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): July 24, 2002
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 (Commission File Number) (I.R.S. Employer
of incorporation) 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.)
1-800 CONTACTS, INC.
INDEX
This Amendment No. 1 to the Current Report on Form 8-K dated July 24, 2002
is being filed by 1-800 CONTACTS, INC. to provide the financial statements and
pro forma financial information.
PAGE NO.
--------
Item 7. Financial Statements and Exhibits
(a) Financial statements of business acquired:
Report of Independent Auditors. . . . . . . . . . . . . . . . . . . 3
Combined Balance Sheets
as of December 31, 2001 and 2000 . . . . . . . . . . . . . . . 4
Combined Statements of Operations
for the years ended December 31, 2001 and 2000 . . . . . . . . 5
Combined Statements of Changes in Net Assets (Liabilities)
and Comprehensive Income (Loss) for the years ended
December 31, 2001 and 2000 . . . . . . . . . . . . . . . . . . 6
Combined Statements of Cash Flows
for the years ended December 31, 2001 and 2000 . . . . . . . . 7
Notes to Combined Financial Statements. . . . . . . . . . . . . . . 8
Unaudited Condensed Combined Balance Sheets
as of June 30, 2002 and December 31, 2001. . . . . . . . . . . 19
Unaudited Condensed Combined Statements of Operations
for the six months ended June 30, 2002 and 2001. . . . . . . . 20
Unaudited Condensed Combined Statements of Cash Flows
for the sixth months ended June 30, 2002 and 2001. . . . . . . 21
Notes to Unaudited Condensed Combined Financial Statements. . . . . 22
(b) Pro forma financial information:
Unaudited Pro Forma Condensed Financial Information . . . . . . . . 24
Unaudited Pro Forma Condensed Combined Balance Sheet
as of June 29, 2002. . . . . . . . . . . . . . . . . . . . . . 25
Unaudited Pro Forma Condensed Combined Statement of Operations
for the two quarters ended June 29, 2002 . . . . . . . . . . . 26
Unaudited Pro Forma Condensed Combined Statement of Operations
for the year ended December 29, 2001 . . . . . . . . . . . . . 27
Notes to Unaudited Pro Forma Condensed Combined
Financial Statements . . . . . . . . . . . . . . . . . . . . . 28
REPORT OF INDEPENDENT AUDITORS
The Boards of Directors of
ClearLab Pte Ltd,
Igel C M Laboratory Pte Ltd, and
International Vision Laboratories Pte Ltd:
We have audited the accompanying combined balance sheets of the IGEL Operations,
a combination of Igel C M Laboratory Pte Ltd and certain carved-out components
of International Vision Laboratories Pte Ltd, as of December 31, 2001 and 2000,
and the related combined statements of operations, changes in net assets
(liabilities) and comprehensive income (loss), and cash flows for the years then
ended. These combined financial statements are the responsibility of IGEL
Operations' 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, the combined financial statements referred to above present
fairly, in all material respects, the financial position of IGEL Operations as
of December 31, 2001 and 2000, and the results of their operations and their
cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
KPMG
Singapore
October 7, 2002
3
IGEL OPERATIONS
COMBINED BALANCE SHEETS
AS OF DECEMBER 31, 2001 AND 2000
(IN UNITED STATES DOLLARS)
NOTES 2001 2000
----- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash $ 27,448 $ 78,491
Trade receivables (net of allowance for doubtful
accounts of $759,437 and $329,962, respectively) 3,4 1,121,689 1,960,089
Other receivables and prepayments 64,610 399,857
Inventories 5 2,831,452 4,394,308
------------ ------------
Total current assets 4,045,199 6,832,745
NON-CURRENT ASSETS:
Property, plant and equipment, net 6 7,765,041 8,994,282
------------ ------------
TOTAL ASSETS $ 11,810,240 $ 15,827,027
============ ============
LIABILITIES AND NET ASSETS
CURRENT LIABILITIES:
Trade payables $ 469,168 $ 785,156
Other payables 599,695 1,032,280
Income tax payable 105,831 184,618
Deferred income tax liabilities -- 270,000
Amounts due to related parties 3 2,860,668 2,146,148
Current portion of long-term loans 7 8,691,826 --
Current portion of capital lease obligations 10 399,400 427,641
------------ ------------
Total current liabilities 13,126,588 4,845,843
------------ ------------
NON-CURRENT LIABILITIES:
Long-term loans, less current portion 7 -- 9,482,854
Capital lease obligations, less current portion 10 498,387 953,801
------------ ------------
Total non-current liabilities 498,387 10,436,655
------------ ------------
TOTAL LIABILITIES 13,624,975 15,282,498
NET ASSETS (LIABILITIES) (1,814,735) 544,529
------------ ------------
TOTAL LIABILITIES AND NET ASSETS $ 11,810,240 $ 15,827,027
============ ============
See accompanying notes to combined financial statements.
4
IGEL OPERATIONS
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001 AND 2000
(IN UNITED STATES DOLLARS)
NOTES 2001 2000
----- ------------ ------------
REVENUE
Product sales $ 3,226,392 $ 4,017,350
Rental income 432,646 590,566
----------- -----------
3,659,038 4,607,916
----------- -----------
COSTS AND EXPENSES
Cost of product sales (2,562,104) (2,560,155)
Write down of inventories (1,858,412) --
Cost of rental income (483,561) (465,013)
Selling, general and administrative expenses (1,814,078) (1,906,126)
----------- -----------
(6,718,155) (4,931,294)
----------- -----------
LOSS FROM OPERATIONS (3,059,117) (323,378)
Other income 66,388 54,756
Interest expense (429,507) (415,607)
Foreign exchange gain 461,582 385,396
----------- -----------
LOSS BEFORE INCOME TAXES (2,960,654) (298,833)
Income tax benefit 8 279,899 3,028
----------- -----------
NET LOSS $(2,680,755) $ (295,805)
=========== ===========
See accompanying notes to combined financial statements.
5
IGEL OPERATIONS
COMBINED STATEMENTS OF CHANGES IN NET ASSETS (LIABILITIES)
AND COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, 2001 AND 2000
(IN UNITED STATES DOLLARS)
NET
ASSETS COMPREHENSIVE
NOTES (LIABILITIES) INCOME (LOSS)
----- ------------- ------------
Balance at January 1, 2000 $ 178,273 $ --
Net loss for the year (295,805) (295,805)
Net cash transfers from IVL Parent 1 678,935 --
Foreign currency translation adjustments (16,874) (16,874)
----------- -----------
Comprehensive loss for 2000 (312,679)
===========
Balance at December 31, 2000 544,529 --
Net loss for the year (2,680,755) (2,680,755)
Net cash transfers from IVL Parent 1 291,346 --
Foreign currency translation adjustments 30,145 30,145
----------- -----------
Comprehensive loss for 2001 $(2,650,610)
===========
Balance at December 31, 2001 $(1,814,735)
===========
See accompanying notes to combined financial statements.
