelot Ventures/CJ, LLC d/b/a Lens 1st

Statement of Operations

For the Year Ended December 31, 2002 and for the

Period from Inception (June 8, 2001) through December 31, 2001

 

 

 

2002

 

2001

 

 

 

 

 

 

 

Revenue

 

$

14,158,269

 

$

8,197,484

 

Cost of goods sold

 

9,202,912

 

5,109,918

 

Gross profit

 

4,955,357

 

3,087,566

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

Administrative and general

 

3,678,219

 

1,845,018

 

Advertising and marketing

 

1,262,785

 

1,812,140

 

Depreciation and amortization

 

1,268,384

 

1,171,975

 

Total operating expenses

 

6,209,388

 

4,829,133

 

Loss from operations

 

(1,254,031

)

(1,741,567

)

Interest expense

 

135,226

 

82,976

 

 

 

 

 

 

 

Net loss

 

$

(1,389,257

)

$

(1,824,543

)

 

The accompanying notes are an integral part of these financial statements.

 

22

 

Camelot Ventures/CJ, LLC d/b/a Lens 1st

Statement of Members’ Equity

For the Year Ended December 31, 2002 and for the

Period from Inception (June 8, 2001) through December 31, 2001

 

 

 

Units

 

Total
members’
equity

 

 

 

 

 

 

 

Balance, June 8, 2001

 

—

 

$

—

 

Issuance of membership units

 

8,500,000

 

3,000,000

 

Non-cash compensation related to issuance of options

 

—

 

9,541

 

Net loss

 

—

 

(1,824,543

)

Balance, December 31, 2001

 

8,500,000

 

1,184,998

 

Issuance of membership units

 

2,685,862

 

483,467

 

Non-cash compensation related to issuance of options

 

—

 

29,882

 

Net loss

 

—

 

(1,389,257

)

 

 

 

 

 

 

Balance, December 31, 2002

 

11,185,862

 

$

309,090

 

 

The accompanying notes are an integral part of these financial statements.

 

23

 

Camelot Ventures/CJ, LLC d/b/a Lens 1st

Statement of Cash Flows

For the Year Ended December 31, 2002 and for the

Period from Inception (June 8, 2001) through December 31, 2001

 

 

 

2002

 

2001

 

 

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

Net loss

 

$

(1,389,257

)

$

(1,824,543

)

Adjustments to reconcile net loss to net cash used in operating activities

 

 

 

 

 

Depreciation and amortization

 

1,268,384

 

1,171,975

 

Non-cash compensation related to issuance of options
for membership units

 

29,882

 

9,541

 

Bad debt expense

 

10,144

 

23,196

 

Changes in current assets and current liabilities

 

 

 

 

 

Accounts receivable

 

(213,769

)

(93,285

)

Inventory

 

35,761

 

(1,156,890

)

Prepaid expense

 

48,925

 

(45,803

)

Accounts payable

 

66,323

 

(477,884

)

Accrued and other liabilities

 

45,726

 

107,970

 

Net cash used in operating activities

 

(97,881

)

(2,285,723

)

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Purchases of property and equipment

 

(341,593

)

(227,938

)

Acquisition of certain assets

 

—

 

(5,081,839

)

Cash paid for non-compete agreement

 

—

 

(250,000

)

Proceeds from escrow

 

125,000

 

—

 

Net cash used by investing activities

 

(216,593

)

(5,559,777

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Outstanding checks in excess of bank balance

 

(170,779

)

308,096

 

Proceeds on revolving line of credit, net

 

16,529

 

2,537,404

 

Proceeds from issuance of term note

 

—

 

2,000,000

 

Proceeds from issuance of Members’ equity

 

483,467

 

3,000,000

 

Net cash provided by financing activities

 

329,217

 

7,845,500

 

Net change in cash

 

14,743

 

—

 

 

 

 

 

 

 

Cash, beginning of period

 

—

 

—

 

 

 

 

 

 

 

Cash, end of period

 

$

14,743

 

$

—

 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

Cash paid for interest

 

$

102,171

 

$

21,257

 

 

The accompanying notes are an integral part of these financial statements.

