1 800 CONTACTS INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q

(Mark one)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended June 29, 2002

/ / 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 (I.R.S. Employer Identification No.)
incorporation or organization)

66 E. Wadsworth Park Drive, 3rd Floor
Draper, UT 84020
- ---------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.

/X/ Yes / / No

As of August 6, 2002, the Registrant had 12,082,292 shares of Common Stock,
par value $0.01 per share, outstanding.

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1-800 CONTACTS, INC.

INDEX

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

1-800 CONTACTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)

ASSETS

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

3

1-800 CONTACTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except per share amounts)

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

4

1-800 CONTACTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)

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

5

1-800 CONTACTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1. PRESENTATION OF CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The accompanying condensed consolidated financial statements have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such rules and regulations. These condensed consolidated
financial statements reflect all adjustments (consisting only of normal
recurring adjustments), which in the opinion of management, are necessary to
present fairly the results of operations of the Company for the periods
presented. It is suggested that these condensed consolidated financial
statements be read in conjunction with the audited financial statements and the
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 29, 2001.

The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the full year.

NOTE 2. NET INCOME PER COMMON SHARE

Basic net income per common share ("Basic EPS") excludes dilution and is
computed by dividing net income by the weighted-average number of common shares
outstanding during the period. Diluted net income per common share ("Diluted
EPS") reflects the potential dilution that could occur if stock options or other
common stock equivalents were exercised or converted into common stock. The
computation of Diluted EPS does not assume exercise or conversion of securities
that would have an antidilutive effect on net income per common share. For the
quarters ended June 30, 2001 and June 29, 2002, options to purchase 125,138 and
339,191 shares of common stock, respectively, were not included in the
computation of Diluted EPS because the exercise prices of the options were
greater than the average market prices of the common shares.

The following is a reconciliation of the numerator and denominator used to
calculate Basic and Diluted EPS (in thousands, except per share amounts):

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NOTE 3. COMPREHENSIVE INCOME

Comprehensive income for the two quarters ended June 30, 2001 and June 29,
2002 consists of the following components (in thousands):

NOTE 4. COMMON STOCK TRANSACTIONS

During the two quarters ended June 29, 2002, the Company repurchased
200,000 shares for a total cost of approximately $2.2 million.

The Company's Board of Directors has authorized the repurchase of up to
3,000,000 shares of the Company's common stock. A purchase of the full 3,000,000
shares would equal approximately 23.3 percent of the total shares issued. The
repurchase of common stock is subject to market conditions and is accomplished
through periodic purchases at prevailing prices on the open market, by block
purchases or in privately negotiated transactions. The repurchased shares are
retained as treasury stock to be used for corporate purposes. Through June 29,
2002, the Company had repurchased 1,706,500 shares for a total cost of
approximately $22.1 million.

During the two quarters ended June 29, 2002, employees exercised stock
options to purchase 5,878 shares of common stock for a total of approximately
$38,000. The Company recorded an increase in additional paid-in capital of
approximately $11,000 for the income tax benefit related to these stock option
exercises.

During the two quarters ended June 29, 2002, the Company granted
nonqualified stock options to purchase 142,776 shares of common stock to
employees, directors and consultants of the Company. The exercise prices of the
options range from $10.91 to $12.00, which were not less than the quoted fair
market values at the grant date. The options vest equally over a four-year
period and expire in seven to ten years. During the two quarters ended June 29,
2002, the Company recorded approximately $3,000 of expense for options granted
to consultants.

On April 12, 2002, the Company's Board of Directors approved and adopted,
subject to stockholder approval, certain amendments to the Company's stock
option plan to provide for an increase in the number of shares of common stock
reserved for issuance under the plan from 620,000 to 1,240,000. These amendments
were approved at the annual meeting of stockholders held on May 17, 2002.

NOTE 5. LINE OF CREDIT

As of June 29, 2002, the Company had a revolving credit facility that
provided for borrowings equal to the lesser of $20.0 million or 50 percent of
eligible inventory. The credit facility bore interest at a floating rate equal
to the lender's prime interest rate minus 0.25 percent (4.5 percent at June 29,
2002) or 2.35 percent above the lender's thirty day LIBOR. If at any time, the
Company's ratio of liabilities to net worth was more than 1.5, the floating rate
increased by 0.25 percent. The credit facility also included an unused credit
fee equal to one-eighth of one percent, payable quarterly. As of June 29, 2002,
the Company's outstanding borrowings on the credit facility, including bank
overdrafts, were approximately $19.1 million. The credit facility was secured by
substantially all of the Company's assets and contained financial covenants
customary for this type of financing. As of June 29, 2002, the Company was not
in compliance with the credit facility's minimum quarterly net profit covenant.
However, prior to this date, in conjunction with a new credit facility, which
was funded on July 22, 2002 (see Note 9), the Company and the lender had
agreed to a lower minimum quarterly net profit covenant for the quarter ended
June 29, 2002 and the lender

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waived the covenant violation for the quarter ended June 29, 2002.

NOTE 6. LEGAL MATTERS

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. On June 18, 2002, the court granted a summary
judgment motion in favor of the plaintiff. However, the court made no findings
of any violations of Kansas law. Further, the court based its decision on a
Kansas optometry law that has been repealed and amended by the Kansas
legislature. Accordingly, the Company has filed a motion to alter or amend
judgment, asking the court to reverse its decision, and to enter summary
judgment in favor of defendant, or to dismiss the KBEO's lawsuit as moot based
on the new law. The motion has been fully briefed, and the parties are awaiting
the court's decision. If the court does not reverse its previous ruling, the
Company intends to file an appeal to the Kansas court of appeals.

On or about November 2, 1999, the Texas Optometry Board filed a civil
action against the Company seeking injunctive relief and civil penalties against
the Company for alleged violations of the Texas Optometry Act. The Company has
entered into a settlement agreement which resolves the complaint. A cash payment
of $8,500 was made in connection with the settlement.

