Listing of Coastal Contacts Inc. on NASDAQ OMX Stockholm

Listing of Coastal Contacts Inc. on NASDAQ OMX Stockholm October 2009 ticker: coa www.coastalcontacts.com www.lensway.se Important information This prospectus has been prepared in conjunction with the contemplated listing (the “Listing”) of common shares (the “Shares”)
in Coastal Contacts Inc. on NASDAQ OMX Stockholm AB
(“NASDAQ OMX Stockholm”). Reference to “Coastal Contacts”,
the “Company”, “us”, “our” or “we” in this prospectus refers to
Coastal Contacts Inc. (Canadian corporation number 382848-4).
References to the “Group” refer to the Company and its subsidiaries, unless otherwise can be derived from the context in which
the reference appears. References to the “Board of Directors”
or the “Directors” refer to the board of directors or directors of
Coastal Contacts unless otherwise can be derived from the context in which the reference appears.
Reference to “Öhman” refers to E. Öhman J:or Fondkommission
AB. In connection with the Listing, Öhman is acting as financial
adviser to the Company. Reference to “TSX” refers to the Toronto
Stock Exchange. Reference to “CAD” refers to Canadian dollars.
Reference to “SEK” refers to Swedish kronor. Reference to “USD”
refers to United States dollars.
This prospectus has been prepared in accordance with the
Swedish Financial Instruments Trading Act (Sw. lagen (1991:980)
om handel med finansiella instrument) and the Commission
Regulation (EC) No. 809/2004. The prospectus has been
approved and registered by the Swedish Financial Supervisory
Authority (Finansinspektionen) (“SFSA”) pursuant to the provisions of Chapter 2, Sections 25 and 26 of the Trading Act.
Approval and registration by SFSA do not imply that SFSA guarantees that the factual information provided in this prospectus is
correct and complete.
This is not an offering to purchase or to subscribe for
Shares in Coastal Contacts. This prospectus is exempt
from requirements of being prepared in Swedish as this
prospectus has been prepared in conjunction with an
application for admission to trading of the Shares on a
regulated market. The prospectus may not be distributed in
any country where the distribution of this document requires
additional prospectuses, registrations or measures, other than
those pursuant to Swedish law or would conflict with regulations
in such country or jurisdiction. The Shares have not been and will
not be registered under the United States Securities Act of 1933
as currently in effect. The prospectus is governed by material
Swedish law. The courts of Sweden have exclusive jurisdiction
to settle any dispute arising out of or in connection with this
prospectus.
This prospectus has been prepared by the Board of Directors
of Coastal Contacts, based on information from the Company
and information from third parties that the Board of Directors
considers to be reliable. The information from third parties contained herein has been correctly restated and – to the best of
the Board of Directors’ knowledge and as far as it can warrant
through comparison with other information made public by the
third parties from which the information has been obtained –
no information has been omitted in such manner that would
render the information set forth herein erroneous or misleading. However, the accuracy or completeness of the information
cannot be guaranteed, irrespective of whether it relates to the
past or future circumstances, as no independent verification has
been made of the information. Reference in this prospectus to
the Company’s websites does not imply that information on the
websites is incorporated in the prospectus.
This prospectus contains forward-looking statements. The
words “may”, “intend”, “plan”, “anticipate”, “believe”, “estimate”, “expect”, “goal”, “target”, “likely”, “potential”, “continue”,
“project”, “forecast”, “prospects” and similar expressions typically are used to identify forward-looking statements. Forwardlooking statements are based on the then-current expectations,
beliefs, assumptions, estimates and forecasts about the business and the industry and markets in which the Company operates. Forward-looking statements are not guarantees of future
performance and involve risks, uncertainties and assumptions
which are difficult to predict. A potential investor is cautioned
that forward-looking statements or information are only predictions, and that the Company’s actual future results or performance may be materially different due to a number of factors.
Accordingly, a potential investor should not place undue reliance
on forward-looking statements and information, which are qualified in their entirety by this cautionary statement. These forward-looking statements, as well as other information in the prospectus, are made as of the date of the prospectus. The Board of
Directors expressly disclaims any intent or obligation to update
these forward-looking statements or any other information in
the prospectus, unless specifically stated otherwise and except
as required by applicable law, regulation or listing agreement.
Figures in this prospectus may have been rounded and tables
may not always exactly sum up.
Apart from the financial statements for the financial years
ended October 31, 2006, 2007 and 2008 no information in this
prospectus has been audited or reviewed by the Company’s
auditors.
Summary 2
Risk factors 6
Background and reasons for the Listing 17
Statement by the CEO 18
Information and conditions regarding the Listing 20
Industry overview 22
Business of Coastal Contacts 25
Selected consolidated financial information of Coastal Contacts 30
Financial and operational review 32
Board of Directors, senior executives and independent auditors 35
Shareholders’ equity capital, indebtedness and other financial information 40
Share capital, dividend and ownership structure 42
Corporate governance 46
Legal matters and supplementary information 52
Articles of Incorporation, by-laws and corporate law 54
Taxation in Sweden 62
Financial Information 64
Principal differences between IFRS and Canadian GAAP 65
Unaudited interim report for the period November 1, 2008–July 31, 2009 66
Addresses Inside cover
Ke y infor mat ion
Estimated first day of trading
on NASDAQ OMX Stockholm: . . . . . . . . . . . . . . . . . . . . Around November 9, 2009
Short name on NASDAQ OMX Stockholm: . . . . . . . . . . . . . . . . . . . . . . . . . . . . COA
ISIN-code for Shares intended to be listed
on NASDAQ OMX Stockholm: . . . . . . . . . . . . . . . . . . . . . . . . . . . . CA19044R1082
ISIN-code for Shares listed on the Toronto Stock Exchange: . . . . . . . . CA19044R1082
Segment/Sector on NASDAQ OMX Stockholm: . . . . . . . . . . Consumer Discretionary
Trading lot on NASDAQ OMX Stockholm: . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Share
Financi al c alendar
Annual Financial Statements and MD&A
November 2008–October 2009: . . . . . . . . . . . . . . . On or before December 31, 2009
Management proxy circular and annual
information form for the fiscal year 2009: . . . . . . . . . On or before January 31, 2010
Interim report November 2009–January 2010: . . . . . . . On or before March 15, 2010
Interim report February 2010–April 2010: . . . . . . . . . . . On or before June 15, 2010
1
Summary This summary is only intended to be viewed as an introduction to the prospectus. Each and every decision to purchase
Shares in the Company must be based on an assessment of
the prospectus in its entirety. An investor who files suit in
a court of law as a consequence of information set forth in
this prospectus may be forced to bear the cost of the translation of the prospectus. A person may be held liable for
information included in, or omitted from, the summary
or a translation of the summary only if the summary or the
translation is misleading or erroneous in relation to, or
inconsistent with, the other parts of the prospectus.
The L isting
Coastal Contacts’ Shares are currently traded on the Toronto
Stock Exchange in Canada, under the short name COA. The
Company has decided to apply for a listing on NASDAQ
OMX Stockholm. The Listing is conditional upon Coastal
Contacts meeting NASDAQ OMX Stockholm’s ownership
distribution requirements and that no circumstances arise
where the realization of the Listing could be considered as
inappropriate by the Board of Directors.
The estimated first day of trading on NASDAQ OMX
Stockholm is on or about November 9, 2009, assuming
NASDAQ OMX Stockholm approves the Listing. The
Shares to be listed on NASDAQ OMX Stockholm will be
traded in SEK under the short name COA. In connection
with the application for Listing the Company has entered
into a contract with Öhman to act as market maker.
for investors who are aware of the Lensway brand to participate in its future. Stock market liquidity on a major
European exchange could also improve the attractiveness of
the Company to potential European merger targets.
R isk fac tor s
An investment in securities involves a significant degree of
risk. The Company’s operations are affected by a number
of factors which cannot be controlled by the Company.
Below, factors deemed to be of particular significance to
the future prospects of the Company are described. The
summary of risk factors set forth below is not exhaustive.
The Company’s operations may also be materially adversely
affected by other risks and uncertainties which are currently unknown to the Company, or which are currently
not viewed as material. Not all risk factors are described in
detail. Further, the risks are not ranked according to degree
of importance. Nor do they indicate how significant the
impact could be on the Company’s operations. If any of
the following risks, or any other unreferenced factor, actually occur, the business, financial condition and/or operating results of the Company could be materially adversely
affected. This could cause the trading price of the Shares to
decline, and an investor could lose all or part of the investment in the Company. Accordingly, a potential investor
should carefully consider the risks described in the section
“Risk factors”.
Risks related to the global capital
Background and re a sons
market environment
for the L isting
Coastal Contacts has successfully executed a strategy of
global market diversification, becoming the largest online
optical retailer in many markets. The Company is focused
on achieving consistent and sustainable growth through the
continued development of its business. Through expansion
into new markets, expansion of market share within existing
markets and expanding its product offering, such as prescription eyeglasses, and strategic acquisitions.
A NASDAQ OMX Stockholm listing may facilitate and
allow European investors to invest in Coastal Contacts’
stock. The Company believes that a listing of Coastal
Contacts’ Shares on NASDAQ OMX Stockholm may, over
the long run, enhance the Share trading liquidity, expand
the Company’s shareholder base and provide an opportunity
2
Risks related to the Company
– L imited operating history and rapid growth
– L imited trading history
– Dilution
– L imited history of profits
– R isks related to supply
– I nventory risks
– Consumer credit risk
– L oss of customer database
– Acquisitions risk
– Disruption in distribution facilities
– Operation of distribution centers
– Brand, product and service awareness
– Dependence on key executives
– Control by Directors and officers
– Third party reliance for shipping and payment processing
– Foreign exchange fluctuations
– Tax complexity
– Product liability exposure
– No property rights in internet addresses
– L itigation
– Dependence on telephone, internet and management
information systems
Risks related to international
regulatory environment
– Failure to meet international regulatory requirements
– The Fairness to Contact Lens Consumers Act (the
“FCLCA”) may have an adverse effect
– Failure to meet United States and Canadian federal
regulatory requirements.
– The FDA could consider certain of the contact lenses to
be misbranded
– Changes in the legal environment
Risks related to the market
– Reduction in demand for contact lenses
– Competition from traditional and online retailers
– Seasonality
Risks related to the internet
– Continued growth in use of the internet
– Online security breaches
– Website complications
– Response to emerging technologies
– Government regulation of internet and data transmission
– Potential liability for website content
Risks related to the investment in shares
– R isks related to the stock market in general
– R isks related to dividends
– R isks related to voting rights
Risks related to the Listing
Market overv iew
Drivers of visual correction industry
It is estimated that world population will grow by 16.8
percent between 2005 and 2020 and the number of people
wearing eyewear, contact lenses or who have had eye surgery will increase by 79 percent from 1.4 billion people to
2.5 billion.2
Contact lenses
Contact lenses are primarily used to correct for refractive
errors in the eye. In the mid 1900’s the first hard-plastic
contact lenses were developed and in the 1970’s the soft
contact lenses were introduced. The main market for contact lenses is to treat different kinds of eye disorders, with
soft contact lenses being the leading category. However,
the global contact lens penetration among vision corrected
remains relatively low. The Company estimates the market
for soft contact lenses to have been approximately USD 5.0
billion worldwide in 2008.
The largest markets for contact lenses are the United
States, Japan and Europe representing close to 90 percent of the global contact lens market.3 Other markets are
experiencing higher growth rates as their markets proceed
towards maturity.
Prescription eyeglasses
Prescription eyeglasses account for the largest part of the
total retail eyewear market. The Company estimates that
the market for prescription eyeglasses in the markets where
it currently operates amounts to approximately CAD 37
billion. The optical retail industry is highly fragmented
and consists mainly of national and regional optical retail
chains, independent optometry practitioners and mass merchandisers. In general, independent optometry practitioners are more expensive than the other alternatives.
Traditionally, a majority of the contact lenses and eyeglasses are purchased directly from eye-care practitioners.
This group consists of ophthalmologists, optometrists and
opticians in private practices, as well as national optical
chains. Historically, the eye care practitioners have earned
very high margins on selling contact lenses and eyeglasses.
In recent years, several direct-to-consumer marketers have
emerged. Many of these are focused on smaller geographic
markets and many generate much of their sales through
call-centers.
The global retail eyewear market is estimated to have been
worth approximately USD 64 billion in 2008 and will reach
a value of approximately USD 68 billion in the year 2013.1
In some aspects the optical retail industry differs from many
other traditional retailing sectors. The medical nature of
the industry as well as the recommended annual wellness
exams and the frequency of replacement of eyeglasses help
stabilize sales.
1 Packaged Facts, The U.S. Eyewear Market: Prescription and
Nonprescription Lenses, Sunglasses, Contact Lenses, and
Frames, 2nd Edition, June 2009.
2 Chaffin, R. and Schaus, M. Global View of Vision Correction
Buyers, May 2008.
3 Global Industry Analysts, Inc. Contact Lenses and Solutions
– A Global Strategic Business Review, July 2007.
3
Information regarding the Company
Recurring revenue stream
Business concept
The Company’s operations are sustained by having a high
repeat-customer order flow. The Company generally has
a re-order rate of over 70 percent which helps reduce the
average acquisition cost per customer and creates barriers
for potential competitors that have to acquire or retain new
customers at higher average costs.1
Coastal Contacts, including its European brand Lensway,
is a well-established multinational online vision products
retailer. Coastal Contacts designs, produces and distributes
a diversified offering of optical products, including contact
lenses and eyeglasses. Coastal Contacts sells into more than
150 countries through proprietary web properties, such as
www.coastalcontacts.com and www.lensway.se, which reflect
the culture and consumer preference of the target market.
History
Coastal Contacts was established in Vancouver, British
Columbia, Canada in 2000 as an online retailer of replacement contact lenses and optical products. In June 2004
Coastal Contacts acquired Lensway AB, a Swedish online
retailer and distributor of contact lenses with operations in
several European countries. In May 2005, the Company
acquired Yourlenses Scandinavia AB in a step to consolidate
the Scandinavian online contact lens market and strengthen
the Company’s position in Europe. In 2006, the Company
acquired the companies operating MyLenses.nl, an established online retailer of contact lenses and optical products
in the Netherlands, and AsianZakka Pte Ltd., a Singaporebased retailer of contact lenses in Japan.
As a result of selective and active marketing practices,
and the acquisitions mentioned above, the Company has
transitioned into a diversified multinational optical retailer.
By 2009 the Company had built a list of over two million
vision corrected customers in Europe, North America, Asia
and the South Pacific.
Business process
The Coastal Contacts business model differs substantially
from the traditional way of selling eyeglasses and contact
lenses. Coastal Contacts distributes contacts lenses from the
manufacturers directly to customers and purchases frames
and lenses from its suppliers in, for example, Asia before
performing the edging and final assembly of the eyeglasses
and shipping them to the customers. Compared to the traditional process of distribution of optical products, expensive retail space and several middlemen have been removed,
creating cost-savings and convenience for Coastal Contacts’
customers.
Contact lenses
The Company offers contact lenses manufactured by all
the major multinational manufacturers. From its distribution and call centers in Stockholm, Sweden and Vancouver,
British Columbia, Canada, the Company is able to ship the
majority of customers’ orders within one business day. Over
100 million contact lenses have been shipped since inception with an average order size of approximately CAD 100.
Eyeglasses
In February 2008, Coastal Contacts launched a directto-consumer eyeglasses business. The Company has built
eyeglasses manufacturing labs at its facilities in Stockholm,
Sweden and Vancouver, British Columbia, Canada. Since
entering the market for eyeglasses in February 2008 the
Company has shipped over 100,000 prescription eyeglasses.
In July 2009, the Company reported monthly sales of eyeglasses surpassing CAD 1 million for the first time.
Ma jor shar eholder s
The principal owner of the Company is Roger Hardy, the
Chairman and Chief Executive Officer of the Company,
with a voting right corresponding to 12.2 percent of the
votes in the Company. According to its regulatory filings,
as of August 2009, Affiliated Managers Group Inc., an
American institutional investor with its Canadian affiliate
Montrusco Bolton Investments Inc., held 11.4 percent of
the Shares of the Company. In addition to these shareholders, other Directors and senior executives of the Company
hold approximately 10.3 percent of the Shares and votes in
the Company.
Di v idend pol ic y
The Company has not declared or paid dividends since the
date of its incorporation. Although the Company has no current intention to pay dividends, any decision to pay dividends
will be at the discression of the Board, and may depend upon
the Company’s financial requirements to finance future
growth, the Company’s financial condition, results of operations and other factors which the Board of Directors of the
Company may consider appropriate under the circumstances.
For more information see sector “Risk factors”.
1 The re-order rate is the percentage of total orders in a period
that have come from customers who have ordered from the
Company in the past. It is a non-GAAP measure that does not
have a standardized meaning prescribed by Canadian GAAP
and therefore is unlikely to be comparable to similar measures
presented by other companies.
4
Financi al information
Coastal Contacts’ financial year ends on October 31. The
table below sets forth the financial development during the
past three financial years and the past two interim periods
from November to July for a selection of material items in
the Company’s income statements and balance sheets, see
further “Selected consolidated financial information of
Coastal Contacts”.
Income statement in summary
In thousands of CAD
Sales
Cost of sales
Gross profit
EBIT
Earnings before income tax
Net earnings (loss)
Nov 2008–
July 2009
(9 months)
Unaudited
Nov 2007–
July 2008
(9 months)
Unaudited
102,154
–72,424
29,730
2,847
2,915
2,099
86,731
–63,289
23,442
1,088
–611
–1,184
Nov 2007–
Oct 2008
(12 months)
Audited
118,759
–86,243
32,516
556
–9
–786
Nov 2006–
Oct 2007
(12 months)
Audited
102,174
–74,497
27,677
1,755
2,588
1,625
Nov 2005–
Oct 2006
(12 months)
Audited
81,014
–60,709
20,305
1,275
–385
–1,336
Balance sheet in summary
In thousands of CAD
Goodwill
Intangible assets
Property, equipment and
leasehold improvements
Inventory
Accounts receivable
Other current assets
Cash and cash equivalents
Total assets
Shareholders’ equity
Non-current liabilities
Current liabilities
Total shareholders’ equity and liabilities
July 31, 2009
Unaudited
July 31, 2008
Unaudited
Oct 31, 2008
Audited
Oct 31, 2007
Audited
Oct 31, 2006
Audited
7,598
9,577
8,537
12,225
7,908
11,061
7,529
11,712
6,697
13,632
2,939
12,610
7,503
1,836
14,000
56,063
33,827
3,476
18,760
2,901
10,624
7,833
2,462
19,959
64,541
39,813
4,258
20,470
3,038
9,495
7,279
2,268
15,206
56,255
33,470
3,904
18,881
2,700
8,531
6,649
5,594
23,367
66,082
47,580
3,819
14,683
2,773
12,262
7,127
1,312
24,273
68,076
51,453
4,313
12,310
56,063
64,541
56,255
66,082
68,076
Accounting for working capital
Addi t ional infor mat ion
As of 31 July 2009, the Company’s cash and cash equivalents
totaled CAD 14.0 million and the Company had no financial debt. After this date, the Company has not raised any
financial debt. The Company has lease obligations of CAD
3.7 million of which CAD 0.7 million and CAD 1.1 million matures in 2009 and in 2010 respectively. The Board of
Directors and management believe that the Company’s current financial resources, together with cash flows from operations, are sufficient to fund its commitments and working
capital requirements for the next twelve months.
Advisers
E. Öhman J:or Fondkommission AB acts as financial adviser
for the Company and Kilpatrick Stockton acts as Swedish
legal adviser and Sangra Moller LLP acts as Canadian legal
adviser for the Company in connection with the Listing.
5
Risk Factors An investment in securities involves a significant degree of
risk. The Company’s operations are affected by a number of
factors which cannot be controlled by the Company. Below,
factors deemed to be of particular significance to the future
prospects of the Company are described. The summary of
risk factors set forth below is not exhaustive. The Company’s
operations may also be materially adversely affected by
other risks and uncertainties which are currently unknown
to the Company, or which are currently not viewed as material. Not all risk factors are described in detail. Further,
the risks are not ranked according to degree of importance.
Nor do they indicate how significant the impact could be on
the Company’s operations. Accordingly, a potential investor should not only carefully consider the risks described
herein but also other information included in the prospectus as well as the macroeconomic environment. If any of
the following risks, or any other unreferenced factor, actually occur, the business, financial condition and/or operating results of the Company could be materially adversely
affected. This could cause the trading price of the Shares to
decline, and an investor could lose all or part of the investment in the Company. The following discussion highlights
some of the risks and uncertainties facing the Company.
R isk s rel ated to the global
c api tal market env ironment
In the fall of 2008, the world’s industrial nations entered
into a severe economic and liquidity crisis. This crisis is
still having a broad impact on the world’s economy, with
unspecified results, and heightens the risks outlined below.
Due to the speed, size, scope, volatility and severity of the
crisis, we are unable to accurately predict the impact it will
have on the Company. For example, the significant volatility in foreign currency exchange rates that we experienced
throughout fiscal 2008 and thus far in 2009 could continue in future periods. This could materially impact our
revenues, margins and resultant earnings in certain markets. The current economic conditions could further significantly impact our suppliers, including their access to
products and financing. Additionally, many of our customers are in countries heavily exposed to the credit crisis, such
as the United States. Our customers worldwide may have
difficulty affording our products or paying their outstanding accounts owed to us.
6
R isk s r el ated to the Company
Limited operating history and rapid growth
We were formed under the federal laws of Canada in 2000
and therefore have a limited operating history. We may experience significant fluctuations in our operating results and
rate of growth. Our limited operating history, our evolving
business model and the unpredictability of demand in our
industry make it difficult for us to accurately forecast the
level or source of our revenues and our rate of growth. We
believe that because of these factors, historical trends and
quarter-to-quarter comparisons of our operating results are
not necessarily meaningful and should not be relied upon
as an indicator of our future performance. In the past, our
operating results have sometimes been, and it is likely that
in some future quarter or quarters they will be, below the
expectations of investors and securities analysts. In that
event, the price of the Shares may fall substantially and
investors may lose all or a part of their investment.