 

24

 

Camelot Ventures/CJ, LLC d/b/a Lens 1st

Notes to Financial Statements

 

1.                   Nature of Business

 

Camelot Ventures/CJ, L.L.C. d/b/a Lens 1st (the “Company”) is a Michigan limited liability company.  The Company commenced business on June 8, 2001 with the purchase of certain assets of K&D Distributors, Ltd. as described below.  The Company is involved in the sale and distribution of replacement contact lenses throughout the United States.

 

Business acquisition

On June 8, 2001, the Company purchased certain assets and assumed certain liabilities of K&D Distributors, Ltd.  The Company initially paid $5,000,000, assumed net liabilities of approximately $181,000 including costs incurred of approximately $82,000.  Of the initial purchase price, $500,000 was held in escrow subject to a final closing balance sheet.  In early 2002, the Company reached agreement with the sellers and received $125,000 from the escrow account, subsequently reducing the purchase price.

 

The purchase price has been allocated as follows:

 

Accounts receivable

 

$

115,494

 

Inventory

 

441,530

 

Prepaid expenses

 

115,476

 

Intangible assets

 

2,229,247

 

Property and equipment

 

515,643

 

Accounts payable

 

(1,307,726

)

Other current liabilities

 

(143,243

)

Goodwill

 

2,908,579

 

 

 

 

 

Cash paid, net of escrow proceeds

 

$

4,875,000

 

 

2.                   Summary of Significant Accounting Policies

 

Significant estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect amounts and disclosures reported in the financial statements.  Actual results could differ from those estimates.

 

Revenue recognition

Revenue is recognized at the time of shipment to the customer.  Payment received prior to shipment results in unearned revenue for amounts collected from customers for which shipment has not occurred.  The Company classifies amounts billed to a customer for shipping and handling as revenue and the corresponding costs incurred for shipping and handling is charged to cost of sales.

 

Advertising

The Company expenses all costs for advertising when the associated materials are mailed or delivered to potential customers.  Advertising costs were $1,262,785 and $1,812,140 for the year ended December 31, 2002 and for the period from inception (June 8, 2001) through December 31, 2001, respectively.

 

25

 

Income taxes

Federal income taxes are not payable by, or provided for the Company.  Each member is taxed on its share of the Company earnings under the Internal Revenue Code.

 

Inventories

Inventories consist principally of contact lenses and related accessories.  Contact lenses are stated at the lower of cost, determined on a first-in, first-out basis, or market.

 

Property and equipment

Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated economic useful life, ranging from three to five years.  Upon retirement or sale, the cost of assets disposed of and related accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to income.  Repairs and maintenance costs are charged to expense as incurred.

 

Stock-based compensation

Non-employee option awards under the Company’s Incentive Option Plan are accounted for in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” and related interpretations.

 

Goodwill and intangible assets

The Company follows the guidelines of SFAS No. 142, “Goodwill and Other Intangible Assets.”  Goodwill is not amortized but is tested for impairment by the Company on an annual basis.  Intangible assets include a non-compete agreement and customer lists acquired through acquisition (Note 1).  They are amortized over the estimated economic useful lives, ranging from one to five years.  The Company tests intangible assets for impairment on an annual basis and any resulting impairment loss is charged to income.

 

3.                   Intangible Assets

 

As a condition of acquiring the assets of the Company, the Company entered into a Consulting and Non-Compete Agreement (“Agreement”) with one of the principals of the sellers.  Under the terms of this agreement, in addition to providing limited consulting services, the consultant has agreed not to compete for a period of one year from the date of sale and not to solicit the Company’s employees for a period of two years from the date of sale.

 

The Company paid $450,000 to the consultant, comprising of $150,000 paid at closing, $100,000 paid in 2001 upon performance of the consulting services and a $200,000 note.  The note bears no interest, has a principal amount of $200,000, and is due June 11, 2003.  The note is reflected as an accrued liability in the accompanying balance sheet.  The value of the Agreement is being amortized over the 12-month non-compete period.

 

The customer lists acquired were valued based upon the projected gross margin per customer.  The customer lists are being amortized on an accelerated basis over five years, reflecting the expected future revenue received from those customers.