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. This settlement agreement became effective on February 29, 2000,
and relates to the Company's sales practices in Texas. The agreement began to be
implemented in November 2000 and allowed for a review of and, if necessary,
changes to the Company's practices during an initial 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 and the TDH have reached a settlement, and the matter is
now closed. A cash payment of $5,000 was made in connection with the settlement.

On May 22, 2001, the Middle District Court in Jacksonville, Florida
announced a preliminary settlement with Johnson & Johnson with respect to the
multi-district litigation ("MDL") brought by the attorneys general of 32 states
on behalf of a nationwide class of consumers. This suit alleged that consumers
overpaid for contact lenses as a result of antitrust violations by Johnson &
Johnson, CIBA Vision, Bausch & Lomb, and the American Optometric Association
("AOA"). Specifically, the attorneys general alleged that the manufacturers and
the AOA conspired to eliminate competition from alternative distribution
channels, including mail order companies, and ensure that contact lenses would
only be available from eye care professionals. On or about October 12, 2001, the
Company was granted intervener status by the court in the MDL lawsuit. This
status allows the Company to become a party to the lawsuit for the limited
purpose of enforcing the injunctive relief provisions of the MDL settlement
agreement, e.g. requiring Johnson & Johnson's eye care division, Vistakon, to
sell its products directly to the Company. The court finalized the MDL
settlement agreement on November 1, 2001. The agreement became effective on
December 1, 2001. To date, Vistakon has refused to open an account with the
Company. The Company filed a motion with the court alleging that Johnson &
Johnson is in violation of the settlement agreement because it has refused to
open an account with the Company. The court has granted motions for discovery
and an evidentiary hearing has been rescheduled for October 2002 regarding this
motion for contempt.

On October 18, 2001, Vistakon filed an action against the Company
concerning certain of the Company's communications with customers informing them
of the Company's belief that there are superior products available

8

from other manufacturers with less restrictive distribution policies. The action
was filed in the Middle District Court in Jacksonville, Florida. The complaint
alleges claims for false advertising, unfair trade practices, tortious
interference with prospective economic advantage and defamation and seeks both
damages and injunctive relief. Vistakon also filed a motion for preliminary
injunction which the Company opposed. The court granted Vistakon's preliminary
injunction motion in part. The court ruled that when the Company wishes to rely
on a particular study that the Company needs to make clear which lenses the
study compares. Also, the court found that some of the Company's statements were
inconsistent when it stated that it continues to fill virtually all orders of
Vistakon products while also stating that Vistakon has attempted to cut off the
Company's sources for Vistakon product. On July 30, 2002, the U.S. Court of
Appeals for the 11th Circuit reversed and vacated the injunction in its
entirety.

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,
except for legal and professional fees that the Company incurs from time to
time, 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, financial position and liquidity.

NOTE 7. COMMITMENTS AND CONTINGENCIES

As of June 29, 2002, the Company had remaining commitments to purchase
approximately $8.8 million of inventory through December 2002. Also, as of June
29, 2002, the Company had remaining noncancelable commitments with various
advertising companies that will require the Company to pay approximately $3.4
million for advertising through December 2002.

NOTE 8. RECENTLY ISSUED ACCOUNTING STANDARDS

In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," and No. 142, "Goodwill and Other Intangible Assets," effective
for fiscal years beginning after December 15, 2001. Under the new rules,
goodwill and intangible assets deemed to have indefinite lives will no longer be
amortized but will be subject to annual impairment tests in accordance with the
Statements. Other intangible assets will continue to be amortized over their
useful lives. The Company adopted these new rules on accounting for goodwill and
other intangible assets effective in the first quarter of fiscal 2002. There was
no impact on the financial statements of the Company because all of the
Company's intangibles were subject to amortization. Therefore, no reconciliation
of reported net income to adjusted net income is presented.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which replaces SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets to Be Disposed Of." The
accounting model for long-lived assets to be disposed of by sale applies to all
long-lived assets, including discontinued operations, and replaces the
provisions of Accounting Principles Board Opinion No. 30, "Reporting Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business," for
the disposal of segments of a business. This statement requires that those
long-lived assets be measured at the lower of the carrying amount or fair value
less costs to sell, whether reported in continuing operations or in discontinued
operations. As a result, discontinued operations will no longer be measured at
net realizable value or include amounts for operating losses that have not yet
occurred. This statement also broadens the reporting of discontinued operations
to include all components of an entity with operations that can be distinguished
from the rest of the entity and that will be eliminated from the ongoing
operations of the entity in a disposal transaction. This statement is effective
for fiscal years beginning after December 15, 2001. The Company adopted this
statement effective in the first quarter of fiscal 2002. There was no impact on
the financial statements of the Company.

In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities." Under SFAS No. 146, a company will record a
liability for a cost associated with an exit or disposal

9

activity when that liability is incurred and can be measured at fair value. A
liability is incurred when an event obligates the entity to transfer or use
assets (i.e. when an event leaves the company little or no discretion to avoid
transferring or using the assets in the future). Under previous accounting
rules, if a company's management approved an exit plan, the company generally
could record the costs of that plan as a liability on the approval date, even if
the company did not incur the costs until a later date. Under SFAS No. 146, some
of those costs might qualify for immediate recognition, others might be spread
over one or more quarters, and still others might not be recorded until incurred
in a much later period. The Company is currently reviewing the standard, which
is effective for periods after December 31, 2002 prospectively, and does not
expect it to have a significant impact on its results of operations, financial
position or liquidity.