6
IGEL OPERATIONS
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001 AND 2000
(IN UNITED STATES DOLLARS)
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,680,755) $ (295,805)
Adjustments to arrive at cash provided by (used in)
operating activities:
Depreciation expense 935,395 612,545
(Gain) loss on disposal of property, plant and equipment (255) 383
Deferred income taxes (270,000) (68,496)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
Trade receivables 742,922 339,114
Other receivables and prepayments 320,227 (177,576)
Inventories 1,340,207 (739,006)
Trade payables (277,203) 583,642
Other payables (382,059) 385,828
Income tax payable (69,789) 27,532
----------- -----------
Net cash (used in) provided by operating activities (341,310) 668,161
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property plant and equipment (234,301) (866,384)
Proceeds from disposal of property, plant and equipment 4,470 50,283
----------- -----------
Net cash used in investing activities (229,831) (816,101)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term loans (234,123) (338,810)
Principal payments on capital lease obligations (413,453) (260,153)
Increase in amounts due to related parties 863,375 18,528
Net cash transfers from IVL Parent 291,346 678,935
----------- -----------
Net cash provided by financing activities 507,145 98,500
----------- -----------
Effect of exchange rate changes on cash 12,953 (55,650)
----------- -----------
Net decrease in cash (51,043) (105,090)
Cash at beginning of year 78,491 183,581
----------- -----------
CASH AT END OF YEAR $ 27,448 $ 78,491
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ (429,507) $ (374,272)
Income taxes (68,888) (54,750)
Non-cash items:
Equipment acquired under capital leases $ -- $ 1,158,734
See accompanying notes to combined financial statements.
7
IGEL OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 AND 2000
(IN UNITED STATES DOLLARS)
1 DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
The operations of Igel CM Laboratory Pte Ltd ("ICML") and International
Vision Laboratories Pte Ltd ("IVL") consist of manufacturing, distribution
and development of eye care products and the rental of property. ICML and
IVL are based in Singapore and are wholly owned subsidiaries of
International Visioncare Pte Ltd ("IVC").
On July 24, 2002, 1-800 CONTACTS, INC. ("1-800 CONTACTS") completed the
acquisition of substantially all of the key operating assets and certain
liabilities of ICML, and certain assets and liabilities of IVL related to
the land and building rental operations. The accompanying combined
financial statements include the historical financial statements of ICML,
plus carved-out financial information related to the rental operations of
IVL (collectively referred to as the "IGEL Operations"). IVL maintained
sufficiently detailed accounting records to separately account for its
rental operations. As a result, allocations of expenses were not necessary
in connection with the preparation of the carved-out financial information
for the rental operations. The combined statements of changes in net assets
(liabilities) and comprehensive income (loss) include net cash transfers
from the IVL operations that were not acquired by 1-800 CONTACTS (referred
to as "IVL Parent"). All significant balances and transactions between ICML
and the carved-out IVL operations have been eliminated on combination.
The accompanying combined financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America.
2 SIGNIFICANT ACCOUNTING POLICIES
(a) RESEARCH AND DEVELOPMENT
Research and development expenditures are expensed as incurred.
Research and development expenditures amounted to $104,812 and
$230,102 during the years ended December 31, 2001 and 2000,
respectively.
(b) REVENUE RECOGNITION
Revenue from sales of products are recognized when all of the
following have occurred: the product has been shipped to the customer,
title and risk of loss have passed to the customer, IGEL Operations
has the right to invoice the customer and collection of the receivable
is probable. The related freight costs directly associated with
shipping products to customers are included as a component of cost of
product sales.
Rental income receivable under operating leases is recognized on a
straight line basis over the period of the respective lease
agreements.
8
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 AND 2000
(IN UNITED STATES DOLLARS)
2 SIGNIFICANT ACCOUNTING POLICIES (cont'd)
(c) INVENTORIES
Inventories are measured at the lower of cost (using the weighted
average method) or market value (net realizable value). In arriving at
the net realizable value, an allowance is made for all obsolete and
slow-moving items.
(d) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at acquisition cost less
accumulated depreciation. Depreciation is charged so as to write off
the cost of assets over their estimated useful lives, using the
straight-line method, on the following bases:
Leasehold land and building - shorter of term of lease or useful life
of assets
Leasehold improvements - shorter of 5 years or the remaining term of
the related lease
Plant and equipment - 5 to 10 years
Property, plant and equipment that are leased out under operating
leases are presented in the balance sheet according to the nature
of the assets less accumulated depreciation. Lease income from
operating leases is recognized in income on a straight-line basis
over the period of the respective lease agreements.
(e) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED
OF
Long-lived assets and certain identifiable intangibles are reviewed
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 undiscounted future
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.
(f) ACCOUNTING FOR LEASES
Assets and liabilities related to capital leases are recorded as
property, plant and equipment and lease obligations, respectively, and
the related interest is calculated using the effective interest rate
method and charged to interest expense over the lease period.
9
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 AND 2000
(IN UNITED STATES DOLLARS)
2 SIGNIFICANT ACCOUNTING POLICIES (cont'd)
(g) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized
for the estimated future tax effects of differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the tax
years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of changes in tax rates is recognized in income in the
period the rate change is enacted.
When a deferred tax asset has been recognized, an appropriate
allowance is established if, based upon the weight of available
evidence, it is more likely than not that some or all of it will not
be realized.
The results of operations of IVL's carved-out rental operations are
included in the income tax returns of IVL. The provision for income
taxes related to the carved-out rental operations has been determined
on a separate return basis.
(h) RETIREMENT BENEFIT COSTS
Payments to defined contribution retirement plans (including
government-managed retirement benefit plans) are recognized as an
expense as they are incurred. IGEL Operations expensed $183,568 and
$143,280 related to contributions to such plans during the years ended
December 31, 2001 and 2000, respectively.
(i) USE OF ESTIMATES
The financial statements of the IGEL Operations have been prepared in
accordance with accounting principles generally accepted in the United
States of America, which require management to make estimates and
assumptions that affect the amounts reported in the financial
statements. Actual results could differ from those estimates.
Estimates are used in accounting for, among other items, allowances
for doubtful accounts, inventory obsolescence and income taxes.
(j) FOREIGN CURRENCY
Transactions in foreign currencies are recorded in Singapore dollars
at the rates ruling at the dates of the transactions. At each balance
sheet date, recorded monetary balances that are denominated in foreign
currencies are translated to Singapore dollars at the exchange rates
prevailing at the balance sheet date. All realized and unrealized
exchange gains and losses are recognized in the statement of
operations.
The financial statements of IGEL Operations are maintained in their
functional currency, which is the Singapore dollar. The financial
statements in Singapore dollars are translated into United States
dollars by translating assets and liabilities at the closing rate of
exchange on the balance sheet date and translating revenues and
expenses using the average exchange rate prevailing during the period.
