-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S1TzZqrYXyZdL3lOyaN85nzKcAAWyCaLuwgSlepbkK8zKshIt5ChvkZKTto7XYPo /Es6s5Y5c95eFO15LwE5fw== 0000927356-01-000365.txt : 20010402 0000927356-01-000365.hdr.sgml : 20010402 ACCESSION NUMBER: 0000927356-01-000365 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20001230 FILED AS OF DATE: 20010330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: 1 800 CONTACTS INC CENTRAL INDEX KEY: 0001050122 STANDARD INDUSTRIAL CLASSIFICATION: OPTICAL INSTRUMENTS & LENSES [3827] IRS NUMBER: 870571643 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23633 FILM NUMBER: 1587687 BUSINESS ADDRESS: STREET 1: 13751 S WADSWORTH PARK DR SUITE D-140 CITY: DRAPER STATE: UT ZIP: 84020 BUSINESS PHONE: 8015728225 MAIL ADDRESS: STREET 1: 13751 S WADSWORTH PARK DR SUITE D-140 CITY: DRAPER STATE: UT ZIP: 84020 10-K 1 0001.txt ANNUAL REPORT - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 30, 2000 or [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to ______________ Commission file number: 0-23633 ----------- 1-800 CONTACTS, INC. (Exact name of registrant as specified in its charter) Delaware 87-0571643 - -------------------------------------------------------------- ------------------------------------ (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 66 E. Wadsworth Park Drive 3rd Floor, Draper, UT 84020 - -------------------------------------------------------------- ------------------------------------ (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 924-9800 Securities registered pursuant to Section 12(b) of the Act: Not applicable Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share -------------------------------------- (Title of Class) 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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of voting common equity held by non-affiliates of the registrant as of March 19, 2001 at a closing sale price of $21.938 as reported by the Nasdaq National Market ("Nasdaq") was approximately $150 million. Shares held by each officer and director and by each person who owns or may be deemed to own 10% or more of the outstanding Common Stock have been excluded since such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of March 19, 2001, the Registrant had 11,588,125 shares of Common Stock, par value $0.01 per share, outstanding. Documents Incorporated by Reference Portions of the Registrant's Proxy Statement to be used in connection with the solicitation of proxies for the Annual Meeting of Stockholders to be held on May 18, 2001 (the "Proxy Statement") are incorporated by reference in Part III of this Annual Report on Form 10-K (the "Form 10-K"). - ------------------------------------------------------------------------------- 1-800 CONTACTS, INC. INDEX TO ANNUAL REPORT ON FORM 10-K
Page No. -------- PART I Item 1. Business................................................................ 3 Item 2. Properties.............................................................. 12 Item 3. Legal Proceedings....................................................... 13 Item 4. Submission of Matters to a Vote of Security Holders..................... 14 Item 4A. Executive Officers of the Registrant.................................... 14 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters... 15 Item 6. Selected Financial Data................................................. 16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................. 17 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.............. 23 Item 8. Financial Statements and Supplementary Data............................. 23 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.................................................. 24 PART III Item 10. Directors and Executive Officers of the Registrant...................... 24 Item 11. Executive Compensation.................................................. 24 Item 12. Security Ownership of Certain Beneficial Owners and Management.......... 24 Item 13. Certain Relationships and Related Transactions.......................... 24 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........ 24
PART I Item 1. Business. Overview 1-800 CONTACTS, INC. (the "Company") was incorporated under the laws of the State of Utah in February 1995 and was reincorporated under the laws of the State of Delaware in February 1998 in conjunction with its initial public offering of common stock. The Company is the successor to the business founded by the Company's Vice President of Sales in March 1991. The Company's principal executive office is located at 66 E. Wadsworth Park Drive 3rd Floor, Draper, Utah 84020, and its telephone number is (801) 924-9800. The Company maintains a website on the Internet at www.1800contacts.com. The Company is a leading direct marketer of replacement contact lenses. As of December 30, 2000, the Company had shipped more than 3.7 million orders to approximately 1.8 million customers since inception. Through its easy-to- remember, toll-free telephone number, "1-800 CONTACTS" (1-800-266-8228), and through its Internet addresses, which include "www.1800contacts.com," "www.contacts.com" and "www.contactlenses.com," the Company sells all of the popular brands of contact lenses, including those manufactured by Johnson & Johnson, CIBA Vision, Wesley Jessen (recently acquired by CIBA Vision), Bausch & Lomb, Ocular Sciences and CooperVision. The Company's high volume, cost- efficient operations, supported by its proprietary management information systems, enable it to offer consumers an attractive alternative for obtaining replacement contact lenses in terms of convenience, price, speed of delivery and customer service. As a result of its extensive inventory of more than 30,000 SKUs, the Company generally ships approximately 90% of its orders within one business day of receipt. The Company believes that it offers its customers an attractive alternative for obtaining replacement contact lenses in terms of convenience, price, speed of delivery and customer service. The Company's net sales have grown rapidly, from $3.6 million in fiscal 1996 to $145 million in fiscal 2000. The Internet is the Company's fastest-growing sales channel and a more cost-effective way for the Company to serve its customers. The Company's Internet sales for fiscal 2000 were $53.8 million compared to $18.7 million in the previous fiscal year. During the fourth quarter of fiscal 2000, new Internet orders represented approximately 47% of the Company's total new orders. Its online presence enables the Company to operate more efficiently by substantially eliminating the payroll and long distance costs associated with telephone orders. This increased efficiency allows the Company to offer Internet customers free shipping in addition to other services such as e-mail shipping confirmation, online order tracking and e-mail correspondence. The Company believes that its customers will increasingly use the Internet to order and reorder replacement contact lenses. The Company markets its products through a national advertising campaign that aims to increase recognition of the 1-800 CONTACTS brand name, increase traffic on its website, add new customers, continue to build strong customer loyalty and maximize repeat purchases. As compared to other direct marketers of replacement contact lenses, the Company believes that its toll-free telephone number and Internet addresses afford it a significant competitive advantage in generating consumer awareness and repeat business. The Company spent approximately $25.6 million on advertising in fiscal 2000 and has invested more than $74 million in its national advertising campaign over the last several years. The Company's experience has been that increases in advertising expenditures have a direct impact on the growth of net sales. Industry Overview Industry analysts estimate that over 50% of the United States' population need some form of corrective eyewear. Contact lenses are a convenient, cost- effective alternative to eyeglasses, and the number of contact lens wearers is expected to increase as technology further improves the convenience, comfort and fit of contact lenses. As a result, the contact lens market is large and growing. The growth in the disposable market is largely due to the shift in the contact lens market away from traditional soft lenses, which generally are replaced on an annual basis, to disposable lenses, which are replaced on a daily, weekly, or bi-weekly basis. 3 Traditionally, contact lenses were sold to consumers almost exclusively by either ophthalmologists or optometrists (referred to herein collectively as "eye care practitioners"). Eye care practitioners would typically supply a patient with his or her initial pair of contact lenses in connection with providing the patient an eye examination and subsequently provide all replacement lenses, regardless of whether the patient was given or required another eye examination. Because the initial fitting of contact lenses requires a prescription written by an eye care practitioner, the initial sale of contact lenses still takes place primarily in this manner. Over the last decade, however, a number of alternative sellers of replacement contact lenses have emerged, including direct marketers. The Company believes that increased consumer awareness of the benefits of the direct marketing of contact lenses will lead to further growth of this method of buying and selling contact lenses. Purchasing replacement contact lenses from a direct marketer offers the convenience of shopping at home, rapid home delivery, quick and easy telephone or Internet ordering and competitive pricing. In addition, the growth in popularity of disposable contact lenses, which require patients to purchase replacement lenses more frequently, has contributed to the growth of the direct marketing channel. The direct marketing industry continues to grow as many retail customers have migrated towards the convenience and service offered by home shopping, and the Company expects the direct marketing segment of the contact lens industry to grow in tandem with the growth in the direct marketing industry as a whole. The Company believes that the growth and acceptance of the Internet presents significant opportunities for direct marketers of contact lenses such as the Company. The factors driving this growth include the increasing number and decreasing cost of personal computers in homes and offices, technological innovations providing easier, faster and cheaper access to the Internet, the proliferation of content and services being provided on the Internet and the increasing use of the Internet by business and consumers as a medium for conducting business. The Internet possesses a number of unique and commercially powerful characteristics that differentiate it from traditional media: users communicate or access information without geographic limitations; users access dynamic and interactive content on a real-time basis; and users communicate and interact instantaneously. The Internet has created a dynamic and particularly attractive medium for commerce, empowering customers to gather more comparative purchasing data than is feasible with traditional commerce systems, to shop in a more convenient manner and to interact with sellers in many new ways. The Company believes that the Internet provides a convenient and efficient medium for the sale of replacement contact lenses. Historically, sales of contact lenses by direct marketers have been impeded by eye care practitioners and contact lens manufacturers. Many eye care practitioners have been reluctant to provide patients with a copy of their prescription or to release such information to direct marketers upon request, thereby impeding patients from purchasing lenses from a direct marketer. In addition, until recently substantially all of the major manufacturers of contact lenses had refused to sell contact lenses directly to direct marketing companies and had sought to prohibit their distributors from doing so. These traditional barriers to the direct marketing of contact lenses have been reduced and may be completely eliminated in the future. The Federal Trade Commission (the "FTC") has from time to time solicited comments regarding whether eye care practitioners should be required to release contact lens prescriptions to their patients. In addition, the Attorneys General for more than 30 states have joined in a lawsuit against the major contact lens manufacturers and certain eye care practitioners and their trade associations alleging that the manufacturers' policy not to sell to direct marketers was adopted in conspiracy with eye care practitioners to eliminate alternative channels of trade from the contact lens market. See "Purchasing and Principal Suppliers" and "Government Regulation." Product Offerings Contact lenses can be divided into two categories: soft lenses and hard lenses (primarily rigid gas permeable). There are three principal wearing regimes for soft contact lenses: conventional, disposable and planned replacement. Conventional lenses are designed to be worn indefinitely but are typically replaced after 12 to 24 months. Disposable soft contact lenses were introduced in the late 1980s based on the concept that changing lenses on a more regular basis was important to comfort, convenience, maintaining healthy eyes and patient compliance. Disposable lenses are changed as often as daily and up to every two weeks, depending on the product. Planned replacement lenses are 4 designed to be changed as often as every two weeks and up to every three months and currently represent a small portion of the overall soft lens market. The Company is a direct marketer of replacement contact lenses and does not manufacture contact lenses or provide eye examinations or related services to its customers. The Company offers substantially all of the soft and hard contact lenses produced by the leading contact lens manufacturers, including Johnson & Johnson, CIBA Vision, Wesley Jessen (recently acquired by CIBA Vision), Bausch & Lomb, Ocular Sciences and CooperVision. The Company stocks a large inventory of lenses from which it can ship approximately 90% of its orders within one business day of receipt. The Company believes that its ability to maintain a large inventory of contact lenses provides it with a competitive advantage over eye care practitioners, optical chains and discount stores and serves as an effective barrier to entry to potential entrants in the direct marketing of contact lenses. In July 1997, the Company was approved as an authorized distributor of CIBA Vision. The Company also purchases product directly from certain other manufacturers. See "Purchasing and Principal Suppliers." The Company's products are delivered in the same sterile, safety sealed containers in which the lenses were packaged by the manufacturer. From time to time, the Company purchases contact lenses that were labeled as "samples" by the manufacturer. Such lenses are sometimes offered by the Company to customers as part of promotional programs at reduced prices. Customers and Marketing The Company's customers are located principally throughout the United States. The percentage of the Company's customers that are located in each state is approximately equal to the percentage of the United States' population which resides in such state, with the largest concentration of the Company's customers residing in California. The Company strives to deliver a high level of customer service in an effort to maintain and expand its loyal customer base. The Company utilizes a focused, closely managed and monitored marketing strategy that is designed to enhance the awareness and value of its brand. The Company continually researches and analyzes new ways in which to advertise its products. After identifying an attractive potential new advertisement or advertising medium, the Company commits to such advertising for an initial test period. The response generated by such advertising is monitored and analyzed by the Company and a decision to commit significant resources to a particular advertisement or advertising medium is made only if the Company is satisfied with the response rates it has generated. After the initial testing period, the Company continues to closely monitor its advertising in order to identify and react to trends in consumer response patterns and adjust its marketing strategy accordingly. The majority of contact lens wearers are between the ages of 18 and 49. In addition, approximately two-thirds of contact lens wearers are women and contact lens wearers generally have higher incomes than eyeglass wearers do. Through its national advertising campaign, the Company is able to target its advertising to contact lens wearers in these key demographic groups, as well as certain other persons based on other important demographics. The Company spent approximately $25.6 million on advertising in fiscal 2000 and intends to increase advertising spending in fiscal 2001 to continue its nationwide advertising campaign that aims to increase recognition of the 1-800 CONTACTS brand name, increase traffic on its website, add new customers, continue to build strong customer loyalty and maximize repeat purchases. The Company's advertising campaign targets both its traditional telephone customers and its online customers and is designed to drive new and repeat purchases. In addition, the Company intends to continue expanding its direct marketing campaign to its more than 1.8 million customers through the U.S. mail and e-mail. A brief description of the principal components of the Company's national advertising campaign is set forth below: Broadcast. The Company utilizes a nationwide broadcast advertising campaign with significant purchases on both cable and network television. The Company's television ads typically focus on its ability to rapidly deliver to customers the same contact lenses offered by eye care practitioners. The Company believes that its easy-to-remember 5 phone number and Internet address make television a particularly effective marketing vehicle and that television advertising will continue to be the key to building awareness for its 1-800 CONTACTS brand name. Internet. The Company uses the unique resources of the Internet as a means of marketing in an effort to drive new and repeat traffic. The Company continues to seek opportunities to expand its presence within highly trafficked content sites. Direct-Mailing. The Company uses direct-mail to advertise its products to selected groups of consumers. The Company utilizes mailing lists obtained from both private and public sources to target its advertisements specifically to contact lens wearers. Cooperative Mailings. The Company advertises its products in cooperative mail programs sponsored by the leading cooperative mail companies in the United States. This advertising medium permits the Company to target consumers in specific zip codes according to age, income and other important demographics. Management Information Systems The Company has developed proprietary management information systems that integrate the Company's order entry and order fulfillment operations. The Company is continually upgrading and enhancing these systems and believes that these systems enable it to operate efficiently and provide enhanced customer service. The key features of these management information systems are their ability to: (i) process numerous types of orders, including telephone, Internet and others; (ii) continually monitor and track the Company's inventory levels for substantially all of its products; (iii) rapidly process credit card orders; (iv) increase the speed of the shipping process with integrated and automated shipping functions and (v) increase accuracy through the scanning of each order prior to shipment to ensure it contains the correct quantity and type of lenses. The management information systems provide the Company's customer service representatives ("CSRs") with real-time product availability information for substantially all of its products through a direct connection with the Company's distribution center, whereupon information is immediately updated as lenses are shipped. In addition, Internet customers can obtain real-time product availability information for many products. The management information systems also have an integrated direct connection for processing credit card payments which allows the CSR to charge the customer's card and ensure that a valid card number and authorization have been received in approximately five seconds while the CSR is on the phone with the customer. CSRs also have access to records of all prior contact with a customer, including the customer's address, prescription information, order history and payment history and notes of any prior contact with the customer made by phone, Internet, e-mail, mail or fax. Based on product availability provided by the management information systems, the CSR provides the customer with an estimated date of delivery of their lenses. If a customer's order will not be shipped by the promised delivery date, the management information systems notify the CSR who entered the order and provide any information explaining the delay, and the CSR then contacts the customer to inform them of the delay. After an order has been entered into the management information systems by a CSR, it is sent to the Company's distribution center via a direct connection. After the distribution center receives the order, the invoice for the order is printed. The invoice for each order contains the type and quantity of the lenses, as well as a shipping label for the order. Tracking, manifesting, billing and other shipping functions are integrated into the Company's management information systems so that all necessary bar codes and tracking information for shipment via independent couriers are printed directly on the Company's shipping label, and separate labeling or a separate computer is not needed to ship packages via independent couriers. After the invoice for an order is printed at the Company's distribution center, the order is pulled from inventory and scanned to ensure that the prescription and quantity of each item matches the order in the Company's management information systems. Audible notices inform the shipping agent of any errors in the order. After the order has been scanned for accuracy, the management information systems update the Company's inventory level. Then the order is placed in a box produced by the Company's automated box folder and is sent to an automatic sealer. After the package leaves the sealer, 6 another scanner reads the bar code on the shipping label to determine which method of shipment is being used, adds the package to the appropriate carrier's manifest and directs the appropriate hydraulic diverter to push the package into the appropriate carrier's shipping bin. The Company has installed a battery powered back-up system capable of supporting its entire call center, computer room and phone switch. This system is further supported by a generator capable of supporting the Company's call center operations for a period of five days. All critical data is simultaneously written to a series of back-up drives throughout the day and at the end of the day the Company's data is transmitted to an offsite location. There can be no assurance that the Company's back-up system will be sufficient to prevent an interruption in the Company's operations in the event of disruption in the Company's management information systems, and an extended disruption in the management information systems could adversely affect the Company's business, financial condition and results of operations. Operations The primary components of the Company's operations include its teleservices, order entry and customer service, Internet and distribution and fulfillment. Teleservices, Order Entry and Customer Service. The Company provides its customers with toll-free telephone access to its CSRs. Currently, the Company's call center generally operates from 6:00 a.m. to 10:00 p.m. (MST) Monday through Friday, 7:00 a.m. to 9:00 p.m. (MST) on Saturday and 8:00 a.m. to 4:00 p.m. (MST) on Sunday. Customers may place orders via the Internet 24 hours a day, 7 days a week. Potential customers may also obtain product, pricing or other information over the Internet or through an interactive voice response system. The Company's orders are received by phone, Internet, mail, facsimile and electronic mail. CSRs process orders directly into the Company's proprietary management information systems, which provide customer order history and information, product specifications, product availability, expected shipping date and order number. CSRs are provided with a sales script and are trained to provide information about promotional items. Additionally, CSRs are trained to provide customer service and are authorized to resolve all customer service issues, including accepting returns and issuing refunds, as appropriate. The Company believes its customers are particularly sensitive to the way merchants and salespeople communicate with them. The Company strives to hire energetic, service-oriented CSRs who can understand and relate to customers. CSRs participate in an extensive training program. The Company also has a quality assurance department. This department monitors and reviews the CSRs' performance and coaches the CSRs as necessary. The Company completed the move into its new call center during July 1998. In conjunction with the move, the Company acquired new telecommunications systems and enhanced its management information systems. Since the move, the Company has further upgraded and enhanced its management information systems, as this is a continual process. In its current facility, the Company believes it has the capacity to handle up to 30,000 calls per day. The Company believes that it processes telephone orders on average in less time than its competitors, which allows each CSR to handle a greater number of orders per day. The laws in most states require that contact lenses be sold pursuant to a valid prescription. 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. 