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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
___________________________
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ___________.
Commission file number: 0-23633
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1-800 CONTACTS, INC.
(Exact name of registrant as specified in its charter)
Delaware 87-0571643
------------------------------------------ ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
66 E. Wadsworth Park Drive, 3/rd/ Floor
Draper, UT 84020
------------------------------------------ ------------------------------------
(Address of principal executive offices) (Zip Code)
(801) 924-9800
---------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [_] No
As of May 8, 2001, the Registrant had 11,566,033 shares of Common Stock,
par value $0.01 per share outstanding.
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1-800 CONTACTS, INC.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of December 30, 2000
and March 31, 2001..................................................................................... 3
Condensed Consolidated Statements of Income for the Quarters Ended
April 1, 2000 and March 31, 2001....................................................................... 4
Condensed Consolidated Statement of Stockholders' Equity for the
Quarter Ended March 31, 2001........................................................................... 5
Condensed Consolidated Statements of Cash Flows for the Quarters Ended
April 1, 2000 and March 31, 2001....................................................................... 6
Notes to Condensed Consolidated Financial Statements........................................................ 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................................................. 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................................. 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................................... 14
Item 2. Changes in Securities and Use of Proceeds................................................................... 14
Item 3. Defaults upon Senior Securities............................................................................. 14
Item 4. Submission of Matters to a Vote of Security Holders......................................................... 14
Item 5. Other Information........................................................................................... 14
Item 6. Exhibits and Reports on Form 8-K............................................................................ 14
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
1-800 CONTACTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS
December 30, March 31,
2000 2001
--------------- ---------------
CURRENT ASSETS:
Cash and cash equivalents $ 42,558 $ 3,678,553
Inventories 20,402,076 21,553,620
Deferred income taxes 673,710 718,254
Other current assets 385,001 751,896
--------------- ---------------
Total current assets 21,503,345 26,702,323
PROPERTY AND EQUIPMENT, net 2,843,103 3,119,407
DEFERRED INCOME TAXES 203,620 333,237
INTANGIBLE ASSETS, net 1,261,916 1,233,923
OTHER ASSETS 295,775 69,294
--------------- ---------------
Total assets $ 26,107,759 $ 31,458,184
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit $ 3,264,979 $ -
Accounts payable 3,646,578 8,378,141
Accrued liabilities 3,541,463 4,479,469
Income taxes payable 1,206,523 1,788,928
Unearned revenue 483,812 306,535
--------------- ---------------
Total current liabilities 12,143,355 14,953,073
--------------- ---------------
STOCKHOLDERS' EQUITY:
Common stock 128,611 128,611
Additional paid-in capital 23,802,342 23,910,030
Retained earnings 8,412,507 10,742,491
Treasury stock at cost (18,376,111) (18,274,016)
Accumulated other comprehensive loss (2,945) (2,005)
--------------- ---------------
Total stockholders' equity 13,964,404 16,505,111
--------------- ---------------
Total liabilities and stockholders' equity $ 26,107,759 $ 31,458,184
=============== ===============
The accompanying notes to condensed consolidated financial statements are an
integral part of these condensed consolidated statements.
3
1-800 CONTACTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Quarter Ended
------------------------------
April 1, March 31,
2000 2001
-------------- --------------
NET SALES $ 31,419,004 $ 42,817,306
COST OF GOODS SOLD 18,532,597 25,534,386
-------------- --------------
Gross profit 12,886,407 17,282,920
-------------- --------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
Advertising expense 6,502,196 8,263,823
Other selling, general and administrative expenses 3,604,764 4,967,479
-------------- --------------
Total selling, general and administrative expenses 10,106,960 13,231,302
-------------- --------------
INCOME FROM OPERATIONS 2,779,447 4,051,618
OTHER INCOME (EXPENSE), net 115,829 (204,516)
-------------- --------------
INCOME BEFORE PROVISION FOR INCOME TAXES 2,895,276 3,847,102
PROVISION FOR INCOME TAXES (1,082,727) (1,517,118)
-------------- --------------
NET INCOME $ 1,812,549 $ 2,329,984
============== ==============
PER SHARE INFORMATION:
Basic net income per common share $ 0.15 $ 0.20
============== ==============
Diluted net income per common share $ 0.14 $ 0.20
============== ==============
The accompanying notes to condensed consolidated financial statements are an
integral part of these condensed consolidated statements.