10
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 AND 2000
(IN UNITED STATES DOLLARS)
2 SIGNIFICANT ACCOUNTING POLICIES (cont'd)
(j) FOREIGN CURRENCY (cont'd)
The resulting translation adjustments are recorded as a component of
other comprehensive income (loss).
(k) NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB)
issued SFAS No. 141, "Business Combinations", and SFAS No. 142,
"Goodwill and Other Intangible Assets". SFAS No. 141 equires that
the purchase method of accounting be used for all usiness
combinations initiated after June 30, 2001 as well as all urchase
method business combinations completed after June 30, 2001. FAS No.
141 also specifies criteria intangible assets acquired in a urchase
method business combination must meet to be recognized and eported
apart from goodwill, noting that any purchase price allocable o an
assembled workforce may not be accounted for separately. SFAS o.
142 requires that goodwill and intangible assets with indefinite
seful lives no longer be amortized, but instead tested for
impairment t least annually in accordance with the provisions of
SFAS No. 142.
SFAS No. 142 requires that intangible assets with estimated useful
lives be amortized over their respective estimated useful lives to
their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 144, "Accounting for Impairment or Disposal
of Long-Lived Assets", which was issued in August 2001. IGEL
Operations adopted the provisions of SFAS No. 141 for business
combinations initiated after June 30, 2001, and SFAS No. 142 effective
January 1, 2002. The adoption of SFAS No.'s 141 and 142 did not have a
material effect on IGEL Operations' financial position or results of
operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations", which addresses financial accounting and
reporting for obligations associated with the retirement of tangible
long-lived assets and associated asset retirement costs. This
statement applies to legal obligations associated with the retirement
of long-lived assets that result from the acquisition, construction,
development and (or) normal use of the asset. SFAS No. 143 requires
that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The fair value of the liability is
added to the carrying amount of the associated asset and this
additional carrying amount is depreciated over the life of the asset.
The liability is accreted at the end of each period through charges to
operating expense. If the obligation is settled for other than the
carrying amount of the liability, IGEL Operations will recognize a
gain or loss on settlement. IGEL Operations are required to adopt the
provision of SFAS No. 143 effective January 1, 2003. It is not
practicable for IGEL Operations to estimate the impact of adopting
this statement at the date of this report.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which supersedes SFAS
No. 121, "Accounting for Impairment of Long-Lived Assets to be
Disposed of". SFAS No. 144 retains the fundamental provisions of SFAS
No. 121 for recognition and measurement of the impairment of
long-lived assets to be held and used and measurement of long-lived
assets to be disposed of by sale. SFAS No. 144 addresses certain
implementation issues related to SFAS. No. 121. This Statement also
supersedes the accounting and reporting provisions of APB Opinion No.
30, "Reporting the Results of Operations -
11
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 AND 2000
(IN UNITED STATES DOLLARS)
2 SIGNIFICANT ACCOUNTING POLICIES (cont'd)
(k) NEW ACCOUNTING PRONOUNCEMENTS (cont'd)
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", for segments of a business to be disposed of. SFAS No.
144 retains the basic provisions of Opinion No. 30 for the
presentation of discontinued operations in the income statement but
broadens that presentation to include a component of an entity, rather
than a segment of a business. The IGEL Operations adopted SFAS No 144
effective January 1, 2002. The adoption of SFAS No. 144 did not have a
material effect on IGEL Operations' financial position or results of
operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections". SFAS No. 145 requires, among other things,
that gains and losses on the early extinguishment of debt be
classified as extraordinary only if they meet the criteria for
extraordinary treatment set forth in 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". The provisions of SFAS No. 145
related to classification of gains and losses on the early
extinguishment of debt are effective for fiscal years beginning after
May 15, 2002. IGEL Operations are required to adopt the provision of
SFAS No. 145 effective January 1, 2003.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement requires
costs associated with exit or disposal activities to be recorded at
their fair values when a liability has been incurred. Under the
previous guidance, certain exit costs were accrued upon management's
commitment to an exit plan, which is generally before an actual
liability has been incurred. The provisions of SFAS No. 146 are
effective for exit or disposal activities that are initiated after
December 31, 2002. IGEL Operations are required to adopt the provision
of SFAS No. 146 effective January 1, 2003.
3 RELATED PARTY TRANSACTIONS
IVC is a wholly owned subsidiary of Alliance Technology and Development
Limited ("ATD"), which is the ultimate holding company of ICML and IVL.
Related parties include all companies which are members of the ATD group of
companies.
Certain of IGEL Operations' transactions and arrangements entered into in
the normal course of business are with related parties and may not be
reflective of transactions of a similar nature carried out with unrelated
parties in a competitive environment. These transactions consist primarily
of product sales, rental arrangements, and related company borrowing or
funding arrangements.
IGEL Operations sell products to a related corporation in the Peoples'
Republic of China. As there was uncertainty about the collectibility of the
receivables in 2001, revenue from these sales was recognized only to the
extent that collection was reasonably assured. Sales to the related
companies in 2001 were $747,882 of which $193,977 was recognized as
revenue.
12
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 AND 2000
(IN UNITED STATES DOLLARS)
3 RELATED PARTY TRANSACTIONS
The following table describes significant related party transactions and
balances at December 31, 2001 and 2000:
2001 2000
---------- ----------
Transactions conducted during the year:
Sales $1,044,032 $1,025,245
Rental income 66,423 73,101
Other income 36,318 13,421
Balances outstanding at year end:
Trade receivables (net of allowance for doubtful accounts 632,579 1,061,802
of $705,819 and $171,072, respectively)
Other receivables and prepaid expenses 3,361 184,965
Due to IVC and other related parties 2,860,668 2,146,148
Trade payables 47,953 50,945
The amounts due to IVC and other related parties primarily relate to
expenses paid by these related parties on behalf of the IGEL Operations and
such amounts are due on demand.
4 TRADE RECEIVABLES
2001 2000
----------- -----------
Third parties $ 542,728 $ 1,057,177
Related parties 1,338,398 1,232,874
----------- -----------
1,881,126 2,290,051
Less: Allowance for doubtful trade receivables (759,437) (329,962)
----------- -----------
$ 1,121,689 $ 1,960,089
=========== ===========
Movements in the allowance for doubtful trade receivables are as follows:
2001 2000
--------- ---------
Beginning $ 329,962 $ 153,019
Charge 525,717 176,943
Utilized (96,242) --
--------- ---------
Ending $ 759,437 $ 329,962
========= =========
13
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 AND 2000
(IN UNITED STATES DOLLARS)
5 INVENTORIES
2001 2000
----------- -----------
Finished goods $ 2,340,405 $ 2,682,721
Work-in-progress 1,253,741 1,674,714
Raw materials 106,750 74,255
----------- -----------
3,700,896 4,431,690
Less: Reserve for obsolete inventories (869,444) (37,382)
----------- -----------
$ 2,831,452 $ 4,394,308
=========== ===========
During 2001, IGEL Operations wrote-off and reserved a total of $1,858,412
of inventories that became obsolete due to a change in design and
modernization of the production process and lower than expected demand
experienced for certain products.