NOTE 9. SUBSEQUENT EVENT

On July 24, 2002, the Company completed the acquisition of certain net
assets and most of the business operations of IGEL, a contract manufacturer of
contact lenses based in Singapore. The acquisition was effected through a wholly
owned subsidiary of the Company, IGEL Acquisition Co. Pte Ltd, and included the
purchase of assets of Igel C.M. Laboratory Pte Ltd and International Vision
Laboratories Pte Ltd, both subsidiaries of Igel Visioncare Pte Ltd, as well as
certain other assets from Sinduchajana Sulistyo and Stephen D. Newman. The
principal assets acquired included a long-term leasehold interest in the land
upon which, and the building in which, the manufacturing facility is located,
equipment, inventories, and certain intellectual property rights, including
patents key to the operation of the acquired business. The Company intends to
account for this transaction under the purchase method in accordance with SFAS
No. 141.

The consideration paid by the Company consisted of approximately $5 million
in cash, approximately $9 million in assumed building and business loans to be
paid over the next 7 years, approximately $1 million in assumed capital leases,
a note of approximately $2 million to be paid over the next 5 years, 700,000
shares of restricted common stock of the Company, and 270,000 stock options in
three tranches of 90,000 each with exercise prices of $15, $25 and $35 per
share, respectively. The 700,000 shares of restricted common stock are held in
escrow, subject to a performance guarantee, and vest over a two-year schedule
with no shares released from escrow for a minimum of one year. The Company
financed the cash consideration used in this asset purchase by obtaining a $10
million term loan from its current lender. The Company also executed guarantees
for the building and business loans assumed in the transaction.

In contemplation of the acquisition and to provide interim financing for
operations and equipment purchases, the Company entered into a consulting
agreement with Stephen D. Newman effective January 31, 2002 and later loaned
Stephen D. Newman $550,000. Upon closing of the transaction, Stephen D. Newman
became an employee of the Company, and the loan was satisfied as part of the
purchase consideration and transfer of equipment to the Company.

The Company entered into a new loan agreement, effective July 22, 2002,
providing for both the $10 million term loan and a new revolving credit facility
for borrowings up to $20 million, which replaces the credit facility described
in Note 5. The amount outstanding on both the term loan and the revolving credit
facility is limited to a percentage of eligible inventory. The percentage is 75%
until September 30, 2002 and thereafter is reduced by 1.25% each quarter until
the percentage is 50%. The loan agreement is secured by substantially all of the
Company's assets, including a portion of the Company's common stock in its
Singapore subsidiary and all intercompany loans to this subsidiary, and contains
various financial covenants customary for this type of financing.

The $10 million term loan bears interest at a floating rate equal to the
lender's prime interest rate plus 0.50 percent (5.25 percent at June 29, 2002)
or 3.0 percent above the lender's LIBOR for the applicable period. Interest is
payable monthly. Principal payments are due quarterly beginning October 1, 2002
until maturity on June 30, 2007. Principal payments are as follows: payments 1
through 4 - $450,000; payments 5 though 8 - $475,000; payments 9 through 12 -
$500,000; payments 13 through 16 - $525,000; and payments 17 through maturity -
$550,000.

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The $20 million revolving credit facility bears interest at a floating rate
equal to the lender's prime interest rate plus 0.25 percent (5.0 percent at June
29, 2002) or 2.75 percent above the lender's LIBOR for the applicable period.
Interest is payable monthly. The credit facility also includes an unused credit
fee equal to one-eighth of one percent, payable quarterly. The credit facility
expires April 30, 2003.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

The Company is a leading direct marketer of replacement contact lenses. The
Company was formed in February 1995 and is the successor to the mail order
business founded by the Company's Vice President of Sales in March 1991.
Historically, the Company's net sales have grown rapidly, from $3.6 million in
fiscal 1996 to $169.0 million in fiscal 2001. During the first two quarters of
2002, net sales declined to $83.8 million from $87.0 million in the first two
quarters of fiscal 2001. Internet sales grew from an insignificant amount in
fiscal 1996 to $67.6 million in fiscal 2001 and from $33.3 million in the first
two quarters of fiscal 2001 to $33.6 million in the first two quarters of fiscal
2002.

The Company's fiscal year consists of a 52/53 week period ending on the
Saturday nearest to December 31.

The Company expenses all advertising costs when the advertising first takes
place. As a result, quarter-to-quarter comparisons are impacted within and
between quarters by the timing of television, radio and Internet advertisements
and by the mailing of the Company's printed advertisements. The volume of
mailings and other advertising may vary in different quarters and from year to
year depending on the Company's assessment of prevailing market opportunities.

The sale and delivery of contact lenses are governed by both federal and
state laws and regulations. The Company sells to customers in all 50 states, and
each sale is likely to be subject to the laws of the state where the customer is
located. In some states, the Company operates according to agreements it has
entered into with local regulatory authorities or medical boards or agencies.
The Company has made a number of significant changes to its operating practice
in recent months. The Company's current general operating practice is to obtain
a copy of the customer's prescription or to passively verify each customer's
prescription with his/her eye care practitioner. If the customer does not have a
copy of his/her prescription, the Company asks the customer for his/her exact
prescription specifications and then directly contacts the customer's eye care
practitioner to passively verify the customer's prescription. The Company
directly communicates to the eye care practitioner the prescription
specifications received from the customer and informs the eye care practitioner
that it will proceed to complete the sale based on such information unless the
eye care practitioner advises it that such information is expired or incorrect.
If the eye care practitioner does not advise the Company that such information
is expired or incorrect within a minimum period, the Company's general practice
is to complete the sale and ship the lenses based on the information
communicated to the eye care practitioner. If the Company is unable to obtain a
copy of the customer's prescription or passively verify the prescription with
the customer's eye care practitioner, the Company's policy is not to proceed
with the sale. The Company retains copies of the written prescriptions that it
receives and maintains records of its communications with the customer's
prescriber.