 

26

 

Intangible assets and accumulated amortization as of December 31, 2002 and 2001 are as follows:

 

 

 

2002

 

2001

 

 

 

 

 

 

 

Customer list

 

$

2,229,247

 

$

2,229,247

 

Non-compete agreement

 

—

 

450,000

 

 

 

2,229,247

 

2,679,247

 

Less - accumulated amortization

 

(1,546,533

)

(1,031,006

)

 

 

 

 

 

 

 

 

$

682,714

 

$

1,648,241

 

 

Future aggregate amortization expense related to intangible assets is as follows:

 

For the year ending December 31

 

 

 

2003

 

$

381,233

 

2004

 

186,804

 

2005

 

91,534

 

2006

 

23,143

 

 

 

 

 

 

 

$

682,714

 

 

4.                   Property and equipment

 

Property and equipment consist of the following at December 31, 2002 and 2001:

 

 

 

2002

 

2001

 

 

 

 

 

 

 

Furniture and fixtures

 

$

97,132

 

$

89,740

 

Leasehold improvements

 

24,893

 

2,768

 

Computer equipment

 

443,742

 

319,748

 

Computer software

 

519,408

 

331,326

 

 

 

1,085,175

 

743,582

 

Less - accumulated depreciation

 

443,827

 

140,970

 

 

 

 

 

 

 

 

 

$

641,348

 

$

602,612

 

 

5.                   Financing

 

The Company has a three-year revolving credit facility with a bank allowing for maximum borrowings of $3,000,000, expiring June 8, 2004.  At December 31, 2002 and 2001, $2,553,933 and $2,537,404, respectively, was outstanding on the line.

 

The Company entered into a term loan payable to a bank for $2,000,000 at the purchase date..  Principal is payable in monthly installments of $33,333, beginning January 1, 2003, with the balance due June 8, 2006.

 

27

 

The aggregate maturities of the term note payable are as follows:

 

For the year ended December 31

 

 

 

2003

 

$

400,000

 

2004

 

400,000

 

2005

 

400,000

 

2006

 

800,000

 

 

 

 

 

 

 

$

2,000,000

 

 

Interest on both facilities is payable at rates that vary based on either the bank’s prime rate minus 1.5%, (2.05% and 3.25% at December 31, 2002 and 2001, respectively) or the bank’s Eurodollar rate plus 0.5% (1.85% and 2.34% at December 31, 2002 and 2001, respectively).  Per the agreement, interest on the term loan is deferred until June 30, 2002 at which time it will be paid monthly.  At December 31, 2002, the rate on the term loan outstanding was the Eurodollar rate.  At December 31, 2002 and 2001, the Company had $2,200,000 and $2,300,000, respectively, outstanding on the revolving line of credit at the Eurodollar based rate and $353,933 and $237,404, respectively, outstanding on the revolving line of credit at the prime based rate.

 

The bank debt is collateralized by substantially all assets of the Company.

 

Under the note agreement with the bank, the Company is subject to certain financial and non-financial covenants including a revenue to advertising expense ratio.

 

6.                   Operating Lease Commitments

 

The Company leases its call center and distribution facilities under non-cancelable operating leases.  The leases expire on various dates through 2004.  Rental expense under these leases totaled approximately $195,000 and $89,000 for the year ended December 31, 2002 and for the period from inception (June 8, 2001) through December 31, 2001, respectively.

 

Future minimum payments under non-cancelable operating leases with maturities in excess of one year and in effect at December 31, 2002 are summarized as follows:

 

Year ended December 31,

 

 

 

2003

 

$

195,000

 

2004

 

38,000

 

 

 

 

 

 

 

$

233,000

 

 

7.                   Related Party Transactions

 

The distribution center is subleased from an entity owned by a member of the Company through September 2002.  Rental expense for the year ended December 31, 2002 and for the period from inception (June 8, 2001) through December 31, 2001 were approximately $20,000 and $18,000, respectively.

 

28

 

The Company sells products to a member of the Company under a distribution agreement whereby the Company receives a markup of approximately 18%.  Net sales under this agreement for the year ended December 31, 2002 and for the period from inception (June 8, 2001) through December 31, 2001 were approximately $304,000 and $239,000, respectively.  Included in accounts receivable at December 31, 2002 and 2001 $43,947 and $30,417, respectively is due the Company from the member.