6 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of December 31, 2001 and 2000 are
summarized as follows:
2001 2000
------------ ------------
Leasehold land and building $ 7,952,466 $ 8,448,634
Leasehold improvements 275,740 292,943
Plant and equipment 3,919,130 4,039,175
------------ ------------
12,147,336 12,780,752
Less: Accumulated depreciation (4,382,295) (3,786,470)
------------ ------------
$ 7,765,041 $ 8,994,282
============ ============
Depreciation charged to results of operations amounted to $935,395 and
$612,545 for the years ended December 31, 2001 and 2000, respectively.
Property, plant and equipment under capital lease as of December 31, 2001
and 2000 are summarized as follows:
2001 2000
----------- -----------
Plant and equipment $ 1,548,000 $ 1,653,000
Less: Accumulated depreciation (506,000) (363,000)
----------- -----------
$ 1,042,000 $ 1,290,000
=========== ===========
14
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 AND 2000
(IN UNITED STATES DOLLARS)
7 LONG-TERM LOANS
2001 2000
----------- -----------
Term loan $ 3,806,417 $ 4,043,905
Multi-currency revolving line of credit 4,885,409 5,438,949
----------- -----------
8,691,826 9,482,854
Less: Current portion (8,691,826) --
----------- -----------
Non-current portion $ -- $ 9,482,854
=========== ===========
The term loan and multi-currency revolving line of credit ("MRLC"),
denominated in Singapore dollars and Japanese Yen, respectively, are
secured by IVL's leasehold building, a guarantee from ATD, an assignment of
all the rights and benefits arising from IVL's tenancy agreements and a
floating charge on all other assets of IVL. These loans are repayable on
October 31, 2002. As of December 31, 2001 and 2000, the interest rate on
the term loan is 1.25% per annum above the bank's prevailing prime rate
(5.35% and 5.80% at December 31, 2001 and 2000, respectively) and the
interest rate on the MRLC is 1.5% per annum above the Singapore Interbank
Offer Rate (1.25% and 2.81% at December 31, 2001 and 2000, respectively).
The agreement with the bank contained debt covenants that required IVL to
maintain:
- aggregate total banking facilities to be lower than 85% of the
property's market value;
- minimum net worth, computed in accordance with the agreement
definitions, of $1.6 million;
- historical interest coverage ratio of not less than 1.1 on a quarterly
basis.
At December 31, 2001, IVL was in breach of the above mentioned debt
covenants and as a result, the loans were classified as current in the
accompanying combined balance sheet. The loans were assumed by 1-800
CONTACTS in connection with the acquisition of the IGEL Operations and were
subsequently refinanced on a long-term basis.
15
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 AND 2000
(IN UNITED STATES DOLLARS)
8 INCOME TAXES
Income tax benefit consists of the following:
2001 2000
--------- ---------
Current (9,899) 76,972
Deferred (270,000) (80,000)
--------- ---------
$(279,899) $ (3,028)
========= =========
A reconciliation of the expected income tax benefit computed by applying
statutory rates to pretax loss to the actual income tax benefit is as
follows:
2001 2000
--------- ---------
Income taxes computed at Singapore statutory tax
rate of 24.5% (2000: 25.5%) $(725,360) $ (76,202)
Non-deductible expenses 75,360 73,174
Change in valuation allowance 370,101 --
--------- ---------
$(279,899) $ (3,028)
========= =========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 2001 and 2000 are presented below.
2001 2000
--------- ---------
Deferred tax assets:
Others $ 9,300 $ --
Property, plant and equipment due to basis differences 55,000 --
Tax loss carryforwards 305,801 --
--------- ---------
370,101 --
--------- ---------
Deferred tax liabilities:
Property, plant and equipment due to basis difference -- (242,483)
Others -- (27,517)
--------- ---------
-- (270,000)
--------- ---------
Net deferred tax assets (liabilities) 370,101 (270,000)
Less: Valuation allowance (370,101) --
--------- ---------
$ -- $(270,000)
========= =========
Management believes that it is more likely than not that the net deferred
tax assets will not be realized given the recent history of operating
losses and, accordingly, has provided a valuation allowance.
IGEL Operations' tax loss carryforwards will not be available for use by
1-800 CONTACTS.
16
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 AND 2000
(IN UNITED STATES DOLLARS)
9 OPERATING LEASE COMMITMENTS
As of December 31, 2001, the future commitments related to a noncancelable
land operating lease are as follows:
2001
-----------
2002 $ 153,825
2003 167,642
2004 174,348
2005 181,321
2006 188,574
Thereafter 3,478,510
-----------
Total minimum lease payments $ 4,344,220
===========
Rent expense amounted to approximately $211,790 and $211,070 for the years
ended December 31, 2001 and 2000, respectively.
The property lease was entered into with Housing and Development Board
("HDB") for an initial lease term of 30 years commencing 1 September 1990
and renewable for a further 30 years. Rental expense is paid quarterly in
advance to HDB for the leasehold property. The annual rent is subject to a
maximum yearly increase of 7.6% at the discretion of HDB.
10 CAPITAL LEASE OBLIGATIONS
The net present value of future minimum lease payments under capital leases
as well as total future minimum lease payments as of December 31, 2001 are
as follows:
2001
-----------
2002 $ 467,549
2003 392,964
2004 190,058
-----------
Total future minimum lease payments 1,050,571
Less: Imputed interest (152,784)
-----------
Present value of minimum lease payments 897,787
Less: Current portion (399,400)
-----------
$ 498,387
===========
17
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001 AND 2000
(IN UNITED STATES DOLLARS)
11 COMMITMENTS
During 2001, IGEL Operations entered into a Collaboration and Limited
Rights Agreement ("Agreement") with an executive director of IGEL
Operations to exploit and utilize certain existing technology and new
technology developed as a result of the collaboration. Under the Agreement,
such technology will be under the ownership of the executive director.
Should the employment of the executive director be terminated by the IGEL
Operations, the Agreement provides for the continuous use of the technology
only on the basis that IGEL Operations pay the executive director an agreed
upon royalty, which at December 31, 2001, is 5% of sales of contact lenses
manufactured using this technology.
12 CONCENTRATION OF RISK
Revenues from major customers, as a percentage of net revenues, were as
follows:
2001 2000
---- ----
Customer A 67% 74%
Customer B * 26 21
Others 7 5
--- ---
100 100
--- ---
* Related party
The substantial majority of the IGEL Operations sales are to two customers
which exposes it to a concentration of credit risk.