4
1-800 CONTACTS, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Quarter Ended March 31, 2001
(Unaudited)
Accumulated
Common Stock Additional Treasury Stock Other
----------------------- Paid-in Retained -------------------------- Comprehensive
Shares Amount Capital Earnings Shares Amount Loss
---------- --------- ----------- ----------- ----------- ------------- -------------
BALANCE,
December 30, 2000 12,861,136 $ 128,611 $23,802,342 $ 8,412,507 (1,289,555) $(18,376,111) $ (2,945)
Exercise of common
stock options - - (1,186) - 16,842 102,095 -
Income tax benefit from
common stock
options exercised - - 108,874 - - - -
Net income - - - 2,329,984 - - -
Foreign currency
translation adjustments - - - - - - 940
--------- --------- ----------- ----------- ---------- ------------ --------
Comprehensive income
BALANCE,
March 31, 2001 12,861,136 $ 128,611 $23,910,030 $10,742,491 (1,272,713) $(18,274,016) $ (2,005)
========== ========= =========== =========== =========== ============= =========
Total
Stockholders' Comprehensive
Equity Income
------------ ------------
BALANCE,
December 30, 2000 $ 13,964,404
Exercise of common
stock options 100,909
Income tax benefit from
common stock
options exercised 108,874
Net income 2,329,984 $ 2,329,984
Foreign currency
translation adjustments 940 940
------------ -----------
Comprehensive income $ 2,330,924
===========
BALANCE,
March 31, 2001 $ 16,505,111
============
The accompanying notes to condensed consolidated financial statements are an
integral part of these condensed consolidated statements.
5
1-800 CONTACTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Quarter Ended
-------------------------------
April 1, March 31,
2000 2001
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,812,549 $ 2,329,984
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 261,877 328,909
Gain on sale of property and equipment (2,650) (5,000)
Loss on impairment of non-marketable securities - 220,000
Deferred income taxes (32,235) (174,161)
Changes in operating assets and liabilities:
Inventories 1,417,372 (1,151,544)
Other current assets 55,888 (367,031)
Accounts payable 2,417,704 4,731,643
Accrued liabilities 930,660 938,080
Income taxes payable 714,962 691,279
Unearned revenue 147,303 (177,277)
-------------- --------------
Net cash provided by operating activities 7,723,430 7,364,882
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (224,970) (516,970)
Proceeds from sale of property and equipment 2,650 5,000
Purchase of intangible assets (10,000) (61,675)
Purchase of non-marketable securities (220,000) -
Deposits (35,398) 6,227
-------------- --------------
Net cash used in investing activities (487,718) (567,418)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock repurchases (4,280,588) -
Proceeds from exercise of common stock options 150,464 100,909
Net repayments on line of credit - (3,264,979)
Principal payments on capital lease obligation (9,795) -
-------------- --------------
Net cash used in financing activities (4,139,919) (3,164,070)
-------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,095,793 3,633,394
EFFECT OF FOREIGN EXCHANGE RATES ON CASH - 2,601
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,329,088 42,558
-------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,424,881 $ 3,678,553
============== ==============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 705 $ 31,701
Cash paid for income taxes 300,000 1,000,000
The accompanying notes to condensed consolidated financial statements are
an integral part of these condensed consolidated statements.
6
1-800 CONTACTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. PRESENTATION OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying condensed consolidated financial statements have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. These condensed consolidated financial statements
reflect all adjustments (consisting only of normal recurring adjustments), which
in the opinion of management, are necessary to present fairly the results of
operations of the Company for the periods presented. It is suggested that these
condensed consolidated financial statements be read in conjunction with the
audited financial statements and the notes thereto included in the Company's
Annual Report to Shareholders on Form 10-K.