Our revenue growth and profitability depend on the
continued growth of demand for the products we offer.
Demand for many of our products and, therefore, our business, is affected by changes in consumer preferences, general economic and business conditions and world events.
For example, threatened or actual terrorist attacks, armed
hostilities (or the resulting security concerns) or natural
disasters could create economic and consumer uncertainty
and delays in and increased costs of product shipments to
and from us, which may decrease demand. A softening of
demand, for whatever reason, may result in decreased revenue or growth. Revenue growth may not be sustainable
and the Company-wide and by-segment percentage growth
rates may decrease in the future.
We have now entered the prescription eyeglasses business. While our initial results appear promising, we may
not be able to build a successful and sustainable business
in this market. Our success is dependent on new suppliers, new assembly and distribution processes as well as new
marketing processes. There is no assurance that we will be
able to acquire customers at acceptable costs. Our long term
customer retention, inventory obsolescence and product
return rates are unknown. We may invest in technology and
processes that are not ultimately suitable for the business
and we may not be able to recruit the specialized employees required in this business. We do not yet have long term
relationships with suppliers, and therefore may suffer delivery and quality inconsistency. Additionally, we may face
more asserted competition as prescription eyeglasses sales
represent a much greater proportion of our competitors’
revenues and profits than do contact lenses. This competition may be in the form of increased advertising, lower retail
pricing, legal challenges, regulatory lobbying, supplier lockups or other unforeseen strategies.
Our revenues, predictions and operating results have varied significantly in the past and may vary significantly from
quarter-to-quarter due to a number of factors, including:
our ability to retain and increase sales to existing customers,
attract new customers and satisfy our customers’ demands;
the frequency and size of customer orders and the quantity
and mix of products our customers purchase; changes in
consumer acceptance and usage of the internet, online services and e-commerce; changes in fashion and customer preferences as these relate to our eyeglasses selection; the prices
we charge for our products and for shipping those products,
or changes in our pricing policies or the pricing policies of
our competitors; the extent to which we offer free shipping
or other promotional discounts to customers; the extent to
which the current economic conditions restrict spending on
our products; our ability to acquire merchandise at a reasonable price, if at all, manage inventory and fulfill orders;
technical difficulties, system downtime or interruptions;
our actual or expected return on marketing spending; timing and costs of upgrades and developments in our systems
and infrastructure; timing and costs of marketing and other
investments; disruptions in service by shipping carriers; our
ability to estimate customer debt default rates; the introduction by our competitors of websites, products or services;
changes in tax rates, regulations, estimates, assessments or
rulings; the extent of marketing or other reimbursements
available from third parties; an increase in the price of
fuel, which is used in the transportation of packages, or an
increase in the prices of other energy products, primarily
natural gas and electricity, which are used by our operating
facilities; the effects of strategic alliances, potential acquisitions and other business combinations, and our ability to
successfully and timely integrate them into our business;
changes in government regulation or the effects of certain
licensing and regulatory bodies’ lobbying or legal action
surrounding the sale of contact lenses and eyeglasses; actual
or expected foreign exchange rates; and current economic
conditions and world events.
In addition, our operating expenses are largely based
on anticipated revenue trends, and a high percentage of
our expenses are fixed in the short-term. As a result, a
delay in generating or recognizing revenue for any reason
could result in substantially adverse operating results. We
have grown very rapidly and we need to manage changing
and expanding operations. Much of our past growth has
come from the acquisition of other companies. Our past
growth has placed, and it is expected that our anticipated
future operations and expansion will continue to place a
significant strain on our managerial, operational, financial and other resources. Some of the administrative and
operational challenges we have faced in the past as a result
of our expansion include the management of an expanded
number of product offerings, the assimilation of financial reporting systems, technology and other systems of
acquired companies, increased pressure on senior management and increased demand on our systems and internal
controls. Our ability to manage our operations and expansion effectively depends on the continued development and
implementation of plans, systems and controls that meet
our operational, financial and management needs. If we
are unable to develop or implement these plans, systems or
controls or otherwise manage our operations and growth
effectively, we will be unable to increase or maintain gross
margins or achieve sustained profitability, and our business
could be harmed. Additionally, our market is subject to
rapid changes in technology and the business environment.
We may adjust our strategies in response to these changes by
changing, divesting or discontinuing organically developed
or acquired systems, operations or businesses that may no
longer be consistent with the business environment or our
strategies. Such changes could have a material impact on
our operating results.
Limited trading history
Due in part to the relatively recent listing of the Shares on a
public market, our limited operating history and low trading volumes, the market price for our Shares is likely to be
volatile and may be significantly affected by such factors as
quarter-to-quarter variations in our results of operations
or predictions, announcements, changes in general market
conditions for contact lenses and vision products, adverse
publicity regarding us or our industry in general, regulatory
actions, changes in financial estimates by securities analysts
and other factors.
Dilution
We have the authority to issue an unlimited number of common shares and preferred shares. We may undertake additional offerings or issuances of securities in the future. The
increase in the number of Shares outstanding and the possibility of sales or issuances of such Shares may have a negative
impact on the price of Shares already outstanding. In addition, in the event of an issuance of additional Shares, the
voting power of our existing shareholders would be diluted.
Limited history of profits
We have had a net loss in two of the last three audited
reporting periods, and we may generate losses in the future.
As a result, our stock price may decline and investors may
lose all or a part of their investment in the Shares.
7
Risks related to supply
Product cost is our largest expense. Certain major optical
products manufacturers have refused to sell their products to direct marketers, including the Company, and have
sought to prohibit others from doing so. As a result, it is
our current practice to purchase a portion of our products
from distributors that may be subject to re-sale restrictions
from manufacturers. We may not be able to obtain sufficient quantities of contact lenses at competitive prices in the
future to meet existing or anticipated demand, and any such
inability could have a material adverse effect on our business, financial condition and results of operations.
A single distributor supplied us with approximately 35
percent, 38 percent and 28 percent of our inventory purchases in the nine months ended July 31, 2009, and years
ended October 31, 2008, and 2007, respectively, and our
top three suppliers accounted for approximately 73 percent,
71 percent and 52 percent of our inventory purchases in the
nine months ended July 31, 2009, and years ended October
31, 2008, and 2007 respectively. We believe that the loss of
any one supplier would not pose any long term difficulties
as other suppliers are readily available, however in the event
that several of these suppliers can no longer supply us with
contact lenses, we may not be able to secure other adequate
sources of supply at all or on favourable terms. Such occurrences could adversely affect our business by increasing
costs or, in the event adequate replacement supply cannot
be secured, reducing net sales.
Inventory risks
We have significant inventory risk. We must maintain sufficient inventory levels to operate our business successfully
and meet our customers’ expectations that we will have
the products they order in stock. However, we must also
guard against the risk of accumulating excess inventory. We
are exposed to inventory risks as a result of rapid changes
in product cycles, changes in consumer tastes, changes in
wholesale pricing and foreign exchange rates, impairments
of the general consumer economic environment, uncertainty of success of product launches, manufacturer backorders and other vendor-related problems. In order to be successful, we must accurately predict these trends and events,
which we may be unable to do successfully, and avoid overstocking or under-stocking products. In addition, demand
for products can change significantly between the time
product inventory is ordered and the time it is available
for sale. Changes in fashion and customer preferences have
become a more important risk factor relating to inventory
since we introduced eyeglasses into our business. As we
introduce new products, it is particularly difficult to forecast product demand accurately. Excess inventory could lead
to inventory obsolescence, and insufficient inventory could
harm our customer relationships and profits and require us
to make split shipments for backordered items or pay for
8
expedited delivery from the manufacturer if it has insufficient inventory.
Consumer credit risk
We offer most of our customers the option of paying for
their orders after they have been delivered, which exposes
us to credit default risk. If a material number of customers
fail to honor such debts in rates in excess of our estimated
default rates, our business, financial condition and results of
operation could be materially and adversely affected. This
risk may have been exacerbated by the recent economic crisis. As consumers are impacted by the current economic
downturn, we may experience higher credit default costs in
the future.
Loss of customer database
Although our customer database is replicated, backed-up
and stored off-site, the customer database is still potentially
at risk from fire, flood, earthquake, computer systems failure
and theft. In the event of a partial or total loss of our customer database, we would not be able to readily market our
products, or to remind customers to reorder lenses, which
may decrease sales. Additional costs may also be incurred
in restoring our database, also decreasing our profitability.
Acquisitions risk
Our future growth strategy depends in part on our ability
to acquire complementary or strategic businesses or assets.
Any such acquisition could result in dilution, operating difficulties, difficulties in integrating acquired businesses and
other harmful consequences.
We may acquire, and have in the past acquired, complementary or strategic businesses, technologies, services and
products as part of our strategy to increase our net sales
and customer base. The process of integrating these acquisitions into our business and operations, and the integration of any future acquired business, technology, service or
product, may result in unforeseen operating difficulties and
expenditures. The integration of our acquisitions, and the
integration of any future acquisition, also requires significant management resources that would otherwise be available for operation, ongoing development and expansion of
our business. To the extent that we miscalculate our ability
to integrate and properly manage acquired businesses, or
we depend on the continued service of acquired personnel
who choose to leave, we may have difficulty in achieving
our operating and strategic objectives. In addition, we may
not realize the anticipated benefits of any acquisition. We
continue to actively seek acquisition opportunities. We may
be unable to identify suitable acquisition opportunities or
to negotiate and complete acquisitions on favorable terms,
or at all. In addition, any future acquisitions may require
substantial capital resources and we may need to obtain
additional capital or financing from time to time to fund
these activities. This could result in potentially dilutive issuances of our securities or the incurrence of debt, contingent
liabilities or amortization expenses related to goodwill and
other intangible assets, any of which could harm our business, financial condition and results of operation. Sufficient
capital or financing for our acquisition activities may not be
available to us on satisfactory terms, or at all.
Disruption in distribution facilities
We conduct all of our fulfillment operations from our distribution facilities in Stockholm, Sweden and Vancouver,
British Columbia, Canada. Any significant disruption of
these centers’ operations will adversely affect our ability
to make timely delivery of our products. A natural disaster or other catastrophic event, such as an earthquake, fire,
flood, severe storm, break-in, server or systems failure, terrorist attack or other comparable event at these facilities
could cause interruptions or delays in our business and loss
of inventory and could render us unable to process or fulfill customer orders in a timely manner, or at all. Further,
although we maintain off-site secured data storage, our
insurance may not adequately compensate us for losses that
may occur. In the event that a significant part of any of
these facilities was destroyed or our operations were interrupted for any extended period of time, our business, financial condition and operating results would be harmed. We
assemble custom made eyeglasses on our premises using
sophisticated equipment. Our business depends on the
safe and continued operation of this equipment in order to
assemble these eyeglasses for our customers. Additionally,
in order to capitalize on the international marketplace for
contact lenses, we may require additional overseas distribution facilities to offset the prohibitive shipping costs that are
currently offered to customers in these markets.
Operation of distribution centers
If we are unable to optimize management of our distribution centers, we may be unable to meet customer expectations. Because it is difficult to predict sales volume, we
may be unable to manage our facilities in an optimal way,
which may result in excess or insufficient inventory, warehousing, fulfillment or distribution capacity. In addition,
failure to effectively control product damage and shrinkage
through effective security measures and inventory management practices could adversely impact our operating margins. Our margins and revenues may also be affected if
we are unable to obtain products from manufacturers and
wholesalers on timely and favorable terms. In addition, if
we need to increase our distribution capacity sooner than
anticipated, that expansion would require additional financing that may not be available to us on favorable terms when
required, or at all. We are dependent on a limited number
of fulfillment and distribution partners. If we are unable
to expeditiously and cost-effectively obtain shipments of
products from our vendors and deliver merchandise to our
customers, our business and results of operations may be
harmed. We cannot control all of the various factors that
might affect our timely and cost-effective procurement of
products from our vendors and delivery of products to our
customers. We also rely on a limited number of third party
carriers for shipments of products to and from our distribution facilities and to customers. We are therefore subject to
the risks, including increased fuel costs, security concerns,
labor disputes, union organizing activity, and inclement
weather, associated with our carriers’ ability to provide
product fulfillment and delivery services to meet our distribution and shipping needs. Failure to procure and deliver
merchandise, either to us or to our customers in a timely
and accurate manner, will harm our reputation, our business and our results of operations. In addition, any increase
in fulfillment costs and expenses could adversely affect our
business and operating results. Our operating results could
also be materially adversely affected if the governments of
the United States, Sweden, Norway, Denmark, Finland, the
UK, the Netherlands, Japan or the various other countries
in which we sell our products implement or enforce stricter
importation controls.
Brand, product and service awareness
If our marketing efforts are not effective at attracting
and retaining customers at an acceptable cost, we will be
unable to achieve sustained profitability, and if we do not
establish our brand and increase awareness of our products
and services, we may not build a critical mass of customers. Promoting and positioning our brand depends largely
on the success of our marketing efforts and our ability to
provide consistent, high quality customer experiences.
To promote our brand and our products and services, we
have incurred and expect to continue to incur substantial
expense in our marketing efforts to attract and retain customers. Our brand campaign may be less successful than
we anticipate, and our other promotional activities may not
be effective at building our brand awareness and customer
base to the extent necessary to generate sufficient revenue to
become profitable. Search engine advertisements and other
online marketing initiatives comprise a substantial part of
our marketing efforts, and our success depends, in part,
on our ability to manage costs associated with these initiatives or find other channels to acquire and retain customers
cost-effectively. The demand for, and cost of, online advertising has been increasing and may continue to increase.
An inability to acquire and retain customers at a reasonable cost could make our market uneconomical and would
increase our operating costs and prevent us from being
profitable. Furthermore, as our marketing efforts increase
and our brand awareness increases, the risks relating to
the misappropriation of our brands and trademarks also
increase. Should a competitor or other entity be successful
9
in misappropriating our brands or trademarks, this could
have a material adverse effect on our business, financial condition and results of operations.
Dependence on key executives
We are dependent to a large degree on the services of our
senior management team. The loss of any of our key executives could have a material adverse effect on us. Our ability
to manage our anticipated growth will depend on our ability to identify, hire and retain highly skilled management
and technical personnel. Competition for such personnel is
significant. As a result, there can be no assurance that we
will be successful in attracting and retaining such personnel. Failure to attract such personnel could have a material adverse effect on our business, financial condition and
results of operations.
Control by Directors and officers
As at the date of this document, Coastal Contacts’ Directors’
and senior executives’ aggregate ownership of Shares (on a
non-diluted basis) in the Company corresponds to a control
of approximately 22.5 percent of the aggregate voting power
of the Company, which would allow such shareholders, in
the event that they acted together, to limit the actions taken
by other shareholders of the Company, including the election of Directors. Such concentration of ownership could
also have the effect of delaying, deterring or preventing a
change in control of the Company that might otherwise
be beneficial to our shareholders and may also discourage
acquisition bids for the Company and limit the amount
certain investors may be willing to pay for our the Shares.
There can be no guarantee that the concentration of ownership of the Shares by our Directors and senior officers will
not increase in the future.
Third party reliance for shipping
and payment processing
We rely heavily on third party mail and courier delivery
organizations to deliver our products to customers both
domestically and internationally and receive a significant
portion of our payments from customers using credit cards
or other electronic payment methods. Increases in shipping,
postal or payment processing rates could have a material
adverse effect on our operating results as we may not be
able to effectively pass such increases on to our customers.
In addition, strikes or other service interruptions by service providers could adversely affect our ability to market,
deliver and collect on our sales on a timely basis.
Foreign exchange fluctuations
A significant majority of our sales and costs are denominated in currencies other than the Canadian dollar. In addition, we have a self sustaining foreign operation in Europe
with its own functional currency. Our operating results
10
are significantly subject to foreign currency exchange rate
fluctuations between these currencies and the currencies in
which we sell, purchase or hold assets. In particular, a weakening of the CAD relative to the USD and a strengthening
of the CAD relative to other world currencies could have a
material adverse impact on our operating results.
Tax complexity
We market and sell products and operate our business in
a number of tax jurisdictions worldwide. Each jurisdiction
has its own sales, VAT and income tax regimes. These rules
are complex and generally different in each jurisdiction. The
complexity of our multinational corporate structure could
subject us to unforeseen income and commodity tax exposure. In addition, some jurisdictions have sought to impose
sales tax collection obligations on out-of-jurisdiction direct
marketing companies such as ours. A successful assertion
by one or more jurisdictions that we must, or should have,
collected more sales tax than we currently collect or that
we are subject to additional income tax could materially
and adversely affect our operating results and could require
us to increase the price of our products to our customers,
which could adversely affect our business, financial condition and results of operations.
Product liability exposure
We sell optical products to the general public, including private label products. Consequently, we incur, relative to other
industries, a higher risk of exposure to product liability and
personal injury claims. While we maintain product liability
insurance, such coverage may be inadequate to cover any
liabilities we incur. Claims brought against us could result
in diverted management time, significant adverse publicity and could be costly to defend or settle. Such costs not
covered by or in excess of the available insurance coverage
could have a material adverse effect on our business, financial condition and results of operations.
No property rights in internet addresses
We have obtained the rights to various internet addresses.
We cannot practically acquire rights to all addresses similar
to our current addresses. If third parties obtain rights to
use similar addresses, these third parties may confuse our
customers and cause our customers to inadvertently place
orders with these third parties, which could result in lost
sales and could damage our brands. As with telephone numbers, we do not have and cannot acquire any property rights
in internet addresses. As a result, we may be unable to retain
the use of our internet addresses. The loss of the ability to
use our internet addresses would have a material adverse
effect on our business, financial condition and results of
operations.
Litigation
The Company is currently subject to litigation and may be
involved in disputes with other parties in the future, which
may result in litigation. If we are unable to resolve these
disputes favorably, it may have a material adverse impact on
the Company’s financial condition, cash flow and results of
operations. See “Legal Proceedings”.
Dependence on telephone, internet and
management information systems
Our success depends, in part, on the ability to provide
prompt, accurate and complete service to customers on a
competitive basis, and the ability to purchase and promote
products, manage inventory, ship products, manage sales
and marketing activities and maintain efficient operations
through telephone and proprietary management information systems. A significant disruption in telephone, internet
or management information systems could harm relations
with customers and the ability to manage our operations.
From time to time, we have experienced temporary interruptions in telephone and internet service as a result of
technical problems experienced by our long-distance carriers and internet providers. Similar interruptions may occur
in the future and such interruptions may harm our business.
Furthermore, extended or repeated reliance on our back-up
computer systems may harm our business.
R isk s rel ated to international
regul atory env ironment
Failure to meet international
regulatory requirements
The sale and distribution of contact lenses and other optical
products is subject to various governmental laws and regulations. We sell to consumers in various states, provinces, cantons and countries, and our sales may therefore be subject
to the laws of various states, provinces, cantons or countries.
The laws and regulations governing the distribution and sale
of optical products vary from jurisdiction to jurisdiction but
are generally classifiable into the following categories: (i)
laws that require contact lenses and/or optical products to
be sold only with a prescription; (ii) laws that require contact lenses and/or optical products to be sold only in transactions that occur with the eye care practitioners in personal
attendance or operating in a supervisory role; (iii) laws that
require those selling contact lenses and/or optical products
to be licensed as eye care practitioners; (iv) laws that do not
specifically address contact lenses and/or optical products
or that are ambiguous; and (v) laws which we believe place
no restrictions on the distribution and sale of replacement
contact lenses and/or optical products. A number of jurisdictions comprising a large portion of our sales have laws
and regulations that require that contact lenses only are sold
to a consumer pursuant to a valid prescription. Satisfying
such prescription requirement, in some jurisdictions, places
on the seller an obligation to verify such customer’s prescription information with the customer’s eye care practitioners, while in other jurisdictions, a written prescription is
required to be obtained before providing the contact lenses
to the consumer. Where required, and in particular in the
United States, it is our current general operating practice
to obtain the customer’s prescription or, if possible, verify
such prescription with the customer’s eye care practitioner.
If the customer is unable to provide us with a copy of his or
her prescription, we request that the customer provide us
with the exact prescription specification and we then contact the eye care practitioner directly to attempt to verify
the customer’s prescription. Where required, we communicate to the eye care practitioner the information received
from the customer and inform the eye care practitioner that
unless the eye care practitioner advises that such information is expired or is incorrect, we will proceed to complete
the sale and ship the contact lenses. Although we and certain of our employees/consultants are licensed or registered
to sell contact lenses in certain jurisdictions, neither we nor
any of our employees/consultants are licensed or registered
in each jurisdiction in which we conduct our business. The
laws in a number of jurisdictions require a person licensed
under applicable law to sell contact lenses to be in personal
attendance at the place of sale. Any action or proceeding
commenced against us based on lack of compliance with
applicable laws or regulations of any state, province, canton, or country could result in significant fines to us, our
being prohibited from making sales in a particular jurisdiction and/or our being required to comply with such laws
or other penalties. Additionally, other jurisdictions could
rely on such judgments in pursuing their own similar judgments. Such required compliance could result in increased
operating costs to us, the loss of a substantial portion of our
customers for whom we are unable to obtain or verify prescription information, the inability to sell to customers in
a particular jurisdiction and other penalties and civil fines.
The occurrence of any of these events could have a material adverse effect on our business, financial condition and
results of operations. We can provide no assurance that any
state, province, canton or country will not enact or impose
laws or regulations that prohibit direct-to-consumer marketing of contact lenses or prescription eyeglasses or otherwise impair our ability to sell our products. The nature of
our business requires that we import contact lenses and eyeglasses into various jurisdictions, particularly to a number
of countries in the European Union and Japan. Certain of
these countries also have legislations and regulations which
govern the importing of contact lenses. While we work to be
in compliance with such legislation and regulations, should
such legislation or regulations change or should certain of
our suppliers not comply with such legislation or regulations, any restriction imposed on either us or our suppliers
in connection with the importing of products could have a
11
material adverse effect on our business, financial condition
and results of operation. Additionally, our business, financial condition and results of operations could be materially
adversely affected by lobbying action by licensing and regulatory bodies who wish to restrict the sale of our products.