On May 22, 2001, the Middle District Court in Jacksonville, Florida
announced a preliminary settlement with Johnson & Johnson with respect to the
multi-district litigation brought by the attorneys general of 32 states on
behalf of a nationwide class of consumers. This suit alleged that consumers
overpaid for contact lenses as a result of antitrust violations by Johnson &
Johnson, CIBA Vision, Bausch & Lomb, and the American Optometric Association
("AOA"). Specifically, the attorneys general alleged that the manufacturers and
the AOA conspired to eliminate competition from alternative distribution
channels, including mail order companies, and ensure that contact lenses would
only be available from eye care professionals. The court finalized the
settlement agreement on November 1, 2001. The agreement became effective on
December 1, 2001. CIBA Vision settled this lawsuit more than four years ago and
Bausch & Lomb settled in the first part of 2001. The Company now purchases
lenses directly from these two manufacturers.

Johnson & Johnson's press release announcing the settlement stated that it
would begin selling to alternative channels of distribution. To date, Johnson &
Johnson's eye care division, Vistakon, has refused to open an account with the
Company. In October 2001, the Company was granted intervener status to this
multi-district litigation by the court. This status allows the Company to become
a party to the lawsuit for the limited purpose of enforcing the

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injunctive relief provisions of the settlement agreement, e.g. requiring
Vistakon to sell its products directly to the Company.

Vistakon's current interpretation of the settlement agreement, and its
subsequent actions, have made its products more difficult for the Company to
obtain at historical prices and quantities. As long as Vistakon continues these
efforts to restrict supply of its products to the Company, the Company's future
net sales and/or gross profit will be negatively impacted. As a result of this
restricted supply, the Company has reduced its planned advertising spending,
which will also adversely impact net sales.

The Company is also investing significant resources to ensure that the
settlement agreement will allow it to purchase contact lenses directly from
Vistakon. As a result, the Company expects to continue to incur significant
legal and related expenses during fiscal 2002.

RESULTS OF OPERATIONS

The following table presents the Company's results of operations expressed
as a percentage of net sales for the periods indicated:

NET SALES. Net sales for the quarter ended June 29, 2002 decreased 5% to
$42.2 million from $44.2 million for the quarter ended June 30, 2001. For the
two quarters ended June 29, 2002, net sales decreased 4% to $83.8 million from
$87.0 million for the two quarters ended June 30, 2001. These decreases are
mainly due to a decline in new sales as a result of spending less on advertising
as part of the Company's ongoing effort to manage demand for Vistakon products
in response to Vistakon's continued refusal to sell to the Company. During the
second quarter of fiscal 2002, the Company spent about 60% less on national
advertising than in the second quarter of fiscal 2001. Total advertising
spending for the first two quarters of fiscal 2002 was about $8.9 million less
than advertising spending in the first two quarters of fiscal 2001. The decline
in new sales was partially offset by the increase in repeat sales as the Company
continues to realize the benefits of a strong customer base. Repeat sales for
the second quarter of fiscal 2002 increased 11% to $34.2 million, or 81% of net
sales, from $30.8 million, or 70% of net sales, for the second quarter of fiscal
2001. Repeat sales for the first two quarters of fiscal 2002 increased 14% to
$67.1 million, or 80% of net sales, from $58.9 million, or 68% of net sales, for
the first two quarters of fiscal 2001. The Company also believes that its net
sales reflect some of the benefits of the more than $100 million it has invested
in its national advertising campaign over the last several years and its
commitment to customer service. In addition, the Company continues to refine its
marketing efforts to its customer base, to enhance its website and to highlight
its website in its advertising. Internet sales for the second quarter of fiscal
2002 were $16.5 million, or 39% of net sales, as compared to $17.1 million, or
39% of net sales, for the second quarter of fiscal 2001. For the first two
quarters of fiscal 2002, Internet sales were $33.6 million, or 40% of net sales,
as compared to $33.3 million, or 38% of net sales, for the same period in fiscal
2001. During the second quarter of fiscal 2002, the Company was able to

13

obtain higher levels of Vistakon products as a result of offering even higher
wholesale prices beginning in December 2001. The Company passed on a portion of
these wholesale price increases by increasing retail prices for these products
to its customers. The recently increased levels of Vistakon products have
allowed the Company to move the standard quantity of Vistakon contact lenses
offered to customers back to historical quantities consistent with what the
Company offers with other manufacturers' products. Despite these higher
quantities, the Company is still not offering quantity discounts on the majority
of Vistakon contact lenses because of the higher wholesale prices. The Company
initially suspended these quantity discounts in June 2001. During the second
quarter of fiscal 2002, the Company was able to fill nearly all requests from
customers for Vistakon products, albeit at substantially higher costs to the
Company to acquire such product for resale.

GROSS PROFIT. Gross profit as a percentage of net sales decreased to 29.4%
for the quarter ended June 29, 2002 from 40.6% for the quarter ended June 30,
2001. For the two quarters ended June 29, 2002, gross profit as a percentage of
net sales decreased to 30.0% from 40.5% for the two quarters ended June 30,
2001. During the first two quarters of fiscal 2002, gross profit was impacted by
the increase in wholesale prices paid for Vistakon products. To offset some of
the increase in wholesale prices paid for Vistakon products, the Company raised
its retail prices on Vistakon products during December 2001. During the first
two quarters of fiscal 2002, Vistakon products accounted for about 40% of the
Company's net sales. Gross profit during the second quarter of fiscal 2002 was
also negatively impacted by product discounts the Company offered in Texas to
offset the inconvenience its customers are experiencing trying to obtain
prescriptions from their eye care providers. If wholesale prices of Vistakon
products remain at current levels, gross profit will continue to be adversely
impacted in future periods. The Company offered even higher wholesale prices on
Vistakon products beginning in December 2001, which resulted in increased levels
of Vistakon products on hand at the close of the second quarter of fiscal 2002.
The Company expects its level of Vistakon products to decline in the next
quarter as the Company has reduced the volume it is buying and has recently
dropped the wholesale prices it is offering.