7 Internet. The Company's website, contacts.com, provides customers with a quick, efficient and cost-effective method for obtaining replacement contact lenses 24 hours a day, 7 days a week. The Company is continually upgrading the content and functionality of its website. The website allows customers to easily browse and purchase substantially all of the Company's products, promotes brand loyalty and encourages repeat purchases by providing an inviting customer experience. The Company has designed its website to be fast, secure and easy to use and to enable its customers to purchase products with minimal effort. The Company also offers Internet customers services such as free shipping, shipping confirmation and online order tracking. During the call center's operating periods, the Company offers service and support to its Internet customers over the telephone. The Company also provides real-time online messaging and e-mail support to customers 24 hours a day, 7 days a week. The Company's website allows customers to dispense with providing personal profile information after their initial order. The website has permitted the Company to expand its customer base through better service while reducing transactional costs. The Company's online service automates the processing of customer orders, interacts with the management information systems and allows the Company to gather, store and use customer and transaction information in a comprehensive and cost-efficient manner. The Company's website contains customized software applications that interface with the Company's management information systems. The Company maintains a database containing information compiled from customer profiles, shopping patterns and sales data. The Company analyzes information in this database to develop targeted marketing programs and provide personalized and enhanced customer service. This database is scaleable to permit large transaction volumes. The Company's systems support automated e-mail communications with customers to facilitate confirmations of orders, provide customer support, obtain customer feedback and engage in targeted marketing programs. The Company uses a combination of proprietary and industry-standard encryption and authentication measures designed to protect a customer's information. The Company maintains an Internet firewall to protect its internal systems and all credit card and other customer information. Distribution and Fulfillment. Approximately 90% of the Company's orders are shipped within one business day of receipt. Customers generally receive orders within one to five business days after shipping, depending upon the method of delivery chosen by the customer. A shipping and handling fee is charged on each customer order, except those orders received via the Internet and those received by mail with an enclosed check. Customers have the option of having their order delivered by overnight courier for an additional charge. The Company's management information systems automatically determine the anticipated delivery date for each order. The Company uses an integrated packing and shipping system via a direct connection to the Company's management information systems. This system monitors the in-stock status of each item ordered, processes the order and generates warehouse selection tickets and packing slips for order fulfillment operations. The Company's management information systems are specifically designed with a number of quality control features to help ensure the accuracy of each order. The Company began operations in its new distribution center in February 1999. This new facility is strategically located near the Salt Lake City, Utah airport. In the fourth quarter of fiscal 2000, the Company nearly doubled the size of its distribution center, increasing the total space to approximately 66,000 square feet. Purchasing and Principal Suppliers Until recently, substantially all of the major manufacturers of contact lenses had refused to sell lenses directly to direct marketers, including the Company, and had sought to prohibit their distributors from doing so. As a result, the Company currently purchases a substantial portion of its products from unauthorized distributors. The Company is aware that at least one large manufacturer of contact lenses puts tracking codes on its products in an effort to identify distributors who are selling to direct marketers. In June 1994, the Attorney General for the State of Florida, acting on behalf of disposable contact lens consumers in that state, filed an anti-trust action against Johnson & 8 Johnson, CIBA Vision, Bausch & Lomb and certain eye care practitioners and their trade associations alleging, among other things, that the contact lens manufacturers' policy not to sell to mail order distributors and others was adopted in conspiracy with eye care practitioners, as the result of pressure by eye care practitioners, in order to eliminate alternative channels of trade from the disposable lens market (the "Florida Action"). In December 1996, the Attorney General for the State of New York, on behalf of itself and the Attorney Generals for approximately 21 other States, filed a substantially similar action naming three major manufacturers of soft contact lenses as well as several optometrists and their trade associations as defendants (the "New York Action"). Additional states have joined the New York Action since it was filed, and the Florida Action and the New York Action have been consolidated (the "Attorney General Action"). The Attorney General Action entered into the trial phase in March 2001 in Jacksonville, Florida. Based upon public filings made in the Attorney General Action, the Company believes that one defendant, CIBA Vision Corporation, has entered into a proposed settlement agreement pursuant to which it has agreed to pay $5 million into a settlement fund, agreed to provide rebates and coupons to consumers and agreed to begin to sell soft contact lenses to direct marketers. Since this settlement agreement was announced, the Company has become an authorized distributor of CIBA Vision's contact lenses and can purchase such lenses at wholesale level prices. Based upon a press release issued by Bausch & Lomb in February 2001, the Company believes that Bausch & Lomb has entered into a proposed settlement agreement pursuant to which it has agreed to pay $8 million into a settlement fund, agreed to provide rebates and coupons to consumers and agreed to begin to sell its contact lenses to direct marketers. As of the date of this filing, Johnson & Johnson and Ocular Sciences are the only major manufacturers who refuse to sell directly to the Company. As a result of some manufacturers' refusal to sell to direct marketers, the Company is not an authorized dealer for some of the products which it sells. In addition, the Company believes that the price which it pays for certain products is sometimes higher than those paid by eye care practitioners, retail chains and mass merchandisers, who are able to buy directly from the manufacturers of such lenses and who benefit from being allowed to participate in cooperative advertising funds, coupon, sample, rebate and other marketing and promotional programs. Although the Company has been able to obtain most contact lens brands at competitive prices in sufficient quantities on a regular basis, there can be no assurance that the Company will not encounter difficulties in the future, particularly in light of the Company's anticipated growth. The inability of the Company to obtain sufficient quantities of contact lenses at competitive prices would have a material adverse effect on the Company's business, financial condition and results of operations. Although the Company seeks to reduce its reliance on any one supplier by establishing relationships with a number of distributors and other sources, the Company purchased from a single distributor approximately 47%, 38% and 35% of its contact lens inventory in fiscal 1998, 1999 and 2000, respectively. The Company's top three suppliers accounted for approximately 70%, 68% and 62% of the Company's inventory purchases in fiscal 1998, 1999 and 2000, respectively. The Company believes that a substantial number of its suppliers are not authorized by contact lens manufacturers to distribute their products. The Company does not have written agreements with substantially all of its suppliers. The Company continually seeks to establish new relationships with potential suppliers in order to be able to obtain adequate inventory at competitive prices. Competition The retail sale of contact lenses is a highly competitive and fragmented industry. Traditionally, contact lenses were sold to customers almost exclusively by eye care practitioners in connection with providing them an eye examination. Competition for patients and the revenue related to providing them contact lenses significantly increased as optical chains and large discount retailers began providing optical services and has further intensified with the entry of direct marketers such as the Company. The Company believes that the eye care profession suffers from a surplus of eye care practitioners, and that the resulting competitive pressure has been exacerbated by the increased prevalence of retail optical chains, mass merchandisers and direct marketers. Consequently, the competition amongst eye care 9 practitioners to acquire customers and the competition to provide replacement lenses to such customers has intensified. The Company's principal competitors include ophthalmologists and optometrists in private practice. The Company also competes with national optical chains, such as Cole Vision, LensCrafters and National Vision Association and mass merchandisers, such as Wal-Mart, Sam's and Costco. In addition, the Company competes with other direct marketers of contact lenses. The Company may face increased competition in the future from new entrants in the direct marketing business, which may include national optical chains and mass merchandisers, some of which may have significantly greater resources than the Company. The Company believes that many of its competitors, including most eye care practitioners, national optical chains and mass merchandisers, have direct supply arrangements with contact lens manufacturers, which in some cases affords such competitors with better pricing terms, access to supply and other sales and marketing programs. In addition, some of the competitors are significantly larger in overall revenues and have significantly greater resources than the Company. The Company believes that the principal basis of competition in the industry include price, product availability, customer service and consumer awareness. Government Regulation Federal Regulation. Contact lenses are regulated by the FDA as "medical devices." The FDA classifies medical devices as Class I, Class II or Class III and regulates them to varying degrees, with Class I medical devices subject to the least amount of regulation and Class III medical devices subject to the most stringent regulations. Rigid gas permeable and soft contact lenses are classified as Class II medical devices if intended only for daily wear and as Class III medical devices if intended for extended wear. These regulations generally apply only to manufacturers of contact lenses, and therefore do not directly impact the Company. Federal regulations also require the labels on "medical devices" to contain adequate instructions for their safe and proper use. However, there is an exemption from this requirement for medical devices the use of which is not safe except under the supervision of a practitioner licensed by law to direct the use of such device. Devices which fall in this exception must contain as part of their labeling the statement "Caution: Federal law restricts this device to sale by or on the order of ________ (physician or other licensed practitioner)," the blank to be filled in with the word physician or other practitioner authorized by the law of the state in which the practitioner practices to use or order the use of the device. The FDA considers contact lenses to qualify for this labeling exemption; however, a device bearing this legend that is dispensed without a prescription may be considered misbranded by the FDA. Potential penalties for misbranding include warning letters from the FDA, seizure, injunction, civil penalties, or prosecution. To date, the FDA has not taken any such action against the Company. State Regulation. The sale and delivery of contact lenses to the consumer is subject to state laws and regulations. The Company sells to customers in all 50 states and each sale is likely to be subject to the laws of the state where the customer is located. The laws and regulations governing the sale and delivery of contact lenses vary from state to state, but generally can be classified into six categories: (i) laws that require contact lenses only be dispensed pursuant to a prescription; (ii) laws that require the dispenser to be licensed by the state as an optometrist, ophthalmologist or other professional authorized to dispense lenses; (iii) laws that require lenses be dispensed only in a face-to-face transaction; (iv) laws with requirements that are unclear or do not specifically address the sale and delivery of contact lenses; (v) agreements with regulatory authorities which regulate the dispensing of contact lenses and (vi) laws that the Company believes place no restrictions on the dispensing of replacement contact lenses. Many of the states requiring that contacts be dispensed in face-to-face meetings or by a person licensed by such state to dispense lenses also require that lenses only be dispensed pursuant to a valid prescription. The laws and regulations in a significant number of states, including most of the states wherein a large portion of the Company's sales are concentrated, require that contact lenses only be sold to a consumer pursuant to a valid prescription. In some states, satisfying this prescription requirement obligates the dispenser only to verify the customer's prescription with the customer's prescriber, while other states specifically require that a written prescription be obtained before providing the lenses to the customer. In some states, the Company operates according to 10 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. The Company's ability to comply with state laws and regulations requiring a valid prescription is hampered because the Company's customers are often unable to get a copy of their prescription. The Company believes that optometrists, ophthalmologists and other contact lens prescribers have historically refused to release copies of a patient's contact lens prescription to the patient. In addition, such providers have refused to release or verify prescriptions at the request of direct marketers. Federal law requires prescribers to release prescriptions for eyeglasses to a patient, but the issue of whether or not a prescriber must release a contact lens prescription to the patient, or at the patient's request, is under review by the FTC. In the absence of federal law on the matter, contact lens prescription release is currently governed by state law. The Company believes there are approximately 22 states that require contact lens prescribers to release the prescriptions for contact lenses to the patient. However, even in states with a mandatory release law, the Company believes that many prescribers continue to refuse to release prescriptions to their patients or to direct marketers of contact lenses, including the Company. In addition to requiring a valid prescription, a substantial number of states also require that contact lenses only be dispensed by a person licensed to do so under that state's laws. A dispenser may be required to be licensed as an optometrist, ophthalmologist, optician, ophthalmic dispenser or contact lens dispenser, depending on the state in which the customer is located. Neither the Company nor any of its employees is a licensed or registered dispenser of contact lenses in many of the states in which the Company does business. The laws in a small number of states effectively prohibit the sale of contacts through the mail by requiring that a person licensed under that state's law to dispense contacts be in personal attendance at the place of sale. In addition, there are several states in which the laws and regulations do not specifically address the issue of who may dispense contact lenses or are unclear with respect to the requirements for dispensing lenses. Generally, these laws are older and were written before mail order and other distributors began selling contact lenses. Lastly, the Company believes that the laws in a small number of states do not require that replacement contact lenses be dispensed pursuant to a prescription or only by a professional licensed in such state. Any action brought against the Company based on its failure to comply with applicable state laws and regulations could result in significant fines to the Company, the Company being prohibited from making sales in a particular state, the Company being required to comply with such laws or could constitute a misdemeanor. Such required compliance could result in: (i) increased costs to the Company; (ii) the loss of a substantial portion of the Company's customers for whom the Company is unable to obtain or verify their prescription; (iii) the inability to sell to customers at all in a particular state if the Company cannot comply with such state's laws and (iv) misdemeanor penalties and civil fines. The occurrence of any of the above results could have a material adverse effect on the Company's ability to sell contact lenses and to continue to operate profitably. Furthermore, there can be no assurance that states will not enact or impose laws or regulations that prohibit mail order dispensing of contact lenses or otherwise impair the Company's ability to sell contact lenses and continue to operate profitably. The Company has not obtained an opinion of counsel with regard to its compliance with all applicable state laws and regulations or the enforceability of such state laws and regulations, and information contained herein regarding the Company's compliance with applicable state laws and regulations should not be construed as being based on an opinion of counsel. The Company has in the past, and intends in the future, to vigorously defend any actions brought against it. An FTC rule adopted in 1978 requires eye care practitioners to provide their patients with a copy of their eyeglass prescription (the "Prescription Release Rule"). The Prescription Release Rule was adopted based on a finding by the FTC that consumers were being deterred from comparison shopping for eyeglasses because eye care practitioners refused to release prescriptions. In April 1997, the FTC published a request for comments regarding the 11 Prescription Release Rule with respect to whether the rule should be expanded to require the release of contact lens prescriptions, whether consumers have historically been able to get their contact lens prescriptions upon request and whether the refusal to release contact lens prescriptions has benefits justifying such refusal. The April 1997 request for comment is still open. The Attorneys General of 17 states have provided comment to the FTC in support of extending the Prescription Release Rule to contact lenses. The FTC undertook a similar review in 1985 and again in 1995, both times concluding that the rule should not be expanded to require the release of contact lens prescriptions. From time to time the Company receives notices, inquiries or other correspondence from states or their 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. See "Legal Proceedings" for formal complaints filed against the Company concerning its business practices. Intellectual Property The Company conducts its business under the trade name and service marks "1-800 CONTACTS." The Company has taken steps to register and protect these marks and believes that such marks have significant value and are an important factor in the marketing of its products. The Company owns the right to use the 1-800 CONTACTS telephone number. However, under applicable FCC rules and regulations, the Company does not have and cannot acquire any property rights to the telephone number. The Company does not expect to lose the right to use the 1-800 CONTACTS number; however, there can be no assurance in this regard. The loss of the right to use the 1-800 CONTACTS number would have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Company has obtained the rights to international equivalents for the 1-800 CONTACTS phone number; however, like the 1-800 CONTACTS number, the Company does not have and cannot acquire any property rights in these telephone numbers. The Company also has obtained the rights to various Internet addresses, including but not limited to www.1800contacts.com, www.contacts.com and www.contactlenses.com. As with phone numbers, the Company does not have and cannot acquire any property rights in Internet addresses. The Company does not expect to lose the ability to use the Internet addresses; however, there can be no assurance in this regard and such loss would have a material adverse effect on the Company's financial position and results of operations. Employees As of December 30, 2000 the Company employed 368 persons, of which 246 were full-time employees and 122 were part-time employees. None of the Company's employees is covered by a collective bargaining agreement. The Company believes its relationship with its employees to be good. Item 2. Properties. The Company's management and call center operations are located in Draper, Utah, a suburb of Salt Lake City. In January 2001, the Company amended its lease agreement to increase the space by approximately 7,000 square feet, bringing the total leased space to approximately 39,000 square feet. The lease term was extended to 2006. The Company's distribution center is located near the Salt Lake City, Utah airport. In October 2000, the Company amended its lease agreement to increase the space by approximately 31,000 square feet, bringing the total leased space to approximately 66,000 square feet. The lease term for the distribution center was extended through December 2002. 12 Item 3. Legal Proceedings. On July 14, 1998, Craig S. Steinberg, O.D., a professional corporation d.b.a. City Eyes Optometry Center, filed a purported class action on behalf of all California optometrists against the Company and its directors in Los Angeles County Superior Court. The complaint alleged three separate causes of action for unfair competition: (i) selling contact lenses to California residents without being registered, (ii) selling contact lenses to California residents without verifying the prescription and (iii) failing to disclose in its advertising that it sells "sample" lenses not intended for sale to the public. The complaint requested various forms of relief, including damages of an unspecified amount, attorney's fees and a permanent injunction. The Company removed the action to the United States District Court for the Central District of California. Plaintiff and another California optometrist, Ellis Miles, (collectively "plaintiffs") filed a First Amended Complaint ("FAC") against the Company and its directors on or about September 3, 1998 purporting to sue on behalf of the public under California's unfair competition statute rather than as a class action on behalf of optometrists. Although the substantive claims for unfair competition remain the same, the FAC seeks injunctive relief and restitution rather than damages. Plaintiffs also dismissed the Company's directors as defendants, leaving the Company as the only remaining defendant. Upon agreement among the parties, the case was remanded to Los Angeles County Superior Court based upon plaintiffs' stipulation that they no longer seek monetary relief on behalf of themselves or other optometrists. In response to a series of motions filed by the Company, plaintiffs abandoned their claim for selling lenses without being registered. In addition, by Order dated January 12, 2001, the Court granted the Company's motion to strike all claims for monetary relief without leave to amend. Plaintiffs filed a Petition for Writ of Mandate with the California Court of Appeals on or about January 21, 2001, seeking to overturn the trial court's ruling. The Court of Appeals denied plaintiffs petition on February 15, 2001. Plaintiff filed a Petition for Review with the California Supreme Court on or about February 21, 2001. The Supreme Court has not yet ruled on this petition. 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 13 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. Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of the Company's scurity holders in the fourth quarter of fiscal 2000. Item 4A. Executive Officers of the Registrant The information under this Item is furnished pursuant to Instruction 3 to Item 401(b) of Regulation S-K. Executive officers of the Company are elected by and serve at the discretion of the Board of Directors.
Name Age Position - ----------------------------------------------------------------------------------------------------- Jonathan C. Coon.............. 31 President, Chief Executive Officer and Director John F. Nichols............... 40 Vice President, Sales and Director Scott S. Tanner............... 40 Chief Operating Officer, Chief Financial Officer and Director Kevin K. McCallum............. 39 Vice President, Marketing Robert G. Hunter.............. 34 Vice President, Finance
Jonathan C. Coon is a co-founder of the Company and currently serves as President and Chief Executive Officer and Director. Mr. Coon received his Bachelor's Degree from Brigham Young University in 1994. Mr. Coon has eight years of experience in the contact lens distribution industry. John F. Nichols is a co-founder of the Company and currently serves as Vice President, Sales and Director. Mr. Nichols is a certified optician in the State of California and was the owner of the Discount Lens Club from 1991 until February 1995. Mr. Nichols worked with Bausch & Lomb as a Senior Sales Representative from 1989 to 1991. Scott S. Tanner has served as the Chief Operating Officer of the Company since November 1999 and as the Chief Financial Officer and Director since November 1997. Prior to joining the Company, Mr. Tanner served as the Chief Financial Officer of Country Club Foods, Inc., a Utah-based snack food manufacturer and distributor, from 1995 to 1997. Prior thereto, Mr. Tanner served in various management positions at Apple Computer, Inc. from 1988 to 1995 and worked at Peat, Marwick & Mitchell & Co. in San Francisco from 1984 to 1986. Mr. Tanner received a Bachelor's Degree from Stanford University and an MBA from Harvard University. Kevin K. McCallum has served as Vice President, Marketing of the Company since March 2000. Prior to joining the Company, Mr. McCallum, a 9-year veteran of Procter & Gamble from 1991 to 2000, served as a Director of Marketing for several of Proctor & Gamble's global laundry and cleaning brands. Prior thereto, Mr. McCallum served as a line officer in the U.S. Navy from 1984 to 1989. Mr. McCallum received a Bachelor's Degree from the United States Naval Academy and an MBA from the Georgia Institute of Technology. Robert G. Hunter has served as Vice President, Finance of the Company since August 2000. Prior to his current position, Mr. Hunter served as the Corporate Controller since November 1997. Before joining the Company, Mr. Hunter served as an auditor with Hawkins, Cloward & Simister LC from November 1993 to 1997 and with Arthur Andersen LLP from April 1992 to November 1993. Mr. Hunter is a Certified Public Accountant. Mr. Hunter graduated summa cum laude with a Bachelor's Degree from Brigham Young University, where he also earned a Masters of Accountancy Degree. 14 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. Market Information The Common Stock is traded on the Nasdaq National Market ("Nasdaq") under the symbol "CTAC." The Common Stock commenced trading on February 10, 1998. On July 24, 2000, the Company effected a two-for-one stock split. This stock split has been retroactively reflected in the following table which sets forth the high and low closing sale prices per share for the Common Stock as reported by the Nasdaq for the periods presented:
High Low --------- ------ Year ended January 2, 1999: First Quarter (beginning February 10, 1998).... $10.44 $ 6.78 Second Quarter................................. 9.94 6.50 Third Quarter.................................. 8.19 2.81 Fourth Quarter................................. 9.00 2.38 Year ended January 1, 2000: First Quarter.................................. 8.88 5.31 Second Quarter................................. 11.38 8.38 Third Quarter.................................. 14.25 8.19 Fourth Quarter................................. 15.44 11.50 Year ended December 30, 2000: First Quarter.................................. 17.31 12.97 Second Quarter................................. 24.00 12.50 Third Quarter.................................. 62.50 22.72 Fourth Quarter................................. 47.75 25.19
Holders As of March 16, 2001, there were approximately 80 holders of record of Common Stock. The Company believes that it has a significantly larger number of beneficial holders of Common Stock. A recently reported last sale price of the Common Stock on the Nasdaq is set forth on the cover page of this report. Dividends The Company anticipates that all of its future earnings will be retained to finance the expansion of its business. Any future determination to pay dividends will be at the discretion of the Company's Board of Directors and will depend upon among other factors, the Company's results of operations, financial condition, capital requirements and contractual restrictions. In addition, the Company's revolving credit facility prohibits the Company from paying any cash dividends on the Common Stock. Recent Sales of Unregistered Securities No securities of the Company that were not registered under the Securities Act have been issued or sold by the Company within the period covered by this report. 15 Item 6. Selected Financial Data. The financial data as of and for the years ended December 31, 1996 and 1997, January 2, 1999 ("fiscal 1998"), January 1, 2000 ("fiscal 1999") and December 30, 2000 ("fiscal 2000") have been derived from the audited financial statements of the Company. The selected financial data below should be read in conjunction with the financial statements and the notes thereto of the Company and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Such information for the three years ended December 30, 2000 is included as part of this Form 10-K.