 

On November 25, 2002, a related party through common ownership, Lens Express, LLC, purchased substantially all assets and certain liabilities of a significant competitor.  The Company was a guarantor to this agreement.  The agreement called for the Company to unconditionally guarantee the performance of Lens Express, LLC of its obligations under the purchase agreement.  The significant obligations remaining at December 31, 2002 included guaranteeing the various accounts payable and accrued expenses totaling approximately $1,400,000.

 

The Company also sells its products to Lens Express and pays certain liabilities with subsequent reimbursement.  The sales during the year ended December 31, 2002 were appropriately $49,000, and liabilities paid on behalf of Lens Express were $208,000.  As of December 31, 2002, the Company had a receivable from Lens Express of approximately $106,000.

 

8.                   401(k) Plan

 

In September, 2001 the Company established a defined contribution 401(k) plan.  The plan covers substantially all employees of the Company with contributions based on a percentage of employee compensation up to a maximum of 25%.  In addition, the Company matches 50% of employees’ salary reduction, up to 4% of compensation.  Profit sharing expense totaled approximately $13,500 and $6,200 for the year ended December 31, 2002 and for the period from inception (June 8, 2001) through December 31, 2001, respectively.

 

9.                   Incentive Option Plan

 

An option plan was established by a member that provide for the granting of options to key employees and consultants.  The objective of this plan includes attracting and retaining the best personnel, providing for additional performance incentives, and promoting the success of the Company by providing employees the opportunity to acquire membership units.  The Incentive Option Plan authorizes options for up to 725,000 common units of membership interests of a member.  Upon exercise of the options of the member, the member remits the funds received from the option holder to the Company and the member’s membership units in the Company increases at a corresponding rate.  As of December 31, 2002 and 2001, 455,500 and 274,500 options have been granted, respectively.  The exercise price is equal to or above the fair market value of the units at the grant date, as determined by the Company.  Options generally vest ratably over a four-year period and expire in ten years.

 

The fair value of each option granted was estimated on the date of grant using a Black-Scholes option pricing model with the following assumptions: no individual yield; a 10-year expected life; expected volatility of 45%; and risk-free interest rates ranging from 4.17% to 5.07% for the grants issued during the year ended December 31, 2002 and from 5.28% to 5.49% for the grants issued during the period from inception (June 8, 2001) through December 31, 2001.

 

29

 

The following table summarizes the activity of the Company’s option plan for employees:

 

 

 

Number of
options

 

Weighted
average
exercise
price

 

 

 

 

 

 

 

Outstanding at June 8, 2001

 

—

 

$

—

 

Granted

 

274,500

 

1.00

 

Cancelled

 

(1,500

)

1.00

 

 

 

 

 

 

 

Outstanding at December 31, 2001

 

273,000

 

1.00

 

 

 

 

 

 

 

Granted

 

181,000

 

1.00

 

Cancelled

 

(263,000

)

1.00

 

 

 

 

 

 

 

Outstanding at December 31, 2002

 

191,000

 

 

 

 

 

 

 

 

 

Weighted average remaining contractual life

 

9.3 years

 

 

 

 

 

 

 

 

 

Weighted average grant date fair value

 

 

 

$

0.18

 

 

 

 

 

 

 

Options exercisable at December 31, 2002

 

3,125

 

 

 

 

In October 2002, the Company adopted a stock option plan that granted 638,883 options subject to certain conditions to the Company’s Chief Executive Officer. The options have been granted with immediate vesting and an option term of the earlier of ten years or the termination date. The exercise price of the options is $1.27 per unit, the fair value of the units which was estimated at the date of the grant using the Black-Scholes option-pricing model was $22,401 or $0.04 per unit. The following weighted-average assumptions were used: no individual yield; a 10-year expected life; volatility of 45%; and risk free interest of 4.17%.

 

The relative fair value of the total options issued during the year ended December 31, 2002 and for the period from inception (June 8, 2001) through December 31, 2001 was $29,882 and $9,541, respectively, and was charged to compensation expense.

 

10.            Contingencies

 

Upon the occurrence of a Liquidity Event as defined in the Operating Agreement for Camelot Ventures/CJ, LLC, certain members will earn up to an additional 756,853 membership units.