ADVERTISING EXPENSE. Advertising expense for the quarter ended June 29,
2002 decreased $3.4 million, or 46%, from the quarter ended June 30, 2001. As a
percentage of net sales, advertising expense decreased to 9.2% for the second
quarter of fiscal 2002 from 16.5% for the second quarter of fiscal 2001. During
the second quarter of fiscal 2002, the Company spent about 60% less on national
advertising than in the second quarter of fiscal 2001, as a portion of the
advertising spending was allocated to local advertising as part of the Company's
efforts to overcome the anticompetitive barriers in the industry on behalf of
itself and consumers. For the two quarters ended June 29, 2002, advertising
expense decreased $8.9 million, or 57%, from the two quarters ended June 30,
2001. As a percentage of net sales, total advertising expense decreased to 7.9%
for the first two quarters of fiscal 2002 from 17.9% for the first two quarters
of fiscal 2001. The decreases in advertising expense are part of the Company's
ongoing effort to manage demand for Vistakon products in response to Vistakon's
continued refusal to sell to the Company. Until the current environment (higher
prices for and restricted supply of Vistakon products) changes, the Company
plans on spending about $6 to $7 million on advertising during the remainder of
fiscal 2002. However, if opportunities present themselves, the Company may
increase advertising spending above currently planned levels.

LEGAL AND PROFESSIONAL FEES. Legal and professional fees for the quarter
ended June 29, 2002 increased $0.7 million, or 136%, from the quarter ended June
30, 2001. As a percentage of net sales, legal and professional fees increased to
2.7% for the second quarter of fiscal 2002 from 1.1% for the second quarter of
fiscal 2001. For the two quarters ended June 29, 2002, legal and professional
fees increased $1.5 million, or 164%, from the two quarters ended June 30, 2001.
As a percentage of net sales, legal and professional fees increased to 2.9% for
the first two quarters of fiscal 2002 from 1.0% for the first two quarters of
fiscal 2001. During the first two quarters of fiscal 2002, the Company incurred
significant legal and professional fees related to its legal matters and its
increased efforts to overcome the anticompetitive barriers in the industry on
behalf of itself and consumers. The Company expects to continue to incur
significant legal and professional fees as it continues this proactive approach,
including investing resources to ensure that the multi-district litigation
settlement agreement with Johnson & Johnson will allow it to purchase contact
lenses directly from Vistakon.

OTHER SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Other selling, general
and administrative expenses for the quarter ended June 29, 2002 increased $0.7
million, or 14%, from the quarter ended June 30, 2001. As a percentage of net
sales, other selling, general and administrative expenses increased to 13.1% for
the second quarter of fiscal 2002 from 10.9% for the second quarter of fiscal
2001. For the two quarters ended June 29, 2002, other

14

selling, general and administrative expenses increased $1.5 million, or 16%,
from the two quarters ended June 30, 2001. As a percentage of net sales, other
selling, general and administrative expenses increased to 13.0% for the first
two quarters of fiscal 2002 from 10.8% for the first two quarters of fiscal
2001. Operating and payroll costs increased as the Company enhanced its
operating infrastructure and its management team to meet the demands of the
business.

OTHER INCOME (EXPENSE), NET. Other income (expense) decreased to
approximately ($193,000) and ($323,000) for the quarter and two quarters ended
June 29, 2002, respectively, from approximately $33,000 and ($171,000) for the
quarter and two quarters ended June 30, 2001, respectively. For the first two
quarters of fiscal 2002, other expense consists mainly of interest expense,
resulting from the increased use of the revolving credit facility. During the
first quarter of fiscal 2001, the Company recorded a $220,000 loss related to
the impairment of non-marketable securities. This loss was partially offset by
interest income in excess of interest expense in the fiscal 2001 periods.

INCOME TAXES. The Company's effective tax rate for the quarter and two
quarters ended June 29, 2002, was 40.4% and 39.6%, respectively. For the quarter
and two quarters ended June 30, 2001, the Company's effective tax rate was 38.5%
and 38.9%, respectively. For the fiscal 2002 periods, the Company's
nondeductible expenses relating to its lobbying efforts were higher in
proportion to net income than in the fiscal 2001 periods. As of June 29, 2002,
the Company had not provided a valuation allowance on deferred tax assets. The
Company's future effective tax rate will depend upon future taxable income. The
Company anticipates that its fiscal 2002 effective income tax rate will be
approximately 39%.

LIQUIDITY AND CAPITAL RESOURCES

For the two quarters ended June 29, 2002 and June 30, 2001, net cash (used
in) provided by operating activities was approximately ($2.4 million) and $4.3
million, respectively. In the fiscal 2002 period, cash was used primarily to
fund a significant increase in inventories partially offset by net income and an
increase in accounts payable. In the fiscal 2001 period, cash was provided
primarily by net income and an increase in accounts payable partially offset by
a significant increase in inventories. In order to help ensure sufficient supply
of inventory, the Company generally carries a higher level of inventory than if
it were able to purchase directly from all contact lens manufacturers. During
the fiscal 2002 period, the Company significantly increased its levels of
Vistakon products. The Company expects its level of Vistakon products to decline
in the next quarter as the Company has reduced the volume it is buying and has
recently dropped the wholesale prices it is offering.

The Company used approximately $2.0 million and $1.0 million for investing
activities in the two quarters ended June 29, 2002 and June 30, 2001,
respectively. The principal purpose of these investments relates to capital
expenditures for infrastructure improvements. Capital expenditures were
approximately $0.9 million for each of the fiscal 2002 and 2001 periods. For the
fiscal 2002 period, the Company incurred capital expenditures of approximately
$0.3 million related to the establishment of a Texas distribution center. 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 operations. During
the fiscal 2002 period, the Company also incurred approximately $0.5 million in
capitalized acquisition costs and issued notes receivable for approximately $0.6
million related to this acquisition of a contract manufacturer of contact lenses
(see discussion below). The Company expects that the total acquisition costs
will not exceed $1.5 million.