The Fairness to Contact Lens Consumers Act
(the “FCLCA”) may have an adverse effect
The FCLCA, which establishes a national uniform standard
in the United States with regard to re-leasing and verifying
contact lens prescriptions, requires all eye care practitioners
to give patients a copy of their prescription after they have
been fitted for contact lenses, whether patients request it or
not. It also requires all eye care practitioners to respond to
direct marketers’ requests to verify consumer prescriptions
and provides that their failure to respond within eight business hours shall result in the prescription being presumed
valid. We believe that since the enactment of the FCLCA,
many orders have been cancelled unnecessarily by eye care
practitioners who prefer to record sales of contact lenses at
their own store. Eye care practitioners may, among other
things, solicit our customers during the verification delay
period, respond that prescriptions are expired or invalid
but then sell contact lenses without further examination or
refuse to release prescriptions automatically to all contact
lens wearers. If eye care practitioners fail to comply with the
FCLCA, and if the new rules are not vigorously enforced,
the new prescription verification requirements could have
an adverse impact on our net sales. Furthermore, we are
unable to monitor and ensure that our competitors follow
the requirements of the FCLCA, or, if they do follow the
requirements of the FCLCA, that they follow them to the
same extent that we do. Failure to follow the provisions of
the FCLCA will give our competitors an advantage over us
to the extent that such non-compliance is un-detected by
reducing the compliance costs associated with the FCLCA
of these competitors.
Failure to meet United States and Canadian
or the FD Act. The distribution of medical devices that do
not comply with the FDC Act or the FD Act is unlawful,
and subjects the distributor and the devices themselves to
regulatory action. The possible sanctions include warning
letters, injunctions, civil penalties, criminal prosecution and
seizure of infringing contact lenses. Similar sanctions may
be enacted by government regulatory authorities in other
markets where we conduct business.
The FDA could consider certain of the
contact lenses to be misbranded
The FDA also regulates the labeling of medical devices.
The contact lenses that we sell are prescription devices,
and therefore contain the following 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
we have encountered in obtaining the cooperation of eye
care practitioners, we sometimes sell lenses based solely on
the prescription information provided by the customer without a written prescription or other order by the customer’s
eye care practitioner. Although the FDA has not objected
to the sale of contact 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 FDC Act,
and can result in warning letters, seizure, injunctions, civil
penalties or prosecution.
Changes in the legal environment
Given the extensive regulation which governs our business, any changes or enforcements in this regulatory regime
could have a material adverse effect on our business, financial condition and results of operations. We seek to ensure
that we remain in broad compliance with all legislation and
regulations which impact our business, but there can be no
assurance that we will timely respond to all such changes or
that such responses will satisfy new requirements.
federal regulatory requirements
Contact lenses are regulated as medical devices in the
United States by the Federal Food and Drug Administration
(“FDA”) and in Canada by Health Canada. Under the
Federal Food, Drug, and Cosmetic Act (the “FDC Act”)
in the United States, medical devices must meet a number
of regulatory requirements, including the requirement that
they are cleared or approved by the FDA, are manufactured
in accordance with good manufacturing practice regulations, are labeled in compliance with federal law, and are
listed with the FDA. The Food and Drugs Act (the “FD
Act”) in Canada has similar requirements. We attempt to
ensure that the contact lenses we buy comply with federal
laws. However, we are not the manufacturer and cannot
ensure that the lenses we sell do comply with the FDC Act
12
R isk s r el ated to the mar ket
Reduction in demand for contact lenses
We encounter competition from manufacturers of eyeglasses and from alternative technologies, such as surgical
refractive procedures, including new refractive laser procedures such as PRK, or photorefractive keratotomy, and
LASIK, or laser in situ keratomileusis. If surgical refractive
procedures become increasingly accepted as an effective
and safe technique for permanent vision correction, they
could substantially reduce the demand for contact lenses.
Accordingly, these procedures, or other alternative technologies that may be developed in the future, may cause
a substantial decline in the number of contact lens wearers
and harm our business.
Competition from traditional and online retailers
We compete in an emerging market that is highly competitive, and it is our expectation that competition will increase
in the future. We compete with a variety of companies, many
of which have significantly greater financial, technical and
marketing resources. These competitors include: (i) various
on-line and mail-order stores that sell contact lenses; and
(ii) existing drugstores and optical chains. Most of these
drugstores and optical chains, which include national,
regional and local drugstore chains, discount drugstores,
supermarkets, combination food and drugstores, discount
general merchandise stores, mass market retailers, independent drugstores and local merchants, have existed for a
longer period, have greater financial resources, have established marketing relationships with leading suppliers and
have secured greater presence in the distribution channels.
Some of these companies may also commence or expand
their presence on the internet. We believe primarily that the
principal factors that would draw an end-user to an on-line
direct-to-consumer application include brand selection and
availability, convenience, price, accessibility, customer service, quality of search tools, quality of content and reliability
and speed of fulfillment of products ordered. We will in the
future have no control over how successful our competitors are in addressing these factors. In addition, our online
competitors can duplicate many of the services and content
offered on our websites.
Seasonality
Seasonality effects may impact our revenue distribution
throughout the year. Consistent with the fashion and
beauty industries, sales are generally stronger during the
spring, summer and fall months. Generally, sales are lower
during the holiday season as customers choose to divert discretionary funds toward holiday purchases. There can be
no assurance that we will be able to effectively manage the
seasonal fluctuations in our revenues and a failure to do so
could have a material adverse effect on our business, financial condition and results of operations.
R isk s rel ated to the internet
Continued growth in use of the internet
The internet is rapidly evolving. A decrease in the growth of
internet usage could harm our business. The following factors may inhibit growth in internet usage, limit visits to our
internet addresses or limit orders placed through our websites: (i) inadequate internet infrastructure; (ii) security and
privacy concerns; (iii) inconsistent quality of service; and
(iv) unavailability of low cost, high-speed service. Our success is dependent, in part, upon the ability of internet infrastructure to support increased use. The performance and
reliability of the internet may decline as the number of users
increase or the bandwidth requirements of users increase.
The internet has experienced a variety of outages due to
damage to portions of its infrastructure. If outages or delays
occur frequently in the future, internet usage, including
usage of our websites, could grow slowly or decline. Even if
the necessary infrastructure or technologies are developed,
we may have to spend considerable amounts of time and
money to adapt and develop solutions accordingly.
Online security breaches
Secured transmission of confidential information over the
internet is essential to maintaining customer confidence.
Substantial or ongoing security breaches of our systems
or other related internet-based systems could significantly
harm our business. Any penetration of our network security or other misappropriation of our users’ personal information could subject us to liability. We may be liable for
claims based on unauthorized purchases with credit card
information, impersonation or other similar fraud claims.
Claims could also be based on other misuses of personal
information, such as for unauthorized marketing purposes.
These claims could result in litigation and financial liability. Security breaches could also damage our reputation
and expose us to a risk of loss or litigation and possibly
liability. We rely on licensed encryption and authentication
technology to effect secured transmissions of confidential
information, including credit card numbers. It is possible
that advances in computer capabilities, new discoveries
or other developments could result in the compromise or
breach of the technology used by us to protect our customers’ transaction data. We may incur substantial expenses
to protect against and remedy security breaches and their
consequences. Our insurance policies may not be adequate
to reimburse us for losses caused by security breaches. We
cannot guarantee that our security measures will prevent
security breaches.
Website complications
The satisfactory performance, reliability and availability of
our websites, transaction processing systems and network
infrastructure are critical to our reputation and our ability
to attract and retain customers and to maintain adequate
customer service levels. Our network and communications
systems are vulnerable to system interruption and damage,
which could harm our operations and reputation, which
could have a materially adverse effect on our business,
financial condition and results of operations. Our ability to
receive and fulfill orders successfully is critical to our success
and largely depends upon the efficient and uninterrupted
operation of our computer and communications hardware and software systems. We experience periodic system
interruptions that impair the performance of our transaction systems or make our websites inaccessible to customers. These systems interruptions may prevent us from efficiently accepting and fulfilling orders, timely sending out
promotional e-mails and other customer communications,
13
introducing new products and features on our websites,
timely responding to customers, or providing services to
third parties. Frequent or persistent interruptions in our
services could cause current or potential customers to
believe that our systems are unreliable, which could cause
them to avoid our websites, drive them to our competitors,
and harm our reputation. To minimize future system interruptions, we need to continue to add software and hardware
and improve our systems and network infrastructure to
accommodate increases in website traffic and sales volume.
We may be unable to timely and effectively upgrade and
expand our systems and integrate additional functionality
into our existing systems in a cost effective manner. Any of
the aforementioned circumstances could harm our business,
revenues and operating results. Our systems and operations,
and those of our suppliers and internet service providers,
are vulnerable to damage or interruption from fire, flood,
earthquakes, power loss, server failure, telecommunications
and internet service failure, acts of war or terrorism, computer viruses and denial-of-service attacks, physical or electronic break-ins, sabotage, and similar events. Any of these
events could lead to system interruptions, service delays
and loss of critical data for us, our suppliers or our internet
service providers, and could prevent us from accepting and
fulfilling customer orders. Any significant interruption in
the availability or functionality of our websites or our customer processing, distribution or communications systems,
for any reason, could seriously harm our business, financial
condition and operating results.
Response to emerging technologies
As the internet and online commerce industry evolve, we
must license leading technology useful in our business,
enhance our existing services and develop new services and
technologies that address the increasingly sophisticated and
varied needs of our perspective customers and respond to
technological advances and emerging industry standards
and practices on a cost effective and timely basis. We may
not be able to successfully implement new technologies or
adapt our websites, proprietary technology and transaction
processing systems to customer requirements for emerging
industry standards. If we are unable to do so, it could have a
material adverse effect on our business, financial condition
and results of operations.
14
Government regulation of internet
and data transmission
Laws and regulations directly applicable to communications or commerce over the internet are becoming more
prevalent. Rapid growth and development of the market for
online commerce may prompt calls for more stringent consumer protection laws that may impose additional burdens
on companies conducting business online and, in particular, companies that fill prescriptions for disposable contact
lenses and optical products. Adoption or modification of
laws or regulations relating to online business could materially adversely affect our business, financial condition and
results of operations.
Potential liability for website content
Due to the fact that we post product information and other
content on our websites, we face potential liability for negligence, copyright, patent or trademark infringement, defamation, indecency and other claims based on the nature and
content of the materials presented. In the past, such claims
have been brought and in some cases resulted in successful
suit against the internet content distributors. In addition,
we could be exposed to liability with respect to unauthorized duplication of content or unauthorized use of another
party’s proprietary technology. Although we maintain general liability insurance, our insurance may not cover potential claims of this type or may not be adequate to indemnify
us for all liability that may be imposed. Any imposition of
liability that is not covered by insurance or that is in excess
of insurance coverage could have a material adverse effect on
our business, financial condition and result of operations.
R isk s rel ated to the
R isk s r el ated to the L ist ing
investment in shares
The Company has applied for the Listing of the Shares
on NASDAQ OMX Stockholm. However, there can be
no guarantee that the Listing will be completed. If there
will not be a large enough number of investors that hold
Shares in the Company that are intended for the Listing,
the Company may not be able to fulfill the listing requirements of NASDAQ OMX Stockholm, requiring that there
is sufficient liquidity in order to facilitate orderly trading
and an efficient price formation process.
Risks related to the stock market in general
Risk and risk-taking are inevitable a part of investing in
shares. In addition to the Company’s performance and the
risk factors outlined in this prospectus, the price performance of the Shares depends on a number of factors, some of
which are related to the market in general. Such factors may
include the economic climate, market interest rates, capital flows, political uncertainties and market and behavioral
psychology. The Company is unable to predict or exercise
control over these factors. Thus, a potential investor should
be aware of the risk that the trading price of the Shares can
decline, and an investor could lose all or part of the investment in the Company.
Risks related to dividends
There can be no guarantees that dividends will be paid
to shareholders, as such dividends are dependent on the
Company’s business and financial position as well as other
factors. The Company has no current intention to pay dividends, for more information see “Dividend policy”.
Euroclear Sweden will act as a local central securities
depository for the Shares to be listed on NASDAQ OMX
Stockholm. For holders of Shares to be listed on NASDAQ
OMX Stockholm, the Company intends to administer payment of dividends through Euroclear Sweden. However,
the methodology for providing payment of dividends
through Euroclear Sweden has not yet been established and
no agreement with Euroclear Sweden regarding administration of dividend has been entered into. The lack of agreement with Euroclear Sweden does not deprive holders of
Shares to be listed on NASDAQ OMX Stockholm the right
to receive dividend, but may cause delays and other problems in relation to the administration of the dividend.
Illiquid trading
It is impossible to anticipate the degree to which investors’
interest in the Company will lead to active trading in its
Shares or how trading in the Shares will function in the
future. Should active and liquid trading not materialise or
prove not durable, holders of Shares may find it difficult to
sell their Shares without driving down the market price, or
at all.
15
Part of the Coastal Contacts Group
16
Background and reasons
for the Listing
Coastal Contacts, including its wholly-owned Lensway
brand in Europe, is an established worldwide online retailer
of optical products, with customers in North America,
Europe and the Asia-Pacific region. Since its inception in
2000, the Company’s business has grown to 1.3 million
orders shipped in its last four fiscal quarters representing
over CAD 134 million in revenues. The Company’s business
is designed to offer lower prices and superior levels of service when compared to the traditional retail optical stores,
the majority of which are owner managed locations. In its
operating facilities in Stockholm, Sweden and Vancouver,
British Columbia, the Company maintains eyeglass assembly facilities and significant contact lens inventories, which
allow it to provide its customers with a broad product offering, faster delivery times and competitive prices.
The Company has a successful history of acquiring
leading online retailers in the optical industry. In 2004,
the Company acquired Lensway AB. Since that time the
Company has built the Lensway brand into a well-established online optical products retailer in Europe. In 2005,
the Company acquired YourLenses Scandinavia AB and
consolidated the platform under the Lensway brand. In
2006, the Company acquired Mylenses, an established contact lens online retail brand in Holland, and AsianZakka
Pte Ltd., an established retailer in online optical sales in
Japan. Since 2006 all of the Company’s growth has been
organic except for the Company’s acquisition in 2009 of the
assets of EyePassion Ltd., a private company selling directly
to consumers in Sweden. Acquisitions have been a part of
the Company’s growth strategy since inception.
During its fiscal year 2008 the Company entered the
online prescription eyeglasses market. Without the cost
of expensive traditional retail space, the Company is able
to operate with a lean cost structure compared to traditional optical channels. The Company sources products
directly from suppliers in Asia and abroad, allowing it to
further reduce costs by eliminating distribution steps.
The Company’s low overhead burden, efficient global
purchasing relationships, and high volume manufacturing laboratories allow it to deliver eyeglasses to customers
at low retail prices. Leveraging its database of more than
two million vision corrected customers and providing more
products and services to them is an opportunity for the
Company.
The Company has expanded its global market diversification, becoming an established online optical retailer in
several European markets. The Company is focused on the
continued development and growth of its business through
expansion into new markets, expansion of market share
within existing markets, expanding its product offering,
such as prescription eyeglasses, and strategic acquisitions.
A NASDAQ OMX Stockholm listing may facilitate and
allow European investors to invest in Coastal Contacts’
stock. The Company believes that a listing of Coastal
Contacts’ Shares on NASDAQ OMX Stockholm may, over
the long run, enhance the Share trading liquidity, expand
the Company’s shareholder base and provide an opportunity for investors who are aware of the Lensway brand to
participate in its future. Stock market liquidity on a major
European exchange could also improve the attractiveness of
the Company to potential European merger targets.
In light of the above, the Company will seek to list its
Shares on the NASDAQ OMX Stockholm exchange.
The estimated first day of trading of the Shares on
NASDAQ OMX Stockholm in conjunction with the Listing
is November 9, 2009. Further information is available in this
prospectus, which has been prepared by the Board of Directors
in conjunction with the Listing.
The Board of Directors is responsible for the contents of this
prospectus. The Board of Directors hereby declares that, having taken all reasonable care to ensure that such is the case,
the information contained in this prospectus is, to the best of
their knowledge, in accordance with the facts and contains no
omission likely to affect its import.
Vancouver, October 14, 2009
Roger Hardy
Chairman
Daniel Mühlbach
Director
Murray McBride
Director
Michaela Tokarski
Director
Curt Cranfield
Director
Jeffrey Mason
Director
17
Statement by the CEO Having worked previously in the logistics industry and
with a major contact lens manufacturer, I founded Coastal
Contacts in 2000 to capitalize on the direct-to-consumer
trend that was to become an important channel in the contact lens industry. Starting with little more than a computer,
a simple website, and one telephone, the business began.
We have now grown to become an established international business in the online vision products industry with
two main distribution hubs in Vancouver, Canada and
Stockholm, Sweden and more than two million customers
in our system.
A key to the growth of Coastal Contacts has been
the strategic and platform acquisitions that management
has executed along with organic growth and a compelling value proposition. In 2004 we acquired all the assets
of Lensway AB, helping to create an established online
vision products retailer in Europe. Based in Stockholm,
Lensway has become a well recognized brand, particularly
in Scandinavia, and has helped to drive online penetration
in the contact lens market. We later purchased Yourlenses
Scandinavia AB and consolidated the platform under the
Lensway brand. In 2006 we followed with the strategic
acquisition of AsianZakka Pte Ltd. owner of www.contactsan.com to address the Japanese market and the companies that operated www.mylenses.nl to address the Dutch
market.
These acquisitions, combined with strong organic
growth and recurring revenue from repeat customers has
helped make Coastal Contacts a well-established and multinational direct-to-consumer vision products company.
We will continue to focus on markets that are receptive to
online business models and have high internet penetration
in such markets we believe that, over time, the value proposition of savings and convenience will win market share
from the large traditional retail optical channel.
We believe the online market for contact lenses continues to hold significant potential as the majority of consumers around the world still buy lenses the traditional way
from their eye care practitioner or a retail optical store.
That trend is changing as consumers seek value and convenience from sources they know and can trust. Coastal
Contacts is positioned to take advantage of that trend. With
our recently launched eyeglasses business, we see the same
trend. The eyeglasses market addresses more than half the
world’s adult population. The eyeglasses unit is growing
rapidly and is being well received by our customers and prospective customers in terms of quality, value, convenience
and speed of delivery.
In September 2009, Coastal Contacts decided to
explore listing the Company’s Shares on NASDAQ OMX
Stockholm. The purpose of such a listing is to increase the
awareness of Coastal Contacts among Swedish and other
European institutional and private investors as well as analysts, media, suppliers and customers. The Listing would
provide the Company with broader capital market exposure
which could facilitate further expansion possibilities for the
Company.
In the months and years to come, Coastal Contacts will
continue to invest in its operational platform and grow its
business organically, through product line additions and
through acquisitions. We have an exceptionally skilled
organization, a cost efficient business model, favorable
demographic and consumer trends and the commitment to
become one of the world’s leading eyewear companies.
Vancouver, October 14, 2009
Roger Hardy
Chairman and Chief Executive Officer
18
Part of the Coastal Contacts Group
19
Information and conditions regarding the Listing This is not an offering to purchase or to
subscribe for Shares in Coastal Contacts.
Tr ading of Shares
The Shares are currently traded on the Toronto Stock
Exchange in Canada, under the short name COA and the
ISIN-code for the Shares is CA19044R1082. The Shares
are denominated in CAD and traded on the Toronto Stock
Exchange in CAD.
The Company has decided to apply for a listing on
NASDAQ OMX Stockholm under the short name COA
and the ISIN-code for the Shares will be CA19044R1082.
The Shares to be listed on NASDAQ OMX Stockholm will
be traded in SEK and settled in SEK. Estimated first day
of trading on NASDAQ OMX Stockholm is on or about
November 9, 2009, assuming NASDAQ OMX Stockholm
approves the Listing. In connection with the application
for Listing, the Company has entered into a contract with
Öhman to act as market maker, see section “Market maker”.
Publ ic ation of notic e
regarding the L isting
Notice regarding the Listing will be made public through
a press release in conjunction with approval of listing of
Coastal Contacts’ Shares on NASDAQ OMX Stockholm.
materials and to exercise their voting rights by proxy, the
Company is in discussions with Euroclear Sweden to finalize the terms of using its services for this administration.
The Company expects that these services shall be implemented before the Company’s next annual general meeting.
R egistr at ion of Shar es wi th
Euroc le ar Sweden for tr ading
on NASDAQ OMX Stoc kholm
Only Shares registered in the local central securities depository (“LCSD”) system with Euroclear Sweden will be subject
to trade on NASDAQ OMX Stockholm following the Listing.
Holders of the Company’s Canadian listed Shares are
entitled to register their Shares in the LCSD system with
Euroclear Sweden in order to trade their shares on NASDAQ
OMX Stockholm and vice versa. In order to proceed with
such registration, the holders of Shares are requested to
contact their nominees or their bank. The nominee or
the bank may likely charge a fee per each registration of
Canadian listed Shares in the LCSD system with Euroclear
Sweden and vice versa. For more information regarding
such charges, any prospective investor in the Shares is urged
to contact his or her nominee or bank.
Custody of Shares to be l isted
20
on NASDAQ OMX Stoc kholm
Condi t ions for the
Shares that are to be listed on NASDAQ OMX Stockholm
will be kept in custody in Canada by a global custodian with
Euroclear Sweden as the registered holder. Euroclear Sweden
will act as a local central securities depository enabling trading and safekeeping for the Shares to be listed on NASDAQ
OMX Stockholm. The Company is responsible, in accordance with Canadian securities laws, for providing the holders
of Shares to be listed on NASDAQ OMX Stockholm with
information on the following items, among others:
– General meetings of shareholders of the Company;
– Procedures of exercising voting rights by proxy;
– Terms and conditions governing dividends and their payment if any; and
– Terms, conditions and instructions pertaining to new
share issues.