18
IGEL OPERATIONS
UNAUDITED CONDENSED COMBINED BALANCE SHEETS
(IN UNITED STATES DOLLARS)
AS OF
-------------------------------
JUNE 30, DECEMBER 31,
NOTES 2002 2001
----- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash $ 10,972 $ 27,448
Trade receivables (net of allowance for doubtful
accounts of $821,579 and $759,025, respectively) 570,070 1,121,689
Other receivables and prepayments 64,268 64,610
Inventories 3 1,415,345 2,831,452
------------ ------------
Total current assets 2,060,655 4,045,199
NON-CURRENT ASSETS:
Property, plant and equipment, net 7,658,821 7,765,041
------------ ------------
TOTAL ASSETS $ 9,719,476 $ 11,810,240
============ ============
LIABILITIES AND NET ASSETS
CURRENT LIABILITIES:
Trade and other payables $ 1,524,834 $ 1,068,863
Income tax payable 110,330 105,831
Advances from IVC directors 4 675,807 --
Amounts due to related parties 2,856,676 2,860,668
Current portion of capital lease obligations 408,631 399,400
Current portion of long-term loans 5 9,068,984 8,691,826
------------ ------------
Total current liabilities 14,645,262 13,126,588
NON-CURRENT LIABILITIES:
Capital lease obligations, less current portion 326,503 498,387
------------ ------------
TOTAL LIABILITIES 14,971,765 13,624,975
NET ASSETS (LIABILITIES) (5,252,289) (1,814,735)
------------ ------------
TOTAL LIABILITIES AND NET ASSETS $ 9,719,476 $ 11,810,240
============ ============
See accompanying notes to unaudited condensed combined financial statements.
19
IGEL OPERATIONS
UNAUDITED CONDENSED COMBINED STATEMENTS OF OPERATIONS
(IN UNITED STATES DOLLARS)
SIX MONTHS ENDED JUNE 30,
-----------------------------
2002 2001
----------- -----------
REVENUE
Product sales $ 1,360,567 $ 1,825,031
Rental income 202,967 224,931
----------- -----------
1,563,534 2,049,962
----------- -----------
COSTS AND EXPENSES
Cost of product sales (1,169,860) (1,706,174)
Write down of inventories (2,208,672) (1,858,412)
Cost of rental income (250,670) (287,607)
Selling, general and administrative expenses (716,075) (669,778)
----------- -----------
(4,345,277) (4,521,971)
----------- -----------
LOSS FROM OPERATIONS (2,781,743) (2,472,009)
Other income 42,996 30,187
Interest expense (229,460) (211,656)
Foreign exchange (loss) gain (37,600) 335,256
----------- -----------
LOSS BEFORE INCOME TAXES (3,005,807) (2,318,222)
Income tax benefit -- 219,191
----------- -----------
NET LOSS $(3,005,807) $(2,099,031)
=========== ===========
See accompanying notes to unaudited condensed combined financial statements.
20
IGEL OPERATIONS
UNAUDITED CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(IN UNITED STATES DOLLARS)
SIX MONTHS ENDED JUNE 30
-----------------------------
2002 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,005,807) $(2,099,031)
Adjustments to arrive at cash used in
operating activities:
Depreciation expense 468,014 447,994
Deferred income taxes -- (219,191)
Changes in operating assets and liabilities:
Trade receivables 591,110 128,682
Other receivables and prepayments 3,115 260,813
Inventories 1,512,577 1,363,971
Trade payables and other payables 402,769 (135,171)
Income tax payable (129) (50,810)
----------- -----------
Net cash used in operating activities (28,351) (302,473)
----------- -----------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property plant and equipment (33,117) (292,520)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term loans -- (256,191)
Advances from IVC directors 675,807 --
Payment of capital lease obligations (198,684) (283,495)
(Decrease)/ Increase in due from related parties (126,958) 640,443
Net cash transfers (to) from IVL Parent (378,496) 450,701
----------- -----------
Net cash (used in) provided by financing activities (28,331) 551,458
----------- -----------
Effect of exchange rate changes on cash 73,323 (9,608)
----------- -----------
Net decrease in cash (16,476) (53,413)
Cash at beginning of period 27,448 78,491
----------- -----------
CASH AT END OF PERIOD $ 10,972 $ 25,078
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ (233,580) $ (211,656)
See accompanying notes to unaudited condensed combined financial statements.
21
IGEL OPERATIONS
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
(IN UNITED STATES DOLLARS)
1 BASIS OF PRESENTATION
The operations of Igel C M Laboratory Pte Ltd ("ICML") and International
Vision Laboratories Pte Ltd ("IVL") consist of manufacturing, distribution
and development of eye care products and the rental of property. ICML and
IVL are based in Singapore and are wholly owned subsidiaries of
International Visioncare Pte Ltd ("IVC").
On July 24, 2002, 1-800 CONTACTS, INC. ("1-800 CONTACTS") completed the
acquisition of substantially all of the key operating assets and certain
liabilities of ICML, and certain assets and liabilities of IVL related to
the land and building rental operations. The accompanying combined
financial statements include the historical financial statements of ICML,
plus carved-out financial information related to the rental operations of
IVL (collectively referred to as the "IGEL Operations"). IVL maintained
sufficiently detailed accounting records to separately account for its
rental operations. As a result, allocations of expenses were not necessary
in connection with the preparation of the carved-out financial information
for the rental operations. The combined statements of changes in net assets
(liabilities) and comprehensive income (loss) include net cash transfers
from the IVL operations that were not acquired by 1-800 CONTACTS (referred
to as "IVL Parent"). All significant balances and transactions between ICML
and the carved-out IVL operations have been eliminated on combination.
The accompanying condensed combined financial statements have been
prepared, 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
accounting principles generally accepted in the United States have been
condensed or omitted pursuant to such rules and regulations. These
condensed combined financial statements reflect all adjustments (consisting
of normal adjustments), which in the opinion of management are necessary to
present fairly the results of operations for the periods presented. It is
suggested that these condensed combined financial statements be read in
conjunction with the audited financial statements and notes thereto
included elsewhere in this Current Report on Form 8-K. The results of
operations for the interim periods presented are not necessarily indicative
of the results to be expected for the entire year.
2 COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) for the six months ended June 30, 2002 and 2001
consists of the following components:
SIX MONTHS ENDED
-----------------------------
JUNE 30, JUNE 30,
2002 2001
----------- -----------
Net loss $(3,005,807) $(2,099,031)
Foreign currency translation adjustment (53,251) 22,467
----------- -----------
$(3,059,058) $(2,076,564)
=========== ===========
22
NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
JUNE 30, 2002 AND 2001
(IN UNITED STATES DOLLARS)
3 INVENTORIES
AS OF
----------------------------
JUNE 30, DECEMBER 31,
2002 2001
----------- -----------
Finished goods $ 833,762 $ 2,340,405
Work-in-progress 402,537 1,253,741
Raw materials 179,046 106,750
----------- -----------
1,415,345 3,700,896
Less: reserve for obsolete inventories -- (869,444)
----------- -----------
$ 1,415,345 $ 2,831,452
=========== ===========
During the six months ended June 30, 2002, the IGEL Operations wrote off
inventories of $2,208,672, as result of continued declines in sales and a
decision not to complete the manufacturing process and sell certain lenses.