 

11.            Subsequent Event

 

On January 30, 2003, substantially all assets and liabilities of the Company and Lens Express were sold to 1-800 Contacts, Inc. for $6.5 million in cash and 900,000 shares of restricted stock of 1-800 Contracts, Inc.

 

30

 

K&D Distributors, Ltd.
d/b/a Lens 1st

 

Report on Audit of Financial Statements

For the Period from January 1 through
June 7, 2001

 

31

 

Report of Independent Accountants

 

 

To the Board of Directors and

Members of K&D Distributors, Ltd. d/b/a Lens 1st

 

In our opinion, the accompanying statement of financial position and the related statements of operations, of members’ deficit and of cash flows present fairly, in all material respects, the financial position of K&D Distributors, Ltd. d/b/a Lens 1st at June 7, 2001, and the results of its operations and its cash flows for the period from January 1, 2001 through June 7, 2001 in conformity with accounting principles generally accepted in the United States of America.  These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audit.  We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

 

The accompanying financial statements have been prepared as if the Company will continue as a going concern.  As discussed in Note 7 to the financial statements, the Company sold substantially all assets on June 8, 2001 and ceased operations.  Proceeds from the sale were used to repay existing liabilities and partially repay debt.  Remaining debt balances were forgiven.  The financial statements do not include any adjustments that might result from the outcome of this event.

 

PriceWaterhouseCoopers LLP

 

March 14, 2003

 

32

 

K&D Distributors, Ltd. d/b/a Lens 1st

Statement of Financial Position

June 7, 2001

 

Assets

 

 

 

Current assets

 

 

 

Cash

 

$

16,942

 

Accounts receivable

 

115,494

 

Inventory

 

441,530

 

Prepaid expenses

 

121,185

 

Total current assets

 

695,151

 

 

 

 

 

Property and equipment, net

 

515,641

 

Intangible assets, net

 

25,611

 

Goodwill

 

175,741

 

 

 

 

 

Total assets

 

$

1,412,144

 

 

 

 

 

Liabilities and Members’ Equity

 

 

 

Current liabilities

 

 

 

Outstanding checks in excess of bank balance

 

$

67,893

 

Accounts payable

 

1,215,741

 

Accrued liabilities

 

95,912

 

Accrued interest

 

842,141

 

Unearned revenue

 

47,330

 

Notes payable

 

10,452,612

 

Total current liabilities

 

12,721,629

 

Members’ deficit

 

(11,309,485

)

 

 

 

 

Total liabilities and members’ deficit

 

$

1,412,144

 

 

The accompanying notes are an integral part of these financial statements.

 

33

 

K&D Distributors, Ltd. d/b/a Lens 1st

Statement of Operations

For the Period from January 1, 2001 through June 7, 2001

 

Revenue

 

$

5,808,687

 

Cost of goods sold

 

3,550,442

 

Gross profit

 

2,258,245

 

 

 

 

 

Operating expenses

 

 

 

Administrative and general

 

1,737,302

 

Advertising and marketing

 

1,137,753

 

Depreciation and amortization

 

138,916

 

Total operating expenses

 

3,013,971

 

Loss from operations

 

(755,726

)

Interest expense

 

440,485

 

 

 

 

 

Net loss

 

$

(1,196,211

)

 

The accompanying notes are an integral part of these financial statements.

 

34

 

K&D Distributors, Ltd. d/b/a Lens 1st

Statement of Members’ Deficit

For the Period from January 1, 2001 through June 7, 2001

 

 

 

Total
members’
deficit

 

 

 

 

 

Balance, January 1, 2001

 

$

(10,113,274

)

Net loss

 

(1,196,211

)

 

 

 

 

Balance, June 7, 2001

 

$

(11,309,485

)

 

The accompanying notes are an integral part of these financial statements.