The Company’s responsibilities includes mailing meeting
materials, including instruction on how to exercise voting
rights by proxy, to its shareholders at least 21 days prior
to the meeting. In order to facilitate for holders of Shares
to be listed on NASDAQ OMX Stockholm to receive such
complet ion of the L ist ing
The Listing is conditional upon Coastal Contacts meeting NASDAQ OMX Stockholm’s ownership distribution
requirements and that no circumstances arise where the
realization of the Listing could be considered as inappropriate by the Board of Directors in consultation with Öhman.
Such circumstances could for instance be based on economic, financial or political terms and concern domestic as
well as foreign issues, and/or due to a determination of the
Board of Directors that the holders of Shares to be listed
on NASDAQ OMX Stockholm is insufficient to provide a
regular and liquid trade of Coastal Contacts’ Shares. The
intention to complete the Listing can therefore be withdrawn. Notice will in such case be made public promptly
through a press release.
Mar ket maker
Coastal Contacts has appointed Öhman to be market maker
in conjunction with the admission to trading on NASDAQ
OMX Stockholm with the objective to promote a good
Part of the Coastal Contacts Group
liquidity in the Share on this market and ensure a small
spread between purchase and sales prices in the ongoing
trading. According to the agreement Öhman shall place a
purchase and sales volume corresponding to a value of at
least SEK 30,000 each so that there is a maximum difference of four percent between the purchase and sales prices.
The assignment shall commence in conjunction with the
Company’s admission on NASDAQ OMX Stockholm and
will last for a minimum of six months.
Other
As far as members of the Board of Directors are aware, no
physical or legal persons involved in the Listing have financial or other relevant interests that are of importance to the
Listing other than as described herein.
The estimated total costs associated with the Listing
amount to CAD 0.8 million.
The Shares in the Company are not subject to a mandatory bid obligation, redemption rights or redemption
obligation.
From October 24, 2007 until July 31, 2009, the
Company purchased and cancelled approximately 2.7 million of the Company’s Shares in two normal course issuer
bids (“NCIBs”) at an average price of CAD 0.96 per Share.
These purchases were conducted on the Toronto Stock
Exchange.
In addition to the NCIBs described above, on February
25, 2008 and August 1, 2008, the Company purchased and
cancelled approximately 6.8 million and 5.0 million Shares
pursuant to issuer bids at CAD 1.25 and CAD 1.00 per
Share respectively. Apart from the above, no public tender
offers have been made for the Company’s Shares during the
current or the past fiscal year.
21
Industry overview This section presents an overview
of the global vision care market.
Corrective vision care products have the aim to improve the
vision of the user. There is a wide range of eye diseases and
disorders that can have a negative effect on vision. One of
the most common categories of eye disorders is refractive
errors which lead to a deterioration of vision in one or both
eyes. This disorder is caused by a mismatch between the
refractive power and the length of the eye, leading to an
error in the focusing of light in the eye. Refractive errors
can be corrected with contact lenses, eyeglasses or refractive surgeries.
Common eye disorders
Prevalence in the
overall population (United States or
worldwide)
Name
Effect
Treatment
Myopia
Nearsightedness. The disorder generally
develops in the ages 7–16 years.
Concave lenses, contact lenses, laser
surgery
33%a
Hyperopia
Farsightedness.
Convex lenses, contact lenses, laser
surgery
4%a
Astigmatism A disorder caused by non-uniform curvature of
the eye’s cornea causing the refractive power of
the eye to differ depending on from what angel
light comes into the eye.
Cylindrical lenses in eyeglasses, toric
contact lenses, refractive surgery
under certain circumstances
36%a
Presbyopia
Convex lenses for reading, special
contact lenses, refractive surgery
under certain circumstances
15%b
Usually the lens gets less elastic with age and
therefore loses some of its ability to focus. This
makes reading at normal reading distance more
difficult. The condition becomes increasingly
problematic after the age of forty.
a. United States prevalence
b. Worldwide prevalence
Sources: Vitale, S. et al Prevalence of Refractive Error in the United States, 1999–2004, Arch Ophthalmol. 2008;126(8): 1111–1119 and
Holden, B.A. et al Global Vision Impairment Due to Uncorrected Presbyopia; Arch Ophthalmol. 2008; 126(12): 1731-1739
Recent estimates of the prevalence of refractive disorders
in the United States, indicate that approximately 85 percent
of the population over the age of 20 suffer from one or several forms of refractive errors and that half the population
over the age of 20 is affected by clinically important refractive disorders.1
Drivers of visual correction industry
The global retail eyewear market is estimated to have been
worth approximately USD 64 billion in 2008 and will reach
a value of approximately USD 68 billion in the year 2013.2
1 Vitale, S. et al, 2008.
2 Packaged Facts, The U.S. Eyewear Market: Prescription and
Nonprescription Lenses, Sunglasses, Contact Lenses, and
Frames, 2nd Edition, June 2009.
22
The optical retail industry differs from many other traditional retailing sectors due to the medical nature of the
industry as well as the recommended annual wellness exams
and the frequency of replacement of eyeglasses which all
help stabilize sales.
It is estimated that world population will grow by 16.8
percent between 2005 and 2020 and the number of people
wearing eyewear, contact lenses or who have had eye surgery will increase by 79 percent from 1.4 billion people to
2.5 billion.3
Some studies indicate that there might have been an
increase in the prevalence of myopia4. Even though these
results need to be confirmed with more research, one
3 Chaffin, R. and Schaus, M. Global View of Vision Correction
Buyers, May 2008.
4 Vitale, S. et al, 2008.
possible reason may be that it is more common for young
people to attend school and university and that their eyes are
under stress from increased reading and use of computers.
Presbyopia, on the other hand, is closely associated
with age. As the demographics change, and life expectancy
increases, it is likely that there will be a higher incidence of
presbyopia as well.
Another factor affecting growth in the industry is the
growing wealth and the rural migration to cities in the
developing economies, increasing the demand and need for
vision correction.
Contac t lenses
Contact lenses are primarily used to correct for refractive
errors in the eye. In the mid 1900’s the first hard-plastic
contact lenses were developed and in the 1970’s soft contact
lenses were introduced. Soft contact lenses are usually more
comfortable because they allow oxygen to penetrate to the
eye’s surface, but due to their delicacy they are more easily
damaged and require careful maintenance. Rigid or hybrid
lenses still account for approximately nine percent of contact lenses prescriptions, and are used for example to treat
astigmatism.1
two thirds of contact lenses worldwide are prescribed for
women.5
Another growth factor in recent years has been technological development; making contact lenses more comfortable and convenient for consumers. Also, an increased
emphasis on hygiene problems with lenses has increased the
demand for daily lenses that by definition require more frequent replacement. Contact lenses are generally sold with a
recommended replacement schedule with primary modalities of single-use, two week and monthly use. It is estimated
that 27 percent of contact lenses sold worldwide are for single-use, 19 percent for up to two-week use and 54 percent
for monthly or longer use.6
The main manufacturers in the global soft contact lens
market include Johnson & Johnson Vision Care., CIBA
VISION, CooperVision Inc. and Bausch & Lomb Inc.
In addition to contact lenses there is also a market for
contact lens solutions and accessories for lens-care. The
Company estimates the worldwide market for these products to amount to approximately USD 1.6 billion. This
market is mainly dominated by manufacturers such as Alcon
Inc., Bausch & Lomb Inc., American Medical Optics Inc.
and CIBA VISION.
The market for contact lenses can be divided into two main
categories:
– Spherical lenses, including lenses for correcting near- and
farsightedness; and
– Specialty lenses, including toric and multifocal lenses,
addressing more complex eye disorders, and cosmetic
lenses
The main market for contact lenses is to treat different
kinds of eye disorders, with soft contact lenses being the
leading category. However, the global contact lens penetration among vision corrected remains relatively low.
The Company estimates the market for soft contact lenses
to have been approximately USD 5.0 billion worldwide in
2008.
The largest markets for contact lenses are the United
States, Japan and Europe representing close to 90 percent of the global contact lens market.2 Other markets are
experiencing higher growth rates as their markets proceed
towards maturity.
A key group driving the growth in the contact lens
industry is teenagers and young adults as the average age of
contact lens users is approximately 30 years.3 Traditionally,
the use of contact lenses has dropped significantly with age
but industry experts claim that this trend will change when
the contact lens users of today age.4 Another important
group for the contact lens market is women as approximately
Prescription eyeglasses can be divided into three categories:
– Regular lenses to correct vision problems such as nearsightedness, farsightedness and astigmatism;
– Multifocal lenses that allow the wearer to adjust focus
between two distinct focal lengths; and
– L enses for reading glasses that magnify the image to
allow for easy reading.
Prescription eyeglasses account for the largest part of the
total retail eyewear market. The Company estimates that
the market for prescription eyeglasses in the markets where
it currently operates amounts to approximately CAD 37 billion. Following an estimated decline of 6.4 percent between
2008 and 2009, the compounded annual growth rate for
the market between 2009 and 2013 is estimated to amount
to 2.8 percent in the United States.7 In 2005 the retail market for lenses and frames in Europe was estimated to be
worth approximately USD 23 billion.8
1 Morgan, P.B. et al, International Contact Lens Prescribing in
2008, Contact Lens Spectrum, February 2009.
2 Global Industry Analysts, Inc. Contact Lenses and Solutions
– A Global Strategic Business Review, July 2007.
3 Morgan, P.B. et al, February 2009.
4 Packaged Facts, June 2009.
5
6
7
8
Pr esc r ip t ion e yegl a s ses
Eyeglasses consist of frames combined with lenses that are
used for vision correction, eye protection and protection
from ultraviolet rays. Corrective eyeglasses are generally
manufactured in two steps where finished and half-finished
glasses are produced on a large scale in factories and then
processed in laboratories where they are adjusted with different coatings, filters and surface treatments.
Morgan, P.B. et al, February 2009.
Morgan, P.B. et al, February 2009.
Packaged Facts, June 2009.
Citigroup, Italian Eyewear, October 2007.
23
In Sweden, the total market for vision aid was estimated
to be approximately USD 0.9 billion in 2008. 1 In Norway,
the total optical retail market amounted to USD 0.5 billion
in 2007. 2
The market for eyeglasses is dominated by a number
of manufacturers such as Luxottica Group S.p.A., Essilor
International S.A., Marchon Eyewear Inc. and Safilo Group
S.p.A. The manufacturers buy licenses to produce eyeglasses
that are labeled with third party brands and to some extent
produce eyeglasses that are proprietary labeled. Some of the
manufacturers are also active within the retailing distribution chain.
In the recent decades there has been a rapid shift to new
technologies, including a shift from lenses made out of glass
to lenses made out of different plastics. The quality of lenses
has been improved through the development of lens filters
and coatings with characteristics such as anti-reflection, anti
scratch and other treatments. With the new technologies,
new generations of bifocal and progressive lenses have been
developed that are better suited to address more complicated
eye disorders and increase convenience for consumers compared to traditional eyeglass manufacturing technologies.
Whereas many of these technologies have become
increasingly common in Europe, the United States and
Japan, there is still growth potential in developing countries where many lenses still are made of glass and where the
lenses often come without additional features, such as anti
reflective coating.
These two factors have opposite effects on the demand for
eye- and sunglasses during economic downturns.4
Compet i t ion
The optical retail industry is highly fragmented and consists
mainly of national and regional optical retail chains, independent optometry practitioners and mass merchandisers.
In general, independent optometry practitioners are
more expensive than the other alternatives.
Traditionally, a majority of the contact lenses are purchased directly from eye care practitioners. This group consists of ophthalmologists, optometrists and opticians in private practices, as well as national optical chains. Historically,
the eye care practitioners have earned very high margins
on selling contact lenses and eyeglasses and following the
breakthrough of online retailers, some eye care practitioners have tried to maintain their market share by writing
short-term prescriptions and using alternative brands only
available to eye care practitioners. For consumers the eye
care practitioners can be especially costly and inconvenient
because the eye care practitioners only purchase small quantities of contact lenses and therefore have limited economies
of scale which may lead to high average retail prices.
In recent years, several direct-to-consumer marketers
have emerged. Many of these are focused on smaller geographic markets and many generate much of their sales
through call-centers.
Sungl a s ses
Sunglass lenses reduce eye stress by filtering a proportion
of the sunlight that otherwise would reach the naked,
unprotected eye. They also offer protection from ultraviolet radiation. Long-term exposure to ultraviolet radiation may increase the risk for several eye disorders such as
snow-blindness.
The market for sunglasses can be segmented in price
and function. The two major price segments are premium
and retail. Premium sunglasses are more expensive and can
further be divided into two functions, sports and fashion.
The global market for sunglasses was estimated to be worth
close to USD 5 billion in 2006.3
Share of United States retail eyewear
market by channel, 2008
Opthamologists & other
health care services 6.7%
Health & personal
care stores 3.7%
Department
stores 5.3%
Warehouse clubs and
supercenters 9.7%
Nonstore retailers
(internet & catalog
sales) 1.9%
Clothing & clothing
accessories stores
1.8%
Sporting goods,
hobby, book and
music stores 1.9%
Other 2.4%
The mar ket for e yegl a s ses
The eyeglasses industry is complex and affected by several
different factors. Eyeglasses have traditionally been regarded
as a stable commodity product due to its use as a medical aid
for corrective purposes. However, many eye- and sunglasses
are today considered as luxury goods, especially when
expensive brands are licensed by the major manufacturers.
Optometrists
22.5%
Optical goods
stores 44.0%
Source: Packaged Facts, June 2009.
1 Forne, D., Förmånliga optiker vinnare, Dagens Handel,
December 2008.
2 Optikeren, Bransjens omsetning 3 milliarder, October 2008.
3 Koncept Analytics, Global Eyewear market: Focus on Contact
Lenses & Sunglasses, November 2008.
24
4 Packaged Facts, June 2009.
Business of Coastal Contacts
This section presents an overview of Coastal
Contacts. The section includes the Company’s
history, strategies and main activities and a
description of the Company’s operating structure.
Busines s conc ep t
Coastal Contacts, including its European brand Lensway,
is an established online vision products retailer with worldwide sales. Coastal Contacts designs, produces and distributes a diversified offering of optical products, such as contact
lenses and eyeglasses. Coastal Contacts sells into more than
150 countries through proprietary web properties, such as
www.coastalcontacts.com and www.lensway.se, which reflect
the culture and consumer preference of the target market.
Busines s model
Coastal Contacts is a direct-to-consumer marketer and distributor of replacement contact lenses, eyewear and related
products, primarily through the Company’s internet websites. Coastal Contacts’ business model involves leveraging
the efficiencies of the internet to deliver vision products
such as contact lenses, eyeglasses and accessories directly to
consumers in a manner which provides greater value and
convenience than a traditional retail model. The Company
purchases products in large quantities, providing significant volume discounts from manufacturers and distributors
which can often provide a significant cost advantage over
retail optical stores. Typically, once a consumer has purchased from Coastal Contacts they have a high probability
of returning for additional purchases creating a stable and
predictable revenue stream.
V ision
The Company strives to become the dominant global vision
care provider. It has launched its entry into the contact lens
and eyeglasses market with the corporate credo “Saving
the world from over-priced vision care” as a statement of the
Company’s ambition to substantially lower the prices of
eyewear for consumers.
History and important e vents
Coastal Contacts was established in Vancouver, British
Columbia, Canada in 2000 as a direct-to-consumer retailer
of replacement contact lenses and optical products through
the Company’s internet websites.
The Company spent its first three years of operation
focused on obtaining market share in the United States.
At the end of its fiscal year 2003, the Company’s revenues
amounted to CAD 20.1 million and the United States
accounted for over 90 percent of the Company’s sales.
The Company raised CAD 6.0 million in conjunction
with the Company’s initial public offering of 6.0 million
Shares on the TSX Venture Exchange on March 31, 2004.
In June 2004 Coastal Contacts acquired Lensway AB, a
Swedish online retailer and distributor of contact lenses
with operations in several European countries. To fund the
acquisition a private placement was completed raising CAD
2.0 million.
A further CAD 12.3 million was raised in March 2005
through the completion of a bought deal private placement
of 11.2 million Shares. The private placement was carried
out to fund continued expansion, as well as increased sales
and marketing and for working capital purposes.
In May 2005, the Company acquired Yourlenses
Scandinavia AB in a step to consolidate the Scandinavian
online contact lens market and strengthen the Company’s
position in Europe. Yourlenses Scandinavia AB sold lenses
in Sweden, Norway, Denmark, Finland, Switzerland,
Austria, Great Britain and Germany.
A further CAD 22.5 million was raised in February 2006
through the completion of a bought deal private placement
of 9 million Shares. On May 9, 2006, the Company began
trading its Shares on the Toronto Stock Exchange. In 2006,
the Company acquired the companies operating MyLenses.
nl, an established online distributor of contact lenses and
optical products in the Netherlands, and AsianZakka Pte
Ltd., a Singapore-based distributor of contact lenses in
Japan. The acquisitions were in line with the strategy to
increase the Company’s presence in Europe and establish
itself in fast-growing markets in Asia.
As a result of selective and active marketing practices,
and the acquisitions mentioned above, the Company has
transitioned into a diversified multinational optical retailer.
By 2009 the Company had built a list of over two million
vision corrected customers in Europe, North America, Asia
and the South Pacific.
In the beginning of 2008, the Company expanded its
product line to include prescription eyeglasses in response
to consumer demand for high quality eyewear, delivered
quickly at affordable prices. The Company believes that by
leveraging its database of over two million vision corrected
customers, many of whom also wear eyeglasses, Coastal
Contacts has a unique competitive advantage in this rapidly
growing channel.
25
The Company now sells more than 500 styles of eyeglasses on its websites and in March 2009 the Company
launched its proprietary Virtual Mirror which allows consumers to upload a digital photo and “virtually” try on
hundreds of eyeglasses styles. By July 2009, in less than 24
months after establishing the online eyeglasses business, the
Company reported it had exceeded CAD 1 million in sales
in a single month for the first time.
In addition, Coastal Contacts is working on other
methods to monetize its growing database of customers.
For example, in October 2008, the Company created an
exclusive partnership with the Scandinavian laser vision correction provider Memira Sverige AB to co-market laser correction services to customers of the Company’s subsidiary
LensLogistics AB.
Industry awards and recogni tions
Over the years Coastal Contacts has received recognition for
its business model and approach on the direct-to-consumer
market resulting in a number of awards since its foundation.
In May 2006, the Company was ranked fifth in the
Health and Beauty category of the top 500 e-retailers in the
United States by the magazine Internet Retailer.
In March 2007, the Company’s European subsidiary
Lensway AB was awarded first place at the annual European
Q-Survey awards for customer service. Q-Survey AB is a
European company offering benchmarking and quality
assurance of call center services through surveys and analysis.
The relevant judgment criteria for the competition included
general attitude, treatment of customers, commitment,
accuracy, knowledge of products, initiative and efficiency.
Companies are judged by professional evaluators who make
200 phone calls to each of the competing companies.
The Company has also been recognized for its logistics
abilities and its European subsidiary LensLogistics AB was
nominated for the Posten Logistics Award in September
2007. The award is given annually by the Swedish Postal
Corporation to the company or organization that has created the most effective, innovative and creative logistics solution that also increases the competitiveness of the company.
In November 2008, the Company was recognized as
one of British Columbia’s top 25 exporters for 2008 by the
Government of British Columbia.
Busines s proc es s
The Company’s aim is to offer its customers products at
lower prices, better service, selection and more styles than
the traditional vision care retailers. Lower prices can be
achieved from the centralization of distribution to the
Company’s two sites in Stockholm, Sweden and Vancouver,
British Columbia, Canada, volume purchasing and a lack
of expensive retail space. The Swedish center serves the
European market whereas the Company’s North American
and Asia-Pacific markets are served from the Canadian distribution center.
Customers can choose to place orders either on the
Company’s websites or phone in their orders toll-free to
the primary call-centers located in Stockholm, Sweden and
Vancouver, British Columbia, Canada.
After the customer has placed its order it is processed
for shipping and then shipped from the distribution centers or, in some cases, directly from a supplier. In addition,
customers receive update e-mails throughout the ordering,
logistics and payment processes to inform on the up-to-date
status of their orders.
Much of the process is automated, implying that most
of the orders are processed without human interaction with
the customer. By having a large part of the sales coming
through its websites rather than through its call-centers,
the Company can have a lower cost structure than some of
its main direct-to-consumer competitors. Additionally, the
Company’s lack of expensive retail space presents substantial
cost competitiveness over traditional retail optical stores.
The Coastal Contacts business model differs substantially from the traditional way of selling eyeglasses and
contact lenses. Coastal Contacts distributes contacts lenses
from the manufacturers directly to customers and purchases
frames and lenses from its suppliers in for example Asia,
before performing the edging and final assembly of the eyeglasses and shipping them to the customers. Compared to
Business model
Traditional
way
Manufacturer
Distributor
Wholesaler
ECP, retailer
Customer
Contact lenses
Manufacturer
Coastal
Contacts way
Customer
Eyeglasses*
Customer
* Coastal Contacts does not manufacture frames or lenses but does perform edging and final assembly of eyeglasses.
26
the traditional process of distribution of optical products,
up to several middlemen can be removed, creating costsavings and convenience for Coastal Contacts’ customers.
The Company’s operations are sustained by having a
high repeat-customer order flow. The Company generally
has a re-order rate of over 70 percent which helps reduce the
average acquisition cost per customer and creates barriers
for potential competitors that have to acquire or retain new
customers at much higher average cost. In some markets the
Company experiences re-order rates in excess of 80 percent.1
Re-orders are facilitated by reminding customers to reorder as well as saving their prescriptions and addresses so
that these do not have to be re-entered for every new order.
