DRAPER, Utah, Nov. 8 /PRNewswire-FirstCall/ -- 1-800 CONTACTS, INC.
(Nasdaq: CTAC), today reported results for its third quarter ended October 1,
2005.
(Logo: http://www.newscom.com/cgi-bin/prnh/20040107/LACONTACTSLOGO)
Net sales for the third quarter ended October 1, 2005 were $60.9 million,
compared to $56.9 million for the comparable quarter of the prior year, a 7%
increase. For the third quarter of fiscal 2005, the Company reported a net
loss of $(0.6) million, or $(0.04) per diluted common share, compared to net
income of $1.4 million, or $0.10 per diluted common share, for the third
quarter of fiscal 2004.
Net sales and operating income for the Company's US retail business for
the third quarter of fiscal 2005 were $55.8 million and $3.4 million,
respectively, compared to net sales of $55.0 million and operating income of
$5.2 million for the third quarter of fiscal 2004. Net sales and operating
loss for ClearLab, the Company's international manufacturing business, for the
third quarter of fiscal 2005 were $6.0 million and $(1.4) million,
respectively, compared to net sales of $1.9 million and an operating loss of
$(2.1) million for the third quarter of fiscal 2004. ClearLab's results for
the third quarter of fiscal 2005 include $1.0 million in license fees from the
Company's Japanese license agreement.
The Company's gross margin decreased to 38.0% for the third quarter of
fiscal 2005 from 38.7% in the third quarter of fiscal 2004. The gross margin
for the US retail business decreased to 39.3% for the third quarter of fiscal
2005 from 40.5% in the third quarter of fiscal 2004. The Company expects US
retail gross margin for the fourth quarter of fiscal 2005 to be consistent
with the gross margin for the third quarter of fiscal 2005.
Advertising expenses for the third quarter of fiscal 2005 were
$6.6 million, or 10.9% of net sales, compared to $6.5 million, or 11.5% of net
sales, for the comparable quarter of the prior year. Legal and professional
expenses for the third quarter of fiscal 2005 were $1.2 million compared to
$1.0 million for the third quarter of the prior year.
Research and development spending as a percentage of net sales was 0.7%
for the third quarter of fiscal 2005 down from 1.0% for the third quarter of
fiscal 2004. Other selling, general and administrative expenses as a
percentage of net sales increased to 22.2% for the third quarter of fiscal
2005 from 19.0% for the third quarter of fiscal 2004. For the US retail
business, during the third quarter of fiscal 2005, other selling, general and
administrative expenses as a percentage of net sales also increased to 19.7%
from 17.6% in the third quarter of fiscal 2004. Other expense for the fiscal
2005 periods increased principally because of unrealized foreign exchange
transaction losses related primarily to intercompany loans to ClearLab.
Fourth Quarter and Fiscal 2005 Outlook for US Retail
For the fourth quarter of fiscal 2005, the Company expects US retail net
sales of approximately $50 million to $51 million, with operating income of
approximately $3.0 million. For fiscal 2005, the Company expects to achieve
US retail net sales of approximately $220 million and US retail operating
income of approximately $15 million. The Company expects advertising expenses
of approximately $25 million for fiscal 2005.
Fourth Quarter and Fiscal 2005 Outlook for ClearLab
The Company expects ClearLab to achieve revenue of approximately
$6.0 million and an operating loss of approximately $(0.5) million for the
fourth quarter of fiscal 2005. The Company expects fiscal 2005 revenues for
ClearLab of approximately $21 million and an operating loss of approximately
$(5.9) million for the year.
Outlook
Jonathan Coon, Chief Executive Officer, commented, "Needless to say, these
operating results are disappointing. Our sales have been softer than
anticipated. In addition to lost sales resulting from a disruption to our
website when we upgraded to a new version, we believe that two external
factors have impacted our ability to acquire and retain customers -- the
growing problem of 'doctors only' lenses and the prescription verification
practices of another online seller. The impact of these external factors is
difficult for us to quantify.
"We thought a legislative resolution to 'doctors only' lenses was pending.
Unfortunately, the effort to allow all 35 million Americans who wear contacts
to separate the purchase of lenses from the eye exam is not yet over. The US
Senate included in an appropriations bill language that would have closed the
'doctors only' lenses loophole in the Fairness to Contact Lens Consumers Act
(FCLCA) by codifying the consent decrees reached by the attorneys general.
This legislation would have made the terms of the attorneys general
settlements, which already apply to 80% of all lenses sold, permanent and
extended the same terms to all manufacturers. Although this language was in
the version of the bill passed by the full senate in September, it was not in
the final version of the bill passed by both houses at the end of October.