Year Year Year Year Year Ended Ended Ended Ended Ended December 31, December 31, January 2, January 1, December 30, 1996 1997 1999 2000 2000 ------------ ------------ ----------- ----------- ------------ Statement of Operations Data: Net sales $3,628,296 $21,115,314 $59,875,941 $98,524,906 $144,970,717 Cost of goods sold 2,215,306 14,024,523 37,315,413 59,415,723 86,367,149 ---------- ----------- ----------- ----------- ------------ Gross profit 1,412,990 7,090,791 22,560,528 39,109,183 58,603,568 ---------- ----------- ----------- ----------- ------------ Advertising expense 468,146 3,485,619 24,206,857 20,238,267 25,603,365 Other selling, general and administrative expenses 573,166 2,459,602 7,334,668 12,001,536 16,120,718 ---------- ----------- ----------- ----------- ------------ Total selling, general and administrative expenses 1,041,312 5,945,221 31,541,525 32,239,803 41,724,083 ---------- ----------- ----------- ----------- ------------ Income (loss) from operations 371,678 1,145,570 (8,980,997) 6,869,380 16,879,485 Other income (expense), net (23,315) (113,162) 445,710 (40,552) 198,433 ---------- ----------- ----------- ----------- ------------ Income (loss) before benefit (provision) for income taxes 348,363 1,032,408 (8,535,287) 6,828,828 17,077,918 Benefit (provision) for income taxes(1) (134,120) (397,477) 642,679 (701,250) (6,603,917) ---------- ----------- ----------- ----------- ------------ Net income (loss)(1) $ 214,243 $ 634,931 $(7,892,608) $ 6,127,578 $ 10,474,001 ========== =========== =========== =========== ============ Basic net income (loss) per common share $ 0.07 $ (0.63) $ 0.49 $ 0.88 =========== =========== =========== ============ Diluted net income (loss) per common share(2) $ 0.07 $ (0.63) $ 0.48 $ 0.86 =========== =========== =========== ============ Balance Sheet Data (at the end of period): Working capital (deficit) $ (204,080) $(1,621,522) $11,844,537 $14,837,002 $ 9,359,990 Total assets 1,156,646 7,781,064 18,016,136 25,053,572 26,107,759 Total debt (including current portion) 370,705 2,759,837 66,877 30,166 3,264,979 Stockholders' equity 146,359 854,358 14,832,825 18,700,709 13,964,404
- --------------------------- (1) Prior to February 9, 1998, the Company operated as an S corporation and was not subject to federal and certain state income taxes. The benefit (provision) for income taxes and net income (loss) for the periods prior to February 9, 1998 reflect income taxes on a pro forma basis as if the Company had been a C corporation. (2) Diluted net income (loss) per common share is based on the weighted average shares of Common Stock and Common Stock equivalents outstanding, including actual shares outstanding and shares deemed to be outstanding using the treasury stock method. The shares deemed to be outstanding for 1997 include the number of shares sufficient to fund the S corporation distribution of approximately $983,000. 16 Item 7. 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 million in fiscal 2000, with Internet sales having grown from an insignificant amount in fiscal 1996 to approximately $53.8 million in fiscal 2000. On July 24, 2000, the Company effected a two-for-one stock split. All share and per share information in this Form 10-K has been adjusted retroactively to give effect to this stock split. Effective January 1, 1998, the Company changed from a calendar year end to a 52/53 week year ending on the Saturday nearest to December 31. Due to this change, fiscal year 1998 represents 52 weeks and 3 days, covering the period January 1, 1998 to January 2, 1999. Fiscal year 1999, ended January 1, 2000, and fiscal year 2000, ended December 30, 2000, are 52 week years. During fiscal 1998, the Company began utilizing a variety of new advertising vehicles, including an extensive television marketing campaign, new print vehicles, Internet and radio spots. As direct-response information became available during the fourth quarter of fiscal 1998, the Company determined that its ability to track individual sales to specific advertising campaigns was restricted as a result of the variety of new advertising vehicles utilized. Therefore, beginning in the fourth quarter of fiscal 1998, the Company began expensing all advertising costs, including all direct-mail 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. See "Government Regulation" under Item 1 of Part I of this Form 10-K. 17 Results of Operations The following table presents the Company's results of operations expressed as a percentage of net sales for the periods indicated:
Fiscal Year ------------------------------------------------ 1998 1999 2000 ------ ------ ------ Net sales 100.0% 100.0% 100.0% Cost of goods sold 62.3 60.3 59.6 ----- ----- ----- Gross profit 37.7 39.7 40.4 ----- ----- ----- Advertising expense 40.4 20.5 17.7 Other selling, general and administrative expenses 12.3 12.2 11.1 ----- ----- ----- Total selling, general and administrative expenses 52.7 32.7 28.8 ----- ----- ----- Income (loss) from operations (15.0) 7.0 11.6 Other income (expense), net 0.7 (0.1) 0.2 ----- ----- ----- Income (loss) before benefit (provision) for income taxes (14.3) 6.9 11.8 Benefit (provision) for income taxes 1.1 (0.7) (4.6) ----- ----- ----- Net income (loss) (13.2)% 6.2% 7.2% ===== ===== =====
Fiscal Year 2000 Compared to Fiscal Year 1999 Net sales. Net sales for fiscal 2000 increased 47% to $145 million from $98.5 million for fiscal 1999. The Company added more than 610,000 new customers during fiscal 2000. The Company is realizing the benefits of repeat sales from a growing customer base. Repeat sales for fiscal 2000 increased 67% to $90.1 million, or 62% of net sales, from $53.8 million, or 55% of net sales, for fiscal 1999. The Company also believes that this increase in net sales reflects some of the benefits of the more than $74 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 fiscal 2000 were $53.8 million, or 37% of net sales, as compared to $18.7 million, or 19% of net sales, for fiscal 1999. 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 increased to 40.4% for fiscal 2000 from 39.7% for fiscal 1999. Although gross profit as a percentage of net sales increased as compared to the prior year, it has decreased slightly each quarter during fiscal 2000 from 41.0% in the first quarter of fiscal 2000 to 40.1% by the fourth quarter of fiscal 2000. With the increase in sales, the Company continues to obtain inventory at lower costs because of purchase volumes and more competitive pricing resulting from access to more vendors. The Company also believes that enhanced inventory management techniques have had a positive impact on gross profit. These factors are offset by the increase in Internet sales as a percentage of net sales since Internet orders generate lower gross profit because the Company offers free shipping on those orders. The Company believes 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 fiscal 2000 increased $5.4 million, or 27%, from fiscal 1999. As a percentage of net sales, advertising expense decreased to 17.7% for fiscal 2000 from 20.5% for fiscal 1999. The Company plans to increase advertising spending in fiscal 2001 by approximately 18% 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 fiscal 2000 increased $4.1 million, or 34%, from fiscal 1999. As a percentage of net sales, other selling, general and 18 administrative expenses decreased to 11.1% for fiscal 2000 from 12.2% for fiscal 1999. With the continued growth in net sales, the Company has been able to leverage the fixed portion of these expenses. In addition, some variable expenses such as wages and telephone expenses have decreased as a percentage of net sales largely due to the increase in the percentage of net sales via the Internet, which requires less employee interaction, and a decrease in telephone rates. Other income (expense), net. Other income (expense) increased to approximately $198,000 for fiscal 2000 from approximately ($41,000) for fiscal 1999. Interest income decreased due to lower cash balances throughout the year, and interest expense increased because of increased utilization of the credit facility during fiscal 2000. However, during fiscal 1999, the Company expensed approximately $293,000 in costs related to the Company's cancelled common stock offering. Income taxes. The Company's effective tax rate for fiscal 2000 was approximately 38.7%. For fiscal 1999, the Company's effective tax rate was approximately 10.3%, which reflects a reduction in the valuation allowance as a result of utilizing all of its tax operating loss carryforwards. The Company anticipates that its fiscal 2001 effective income tax rate will be approximately 39%. Fiscal Year 1999 Compared to Fiscal Year 1998 Net sales. Net sales for fiscal 1999 increased 64% to $98.5 million from $59.9 million for fiscal 1998. The Company believes that this increase in net sales reflects some of the benefits of its increased television and Internet advertising. Internet sales for fiscal 1999 were approximately $18.7 million, or 19% of net sales, as compared to approximately $2.3 million, or 3.8% of net sales, for fiscal 1998. The Company also realized the benefits of repeat sales from a growing customer base. Repeat sales for fiscal 1999 increased 138% to $53.8 million, or 54.6% of net sales, from $22.6 million, or 37.7% of net sales, for fiscal 1998. Gross profit. Gross profit as a percentage of net sales increased to 39.7% for fiscal 1999 from 37.7% for fiscal 1998. With the increase in sales, the Company obtained inventory at lower costs because of purchase volumes and more competitive pricing resulting from access to more vendors. In addition, the Company believes that enhanced inventory management techniques also had a positive impact on gross profit. Advertising expense. Advertising expense for fiscal 1999 decreased $4.0 million, or 16%, from fiscal 1998. As a percentage of net sales, advertising expense decreased to 20.5% for fiscal 1999 from 40.4% for fiscal 1998. Beginning in the fourth quarter of fiscal 1998, the Company began expensing all advertising costs, including all direct-mail advertising costs, when the advertising first takes place. The Company also determined that for previously deferred advertising costs the period during which the future benefits were expected to be received was shortened. Accordingly, the Company amortized the balance of deferred advertising costs at the beginning of the fourth quarter of fiscal 1998 over five months. Other selling, general and administrative expenses. Other selling, general and administrative expenses for fiscal 1999 increased $4.7 million, or 64%, from fiscal 1998. As a percentage of net sales, other selling, general and administrative expenses decreased slightly to 12.2% for fiscal 1999 from 12.3% for fiscal 1998. Other income (expense), net. Other income (expense) decreased to approximately ($41,000) for fiscal 1999 from approximately $446,000 for fiscal 1998. During fiscal 1999, the Company expensed approximately $293,000 in costs related to the Company's cancelled common stock offering. In addition, interest income decreased due to lower cash balances throughout the year. For fiscal 1999, the decrease in interest income was offset by the decrease in interest expense as the majority of the Company's debt was paid off during the first quarter of fiscal 1998 with proceeds from its initial public offering of common stock ("IPO"). 19 Income taxes. For fiscal 1998, the Company had a net benefit for income taxes. This resulted from losses offset by a partial valuation allowance against these deferred tax assets. The Company's effective tax rate for fiscal 1999 was approximately 10.3%, which reflects a reduction in the valuation allowance as a result of utilizing all of its tax operating loss carryforwards. Liquidity and Capital Resources The Company historically funded its growth through a combination of funds generated from operations and borrowings. During February 1998, the Company issued 4,427,500 shares of common stock in connection with its IPO, which included 577,500 shares pursuant to the underwriters' over-allotment option. The proceeds received from the IPO, net of underwriting commissions and offering costs, totaled approximately $24.9 million. The Company used these funds to enhance growth through increased advertising expenditures and to increase inventory levels in anticipation of future sales. In order to help ensure sufficient supply of inventory, the Company generally carries a higher level of inventory than it would if it were able to purchase directly from all contact lens manufacturers. For fiscal 2000, 1999 and 1998, net cash provided by (used in) operating activities was approximately $11.0 million, $5.3 million and $(13.8) million, respectively. For fiscal 2000 and 1999, cash was provided primarily by net income and increases in accounts payable, accrued liabilities and income taxes payable offset by an increase in inventories. During fiscal 1998, cash was used primarily to fund the Company's growth as the Company increased inventory levels and advertising spending. The Company used approximately $1.8 million, $2.3 million and $2.0 million for investing activities in fiscal 2000, 1999 and 1998, respectively. The majority of these amounts relate to capital expenditures for infrastructure improvements. Capital expenditures for fiscal 2000 were approximately $1.4 million. 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. Capital expenditures for fiscal 1999 were approximately $1.0 million. The Company began operations in its new distribution center in February 1999. During the fourth quarter of fiscal 2000, the Company nearly doubled the size of its distribution center by leasing additional space of approximately 31,000 square feet, bringing the total to approximately 66,000 square feet. The Company also increased its leased space used for its management and call center operations by approximately 7,000 additional square feet during the fourth quarter of fiscal 2000 and the first quarter of fiscal 2001. On May 4, 1999, the Company acquired certain assets of Contact Lenses Online, Inc. ("CLO") for $1.2 million in cash, of which $0.9 million was paid during fiscal 1999. The assets acquired include the Internet address, www.contactlenses.com, various telephone numbers and CLO's customer database. The Company also acquired additional Internet addresses for approximately $0.2 million and $0.3 million during fiscal 2000 and 1999, respectively. Capital expenditures for fiscal 1998 were approximately $2.0 million. The Company completed the move into its new call center during July 1998. In conjunction with the move, the Company acquired new telecommunications systems and enhanced its management information systems. The Company received payment in full on the notes receivable from stockholders during the first quarter of fiscal 1998, as the notes were netted with the S Corporation distribution paid during the period. 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 December 30, 2000, the Company had certain commitments to purchase approximately $11.5 million of broadcast advertising through September 2001. The Company had options to cancel approximately $2 million of the amount committed. 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 through December 31, 2001. The Company considers opportunities to expand its business operations to international markets. During fiscal 2000, the Company established a subsidiary in Japan and incurred expenses relating to market research in 20 Japan. Currently, the Company has not established operations in Japan and does not expect to establish operations there during fiscal 2001. During fiscal 2000 and 1999, the Company used approximately $13.5 million and $2.4 million for financing activities. During fiscal 2000, the Company repurchased 1,084,000 shares of its common stock for a total cost of approximately $16.8 million. During fiscal 1999, the Company repurchased 370,000 shares of its common stock for a total cost of approximately $2.5 million. In both fiscal 2000 and 1999, these repurchases were offset slightly by proceeds from the exercise of common stock options. In fiscal 2000, the Company also made its final payment relating to the 1999 purchase of CLO's assets and had net borrowings on its revolving credit facility of approximately $3.3 million. For fiscal 1998, net cash of approximately $19.6 million was provided by financing activities, resulting from net proceeds received from the IPO, offset by repayments of debt, distributions to stockholders (S corporation distribution) and repurchase of stock. On October 13, 1998, the Company's Board of Directors authorized a repurchase of up to 1,000,000 shares of its common stock. On February 17, 2000, the Company's Board of Directors authorized an additional repurchase of up to 1,000,000 shares of its common stock, bringing the total authorization to 2,000,000 shares. A purchase of the full 2,000,000 shares would equal approximately 15.6 percent of the total shares issued. The repurchase of common stock is subject to market conditions and is accomplished through periodic purchases at prevailing prices on the open market, by block purchases or in privately negotiated transactions. The repurchased shares are retained as treasury stock to be used for corporate purposes. Through December 30, 2000, the Company had repurchased 1,484,000 shares for a total cost of approximately $19.5 million. 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 (9.5 percent as of December 30, 2000). As of December 30, 2000, the Company's outstanding borrowings on the credit facility were approximately $3.3 million. The credit facility is secured by substantially all of the Company's assets and contains financial covenants customary for this type of financing. The credit facility expires April 30, 2001. Subsequent to December 30, 2000, the Company has repaid the amount owed on the credit facility. Management is currently in negotiations to renew the credit 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 fiscal 2001. The Company may be required to seek additional sources of funds for accelerated growth or continued growth after that point, and there can be no assurance that such funds will be available on satisfactory terms. Failure to obtain such financing could delay or prevent the Company's planned growth, which could adversely affect the Company's business, financial condition and results of operations. As a result of state regulatory requirements, the Company's liquidity, capital resources and results of operations may be negatively impacted in the future if the Company incurs increased costs or fines, is prohibited from selling its products in a particular state(s) or experiences losses of a substantial portion of the Company's customers for whom the Company is unable to obtain or verify a prescription due to the enforcement of requirements by state regulatory agencies. Forward-Looking Statements Except for the historical information contained herein, the matters discussed in this Form 10-K 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 21 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; . 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; 22 . 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. Seasonality The Company does not believe that seasonality has had a material effect on its operations. Inflation The Company does not believe that inflation has had a material effect on its operations. Item 7A. 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 December 30, 2000, the Company's outstanding borrowings on the credit facility were approximately $3.3 million. 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 December 30, 2000, the Company's total cash in foreign currencies was approximately $17,000. In addition, all of the Company's revenue transactions are in U.S. dollars. Item 8. Financial Statements and Supplementary Data. The audited financial statements required by Item 8 are set forth on pages F-1 through F-21 of this Form 10-K. Selected Quarterly Results of Operations The following unaudited selected quarterly results of operations data for the last eight quarters have been derived from the Company's unaudited consolidated financial statements, which in the opinion of management, have been prepared on the same basis as the audited financial statements and reflect all adjustments (consisting of normal recurring adjustments) necessary to present fairly the information for the quarters presented. This information should be read in conjunction with the financial statements and the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included as part of this Form 10-K. The operating results for the quarters presented are not necessarily indicative of the operating results for any future period.
First Quarter Second Quarter Third Quarter Fourth Quarter ------------- -------------- ------------- -------------- Year ended January 1, 2000: Net sales $22,304,257 $23,960,056 $26,889,818 $25,370,775 Gross profit 8,395,110 9,305,373 10,936,401 10,472,299 Net income 297,177 1,466,185 1,025,550 3,338,666 Basic net income per common share 0.02 0.12 0.08 0.27 Diluted net income per common share 0.02 0.12 0.08 0.26 Year ended December 30, 2000: Net sales $31,419,004 $35,708,171 $40,724,366 $37,119,176 Gross profit 12,886,407 14,461,074 16,358,379 14,897,708 Net income 1,812,549 3,029,762 2,587,162 3,044,528 Basic net income per common share 0.15 0.25 0.22 0.26 Diluted net income per common share 0.14 0.25 0.22 0.26
23 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None. PART III Item 10. Directors and Executive Officers of the Registrant. Information with respect to Directors of the Company is set forth in the Proxy Statement under the heading "Proposal No. 1 -- Election of Directors," which information is incorporated herein by reference. Information regarding the executive officers of the Company is included as Item 4A of Part I of this Form 10-K as permitted by Instruction 3 to Item 401(b) of Regulation S-K. Information required by Item 405 of Regulation S-K is set forth in the Proxy Statement under the heading "Section 16(a) Beneficial Ownership Reporting Compliance," which information is incorporated herein by reference. Item 11. Executive Compensation. Information with respect to executive compensation is set forth in the Proxy Statement under the heading "Executive Compensation and Other Matters," which information is incorporated herein by reference (except for the Compensation Committee Report on Executive Compensation, the Performance Graph and Report of the Audit Committee of the Board of Directors). Item 12. Security Ownership of Certain Beneficial Owners and Management. Information with respect to security ownership of certain beneficial owners and management is set forth in the Proxy Statement under the heading "Security Ownership of Certain Beneficial Owners and Management," which information is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. Information with respect to certain relationships and related transactions is set forth in the Proxy Statement under the headings "Compensation Committee Interlocks and Insider Participation" and "Certain Relationships and Related Transactions," which information is incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) The following documents are filed as a part of this report: 1. Financial Statements. The following financial statements of the Company and the report of the independent public accountants thereon, are included in this Form 10-K on pages F-1 through F- 21: Report of Independent Public Accountants Consolidated Balance Sheets as of January 1, 2000 and December 30, 2000 Consolidated Statements of Operations for the fiscal years ended January 2, 1999, January 1, 2000 and December 30, 2000 Consolidated Statements of Stockholders' Equity for the fiscal years ended January 2, 1999, January 1, 2000 and December 30, 2000 24 Consolidated Statements of Cash Flows for the fiscal years ended January 2, 1999, January 1, 2000 and December 30, 2000 Notes to Consolidated Financial Statements 2. Financial Statement Schedules. All financial statement schedules have been omitted because they are inapplicable or the required information is included elsewhere herein. 3. Exhibits. The Company will furnish to any eligible stockholder, upon written request of such stockholder, a copy of any exhibit listed below upon the payment of a reasonable fee equal to the Company's expenses in furnishing such exhibit.