The two million vision corrected customers in the database
the Company has accumulated in the contact lens business
is also being used in the establishment of the eyeglasses
business line.
Following the completion of several acquisitions in
Europe, Coastal Contacts has grown to become a wellestablished online retailer of contact lenses and other optical products in several European markets by making effective marketing investments in a variety of markets. As the
Company has continued to grow its sales and customer base
substantially, the Company has noted that in the geographic
regions where it enjoyed substantial market positions, it was
often able to acquire customers with lower acquisition costs
and higher profit margins.
The Company has added its own private-label branded
products to the product mix to further improve margins.
Proprietary brands are usually higher margin products due
to the reduction in costs that follows from not having to pay
licenses to the owner of the third-party brand.
Historically the Company has entered into new markets
through acquisitions which has led to the use of a number
of brands. In an attempt to increase the effectiveness of marketing and promotion, Coastal Contacts has consolidated
its operating brands in Europe under the Lensway brand.
Marketing activities:
The main marketing strategy is designed to attract customers to the Company’s internet websites.
The marketing and selling strategy can be summarized in
six components:
(i) Direct internet. Coastal Contacts uses internet
resources, in particular search engines to derive new
and repeat traffic.
(ii) Internet affiliate programs. The Company works
together with other internet-based companies to crossmarket offerings. The other companies are compensated
either on cost-per-click or cost-per-acquisition basis.
(iii)Customer loyalty and awareness programs. The
Company uses e-mail, direct-mail and telemarketing
to increase customer awareness within the existing customer base. An internal marketing initiative designed
to inform customers of re-order dates, changes in product offerings and special offers has been implemented.
(iv) Multimedia. The Company uses various media including print ads, radio and television to supplement the
selling and marketing program and to reinforce brand
awareness.
(v) Direct mailing. Direct-mail is used to advertise products to specifically targeted groups or to market to the
existing customer base.
(vi) Cooperative mailings. The Company participates in
cooperative mail programs sponsored by leading cooperative mail companies. In these programs consumers
in specific zip codes can be targeted according to age,
income and other important demographics.
In line with its vision to become a dominant global vision
care retailer, the Company continues to venture into new
geographical markets and business lines, such as eyeglasses.
Ma in ac t i v i t ies
The Company’s main activities include the directto-consumer
marketing
and
retailing
of
contact lenses, eyeglasses and related products. The
Company’s eyeglasses operation was launched in the
beginning of 2008. The Company provides contact
lenses, eyeglasses and related products through the
Company’s websites, including, www.coastalcontacts.com,
www.lensway.com, www.clearlycontacts.ca, www.mylenses.nl
and www.contactsan.com or on the phone through the
Company’s call centers.
1 The re-order rate is the percentage of total orders in a period
that have come from customers who have ordered from the
Company in the past. It is a non-GAAP measure that does not
have a standardized meaning prescribed by Canadian GAAP
and therefore is unlikely to be comparable to similar measures
presented by other companies.
27
Ma in markets
The Company sells vision care products to customers
in over 150 countries and its main markets are Sweden,
Canada, Norway and the United States, which accounted
for approximately 67 percent of the Company’s total sales
for the nine-month period ended July 31, 2009.
The majority of the Company’s sales are from contact
lenses. Eyeglasses sales form a relatively new and growing
product offering and the monthly sales of eyeglasses reached
CAD 1 million for the first time in July 2009. As of the date
of this document the sales of eyeglasses correspond to less
than 10 percent of the Company’s total sales. The eyeglasses
are currently offered for sale across Europe, North America
and the Pacific region.
Sales by geographical segment
Sales (CAD
thousands)
2005/
2006
2006/
2007
2007/
2008
Nov. 1,
2007–
July 31,
2008
Nov. 1,
2008–
July 31,
2009
22,661
Sweden
21,638
25,968
30,929
23,031
Canada
3,617
7,858
13,754
9,387
17,085
Norway
12,634
15,981
19,278
14,307
14,506
United States
25,665
16,972
17,706
12,429
14,476
Other
17,459
35,395
37,092
27,577
33,426
Total
81,014 102,174 118,759
86,731 102,154
Contact lenses
The Company offers soft contact lenses manufactured
by all major multinational companies such as Johnson &
Johnson Inc., CIBA VISION, Bausch & Lomb Inc. and
CooperVision Inc. as well as private-label products such as
Clearly Contacts and Clearly Colors. The product offering
includes contact lenses for refractive disorders such as myopia, hyperopia, astigmatism and presbyopia.
The Company also provides customers with contact lens
solutions and accessories for cleaning, removing proteins,
disinfecting, rinsing, rewetting and storing lenses.
From its distribution and call centers in Stockholm,
Sweden and Vancouver, British Columbia, Canada, the
Company is able to ship the majority of customers’ orders
within one business day. Over 100 million contact lenses
have been shipped since inception with an average order size
of approximately CAD 100.
The Swedish subsidiary, LensLogistics AB, is a wellestablished and recognized online retailer of optical products in several markets in Europe. In Sweden nearly 30% of
contact lenses are purchased through the Company, making
Coastal Contacts a market leader in the Swedish market.1
1 Forne, D., December 2008.
28
In addition to direct-to-consumer marketing the
Company has developed LensLogistics to address the eye
care practitioners market. LensLogistics AB provides help
for eye care practitioners to save money on administration, inventory and lens costs by shipping orders directly
to the residences of the eye care practitioners’ patients.
LensLogistics AB can also provide eye care practitioners
with a more effective route of purchasing lenses compared
to the traditional approach to contact and negotiate with
each individual manufacturer.
Eyeglasses
In February 2008, Coastal Contacts launched a directto-consumer eyeglasses business. The Company has built
eyeglasses manufacturing labs at its facilities in Stockholm,
Sweden and Vancouver, British Columbia, Canada. In these
facilities the majority of edging and final assembly is performed while third party partners are used for special orders
and when demand exceeds in-house supply. The frames and
lenses are purchased from a variety of different suppliers.
Coastal Contacts offers frames for men, women and
children from several famous brands such as Armani, Calvin
Klein, Hugo Boss and Gucci in addition to several private
label brands. The lenses in eyeglasses are manufactured
according to the prescription provided by the customer.
In May 2009, the Company added progressive lenses to
its eyeglasses product offering. Progressive lenses are typically targeted to consumers over 40 years of age that are
experiencing presbyopia, the common refractive disorder.
One obstacle for online retailing companies is the fact
that consumers in many cases are reluctant to buy goods
without trying them first. Coastal Contacts has lessened
this problem by offering customers trial packs in some
of its markets, letting the consumer order four different
frames that are shipped to them for free, with postage paid
return and without any obligation to buy. Additionally the
Company offers its customers a generous return policy.
To further increase customer convenience the Company
launched its Virtual Mirror in March 2009, allowing customers to try on hundreds of eyeglasses styles online after
uploading a digital picture. To date, more than 150,000
customers have uploaded their photos.
Since entering the market for eyeglasses in February
2008 the Company has shipped over 100,000 prescription
eyeglasses. In July 2009, the Company reported monthly
sales of eyeglasses surpassing CAD 1 million for the first
time.
Besides offering glasses for vision correction purposes
the Company also provides sunglasses from several different brands.
Organiz ational struc ture
The Company has six material, wholly-owned subsidiaries:
LensLogistics AB and Yourlenses Scandinavia AB which
are organized under the laws of Sweden, AsianZakka Pte
Ltd., which is organized under the laws of Singapore and
Lensway BV, Condis BV and Eye-2 BV each of which is
organized under the laws of the Netherlands.
As of July 31, 2009, the Company had 266 employees, of which 128 were employed in Sweden and 138 were
employed in Canada.
The Company is organized to efficiently operate online
direct-to-consumer vision care retailing with two distribution centers in Stockholm, Sweden and Vancouver, British
Columbia, Canada. The corporate headquarters is located
in Vancouver, British Columbia, Canada and is responsible
for oversight, finance, corporate development, investor relations and regulatory activities, whereas the local branches in
Stockholm and Vancouver manage purchasing, marketing,
IT, logistics and customer service.
Subsidiary
Share
capital
Share
votes
Domicile
LensLogistics AB
100%
100%
Sweden
Yourlenses Scandinavia AB 100%
100%
Sweden
Lensway BV
100%
100%
The Netherlands
Condis BV
100%
100%
The Netherlands
Eye-2 BV
100%
100%
The Netherlands
AsianZakka Pte Ltd.
100%
100%
Singapore
29
Selected consolidated financial information of Coastal Contacts Coastal Contacts’ financial year ends on October 31. The
Company prepares the consolidated financial statements
in accordance with Canadian generally accepted accounting principles (“GAAP”) and uses CAD as reporting currency. The financial information for the financial years
2005/2006, 2006/2007 and 2007/2008 has been derived
from the audited financial statements of the Company.
The financial information for the interim periods from
November 1, 2008 to July 31, 2009 and from November
1, 2007 to July 31, 2008 is unaudited. This section should
be read in conjunction with the aforementioned financial
information which is incorporated into this document by
reference, see “Financial information”.
Income statement in summary
In thousands of CAD
Nov 2008–
July 2009
(9 months)
Unaudited
Nov 2007–
July 2008
(9 months)
Unaudited
Nov 2007–
Oct 2008
(12 months)
Audited
Nov 2006–
Oct 2007
(12 months)
Audited
Nov 2005–
Oct 2006
(12 months)
Audited
Sales
102,154
86,731
118,759
102,174
81,014
Cost of sales
–72,424
–63,289
–86,243
–74,497
–60,709
Gross profit
29,730
23,442
32,516
27,677
20,305
–24,553
–21,519
–28,919
–23,484
–20,837
–485
–495
–627
–443
–268
Selling, general and
administration expenses
Stock-based compensation
Amortization on property,
equipment and leasehold
improvements
Amortization on intangible assets
Foreign exchange gains (losses)
Restructuring charges
EBIT
Interest income, net
Earnings before income tax
Income tax expense
Net earnings (loss)
–719
–697
–1,237
–802
–553
–1,115
–1,234
–1,343
–1,230
–758
–11
259
–102
37
836
–
–844
–844
–
–
2,847
–1,088
–556
1,755
–1,275
68
477
547
833
890
2,915
–611
–9
2,588
–385
–816
–573
–777
–963
–951
2,099
–1,184
–786
1,625
–1,336
Balance sheet in summary
In thousands of CAD
July 31, 2008
Unaudited
Oct 31, 2008
Audited
Oct 31, 2007
Audited
Oct 31, 2006
Audited
Goodwill
7,598
8,537
7,908
7,529
6,697
Intangible assets
9,577
12,225
11,061
11,712
13,632
Property, equipment and
leasehold improvements
Inventory
Accounts receivable
Other current assets
2,939
2,901
3,038
2,700
2,773
12,610
10,624
9,495
8,531
12,262
7,503
7,833
7,279
6,649
7,127
1,836
2,462
2,268
5,594
1,312
Cash and cash equivalents
14,000
19,959
15,206
23,367
24,273
Total assets
56,063
64,541
56,255
66,082
68,076
Shareholders’ equity
33,827
39,813
33,470
47,580
51,453
Non-current liabilities
30
July 31, 2009
Unaudited
3,476
4,258
3,904
3,819
4,313
Current liabilities
18,760
20,470
18,881
14,683
12,310
Total shareholders’ equity and
liabilities
56,063
64,541
56,255
66,082
68,076
Cash flow statement in summary
Nov 2008–
July 2009
(9 months)
Unaudited
In thousands of CAD
Operating activities
1,641
Nov 2007–
July 2008
(9 months)
Unaudited
Nov 2007–
Oct 2008
(12 months)
Audited
2,701
4,483
Nov 2006–
Oct 2007
(12 months)
Audited
Nov 2005–
Oct 2006
(12 months)
Audited
9,422
–5,823
Investing activities
–642
2,687
2,217
–5,611
–6,839
Financing activities
–1,169
–9,951
–15,141
–3,985
23,630
Total net cash flow at end of period
–170
–4,563
–8,441
–174
10,968
Effect of exchange rate changes
on cash and cash equivalents
–1,036
1,155
280
–732
–305
Cash and cash equivalent at
beginning of the period
15,206
23,367
23,367
24,273
13,610
Cash and cash equivalent at end
of the period
14,000
19,959
15,206
23,367
24,273
Key ratios
Nov 2008–
July 2009
(9 months)
Unaudited
Gross profit margin (%)
Nov 2007–
July 2008
(9 months)
Unaudited
Nov 2007–
Oct 2008
(12 months)
Audited
Nov 2006–
Oct 2007
(12 months)
Audited
Nov 2005–
Oct 2006
(12 months)
Audited
29.1
27.0
27.4
27.1
25.1
2.8
-1.3
-0.5
1.7
-1.6
EBIT-margin (%)
Net margin (%)
2.1
-1.4
-0.7
1.6
-1.6
Return on equity (%)
6.2
Neg.
Neg.
3.3
Neg.
60.3
61.7
59.5
72.0
75.6
Equity ratio (%)
Debt/Equity ratio (%)
0
0
0
0
0
Basic earnings per Share
0.04
-0.02
-0.01
0.02
-0.02
Diluted earnings per Share
0.04
-0.02
-0.01
0.02
-0.02
Dividend per Share
0
0
0
0
0
Weighted average number of
Shares outstanding – basic
57,781,343
68,217,592
64,559,267
72,948,602
68,018,799
Weighted average number of
Shares outstanding – diluted
57,909,739
68,217,592
64,559,267
73,074,756
68,018,799
Number of Shares outstanding
at period end
56,901,719
63,430,443
58,318,643
71,426,512
74,681,712
266
198
191
186
164
1
23
22
23
2
267
221
213
209
166
Number of employees end of the
period (full time equivalent)
Employees:
Contractors:
Total:
Ratio definitions
Gross profit margin
Sales less cost of sales in relation to sales
EBIT
Earnings before net interest income and tax expenses
EBIT margin
EBIT in relation to sales
Net margin
Net earnings in relation to sales
Return on equity
Net earnings in relation to average shareholders’ equity (not annualized)
Equity ratio
Shareholders’ equity in relation to total assets
Debt/Equity ratio
Interest bearing liabilities in relation to shareholders’ equity
Basic earnings
per Share
Net earnings attributable to shareholders holding ordinary Shares divided by the number of
Shares issued
Diluted earnings
per Share
Net earnings attributable to shareholders holding ordinary Shares divided by the number of
outstanding Shares on a fully diluted basis
31
Financial and operational review November 1, 2008–July 31, 2009
in compar ison wi th November
equivalents of CAD 14.0 million as compared to cash and
cash equivalents of CAD 20.0 million at July 31, 2008.
1, 2007–July 31, 2008
Sales and earnings
Investments and amortization
Revenues increased by 18 percent to CAD 102.2 million
(CAD 86.7 million). The revenues grew 12 percent due
to an increase in shipped orders and 12 percent due to an
increase in average revenue per order and decreased by 6 percent as a result of foreign currency exchange rates.
During the first nine months of the year, gross margins
improved to 29 percent (27 percent). The increase was primarily a result of product mix, geographical mix of revenues
and increased pricing in certain markets. For the period
investments in advertising increased as a percentage of total
sales whereas other selling, general and administrative costs
decreased as a percentage of total sales.
EBIT amounted to CAD 2.8 million (CAD –1.1 million). Earnings before tax amounted to CAD 2.9 million
(CAD –0.6 million). Earnings after tax amounted to CAD
2.1 million (CAD –1.2 million).
Coastal Contacts used CAD 0.6 million for investing activities (generated CAD 2.7 million from investing activities)
in the nine months ended July 31, 2009. Amortization
decreased to CAD 1.8 million in the nine months ended
July 31, 2009 from CAD 1.9 million in the nine months
ended July 31, 2008.
Financing and liquidity
Total assets for the Group at July 31, 2009 totaled CAD 56.1
million (CAD 64.5 million). Shareholders’ equity decreased
over the period to CAD 33.8 million (CAD 39.8 million).
During the first nine months of the year, the Company purchased and cancelled 1,416,924 Shares at an average price
of CAD 0.83. Inventory amounted to CAD 12.6 million
at July 31, 2009 compared to CAD 10.6 million at July 31,
2008.
Cash inflows from operations for the first nine months
of the year were CAD 1.6 million of which CAD 4.6 million came from net income excluding non-cash items, and
CAD 3.0 million was used in working capital. For the same
period in 2008 the Company had cash inflows from operations of CAD 2.7 million, of which CAD 0.8 million came
from net income excluding non-cash items and CAD 1.9
million of which was from changes in working capital. Cash
flows from changes in non-cash working capital can fluctuate
from quarter to quarter in the ordinary course of business
with the timing of receipts and payments from customers
and suppliers. Cash flow after investing activities for the nine
months ended July 31, 2009 was CAD 1.0 million (CAD
5.4 million).
The Company had no interest bearing debt at July 31,
2009 (CAD 0.0 million)
At July 31, 2009 Coastal Contacts had cash and cash
32
November 1, 2007– Oc tober 31, 2008
in compar ison wi th November
1, 2006 – Oc tober 31, 2007
Sales and earnings
Revenues increased by 16 percent to CAD 118.8 million
(CAD 102.2 million). Coastal Contacts’ revenues grew
12 percent due to an increase in shipped orders, decreased
by 1 percent as a result of foreign currency exchange rates,
and increased by 5 percent as a result of increased revenue
per order, exclusive of foreign exchange. Coastal Contacts’
annual revenues increased in all major markets as a result
of continued growth in marketing investments, the introduction of the new prescription eyeglasses business, and the
customers’ continued adoption of the online sales model.
During year 2008, gross margins remained constant at
27 percent (27 percent). The Company tends to experience
higher gross margins in more mature markets where the
Company achieves a significant leadership position.
EBIT amounted to CAD -0.6 million (CAD 1.8 million). Earnings before tax amounted to CAD –0.0 million
(CAD 2.6 million). Earnings after tax amounted to CAD
–0.8 million (CAD 1.6 million). Earnings decreased due to
higher selling, general and administrative expenses which
amounted CAD 28.9 million (CAD 23.5 million). During
2008 Coastal Contacts executed on additional planned
investment in advertising and personnel to support the
Company’s growing global business and the Company’s new
product lines. The earnings also were affected by restructuring charges associated with the consolidation of the Dutch
and Asian operations of totaling CAD 0.8 million.
Financing and liquidity
Total assets for the Group at October 31, 2008 totaled CAD
56.3 million (CAD 66.1 million). Shareholders’ equity
decreased over the period to CAD 33.5 million (CAD 47.6
million). During 2008 fiscal year the Company bought back
and cancelled 13,038,744 Shares. Inventory amounted to
CAD 9.5 million at October 31, 2008 compared to CAD
8.5 million at October 31, 2007.
Cash inflows from operations for the year ended October
31, 2008 were CAD 4.5 million of which CAD 2.0 million
resulted from a net loss excluding non-cash items, and CAD
2.5 million resulted from changes in working capital. For the
same period in 2007 the Company had cash inflows from
operations of CAD 9.4 million, of which CAD 3.6 million
was from net income excluding non-cash items and CAD 5.8
million of which was from changes in working capital. The
decrease in the Company’s non-cash working capital in the
financial year 2008 is primarily due to an increase in accounts
payable and accrued liabilities. Cash flows from changes in
non-cash working capital can fluctuate from quarter to quarter in the ordinary course of business with the timing of
receipts and payments from customers and suppliers. Cash
flow after investing activities for the year ended October 31,
2008 was CAD 6.7 million (CAD 3.8 million).
The Company had no interest bearing debt at October
31, 2008 (CAD 0.0 million).
At October 31, 2008 Coastal Contacts had cash and cash
equivalents of CAD 15.2 million as compared to cash and
cash equivalents of CAD 23.4 million and CAD 4.0 million in short-term investments, totaling CAD 27.4 million
at October 31, 2007.
Investments and amortization
Coastal Contacts generated CAD 2.2 million from investing
activities (used CAD 5.6 million for investing activities) in
the year ended October 31, 2008 as maturities of the short
term investments of CAD 4.0 million exceeded the CAD 1.8
million the Company invested in leasehold improvements,
production equipment purchases and software development.
Amortization increased to CAD 2.4 million in the year ended
October 31, 2008 from CAD 2.0 million in 2007. These
increases were due to additions to leasehold improvements and
capital expenditures on eyeglass manufacturing equipment.
Earnings before tax amounted to CAD 2.6 million (CAD –0.4
million). Earnings after tax amounted to CAD 1.6 million
(CAD –1.3 million). The earnings increased due to decreased
selling, general and administrative expenses relative to sales.
During year 2007 selling, general and administrative expenses
amounted to 23 percent (26 percent) of sales.
Financing and liquidity
Total assets for the Group at October 31, 2007 totaled CAD
66.1 million (CAD 68.1 million). Shareholders’ equity
decreased over the period to CAD 47.6 million (CAD 51.5
million). During 2007 fiscal year the Company bought back
and cancelled 3,805,200 Shares at an average price of CAD
1.05. As at October 31, 2007 another 78,500 Shares had
been purchased, but not yet cancelled. Inventory amounted
to CAD 8.5 million at October 31, 2007 compared to CAD
12.3 million at October 31, 2006.
Cash inflows from operations for the year ended October
31, 2007 were CAD 9.4 million of which CAD 3.6 million
was generated from net income excluding non-cash items,
and CAD 5.8 million was generated from changes in working capital. For the same period in 2006 the Company used
CAD 5.8 million in operations, of which CAD 0.3 million
was used for the net loss excluding non-cash items and CAD
5.5 million was used in working capital. Cash was used to
increase inventory and reduce accounts payable during the
period. Cash flow from changes in non-working capital can
fluctuate from quarter to quarter in the ordinary course
of business with the timing of receipts and payments from
customers and suppliers. Cash flow after investing activities
for the year ended October 31, 2007 was CAD 3.8 million
(CAD –12.7 million).