"This setback has delayed a resolution to this practice while at the same
time 'doctors only' lenses are taking an ever increasing toll on consumers and
our business each day that the practice is allowed to continue. The
manufacturer of the most popular 'doctors only' lenses announced that sales of
their restricted lenses grew 36% in their second quarter and 42% in their
third quarter. This problem is growing at an accelerating rate. We have
talked for more than a year about the impact of 'doctors only' lenses on our
business. We are currently turning away thousands of customers each week who
want to order lenses which we cannot obtain -- lenses which are only sold to
eye care providers and retailers affiliated with an eye care provider.
"For anyone new to our business, it is important to understand the history
of this problem to appreciate the current situation. The primary threat to
the very existence of our business has always been that, unlike most other
health care providers, eye doctors are permitted in all 50 states to sell the
products that they prescribe and profit from filling their own prescriptions.
"This conflict of interest has produced a series of anti-competitive and
anti-consumer behavior -- some of which resulted in litigation by 32 state
attorneys general against the three largest (at the time) contact lens
manufacturers, the American Optometric Association (AOA), and some individual
eye care providers (ECPs). These lawsuits alleged that the AOA, ECPs, and
manufacturers had conspired together to prevent "alternative channel"
retailers from competing with eye doctors for the sale of contact lenses. All
of these lawsuits were eventually settled, and all three manufacturers agreed
to sell to alternative channels (retailers not affiliated with an ECP).
"Even after the attorneys general lawsuits were settled and the major
manufacturers began selling directly to alternative channels including our
company, there were still two primary threats to our ability to acquire and
retain customers. First, some eye doctors, in their dual roles as both
prescriber and retailer, refused to release or verify prescriptions in an
effort to tie the sale of products to the eye exam. Second, some online
sellers did no prescription verification while 1-800 CONTACTS maintained
strict verification systems.
"The Fairness to Contact Lens Consumers Act (FCLCA), enacted in December
of 2003, sought to deal with both of these issues and create a fair and level
playing field with clear rules for both sides -- or at least as fair and level
a playing field as can be created when eye doctors sell what they prescribe.
The FCLCA struck the right compromise between some eye doctors, who refused to
release prescriptions in an effort to maximize their revenue by tying the sale
of lenses to the exam, and some online sellers, who tried to maximize their
revenue by shipping lenses without verifying prescriptions. The FCLCA
requires eye doctors to release and verify prescriptions and puts clear
requirements on non-ECP sellers to verify prescriptions, wait eight business
hours for prescribers to respond, and cancel orders if the prescriber informs
the seller that the prescription is invalid.
"The FCLCA has the potential to work for eye doctors, consumers, and the
industry as a whole. However, that potential is being threatened by an effort
by some in the industry to return to the pre-FCLCA days of ECPs tying sales to
exams and online sellers making sales without verifying prescriptions."
The Company has published a preliminary review of the three largest online
sellers' compliance with the prescription verification requirements of the
FCLCA on its website at http://www.1800contacts.com/compliance. This review includes
a description of a letter the Company recently received from FTC regarding the
Company's own compliance with the FCLCA as well as its reply in which the
Company summarizes a thorough review of its systems. Although our review
showed broad compliance with the FCLCA verification requirements by 1-800
CONTACTS and the second largest online seller, Vision Direct, the study
revealed what appears to be a pattern and practice of non-compliance by the
third largest online seller, Coastal Contacts.
Joe Zeidner, 1-800 CONTACTS' general counsel, stated, "We acknowledge in
preparing and publishing this review that we are an interested party; however,
we were compelled to publish the results of this review for two reasons.
First, the actions detailed in this review are negatively impacting our
ability to acquire and retain customers. Second, as the industry leader, we
are often criticized for the actions of others. Mistakes can happen and no
system can ever be perfect. However, at least during this recent testing
period, it appears that Coastal Contacts maintained a pattern and practice
that was inconsistent with the prescription verification requirements of the
FCLCA and engaged in trade practices that misled consumers."
Shipping lenses without verifying prescriptions is already covered by the
FCLCA with fines of up to $11,000 per occurrence for each violation. Shipping
lenses without verifying prescriptions is already illegal.
Eye doctors tying sales to the exam by prescribing 'doctors only' lenses
is not prohibited by current FCLCA language and threatens to undermine the
benefits that the FCLCA sought to provide to the 35 million Americans who wear
contact lenses.
There are four key factors that define the contact lens market:
1. Contact lenses are medical devices which require a prescription for
purchase.