Exhibit No. Exhibit ------- ------------------------------------------------------------------------ 3.1(i) Restated Certificate of Incorporation of the Company. (1) 3.1(ii) Restated By-Laws of the Company. (1) 4.1 Form of certificate representing shares of Common Stock, $0.01 par value per share. (2) 10.1 Employment Agreement between the Company and Jonathan C. Coon. (2) * 10.2 Employment Agreement between the Company and John F. Nichols. (2) * 10.3 Employment Agreement between the Company and Scott S. Tanner. (2) * 10.4 Employment Agreement between the Company and Robert G. Hunter. (2) * 10.5 1-800 CONTACTS, INC. 1998 Incentive Stock Option Plan. (2) * 10.6 Employment Agreement between the Company and Kevin K. McCallum. * 10.7 Lease between the Company and Draper Land Limited Partnership No. 2, dated November 3, 1997, with respect to the Company's call center. (2) 10.8 Lease between the Company and Bird and Saunders, dated January 23, 1998, with respect to the Company's former warehouse. (2) 10.9 Change in Terms Agreement to First Amendment to Revolving Credit Agreement between the Company and Zions First National Bank, dated November 22, 2000. 10.10 Indemnification Agreement between the Company and its officers and directors. (2) 10.11 Agreement for Distribution of Retained Earnings and Tax Indemnification between the Company and the Existing Stockholders. (2) 10.12 First Amendment to Lease between the Company and ProLogis North American Properties Fund I LLC, dated October 9, 2000, with respect to the Company's distribution center. 10.13 Stock Option Agreement. (2) * 10.14 First Amendment to Lease between the Company and Draper Land Limited Partnership No. 2, dated May 25, 1998, with respect to the Company's call center. (3) 10.15 Second Amendment to Lease between the Company and Draper Land Limited Partnership No. 2, dated August 6, 1998, with respect to the Company's call center. (3)
25
Exhibit No. Exhibit ------- ------------------------------------------------------------------------ 10.16 Lease between the Company and ProLogis Development Services Incorporated, dated October 13, 1998, with respect to the Company's distribution center. (3) 10.17 Revolving Credit Agreement between the Company and Zions First National Bank, dated October 29, 1998. (3) 10.18 First Amendment to Revolving Credit Agreement between the Company and Zions First National Bank, dated September 17, 1999. (4) 10.19 Third Amendment to Lease between the Company and Draper Land Limited Partnership No. 2, dated January 17, 2001, with respect to the Company's call center. 10.20 Fourth Amendment to Lease between the Company and Draper Land Limited Partnership No. 2, dated January 17, 2001, with respect to the Company's call center. 10.21 Fifth Amendment to Lease between the Company and Draper Land Limited Partnership No. 2, dated January 17, 2001, with respect to the Company's call center. 10.22 Sixth Amendment to Lease between the Company and Draper Land Limited Partnership No. 2, dated January 17, 2001, with respect to the Company's call center. 21.1 Subsidiaries of the Registrant 23.1 Consent of Independent Public Accountants. -------------------- (1) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended April 4, 1998 (Commission File No. 0-23633). (2) Incorporated by reference to the same numbered exhibit to the Company's Registration Statement on Form S-1 (Registration No. 333-41055). (3) Incorporated by reference to the same numbered exhibit to the Company's Annual Report on Form 10-K for the year ended January 2, 1999 (Commission File No. 0-23633). (4) Incorporated by reference to the same numbered exhibit to the Company's Annual Report on Form 10-K for the year ended January 1, 2000 (Commission File No. 0-23633). * Management contract, compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of this report.
(b) Reports on Form 8-K. None. 26 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, on March 30, 2001. 1-800 CONTACTS, INC. 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 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities indicated on March 30, 2001. Signature Capacity --------- -------- /s/ Jonathan C. Coon President, Chief Executive Officer and Director - ----------------------- (principal executive officer) Jonathan C. Coon /s/ Scott S. Tanner Chief Operating Officer, Chief Financial Officer - ----------------------- and Director (principal financial officer) Scott S. Tanner /s/ Robert G. Hunter Vice President, Finance (principal accounting - ----------------------- officer) Robert G. Hunter /s/ John F. Nichols Director - ----------------------- John F. Nichols /s/ Stephen A. Yacktman Director - ----------------------- Stephen A. Yacktman /s/ E. Dean Butler Director - ----------------------- E. Dean Butler /s/ Jason S. Subotky Director - ----------------------- Jason S. Subotky /s/ Brad Knight Director - ----------------------- Brad Knight 27 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Report of Independent Public Accountants........................................... F-2 Consolidated Balance Sheets as of January 1, 2000 and December 30, 2000............ F-3 Consolidated Statements of Operations for the fiscal years ended January 2, 1999, January 1, 2000 and December 30, 2000............................................ F-5 Consolidated Statements of Stockholders' Equity for the fiscal years ended January 2, 1999, January 1, 2000 and December 30, 2000........................... F-6 Consolidated Statements of Cash Flows for the fiscal years ended January 2, 1999, January 1, 2000 and December 30, 2000........................... F-7 Notes to Consolidated Financial Statements......................................... F-9
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To 1-800 CONTACTS, INC.: We have audited the accompanying consolidated balance sheets of 1-800 CONTACTS, INC. and subsidiaries as of January 1, 2000 and December 30, 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three fiscal years in the period ended December 30, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of 1-800 CONTACTS, INC. and subsidiaries as of January 1, 2000 and December 30, 2000, and the results of their operations and their cash flows for each of the three fiscal years in the period ended December 30, 2000 in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Salt Lake City, Utah March 2, 2001 F-2 1-800 CONTACTS, INC. CONSOLIDATED BALANCE SHEETS ASSETS January 1, December 30, 2000 2000 ------------ ------------ CURRENT ASSETS: Cash and cash equivalents $ 4,329,088 $ 42,558 Inventories 15,980,169 20,402,076 Deferred income taxes 405,021 673,710 Other current assets 475,587 385,001 ------------ ------------ Total current assets 21,189,865 21,503,345 ------------ ------------ PROPERTY AND EQUIPMENT, at cost: Office, computer and other equipment 2,869,263 3,800,122 Leasehold improvements 649,447 1,031,330 ------------ ------------ 3,518,710 4,831,452 Less - accumulated depreciation and amortization (1,252,404) (1,988,349) ------------ ------------ Net property and equipment 2,266,306 2,843,103 ------------ ------------ DEFERRED INCOME TAXES 116,136 203,620 ------------ ------------ INTANGIBLE ASSETS, net of accumulated amortization of $313,890 and $651,899, respectively 1,394,945 1,261,916 ------------ ------------ OTHER ASSETS 86,320 295,775 ------------ ------------ Total assets $25,053,572 $26,107,759 ============ ============ The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. F-3 1-800 CONTACTS, INC. CONSOLIDATED BALANCE SHEETS (continued) LIABILITIES AND STOCKHOLDERS' EQUITY January 1, December 30, 2000 2000 ------------ ------------ CURRENT LIABILITIES: Line of credit $ - $ 3,264,979 Capital lease obligation 30,166 - Acquisition payable 300,000 - Accounts payable 3,059,993 3,646,578 Accrued liabilities 1,856,756 2,564,463 Accrued shipping costs 336,000 977,000 Income taxes payable 447,143 1,206,523 Unearned revenue 322,805 483,812 ------------ ------------ Total current liabilities 6,352,863 12,143,355 ------------ ------------ COMMITMENTS AND CONTINGENCIES (Notes 1 and 4) STOCKHOLDERS' EQUITY: Common stock, $.01 par value, 20,000,000 shares authorized, 12,861,136 shares issued 128,611 128,611 Additional paid-in capital 22,992,892 23,802,342 Retained earnings (accumulated deficit) (2,061,494) 8,412,507 Treasury stock at cost, 341,650 and 1,289,555 shares, respectively (2,359,300) (18,376,111) Accumulated other comprehensive loss - (2,945) ------------ ------------ Total stockholders' equity 18,700,709 13,964,404 ------------ ------------ Total liabilities and stockholders' equity $ 25,053,572 $ 26,107,759 ============ ============ The accompanying notes to consolidated financial statements are an integral part of these consolidated balance sheets. F-4 1-800 CONTACTS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Year Ended -------------------------------------------------- January 2, January 1, December 30, 1999 2000 2000 -------------- -------------- -------------- NET SALES $ 59,875,941 $ 98,524,906 $144,970,717 COST OF GOODS SOLD 37,315,413 59,415,723 86,367,149 -------------- -------------- -------------- Gross profit 22,560,528 39,109,183 58,603,568 -------------- -------------- -------------- SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Advertising expense 24,206,857 20,238,267 25,603,365 Other selling, general and administrative expenses 7,334,668 12,001,536 16,120,718 -------------- -------------- -------------- Total selling, general and administrative expenses 31,541,525 32,239,803 41,724,083 -------------- -------------- -------------- INCOME (LOSS) FROM OPERATIONS (8,980,997) 6,869,380 16,879,485 -------------- -------------- -------------- OTHER INCOME (EXPENSE): Interest expense (104,370) (31,860) (68,741) Interest income 553,843 310,185 238,854 Cancelled offering costs - (293,059) - Other, net (3,763) (25,818) 28,320 -------------- -------------- -------------- Total other, net 445,710 (40,552) 198,433 -------------- -------------- -------------- INCOME (LOSS) BEFORE BENEFIT (PROVISION) FOR INCOME TAXES (8,535,287) 6,828,828 17,077,918 BENEFIT (PROVISION) FOR INCOME TAXES 642,679 (701,250) (6,603,917) -------------- -------------- -------------- NET INCOME (LOSS) $ (7,892,608) $ 6,127,578 $ 10,474,001 ============== ============== ============== PER SHARE INFORMATION: Basic net income (loss) per common share $ (0.63) $ 0.49 $ 0.88 ============== ============== ============== Diluted net income (loss) per common share $ (0.63) $ 0.48 $ 0.86 ============== ============== ==============
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. F-5 1-800 CONTACTS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Retained Notes Common Stock Additional Earnings Treasury Stock Receivable ------------------------- Paid-in (Accumulated) ------------------------- From Shares Amount Capital (Deficit) Shares Amount Stockholders ----------- ----------- ----------- ------------- ----------- ------------ ------------ BALANCE, December 31, 1997 9,318,938 $ 93,189 $ 47,094 $ 1,286,220 - $ - $ (572,145) Advances to stockholders - - - - - - (27,544) Distributions to stockholders, net - - - (1,582,684) - - 599,689 Sale of common stock, net of offering costs 4,427,500 44,275 24,805,834 - - - - Repurchase and retirement of common stock (885,302) (8,853) (1,891,147) - - - - Purchase of treasury shares - - - - (30,000) (81,375) - Exercise of common stock options - - (8,820) - 8,000 21,700 - Net loss - - - (7,892,608) - - - ----------- ----------- ----------- ------------- ----------- ------------ ------------ Comprehensive loss BALANCE, January 2, 1999 12,861,136 128,611 22,952,961 (8,189,072) (22,000) (59,675) - Purchase of treasury shares - - - - (370,000) (2,530,286) - Exercise of common stock options - - (92,654) - 50,350 230,661 - Income tax benefit from common stock options exercised - - 132,585 - - - - Net income - - - 6,127,578 - - - ----------- ----------- ----------- ------------- ----------- ------------ ------------ Comprehensive income BALANCE, January 1, 2000 12,861,136 128,611 22,992,892 (2,061,494) (341,650) (2,359,300) - Purchase of treasury shares - - - - (1,084,000) (16,841,448) - Exercise of common stock options - - (386,680) - 136,095 824,637 - Income tax benefit from common stock options exercised - - 1,196,130 - - - - Net income - - - 10,474,001 - - - Foreign currency translation adjustments - - - - - - - ----------- ----------- ----------- ------------- ----------- ------------ ------------ Comprehensive income BALANCE, December 30, 2000 12,861,136 $ 128,611 $23,802,342 $ 8,412,507 (1,289,555) $(18,376,111) $ - =========== =========== =========== ============= =========== ============ ============ Accumulated Other Total Comprehensive Comprehensive Stockholders' Income Loss Equity (Loss) ------------- ------------- ------------- BALANCE, December 31, 1997 $ - $ 854,358 $ - Advances to stockholders - (27,544) - Distributions to stockholders, net - (982,995) - Sale of common stock, net of offering costs - 24,850,109 - Repurchase and retirement of common stock - (1,900,000) - Purchase of treasury shares - (81,375) - Exercise of common stock options - 12,880 - Net loss - (7,892,608) (7,892,608) ------------- ------------- ------------- Comprehensive loss $ (7,892,608) ============= BALANCE, January 2, 1999 - 14,832,825 - Purchase of treasury shares - (2,530,286) - Exercise of common stock options - 138,007 - Income tax benefit from common stock options exercised - 132,585 - Net income - 6,127,578 6,127,578 ------------- ------------- ------------- Comprehensive income $ 6,127,578 ============= BALANCE, January 1, 2000 - 18,700,709 - Purchase of treasury shares - (16,841,448) - Exercise of common stock options - 437,957 - Income tax benefit from common stock options exercised - 1,196,130 - Net income - 10,474,001 10,474,001 Foreign currency translation adjustments (2,945) (2,945) (2,945) ------------- ------------- ------------- Comprehensive income $ 10,471,056 ============= BALANCE, December 30, 2000 $ (2,945) $ 13,964,404 ============= =============
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. F-6 1-800 CONTACTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended -------------------------------------------------- January 2, January 1, December 30, 1999 2000 2000 -------------- -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (7,892,608) $ 6,127,578 $ 10,474,001 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 446,389 992,184 1,126,162 Other 13,762 26,218 (2,650) Deferred income taxes (642,679) 254,107 (356,173) Changes in operating assets and liabilities: Inventories (5,940,469) (5,227,845) (4,421,907) Other current assets (300,475) 7,552 90,448 Deferred advertising costs 1,530,064 175,631 - Accounts payable (1,705,707) 1,003,542 586,703 Accrued liabilities 518,500 1,106,883 707,727 Accrued shipping costs 71,504 195,430 641,000 Income taxes payable - 447,143 1,955,510 Unearned revenue 65,268 153,265 161,007 -------------- -------------- -------------- Net cash (used in) provided by operating activities (13,836,451) 5,261,688 10,961,828 -------------- -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Net increase in notes receivable from stockholders (27,544) - - Purchase of property and equipment (2,013,361) (1,019,596) (1,365,649) Proceeds from sale of property and equipment 101,768 - 2,650 Purchase of intangible assets (5,000) (1,238,388) (204,980) Purchase of non-marketable securities - - (220,000) Deposits (38,049) (7,846) 10,230 -------------- -------------- -------------- Net cash used in investing activities $ (1,982,186) $ (2,265,830) $ (1,777,749) -------------- -------------- --------------
The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. F-7 1-800 CONTACTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Fiscal Year Ended -------------------------------------------------- January 2, January 1, December 30, 1999 2000 2000 -------------- -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Sale of common stock, net of underwriting discounts and commissions $ 25,734,844 $ - $ - Common stock offering costs (509,537) - - Common stock repurchases (1,981,375) (2,530,286) (16,841,448) Proceeds from exercise of common stock options 12,880 138,007 437,957 Net (repayments) borrowings on line of credit (1,055,640) - 3,264,979 Principal payments on notes payable to stockholders (1,613,788) - - Principal payments on notes payable for distributions to stockholders, net (982,995) - - Principal payments on capital lease obligation (23,532) (36,711) (30,166) Payment of acquisition payable - - (300,000) -------------- -------------- -------------- Net cash provided by (used in) financing activities 19,580,857 (2,428,990) (13,468,678) -------------- -------------- -------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,762,220 566,868 (4,284,599) EFFECT OF FOREIGN EXCHANGE RATES ON CASH - - (1,931) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR - 3,762,220 4,329,088 -------------- -------------- -------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,762,220 $ 4,329,088 $ 42,558 ============== ============== ============== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest $ 228,907 $ 33,335 $ 47,425 Cash paid for income taxes - 100,000 4,904,580
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: During the year ended January 2, 1999, the Company distributed $1,582,684 to its S Corporation stockholders. This distribution (net of notes receivable from stockholders of $599,689) was in the form of promissory notes, totaling $982,995, issued by the Company. The promissory notes were paid in full during the year ended January 2, 1999. During the year ended January 1, 2000, the Company acquired $300,000 of certain intangible assets under a short-term acquisition payable (see Note 11). The accompanying notes to consolidated financial statements are an integral part of these consolidated statements. F-8 1-800 CONTACTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. NATURE OF OPERATIONS AND ORGANIZATION OF BUSINESS 1-800 CONTACTS, INC. (the "Company") was incorporated in the state of Utah in February 1995. The Company was reincorporated in Delaware in February 1998 in conjunction with its initial public offering of common stock. The Company is a direct marketer of replacement contact lenses. The Company sells contact lenses primarily through its toll-free telephone number and the Internet. Regulatory Compliance The Company sells contact lenses to customers in all 50 states and each sale is likely to be subject to the laws of the state where the customer is located. The laws and regulations governing the sale and delivery of contact lenses vary from state to state, but generally can be classified into six categories: (i) laws that require contact lenses only be dispensed pursuant to a prescription; (ii) laws that require the dispenser to be licensed by the state as an optometrist, ophthalmologist or other professional authorized to dispense lenses; (iii) laws that require lenses be dispensed only in a face-to-face transaction; (iv) laws with requirements that are unclear or do not specifically address the sale and delivery of contact lenses; (v) agreements with regulatory authorities which regulate the dispensing of contact lenses and (vi) laws that the Company believes place no restrictions on the dispensing of replacement contact lenses. 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. As a result of this operating practice, certain sales made by the Company fail to comply with the applicable statute or regulation in the state in which the customer is located. Any action brought against the Company based on its failure to comply with applicable state laws and regulations could result in significant fines to the Company, the Company being prohibited from making sales in a particular state, the Company being required to comply with such laws or could constitute a misdemeanor. Such required compliance could result in (i) increased costs to the Company; (ii) the loss of a substantial portion of the Company's customers for whom the Company is unable to obtain or verify their prescription; (iii) the inability to sell to customers at all in a particular state if the Company cannot comply with such state's laws and (iv) misdemeanor penalties and civil fines. The occurrence of any of the above results could have a material adverse effect on the Company's ability to sell contact lenses and continue to operate profitably. Furthermore, there can be no assurance that states will not enact or impose laws or regulations that prohibit mail order dispensing of contact lenses or otherwise impair the Company's ability to sell contact lenses and continue to operate profitably. From time to time the Company receives notices, inquiries or other correspondence from states or their 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. See Note 4 for formal complaints filed against the Company concerning its business practices. The FDA regulates the labeling of medical devices. The contact lenses that the Company sells are prescription devices, and therefore contain the statement required by FDA regulations: "Caution: Federal law restricts this device to sale by or on the order of a _________ (physician or other licensed practitioner)." However, because of the difficulty the Company has encountered in obtaining the cooperation of eye care practitioners, the Company sometimes sells lenses based solely on the prescription information provided by the customer without a written F-9 1-800 CONTACTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS prescription or other order by the customer's eye care practitioner. Although the FDA has not objected to the sale of contacts lenses without a written prescription or other order directly from the customer's eye care practitioner, it is possible that the FDA will consider contact lenses that are sold in such a fashion to be misbranded. The sale of misbranded devices is unlawful under the Federal Food, Drug, and Cosmetic Act, and can result in a warning letter, seizure, injunction, civil penalties, or prosecution. To date, the FDA has not taken any such action against the Company. Sources of Supply Historically, substantially all of the major manufacturers of contact lenses have refused to sell lenses directly to direct marketers, including the Company, and have sought to prohibit their distributors from doing so. As a result, the Company currently purchases a substantial portion of its products from unauthorized distributors. The Company is aware that at least one large manufacturer of contact lenses puts tracking codes on its products in an effort to identify distributors who are selling to direct marketers. The Company is not an authorized dealer for some of the products which it sells. In addition, the Company believes that the price which it pays for certain products is sometimes higher than those paid by eye care practitioners, retail chains and mass merchandisers, who are able to buy directly from the manufacturers of such lenses and who benefit from being allowed to participate in cooperative advertising funds, coupon, sample, rebate and other marketing and promotional programs. There can be no assurance that the Company will be able to obtain sufficient quantities of contact lenses at competitive prices in the future to meet the existing or anticipated demand for its products. Any such inability would have a material adverse effect on the Company's business, financial position and results of operations. Although the Company seeks to reduce its reliance on any one supplier by establishing relationships with a number of distributors and other sources, the Company purchased from a single distributor approximately 47 percent, 38 percent and 35 percent of its contact lens inventory in fiscal 1998, 1999 and 2000, respectively. The Company's top three suppliers accounted for approximately 70 percent, 68 percent and 62 percent of the Company's inventory purchases in fiscal 1998, 1999 and 2000, respectively. The Company continually seeks to establish new relationships with potential suppliers in order to be able to obtain adequate inventory at competitive prices. In the event that these suppliers could no longer supply the Company with contact lenses, there can be no assurance that the Company could secure other adequate sources of supply, or that such supply could be obtained on terms no less favorable to the Company than its current supply, which could adversely affect the Company by increasing its costs or, in the event adequate replacement supply cannot be secured, reducing its net sales. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Change in Accounting Period Effective January 1, 1998, the Company changed from a calendar year end to a 52/53 week year, ending on the Saturday nearest to December 31. Due to this change, fiscal year 1998 represents 52 weeks and 3 days, covering the period January 1, 1998 to January 2, 1999. Fiscal year 1999, ended January 1, 2000, and fiscal year 2000, ended December 30, 2000, are 52 week years. Revenue Recognition Sales are recognized at the time of shipment to the customer. Payment for the product is generally received prior to shipment. As a result, unearned revenue represents amounts received from customers for which shipment has not occurred. Shipping and handling fees are included as part of net sales. The related freight costs and supplies directly associated with shipping products to customers are included as a component of cost of goods sold. Other indirect shipping and handling costs, consisting mainly of labor and facilities costs, are included as a component of other selling, general and administrative expenses. F-10 1-800 CONTACTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Principles of Consolidation The consolidated financial statements include the accounts of 1-800 CONTACTS, INC. and its wholly owned subsidiaries, 1-800 CONTACTS Japan, KK and CL4, L.L.C. All significant inter-company accounts and transactions have been eliminated in consolidation. Cash Equivalents The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Inventories Inventories consist of contact lenses and are recorded at the lower of cost (using the first-in, first-out method) or market. Property and Equipment Property and equipment are stated at cost and depreciated using the straight-line method over their estimated useful lives ranging from three to seven years. Leasehold improvements are amortized over the lesser of the useful life or the term of the lease. Major additions and improvements are capitalized, while costs for minor replacements, maintenance and repairs that do not increase the useful life of an asset are expensed as incurred. Upon retirement or other disposition of property and equipment, the cost and related accumulated depreciation or amortization are removed from the accounts. The resulting gain or loss is reflected in income. Advertising Costs The Company currently expenses all advertising costs when the advertising first takes place. Prior to the fourth quarter of fiscal 1998, the Company capitalized certain direct-mail advertising costs and amortized those costs over the period for which the revenues were generated in accordance with Statement of Position ("SOP") 93-7, "Reporting on Advertising Costs." During fiscal 1998, the Company began utilizing a variety of new advertising vehicles, including new print vehicles, Internet and radio spots, and an extensive television marketing campaign. As direct-response information became available during the fourth quarter of fiscal 1998, the Company determined that its ability to track individual sales to specific advertising campaigns was restricted as a result of the variety of new advertising vehicles utilized. Therefore, beginning in the fourth quarter of fiscal 1998, the Company began expensing all advertising costs, including all direct-mail advertising costs, when the advertising first takes place. The Company also determined that for previously deferred advertising costs the period during which the future benefits were expected to be received was shortened and accordingly amortized the balance of deferred advertising costs at the beginning of the fourth quarter of fiscal 1998 over 5 months. F-11 1-800 CONTACTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Intangible Assets Intangible assets mainly consist of amounts paid to secure the rights to the Company's telephone numbers and Internet addresses. These costs are amortized over an estimated life of 5 years. The Company has contractual rights customary to the industry to use its telephone numbers and Internet addresses. However, under applicable rules and regulations of the Federal Communications Commission, the Company does not have and cannot acquire any property rights to the telephone numbers. In addition, the Company does not have and cannot acquire any property rights to the Internet addresses. The Company does not expect to lose the right to use the telephone numbers or Internet addresses; however, there can be no assurance in this regard and such loss would have a material adverse effect on the Company's financial position and results of operations. Fair Value of Financial Instruments The Company's financial instruments consist mainly of cash and cash equivalents, a line of credit, and short-term payables. The Company believes that the carrying amounts approximate fair value. Foreign Currency Translation The accounts of 1-800 CONTACTS Japan, KK are translated into U.S. dollars using the exchange rate at the balance sheet date for assets and liabilities and the weighted average exchange rate for the period for revenues, expenses, gains and losses. Foreign currency translation adjustments are recorded as a separate component of comprehensive income (loss) in stockholders' equity. Long-lived Assets The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future 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. Income Taxes The Company recognizes deferred tax assets or liabilities for expected future tax consequences of events that have been recognized in the financial statements or tax returns. Under this method, deferred tax assets or liabilities are determined based upon the difference between the financial statement and income tax bases of assets and liabilities using enacted tax rates expected to apply when differences are expected to be settled or realized. Net Income (Loss) Per Common Share Basic net income (loss) per common share ("Basic EPS") excludes dilution and is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted net income (loss) 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 (loss) per common share. F-12 1-800 CONTACTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following is a reconciliation of the numerator and denominator used to calculate Basic and Diluted EPS:
Net Income Per-Share (Loss) Shares Amount ------------ ---------- --------- Year Ended January 2, 1999: Basic EPS $(7,892,608) 12,455,280 $(0.63) Effect of stock options ----------- ---------- ------ Diluted EPS $(7,892,608) 12,455,280 $(0.63) =========== ========== ====== Year Ended January 1, 2000: Basic EPS $ 6,127,578 12,596,528 $ 0.49 Effect of stock options 161,996 ----------- ---------- ------ Diluted EPS $ 6,127,578 12,758,524 $ 0.48 =========== ========== ====== Year Ended December 30, 2000: Basic EPS $10,474,001 11,871,779 $ 0.88 Effect of stock options 238,268 ----------- ---------- ------ Diluted EPS $10,474,001 12,110,047 $ 0.86 =========== ========== ======
At January 2, 1999, there were outstanding options to purchase 446,020 shares of common stock that were not included in the computation of Diluted EPS because they would be antidilutive. Reclassifications Certain amounts in prior years' financial statements have been reclassified to conform to the fiscal 2000 presentation. NOTE 3. LINE OF CREDIT Line of Credit The Company has a revolving credit facility that provides for borrowings equal to the lesser of $10.0 million or 50 percent of eligible inventory. The credit facility bears interest at a floating rate equal to the lender's prime interest rate (9.5 percent at December 30, 2000). As of December 30, 2000, the Company's outstanding borrowings on the credit facility were $3,264,979. The credit facility is secured by substantially all of the Company's assets and expires April 30, 2001. The credit facility contains various affirmative and negative covenants which require, among other things, restrictions on additional debt, minimum levels for net income, maintenance of certain working capital levels and restrictions on distributions and changes in ownership. As of December 30, 2000, the Company was in compliance with these covenants. F-13 1-800 CONTACTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4. COMMITMENTS AND CONTINGENCIES Legal and Regulatory Matters On July 14, 1998, Craig S. Steinberg, O.D., a professional corporation d.b.a. City Eyes Optometry Center, filed a purported class action on behalf of all California optometrists against the Company and its directors in Los Angeles County Superior Court. The complaint alleged three separate causes of action for unfair competition: (i) selling contact lenses to California residents without being registered, (ii) selling contact lenses to California residents without verifying the prescription and (iii) failing to disclose in its advertising that it sells "sample" lenses not intended for sale to the public. The complaint requested various forms of relief, including damages of an unspecified amount, attorney's fees and a permanent injunction. The Company removed the action to the United States District Court for the Central District of California. Plaintiff and another California optometrist, Ellis Miles, (collectively "plaintiffs") filed a First Amended Complaint ("FAC") against the Company and its directors on or about September 3, 1998 purporting to sue on behalf of the public under California's unfair competition statute rather than as a class action on behalf of optometrists. Although the substantive claims for unfair competition remain the same, the FAC seeks injunctive relief and restitution rather than damages. Plaintiffs also dismissed the Company's directors as defendants, leaving the Company as the only remaining defendant. Upon agreement among the parties, the case was remanded to Los Angeles County Superior Court based upon plaintiffs' stipulation that they no longer seek monetary relief on behalf of themselves or other optometrists. In response to a series of motions filed by the Company, plaintiffs abandoned their claim for selling lenses without being registered. In addition, by Order dated January 12, 2001, the Court granted the Company's motion to strike all claims for monetary relief without leave to amend. Plaintiffs filed a Petition for Writ of Mandate with the California Court of Appeals on or about January 21, 2001, seeking to overturn the trial court's ruling. The Court of Appeals denied plaintiffs petition on February 15, 2001. Plaintiff filed a Petition for Review with the California Supreme Court on or about February 21, 2001. The Supreme Court has not yet ruled on this petition. 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. F-14 1-800 CONTACTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS See Note 1 for a discussion of regulatory matters. 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. Capital Lease Obligation The Company leased the rights to use its toll-free telephone number from an individual under a capital lease arrangement. At the end of the lease in fiscal year 2000, the Company exercised its option to purchase the interest in the telephone number for $17,500. Operating Leases The Company leases office and warehouse facilities and certain equipment under noncancelable operating leases. Lease expense for the years ended January 2, 1999, January 1, 2000 and December 30, 2000 totaled approximately $377,000, $784,000 and $797,000, respectively. Future minimum lease payments under noncancelable operating leases as of December 30, 2000 are as follows: Fiscal Year Amount ----------- ---------- 2001 $1,054,694 2002 1,074,252 2003 749,375 2004 772,805 2005 797,475 Thereafter 105,492 ---------- $4,554,093 ========== Sales Tax The Company's direct mail business is located, and all of its operations are conducted, in the state of Utah. At December 30, 2000, the Company did not collect sales or other similar taxes for any out-of-state sales. However, various states have sought to impose state sales tax collection obligations on out-of-state mail-order companies, such as the Company. The U.S. Supreme Court has held that the various states, absent Congressional legislation, may not impose tax collection obligations on an out-of-state mail order company whose only contacts with the taxing state are the distribution of advertising materials through the mail, and whose subsequent delivery of purchased goods is by mail or interstate common carriers. The Company has not received an assessment from any state. The Company anticipates that any legislative changes, if adopted, would be applied on a prospective basis. Advertising Commitments As of December 30, 2000, the Company had certain commitments to purchase approximately $11.5 million of broadcast advertising through September 2001. The Company had options to cancel approximately $2 million of the amount committed. F-15 1-800 CONTACTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 through December 31, 2001. NOTE 5. COMMON STOCK TRANSACTIONS On July 7, 2000, the Company's Board of Directors approved a two-for-one common stock split, effected in the form of a stock dividend. The record date for the stock split was July 24, 2000, and the payment date was August 1, 2000. In fiscal 1998, in connection with the filing of an effective Form S-1 Registration Statement and a reincorporation in the state of Delaware, the Board of Directors and stockholders approved a 414.175 for 1 stock split and a change in the authorized common stock to 20,000,000 shares at $0.01 par value per share. These stock splits have been retroactively reflected in the accompanying financial statements for all periods presented. During February 1998, the Company completed its initial public offering of common stock. In connection therewith, the Company issued 4,427,500 shares of common stock, which included 577,500 shares issued pursuant to the underwriters' over-allotment option. The proceeds received from the offering, net of underwriting commissions and offering costs, totaled $24,850,109. In fiscal 1998, the Company exercised its rights to repurchase 885,302 shares of its outstanding common stock for $1,900,000 (see Note 7). On October 13, 1998, the Company's Board of Directors authorized a repurchase of up to 1,000,000 shares of its common stock. On February 17, 2000, the Company's Board of Directors authorized an additional repurchase of up to 1,000,000 shares of its common stock, bringing the total authorization to 2,000,000 shares. A purchase of the full 2,000,000 shares would equal approximately 15.6 percent of the total shares issued. The repurchase of common stock is subject to market conditions and is accomplished through periodic purchases at prevailing prices on the open market, by block purchases or in privately negotiated transactions. The repurchased shares are retained as treasury stock to be used for corporate purposes. Through December 30, 2000, the Company had repurchased 1,484,000 shares for a total cost of $19,453,109. NOTE 6. STOCK OPTIONS AND STOCK OPTION PLAN During fiscal 1998, the Company established a nonqualified and incentive stock option plan. The plan provides for the issuance of a maximum of 620,000 shares of common stock to officers, directors and consultants and other key employees. Incentive stock options and nonqualified options are granted at not less than 100 percent of the fair market value of the underlying common stock on the date of grant. As of December 30, 2000, 231,912 shares are available for future granting. Prior to the establishment of the stock option plan, the Company issued nonqualified stock options to various key employees, a consultant and a director of the Company. During fiscal 1998, the Company granted nonqualified stock options to purchase 143,958 shares of common stock at $5.50 per share to a director of the Company. All options granted through January 1, 2000 vest equally over a three year period and expire in ten years. All options granted during the year ended December 30, 2000, vest equally over a four year period and expire in ten years. F-16 1-800 CONTACTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A summary of stock option activity is as follows:
Weighted Average Exercise Price Per Shares Share -------- --------- Outstanding at December 31, 1997 278,322 $ 3.68 Granted 178,738 5.61 Exercised (8,000) 1.61 Forfeited (3,040) 6.25 -------- Outstanding at January 2, 1999 446,020 4.47 Granted 113,360 6.25 Exercised (50,350) 2.74 Forfeited (14,938) 6.28 -------- Outstanding at January 1, 2000 494,092 5.00 Granted 306,000 18.59 Exercised (136,095) 3.22 Forfeited (48,074) 13.66 -------- Outstanding at December 30, 2000 615,923 $11.45 ======== Exercisable at December 30, 2000 233,663 $ 5.54 ========
The following is additional information with respect to stock options:
Outstanding Weighted-Average Exercisable Range of as of Remaining Weighted-Average as of Weighted-Average Exercise Prices 12/30/00 Contractual Life Exercise Price 12/30/00 Exercise Price - --------------- ----------- ---------------- ---------------- ----------- ---------------- $ 1.61 - $ 4.37 7,970 6.7 $ 3.65 5,970 $ 3.93 4.38 - 8.75 346,161 7.2 5.72 227,693 5.58 13.13 - 17.50 186,192 9.1 14.01 - - 21.88 - 26.25 38,000 9.5 24.00 - - 35.00 - 39.37 17,600 9.9 36.95 - - 39.38 - 43.75 20,000 9.7 43.75 - - -------- ------- 615,923 8.1 11.45 233,663 5.54 ======== =======
F-17 1-800 CONTACTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock option grants to employees. Accordingly, no compensation expense has been recognized for these stock option grants. Had compensation expense for the Company's employee stock option grants been determined in accordance with Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," the Company's net income (loss) and diluted net income (loss) per common share for the years ended January 2, 1999, January 1, 2000 and December 30, 2000 would have been reduced to the pro forma amounts indicated below:
Fiscal Year ------------------------------------------- 1998 1999 2000 ---- ---- ---- Net income (loss): As reported............................... $(7,892,608) $6,127,578 $10,474,001 Pro forma................................. $(8,070,562) $5,864,847 $ 9,981,548 Diluted net income (loss) per common share: As reported............................... $ (0.63) $ 0.48 $ 0.86 Pro forma................................. $ (0.65) $ 0.46 $ 0.82
Due to the nature and timing of options grants, the resulting pro forma compensation cost may not be indicative of future years. The fair value of each option grant has been estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions: weighted average risk-free interest rate of 5.6 percent for fiscal 1998 grants, 5.4 percent for fiscal 1999 grants and 6.6 percent for fiscal 2000 grants; expected stock price volatility of approximately 78 percent for fiscal 1998 grants, 75 percent for fiscal 1999 grants and 80 percent for fiscal 2000 grants; an expected dividend yield of 0 percent for all grants and an expected life of five years for all grants. The weighted average fair value of options granted during fiscal years 1998, 1999 and 2000 was $3.77, $4.07 and $12.91 per share, respectively. NOTE 7. RELATED PARTY TRANSACTIONS As of December 31, 1997, notes receivable from stockholders totaled $572,145. During fiscal 1998, the Company made aggregate loans on the notes to two stockholders totaling $22,300. The notes were unsecured, accrued interest at the prime rate and were due on demand. Interest income on the notes totaled $5,244 during fiscal 1998. During fiscal 1998, the Company made equity distributions to the stockholders sufficient to allow for their repayment on these notes. During fiscal 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. This investment is being accounted for under the cost method. In February 1996, the Company entered into a credit agreement with a stockholder that provided for maximum borrowings of $250,000 of which $243,788 was outstanding at December 31, 1997 and was repaid in fiscal 1998 with proceeds from the Company's initial public offering of common stock. The borrowings accrued interest at the prime rate plus 2 percent. During fiscal 1997, the Company borrowed $1,100,000 from a stockholder under a short-term promissory note which was repaid in fiscal 1998 with proceeds from the Company's initial public offering of common stock. The note accrued interest at prime plus 2 percent and was due July 30, 1998. As consideration for entering into this note, the Company agreed to modify the option it held to repurchase the stockholder's common stock. Under the revised F-18 1-800 CONTACTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS terms of the option, the Company had the right to repurchase 885,302 shares of the stockholder's common stock for $1,900,000, which occurred in fiscal 1998 (see Note 5). In September 1997, the Company borrowed $250,000 from a stockholder under a short-term, unsecured promissory note which was repaid in fiscal 1998 with proceeds from the Company's initial public offering of common stock. The note accrued interest at prime plus 2 percent and was due in September 1998. In addition, for every month the note was outstanding, a fee of $5,000 was added to the outstanding balance and expensed as additional interest. Interest expense under these related party notes was $26,838 in fiscal 1998. NOTE 8. DISTRIBUTIONS TO STOCKHOLDERS Prior to the consummation of its initial public offering in February 1998, the Company entered into an agreement for the distribution of retained earnings and tax indemnification with the existing stockholders. Pursuant to the agreement, an S Corporation distribution of $982,995 (net of notes receivable due from stockholders of $599,689) was distributed in the form of promissory notes issued by the Company. The notes were paid in full after the closing of the offering. The agreement provided for, among other things, the indemnification of the existing stockholders for any losses or liabilities with respect to any additional taxes (including interest, penalties and legal fees) and the repayment to the Company of amounts received as refunds, resulting from the Company's operations during the period in which it was an S Corporation. No amounts are currently payable, or anticipated to be payable, or receivable, or anticipated to be receivable under the agreement. The existing stockholders were indemnified by the Company with respect to federal and state income tax liabilities as a result of an adjustment to the Company's taxable income which increases the tax liability to the existing stockholders for taxable periods ending prior to the termination of the S corporation status. In addition, the existing stockholders indemnified the Company with respect to any federal and state tax liabilities as a result of an adjustment which decreases the existing stockholders' tax liability for taxable periods ending prior to the termination of the Company's S corporation status and correspondingly increases the tax liability of the Company for a taxable period commencing on or after the termination of the Company's S corporation status. NOTE 9. INCOME TAXES Prior to February 9, 1998, the Company had elected for federal and state income tax purposes to include its taxable income with that of its stockholders (an S Corporation election). Effective February 9, 1998 the Company's S corporation election was terminated. As a result, the Company recorded a net deferred tax liability and the related deferred tax provision of approximately $791,000 for the tax effect of the differences between financial statement and income tax basis of assets and liabilities that existed at the termination date of the S corporation election. Income (loss) before income taxes consists of the following components for the years ended January 2, 1999, January 1, 2000 and December 30, 2000:
Fiscal Year --------------------------------------------- 1998 1999 2000 ---- ---- ---- Domestic U.S. operations.......... $(8,535,287) $6,828,828 $17,175,644 Operations of foreign subsidiary.. - - (97,726) ----------- ---------- ----------- $(8,535,287) $6,828,828 $17,077,918 =========== ========== ===========
F-19 1-800 CONTACTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The components of the provision for income taxes for the year ended January 2, 1999 since the termination of the S corporation status and for the years ended January 1, 2000 and December 30, 2000 are as follows:
Fiscal Year ------------------------------------------- 1998 1999 2000 ---- ---- ---- Current provision: Federal................................................. $ - $ (387,204) $(6,053,222) State................................................... - (59,939) (906,868) ----------- ----------- ----------- Total current provision for income taxes........... - (447,143) (6,960,090) ----------- ----------- ----------- Deferred benefit (provision): Federal................................................. 2,864,270 (1,728,208) 311,349 State................................................... 443,386 (267,525) 44,824 Change in valuation allowance........................... (1,874,211) 1,741,626 - Change from S corporation status........................ (790,766) - - ----------- ----------- ----------- Total deferred benefit (provision) for income taxes..................................... 642,679 (254,107) 356,173 ----------- ----------- ----------- Total benefit (provision) for income taxes................... $ 642,679 $ (701,250) $(6,603,917) =========== =========== ===========
During fiscal year 1999, the Company reduced the valuation allowance an additional $132,585 and increased additional paid-in capital from common stock to recognize the tax benefit from common stock options exercised. The following is a reconciliation between the statutory federal income tax rate and the Company's effective income tax rate which is derived by dividing the benefit (provision) for income taxes by income (loss) before benefit (provision) for income taxes for the years ended January 2, 1999, January 1, 2000 and December 30, 2000:
Fiscal Year ------------------------------------------- 1998 1999 2000 ---- ---- ---- Statutory federal income tax rate.......................... 34.0% (34.0)% (34.0)% State income taxes, net of federal benefit................. 3.3 (3.3) (3.3) Change from S corporation status........................... (8.0) - - Valuation allowance........................................ (22.0) 27.3 - Other...................................................... 0.2 (0.3) (0.4) ----- ----- ----- 7.5% (10.3)% (38.7)% ===== ===== =====
The components of the deferred tax assets and liabilities at January 1, 2000 and December 30, 2000 are as follows:
January 1, December 30, 2000 2000 ---------- ------------ Deferred income tax assets: Accrued reserves................................... $346,890 $476,595 Depreciation....................................... 39,615 39,254 Intangibles amortization........................... 76,521 164,366 Other.............................................. 58,131 197,115 -------- -------- $521,157 $877,330 ======== ========
A valuation allowance is provided when it is more likely than not that all or some portion of the deferred tax assets will not be realized. The Company did not have a valuation allowance at January 1, 2000 or December 30, 2000. During fiscal 1999, the Company reversed its valuation allowance due to the profitability of the Company and utilization of its net operating loss carryforwards. The amount of the net deferred tax assets considered realizable, however, could change in the near term based on changing conditions. F-20 1-800 CONTACTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10. PREFERRED STOCK The Company has 1,000,000 shares authorized of $.01 par value preferred stock. For the years ended January 2, 1999, January 1, 2000 and December 30, 2000, no shares were issued or outstanding. The Company's board of directors may, without further action by its stockholders, from time to time, direct the issuance of shares of preferred stock in series and may, at the time of issuance, determine the rights, preferences and limitations of each series. NOTE 11. ASSET ACQUISITION In May 1999, the Company acquired certain assets of Contact Lenses Online, Inc. ("CLO") for $1.2 million in cash to be paid as follows: $600,000 on the closing date, $300,000 six months after the closing date and $300,000 one year after the closing date. As of December 30, 2000, these amounts had been paid in full. The assets acquired include the Internet address www.contactlenses.com, various telephone numbers and CLO's customer database which are included in intangible assets and amortized over an estimated life of 5 years. NOTE 12. RETIREMENT AND SAVINGS PLAN Effective January 1, 2000, the Company established a 401(k) plan covering substantially all of its employees. Eligible employees may contribute, through payroll deductions, up to 15 percent of their eligible compensation, but not more than the statutory limits. The Company contributes fifty cents for each dollar a participant contributes, with a maximum Company contribution of three percent of a participant's eligible compensation. No Company contributions were made during the year ended January 1, 2000. The Company contributed $67,006 to the plan during the year ended December 30, 2000. F-21 EX-10.6 2 0002.txt EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement") is made as of March 13, 2000 between 1-800 CONTACTS, INC., a Utah corporation (the "Company"), and Kevin McCallum (the "Executive"). This Agreement shall be deemed to be effective as of March 13, 2000 (the "Effective Date"). In consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Employment. The Company shall employ Executive, and Executive hereby accepts employment with the Company, upon the terms and conditions set forth in this Agreement, for the period beginning on the Effective Date and ending as provided in paragraph 4 hereof (the "Employment Period"). 2. Position and Duties. (a) During the Employment Period, Executive shall serve as the Vice President of Marketing of the Company and shall have the normal duties, responsibilities and authority of such position. (b) Executive shall report to the Company's Chief Executive Officer and such other persons as the board of directors (the "Board") may direct from time to time, and Executive shall devote his best efforts and his full business time and attention (except for permitted vacation periods and reasonable periods of illness or other incapacity) to the business and affairs of the Company and its Subsidiaries. Executive shall perform his duties and responsibilities to the best of his abilities in a diligent, trustworthy, businesslike and efficient manner. (c) For purposes of this Agreement, "Subsidiaries" shall mean any corporation of which the securities having a majority of the voting power in electing directors are, at the time of determination, owned by the Company, directly or through one of more Subsidiaries. 3. Base Salary and Benefits. (a) During the first year of the Employment Period, Executive's base salary shall be $150,000 per annum (the "Base Salary"), which salary shall be payable in regular installments in accordance with the Company's general payroll practices and shall be subject to customary withholding. Thereafter, the Base Salary shall be such higher rate as corporate management may designate from time to time. As used in this Agreement, the term "Base Salary" shall be deemed to include any such increases as may be designated from time to time by the Board. During the Employment Period, Executive shall be entitled to participate in all of the Company's employee benefit programs for which management employees of the Company and its Subsidiaries are generally eligible (including the Company's stock option program). (b) In addition to the Base Salary, the Board will award an annual bonus of up to $25,000 to Executive following the end of each fiscal year during the Employment Period upon the Company achieving certain operating targets as determined by the Board at the beginning of each fiscal year during the Employment Period. In addition to the Base Salary and any bonuses payable to Executive pursuant to this paragraph, Executive shall be entitled to the following benefits during the Employment Period: (i) reimbursement for the cost of an annual physical examination by a physician of Executive's choice; (ii) a maximum of three weeks vacation each year with salary, subject to additional weeks upon executive approval; (iii) reimbursement for travel, entertainment and other business expenses reasonably incurred by Executive (including costs associated with the use of a mobile telephone).; (iv) $500 per month car allowance; (v) $400 per month house cleaning allowance: (vi) $1000 annual financial planning allowance; 4. Termination. The Employment Period shall continue until earlier of (i) the fourth anniversary of the Effective Date (the "Expiration Date") or (ii) Executive's resignation, death or disability or other incapacity (as determined by the Board in its good faith judgment) or until the Board determines in its good faith judgment that termination of Executive's employment is in the best interests of the Company. Notwithstanding the foregoing, the Employment Period shall be automatically extended for an additional year unless either the Company or the Executive delivers written notice to the other within 60 days of the Expiration Date of its or his intention not to extend the Employment Period. In the event of Executive's resignation of employment for any reason, (other than a breach by the Company of paragraph 2(a)) or termination for Cause (as defined herein), Executive shall not be entitled to receive his Base Salary or any fringe benefits for any period after the termination of the Employment Period. Upon any other termination of the Employment Period, Executive shall be entitled to receive (i) his Base Salary and the health and disability benefits - 2 - described in paragraph 3(a) for a period of 12 months thereafter, and (ii) following the end of the fiscal year in which Executive's employment would have been entitled if he remained employed by the Company or its Subsidiaries for the entire fiscal year (the "Bonus Amount"), (A) 50% of the Bonus Amount if such termination occurs in the first six months of such fiscal year or (B) 100% of the Bonus Amount if such termination occurs in the second six months of such fiscal year. (b) For purposes of this Agreement, "Cause" shall mean (i) the willful and continued failure by Executive to perform his duties of the position set forth herein or his continued failure to perform duties reasonably requested or reasonably prescribed by the Board (other than as a result of Executive's death or disability). (ii) the engaging by Executive in conduct which is materially monetarily injurious to the Company or any of its Subsidiaries, (iii) gross negligence or willful misconduct by Executive in the performance of his duties which results in, or causes, material monetary harm to the Company or any of its Subsidiaries, or (iv) Executive's commission of a felony or other civil or criminal offense involving moral turpitude. In the case of (i), (ii) and (iii) above, finding of Cause for termination shall be made only after reasonable notice to Executive and an opportunity for Executive, together with counsel (if requested by Executive), to be heard before the Board. A determination of Cause by the Board shall be effective only if agreed upon by a majority of the directors, which shall include at least one director who is not an employee of the Company or its Subsidiaries. 5. Confidential Information. Executive acknowledges that the information, observations and data obtained by him while employed by the Company and its Subsidiaries concerning the business or affairs of the Company or any other Subsidiary ("Confidential Information") are the property of the Company or such Subsidiary. Therefore, Executive agrees that he shall not disclose to any unauthorized person or use for his own purposes any Confidential Information without the prior written consent of the Board, unless and to the extent that the aforementioned matters become generally known to and available for use by the public other than as a result of Executive's acts or omissions. Executive shall deliver to the Company at the termination of the Employment Period, or at any other time the Company may request, all memoranda, notes, plans, records, reports, computer tapes, printouts and software and other documents and data (and copies thereof) relating to the Confidential Information, Work Product (as defined below) or the business of the Company or any Subsidiary which he may then possess or have under his control. 6. Inventions and Patents. Executive acknowledges that all inventions, innovations, improvements, developments, methods, designs, analyses, drawings, reports and all similar or related information (whether or not patentable) which relate to the Company's or any of its Subsidiaries' actual or anticipated business, research and development or existing or future products or services and which are conceived, developed or made by Executive while employed by the Company and its Subsidiaries ("Work Product") belong to the Company or such Subsidiary. Executive shall promptly disclose such Work Product to the Board and perform all actions reasonably requested by the Board (whether during or after the Employment Period) to establish and confirm such ownership (including, without limitation, assignments, consents, powers of attorney and other instruments). - 3 - 7. Non-Compete, Non-Solicitation. (a) In further consideration of the compensation to be paid to Executive hereunder, Executive acknowledges that in the course of his employment with the Company he shall become familiar with the Company's trade secrets and with other Confidential Information concerning the Company and its Subsidiaries and that his services shall be of special, unique and extraordinary value to the Company and its Subsidiaries. Therefore, Executive agrees that, during the Employment Period and for two years thereafter (the "Noncompete Period"), he shall not, without the express written consent of the Company, directly or indirectly own any interest in, manage, control, participate in, consult with, render services for, or in any manner engage in any business competing with the businesses of the Company or its Subsidiaries, as such businesses exist or are in process on the date of the termination of Executive's employment, within any geographical area in which the Company or its Subsidiaries engage or plan to engage in such businesses. Nothing herein shall prohibit Executive from being a passive owner of not more than 2% of the outstanding stock of any class of a corporation which is publicly traded, so long as Executive has no active participation in the business of such corporation. (b) During the Noncompete Period, Executive shall not directly or indirectly through another entity (i) hire any person who was an employee of the Company or any Subsidiary at any time during the three-month period prior to the expiration of the Employment Period or (ii) induce or attempt to induce any customer, supplier, licensee, licensor, franchisee or other business relation of the Company or any Subsidiary to cease doing business with the Company or such Subsidiary, or in any way interfere with the relationship between any such customer, supplier, licensee or business relation and the Company or any Subsidiary (including, without limitation, making any negative statements or communications about the Company or its Subsidiaries) which interference causes material monetary damage to the Company or its Subsidiaries. 8. Enforcement. If, at the time of enforcement of paragraph 5, 6, 7 or 8 of this Agreement, a court holds that the restrictions stated herein are unreasonable under circumstances then existing, the parties hereto agree that the maximum period, scope or geographical area reasonable under such circumstances shall be substituted for the stated period, scope or area. Because Executive's services are unique and because Executive has access to Confidential Information and Work Product, the parties hereto agree that money damages would not be an adequate remedy for any breach of this Agreement. Therefore, in the event a breach or threatened breach of this Agreement, the Company or its successors or assigns may, in addition to other rights and remedies existing in their favor, apply to any court of competent jurisdiction for specific performance and/or injunctive or other relief in order to enforce, or prevent any violations of, the provisions hereof (without posting a bond or other security). In addition, in the event of an alleged breach or violation by Executive of paragraph 7, the Noncompete Period shall be tolled until such breach or violation has been duly cured. Executive agrees that the restrictions contained in paragraph 7 are reasonable. 9. Other Businesses. As long as Executive is employed by the Company or any of its Subsidiaries, Executive agrees that he will not, except with the express written consent of the Board, become engaged in, or render services for, any business other than the business of the Company, any of its Subsidiaries or any corporation or partnership in which the Company or any of its Subsidiaries - 4 - have an equity interest; provided, that Executive may devote a de minimis portion of his time to engaging in, or rendering services for, any such business if such activities do not in any material way interfere with the performance by Executive of his obligations hereunder and such activities do not in any way materially and adversely affect the Company. Executive shall notify the Company prior to engaging in any such activities. Nothing contained in this paragraph 9 shall limit the provisions of paragraph 7 above. 10. Executive's Representations. Executive hereby represents and warrants to the Company that (i) the execution, delivery and performance of this Agreement by Executive do not and shall not conflict with, breach, violate or cause a default under any contract, agreement, instrument, order, judgment or decree to which Executive is a party or by which he is bound, (ii) Executive is not a party to or bound by any employment agreement, noncompete agreement or confidentiality agreement with any other person or entity and (iii) upon the execution and delivery of this Agreement by the Company, this Agreement shall be the valid and binding obligation of Executive, enforceable in accordance with its terms. Executive hereby acknowledges and represents that he fully' understands the terms and conditions contained herein. 11. Survival. Paragraphs 5, 6, and 7 and paragraphs 11 through 19 shall survive and continue in full force in accordance with their terms notwithstanding any termination of the Employment Period. 12. Notices. Any notice provided for in this Agreement shall be in writing and shall be either personally delivered, or mailed by first class mail, return receipt requested, to the recipient at the address below indicated: Notices to Executive: Kevin McCallum 13757 Wingfield Circle Draper, Utah 84020 Notices to the Company: 1-800 CONTACTS, INC. 13751 Wadsworth Park Drive, Suite D-140 Draper, Utah 84020 Attn: Board of Directors with a copy to: Kirkland & Ellis 200 E. Randolph Drive Chicago, Illinois 60601 Attn: Dennis M. Myers - 5 - or such other address or to the attention of such other person as the recipient party shall have specified by prior written notice to the sending party. Any notice under this Agreement shall be deemed to have been given when so delivered or mailed. 13. Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provision or any other jurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. 14. Complete Agreement. This Agreement, those documents expressly referred to herein and other documents of even date herewith embody the complete agreement and understanding among the parties and supersede and preempt any prior understandings, agreements or representations by or among the parties, written or oral, which may have related to the subject matter hereof in any way. 15. No Strict Construction. The language used in this Agreement shall be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction shall be applied against any party. 16. Counterparts. This Agreement may be executed in separate counterparts, each of which is deemed to be an original and all of which taken together constitute one and the same agreement. 17. Successors and Assigns. This Agreement is intended to bind and inure to the benefit of and be enforceable by Executive, the Company and their respective heirs, successors and assigns, except that Executive may not assign his rights or delegate his obligations hereunder without the prior written consent of the Company. 18. Choice of Law. All issues and questions concerning the construction, validity, enforcement and interpretation of this Agreement and the exhibits and schedules hereto shall be governed by, and construed in accordance with, the laws of the State of Utah, without giving effect to any choice of law or conflict of law rules or provisions (whether of the State of Utah or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Utah. - 6 - 19. Amendment and Waiver. The provisions of this Agreement may be amended or waived only with the prior written consent of the Company and Executive, and no course of conduct or failure or delay in enforcing the provisions of this Agreement shall affect the validity, binding effect or enforceability of this Agreement. * * * * * - 7 - IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. 1-800 CONTACTS. INC. By: /s/ Jonathan Coon -------------------------------- Name: Jonathan Coon Its: President /s/ Kevin McCallum ------------------------------------ Kevin McCallum - 8 - EX-10.9 3 0003.txt CHANGE IN TERMS AGREEMENT CHANGE IN TERMS AGREEMENT ========================================================================================================= Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials $10,000,000.00 04-30-2001 9003 C 7420 7057008 11049 - --------------------------------------------------------------------------------------------------------- References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - --------------------------------------------------------------------------------------------------------- Borrower: 1-800 CONTACTS (DELAWARE), INC. also known as Lender: ZIONS FIRST NATIONAL BANK 1-800 CONTACTS, INC. HEAD OFFICE/COMMERCIAL BANKING 66 EAST WADSWORTH PARK DRIVE, 3RD FLOOR 2460 SOUTH 3270 WEST DRAPER, UT 84020 WEST VALLEY CITY, UT 84119 =========================================================================================================