The Company had CAD no interest bearing debt at
October 31, 2007 (CAD 0.0 million)
At October 31, 2007 Coastal Contacts had cash and cash
equivalents of CAD 23.4 million and CAD 4.0 million in
short-term investments, totaling CAD 27.4 million as compared to cash and cash equivalents of CAD 24.3 million at
October 31, 2006.
November 1, 2006 – Oc tober 31, 2007
in compar ison wi th November
Investments and amortization
1, 2005– Oc tober 31, 2006
Coastal Contacts used CAD 5.6 million for investing activities (used CAD 6.8 from investing activities) in the year ended
October 31, 2007 due to purchases of short-term investments
amounting to CAD 4.0 million and investments in website
development, software and other capital assets. Amortization
increased to CAD 2.0 million in the year ended October 31,
2007 from CAD 1.3 million in 2006. These increases were
due to expenditures on leasehold improvements, software
development costs and intangible assets related to acquisitions made in the prior year.
Sales and earnings
Revenues increased by 26 percent to CAD 102.2 million
(CAD 81.0 million). Coastal Contacts’ revenues increased
by 2 percent as a result of favorable foreign exchange rates,
17 percent as a result of the inclusion of revenue from the
Dutch and Asian businesses that were acquired in the fourth
quarter of 2006, 6 percent as a result of an increase in
organic sales, and less than 1 percent from increases in bulk
sales over the year.
During year 2007, gross margins improved to 27 percent (25 percent). This was the result of improved pricing
and a greater relative proportion of sales from higher-margin
businesses.
EBIT increased to CAD 1.8 million (CAD -1.3 million).
November 1, 2005– Oc tober 31, 2006
Sales and earnings
Revenues amounted to CAD 81.0 million. Coastal Contacts’
revenues increased primarily due to an increase of 27 percent
33
from organic and acquisition sales growth, offset, in part
by a decrease of 7 percent from the unfavorable impact of
currency.
During year 2006, gross margins amounted to 25 percent. The margin was impacted unfavorably by the impact
of having a higher proportion of sales through more aggressive marketing in the United States, the impact of expanding distribution and customer service capabilities to reflect
the expansion of revenues into new markets and, to a lesser
extent, the unfavorable impact of currency.
EBIT amounted to CAD –1.3 million. Earnings before
tax amounted to CAD –0.4 million. Earnings after tax
amounted to CAD –1.3 million. Earnings decreased due to
increased selling, general and administrative expenses relative to sales. During year 2006 selling, general and administrative expenses increased to 25 percent of sales. The
increase reflects higher bad debt expenses resulting from the
increased use of the “Invoice-Me-Later” option in North
America and higher employee costs to support the businesses that were acquired in the fourth quarter of 2006. The
increase also reflects the costs of radio and catalogue campaigns launched in North America, the impact of legal and
accounting costs related to proposed acquisitions that were
not pursued as well as costs associated with marketing for
expansion into new markets.
Financing and liquidity
Total assets for the Group at October 31, 2006 totaled CAD
68.1 million. Shareholders’ equity increased over the period
to CAD 51.5 million. The Company completed, on a bought
deal underwritten basis, the sale of 9,000,000 special warrants by way of private placement, at a price of CAD 2.5 for
net proceeds of CAD 21.1 million. Each special warrant was
exercised to acquire one Share of the Company for no additional consideration. The Company commenced a normal
course issuer bid during the year ended October 31, 2006
for up to approximately 4.9 million Shares and purchased a
total of 42,700 Shares, none of which had been cancelled at
the end of the year. Inventory amounted to CAD 12.3 million at October 31, 2006.
Cash outflows from operations for the year ended
October 31, 2006 were CAD 5.8 million of which CAD 0.3
million was used for the net loss excluding non-cash items,
and CAD 5.5 million was used for changes in working capital primarily to build inventory levels to support the two
business acquired during the year. Cash flow after investing
activities for the year ended October 31, 2006 was CAD
–12.7 million.
The Company had no interest bearing debt at October
31, 2006.
At October 31, 2006 Coastal Contacts had cash and cash
equivalents of CAD 24.3 million.
Investments and amortization
Coastal Contacts used CAD 6.8 million for investing
activities in the year ended October 31, 2006 primarily in
34
acquiring two new businesses. Amortization amounted to
CAD 1.3 million in the year ended October 31, 2006. These
increases were due to expenditures on leasehold improvements, software development costs and acquisitions.
CURRENT DEVELOPMENTS AND TRENDS
For the period November 1, 2008–July 31, 2009, the
Company’s sales amounted to CAD 102.2 million, corresponding to an increase of 18 percent from the same period
the previous financial year. Orders shipped amounted to
995,314 for the period November 1, 2008–July 31, 2009,
an increase of 12 percent from the 892,411 orders shipped
the same period the previous year. In the first nine months
of this fiscal year, the Company’s average revenue per order
increased with 12 percent, while foreign exchange rate fluctuations caused revenues to decline modestly by 6 percent.
For the nine months ended July 31, 2009 the Company’s
gross margin increased to 29 percent from 27 percent,
when compared to the same period the previous year. These
increases were primarily a result of product mix, geographic
of revenues and increased pricing in certain markets. At the
same time selling, general and administrative expenses were
reduced to 11 percent of sales compared to 13 percent of
sales for the nine months ended July 31, 2008.
During the second quarter the Company increased its
inventory by CAD 4.0 million as the Company purchased a
significant amount of a traditionally rapid-turning inventory
category near the end of the fiscal quarter to take advantage
of favourable pricing. These inventory levels were in excess
of what the Company would normally carry and in the third
quarter inventory declined by CAD 2.1 million to CAD
12.6 million as of July 31, 2009, as the Company consumed
these extraordinary inventory purchases.
During this fiscal year, the Company has managed to
grow its sales of eyeglasses to reach CAD 1 million in sales
in July 2009. The Company has purchased equipment for
CAD 0.6 million during the year to improve its capacity
for providing edging and final assembly of eyeglasses at its
manufacturing labs.
Development after July 31, 2009
No major changes have occurred with regard to the Company’s
financial position, future prospects or position in the market
after the publication of the Company’s unaudited “Interim
report for the period November 1, 2008–July 31, 2009”.
Future development, trends and financial position
In addition to what has been indicated above and in the section “Development after July 31, 2009” and the Company’s
unaudited “Interim report for the period November 1, 2008
–July 31, 2009”, there are no trends, factors of uncertainty
or other demands, undertakings or events that are known
to the Company and that are expected to have a substantial
effect on Coastal Contacts’ business prospects for the current financial year in addition to what has been accounted for
in the section “Risk factors”.
Board of Directors,
senior executives and independent auditors
Board of Direc tor s
Curt Cranfield, born 1968
Roger V. Hardy, born 1969
Director since 2003
Member of the Company’s Compensation and Corporate
Governance Committee and Audit Committee.
Education: Bachelor degrees in Economics and in Health
Information from the University of Victoria in British
Columbia, Canada.
Other assignments: President and Chief Executive Officer of
Qool Media Ltd.
Previous assignments in the past five years: Corporate Director
and business consultant with Qool Media Ltd, co‐founder,
Managing Partner of Cranfield Investment Group, Chief
Executive Officer and President of IP Applications Corp.
Holdings: 10,000 Shares and 58,000 options.
Independent.*
Director since 2002 and Chairman of the
Board of Directors since 2003
Chief Executive Officer and President.
Education: Bachelor of Arts degree from Bishop’s University
in Quebec, Canada.
Other assignments: None.
Previous assignments in the past five years: None.
Holdings: 6,946,827 Shares and 750,000 options.
Not independent (principal owner and executive officer).
Michaela Tokarski, born 1976
Director since 2001
Education: Bachelor of Applied Science degree in chemical
engineering from the University of Waterloo in Ontario,
Canada and a Master of Business Administration in entrepreneurship from the University of Victoria in British Columbia,
Canada.
Other assignments: Strategic and marketing consultant with
Creekside Communications.
Previous assignments in the past five years: Vice President,
Marketing at MODA Solutions Corporation. Director, Sales
and Marketing and Vice President, Product Management of
the Company.
Holdings: 2,246,000 Shares, 31,000 options and 300,000
written call options.
Not independent (sister of the Chief Executive Officer).
Daniel Mühlbach, born 1974
Director since 2005
Chief Executive Officer and Director of LensLogistics AB,
a wholly owned subsidiary of the Company.
Education: Master of Science in Engineering, Industrial
Economics, Luleå University of Technology.
Other assignments: Deputy Director MamaRest AB.
Previous assignments in the past five years: Owns 100 percent of
Auzex Resources Ltd. Previously director of Auzex Resources
Ltd’s wholly-owned subsidiary Mühlbach Invest AB.
Holdings: 2,033,657 Shares and 566,500 options.
Not independent (executive officer).
Murray McBride, born 1935
Jeffrey Mason, born 1957
Director since 2003
Member of the Company’s Compensation and Corporate
Governance Committee and Audit Committee.
Education: University of Toronto B.S.A., Victoria University,
B.D., Yale University, S.T.M.
Other assignments: Business consultant with Murray McBride
Consulting Services Ltd. Previous assignments in the past
five years: Chairman of the Intellivest Group of Companies,
President of the Alexander Proudfoot Company of Canada,
Member of Parliament of Canada, Chairman of the Canadian
Egg Marketing Agency, Vice Chairman and General Manager
of the Farm Credit Corporation of Canada, Chief of Staff of
the Canadian Ministry of Consumer and Corporate Affairs
and Chief of Staff of the Postmaster General of Canada.
Holdings: 540,000 Shares and 58,000 options.
Independent.*
Director since 2006
Member of the Company’s Compensation and Corporate
Governance Committee and Audit Committee.
Education: Bachelor of Commerce degree from the
University of British Columbia, ICD.D certified by the
Institute of Corporate Directors, Chartered Accountant.
Other assignments: Director of Slater Mining Corporation,
Director of Amarc Resources Ltd., member of the business
advisory committee of Multisport Centre of Excellence
Foundation.
* Independent within the meaning set out in Canadian legislation in
that they are free from any interest which could reasonably interfere with their exercise of independent judgment as Directors of
the Company. Under Swedish corporate governance rules, which
do not apply on the Company, Mr. McBride would not be deemed
independent since he is the step-father of the Chief Executive
Officer Roger Hardy and the Director Michaela Tokarski.
35
Previous assignments in the past five years: For the following publicly traded (TSX and American Stock Exchange)
companies: Chief Financial Officer, Secretary and Director
of Continental Minerals Corporation, Farallon Resources
Ltd., Great Basin Gold Ltd., Northern Dynasty Minerals
Limited., Taseko Mines Limited; Chief Financial Officer
and Secretary of Amarc Resources Ltd., Anooraq Resources
Corporation and Detour Gold Corporation; Chief Financial
Officer and Director of Rockwell Diamonds Inc.; Principal
Accounting Officer of Quartz Mountain Resources Ltd. In
addition: Chief Financial Officer, Corporate Secretary and
Director of Hunter Dickinson Inc., Chartered Accountant
while at the international accounting firm of Deloitte &
Touche LLP.
Holdings: 100,200 Shares and 31,000 options.
Independent.*
Senior e xecuti ves
Roger V. Hardy
Chief Executive Officer and President
Employed since 2002 and in current position since 2006.
For more information see above, “Board of Directors”.
Daniel Mühlbach
Chief Executive Officer, LensLogistics AB
Founded Lensway AB in 2000 and in current position since
2000.
For more information see above, “Board of Directors”.
Steve Bochen, born 1961
Chief Operating Officer
Employed and in current position since 2002.
Education: Bachelor of Arts degree in economics from the
University of Western Ontario, Canada.
Other assignments: None.
Previous assignments in the past five years: None.
Holdings: 710,640 Shares and 150,000 options.
Steve Wallace, born 1973
Vice President of Sales, North America
Employed and in current position since 2007.
Education: University of Western Ontario.
Other assignments: None.
Previous assignments in the past five years: Director of
1-800-Got-Junk? LLC, President of Active Wireless Inc.
Holdings: 24,500 Shares and 400,000 options.
Glen Kayll, born 1968
Chief Financial Officer and Vice President, Finance
Employed since 2006 and in current position since 2007.
Education: Bachelor of Commerce, Carleton University.
Masters of Business Administration, Simon Fraser
University. Chartered Accountant.
Previous assignments in the past five years: Vice President,
International Operations of the Company. Treasurer of
PMC-Sierra Inc.
Holdings: 3,000 Shares and 735,000 options.
* Independent within the meaning set out in Canadian legislation
in that they are free from any interest which could reasonably interfere with their exercise of independent judgment as
Directors of the Company. Under Swedish corporate governance
36
Terry Vanderkruyk, born 1957
Vice President, Business and Corporate Development
Employed and in current position since 2006.
Education: Bachelor of Arts, Economics, University of
Victoria, 1979.
Other assignments: None.
Previous assignments in the past five years: Director Business
Development of VSM MedTech Inc., Director Investor
Relations of Protox Therapeutics Inc.
Holdings: 177,300 Shares and 550,000 options.
rules, which do not apply on the Company, Mr. McBride would
not be deemed independent since he is the step-father of the
Chief Executive Officer Roger Hardy and the Director Michaela
Tokarski.
Independent audi tor s
Compensat ion, pensions
Effective January 16, 2008, the Board of Directors
appointed KPMG LLP, Chartered Accountants, Box 10426,
777 Dunsmuir Street, Vancouver, British Columbia, V7Y
1K3, Canada as successor auditor, for the time until the
next Annual General Meeting of the Company. The shareholders re-appointed the auditors at the last Annual General
Meeting.
Ernst & Young LLP, Chartered Accountants Pacific
Centre, 700 West Georgia Street, P.O. Box 10101, British
Columbia, V7Y 1C7, Canada was the Company’s auditor
during the period November 1, 2005 – October 31, 2007.
KPMG LLP, and Ernst & Young LLP are Chartered
Accountants under the accounting and auditing standards of Canada set by the Canadian Institute of Chartered
Accountants.
The change of auditors was made in the ordinary course
of business. For audit committee information, auditor fee
information and other information regarding the auditors
see “Corporate governance – Audit Committee”.
and benefi ts
Other information regarding
the Board of Direc tor s
and senior e xecuti ves
All members of the Board of Directors and senior executives have office address Coastal Contacts Inc., Suite 3202985 Virtual Way, Vancouver, British Columbia, V5M
4X7, except for Daniel Mühlbach whose office address is
Lenslogistics AB, P.O. Box 1294, SE-164 29 Kista, Sweden.
Michaela Tokarski is the sister of Roger Hardy and
Murray McBride is the stepfather of Roger Hardy and
Michaela Tokarski. There are no other family relations as
regards the Board of Directors and senior executives of the
Company.
No member of the Board of Directors or senior executive has been convicted in relation to any fraudulent offences
for the previous five years. None of these persons has, in
the capacity as Director or member of the management of a
company been involved in any bankruptcy, receiverships or
liquidation for the previous five years. No Director or senior
executive has been subject to any official public incrimination and/or sanction by a statutory or regulatory authority
(including designated professional bodies) for the previous
five years. Nor has any of these persons been disqualified by
a court from acting as a member of the administrative, management or supervisory body of a company or from acting as
the management or conduct of the affairs of a company for
the previous five years.
None of the Directors or senior executives has any private interests that could conflict with the interests of the
Company other than interests arising from the current
holdings of Shares and/or options in the Company.
Board of Directors and committees
In December 2006, the Board of Directors approved a
compensation policy for the Directors (the “Directors’
Compensation Policy”) and an expenses and reimbursement
policy and procedure for the Directors (the “Directors’
Expenses – Reimbursement Policy and Procedure”). Under
the Directors’ Compensation Policy, inside Directors are
not paid any compensation. Outside Directors are paid
an annual retainer of CAD 15,000. In addition, outside
Directors are paid CAD 1,000 for each board meeting
attended, with each outside Director to receive a minimum
of CAD 4,000 and a maximum of CAD 6,000 in board
meeting fees per year. The Company has an audit committee (the “Audit Committee”) and a compensation and
corporate governance committee (the “Compensation and
Corporate Governance Committee”). Outside Directors
are to receive CAD 1,000 for each committee meeting
attended, with each outside Director to receive a minimum
of CAD 2,000 and a maximum of CAD 3,000 in committee fees, per committee served, per year. In addition, the
chairperson of the Audit Committee and Compensation
and Corporate Governance Committee receives an additional retainer of CAD 13,000 and CAD 5,000 respectively. Outside Directors are also entitled to a grant of stock
options concurrent with their appointment at each year’s
annual meeting, such options to have a face value of CAD
10,000.
During the year ended October 31, 2008, the Directors
were paid for their attendance at meetings in connection
with their services as Directors as follows: Ms. Tokarski
received CAD 21,000, Mr. Mason received CAD 44,000,
and Messrs. Cranfield and McBride each received CAD
26,000.
Under the Directors’ Expenses – Reimbursement Policy
and Procedure, both inside and outside Directors are entitled to reimbursement of travel and other expenses incurred
in the conduct of the Company’s business.
Senior executives
The Company’s compensation policy with respect to executive officers is designed to provide both short-term and
long-term rewards that are consistent with individual and
corporate performance. The Compensation and Corporate
Governance Committee’s goal is to provide sufficient compensation opportunities for executive officers in order to
attract, retain and motivate the best possible management
team. Compensation for executive officers, including the
Chief Executive Officer and Chief Financial Officer, consists of:
(i) a base salary;
(ii) annual and special bonus incentives; and
(iii) options granted on a discretionary basis under the
Company’s stock option plan.
37
The Chief Executive Officer and Chief Financial Officer of
the Company each have a written employment agreement.
The Compensation and Corporate Governance Committee
determines each executive officer’s base salary with reference to relevant industry norms, experience, past performance and level of responsibility. The Compensation and
Corporate Governance Committee reviews salary levels
periodically and may make adjustments, if warranted, as a
result of salary increase trends in the marketplace, competitive positioning and an increase in responsibilities assumed
by an executive. Annual cash bonus incentives are based
upon the Company’s ability to meet certain financial targets
and each executive’s individual performance.
The Compensation and Corporate Governance
Committee sets performance objectives and target levels on
an annual basis and assesses executives against these targets
in determining their overall compensation. From time to
time, the Board of Directors may declare an additional cash
bonus in favor of one or more executive officers in circumstances where it is determined that the executive in question
has made an exceptional contribution to the performance
of the Company in a particular year. The Compensation
and Corporate Governance Committee also considers stock
options to be an important component of executive compensation. The objective of making grants under the stock
option plan is to encourage executive officers to acquire an
ownership interest in the Company over a period of time,
thus better aligning the interests of executive officers with
the interests of shareholders. When determining possible
future option grants, the Compensation and Corporate
Governance Committee considers past option grants.
Annual compensation
Long term compensation
Awards
Name and principal position
Year
ended
October
31,
Roger V. Hardy
2008
Chief Executive
Officer and
President
Glen Kayll
2
Chief Financial
Officer and Vice
President
Salary (CAD)
Bonus (CAD)
429,771
150,0001
Payouts
Other annual
compensation (CAD)
Securities
under
options
Granted
(#)
3,845
300,000
–
Shares or
units subject
All other to resale
compensarestrictions LTIP Payouts
tion
(CAD)
(CAD)
(CAD)
–
–
–
150,000
–
–
–
-
–
2007
237,846
50,000
22,618
100,000
–
–
–
2006
162,865
8,000
20,960
–
–
–
–
2008
190,269
25,000
669
35,000
–
–
–
–
14,0001
–
–
–
–
–
175,154
–
548
200,000
–
–
–
2007
1
1
2006
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Steve Bochen
2008
150,060
25,000
1,629
–
–
–
–
Chief Operating
Officer
2007
136,538
–
1,506
100,000
–
–
–
2006
134,000
25,541
–
–
–
–
–
2008
220,000
1
70,000
–
200,000
–
–
–
–
55,0001
–
–
–
–
–
2007
171,058
25,000
–
100,000
–
–
–
2006
134,000
25,541
–
–
–
–
–
2008
121,044
31,250
1,965
–
–
–
–
Daniel Mühlbach
Chief Executive
Officer of
Lenslogistics AB,
a wholly-owned
subsidiary
Steve Wallace3
Vice President
of Sales, North
America
2007
55,288
6,250
–
400,000
–
–
–
2006
N/A
N/A
N/A
N/A
N/A
N/A
N/A
Terry Vanderkruyk
2008
150,060
22,500
669
100,000
–
–
–
Vice President,
Business and
Corporate
Development
2007
130,769
25,000
926
100,000
–
–
–
2006
98,558
–
–
–
–
–
–
(1) Messrs. Hardy, Kayll and Mühlbach were awarded bonuses in January of 2008 and January of 2009, all of which were recorded as
expenses in the Company’s 2008 fiscal and are therefore included in this table. January 2009 performance bonuses awarded to Messrs
Hardy, Kayll and Mühlbach were CAD 150,000, CAD 25,000 and CAD 70,000 respectively. January 2008 performance bonuses awarded
to Messrs. Hardy, Kayll and Mühlbach were CAD 150,000, CAD 14,000 and CAD 55,000 respectively.
(2) Mr. Kayll’s employment with the Company commenced on November 8, 2006.
(3) Mr. Wallace’s employment with the Company commenced on July 16, 2007.
38
Benefits upon termination of employment
Except for as set out below, none of the senior executives
are entitled to benefits upon termination of employment.
If Roger V. Hardy’s employment is terminated for any reason prior to the termination of such employment agreement
other than for cause or if he resigns, he will be entitled to
receive his base salary and perquisite benefits for 24 months
following such termination or resignation in addition to
two times his pro-rated bonus. The employment agreement
contains change in control provisions pursuant to which,
if in connection with or within 18 months of a change in
control, Mr. Hardy voluntarily terminates his employment
for good reason or is involuntarily discharged, he shall be
entitled to a severance payment of 2.5 times the sum of his
current annual base salary and 2.5 times his then current
annual bonus. In addition, all unvested rights in any stock
option or other benefit plan will vest in full.