2. Eye doctors are permitted to sell what they prescribe and profit
directly from filling their own prescriptions.
3. Contact lens prescriptions are brand specific. A consumer may not
choose a different lens after the prescription is issued unless
authorized by the prescriber. In the case of a private label lens
sold under many different brand names, the FCLCA allows for
substitution of another brand of the same lens made by that same
manufacturer.
4. Manufacturers not subject to the attorneys general consent decrees are
free to exploit the conflict of interest of the eye doctor's dual role
as prescriber and retailer. Manufacturers can and do entice eye
doctors to prescribe their lenses by promising eye doctors less
competition and higher profits. Manufacturers do this by agreeing to
restrict distribution of 'doctors only' lenses only to eye doctors and
affiliated retailers.
The Company believes that this combination of factors provides a loophole
which allows some eye doctors to avoid the competition intended by the FCLCA.
The mandatory prescription release requirement of the FCLCA was intended to
achieve a simple purpose -- allow the consumer to separate the purchase of
lenses from the eye exam so she can purchase lenses from wherever she chooses.
This principle was endorsed by the AOA. The AOA said in a written statement,
"The AOA has made it crystal clear that consumers should be able to purchase
replacement contact lenses from whatever source they wish."
Jonathan Coon continued, "The effect on a consumer trying to use a
'doctors only' prescription for purchase from a non-ECP seller is the same as
if the prescription had never been released. Withholding the prescription is
a violation of the FCLCA. Writing the prescription for lenses which cannot be
purchased from non-ECPs is not. Eye doctors can comply with the letter of the
law, but avoid its intended effect -- the very definition of a loophole.
"Nearly one in five lenses on the market is already marketed as 'doctors
only' and sold only to ECPs and ECP affiliated retailers. Although in the
past we have been able to obtain most of these lenses through indirect
sources, the number of lenses we cannot obtain increased significantly at the
beginning of this year. The two leading manufacturers of these lenses merged
at the end of last year and stepped up their efforts to cut off our suppliers
-- and make good on their well publicized promises to eliminate competition
for their ECP customers."
These and other companies have produced trade ads, directed to ECPs, which
contain the following explicit statements:
"You'll make more money ... since ProClear Compatibles are only
available through your practice, you'll get what you're looking for;
increased patient loyalty and increased profitability."
"As the only major manufacturer that does not sell to non-professional
Internet and mail order resellers, we're on red alert for market
predators who attempt to divert our lenses."
The largest manufacturer of "doctors only" lenses paid for a 16 page
insert in a leading trade magazine which detailed the reason for "doctors
only" lenses and how they work -- complete with photos and quotes from doctors
explaining why they want "doctors only" lenses. Statements included:
"Outside competition like 1-800 CONTACTS and other Internet providers
are gradually siphoning our patients away. We should be more
aggressive as a profession in putting up barriers against that ... "
" ... I think originally we were fitting lenses like those from CIBA
and Bausch and Lomb, and we would get calls from patients and
1-800 CONTACTS asking us for their contact lens prescriptions. I
wanted to use another strategy to prevent that from happening."
And in the final section entitled "Alternate Channels of Lens
Distribution," an eye doctor is quoted as saying "Obviously, if they
do not have access to the Hydrogenics lens, and I'm hoping that they
do not have access to it, then that is definitely a determining factor
in which lens I'm going to reach for."
This same manufacturer produced a bar graph in another ad which
illustrates the benefit to ECPs of "doctors only" lenses. This manufacturer
claims that refills for lenses made by B&L, CIBA, and J&J (the three
manufacturers subject to the attorneys general consent decrees that sell to
alternative channels) are only sold by the prescriber 79%, 77%, and 65% of the
time, respectively -- while refills for this manufacturer's "doctors only"
lenses are sold by the eye doctor 95% of the time.
Jonathan Coon continued, "We are sharing this level of detail in a press
release for two reasons -- first, so that others can appreciate just how
patently offensive these marketing tactics are and just how blatant this
practice has become. Second, so our shareholders understand what we must do
next.
"The attorneys general consent decrees with J&J, CIBA, and B&L expire in
October of 2006. Our separate settlement agreement with J&J does not expire
until April of 2007. We have been told verbally by some manufacturers that
they intend to continue selling to 1-800 CONTACTS after their settlement
agreements expire. However, we believe there is a risk that continued growth
of 'doctors only' lenses could compel one or more of these manufacturers to
switch back to a 'doctors only' distribution strategy for all or some of their
lenses.
"Addressing the threat of 'doctors only' lenses must be our top priority.