The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the full year.
NOTE 2. NET INCOME PER COMMON SHARE
Basic net income per common share ("Basic EPS") excludes dilution and is
computed by dividing net income by the weighted-average number of common shares
outstanding during the period. Diluted net income per common share ("Diluted
EPS") reflects the potential dilution that could occur if stock options or other
common stock equivalents were exercised or converted into common stock. The
computation of Diluted EPS does not assume exercise or conversion of securities
that would have an antidilutive effect on net income per common share.
The following is a reconciliation of the numerator and denominator used to
calculate Basic and Diluted EPS:
Quarter Ended April 1, 2000 Quarter Ended March 31, 2001
---------------------------------------- ----------------------------------------
Per-Share Per-Share
Net Income Shares Amount Net Income Shares Amount
---------- ---------- ---------- ---------- ---------- ----------
Basic EPS $1,812,549 12,362,412 $ 0.15 $2,329,984 11,576,835 $ 0.20
Effect of stock options 194,702 223,928
---------- ---------- ---------- ---------- ---------- ----------
Diluted EPS $1,812,549 12,557,114 $ 0.14 $2,329,984 11,800,763 $ 0.20
========== ========== ========== ========== ========== ==========
NOTE 3. COMMON STOCK TRANSACTIONS
During the quarter ended March 31, 2001, employees exercised stock options
to purchase 16,842 shares of common stock for a total of $100,909.
During the quarter ended March 31, 2001 the Company granted nonqualified
stock options to purchase 93,564 shares of common stock to employees and
directors of the Company. The exercise prices of the options range from $21.25
to $34.938. The options vest equally over a four year period and expire in ten
years.
On April 20, 2001, the Company's Board of Directors authorized an
additional repurchase of up to 1,000,000 shares of its common stock, bringing
the total authorization to 3,000,000 shares. A purchase of the full 3,000,000
shares would equal approximately 23.3 percent of the total shares issued. The
repurchase of common stock is subject to market conditions and is accomplished
through periodic purchases at prevailing prices on the open
7
market, by block purchases or in privately negotiated transactions. The
repurchased shares will be retained as treasury stock to be used for corporate
purposes. As of March 31, 2001, the Company had repurchased 1,484,000 shares for
a total cost of $19,453,109. Subsequent to March 31, 2001, the Company
repurchased 22,500 shares for a total cost of $438,125.
NOTE 4. IMPAIRMENT OF INVESTMENT
During the quarter ended March 31, 2001, the Company determined that its
investment in the stock of an entity in which a member of the Company's Board of
Directors holds a significant ownership interest and serves as an officer and
director was impaired. The Company recorded a $220,000 loss to adjust the
investment to its determined net realizable value of $0.
NOTE 5. LEGAL MATTERS
On July 14, 1998, Craig S. Steinberg, O.D., a professional corporation
d.b.a. City Eyes Optometry Center, filed a purported class action on behalf of
all California optometrists against the Company and its directors in Los Angeles
County Superior Court. In April 2001, the Company settled this claim. The
settlement did not materially impact the Company's results of operations.
On April 7, 1999, the Kansas Board of Examiners in Optometry ("KBEO")
commenced a civil action against the Company. The action was filed in the
District Court of Shawnee County, Kansas, Division 6. The complaint was amended
on May 28, 1999. The amended complaint alleges that "on one or more occasions"
the Company sold contact lenses in the state of Kansas without receipt of a
prescription. The amended complaint seeks an order enjoining the Company from
further engaging in the alleged activity. The amended complaint does not seek
monetary damages. In response to the amended complaint, the Company has
retained counsel, and intends to vigorously defend itself in this action. The
Company has filed an answer to the amended complaint and, at the request of the
Court, filed a motion for summary judgment. In November 2000, the Court issued
an order denying the summary judgment motion, finding that there were factual
issues regarding whether the KBEO can meet the requirements necessary to obtain
injunctive relief, and whether the Kansas law violates the Commerce Clause of
the United States Constitution. The parties are now engaging in fact and expert
discovery in preparation for trial.