In the event the Company terminates Glen Kayll’s
employment agreement without cause, he is entitled to
receive an amount equal to his base salary plus any accrued
bonus and vacation to the date of termination. The employment agreement also contains change of control provisions
pursuant to which, if the termination of employment of
Glen Kayll occurs in contemplation of, at the time of, or
within 18 months after a change of control, he will be entitled to an amount equal to his base salary plus any accrued
bonus and vacation to the day of termination.
Except as otherwise stated, there are no reserved or
accrued amounts in the Company for pensions or other
post-employment remunerations or post-assignment for
Directors or the senior executives.
39
Shareholders’ equity capital, indebtedness and other financial information C api tal iz ation and indebtednes s
Capitalization
The following tables set out the Company’s capitalization and net indebtedness as at July 31, 2009, on an actual
basis based on the Company’s unaudited “Interim report
for the period November 1, 2008–July 31, 2009”, which
has been prepared in accordance with Canadian GAAP.
The information below has not been audited and should
be read together with the sections “Selected consolidated
financial information of Coastal Contacts”, “Financial and
operating review” and the Company’s unaudited “Interim
report for the period November 1, 2008–July 31, 2009”,
the Company’s audited annual reports for its financial
years 2007/2008, 2006/2007 and 2005/2006, which all
have been incorporated in this prospectus by reference, see
“Financial Information”.
As at July 31, 2009, Coastal Contacts’ shareholders’
equity totaled CAD 33.8 million. Coastal Contacts’ interest bearing liabilities amounted to CAD 0 million and guarantee and pledge commitments amounted to CAD 0 million. After July 31, 2009, there have been no changes in the
Company’s indebtedness. After July 31, 2009, no changes
have occurred in the Company’s shareholders’ equity. The
information in the tables below has not been reviewed by
the Company’s auditors.
As at July 31, 2009 the Company has the equivalent of
CAD 1.4 million of cash on hand which is restricted pursuant to a letter of guarantee issued by a financial institution
in favor of the Norwegian Customs and Excise Service to
secure the payment of duty and value added tax collected
by the Company.
A subsidiary of the Company has access to a secured
overdraft facility, totaling SEK 25 million with interest payable at a rate of one percent above the Stockholm Interbank
Offered rate. The subsidiary uses this operating facility
from time to time for working capital purposes. As at July
31, 2009, there was no balance outstanding pursuant to this
facility.
The following table outlines Coastal Contacts’ equity and
debt capital as at July 31, 2009.
Shareholders’ equity and debt capital (CAD thousands), Unaudited
Guaranteed
Nil
Secured
Nil
Unguaranteed/unsecured
Nil
Total current debt
Nil
Non-current debt (excluding current portion
of long-term debt):
Guaranteed and secured
Nil
Unguaranteed/unsecured
Nil
Total non-current debt (excluding current
portion of long-term debt)
Nil
Shareholders’ equity
Share capital
40,248
Statutory reserve
Nil
Share premium reserve
Nil
Contributed surplus
2,085
Accumulated other comprehensive loss
–3,961
Retained earnings
–6,644
Profit for the period
2,099
Shareholders’ equity
33,827
Total equity and debt
33,827
Net financial indebtedness
The following table outlines Coastal Contacts’ net financial
indebtedness as at July 31, 2009.
Net financial indebtedness (CAD thousands),
Unaudited
A Cash
1,390
C Trading securities
D Liquidity
July 31, 2009
12,610
B Cash equivalents
Nil
(A)+(B)+(C)
14,000
E Current financial receivables
Nil
F Current bank debt
Nil
G Current portion of non-current debt
Nil
H Other current financial debt
Nil
I
Current financial debt
(F)+(G)+(H)
Nil
J Net current financial indebtedness (+)/net current financial resources (–)
(I)–(E)–(D)
–14,000
K Non-current bank loans
Nil
L Bonds issued
Nil
M Other non-current loans
Nil
N Non-current financial indebtedness
(K)+(L)+(M)
O Net financial indebtedness (+)/
net financial resources (–)
40
July 31, 2009
Current debt:
(J)+(N)
Nil
–14,000
Long - l i ved a s sets
Financi al r isk management
Long-lived assets, primarily customer lists and website creation costs are evaluated periodically as events or circumstances indicate a possible inability to recover their carrying amount. Such evaluation is based on assessment of
re-order rates and various analyses, such as discounted and
undiscounted cash flows and profitability projections that
incorporate, as applicable, the impact on the existing business. Any impairment loss, if indicated, is measured as the
amount by which the carrying amount of the asset exceeds
the estimated fair value of the asset.
The Company is exposed to a number of different financial risks through its operations: interest-rate risk, foreign
exchange risk and financing and liquidity risk. The overall
policy for financial risk management is decided by the Board
of Directors and is intended to limit the adverse effects on
the Company’s profits as a result of market fluctuations at
any time.
Goodwill and intangible a s sets
Goodwill represents the excess of the purchase price over the
fair value of the net assets acquired. Goodwill is not amortized and the Company performs an annual impairment test
of the recorded goodwill. In addition the Company tests its
other indefinite-lived intangible assets for impairment.
Inter est- r ate r isk
The interest-rate risk is the risk of changes in the level of
interest rate that can affect the Company’s earnings and
may arise in cash and cash equivalents, short-term borrowing as well as in long-term borrowing. A significant factor
that affects the interest-rate risk is the fixed interest-rate
period.
For eign cur r enc y
e xc hange r ate r isk
Propert y, equipment and
le a sehold improvements
Property, equipment and leasehold improvements
are recorded at cost less accumulated amortization.
Amortization is calculated over the estimated useful life of
the assets.
Oper ational le a ses
The Company has operational leases of CAD 3.7 million of
which CAD 0.7 million is due during 2009 and CAD 1.1
million is due during 2010.
Investments
The Company’s investments are mainly in inventory, manufacturing equipment, leasehold improvements and software development. It is the Company’s assessment that
there will be future investments areas as determined fit.
There are no current material investments nor are there
any material investments for which the Company has made
commitments.
Accounting for wor k ing c api tal
As of 31 July 2009, the Company’s cash and cash equivalents totaled CAD 14.0 million and the Company had
no financial debt. After this date, the Company has not
raised any financial debt. The Company has lease obligations of CAD 3.7 million of which CAD 0.7 million and
CAD 1.1 million matures in 2009 and in 2010 respectively.
The Board of Directors and management believe that the
Company’s current financial resources are sufficient to fund
its commitments and working capital requirements for the
next twelve months.
The Company’s reporting currency is CAD and its
European operation’s functional currency is SEK. The
Company’s operating results are regularly impacted by fluctuations in foreign currency exchange rates. Revenues are
affected to the extent they are earned in currencies other
than the Canadian dollar. Earnings are impacted to the
extent revenues, expenses or monetary assets or liabilities
in foreign currencies are not also offset by opposite balances in those currencies. While a significant portion of
the Company’s product purchases and operating costs are
denominated in CAD, USD or SEK, a significant portion
of the Company’s exposure to those currencies is naturally
hedged by revenues in those currencies. Conversely, however, a material portion of the Company’s revenues are generated in other currencies, such as Norwegian kroner and
the European euro. Fluctuations in the CAD and the SEK
relative to other currencies can have a significant impact on
the Company’s operating results.
Financing and l iquidi t y r isk
Financing and liquidity risk relates to the risk of expenses
becoming higher and financing opportunities limited when
commitments to lease payments fall due or when any loans
have to be converted, and if it is not possible to meet payment obligations as a result of insufficient liquidity or difficulties in obtaining financing. Liquidity risk also relates
to the risk that it is not possible for a financial instrument
to be disposed of without substantial additional expenses.
The liquidity risk is limited as the Company has no financial debt and relatively limited lease obligations and the
Company currently has significant cash resources. Because
of the Company’s business orientation, its regular payment
obligations are limited.
41
Share capital, dividend and ownership structure Share c api tal
CAD 40,248,222 and is divided into 56,901,719 Shares,
these Shares are issued without a par value. All of the issued
Shares are paid for in full. No unlimited Class A preferred
shares without par value are issued and outstanding. All
Shares carry the same voting rights and the same right to
participation in the Company’s assets and profit.
The authorized share capital of the Company is unlimited
and divided into unlimited common shares without par value
(referred to as the Shares throughout this prospectus) and
unlimited Class A preferred shares without par value, where
the authorized share capital for each share class is unlimited. The issued and outstanding share capital amounts to
C hanges in the share c api tal
The following table sets forth the changes in the share capital of Coastal Contacts since November 1, 2005.
Year
Event
November 1, 2005 Balance, beginning of year
Changes in share
capital
October 31, 2006
Private placement
Issued on exercise of
warrants
Issued on exercise of
options
Issued in purchase of
MyLenses
Issued in purchase of
AsianZakka
Balance, end of year
including Shares held in
treasury
Shares purchased not
cancelled
Balance, end of year
November 1, 2006 Balance, beginning of year
Changes in share
capital
October 31, 2007
Repurchase of Shares
Issued on exercise of
options
Balance, end of year
including Shares held in
treasury
Shares purchased not
cancelled
Balance, end of year
November 1, 2007 Balance, beginning of year
Cancelled Shares
Balance, beginning of year
42
Quota value
(CAD)
Change in
share capital
(CAD 000’s)
0.51
Total share
capital
(CAD 000’s)
Change in
number of
Shares
26,264
Total number
of Shares
51,632,951
–
21,070
–
9,000,000
–
–
3,480
–
3,163,715
–
–
188
–
8,193,618
–
–
1,703
–
1,650,000
–
–
811
–
1,041,428
–
0.72
53,515
74,681,712
–
–41
–42,700
0.72
53,474
74,639,012
0.72
53,515
74,681,712
–
–2,727
–
–3,805,200
–
–
69
–
550,000
–
0.71
50,857
71,426,512
–
–89
–78,500
0.71
50,768
71,348,012
0.71
50,857
71,426,512
–
–89
–78,500
0.71
50,768
71,348,012
Changes in share
capital
Repurchase of Shares
–
–9,530
–
–13,038,744
Issued on exercise of option
–
12
–
9,375
October 31, 2008
Balance, end of year
–
–
0.71
41,250
58,318,643
November 1, 2008 Balance, beginning of year
0.71
41,250
58,318,643
Changes in share
capital
July 31, 2009
–
–1,002
–
–1,416,924
–
0.71
0
40,248
0
56,901,719
Repurchase of Shares
Balance, end of period
Shareholder s
Dividend policy
The Company’s stock is publicly traded on the Toronto
Stock Exchange, and consequently share ownership of individuals changes regularly. Only holdings above ten per cent
of the shares and all securities held by insiders are notifiable under Canadian law. According to its regulatory filings
under these rules, as of August 2009 Affiliated Managers
Group Inc., an American institutional investor with its
Canadian affiliate Montrusco Bolton Investments Inc., held
11.4 percent of the Shares of the Company. In addition,
the Company is aware of the share ownership balances of
members of the Company’s Board of Directors and executive officers, for more information see “Board of Directors,
senior executives and independent auditors”.
The Company has not declared or paid dividends since the
date of its incorporation. Although the Company has no
current intention to pay dividends, any decision to pay dividends will be at the discretion of the Board of Directors and
may be dependent upon the Company’s financial requirements to finance future growth, the Company’s financial
condition, results of operations and other factors which the
Board of Directors of the Company may consider appropriate under the circumstances. For more information see
“Risk factors”.
Principal owners
The principal owner of the Company is Roger Hardy, the
Chairman and Chief Executive Officer of the Company,
(the “Principal Owner”) with a voting right corresponding
to 12.2 percent of the votes in the Company as of the date
of this document based on information from Roger Hardy
and the total number of Shares outstanding. This holding
means that the Principal Owner has a significant influence
over the Company and can thus affect issues which are
subject to voting at a general meeting, for example election of the Board of Directors. The Principal Owner may
also be able to prevent or obstruct the Company from being
acquired through a public take-over offering.
Apart from what is stated above, the Company is not
certain of the number of Shares held by any shareholders
other than Directors and executive officers.
Di v idend
Dividends are declared and paid at any time at the discretion of the Board of Directors. There are no fixed dates
for dividends. Entitlement to dividend belongs to anyone
who is registered as a shareholder of the relevant share class
on the record date resolved by the Board of Directors. For
shareholders holding Shares that are traded on the Toronto
Stock Exchange, payment of dividends will be administered by the Company’s transfer agent Computershare
Trust Company of Canada, 510 Burrard Street, 3rd
Floor, Vancouver, British Columbia, V6C 3B9, telephone:
+1 (604) 661 9400, fax: +1 (604) 661 9549. For shareholders holding Shares to be listed on NASDAQ OMX
Stockholm, the Company intends to administer payment
of dividends through Euroclear Sweden. However, the
methodology for providing payment of dividends through
Euroclear Sweden has not yet been established and no agreement with Euroclear Sweden regarding administration of
dividend has been entered into. The lack of agreement with
Euroclear Sweden does not deprive holder of Shares to be
listed on NASDAQ OMX Stockholm the right to receive
dividend, but may cause delays and other problems in relation to the administration of the dividend.
Other information regarding dividends
If a holder of Shares cannot be reached, the shareholder’s
claim on the Company regarding the dividend amount
remains and is restricted only by rules on the period of
limitation. The period of limitation is six years. When the
period of limitation ends, the dividend amount will pass to
the Company. There are currently no fixed dates regarding any dividends and any such date will be determined by
the Board of Directors. There are no restrictions on payments of dividends or special procedures for shareholders
resident in Sweden or Canada or, as far as the Company is
aware of, in any other country. Dividends may be paid in
any currency or any way in kind. Under Canadian law, the
Company is not required to declare dividends and, therefore, the Company’s profits may be accumulated and used
for the purposes of the Company. Under Canadian law, the
payment of dividends is prohibited if: (i) the Company is, or
would after payment be, unable to pay its liabilities as they
become due, and (ii) the realizable value of the Company’s
assets would thereby be less than the aggregate of its liabilities and stated capital on all classes.
Other infor mat ion
The Company’s Shares have been issued in accordance with
the Canada Business Corporation Act (“CBCA”). Holders
of Shares are entitled to a share of the surplus in proportion
to the number of Shares owned by the holder in the event
of a liquidation of the Company, subject to the prior rights
and privileges attaching to any other share class.
Voting rights
Under Canadian securities rules, a company is required to
set a record date for notice of a shareholder meeting, which
must be between 30 and 60 days before the date set for the
meeting, and, if required or permitted by corporate law, a
record date for voting at such a meeting. At least 25 days
before the record date, the Company must also send notice
of both the meeting and record dates to all depositories,
securities regulatory authorities and exchanges on which its
securities are listed. Canadian securities rules also require
a company to mail meeting materials to its shareholders at
least 21 days prior to the meeting.
43
200
9m
200
9m
La
m
200
200
200
Coastal Contacts share price (■ CAD), S&P TSX Composite index (■ Adjusted) and monthly trading
volume (■ Millions of Shares) April 1, 2004–October 14, 2009
Shares,
millions
12
CAD
3.0
2.5
10
2.0
8
1.5
6
1.0
4
0.5
2
0
0
Source: DataStream
2005
2006
2007
Typically, only shareholders of record as of the record
date are entitled to receive notice of and to attend and vote
at the meeting, unless, after the record date, a shareholder
of record transfers any of his Shares and the transferee, having produced properly endorsed certificates evidencing such
Shares or having otherwise established that he owns such
Shares, has demanded not later than ten days before the
meeting that his name is to be included in such list. In any
such case, the transferee is entitled to vote the transferred
Shares at the meeting.
Every shareholder entitled to vote at a meeting of shareholders may appoint a proxyholder, or one or more alternate
proxyholders, who need not be shareholders, to attend and
act as his representative at the meeting in the manner and to
the extent authorized and with the authority conferred by
the proxy. A proxy must be in writing executed by the shareholder or his attorney and must conform with the requirements of the CBCA and applicable securities rules.
Alternatively, every such shareholder which is a body
corporate or association may authorize by resolution of its
Directors or governing body an individual to represent it at
a meeting of shareholders and such individual may exercise
2008
2009
on the shareholder’s behalf all the powers it could exercise
if it were an individual shareholder. The authority of such
an individual shall be established by depositing with the
Company a certified copy of such resolution, or in such
other manner as may be satisfactory to the secretary of the
Company or the Chairman of the meeting. Any such representative need not be a shareholder.
The Board of Directors may specify in a notice calling a meeting of shareholders a time, preceding the time
of such meeting by not more than 48 hours exclusive of
non-business days, before which time proxies to be used
at such meeting must be deposited. A proxy shall be acted
upon only if, prior to the time so specified, it shall have been
deposited with the Company or any agent thereof specified in such notice or if, no such time having been specified
in such notice, it has been received by the secretary of the
Company by the Chairman of the meeting or any adjournment thereof prior to the time of voting.
To ensure timely voting of proxies, the Company is
required under Canadian securities laws to deliver meeting
materials, including proxies, to shareholders at least 21 days
before the meeting.
Share purc ha se op tions
The following table summarizes information about Company Share purchase options outstanding as at July 31, 2009:
Share purchase options outstanding
Range of exercise price
(CAD)
0.69
0.80–0.99
1.00–1.14
1.50
44
Share purchase options exercisable
Number of
common shares
issuable
Weighted average
remaining
contractual life
(years)
Weighted average
exercise price
(CAD)
Number of
common shares
issuable
Weighted average
exercise price
50,000
2,327,500
2,142,937
150,000
4,670,437
4.23
3.12
2.60
4.76
3.40
0.69
0.85
1.07
1.50
0.97
8,333
950,245
1,019,535
15,000
1,993,113
0.69
0.86
1.06
1.50
0.97
Part of the Coastal Contacts Group
45
Corporate governance 46
Swedish cor por ate governanc e
C anadi an cor por ate gover nanc e
Swedish companies listed on NASDAQ OMX Stockholm
are required to comply with the mandatory corporate governance rules included in the Swedish Companies Act and
“Rule book for issuers” issued by the NASDAQ OMX
Stockholm. In addition, the Swedish Code of Corporate
Governance (the “Swedish Code”) is applicable to all
Swedish companies listed on NASDAQ OMX Stockholm.
The Swedish Code acts as a complement to legislation
and other regulations by specifying a norm for good corporate governance at a higher level of ambition than the
statutory regulation. However, this norm is not mandatory.
Companies may deviate from individual rules, providing
they report each deviation, describe their own solution and
explain why (the so called comply or explain principle).
In short, the Swedish Code requires that a company has
a nomination committee (to propose candidates for the post
of chair and other board members, as well as fees and other
remuneration to each board member). Further a company
shall have remuneration committee (to propose remuneration and other terms of employment for the executive management) and an audit committee. The rules regarding audit
committee are being moved to the Swedish Companies Act
and will be mandatory. As regards the composition of these
committees, there are certain requirements regarding the
members’ independence from the company, its management
and its major shareholders.
The Swedish Code also includes requirements as regards
the independence of board members. Not more than one
board member may be a member of the executive management of the company or a subsidiary. Further, the majority
of the board members elected by the shareholders’ meeting are to be independent of the company and its executive
management. At least two of these board members are also
to be independent of the company’s major shareholders.
The Swedish Code also requires that the chair of the board
of directors is to be elected by the shareholders’ meeting.
The Company is not required to comply with the mandatory Swedish corporate governance rules or the Swedish
Code. However, and as further described below, the
Company recognizes the importance of corporate governance issues and complies with the Canadian corporate governance regulations.
In June 2005, securities regulatory authorities in Canada
adopted corporate governance guidelines (“Corporate
Guidelines”) which deal with matters such as the constitution and independence of corporate boards, their functions,
the effectiveness and education of board members and other
items dealing with sound corporate governance practices.
The Board of Directors believes that the Company’s
corporate governance practices have been, and continue to
be, in compliance with applicable Canadian requirements.
Further details are set forth below.
Boar d of Dir ec tor s
The Directors are responsible for managing and supervising
the management of the business and affairs of the Company.
Independence
Each year, the Board of Directors must review the relationship that each Director has with the Company in order to
satisfy themselves that the relevant independence criteria
have been met. Information on each member’s independence is set out in “Directors, senior executives and independent auditors”.
In order to facilitate its exercise of independent judgment
in carrying out its responsibilities, the Board of Directors
may establish informal committees on an as needed basis
consisting solely of independent Directors to consider certain matters to be considered by the Board of Directors.
The Board of Directors, or any committee, may also seek
advice from outside advisors. The Board of Directors also
follows a practice whereby if a Director has an interest in a
matter the Board of Directors is considering such Director
either abstains from voting on the matter or exits the board
meeting.
The independent Directors hold in camera sessions at
regularly scheduled meetings at which non-independent
Directors and members of management are not in attendance. However, in order to facilitate open and candid discussion among independent Directors, communication among
the independent Directors also occurs on an informal and
ongoing basis as needs arise.
The Board of Directors does not have a Chairman independent of management. Mr. Hardy, the Chairman of the
Board of Directors, is also the Company’s Chief Executive
Officer and President. The Board of Directors believes that
this structure best reflects the entrepreneurial leadership of
the Company. The Board of Directors is satisfied that the
autonomy of the Board of Directors and its ability to function independently of management are protected through
measures such as the Audit Committee and Compensation
and Corporate Governance Committee being composed of
a majority of independent Directors and each committee
being chaired by an independent Director. In addition, in
order to provide leadership for its independent Directors,
the Board of Directors encourages its independent Directors
to discuss matters separate from the non-independent
Directors and to seek the advice of financial, legal or other
consultants when necessary.