4 ADVANCES FROM IVC DIRECTORS
During the six months ended June 30, 2002, two directors of IVC advanced
amounts to fund cash flow shortages. Advances amounting to $489,041 bear
interest at 7%, while the remaining advances are interest free. All
advances are unsecured and have no fixed terms of repayment.
5 LONG-TERM LOANS
The term loan and multi-currency revolving line of credit are denominated
in Singapore dollars and Japanese Yen, respectively. These loans were
assumed by 1-800 CONTACTS as part of the acquisition of the IGEL Operations
and were refinanced on a long-term basis.
23
UNAUDITED PRO FORMA CONDENSED
FINANCIAL INFORMATION
INTRODUCTION TO PRO FORMA FINANCIAL INFORMATION
On July 24, 2002, 1-800 CONTACTS, INC. (the Company) completed the acquisition
of certain net assets and the majority of the business operations of IGEL, a
contract manufacturer of contact lenses based in Singapore. The acquisition was
effected through a wholly owned subsidiary of the Company, IGEL Acquisition Co.
Pte Ltd (subsequently renamed ClearLab Pte Ltd), and included the purchase of
assets of Igel C.M. Laboratory Pte Ltd (ICML) and International Vision
Laboratories Pte Ltd (IVL), both subsidiaries of Igel Visioncare Pte Ltd
(collectively, the Seller), as well as certain other assets from Sinduchajana
Sulistyo and Stephen D. Newman (collectively, the Shareholders). The assets
acquired included principally the long-term leasehold interests in the land and
building where the manufacturing facility is located, as well as equipment,
inventories, and certain intellectual property rights, including patents key to
the operation of the acquired business.
The consideration paid by the Company consisted of approximately $5.3 million in
cash, approximately $8.6 million in assumed building and business loans to be
paid over the next 7 years, approximately $0.7 million in assumed capital lease
obligations, a non-interest bearing note of approximately $2.1 million to be
paid over the next 5 years, 700,000 shares of restricted common stock of the
Company, and 270,000 stock options in three tranches of 90,000 each with
exercise prices of $15, $25 and $35, respectively. The 700,000 shares of
restricted common stock are held in escrow, subject to a performance guarantee,
and vest over a two-year schedule with no shares released from escrow for a
minimum of one year. The purchase price for the assets was determined in
arms-length negotiations between the Company and the Seller and Shareholders.
The Company will continue to operate this contract manufacturer through its
wholly owned subsidiary, ClearLab Pte Ltd. The Company obtained the $5.3 million
cash consideration used in this asset purchase from part of a $10 million,
five-year term loan from Zions First National Bank, the Company's current
lender.
The unaudited pro forma condensed combined balance sheet of the Company gives
effect to the acquisition as if it had been completed as of June 29, 2002 (the
balance sheet date of the Company's most recent quarter). The unaudited pro
forma condensed combined statements of operations give effect to the acquisition
as if it had been completed as of the first day of the Company's 2001 fiscal
year (the most recent fiscal year presented). The pro forma adjustments are
described in the accompanying notes.
The accompanying unaudited pro forma condensed combined financial statements are
presented for illustrative purposes only. Such information is not necessarily
indicative of the operating results or financial position that would have
occurred had the acquisition taken place on June 29, 2002 or at the beginning of
the Company's 2001 fiscal year, nor is it indicative of the results that may be
expected for future periods. The pro forma condensed combined financial
statements should be read in conjunction with the Company's consolidated
financial statements and related notes filed in the Company's Annual Report on
Form 10-K and in conjunction with the audited combined financial statements of
ICML and IVL (the IGEL Operations) and related notes included in this Current
Report on Form 8-K/A.
24
1-800 CONTACTS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JUNE 29, 2002
(US DOLLARS IN THOUSANDS)
HISTORICAL
-------------------------------
ICML AND
THE CARVED-OUT
PORTION OF IVL
COMBINED (IGEL PRO FORMA PRO FORMA
1-800 CONTACTS OPERATIONS) ADJUSTMENTS COMBINED
-------------- -------------- ----------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 26 $ 11 $ (11)(a) $ 26
Accounts receivable -- 570 (570)(a) --
Inventories 49,450 1,416 50,866
Deferred income taxes 1,056 -- 1,056
Other current assets 1,737 64 (26)(a) 1,775
-------- -------- -------- --------
Total current assets 52,269 2,061 (607) 53,723
Property and equipment, net 3,595 7,659 300 (b)
1,132 (a) 12,686
Deferred income taxes 541 -- 541
Intangible assets, net 1,320 -- 6,065 (a) 7,385
Other assets 1,165 -- (720)(a)
-- -- (300)(b) 145
-------- -------- -------- --------
Total assets $ 58,890 $ 9,720 $ 5,870 $ 74,480
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 19,067 $ -- 19,067
Current portion of long-term debt
and capital lease obligations -- 13,010 $(11,187)(a) 1,824
Accounts payable 11,464 1,635 (1,635)(a) 11,464
Accrued liabilities 3,491 -- 245 (a) 3,736
Unearned revenue 335 -- 335
-------- -------- -------- --------
Total current liabilities 34,357 14,645 (12,576) 36,426
Long-term debt and capital lease
obligations, less current portion -- 327 14,988 (a) 15,315
Liability related to contingent consideration -- -- 6,766 (a) 6,766
-------- -------- -------- --------
Total liabilities 34,357 14,972 9,178 58,507
-------- -------- -------- --------
Stockholders' equity:
Common stock 129 -- 129
Additional paid-in capital 24,014 -- 24,014
Retained earnings 21,219 -- (8,560)(c) 12,659
Treasury stock (20,826) -- (20,826)
Accumulated other comprehensive loss (3) -- (3)
Net deficit of acquired operations -- (5,252) 5,252(a) --
-------- -------- -------- --------
Total stockholders' equity 24,533 (5,252) (3,308) 15,973
-------- -------- -------- --------
Total liabilities and stockholders' equity $ 58,890 $ 9,720 $ 5,870 $ 74,480
======== ======== ======== ========
See accompanying notes.