On or about November 2, 1999, the Company received a complaint from the
Texas Optometry Board seeking injunctive relief and civil penalties against the
Company for alleged violation of the Texas Optometry Act. The complaint alleges
that the Company (1) failed to state explicitly in its advertisements that a
written prescription is required to purchase contact lenses and (2) dispensed
contact lenses without such a prescription. The Company has filed an answer to
the complaint and plans to vigorously defend this action.
The Company entered into a written settlement agreement with the Texas
Department of Health ("TDH"), the regulatory authority in Texas for sellers of
contact lenses, which became effective February 29, 2000, relating to the
Company's sales practices in Texas. The implementation of this agreement began
November 2000. The agreement allows for a review of and, if necessary, changes
to the Company's practices during a six month period. The TDH issued a Notice
of Violation against the Company on or about February 26, 2001, alleging that
the Company failed to comply with certain provisions of the agreement. The
Company will be engaging in discussions with the TDH regarding this notice.
From time to time the Company is involved in other legal matters generally
incidental to its business.
It is the opinion of management, after discussion with legal counsel, that
the ultimate dispositions of all of these matters will not likely have a
material impact on the financial condition, liquidity or results of operations
of the Company. However, there can be no assurance that the Company will be
successful in its efforts to satisfactorily resolve these matters and the
ultimate outcome could result in a material negative impact on the Company's
results of operations and financial position.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company is a leading direct marketer of replacement contact lenses.
The Company was formed in February 1995 and is the successor to the mail order
business founded by the Company's Vice President of Sales in March 1991. Since
its formation, the Company's net sales have grown rapidly, from $3.6 million in
fiscal 1996 to $145.0 million in fiscal 2000 and from $31.4 million in the first
quarter of fiscal 2000 to $42.8 million in the first quarter of fiscal 2001.
Internet sales have grown from an insignificant amount in fiscal 1996 to
approximately $53.8 million in fiscal 2000 and from $9.2 million in the first
quarter of fiscal 2000 to $16.3 million in the first quarter of fiscal 2001.
The Company's fiscal year consists of a 52/53 week period ending on the
Saturday nearest to December 31.
The Company expenses all advertising costs when the advertising first takes
place. As a result, quarter-to-quarter comparisons are impacted within and
between quarters by the timing of television, radio and Internet advertisements
and by the mailing of the Company's printed advertisements. The volume of
mailings and other advertising may vary in different quarters and from year to
year depending on the Company's assessment of prevailing market opportunities.
The sale and delivery of contact lenses are governed by both federal and
state laws and regulations. The Company sells to customers in all 50 states,
and each sale is likely to be subject to the laws of the state where the
customer is located. In some states, the Company operates according to
agreements it has entered into with local regulatory authorities or medical
boards or agencies. The Company's general operating practice is to attempt to
obtain a valid prescription from each of its customers or his/her eye care
practitioner. If the customer does not have a copy of his/her prescription but
does have the prescription information obtained directly from the customer's eye
care practitioner, the Company attempts to contact the customer's eye care
practitioner to obtain a copy of or verify the customer's prescription. If the
Company is unable to obtain a copy of or verify the customer's prescription, it
is the Company's general practice to complete the sale and ship the lenses to
the customer based on the prescription information provided by the customer.
The Company retains copies of the written prescriptions that it receives and
maintains records of its communications with the customer's prescriber.