Principal Amount: $10,000,000.00 Date of Agreement: November 22, 2000 FOR VALUABLE CONSIDERATION, Lender and Borrower agree to the following change in Borrower's obligation: DESCRIPTION OF EXISTING INDEBTEDNESS. PROMISSORY NOTE FROM 1-800 CONTACTS (DELAWARE), INC. ALSO KNOW AS 1-800 CONTACTS, INC. TO LENDER DATED SEPTEMBER 17, 1999 IN THE ORIGINAL PRINCIPAL AMOUNT OF $10,000,000.00, WITH A INTEREST RATE OF BASE PLUS .500%. Maturity date of April 30, 2001 DESCRIPTION OF COLLATERAL. COMMERCIAL SECURITY AGREEMENT DATED OCTOBER 29, 1998. DESCRIPTION OF CHANGE IN TERMS. INTEREST RATE TO BE REDUCED FROM PRIME RATE PLUS .50% TO A RATE EQUAL TO PRIME RATE. PROMISE TO PAY. 1-800 CONTACTS (DELAWARE), INC. also known as 1-800 CONTACTS, INC. ("Borrower") promises to pay to ZIONS FIRST NATIONAL BANK ("Lender"), or order, In lawful money of the United States of America, the principal amount of Ten Million & 00/100 Dollars ($10,000,000.00) or so much as may be outstanding, together with Interest on the unpaid outstanding principal balance of each advance. Interest shall be calculated from the date of each advance until repayment of each advance. PAYMENT. Borrower will pay this loan in accordance with the following payment schedule: ALL OTHER TERMS AND CONDITIONS OF THE NOTE REMAIN UNCHANGED. The annual interest rate for this Agreement is computed on a 365/360 basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing. Unless otherwise agreed or required by applicable law, payments will be applied first to any unpaid collection costs and any late charges, then to any unpaid interest, and any remaining amount to principal. VARIABLE INTEREST RATE. The interest rate on this Agreement is subject to change from time to time based on changes in an index which is the ZIONS FIRST NATIONAL BANK PRIME RATE (the "Index"). "PRIME RATE" MEANS AN INDEX WHICH IS DETERMINED DAILY BY THE PUBLISHED COMMERCIAL LOAN VARIABLE RATE INDEX HELD BY ANY TWO OF THE FOLLOWING BANKS: CHASE MANHATTAN BANK, WELLS FARGO BANK N.A., AND BANK OF AMERICA, N.A. IN THE EVENT NO TWO OF THE ABOVE BANKS HAVE THE SAME PUBLISHED RATE, THE BANK HAVING THE MEDIAN RATE WILL ESTABLISH LENDERS' PRIME RATE. IF, FOR ANY REASON BEYOND THE CONTROL OF LENDER, ANY OF THE AFOREMENTIONED BANKS BECOMES UNACCEPTABLE AS A REFERENCE FOR THE PURPOSE OF DETERMINING THE PRIME RATE USED HEREIN, LENDER MAY, FIVE DAYS AFTER POSTING NOTICE IN LENDERS OFFICES, SUBSTITUTE ANOTHER COMPARABLE BANK FOR THE ONE DETERMINED UNACCEPTABLE. AS USED IN THIS PARAGRAPH, "COMPARABLE BANK" SHALL MEAN ONE OF THE TEN LARGEST COMMERCIAL BANKS HEADQUARTERED IN THE UNITED STATES OF AMERICA. THIS DEFINITION OF PRIME RATE IS TO BE STRICTLY INTERPRETED AND IS NOT INTENDED TO SERVE ANY PURPOSE OTHER THAN PROVIDING AN INDEX TO DETERMINE THE VARIABLE INTEREST RATE USED HEREIN IT IS NOT THE LOWEST RATE AT WHICH LENDER MAY MAKE LOANS TO ANY OF ITS CUSTOMERS, EITHER NOW OR IN THE FUTURE.. Lender will tell Borrower the current Index rate upon Borrower's request Borrower understands that Lender may make loans based on other rates as well. The interest rate change will not occur more often than each DAY. The Index currently Is 9.500% per annum. The interest rate to be applied to the unpaid principal balance of this Agreement will be at a rate equal to the Index, resulting In an Initial rate of 9.500% per annum. NOTICE: Under no circumstances will the interest rate on this Agreement be more than the maximum rate allowed by applicable law. PREPAYMENT. Borrower agrees that all loan fees and other prepaid finance charges are earned fully as of the date of the loan and will not be subject to refund upon early payment (whether voluntary or as a result of default), except as otherwise required by law. Except for the foregoing, Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments of accrued unpaid interest. Rather, they will reduce the principal balance due. DEFAULT. Borrower will be in default if any of the following happens: (a) Borrower fails to make any payment when due. (b) Borrower breaks any promise Borrower has made to Lender, or Borrower fails to comply with or to perform when due any other term, obligation, covenant, or condition contained in this Agreement or any agreement related to this Agreement, or in any other agreement or loan Borrower has with Lender. (c) Borrower defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's ability to repay this Note or perform Borrower's obligations under this Note or any of the Related Documents. (d) Any representation or statement made or furnished to Lender by Borrower or on Borrower's behalf is false or misleading in any material respect either now or at the time made or furnished. (e) Borrower becomes insolvent, a receiver is appointed for any part of Borrower's property, Borrower makes an assignment for the benefit of creditors, or any proceeding is commenced either by Borrower or against Borrower under any bankruptcy or insolvency laws. (f) Any creditor tries to take any of Borrower's property on or in which Lender has a lien or security interest. This includes a garnishment of any of Borrower's accounts with Lender. (g) Any guarantor dies or any of the other events described in this default section occurs with respect to any guarantor of this Agreement. (h) A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. (i) Lender in good faith deems itself insecure. If any default, other than a default in payment, is curable and if Borrower has not been given a notice of a breach of the same provision of this Agreement within the preceding twelve (12) months, it may be cured (and no event of default will have occurred) if Borrower, after receiving written notice from Lender demanding cure of such default: (a) cures the default within fifteen (15) days; or (b) if the cure requires more than fifteen (15) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Agreement and all accrued unpaid interest immediately due, without notice, and then Borrower will pay that amount. Upon default, including failure to pay upon final maturity, Lender, at its option, may also, if permitted under applicable law, increase the variable interest rate on this Agreement to 3.000 percentage points over the Index. The interest rate will not exceed the maximum rate permitted by applicable law. Lender may hire or pay someone else to help collect this Agreement if Borrower does not pay. Borrower also will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's reasonable attorneys' fees and Lender's legal expenses whether or not there is a lawsuit, including reasonable attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. If 11-22-2000 CHANGE IN TERMS AGREEMENT Page 2 (Continued) ================================================================================ not prohibited by applicable law, Borrower also will pay any court costs, in addition to all other sums provided by law. This Agreement has been delivered to Lender and accepted by Lender in the State of Utah. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of SALT LAKE county, the State of Utah. Subject to the provisions on arbitration, this Agreement shall be governed by and construed in accordance with the laws of the State of Utah. RIGHT OF SETOFF. Borrower grants to Lender a contractual security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or some other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future, excluding however all IRA and Keogh accounts, and all trust accounts for which the grant of a security interest would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on this Agreement against any and all such accounts. LINE OF CREDIT. This Agreement evidences a revolving tine of credit. Advances under this Agreement may be requested orally by Borrower or by an authorized person. Lender may, but need not, require that all oral requests be confirmed in writing. All communications, instructions, or directions by telephone or otherwise to Lender are to be directed to Lender's office shown above. The following party or parties are authorized to request advances under the line of credit until Lender receives from Borrower at Lender's address shown above written notice of revocation of their authority: JONATHAN C. COON, PRESIDENT AND CEO; JOHN NICHOLS, VICE PRESIDENT; and SCOTT TANNER, CHIEF FINANCIAL OFFICER. Borrower agrees to be liable for all sums either: (a) advanced in accordance with the instructions of an authorized person or (b) credited to any of Borrower's accounts with Lender. The unpaid principal balance owing on this Agreement at any time may be evidenced by endorsements on this Agreement or by Lender's internal records, including daily computer print-outs. Lender will have no obligation to advance funds under this Agreement if: (a) Borrower or any guarantor is in default under the terms of this Agreement or any agreement that Borrower or any guarantor has with Lender, including any agreement made in connection with the signing of this Agreement; (b) Borrower or any guarantor ceases doing business or is insolvent; (C) any guarantor seeks, claims or otherwise attempts to limit, modify or revoke such guarantor's guarantee of this Agreement or any other loan with Lender; (d) Borrower has applied funds provided pursuant to this Agreement for purposes other than those authorized by Lender; or (e) Lender in good faith deems itself insecure under this Agreement or any other agreement between Lender and Borrower. ARBITRATION DISCLOSURES: 1. ARBITRATION IS FINAL AND BINDING ON THE PARTIES AND SUBJECT TO ONLY VERY LIMITED REVIEW BY A COURT. 2. IN ARBITRATION THE PARTIES ARE WAIVING THEIR RIGHT TO LITIGATE IN COURT, INCLUDING THEIR RIGHT TO A JURY TRIAL. 3. DISCOVERY IN ARBITRATION IS MORE LIMITED THAN DISCOVERY IN COURT. 4. ARBITRATORS ARE NOT REQUIRED TO INCLUDE FACTUAL FINDINGS OR LEGAL REASONING IN THEIR AWARDS. THE RIGHT TO APPEAL OR TO SEEK MODIFICATION OF ARBITRATORS' RULINGS IS VERY LIMITED. 5. A PANEL OF ARBITRATORS MIGHT INCLUDE AN ARBITRATOR WHO IS OR WAS AFFILIATED WITH THE BANKING INDUSTRY. 6. IF YOU HAVE QUESTIONS ABOUT ARBITRATION, CONSULT YOUR ATTORNEY OR THE AMERICAN ARBITRATION ASSOCIATION. (a) Any claim or controversy ("Dispute") between or among the parties and their assigns, including but not limited to Disputes arising out of or relating to this agreement, this arbitration provision ("arbitration clause"), or any related agreements or instruments relating hereto or delivered in connection herewith ("Related Documents"), and including but not limited to a Dispute based on or arising from an alleged tort, shall at the request of any party be resolved by binding arbitration in accordance with the applicable arbitration rules of the American Arbitration Association (the "Administrator"). The provisions of this arbitration clause shall survive any termination, amendment, or expiration of this agreement or Related Documents. The provisions of this arbitration clause shall supersede any prior arbitration agreement between or among the parties. If any provision of this arbitration clause should be determined to be unenforceable, all other provisions of this arbitration clause shall remain in full force and effect. (b) The arbitration proceedings shall be conducted in Salt Lake City, Utah, at a place to be determined by the Administrator. The Administrator and the arbitrator(s) shall have the authority to the extent practicable to take any action to require the arbitration proceeding to be completed and the arbitrator(s)' award issued within one hundred fifty (150) days of the filing of the Dispute with the Administrator. The arbitrator(s) shall have the authority to impose sanctions on any party that fails to comply with time periods imposed by the Administrator or the arbitrator(s), including the sanction of summarily dismissing any Dispute or defense with prejudice. The arbitrator(s) shall have the authority to resolve any Dispute regarding the terms of this agreement, this arbitration clause or Related Documents, including any claim or controversy regarding the arbitrability of any Dispute. All limitations periods applicable to any Dispute or defense, whether by statute or agreement, shall apply to any arbitration proceeding hereunder and the arbitrator(s) shall have the authority to decide whether any Dispute or defense is barred by a limitations period and, if so, to summarily enter an award dismissing any Dispute or defense on that basis. The doctrines of compulsory counterclaim, res judicata, and collateral estoppel shall apply to any arbitration proceeding hereunder so that a party must state as a counterclaim in the arbitration proceeding any claim or controversy which arises Out of the transaction or occurrence that is the subject matter of the Dispute. The arbitrator(s) may in the arbitrator(s)' discretion and at the request of any party: (1) consolidate in a single arbitration proceeding any other claim or controversy involving another party that is substantially related to the Dispute where that other party is bound by an arbitration clause with the Lender, such as borrowers, guarantors. sureties, and owners of collateral; (2) consolidate in a single arbitration proceeding any other claim or controversy that is substantially similar to the Dispute; and (3) administer multiple arbitration claims or controversies as class actions in accordance with the provisions of Rule 23 of the Federal Rules of Civil Procedure. (c) The arbitrator(s) shall be selected in accordance with the rules of the Administrator from panels maintained by the Administrator. A single arbitrator shall have expertise in the subject matter of the Dispute. Where three arbitrators conduct an arbitration proceeding, the Dispute shall be decided by a majority vote of the three arbitrators, at least one of whom must have expertise in the subject matter of the Dispute and at least one of whom must be a practicing attorney. The arbitrator(s) shall award to the prevailing party recovery of all costs and fees (including attorneys' fees and costs, arbitration administration fees and costs, and arbitrator(s)' fees). The arbitrator(s), either during the pendency of the arbitration proceeding or as part of the arbitration award, also may grant provisional or ancillary remedies, including but not limited to an award of injunctive relief, foreclosure, sequestration, attachment, replevin, garnishment, or the appointment of a receiver. (d) Judgment upon an arbitration award may be entered in any court having jurisdiction, subject to the following limitation: the arbitration award is binding upon the parties only if the amount does not exceed Four Million Dollars ($4,000,000.00); if the award exceeds that limit, either party may demand the right to a court trial. Such a demand must be filed with the Administrator within thirty (30) days following the date of the arbitration award; if such a demand is not made within that time period, the amount of the arbitration award shall be binding. The computation of the total amount of an arbitration award shall include amounts awarded for attorneys fees and costs, arbitration administration fees and costs, and arbitrator(s)' fees (e) No provision of this arbitration clause. nor the exercise of any rights hereunder, shall limit the right of any party to: (1) judicially or non-judicially foreclose against any real or personal property collateral or other security; (2) exercise self-help remedies, including but not limited to repossession and setoff rights; or (3) obtain from a court having jurisdiction thereover any provisional or ancillary remedies, including but not limited to injunctive relief, foreclosure, sequestration, attachment, replevin, garnishment, or the appointment of a receiver. Such rights can be 11-22-2000 CHANGE IN TERMS AGREEMENT Page 3 (Continued) ================================================================================ exercised at any time, before or during initiation of an arbitration proceeding, except to the extent such action is contrary to the arbitration award. The exercise of such rights shall not constitute a waiver of the right to submit any Dispute to arbitration, and any claim or controversy related to the exercise of such rights shall be a Dispute to be resolved under the provisions of this arbitration clause. Any party may initiate arbitration with the Administrator; however, if any party initiates litigation and another party disputes any allegation in that litigation, the disputing party--upon the request at the initiating party--must file a demand for arbitration with the Administrator and pay the Administrator's filing fee. The parties may serve by mail a notice of an initial motion for an order of arbitration. (f) Notwithstanding the applicability of any other law to this agreement, the arbitration clause, or Related Documents between or among the parties, the Federal Arbitration Act, 9 U.S.C. Section 1 et seq., shall apply to the construction and interpretation of this arbitration clause. CONTINUING VALIDITY. Except as expressly changed by this Agreement, the terms of the original obligation or obligations, including all agreements evidenced or securing the obligation(s), remain unchanged and in full force and effect. Consent by Lender to this Agreement does not waive Lender's right to strict performance of the obligation(s) as changed, nor obligate Lender to make any future change in terms. Nothing in this Agreement will constitute a satisfaction of the obligation(s). This Agreement is a final expression of the agreement between Lender and Borrower and may not be contradicted by evidence of any alleged oral agreement. It is the intention of Lender to retain as liable parties all makers and endorsers of the original obligation(s), including accommodation parties, unless a party is expressly released by Lender in writing. Any maker or endorser, including accommodation makers, will not be released by virtue of this Agreement. If any person who signed the original obligation does not sign this Agreement below, then all persons signing below acknowledge that this Agreement is given conditionally, based on the representation to Lender that the non-signing party consents to the changes and provisions of this Agreement or otherwise will not be released by it. This waiver applies not only to any initial extension, modification or release, but also to all such subsequent actions. PRIOR NOTE. This is a renewal of a Promissory Note from Borrower to Lender dated October 29, 1998 in the original principal amount of $5,000,000.00. MISCELLANEOUS PROVISIONS. Lender may delay or forgo enforcing any of its rights or remedies under this Agreement without losing them. Borrower and any other person who signs, guarantees or endorses this Agreement, to the extent allowed by law, waive presentment, demand for payment, protest and notice of dishonor. Upon any change in the terms of this Agreement, and unless otherwise expressly stated in writing, no party who signs this Agreement, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan, or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. FINAL AGREEMENT. Borrower understands that this Agreement and the related loan documents are the final expression of the agreement between Lender and Borrower and may not be contradicted by evidence of any alleged oral agreement. PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS AGREEMENT, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE AGREEMENT AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE AGREEMENT. BORROWER: 1-800 CONTACTS (DELAWARE), INC. also known as 1-800 CONTACTS, INC. COPY By: /s/ Jonathan Coon ------------------------------------ JONATHAN C. COON, PRESIDENT AND CEO =============================================================================== Variable Rate Line of Credit LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver. 3.29(C) Concentrex 2000 All rights reserved. [UT-D20 CONTACTS.LN C3.OVL] EX-10.12 4 0004.txt FIRST AMENDMENT TO LEASE AGREEMENT FIRST AMENDMENT TO LEASE AGREEMENT This FIRST AMENDMENT TO LEASE AGREEMENT ("Amendment") is entered into as of the 9th day of October, 2000 by and between ProLogis North American Properties Fund I LLC, a Delaware Limited Liability Company (the "Landlord") and 1-800-CONTACTS (the "Tenant"). W I T N E S S E T H: WHEREAS, Landlord and Tenant have entered into a Lease, dated as of the 13th day of October, 1998, pursuant to which Landlord Leased in Tenant certain premises located at 1130 South 3800 West, Unit 300 (such Lease, as heretofore and hereafter modified, being herein referred to as the "Lease"). WHEREAS, Landlord and Tenant desire to extend the Lease on the terms and conditions set forth below: NOW THEREFORE, in consideration of Ten Dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Landlord and Tenant agree as follows: 1. The current premises (the "Premises"), consisting of 34,850 square feet, will be increased by approximately 31,000 square feet (the "Expansion Premises") more commonly known as 1130 South 3800 West, Unit 500, Salt Lake City, Utah. Total square footage of the Premises and Expansion Premises (the "Total Premises") will equal 65,850 square feet. The Expansion Premises are depicted on Exhibit "A" attached hereto. 2. The term for the Expansion Premises will commence on November 1, 2000 and expire on December 31, 2002, and the term for the Existing Premises will be extended with an expiration date of December 31, 2002. 3. The Base Rent for the Expansion Premises will be $9,765.00 per month added in the existing rent of $11,674.75 per month due and payable on the 1st day of each calendar month. 