With this in mind, we plan to do what we did when we dealt with the last
threat of this magnitude. We will assume a more defensive posture and make
the resolution of this issue the top priority for every member of our team.
As we did in the past, we plan to reduce our advertising spending by $10 to
$12 million in 2006. We plan to use the proceeds from this reduction to fund
initiatives to accomplish this goal and to pay down debt.
"Although these defensive actions may produce increased earnings in the
short term, cutting advertising by this magnitude is not a long term strategy.
The combination of turning away customers when their 'doctors only' lenses
cannot be obtained and a reduction in advertising will almost certainly result
in lower sales in 2006 than we record in 2005. In addition, other
initiatives, including launching a national store network, will be on hold
until this threat has been addressed. We have signed on a few additional
partners recently and will proceed with these market tests, but cannot launch
a national network until we can guarantee our ability to service our partners'
customers.
"Despite the difficulty of the current situation and the urgency of the
need to address this threat, we expect this issue, like every other issue
which has threatened the 35 million Americans who wear contact lenses, to be
decided in favor of the consumer. We believe that Congress meant to provide
the benefits of the Fairness to Contact Lens Consumers Act to all 35 million
contact lens wearers -- the right to receive their prescription and separate
purchase from exam. The effect on a consumer trying to fill an order from an
online seller for a 'doctors only' lens is the same as if her prescription had
never been released.
"We don't know which of the four factors (mentioned above) that currently
allow sales to be tied to exams will be changed. We believe manufacturers
should be prohibited from enticing prescribers with promises of increased
profits from 'doctors only' lenses. We believe the right solution is to
codify the attorneys general settlements, which already apply to 80% of the
lenses sold and have been market tested for four years. We believe these
settlements should be made permanent and applied to all manufacturers. Before
this is decided, we believe all of these factors will be evaluated --
including the unique right of eye doctors to sell what they prescribe, the
requirement that contact lenses be sold as medical devices, and the brand
specific nature of contact lens prescriptions."
About 1-800 CONTACTS, INC.
1-800 CONTACTS offers consumers an attractive alternative for obtaining
replacement contact lenses in terms of convenience, price and speed of
delivery. Through its easy-to-remember, toll-free telephone number, "1-800
CONTACTS" (1-800-266-8228), and its Internet web site, http://www.contacts.com, the
Company sells almost all of the popular brands of contact lenses. 1-800
CONTACTS offers products at competitive prices, while delivering a high level
of customer service.
ClearLab develops and manufactures a wide range of disposable contact lens
products and distributes these lenses in international markets. More
information about ClearLab can be found at its website, http://www.clearlab.com.
This news release contains forward-looking statements about the Company's
future business prospects. These statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
set forth in or implied by such forward-looking statements. Factors that may
cause future results to differ materially from the Company's current
expectations include, among others: general economic conditions, the health of
the contact lens industry, inventory acquisition and management, manufacturing
operations, governmental regulations, integrations and growth of the Company's
acquisitions into its business, exchange rate fluctuations, advertising
spending and effectiveness, the length of time required for completion of the
Company's obligations under the Japanese license agreement, the ability to
complete the milestones under the Japanese license agreement, the amount of
license fees and royalties that will ultimately be received under the Japanese
license agreement, unanticipated costs and expected benefits associated with
the Japanese license agreement and the Company's supply agreements and related
arrangements, development of a nationwide retail optical store network,
research and development initiatives, prescription verification requirements
of The Fairness to Contact Lens Consumers Act, and other regulatory
considerations. Information on the Company's websites, other than the
information specifically referenced in this press release, shall not be deemed
to be part of this press release.