 

35

 

K&D Distributors, Ltd. d/b/a Lens 1st

Statement of Cash Flows

For the Period from January 1, 2001 through June 7, 2001

 

Cash flows from operating activities

 

 

 

Net loss

 

$

(1,196,211

)

Adjustments to reconcile net loss to net cash used in operating activities

 

 

 

Depreciation and amortization

 

138,916

 

Bad debt expense

 

145,621

 

Changes in current assets and current liabilities

 

 

 

Accounts receivable

 

75,125

 

Inventory

 

(132,425

)

Prepaid expense

 

104,991

 

Accounts payable

 

248,005

 

Accrued expenses and other liabilities

 

417,366

 

Net cash used in operating activities

 

(198,612

)

 

 

 

 

Cash flows from investing activities

 

 

 

Purchases of property and equipment

 

(27,137

)

Advances from affiliates

 

311,769

 

Net cash provided by investing activities

 

284,632

 

 

 

 

 

Cash flows from financing activities

 

 

 

Outstanding checks in excess of bank balance

 

(156,372

)

Proceeds on revolving line of credit, net

 

85,090

 

Net cash used in financing activities

 

(71,282

)

 

 

 

 

Net increase in cash

 

14,738

 

Cash, beginning of period

 

2,204

 

 

 

 

 

Cash, end of period

 

$

16,942

 

 

 

 

 

Supplemental cash flow information

 

 

 

Cash paid for interest

 

$

880,969

 

 

The accompanying notes are an integral part of these financial statements.

 

36

 

K&D Distributors, Ltd. d/b/a Lens 1st

Notes to Financial Statements

 

1.                   Nature of Business

 

K&D Distributors, Ltd. d/b/a Lens 1st (the “Company”) is a limited liability company (LLC) that is wholly owned by KDCPEC, Inc. (the “Parent”) an Ohio corporation.  The Company commenced business on January 7, 1999 and is involved in the sale and distribution of contact lenses throughout the United States.  Effective June 8, 2001, the Company’s assets and operations were sold (see Note 7).

 

2.                   Summary of Significant Accounting Policies

 

Significant estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts and disclosures reported in the financial statements.  Actual results could differ from those estimates.

 

Revenue recognition

Revenue is recognized at the time of shipment to the customer.  Payment received prior to shipment results in unearned revenue for amounts collected from customers for which shipment has not occurred.  The Company classifies amounts billed to a customer for shipping and handling as revenue and the corresponding costs incurred for shipping and handling is charged to cost of sales.

 

Advertising costs

Advertising costs are charged to operations as incurred.  These are reported as advertising and marketing expenses.  Advertising costs totaled $1,137,753 for period from January 1 through June 7, 2001.

 

Income taxes

Federal income taxes are not payable by, or provided for the Company.  Each member is taxed on its share of the Company earnings under the Internal Revenue Code.

 

Inventories

Inventories consist principally of contact lenses and related accessories.  Contact lenses are stated at the lower of cost, determined on a first-in, first-out basis, or market.

 

Property and equipment

Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated economic useful life, ranging from three to five years.  Upon retirement or sale, the cost of assets disposed of and related accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to income.  Repairs and maintenance costs are charged to expense as incurred.

 

Goodwill and intangible assets

Intangible assets are recorded at costs and amortized using the straight-line method.  The non-compete agreement is being amortized over the 5-year life of the agreement.  Goodwill is being amortized over 15 years.  Unamortized goodwill at June 7, 2001 is $175,741.

 

37

 

3.                   Property and equipment

 

Property and equipment consist of the following at June 7, 2001:

 

Furniture and fixtures

 

$

130,633

 

Leasehold improvements

 

56,725

 

Computer equipment

 

246,272

 

Computer software

 

638,993

 

 

 

1,072,623

 

Less - accumulated depreciation

 

556,982

 

 

 

 

 

 

 

$

515,641

 

 

4.                   Financing

 

Notes payable consists of the following as of:

 

Revolving credit note payable to bank due on demand

 

$

6,624,799

 

 

 

 

 

Subordinated unsecured note payable, due January 2004, interest payable quarterly at 11.75% and principal due in full at maturity, convertible into a member’s interest representing 7% to 13% of the Company’s equity, depending on cumulative EBITA, as defined in the agreement

 

3,500,000

 

 

 

 

 

Subordinated unsecured, demand note payable to Parent, with interest at 10%, interest payable in August 2001 and monthly thereafter

 

327,813

 

 

 

 

 

Total

 

$

10,452,612

 

 

Interest on the revolving credit note is payable at rates that vary, based on either the bank’s prime rate, plus a range of 0 to 2.00 points, or the Eurodollar, plus a range of 2.75 to 4.75 points.  The interest rate base is the Company’s choice.  The margin over the base interest rates varies based on the Company’s financial position and financial performance.  At June 7, 2001, the effective interest rate on the note was 8.5% (prime plus 1.50 points).