4. The Estimated Basic Operating Costs per month of the Expansion Premises, to be added to the existing monthly Estimated Operating Costs of $2,556.61, areas follows: Property Taxes: $ 328.60 CAM $1,472.50 Insurance $ 102.30 Other $ 372.00 --------- $2,275.40 5 Landlord agrees to furnish or perform at Landlord's sole cost and expense those improvements to the Premises (the "Tenant Improvements") specified below and Landlord shall be under no further obligation to perform any other improvements to the Premises or the Expansion Premises. Landlord, at Landlord's expense, shall penetrate a 16'0" X 16'0" opening in wall connecting the spaces, and construct an additional 8'0" X 8'0" opening as a walkway between the spaces. Landlord shall also construct approximately 1,000 s.f. of office space. Landlord further warrants that all mechanical portions of the Expansion Premises are to be delivered in good operating condition. Lighting specifications of the Expansion Premises are as follows: 15' 30" above finished door. 6. One Renewal Option: (a) Provided that as of the time of the giving of the Extension Notice and the Commencement Date of the Extension Term, (x) Tenant is the Tenant originally named herein or a Tenant affiliate or successor by merger consolidation or transfer of assets as set forth in Paragraph 17 of the Lease, (y) Tenant actually occupies all of the Premises initially demised under this Lease and any space added to the Premises, and (z) no Event of Default exists or would exist but for the passage of time or the giving of notice, or both; then Tenant shall have the right to extend the Lease Term for an additional Term of 2 years (such additional term is hereinafter called the "Extension Term") commencing on the day following the expiration of the Lease term (hereinafter referred to as the "Commencement Date of the Extension Term"). Tenant shall give Landlord notice (hereinafter called the "Extension Notice") of its election to extend the term of the Lease Term at least 7 months, but not more than 12 months prior to the scheduled expiration date of the Lease Term. (b) The Base Rent payable by Tenant to Landlord during the Extension Term shall be the greater of (i) the Base Rent of $21,439.75 and (ii) the then prevailing market rate for comparable space in the Project and comparable buildings in the vicinity of the Project, taking into account the size of the Lease, the length of the renewal term, market escalations and the credit of Tenant. The Base Rent shall not be reduced by reason of any costs or expenses saved by Landlord by reason of Landlord's not having to find a new tenant for such premises (including, without limitation, brokerage commissions, costs of improvements, rent concessions or lost rental income during any vacancy period). In the event Landlord and Tenant fail to reach an agreement on such rental rate and execute the Amendment (defined below) at least 5 months prior to the expiration of the Lease, then Tenant's exercise of the renewal option shall be deemed withdrawn and Lease shall terminate on its original expiration date. (c) The determination of Base Rent does not reduce the Tenant's obligation to pay or reimburse Landlord for operating expenses and other reimbursable items as set forth in the Lease, and Tenant shall reimburse and pay Landlord as set forth in the Lease with respect to such operating expenses and other items with respect to the Premises during the Extension Term without regard to any cap on such expenses set forth in the Lease. (d) Except for the Base Rent as determined above, Tenant's occupancy of the Premises during the Extension Term shall be on the same terms and conditions as are in effect immediately prior to the expiration of the initial Lease Term; provided, however, Tenant shall have no further right to any allowances, credits or abatements or any options to expand, contract, renew or extend the Lease. (e) If Tenant does not give the Extension Notice within the period set forth in paragraph (a) above, Tenant's right to extend the Lease Term shall automatically terminate. Time is of the essence as to the giving of the Extension Notice. (f) Landlord shall have no obligation to refurbish or otherwise improve the Premises for the Extension Terms. The Premises shall be tendered on the Commencement Date of the Extension in "as-is" condition, except as necessary, the re-carpeting of office in the original 34,850 s.f. Premises. (g) If the Lease is extended for the Extension Term, then Landlord shall prepare and Tenant shall execute an amendment to the Lease confirming the extension of the Lease Term and the other provisions applicable thereto (the "Amendment"). (h) If Tenant exercises its right to extend the terms of the Lease for the Extension Term pursuant to this Addendum, the term "Lease Term" as used in the Lease, shall be construed to include, when practicable, the Extension Term, as applicable, except as provided in (d) above. 7. Right of First Offer. (a) "Offered Space" shall mean the adjacent 17,850 sf which is located to the north of the initial Premises, 1130 South 3800 West, Unit 400, in the Crossroads Corporate Center #1, Salt Lake City, Utah. (b) Provided that as of the date of the giving of Landlord's Notice, (x) Tenant in the Tenant originally named herein, (y) Tenant actually occupies all of the Premises originally demised under this Lease and any premises added to the Premises, and (z) no Event of Default or event which but for the passage of time in the giving of notice, or both, would constitute and Event of Default has occurred and is continuing, if at any time during the Lease Term any lease for any portion of the offered space shall expire, then Landlord, before offering such Offered Space to anyone, other than the tenant them occupying such space (or it affiliates), shall offer to Tenant the right to include the Offered Space with the Premises on the same terms and conditions upon which Landlord intends to offer the Offered Space for lease. (c) Such offer shall be made by Landlord to Tenant in a written notice (hereinafter called the "First Offer Notice") which shall designate the space being offered and shall specify the terms which Landlord intends to offer with respect to any such Offered Space. Tenant may accept the offer set forth in the First Offer Notice by delivering to Landlord an unconditional acceptance (hereinafter called "Tenant's Notice") of such offer within five (5) business days after delivery by Landlord of the First Offer Notice to Tenant. Time shall be of the essence with respect to giving of Tenant's Notice. If Tenant does not accept (or fails to timely accept) an offer made by Landlord pursuant to the provisions of this Addendum with respect to the Offered Space designated in the First Offer Notice, Landlord shall be under no further obligation with respect to such space by reason of this Addendum. (d) Tenant must accept all Offered Space offered by Landlord at any one time if it desires to accept any of such Offered Space and may not exercise it right with respect to only part of such space. In addition, if Landlord desires to lease more than just the Offered Space to one tenant. Landlord may offer to Tenant pursuant to the terms hereof all such space which Landlord desires to lease, and Tenant must exercise it rights hereunder with respect to all such space and may not insist on receiving an offer for just the Offered Space. (e) If Tenant at any time declines any Offered Space offered by Landlord, Tenant shall be deemed to have irrevocably waived all further rights under this Addendum, and landlord shall be free to lease the Offered Space to third parties including on terms which may be less favorable to Landlord than those offered to Tenant. 8. Any obligation or liability whatsoever of ProLogis North American Properties Fund I LLC, a Delaware Limited Liability Company, which may arise at any time under the Lease or this Amendment or any obligation or liability which may be incurred by it pursuant to any other instrument, transaction or undertaking contemplated hereby, shall not be personally binding upon, nor shall resort for the enforcement thereof be had to the property of its trustees, directors, shareholders, officers, employees, or agents regardless of whether such obligation or liability is in the nature of contract, tort or otherwise. 9. Insofar as the specific terms and provisions of this Amendment purport to amend or modify or are in conflict with the specific terms, provisions and exhibits of the Lease, the terms and provisions of this Amendment shall govern and control. 10. Landlord and Tenant hereby agree that (a) this Amendment is incorporated into and made a part of the Lease, (b) any and all references to the Lease hereinafter shall include this Amendment, and (c) the Lease and all terms, conditions, provisions and exhibits of the Lease are in full force and effect as of the date hereof, except as expressly modified and amended hereinabove. 11. Tenant warrants that it has had no dealings with any broker or agent in connection with this Amendment other than Grubb & Ellis, and covenants to pay, hold harmless and indemnify Landlord from and against any and all costs, expenses of liability for any compensation, commissions, and charges claimed by any other broker or agent, with respect to this Amendment or the negotiation thereof with whom Tenant had dealings. IN WITNESS WHEREOF, the parties hereto have signed this First Amendment to Lease Agreement as of the day and year first above written. 1-800-CONTACTS PROLOGIS NORTH AMERICAN PROPERTIES FUND I LLC, a Delaware Limited Liability Company by ProLogis Management Incorporated, Manager By: /s/ Kale Carlile By: /s/ Ned K. Anderson --------------------------- -------------------------- Name: Kale Carlile Name: Ned K. Anderson ------------------------ ------------------------- Title: Director of Distribution Title: Managing Director ------------------------ ----------------------------- (Tenant) (Landlord) [ProLogis LOGO] December 12, 2000 Mr. Kale Carlile 1800 CONTACTS 1130 South 3800 West, Suite 300 Salt Lake City, UT 84104 RE: 1130 South 3800 West, Suite 500 Dear Kale: Welcome to our Crossroads Corporate Center #1, Suite 500 in Salt Lake City, Utah. We would like to clarify some of the terms of your lease agreement with ProLogis North American Properties Fund I LLC. Lease Commencement Date: December 10, 2000 Lease Expiration Date: December 31, 2002 December, 00 ------------ Proration --------- Base Rental per month: $9,765.00 $6,930.00 Monthly Estimated Operating Expenses $2,275.40 $1,614.80 TOTALS $12,040.40 $8,544.80 Please forward payment of $8,544.80 as soon as possible for the month of December, 2000 to my attention at our local office. Coupons for 2001 with new estimated monthly charges will be forthcoming under separate cover. Rental payments are due by the 1st of each month. Please make every effort to ensure timely payment in order to avoid possible late fees. We are pleased to welcome you again as a customer in your new space at Crossroads Corporate Center #1 and look forward to continuing to work with you. Please indicate your agreement with the above changes to your lease by signing and returning the enclosed copy of this letter to me. If I can be of service, please do not hesitate to contact me. Sincerely, /s/ Lisa M. Logue ------------------------------ Lisa M. Logue Property Manager Accepted by: /s/ Kale Carlile 12/20/00 --------------------------- Kale L. Carlile DATE 1 800 CONTACTS EX-10.19 5 0005.txt THIRD AMENDMENT TO LEASE THIRD AMENDMENT TO LEASE THIS THIRD AMENDMENT TO LEASE ("3rd Amendment"), dated this 17 day of January, 2001, is entered into by and between DRAPER LAND LIMITED PARTNERSHIP No. 2, a Utah limited partnership ("Landlord"), and 1-800 CONTACTS, INC., a Delaware Corporation ("Tenant"). W I T N E S S E T H: WHEREAS, Landlord and Tenant (then known as l-800-LENS NOW, INC., dba 1-800-CONTACTS, A Utah corporation) entered into a Lease dated November 3, 1997, as amended by the First Amendment to Lease, dated May 25, 1998, and the Second Amendment to Lease, dated August 6, 1998, which are incorporated herein by reference ("Amended Lease"); WHEREAS, the parties hereto desire to amend certain terms and conditions of the Amended Lease as specifically indicated in this Amendment. However, unless specifically amended herein, all terms and conditions of the Amended Lease remain in full force and effect. NOW, THEREFORE, in consideration of the mutual promises, representations and covenants contained herein, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. The recitals contained herein are hereby incorporated by reference. 2. Article 2(a) of Amended Lease shall be amended as follows: The Lease Term for the Original Premises as specified in the Amended Lease which includes approximately 23,379 Rentable square feet, highlighted on Exhibit A-I attached hereto, shall be extended to end on February 1, 2006. The location of the Original Premises and related Building is commonly known as: 66 E. Wadsworth Park Dr., Bldg. B, Suite #300, Draper, UT 84020 (the "Building"). The lease term for the Expansion Space as specified in the Second Amendment to Lease which includes approximately 8,380 Rentable square feet, highlighted on Exhibit A-2 attached hereto, shall be extended to end on February 1, 2006. The location of the Expansion Space and related Building is commonly known as: 66 E. Wadsworth Park Dr., Bldg. B, Suite #201, Draper, UT 84020 (the "Building"), This thereby establishes a co-terminus lease termination date of February 1, 2006, for the combined 31,759 Rentable square feet of Original Premises plus expansion space. 3. Article 2(b) of Amended Lease concerning the extension option is not affected by this extension of Lease Term. 1 IN WITNESS WHEREOF, the parties have executed this Third Amendment to Lease dated the day and year first above written. TENANT, LANDLORD, 1-800-Contacts, Inc. DRAPER LAND LIMITED PARTNERSHIP No. 2 By /s/ Scott [ILLEGIBLE] By: /s/ Kip Wadsworth --------------------- ------------------ Kip Wadsworth 2 EX-10.20 6 0006.txt FOURTH AMENDMENT TO LEASE FOURTH AMENDMENT TO LEASE THIS FOURTH AMENDMENT TO LEASE (4th Amendment"), dated this 17 day of January, 2001, is entered into by and between DRAPER LAND LIMITED PARTNERSHIP No. 2, a Utah limited partnership ("Landlord"), and 1-800 CONTACTS, INC., a Delaware Corporation ("Tenant"). W I T N E S S E T H: Whereas, Landlord and Tenant (then known as 1-800-LENS NOW, INC., dba 1-800-CONTACTS, A Utah corporation) entered into a Lease dated November 3, 1997, as amended by the First Amendment to Lease. dated May 25, 1998, the Second Amendment to Lease, dated August 6, 1998, and the Third Amendment to Lease. dated January 17, 2001, which are incorporated herein by reference ("Amended Lease"); Whereas, the parties hereto desire to amend certain terms and conditions of the Amended Lease as specifically indicated in this Amendment. However, unless specifically amended herein, all terms and conditions of the Amended Lease remain in full force and effect. NOW, THEREFORE, in consideration of the mutual promises, representations and covenants contained herein, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. The recitals contained herein are hereby incorporated by reference. 2. Article 1 (a) of Amended Lease shall he amended to increase the premises by the following: (a) 2nd Expansion Space. Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, for the term and subject to the terms and conditions hereinafter set forth, to each and all of which Landlord and Tenant hereby mutually agree, those certain premises, highlighted on Exhibit A-I attached hereto, which include approximately 2,281 Rentable square feet of office space ("2nd Expansion Space"). The location of the 2nd Expansion Space and related Building is commonly known as: 66 E. Wadsworth Park Dr., Bldg. B, Suite #203, Draper, UT 84020 (the "Building"). (b) Lease term for 2nd Expansion Space. The Lease Term for the 2nd Expansion Space shall be 67 months commencing October 1, 2000, and ending on April 30, 2006. Options to extend the lease for the 2nd Expansion Space shall be the same as for the Original Premises as specified in the Lease. (c) Rent for 2nd Expansion Space. The Base Rent, paid on a monthly basis, under the Amended Lease is $17.70 per Rentable square foot per year. Base rent shall be 1 increased by $.60 per year per Rentable square foot on May 25th consistent with the annual increase date in the Lease. 3. Additional parking stalls. Tenant will have use of an additional 5 non-reserved parking stalls for each 1,000 Rentable square foot of 2nd Expansion Space. 4. Security Deposit. No additional security deposit is required. 5. Miscellaneous. Except as expressly modified herein, the Lease, First Amendment to Lease, Second Amendment to Lease, and Third Amendment to Lease, remain in full force and effect between the parties in accordance with their original terms. IN WITNESS WHEREOF, the parties have executed this Fourth Amendment to Lease dated the day and year first above written. TENANT, LANDLORD, 1-800-Contacts, Inc. DRAPER LAND LIMITED PARTNERSHIP No. 2 By: /s/ Scott [ILLEGIBLE] By: /s/ Kip Wadsworth -------------------- ----------------- Kip Wadsworth 2 EX-10.21 7 0007.txt FIFTH AMENDMENT TO LEASE FIFTH AMENDMENT TO LEASE THIS FIFTH AMENDMENT TO LEASE ("5th Amendment"), dated this 17 day of January, 2001, is entered into by and between DRAPER LAND LIMITED PARTNERSHIP No. 2, a Utah limited partnership ("Landlord"), and 1-800 CONTACTS, INC., a Delaware Corporation ("Tenant"). W I T N E S S E T H: Whereas, Landlord and Tenant (then known as 1-800-LENS NOW, INC., dba 1-800-CONTACTS, A Utah corporation) entered into a Lease dated November 3, 1997, as amended by the First Amendment to Lease, dated May 25, 1998, the Second Amendment to Lease, dated August 6, 1998, the Third Amendment to Lease, dated January 17, 2001, and the Fourth Amendment to Lease dated January 17, 2001, which are incorporated herein by reference ("Amended Lease"); Whereas, the parties hereto desire to amend certain terms and conditions of the Amended Lease as specifically indicated in this Amendment. However, unless specifically amended herein, all terms and conditions of the Amended Lease remain in full force and effect. NOW, THEREFORE, in consideration of the mutual promises, representations and covenants contained herein, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. The recitals contained herein are hereby incorporated by reference. 2. Article 1 (a) of Amended Lease shall be amended to increase the premises by the following: (a) 3rd Expansion Space. Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, for the term and subject to the terms and conditions hereinafter set forth, to each and all of which Landlord and Tenant hereby mutually agree, those certain premises, highlighted on Exhibit A-I attached hereto, which include approximately 2,409 Rentable square feet of office space ("3rd Expansion Space") The location of the 3rd Expansion Space and related Building is commonly known as: 66 E. Wadsworth Park Dr., Bldg. B, Suite #103, Draper, UT 84020 (the "Building"). (b) Lease term for 3rd Expansion Space. The Lease Term for the 3rd Expansion Space shall be 65 months commencing December 1, 2000, and ending on April 30, 2006. Options to extend the lease for the 3rd Expansion Space shall be the same as for the Original Premises as specified in the Lease. (c) Rent for 3rd Expansion Space. The Base Rent, paid on a monthly basis, under the Amended Lease is $17.70 per year per per rentable square foot. Base rent shall be 1 increased by $.60 per year per Rentable square foot on May 25th consistent with the annual increase date in the Lease. 3. Additional parking stalls. Tenant will have use of an additional 5 non-reserved parking stalls for each 1,000 Rentable square foot of 3rd Expansion Space. 4. Security Deposit. No additional security deposit is required. 5. Miscellaneous. Except as expressly modified herein, the Lease, First Amendment to Lease, Second Amendment to Lease, Third Amendment to Lease, and Fourth Amendment to Lease, remain in full force and effect between the parties in accordance with their original terms. IN WITNESS WHEREOF, the parties have executed this Fifth Amendment to Lease dated the day and year first above written. TENANT, LANDLORD, 1-800-Contacts, Inc. DRAPER LAND LIMITED PARTNERSHIP No. 2 By: /s/ Scott [ILLEGIBLE] By: /s/ Kip Wadsworth -------------------- ----------------- Kip Wadsworth 2 EX-10.22 8 0008.txt SIXTH AMENDMENT TO LEASE SIXTH AMENDMENT TO LEASE THIS SIXTH AMENDMENT TO LEASE ("6th Amendment"), dated this 17 day of January, 2001, is entered into by and between DRAPER LAND LIMITED PARTNERSHIP No. 2, a Utah limited partnership ("Landlord"), and 1-800 CONTACTS, INC., a Delaware Corporation ("Tenant"). W I T N E S S E T H: Whereas, Landlord and Tenant (then known as 1-800-LENS NOW, INC., dba 1- 800-CONTACTS, A Utah corporation) entered into a Lease dated November 3, 1997, as amended by the First Amendment to Lease, dated May 25, 1998, the Second Amendment to Lease, dated August 6, 1998, the Third Amendment to Lease, dated January 17, 2001, the Fourth Amendment to Lease dated January 17, 2001, and the Fifth Amendment to Lease dated January 17, 2001, which are incorporated herein by reference ("Amended Lease"); Whereas, the parties hereto desire to amend certain terms and conditions of the Amended Lease as specifically indicated in this Amendment. However, unless specifically amended herein, all terms and conditions of the Amended Lease remain in full force and effect. NOW, THEREFORE, in consideration of the mutual promises, representations and covenants contained herein, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. The recitals contained herein are hereby incorporated by reference. 2. Article 1 (a) of Amended Lease shall be amended to increase the premises by the following: (a) 4th Expansion Space. Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, for the term and subject to the terms and conditions hereinafter set forth, to each and all of which Landlord and Tenant hereby mutually agree, those certain premises, highlighted on Exhibit A-1 attached hereto, which include approximately 2,602 Rentable square feet of office space ("4th Expansion Space"). The location of the 4th Expansion Space and related Building is commonly known as: 66 E. Wadsworth Park Dr., Bldg. B, Suite, 101, Draper, UT 84020 (the "Building"). (b) Lease term for 4th Expansion Space. The Lease Term for the 4th Expansion Space shall be 64 months commencing January 1, 2001, and ending on April 30, 2006. Options to extend the lease for the 4th Expansion Space shall be the same as for the Original Premises as specified in the Lease. 1 (c) Rent for 4th Expansion Space. The Base Rent is $17.70 per year per per rentable square foot. Base rent shall be increased by $.60 per year per rentable square foot on May 25th consistent with the annual increase date in the Lease. 3. Additional parking stalls. Tenant will have use of an additional 5 non-reserved parking stalls for each 1,000 rentable square feet of 4th Expansion Space. 4. Security Deposit. No additional security deposit is required. 5. Miscellaneous. Except as expressly modified herein, the Lease, First Amendment to Lease, Second Amendment to Lease, Third Amendment to Lease, Fourth Amendment to Lease, and Fifth Amendment to Lease, remain in full force and effect between the parties in accordance with their original terms. IN WITNESS WHEREOF, the parties have executed this Sixth Amendment to Lease dated the day and year first above written. TENANT, LANDLORD, 1-800-Contacts, Inc. DRAPER LAND LIMITED PARTNERSHIP No. 2 By: /s/ Scott [ILLEGIBLE] By: /s/ Kip Wadsworth -------------------- ------------------------------------ Kip Wadsworth 2 EX-21.1 9 0009.txt SUBSIDIARIES OF THE REGISTRANT Exhibit 21.1 SUBSIDIARIES OF 1-800 CONTACTS, INC. The following is a list of the subsidiaries of 1-800 CONTACTS, INC., a Delaware corporation. The common stock of all the corporations listed below is wholly owned by 1-800 CONTACTS, INC. Name of Corporation State / Country of Incorporation - ------------------------ -------------------------------- 1-800 CONTACTS Japan, KK Japan CL I, Inc. Utah CL II, Inc. Utah CL III, Inc. Utah 1-800 CONTACTS, INC. is also the sole member of CL4, L.L.C., a Utah limited liability company. EX-23.1 10 0010.txt CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report in this Form 10-K, into the Company's previously filed Registration Statement on Form S-8, File No. 333-61205. ARTHUR ANDERSEN LLP Salt Lake City, Utah March 28, 2001 -----END PRIVACY-ENHANCED MESSAGE-----