9
Results of Operations
The following table presents the Company's results of operations expressed
as a percentage of net sales for the periods indicated:
Quarter Ended
---------------------------------
April 1, March 31,
2000 2001
------------- -------------
Net sales 100.0% 100.0%
Cost of goods sold 59.0 59.6
------------- -------------
Gross profit 41.0 40.4
------------- -------------
Advertising expense 20.7 19.3
Other selling, general and administrative expenses 11.5 11.6
------------- -------------
Total selling, general and administrative expenses 32.2 30.9
------------- -------------
Income from operations 8.8 9.5
Other income (expense), net 0.4 (0.5)
------------- -------------
Income before provision for income taxes 9.2 9.0
Provision for income taxes (3.4) (3.6)
------------- -------------
Net income 5.8% 5.4%
============= =============
Net sales. Net sales for the quarter ended March 31, 2001 increased 36% to
$42.8 million from $31.4 million for the quarter ended April 1, 2000. The
Company added more than 160,000 new customers during the first quarter of fiscal
2001. The Company is realizing the benefits of repeat sales from a growing
customer base. Repeat sales for the first quarter of fiscal 2001 increased 54%
to $28.1 million, or 66% of net sales, from $18.2 million, or 58% of net sales,
for the first quarter of fiscal 2000. The Company also believes that this
increase in net sales reflects some of the benefits of the more than $82 million
it has invested in its national advertising campaign over the last several years
and its commitment to customer service. In addition to refining its marketing
efforts to its customer base, the Company has also enhanced its website and has
increased the exposure of its website in its advertising. Internet sales for
the first quarter of fiscal 2001 were $16.3 million, or 38% of net sales, as
compared to $9.2 million, or 29% of net sales, for the first quarter of fiscal
2000. Although the Company believes that sales will increase substantially in
fiscal 2001 as compared to fiscal 2000, the Company expects the rate of growth
in net sales to decrease.
Gross profit. Gross profit as a percentage of net sales decreased to 40.4%
for the quarter ended March 31, 2001 from 41.0% for the quarter ended April 1,
2000. The increase in Internet sales as a percentage of net sales impacts gross
profit as a percentage of net sales since Internet orders generate lower gross
profit due to free shipping on those orders. The Company believes that gross
profit as a percentage of net sales may continue to decrease slightly as
Internet sales as a percentage of net sales continues to increase.
Advertising expense. Advertising expense for the quarter ended March 31,
2001 increased $1.8 million, or 27%, from the quarter ended April 1, 2000. As a
percentage of net sales, advertising expense decreased to 19.3% for the first
quarter of fiscal 2001 from 20.7% for the first quarter of fiscal 2000. The
Company plans to increase advertising spending in fiscal 2001 by approximately
20% from its fiscal 2000 spending. However, if opportunities present
themselves, the Company may increase advertising spending above currently
planned levels.
Other selling, general and administrative expenses. Other selling, general
and administrative expenses for the quarter ended March 31, 2001 increased $1.4
million, or 38%, from the quarter ended April 1, 2000. As a percentage of net
sales, other selling, general and administrative expenses increased slightly to
11.6% for the first quarter of fiscal 2001 from 11.5% for the first quarter of
fiscal 2000.
10
Other income (expense), net. Other income (expense) decreased to
approximately ($205,000) for the quarter ended March 31, 2001 from approximately
$116,000 for the quarter ended April 1, 2000. Interest income decreased due to
lower cash balances throughout the quarter. In addition, during the first
quarter of fiscal 2001, the Company recorded a $220,000 loss related to the
impairment of non-marketable securities.
Income taxes. The Company's effective tax rate for the quarter ended March
31, 2001 was 39.4%. For the quarter ended April 1, 2000, the Company's
effective tax rate was 37.4%. As of March 31, 2001, the Company had not
provided a valuation allowance on deferred tax assets. The Company's future
effective tax rate will depend upon future taxable income. The Company
anticipates that its fiscal 2001 effective income tax rate will be approximately
39%.
Liquidity and Capital Resources
For the quarters ended March 31, 2001 and April 1, 2000, net cash provided
by operating activities was approximately $7.4 million and $7.7 million,
respectively. In the fiscal 2001 period, cash was provided primarily by net
income and increases in accounts payable, accrued liabilities and income taxes
payable offset by an increase in inventories. In the fiscal 2000 period, cash
was provided primarily by net income and increases in accounts payable, accrued
liabilities and income taxes payable as well as a decrease in inventories. In
order to help ensure sufficient supply of inventory, the Company generally
carries a higher level of inventory than if it were able to purchase directly
from all contact lens manufacturers.