 

The Company’s bank debt is collateralized by substantially all assets of the Company, the full corporate guaranty of the Parent, and unlimited personal guarantees of two of the stockholders of the Parent.

 

Both loan agreements contain restrictions and covenants which, among other things, require maintenance of certain financial ratios.  The Company was in violation of certain covenants at June 7, 2001 on both the bank and subordinated debt.  In January 2001, the bank called the debt by demanding payment in full.  The bank agreed to forbear any action to collect or impose a default rate until the sale of the Company’s assets and operations (see Note 7) and to advance additional funds to the Company solely at the bank’s discretion.

 

38

 

5.                   Operating Lease Commitments

 

The Company leases its call center and distribution facilities under non-cancelable operating leases.  The leases expire on various dates through 2004.  Rental expense under these leases totaled approximately $68,000 for the period from January 1, 2001 through June 7, 2001.

 

Future minimum payments under non-cancelable operating leases are summarized as follows:

 

June 8 - December 31, 2001

 

$

70,000

 

The year ended December 31,

 

 

 

2002

 

142,000

 

2003

 

147,000

 

2004

 

38,000

 

 

 

 

 

 

 

$

397,000

 

 

6.                   Related Party Transactions

 

The Company’s sales of contact lenses to an affiliate were approximately $196,500 with related costs of sales of $157,300 during the period from January 1, 2001 through June 7, 2001.  The sales were offset by management fees that the Company paid to the affiliate of approximately $92,200.  During the period from January 1, 2001 through June 7, 2001, the Company received payment of approximately $405,000.  As of June 7, 2001, the Company also had a receivable from affiliate of $145,600 which was fully reserved.

 

7.                   Subsequent Event

 

On June 8, 2001, the Company sold substantially all assets and certain liabilities to Camelot Ventures/CJ, LLC.  The outstanding bank debt and other notes payable were retained by the Company.  The total selling price in cash was $5,000,000 of which $500,000 was placed in escrow.  Ultimately, the final selling price was $4,875,000.  All proceeds from the sale were used to repay existing liabilities and partially repay the outstanding revolving bank credit note payable.  Subordinated unsecured debt totaling approximately $3,828,000 and the unpaid balance on the revolving note were forgiven at the time of the sale.  The Company ceased operations at this time.

 

39

 

K&D Distributors, Ltd. d/b/a
Lens1st

 

Financial Report

 

December 31, 2000

 

40

 

Report of Independent Accountants

 

To the Member

K&D Distributors, Ltd. d/b/a Lens1st

 

We have audited the accompanying balance sheet of K&D Distributors, Ltd. as of December 31, 2000, and the related statements of operations and deficiency in assets and cash flows for the year then ended.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with auditing standards generally accepted in the United States of America.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of K&D Distributors, Ltd. as of December 31, 2000, and the results of its operations and its cash flows for the period then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Plante & Moran, PLLC

 

February 7, 2003

 

41

 

K&D Distributors, Ltd. d/b/a Lens1st

 

Balance Sheet
December 31, 2000

 

 

 

December 31,
2000

 

Assets

 

 

 

 

 

 

 

Current Assets

 

 

 

Cash

 

$

2,204

 

Trade accounts receivable:

 

 

 

Affiliate (Note 5)

 

457,390

 

Other

 

190,619

 

Inventory

 

309,105

 

Prepaid expenses

 

226,176

 

 

 

 

 

Total current assets

 

1,185,494

 

 

 

 

 

Property and Equipment

 

 

 

Computer equipment

 

858,488

 

Furniture and fixtures

 

130,273

 

Leasehold improvements

 

56,725

 

 

 

 

 

Total property and equipment

 

1,045,486

 

 

 

 

 

Less accumulated depreciation

 

427,714

 

 

 

 

 

Net property and equipment

 

617,772