1-800 CONTACTS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS INFORMATION
(in thousands, except per share amounts)
(unaudited)
Quarter Ended Three Quarters Ended
October 2, October 1, October 2, October 1,
2004 2005 2004 2005
NET SALES $56,893 $60,858 $157,713 $182,506
COST OF GOODS SOLD 34,889 37,706 97,140 113,178
Gross profit 22,004 23,152 60,573 69,328
SELLING, GENERAL &
ADMINISTRATIVE EXPENSES:
Advertising 6,533 6,606 22,572 20,264
Legal and professional 1,026 1,210 4,207 3,400
Research and development 567 426 1,902 2,292
Purchased in-process
research and development -- -- 83 --
Other selling, general
& administrative 10,789 13,538 31,437 37,359
Total selling, general
& administrative
expenses 18,915 21,780 60,201 63,315
INCOME FROM OPERATIONS 3,089 1,372 372 6,013
OTHER EXPENSE, net (216) (755) (1,271) (2,562)
INCOME (LOSS) BEFORE
PROVISION FOR INCOME
TAXES 2,873 617 (899) 3,451
PROVISION FOR INCOME TAXES (1,520) (1,191) (1,102) (3,801)
NET INCOME (LOSS) $1,353 $(574) $(2,001) $(350)
PER SHARE INFORMATION:
Basic and diluted net
income (loss) per
common share $0.10 $(0.04) $(0.15) $(0.03)
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES
OUTSTANDING:
Basic 13,287 13,329 13,254 13,315
Diluted 13,373 13,329 13,254 13,315
OTHER DATA:
Depreciation $1,076 $1,235 $2,955 $3,405
Amortization 945 1,046 2,675 3,167
Total depreciation
and amortization $2,021 $2,281 $5,630 $6,572
Depreciation and
amortization included in
the following captions:
Cost of goods sold $711 $797 $1,833 $2,200
Research and development 23 32 61 85
Other selling, general &
administrative 1,287 1,452 3,736 4,287
Total depreciation
and amortization $2,021 $2,281 $5,630 $6,572
SEGMENT INFORMATION:
Quarter Ended
October 2, 2004
U.S. International Eliminations Total
Net sales $54,966 $1,927 $-- $56,893
Gross profit (loss) 22,235 (231) -- 22,004
Research and development -- 567 -- 567
Other selling, general &
administrative 9,701 1,088 -- 10,789
Income (loss) from
operations 5,179 (2,090) -- 3,089
Quarter Ended
October 1, 2005
U.S. International Eliminations Total
Net sales $55,791 $5,984 $(917) $60,858
Gross profit (loss) 21,928 1,841 (617) 23,152
Research and development -- 426 -- 426
Other selling, general &
administrative 10,998 2,540 -- 13,538
Income (loss) from
operations 3,367 (1,378) (617) 1,372
Three Quarters Ended
October 2, 2004
U.S. International Eliminations Total
Net sales $153,159 $4,554 $-- $157,713
Gross profit (loss) 60,990 (417) -- 60,573
Research and development 536 1,366 -- 1,902
Purchased in-process
research and development -- 83 -- 83
Other selling, general &
administrative 28,276 3,161 -- 31,437
Income (loss) from
operations 5,865 (5,493) -- 372
Three Quarters Ended
October 1, 2005
U.S. International Eliminations Total
Net sales $168,924 $14,873 $(1,291) $182,506
Gross profit (loss) 66,972 3,147 (791) 69,328
Research and development -- 2,292 -- 2,292
Purchased in-process
research and development -- -- -- --
Other selling, general &
administrative 31,870 5,489 -- 37,359
Income (loss) from
operations 12,159 (5,355) (791) 6,013
1-800 CONTACTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET INFORMATION
(in thousands)
(unaudited)
ASSETS
January 1, October 1,
2005 2005
CURRENT ASSETS:
Cash $3,105 $226
Accounts receivable, net 3,178 4,247
Inventories, net 22,206 27,963
Deferred income taxes 1,328 1,402
Other current assets 3,944 4,624
Total current assets 33,761 38,462
PROPERTY, PLANT AND EQUIPMENT, net 20,618 25,173
DEFERRED INCOME TAXES 720 908
GOODWILL 34,320 35,223
DEFINITE-LIVED INTANGIBLE ASSETS, net 17,897 14,864
OTHER ASSETS 1,669 3,398
Total assets $108,985 $118,028
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $1,632 $1,603
Current portion of capital lease
obligations 47 43
Accounts payable and accrued
liabilities 22,125 29,658
Total current liabilities 23,804 31,304
LONG-TERM LIABILITIES:
Line of credit 14,404 19,449
Long-term debt, net of current portion 8,170 6,742
Capital lease obligations, net of
current portion 98 60
Deferred income tax liabilities 1,458 188
Other long-term liabilities 2,547 736
Total long-term liabilities 26,677 27,175
STOCKHOLDERS' EQUITY 58,504 59,549
Total liabilities and
stockholders' equity $108,985 $118,028
SOURCE 1-800 CONTACTS, INC.
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Related links:
http://www.contacts.com
http://www.1800contacts.com/compliance
http://www.clearlab.com
Photo Notes:http://www.newscom.com/cgi-bin/prnh/20040107/LACONTACTSLOGO
AP Archive: http://photoarchive.ap.org
PRN Photo Desk, photodesk@prnewswire.com
CONTACT:
Brian W. Bethers, President and CFO, or
Robert G. Hunter, Vice President, Finance, both of 1-800
CONTACTS, INC., +1-801-924-9800, investors@contacts.com
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