During the two quarters ended June 29, 2002 and June 30, 2001, net cash
provided by (used in) financing activities was approximately $4.4 million and
($3.3 million), respectively. During the fiscal 2002 period, the Company
repurchased 200,000 shares of its common stock for a total cost of approximately
$2.2 million and increased net borrowings on its credit facility by
approximately $6.5 million. During the fiscal 2001 period, the Company made net
repayments on its credit facility of approximately $3.0 million and repurchased
22,500 shares of its common stock for a total cost of approximately $0.4
million. In both the fiscal 2002 and 2001 periods, these amounts were offset
slightly by proceeds from the exercise of common stock options.

15

The Company's Board of Directors has authorized the repurchase of up to
3,000,000 shares of the Company's common stock. A purchase of the full 3,000,000
shares would equal approximately 23.3 percent of the total shares issued. The
repurchase of common stock is subject to market conditions and is accomplished
through periodic purchases at prevailing prices on the open market, by block
purchases or in privately negotiated transactions. The repurchased shares are
retained as treasury stock to be used for corporate purposes. Through June 29,
2002, the Company had repurchased 1,706,500 shares for a total cost of
approximately $22.1 million.

As of June 29, 2002, the Company had a revolving credit facility to provide
for working capital requirements and other corporate purposes. The credit
facility provided for borrowings equal to the lesser of $20.0 million or 50
percent of eligible inventory and bore interest at a floating rate equal to the
lender's prime interest rate minus 0.25 percent (4.5 percent at June 29, 2002)
or 2.35 percent above the lender's thirty day LIBOR. If at any time, the
Company's ratio of liabilities to net worth was more than 1.5, the floating rate
increased by 0.25 percent. The credit facility also included an unused credit
fee equal to one-eighth of one percent, payable quarterly. As of June 29, 2002,
the Company's outstanding borrowings on the credit facility, including bank
overdrafts, were approximately $19.1 million. The credit facility was secured by
substantially all of the Company's assets and contained financial covenants
customary for this type of financing. As of June 29, 2002, the Company was not
in compliance with the credit facility's minimum quarterly net profit covenant.
However, prior to this date, in conjunction with a new credit facility, which
was funded on July 22, 2002 (see below), the Company and the lender had
agreed to a lower minimum quarterly net profit covenant for the quarter ended
June 29, 2002 and the lender waived the covenant violation for the quarter
ended June 29, 2002.

On July 24, 2002, the Company completed the acquisition of certain net
assets and most of the business operations of IGEL, a contract manufacturer of
contact lenses based in Singapore. The acquisition was effected through a wholly
owned subsidiary of the Company, IGEL Acquisition Co. Pte Ltd, and included the
purchase of assets of Igel C.M. Laboratory Pte Ltd and International Vision
Laboratories Pte Ltd, both subsidiaries of Igel Visioncare Pte Ltd, as well as
certain other assets from Sinduchajana Sulistyo and Stephen D. Newman. The
principal assets acquired included a long-term leasehold interest in the land
upon which, and the building in which, the manufacturing facility is located,
equipment, inventories, and certain intellectual property rights, including
patents key to the operation of the acquired business. The Company intends to
account for this transaction under the purchase method in accordance with SFAS
No. 141.

The consideration paid by the Company consisted of approximately $5 million
in cash, approximately $9 million in assumed building and business loans to be
paid over the next 7 years, approximately $1 million in assumed capital leases,
a note of approximately $2 million to be paid over the next 5 years, 700,000
shares of restricted common stock of the Company, and 270,000 stock options in
three tranches of 90,000 each with exercise prices of $15, $25 and $35 per
share, respectively. The 700,000 shares of restricted common stock are held in
escrow, subject to a performance guarantee, and vest over a two-year schedule
with no shares released from escrow for a minimum of one year. The Company
financed the cash consideration used in this asset purchase by obtaining a $10
million term loan from its current lender. The Company also executed guarantees
for the building and business loans assumed in the transaction.

In contemplation of the acquisition and to provide interim financing for
operations and equipment purchases, the Company entered into a consulting
agreement with Stephen D. Newman effective January 31, 2002 and later loaned
Stephen D. Newman $550,000. Upon closing of the transaction, Stephen D. Newman
became an employee of the Company, and the loan was satisfied as part of the
purchase consideration and transfer of equipment to the Company.

The Company entered into a new loan agreement, effective July 22, 2002,
providing for both the $10 million term loan and a new revolving credit facility
for borrowings up to $20 million, which replaces the credit facility described
above. Of the $10 million term loan, the Company used approximately $3.7 million
to pay down a portion of the outstanding balance on the revolving credit
facility. The remainder of the term loan was used for the cash portion of the
acquisition, acquisition costs, and working capital for the Singapore
subsidiary. The amount outstanding on both the term loan and the revolving
credit facility is limited to a percentage of eligible inventory. The
percentage is 75% until September 30, 2002 and thereafter is reduced by 1.25%
each quarter until the

16

percentage is 50%. The loan agreement is secured by substantially all of the
Company's assets, including a portion of the Company's common stock in its
Singapore subsidiary and all intercompany loans to this subsidiary, and contains
various financial covenants customary for this type of financing.

The $10 million term loan bears interest at a floating rate equal to the
lender's prime interest rate plus 0.50 percent (5.25 percent at June 29, 2002)
or 3.0 percent above the lender's LIBOR for the applicable period. Interest is
payable monthly. Principal payments are due quarterly beginning October 1, 2002
until maturity on June 30, 2007. Principal payments are as follows: payments 1
through 4 - $450,000; payments 5 though 8 - $475,000; payments 9 through 12 -
$500,000; payments 13 through 16 - $525,000; and payments 17 through maturity -
$550,000.