25
1-800 CONTACTS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE TWO QUARTERS ENDED JUNE 29, 2002
(US DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL
--------------------------------
ICML AND
THE CARVED-OUT
PORTION OF IVL
COMBINED (IGEL PRO FORMA PRO FORMA
1-800 CONTACTS OPERATIONS) ADJUSTMENTS COMBINED
-------------- -------------- ----------- ---------
Net product sales $ 83,814 $ 1,361 $ 85,175
Cost of goods sold 58,697 3,378 $ 30 (d) 62,105
-------- -------- -------- --------
Gross profit 25,117 (2,017) (30) 23,070
-------- -------- -------- --------
Selling, general and administrative expenses:
Advertising expense 6,609 6,609
Legal and professional fees 2,400 2,400
Other selling, general and administrative expenses 10,914 716 2 (e)
289 (f) 11,921
-------- -------- -------- --------
Total selling, general and administrative expenses 19,923 716 291 20,930
-------- -------- -------- --------
Income (loss) from operations 5,194 (2,733) (321) 2,140
Interest expense (327) (230) (253)(g) (810)
Other income, net 4 (43) (35)(h) 74
-------- -------- -------- --------
Income (loss) before provision for income taxes 4,871 (3,006) (609) 1,256
Provision for income taxes (1,928) -- -- (1,928)
-------- -------- -------- --------
Net income (loss) $ 2,943 $ (3,006) $ (609) $ (672)
======== ======== ======== ========
Earnings per common share:
Basic $ 0.26 $ (0.06)
======== ========
Diluted $ 0.25 $ (0.06)
======== ========
Weighted average common shares outstanding:
Basic 11,451 11,451
======== ========
Diluted 11,564 11,564
======== ========
See accompanying notes.
26
1-800 CONTACTS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 29, 2001
(US DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL
-------------------------------
ICML AND
THE CARVED-OUT
PORTION OF IVL
COMBINED (IGEL PRO FORMA PRO FORMA
1-800 CONTACTS OPERATIONS) ADJUSTMENTS COMBINED
-------------- -------------- ----------- ---------
Net product sales $ 169,036 $ 3,226 $ 172,262
Cost of goods sold 103,093 4,421 60 (d) 107,574
--------- --------- --------- ---------
Gross profit 65,943 (1,195) (60) 64,688
--------- --------- --------- ---------
Selling, general and administrative expenses:
Advertising expense 26,850 26,850
Legal and professional fees 2,838 2,838
Other selling, general and administrative expenses 19,874 1,814 $ 34 (e)
588 (f) 22,310
--------- --------- --------- ---------
Total selling, general and administrative expenses 49,562 1,814 622 51,998
--------- --------- --------- ---------
Income (loss) from operations 16,381 (3,009) (682) 12,690
Interest expense (96) (430) (612)(g) (1,138)
Other income (expense), net (156) 478 (75)(h) 247
--------- --------- --------- ---------
Income (loss) before provision for income taxes 16,129 (2,961) (1,369) 11,799
(Provision) benefit for income taxes (6,265) 280 -- (5,985)
--------- --------- --------- ---------
Net income (loss) $ 9,864 $ (2,681) $ (1,369) $ 5,814
========= ========= ========= =========
Earnings per common share:
Basic $ 0.85 $ 0.50
========= =========
Diluted $ 0.84 $ 0.49
========= =========
Weighted average common shares outstanding:
Basic 11,574 11,574
========= =========
Diluted 11,752 19 (i) 11,771
========= ========= =========
See accompanying notes.
27
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited pro forma condensed combined financial statements included herein
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and certain footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations; however, management
believes that the disclosures are adequate to make the information presented not
misleading.
2. ACQUISITION
The purchase consideration was denominated primarily in Singapore dollars
("SGD"). As a result, applicable amounts of consideration have been translated
into US dollars ("USD") at the exchange rate on June 29, 2002. All amounts
herein are shown in USD, unless otherwise noted. The following sets forth the
consideration paid by the Company, which is preliminary and subject to certain
adjustments (in thousands).
Cash $ 5,300
6.75% note payable to bank 4,915
6% note payable to parent of Seller (discounted at 7%) 3,663
Non interest bearing note payable (discounted at 7%) 1,789
Capital lease obligations assumed 735
Estimated direct acquisition expenses 1,507
-------
Purchase consideration $17,909
=======
The following table sets forth the preliminary allocation of the purchase
consideration to the tangible and intangible assets acquired and liabilities
assumed as of June 29, 2002 (in thousands).
Inventories $ 1,416
Other current assets 38
Property and equipment 8,791
Other long-term assets 50
In-process research and development 8,560
Definite-lived intangible assets:
Core and completed technologies 4,478
Noncompetition agreement 1,587
Accrued liabilities (245)
--------
Estimated fair value of acquired net assets 24,675
Liability related to contingent consideration (6,766)
--------
Total $ 17,909
========
28
Under Singapore law, the Company will seek to obtain approval to deduct for tax
reporting purposes the amounts assigned to intangible assets. If approval is not
obtained, the Company will record a deferred tax liability of approximately $1.5
million for the tax effect of the intangible assets.
The value allocated to in-process research and development will be charged to
expense upon consummation of the acquisition. The valuation of the in-process
research and development was determined using the income approach method, which
includes an analysis of the markets, cash flows and risks associated with
achieving such cash flows. The amount allocated represents the estimated
purchased in-process technology for projects that have not yet reached
commercial viability. Based on preliminary assessments, the value of these
projects was determined by estimating the costs to develop the purchased
in-process technologies into commercially viable products; estimating the
resulting net cash flows from the sale of the products resulting from completion
reduced by the portion of revenue attributable to core technology; and
discounting the net cash flows back to their present value. Management believes
that the acquired in-process research and development will be successfully
developed; however these technologies may not achieve commercial viability.
In connection with the acquisition, 700,000 shares of restricted common stock of
the Company were placed in escrow and will be released from escrow upon
successful test market results of certain newly developed contact lens products
as specified in the escrow agreement. Upon meeting the specific release
requirements, the shares will be released upon the later of completing the
specified requirements and the vesting dates as specified below. If the
conditions are not met by July 24, 2004, all shares in escrow will be returned
to the Company.
NUMBER OF SHARES VESTING DATE
---------------- ------------
175,000 July 24, 2003
350,000 January 24, 2004
175,000 July 24, 2004
-------
700,000
=======
The ultimate value of the shares will be accounted for as contingent
consideration and recorded as additional purchase price at the time the shares
are released from escrow. In accordance with Statement of Financial Accounting
Standards No. 141, at the date of acquisition the Company has recorded a
liability of $6,766,000 for the excess of the fair value of the acquired net
assets over the purchase consideration (excluding contingent consideration). Any
difference between this amount and the ultimate value determined at the date the
escrow conditions are met will be reflected as an increase to goodwill or a
reduction in the value assigned to the intangible assets. Management believes
that the conditions for release of the escrow will likely be met and that the
shares will be released from escrow.