The Company used approximately $567,000 and $488,000 for investing
activities in the quarters ended March 31, 2001 and April 1, 2000, respectively.
The majority of these amounts relate to capital expenditures for infrastructure
improvements. Capital expenditures for the fiscal 2001 period were
approximately $517,000. A significant portion of these expenditures relate to
the expansion of the Company's leased distribution center and leased space used
for its management and call center operations. Capital expenditures for the
fiscal 2000 period were approximately $260,000 (including approximately $35,000
in deposits). In addition, in March 2000, the Company made a $220,000 investment
in the stock of an entity in which a member of the Company's Board of Directors
holds a significant ownership interest and serves as an officer and director.
The Company anticipates additional capital expenditures for infrastructure as it
continues to expand and improve operating facilities, telecommunications systems
and management information systems in order to handle future growth. The
Company presently anticipates that capital expenditures in fiscal 2001 will be
approximately $1.6 million.
As of March 31, 2001, the Company had certain noncancelable commitments to
purchase approximately $9.4 million of broadcast advertising through September
2001. In addition, the Company has entered into certain noncancelable
commitments with various advertising companies that will require the Company to
pay approximately $6.4 million from January 1, 2001 through December 31, 2001.
During the quarters ended March 31, 2001 and April 1, 2000, the Company
used approximately $3.2 million and $4.1 million for financing activities.
During the fiscal 2001 period, the Company repaid the amount owed on its credit
facility. The net repayments on the credit facility totaled approximately $3.3
million. During the fiscal 2000 period, the Company repurchased a total of
316,000 shares of its common stock for a total cost of approximately $4.3
million. In both the fiscal 2001 and 2000 periods, these amounts were offset
slightly by proceeds from the exercise of common stock options.
On April 20, 2001, the Company's Board of Directors authorized an
additional repurchase of up to 1,000,000 shares of its common stock, bringing
the total authorization to 3,000,000 shares. A purchase of the full 3,000,000
shares would equal approximately 23.3 percent of the total shares issued. The
repurchase of common stock is subject to market conditions and is accomplished
through periodic purchases at prevailing prices on the open market, by block
purchases or in privately negotiated transactions. The repurchased shares will
be retained as treasury stock to be used for corporate purposes. As of March
31, 2001, the Company had repurchased 1,484,000
11
shares for a total cost of approximately $19.5 million. Subsequent to March 31,
2001, the Company repurchased 22,500 shares for a total cost of approximately
$438,000.
The Company has a revolving credit facility to provide for working capital
requirements and other corporate purposes. The credit facility provides for
borrowings equal to the lesser of $10.0 million or 50 percent of eligible
inventory and bears interest at a floating rate equal to the lender's prime
interest rate (8.0 percent as of March 31, 2001). As of March 31, 2001, the
Company had no outstanding borrowings on the credit facility. The credit
facility is secured by substantially all of the Company's assets and contains
financial covenants customary for this type of financing. The credit facility
was to expire on April 30, 2001 but has been extended until May 30, 2001. The
Company is in the process of replacing the facility.
The Company believes that its cash on hand, together with cash generated
from operations and the cash available through the credit facility, will be
sufficient to support current operations and future growth through the next
year. The Company may be required to seek additional sources of funds for
accelerated growth or continued growth after that point, and there can be no
assurance that such funds will be available on satisfactory terms. Failure to
obtain such financing could delay or prevent the Company's planned growth, which
could adversely affect the Company's business, financial condition and results
of operations.
As a result of state regulatory requirements, the Company's liquidity,
capital resources and results of operations may be negatively impacted in the
future if the Company incurs increased costs or fines, is prohibited from
selling its products in a particular state(s) or experiences losses of a
substantial portion of the Company's customers for whom the Company is unable to
obtain or verify a prescription due to the enforcement of requirements by state
regulatory agencies.