The $20 million revolving credit facility bears interest at a floating rate
equal to the lender's prime interest rate plus 0.25 percent (5.0 percent at June
29, 2002) or 2.75 percent above the lender's LIBOR for the applicable period.
Interest is payable monthly. The credit facility also includes an unused credit
fee equal to one-eighth of one percent, payable quarterly. The credit facility
expires April 30, 2003.

IGEL is an innovative manufacturer of high quality, FDA-approved contact
lenses with the capacity to produce 30 to 40 million lenses annually - enough to
service nearly one million two week disposable contact lens wearers. IGEL's
Singapore-based facility has historically done contract manufacturing for
contact lens companies and retailers around the world. IGEL currently produces
two-week disposable lenses for a major global manufacturer to its exacting
specifications and quality standards. Clinical trials publicized by this
manufacturer show that IGEL's lenses are preferred to the top two brands of
two-week disposable contacts for visual clarity, comfort, handling, and overall
preference. This result is due in large part to the proprietary technology
developed by IGEL's chief scientist and CEO, Stephen D. Newman.

In fiscal 2001, the Company tested whether it could successfully transition
its customers into new products by assisting them in getting fitted for a new
brand of contact lenses. The Company believes that these tests indicate that its
customers are receptive to an offer from the Company to try both a new product
and a new eye care practitioner. The Company feels that a more active role in
the product/provider decision may help it address the policies of manufacturers
that refuse to sell their brands to the Company and seek to sell their brands
exclusively to eye care practitioners.

The Company believes that combining both the retail and wholesale gross
profits through vertical integration with IGEL gives it the flexibility to make
a variety of offers to its customers and have more control of production and
inventory. The Company also believes that being vertically integrated will
ensure that it is always able to provide a high quality, cost effective product
to its customers.

During the next two quarters, the Company will be testing new lens and
packaging designs and putting marketing programs and a referral network in
place. The Company expects to complete these projects before the end of 2002 and
to begin national marketing of lenses made by its new manufacturing subsidiary
by the first quarter of fiscal 2003. The Company's first preference will be to
sell its customer the lens she is already wearing. In cases where manufacturers
or eye care practitioners stand in the way of the customer's choice to
purchase from the Company, the Company intends to offer the customer the
opportunity to try an alternative eye care practitioner and an alternative
product.

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, including its new subsidiary's
operations, through the next year. The Company may be required to seek
additional sources of funds for accelerated growth or continued growth beyond
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.

See "Overview" for a discussion regarding the multi-district litigation's
potential impact on the Company's results of operations.

17

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.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

As of June 29, 2002, the Company had remaining commitments to purchase
approximately $8.8 million of inventory through December 2002. Also, as of June
29, 2002, the Company had remaining noncancelable commitments with various
advertising companies that will require the Company to pay approximately $3.4
million for advertising through December 2002. In addition, in conjunction with
the acquisition subsequent to June 29, 2002, the Company incurred additional
indebtedness and assumed other debt obligations (see above). See the Company's
Annual Report to Shareholders on Form 10-K for a summary of the Company's other
contractual obligations and commitments.

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," and No. 142, "Goodwill and Other Intangible Assets," effective
for fiscal years beginning after December 15, 2001. Under the new rules,
goodwill and intangible assets deemed to have indefinite lives will no longer be
amortized but will be subject to annual impairment tests in accordance with the
Statements. Other intangible assets will continue to be amortized over their
useful lives. The Company adopted these new rules on accounting for goodwill and
other intangible assets effective in the first quarter of fiscal 2002. There was
no impact on the financial statements of the Company because all of the
Company's intangibles were subject to amortization.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which replaces SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets to Be Disposed Of." The
accounting model for long-lived assets to be disposed of by sale applies to all
long-lived assets, including discontinued operations, and replaces the
provisions of Accounting Principles Board Opinion No. 30, "Reporting Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business," for
the disposal of segments of a business. This statement requires that those
long-lived assets be measured at the lower of the carrying amount or fair value
less costs to sell, whether reported in continuing operations or in discontinued
operations. As a result, discontinued operations will no longer be measured at
net realizable value or include amounts for operating losses that have not yet
occurred. This statement also broadens the reporting of discontinued operations
to include all components of an entity with operations that can be distinguished
from the rest of the entity and that will be eliminated from the ongoing
operations of the entity in a disposal transaction. This statement is effective
for fiscal years beginning after December 15, 2001. The Company adopted this
statement effective in the first quarter of fiscal 2002. There was no impact on
the financial statements of the Company.

In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities." Under SFAS No. 146, a company will record a
liability for a cost associated with an exit or disposal activity when that
liability is incurred and can be measured at fair value. A liability is incurred
when an event obligates the entity to transfer or use assets (i.e. when an event
leaves the company little or no discretion to avoid transferring or using the
assets in the future). Under previous accounting rules, if a company's
management approved an exit plan, the company generally could record the costs
of that plan as a liability on the approval date, even if the company did not
incur the costs until a later date. Under SFAS No. 146, some of those costs
might qualify for immediate recognition, others might be spread over one or more
quarters, and still others might not be recorded until incurred in a much later
period. The Company is currently reviewing the standard, which is effective for
periods after December 31, 2002 prospectively, and does not expect it to have a
significant impact on its results of operations, financial position or
liquidity.

18

CRITICAL ACCOUNTING POLICIES

See the Company's Annual Report to Shareholders on Form 10-K for a summary
of the Company's critical accounting policies.