29
In connection with the acquisition, certain technologies and intellectual
property were assigned to the Company for use in new products. The Company
issued stock options to purchase 270,000 shares and a non interest bearing note
of SGD $3,750,000 (USD $2,126,000) to the president and chief technology officer
as consideration for the assignment. The note payable is discounted at 7% which
results in a carrying amount of SGD $3,156,000 (USD $1,789,000). The options
consist of three equal tranches with exercise prices of $15, $25 and $35,
respectively. The tranches vest at the end of the third, fourth and fifth years,
respectively, of the agreement. In addition, in the event the Company, in its
sole discretion, decides to exploit the technologies, the Company will be
required to pay commissions on a per unit basis of applicable products sold
beginning one year after the date of the acquisition and ending five years after
the termination of employment agreement described in Note 4. If the Company
decides to exploit the technologies but has not yet exploited them by July 2005,
the Company will pay a commission of SGD$1,000,000 (USD$567,000) and
SGD$1,000,000 for each year thereafter until the Company has exploited the
technologies. In the event that the Company decides, in its sole discretion, not
to exploit the technologies, the Company shall assign the technologies back in
exchange for the forfeiture of any unvested common stock options of the 270,000
stock options issued under this agreement. The value of the stock options will
be determined and recorded as additional purchase consideration at the
applicable vesting dates.
As part of the purchase consideration, the Company assumed or refinanced two
notes payable. One of the notes with a principal balance of SGD $8,670,000 (USD
$4,915,000) is payable to a Singapore bank, bears interest at 6.75% and is
secured by substantially all of the assets of ClearLab Pte Ltd. The other note
with a principal balance of SGD $6,892,000 (USD$3,907,000) is payable to the
parent of the Seller, bears interest at 6% and has a subordinated position to
the note payable to the Singapore bank. Management believes that the note
payable bears a below market interest rate. Accordingly, under purchase
accounting, the note payable is discounted at 7% which results in a carrying
value of SGD $6,462,000 (USD $3,663,000). The notes are payable in increasing
principal installments through 2009. In addition, the Company has guaranteed the
notes.
In July 2002, the Company obtained a $10 million term loan from its current
lender of which approximately $6 million was used to partially fund the
acquisition. The loan bears interest at the bank's prime rate plus 0.5 percent
(5.25 percent at June 29, 2002) or 3.0 percent above the lender's LIBOR for the
applicable period. The loan is payable in increasing quarterly installments
through 2007.
3. PRO FORMA COMBINED NET INCOME PER COMMON SHARE
Pro forma diluted net income per common share ("Diluted EPS") reflects the
potential dilution that could occur if stock options or other common stock
equivalents issued in connection with the acquisition 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
pro forma net income per common share. For the
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year ended December 29, 2001 and the two quarters ended June 29, 2002, options
issued in connection with the acquisition to purchase 240,000 and 360,000 shares
of common stock, respectively, were not included in the computation of Diluted
EPS on a pro forma basis because the exercise prices of the options were greater
than the average market prices of the underlying common shares during the
respective periods.
Diluted EPS does not include the impact of 700,000 shares of restricted common
stock issued in connection with the acquisition since the necessary conditions
for the release of those shares have not been satisfied. The Company expects to
include such shares in Diluted EPS when such conditions for their release from
escrow have been satisfied to the extent such shares have not fully vested.
Shares that have been released from escrow and are fully vested will be included
in the determination of basic net income per common share.
4. EMPLOYMENT AGREEMENT
In connection with the acquisition, the Company entered into an employment
agreement with the president and chief technology officer. Under the provisions
of the agreement, the Company is required to pay SGD$1,125,000 (USD$638,000)
over the five-year term of the agreement for employment. The Company will
account for these amounts as compensation expense as earned. If employment is
terminated for any reason other than cause, the Company is obligated to pay any
unpaid amounts under the agreement at that time. Additionally, the individual
was granted 90,000 stock options in three equal tranches with exercise prices of
$15, $25 and $35, respectively. The tranches vest at the end of the third,
fourth and fifth years, respectively, of the agreement. These options were
granted with exercises prices in excess of the Company's quoted market price on
the date of grant and accordingly, the Company did not record compensation
expense.
The agreement contains a noncompetition clause for two years following the
termination of employment.
5. PRO FORMA ADJUSTMENTS
The pro forma condensed combined financial statements give effect to the
following pro forma adjustments in connection with the acquisition.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
(a) To reflect the purchase consideration and its preliminary allocation
to net assets acquired based on fair values as described in Note 2 and
to remove the assets and liabilities not acquired or assumed by the
Company. The following provides a reconciliation (in thousands) of
other long-term assets and notes payable. All other adjustments can be
readily determined from the information provided in the notes.
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Amounts advanced as purchase consideration by the
Company prior to June 29, 2002 $ (250)
Direct acquisition costs incurred by the Company
prior to June 29, 2002 (520)
Debt issuance costs 50
--------
Pro forma adjustment to other assets $ (720)
========
Note payable to bank $ 4,915
Note payable to parent of Seller 3,663
Non-interest bearing note payable 1,789
Capital lease obligations 735
Bank term loan 6,037
--------
Total 17,139
Less long-term portion (15,315)
Less historical IGEL current obligations (13,010)
--------
Pro forma adjustment to current
portion of long-term debt and
capital lease obligations $(11,186)
========
Long-term portion of debt and capital
capital lease obligations $ 15,315
Less historical IGEL long-term obligations (327)
--------
Pro forma adjustment to long-term
debt and capital lease obligations $ 14,988
========
(b) To reclassify advances of $300,000 made to Stephen D. Newman for the
purchase of certain equipment prior to June 29, 2002.
(c) To reflect the expensing of in-process research and development
acquired in the business combination. A non-recurring charge of
$8,560,000 will be reflected in the statement of operations of the
Company for the quarter ended September 28, 2002. As this charge is
non-recurring and directly associated with the acquisition, no
provision for the write-off has been reflected in the accompanying pro
forma statement of operations.
PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
(d) To reflect depreciation expense related to the $300,000 of equipment
purchased using an estimated useful life of 5 years.
(e) To reflect additional compensation expense to be recorded as a result
of the employment agreement with the president and chief technology
officer.
(f) To reflect amortization related to acquired definite-lived intangible
assets. Core technology has an estimated useful life of 12 years and
the noncompetition agreement has an estimated useful life of 5 years.
(g) To reflect additional interest expense associated with the portion of
the term loan used to finance the acquisition and the
assumed/refinanced notes payable (see Note 2).
(h) To reflect additional depreciation expense on the building using an
estimated useful life of 19 years.
(i) To reflect the dilutive effect of 120,000 common stock options issued
in connection with the acquisition. For the six month period ended
June 29, 2002, no options issued in connection with the acquisition
had a dilutive effect.
No benefit for income taxes has been provided for the above adjustments due
to the uncertainty of their realization as a result of the net operating
losses of the Singapore operations.
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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 hereunto duly authorized.
1-800 CONTACTS, INC.
Date: October 7, 2002 By: /s/ Scott S. Tanner
------------------------
Name: Scott S. Tanner
Title: Chief Operating Officer and
Chief Financial Officer
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