Forward-Looking Statements
Except for the historical information contained herein, the matters
discussed in this Form 10-Q are forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A
of the Securities Act of 1933, as amended. These forward-looking statements
involve risks and uncertainties and often depend on assumptions, data or methods
that may be incorrect or imprecise. The Company's future operating results may
differ materially from the results discussed in, or implied by, forward-looking
statements made by the Company. Factors that may cause such differences
include, but are not limited to, those discussed below and the other risks
detailed in the Company's other reports filed with the Securities and Exchange
Commission. The words such as "believes," "anticipates," "expects," "future,"
"intends," "would," "may" and similar expressions are intended to identify
forward-looking statements. The Company undertakes no obligation to revise any
of these forward-looking statements to reflect events or circumstances after the
date hereof.
Factors That May Affect Future Results
. The Company's sales growth will not continue at historical rates and it may
encounter unforeseen difficulties in managing its future growth;
. A significant portion of the Company's sales do not comply with applicable
state laws and regulations governing the delivery and sale of contact
lenses;
. Because the Company doesn't manufacture contact lenses, it cannot ensure
that the contact lenses it sells meet all federal regulatory requirements;
. It is possible that the FDA will consider certain of the contact lenses the
Company sells to be misbranded;
. The Company currently purchases a substantial portion of its products from
unauthorized distributors and is not an authorized distributor for some of
the products that it sells;
12
. The Company obtains a large percentage of its inventory from a limited
number of suppliers, with a single distributor accounting for 47%, 38% and
35% of the Company's inventory purchases in fiscal 1998, 1999 and 2000,
respectively;
. The Company's quarterly results are likely to vary based upon the level of
sales and marketing activity in any particular quarter;
. The Company is dependent on its telephone, Internet and management
information systems for the sale and distribution of contact lenses;
. The Company has limited operating history and, as a result, there is only
limited financial information and operating information available for a
potential investor to evaluate the Company;
. The retail sale of contact lenses is highly competitive; certain of the
Company's competitors are large, national optical chains that have greater
resources than the Company has;
. The demand for contact lenses could be substantially reduced if alternative
technologies to permanently correct vision gain in popularity;
. The Company does not have any property rights in the 1-800 CONTACTS
telephone number or the Internet addresses that it uses;
. Increases in the cost of shipping, postage or credit card processing could
harm the Company's business;
. The Company's business could be harmed if it is required to collect state
sales tax on the sale of products;
. The Company faces an inherent risk of exposure to product liability claims
in the event that the use of the products it sells results in personal
injury;
. The Company conducts its operations through a single distribution facility;
. The Company's success is dependent, in part, on continued growth in use of
the Internet;
. Government regulation and legal uncertainties relating to the Internet and
online commerce could negatively impact the Company's business operations;
and
. Changing technology could adversely affect the operation of the Company's
website.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to changes in interest rates primarily related to
its revolving credit facility. As of March 31, 2001, the Company had no
outstanding borrowings on the credit facility. The credit facility bears
interest at a variable rate. The Company is exposed to foreign currency risk
due to cash held by its foreign subsidiary. As of March 31, 2001, the Company's
total cash in foreign currencies was approximately $14,000. In addition, all of
the Company's revenue transactions are in U.S. dollars.
13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See notes to condensed consolidated financial statements.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
From time to time the Company receives notices, inquiries or other
correspondence from states or its regulatory bodies charged with overseeing the
sale of contact lenses. The Company's practice is to review such notices with
legal counsel to determine the appropriate response on a case-by-case basis. It
is the opinion of management, after discussion with legal counsel, that the
Company is taking the appropriate steps to address the various notices received.
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits
None.
(B) Reports on From 8-K
No reports on Form 8-K were filed by the Registrant during the quarter
ended March 31, 2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
1-800 CONTACTS, INC.
Dated: May 15, 2001 By: /s/ Jonathan C. Coon
--------------------
Name: Jonathan C. Coon
Title: President and Chief Executive Officer
By: /s/ Scott S. Tanner
-------------------
Name: Scott S. Tanner
Title: Chief Operating Officer and Chief
Financial Officer
15