FORWARD-LOOKING STATEMENTS

Except for the historical information contained herein, the matters
discussed in this Form 10-Q are forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A
of the Securities Act of 1933, as amended. These forward-looking statements
involve risks and uncertainties and often depend on assumptions, data or methods
that may be incorrect or imprecise. The Company's future operating results may
differ materially from the results discussed in, or implied by, forward-looking
statements made by the Company. Factors that may cause such differences include,
but are not limited to, those discussed below and the other risks detailed in
the Company's other reports filed with the Securities and Exchange Commission.
The words such as "believes," "anticipates," "expects," "future," "intends,"
"would," "may" and similar expressions are intended to identify forward-looking
statements. The Company undertakes no obligation to revise any of these
forward-looking statements to reflect events or circumstances after the date
hereof.

FACTORS THAT MAY AFFECT FUTURE RESULTS

- - The Company's sales growth will not continue at historical rates and it may
encounter unforeseen difficulties in managing its future growth;

- - A significant portion of the Company's sales may be found not to comply
with state laws and regulations concerning the delivery and sale of contact
lenses;

- - Because the Company doesn't manufacture most of the contact lenses that it
sells, the Company cannot ensure that all of the contact lenses it sells
meet all federal regulatory requirements;

- - It is possible that the FDA could 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 38%, 35% and
46% of the Company's inventory purchases in fiscal 1999, 2000 and 2001,
respectively;

- - Historically, Johnson & Johnson's Vistakon products have accounted for
about 40% of the Company's net sales; if supply of Vistakon products
remains restricted and wholesale prices remain at current levels, the
Company's future net sales and/or gross profit will be negatively impacted;

- - The Company may continue to incur significant legal and professional fees
related to its legal matters and its increased efforts to proactively
influence the industry on behalf of itself and consumers;

- - 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 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;

19

- - 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 manufacturers or sells results
in personal injury;

- - The Company conducts its retail operations through a single distribution
facility;

- - The Company's success is dependent, in part, on continued use of the
Internet;

- - Government regulation and legal uncertainties relating to the Internet and
online commerce could negatively impact the Company's business operations;

- - Changing technology could adversely affect the operation of the Company's
website;

- - The Company may not be able to develop and manufacture a viable, high
quality contact lens for sale to consumers that meets all federal
regulatory requirements;

- - The Company may not be able to fully integrate the operations of its newly
acquired contact lens manufacturer into its business;

- - Consumer acceptance of the Company's manufactured products may not meet the
Company's expectations;

- - The Company's intellectual property rights may be challenged;

- - The Company may encounter legal, regulatory and government agency oversight
risks with foreign operations;

- - The Company may not be able to establish a sufficient network of eye care
practitioners to prescribe the products manufactured by the Company; and

- - The Company may not be able to adequately manage its foreign currency risk.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of June 29, 2002, the Company was exposed to changes in interest rates
primarily related to its revolving credit facility. The Company's outstanding
borrowings on the credit facility, including bank overdrafts, were approximately
$19.1 million as of June 29, 2002. The credit facility currently bears interest
at a variable rate. The Company was exposed to limited foreign currency risk due
to cash held by its foreign subsidiary in Japan. As of June 29, 2002, the
Company's total cash in foreign currencies was approximately $9,000. In
addition, through June 29, 2002, all of the Company's revenue transactions were
in U.S. dollars. Effective July 24, 2002, the Company acquired certain assets
and most of the business operations of a contract manufacturer of contact lenses
based in Singapore. In conjunction with this transaction, the Company incurred
additional debt in the form of a $10 million term loan denominated in U.S.
dollars and approximately $12 million (U.S. dollars) of other debt obligations
denominated in Singapore dollars. Accordingly, the Company has an increased
exposure to interest rates risks and foreign currency risks. The Company expects
that the majority of the Singapore subsidiary's expenses will be made

20

in Singapore dollars. The Company expects that certain of the Singapore
subsidiary's product sales will be in U.S. dollars while other of its sales will
be in other foreign currencies. The exchange rate between the U.S. dollar and
the Singapore dollar has fluctuated approximately 4% (weakening of the U.S.
dollar) since January 1, 2002 through August 12, 2002. From the date of
acquisition, July 24, 2002, through August 12, 2002 the exchange rate has
fluctuated approximately one percent (strengthening of the U.S. dollar).

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See notes to condensed consolidated financial statements.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The annual meeting of stockholders of the Company was held on May 17, 2002.
The stockholders approved the following matters:

- The election as directors of John F. Nichols and Scott S. Tanner to
serve until the annual meeting of stockholders in 2005 and until their
respective successors are elected and qualified.

The other directors of the Company include the following persons: (i)
Stephen A. Yacktman and E. Dean Butler, who are to serve until the annual
meeting of stockholders in 2003 and (ii) Jonathan C. Coon, Jason S. Subotky
and Bradley T. Knight, who are to serve until the annual meeting of
stockholders in 2004.

- The amendment to the Company's Incentive Stock Option Plan to increase
the number of shares of common stock reserved for issuance thereunder
from 620,000 to 1,240,000.

Votes cast:
For 6,172,145
Against 649,051
Abstained 4,404
Unvoted 2,569,439

ITEM 5. OTHER INFORMATION

From time to time the Company receives notices, inquiries or other
correspondence from states or its regulatory bodies charged with overseeing the
sale of contact lenses. The Company's practice is to review such notices with
legal counsel to determine the appropriate response on a case-by-case basis. It
is the opinion of management, after discussion with legal counsel, that the
Company is taking the appropriate steps to address the various notices received.

21

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(A) Exhibits

Exhibit No. Description of Exhibit
----------- ----------------------

10.1 1-800 CONTACTS, INC. Amended and Restated 1998
Incentive Stock Option Plan.
99.1 Certification Required Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002

(B) Reports on Form 8-K

Current Report on Form 8-K filed May 16, 2002, Changes in
Registrant's Certifying Accountant.

22

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

1-800 CONTACTS, INC.

Dated: August 13, 2002 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

23