Meetings
The following table sets forth the number of board and
committee meetings held and attendance by Directors for
the most recently completed financial year, ended October
31, 2008:
Board
meetings
Compensation
and Corporate
Governance
Committee
Audit
Committee
Roger V. Hardy
6 of 6
N/A
N/A
Michaela Tokarski
6 of 6
N/A
N/A
Director
Murray McBride
6 of 6
2 of 2
5 of 5
Curt Cranfield
6 of 6
2 of 2
5 of 5
Daniel Mühlbach
6 of 6
N/A
N/A
Jeffrey Mason
6 of 6
2 of 2
5 of 5
Subsequent to the year ended October 31, 2008, the Board
of Directors has met on five occasions, the Compensation
and Corporate Governance Committee has met on two
occasions and the Audit Committee has met on four
occasions.
Responsibilities of the Board of Directors
The Board of Directors does not have a written mandate,
but is in the process of implementing one. The Board of
Directors has garnered responsibility for the Company’s
approach to corporate governance. The responsibility for
the day-to-day management of the Company rests with the
executive officers; however, the Board of Directors is ultimately responsible for the stewardship of the Company.
The Board of Directors assumes this responsibility in key
areas such as the following:
(i) safeguarding shareholder interests;
(ii) the adoption of a strategic planning process that
includes reviewing the Company’s long-term objectives on a periodic basis;
(iii) succession planning, including appointing, developing
and monitoring senior management;
(iv) developing and monitoring the Company’s policy for
communicating with shareholders, other stakeholders
and the public;
(v) the integrity of the Company’s internal control systems, which the Board of Directors and the Audit
Committee and Compensation and Corporate
Governance Committee review periodically with management and the Company’s auditors;
(vi) reviewing with management the principal risks affecting the Company and the systems that have been put
in place to manage these risks; and
(vii) considering and approving all significant transactions
or decisions affecting the Company and its subsidiaries
prior to implementation.
Although the Board of Directors has not developed formal position descriptions for its chair, board committee
chairs, or for the Chief Executive Officer, through periodic discussions amongst the Directors and meetings with
the Directors and the Chief Executive Officer they have
acquired a good understanding of their respective roles. In
addition, the Board of Directors sets goals for the Chief
Executive Officer and the attainment of these goals is monitored by the Board of Directors.
Or ientat ion and
cont inuing educ at ion
The Company does not have a formal process of orientation and education for Directors. The current Directors are
experienced in boardroom procedure and corporate governance and generally have a good understanding of the business. As necessary, Directors are provided with information
about the Company, the role of the Board of Directors,
the Board of Directors’ committees, the Directors and the
Company’s industry. In addition, the Company provides
continuing education for its Directors as such needs arise.
Ethic al busines s conduc t
The Company adopted a Code of Business Conduct and
Ethics (the “Code”) in December 2006, setting out the
principles that should guide the behavior of the Company’s
Directors, officers and employees. The Code addresses
issues such as the following:
(i) conflicts of interest, including transactions and agreements in respect of which a Director or executive
officer has a material interest;
(ii) protection and proper use of corporate assets and
opportunities;
(iii) fair dealing with the Company’s security holders, customers, suppliers, competitors and employees;
(iv) compliance with laws, rules and regulations; and
(v) reporting of any illegal or unethical behavior.
The Board of Directors is responsible for monitoring
compliance with the Code. One tool used for monitoring
compliance is the Company’s whistleblower policy (the
“Whistleblower Policy”). Any person can report complaints
or concerns, which may be on an anonymous basis through
the procedures of the Whistleblower Policy.
47
To ensure Directors of the Company exercise independent
judgment in considering transactions, agreements or decisions in respect of which a Director or executive officer has
declared a material personal interest (in accordance with relevant corporate law requirements), the Board of Directors
follows a practice whereby any Director must be absent during any board discussion pertaining thereto and not cast a
vote on any such matter. Significant contracts that may be
deemed to be a conflict are also reviewed and approved by
the Company’s Audit Committee. In addition, the Board of
Directors must comply with conflict of interest provisions
in Canadian corporate law, including relevant securities
regulatory instruments, in order to ensure that Directors
exercise independent judgment in considering transactions
and agreements in respect of which a Director or executive
officer has a material interest.
other executive officers when approving the Chief Executive
Officer’s compensation. The Compensation and Corporate
Governance Committee is composed of three independent
Directors. In order to ensure an objective process for determining compensation, the Compensation and Corporate
Governance Committee reviews independent materials such
as pay survey data and industry reports. The Compensation
and Corporate Governance Committee also encourages
open and frank discussion from its members and seeks leadership from its independent chair. In addition, it benchmarks against other companies using peer group studies
compiled for the Committee.
The Compensation and Corporate Governance
Committee consists of Murray McBride, Curt Cranfield
and Jeffrey Mason.
For more information, see “Compensation, pensions
and benefits”.
Nomination of Direc tor s
Although the Company does not have a nominating committee to propose new board nominees, the Compensation
and Corporate Governance Committee is responsible for
advising the Board of Directors with respect to the filling
of vacancies on the Board of Directors and making recommendations as to nominees for the Board of Directors and
uses an informal consultative process. The Compensation
and Corporate Governance Committee analyzes the needs
of the Board of Directors when vacancies arise and identifies and proposes new nominees who have the necessary
competencies and characteristics to meet such needs. New
candidates are introduced to the Board of Directors by
members of the Compensation and Corporate Governance
Committee. In order to foster an objective nomination
process, the independent Directors are encouraged to recommend nominees for the Board of Directors.
Compensation
The Compensation and Corporate Governance Committee
is appointed by the Board of Directors to, among other
things, discharge the Board of Directors’ responsibilities
relating to compensation of the Company’s Directors and
officers. The Compensation and Corporate Governance
Committee periodically reviews the adequacy and form of
compensation to ensure it realistically reflects the responsibilities and risks involved in being an effective Director
or officer and that the compensation allows the Company
to attract qualified candidates. Such review includes examination of publicly available data as well as independent
compensation surveys. The Compensation and Corporate
Governance Committee annually reviews and approves corporate goals and objectives relevant to the compensation of
the Chief Executive Officer, evaluates the Chief Executive
Officer’s performance in light of those goals and objectives
and sets the Chief Executive Officer’s compensation level
based on this evaluation. The Compensation and Corporate
Governance Committee meets without the presence of
48
Employee share ownership plan
In July 2009, the Company implemented an employee share
ownership plan (“ESOP”) for its eligible employees, who
consist of those employed in Canada on a full-time or parttime basis by the Company or its subsidiaries, including
officers. Eligible employees may elect to participate in the
ESOP by contributing up to eight percent of their gross
earnings or base salary plus bonus (“Base Pay”) up to a
maximum aggregate contribution of CAD 7,500 per calendar year. Participating employees contribute to the ESOP
by way of payroll deductions to an account opened and
maintained by an administrative agent as appointed by the
Company, which may be a personal account, a registered
retirement savings plan account or a tax-free savings account.
The Company or the relevant subsidiary, as the case may
be, will contribute an amount equal to 100 percent of the
amount deducted from the employee’s Base Pay as a result
of the ESOP to a maximum contribution of CAD 7,500. All
funds, including any dividends, deposited to an employee’s
ESOP account will be used to purchase Shares on the open
market at prevailing market prices at the time of such purchases. Participating employees are entitled to request the
administrative agent to sell any of the participant’s Shares
purchased through the ESOP. The participant’s Shares will
be sold by the administrative agent as soon as practical after
receipt of the request at the market price of the Shares at the
time of such sale. In order to be eligible to participate in the
ESOP, an employee must have passed his or her probationary period and must have reached the age of majority in the
jurisdiction of his or her legal residence. Participation in the
ESOP is voluntary.
Stock option plan information
In February 2007, the shareholders of the Company
adopted a stock option plan (the “Option Plan”) for the
Company’s Directors, officers, employees and consultants.
The Option Plan provides that options to purchase Shares
may be granted to eligible persons (defined as Directors,
consultants and employees of the Company or any of its
subsidiaries and employees of a person or company which
provides management services to the Company or any of its
subsidiaries) on terms determined within the limitations set
out in the Option Plan. The maximum number of Shares to
be reserved for issuance at any one time under the Option
Plan and any other employee incentive plan is ten percent of
the issued and outstanding Shares. The exercise price for an
option granted under the Option Plan will be equal to the
volume weighted average trading price of the Shares for the
five trading day period immediately preceding the granting the option. Options granted may be subject to vesting
requirements, provided that options granted to persons
performing investor relations activities will contain vesting provisions such that vesting occurs over at least twelve
months with no more than one quarter of the options vesting in any three-month period.
No single person may be granted options to purchase
Shares representing more than five percent of the issued
and outstanding Shares in any twelve month period unless
disinterested shareholder approval is first obtained. Options
shall not be granted under the following circumstances: (i)
if the exercise thereof would result in the issuance of more
than two percent of the issued and outstanding Shares in
any twelve month period to any consultant of the Company
or any of its subsidiaries; or (ii) if the exercise thereof would
result in the issuance of more than two percent of the issued
and outstanding Shares in any twelve month period to
employees of the Company or any of its subsidiaries who
conduct investor relations activities. The number of Shares
issuable to insiders, at any time, under all security based
compensation arrangements of the Company cannot exceed
ten percent of the issued and outstanding Shares. The
number of Shares issuable to insiders, within any one year
period, under all security based compensation arrangements
of the Company cannot exceed ten percent of the issued and
outstanding Shares. Non-assignable options will be granted
to eligible persons for a period which may not exceed five
years from the date of the grant and will expire within 90
days upon the participant ceasing to be a Director, officer,
employee or consultant of the Company, unless that participant is dismissed with cause, in which case the options
lapse and become terminated immediately. Options granted
to a participant carrying out investor relations activities will
expire within 30 days of that participant ceasing to be a
Director, officer, employee or consultant.
Subject to applicable approval of the TSX, the Board of
Directors may at any time amend or revise the Option Plan,
provided that no such amendments or revisions shall alter
the terms of any options theretofore granted, unless shareholder approval or disinterested shareholder approval, as the
case may be, is obtained and further provided that no shareholder approval is required for the following amendments
or revisions: (i) amendments of a housekeeping nature; (ii) a
change to vesting provisions; (iii) a change to the termination provisions which does not entail an extension beyond
the original expiry date; and (iv) the addition of a cashless
exercise feature, payable in cash or securities, which arises
from a full deduction of the underlying securities from the
Option Plan reserve. The Option Plan is administered by
the Compensation and Corporate Governance Committee.
The Option Plan is subject to the rules and policies of the
TSX including the requirement for shareholder approval
every three years following institution.
Outstanding options
As at July 31, 2009, 4,670,437 options to purchase Shares
were outstanding. Each option entitles the holder thereof to
purchase one Share.
A s ses sments
The Board of Directors is responsible for keeping management informed of its evaluation of the performance of the
Company and its senior officers in achieving and carrying
out the Board of Directors’ established goals and policies,
and is also responsible for advising management of any
remedial action or changes which it may consider necessary.
Additionally, Directors are expected to devote the time and
attention to the Company’s business and affairs as necessary
to discharge their duties as Directors effectively.
The Board of Directors does not have a formal process
to monitor the effectiveness of the Board of Directors, its
committees and individual members, but rather relies on an
informal review process. In order to gauge performance, the
Board of Directors considers the following:
(i) Input from Directors, where appropriate;
(ii) attendance of Directors at meetings of the Board of
Directors and any committee;
(iii) the charter of each committee; and
(iv) the competencies and skills each individual Director is
expected to bring to the Board of Directors and each
committee.
Audi t Commi t tee
The Audit Committee meets with the Company’s auditor
and is responsible for reviewing the Company’s interim and
annual financial statements and making recommendations
for the approval of such financial statements to the Board
of Directors. Material issues related to the audit of internal
accounting controls and information systems are discussed
with the Audit Committee as such issues arise. The Audit
Committee has direct access to the auditors.
Jeffrey Mason is the Chairman of the Audit Committee.
The other members of the Audit Committee are Murray
McBride and Curt Cranfield. Each member of the Audit
Committee is financially literate within the meaning of
National Instrument 52-110 – “Audit Committees” (“NI
52-110”). Jeffrey Mason, Murray McBride and Curt
49
Cranfield are independent members of the Audit Committee
as that term is used in NI 52-110.
Relevant educational experience. Set out below is a
description of the education and experience of each Audit
Committee member relevant to the performance of his
responsibilities as an Audit Committee member:
Jeffrey Mason – Mr. Mason holds a Bachelor of Commerce
degree from the University of British Columbia and
obtained his chartered accountant designation while at the
international accounting firm of Deloitte & Touche LLP.
In October 2008, Mr. Mason completed the certification
required to receive the Professional Institute of Corporate
Directors’ ICD.D designation. He spent the last 15 years as
Chief Financial Officer and Director to ten publicly traded
(TSX and American Stock Exchange) companies. These
companies are principally managed by Hunter Dickinson
Inc., a Canadian management services company that
oversees public companies with significant market capitalization operating in worldwide jurisdictions. As Chief
Financial Officer and Director of Hunter Dickinson Inc.,
Mr. Mason’s responsibilities included mergers and acquisitions, financial public reporting and administration, legal,
human resources and information technology in addition to
his directorship role.
Murray McBride – Mr. McBride acquired significant financial experience and exposure to accounting and financial
issues while serving in a number of positions, including:
Chairman of the Intellivest Group of Companies, President
of the Alexander Proudfoot Company of Canada, Member
of Parliament of Canada, Chairman of the Canadian Egg
Marketing Agency, Vice Chairman and General Manager of
the Farm Credit Corporation of Canada, Chief of Staff of
the Canadian Ministry of Consumer and Corporate Affairs
and Chief of Staff of the Postmaster General of Canada.
Curt Cranfield – Mr. Cranfield acquired significant financial experience and exposure to accounting and financial
issues in his capacity as co-founder, Chief Executive Officer
and President of IP Applications Corp. Mr. Cranfield was
responsible for IP Applications Corp.’s growth from a
start-up business to a publicly traded company. He currently serves as President and Chief Executive Officer of
Qool Media Ltd. Mr. Cranfield has Bachelor degrees in
Economics and Health Information from the University of
Victoria.
Pre approval policies and procedures. The Audit Committee
charter includes responsibilities regarding the provision of
non-audit services by the Company’s external auditors. The
Audit Committee charter states that the Audit Committee
shall: (i) pre-approve the retention of the independent auditor for any non-audit services, including tax services, and
50
the fees for such non-audit services which are provided to
our Company or its subsidiaries; (ii) consider whether the
provision of non-audit services is compatible with maintaining the auditor’s independence; and (iii) if so determined
by the Audit Committee, recommend that our Board of
Directors take appropriate action to satisfy itself of the independence of the auditor.
Reliance on certain exemptions. At no time since the commencement of the Company’s most recently completed
financial year has the Company relied on any exemption
from NI 52-110.
Audit Committee oversight. At no time since the commencement of the most recently completed financial year was a
recommendation of the Audit Committee to nominate or
compensate an external auditor not adopted by the Board
of Directors.
Audit fees. The aggregate fees billed by the external auditor in each of the last two fiscal years for audit services was
CAD 261,122 for the fiscal year ended October 31, 2008
and CAD 312,000 for the fiscal year ended October 31,
2007.
Audit related fees. There were no audit related fees billed
in each of the last two fiscal years for assurance and related
services by the Company’s external auditor that are reasonably related to the performance of the audit or review of the
Company’s financial statements.
Tax fees. The aggregate fees billed in each of the last
two fiscal years for professional services rendered by the
Company’s external auditor for tax compliance, tax advice
and tax planning were CAD 71,503 for the fiscal year
ended October 31, 2008 and CAD 32,000 for the fiscal
year ended October 31, 2007. Tax fees for 2008 and 2007
are primarily for preparation of the Company’s tax returns,
assistance with any audits and other tax consulting.
All other fees. The aggregate fees billed in each of the last
two fiscal years for services provided by the external auditor
were CAD 166,740 for the fiscal year ended October 31,
2008 and CAD nil for the fiscal year ended October 31,
2007. The fees for 2008 related to restructuring advice and
transfer pricing studies.
Insider pol ic y
Coastal Contacts adopted an insider trading policy in July
2005, as amended in February 2007 (the “Insider Policy”),
to provide guidelines to its, and its subsidiaries, employees, officers and Directors with respect to transactions in
Shares or other securities of Coastal Contacts. The Insider
Policy applies to all transactions in the Company’s securities, including Shares, options for Shares and any other
securities which Coastal Contacts may issue from time to
time. The Insider Policy applies to all employees, officers and Directors of, and consultants and contractors to,
Coastal Contacts or its subsidiaries who receive or have
access to material non-public information regarding the
Company (collectively, “Insiders”), as well as to any person
who receives such information from an Insider.
Pursuant to the Insider Policy, no Insider, and no member of the immediately family or household of any Insider,
may engage in any transaction involving a purchase or sale
of the Company’s securities during any period commencing
with the date that he or she possesses material non-public
information concerning Coastal Contacts, and ending at
the close of business on the first trading day following the
date of public disclosure of that information, or such other
time as the information is no longer material. “Tipping” of
information to other persons is also prohibited.
In addition, the Insider Policy stipulates a mandatory
trading ban for all Directors, officers and employees of the
Company having access to Coastal Contact’s internal financial statements or other material non-public information,
prohibiting transactions by such individuals other than during the trading window commencing at the close of business on the first trading day following the date of public disclosure of the financial results for a particular fiscal quarter
or year and continuing up to and including the last day of
the next fiscal quarter.
Distr ibut ion of infor mat ion to
the C anadi an and Swedish mar kets
The Company is subject to the information and reporting
requirements of the CBCA, Canadian provincial securities
laws, and the rules, policies and guidelines of the TSX. The
Company files periodic reports and other information with
securities regulatory authorities in Canada and the TSX
relating to its business, financial condition and other matters. The Company is required to disclose in such reports
certain information, as of particular dates, concerning the
Company’s Directors and officers, their compensation,
stock options granted to them, the principal holders of the
Company’s securities and any material interest of such persons in transactions with the Company.
Financial reports and press releases are published on the
Company’s website and through its news distributors, with
separate news distributors for the Canadian and Swedish
markets.
Swedish insider reporting rules
Following the Listing on NASDAQ OMX Stockholm all
persons holding an insider position (Sw. insynsställning) in
the Company will be required to report their shareholdings
and holdings of other financial instruments in the Company
(including holdings of closely affiliated natural and legal
persons) and changes in such holdings to the SFSA. Such
reporting is mandatory and shall be made in accordance
with the Swedish Act on Reporting Obligations for Certain
Holdings of Financial Instruments (SFS 2000:1087).
These reports are publicly available on the SFSA’s website
www.fi.se. In addition, the same act stipulates a trading ban
for the Chief Executive Officer and the other members of
the Board of Directors of the Company during the thirty
days preceding the announcement of the Company’s ordinary quarterly interim reports up to and including the day
the interim report is announced.
51
Legal matters and supplementary information Shareholder s’ agreement
Except as set out below, the Company is not aware of any
shareholders’ agreements between the Company’s shareholders. Furthermore, the Company is not aware of any
other agreements or similar arrangements which in the
future may result in a change of control of the Company.
As at July 31, 2009, 403,714 common shares were subject to voluntary pooling restrictions.
Tr ansac tions wi th rel ated part ies
No related party of the Company, or any associate or affiliate of such related party, has any material interest, direct or
indirect, in any transaction since November 1, 2005, or in
any proposed transaction which has materially affected or
will materially affect the Company or any of its subsidiaries,
except for as follows.
As at July 31, 2009, there were five promissory notes
outstanding, receivable from officers, ranging in value from
CAD 0.01 million to CAD 0.1 million and totaling CAD
0.32 million (October 31, 2008: CAD 0.32 million) and,
accumulated interest totaled CAD 0.05 million (October
31, 2008: CAD 0.04 million). These loans are payable on
demand and bear interest at a rate of five percent per annum.
The debtors are personally liable for the amounts owed.
Legal proc eedings
Except as set out below, the Company is not involved nor
has been involved in any material legal or arbitration proceedings (including any such proceedings which are pending or threatened of which the Company is aware) within
the preceding financial year.
On September 6, 2007, the Company received a petition
filed by the College of Opticians of British Columbia (the
“Opticians”) in the Supreme Court of British Columbia.
The Opticians sought an order to restrict the Company
from selling contact lenses to members of the public in
British Columbia. On April 25, 2008, the Supreme Court of
British Columbia denied the petition filed by the Opticians.
On May 26, 2008, the Company received a notice of appeal
filed by the Opticians with the British Columbia Court
of Appeal seeking to overturn the ruling by the Supreme
Court of British Columbia. On August 14, 2008 the
Company filed a statement of claim against the Opticians
for certain statements made relating to the sale of contact
lenses. In May 2009, the appeal filed by the Opticians
52
was heard by the British Columbia Court of Appeal and
defended against by the Company. A decision has not been
rendered by the British Columbia Court of Appeal, nor can
a date of a decision be estimated. Although the outcome of
the appeal cannot be determined at this time, management
of the Company believes the original petition and subsequent appeal is without merit.
On August 16, 2006 the Company received a petition
filed by Synsam Services AB (“Synsam”) in the City Court
of Solna. Synsam sought an order to restrict the Company
from using Synsam’s registered trademark “EYEQ” in a certain way on the Lensway.se site. On November 20, 2008
the petition filed by Synsam was granted by the City Court
of Solna. On September 29, 2009, the appeal filed by the
Company was heard by the Court of Appeal. The Company
is unable to predict the outcome of the appeal at this time.
Although the Company has not formally been served
with court documents, it received notice on October 12,
2009, that Charles E. Hill & Associates, Inc. has filed a
claim in the United States District Court Eastern District
of Texas alleging that the Company and a number of other
defendants infringed various U.S. patents relating to certain electronic catalog systems and methods. The Company
believes the claim is without merit and intends to vigorously
defend such claim.
Given the nature of the business environment in which
the Company operates and the relative strength of the
Company’s financial position, other third parties have
threatened or may commence legal or regulatory proceedings against the Company in the ordinary course of business. An adverse determination in litigation or regulatory
proceedings could subject the Company to significant liabilities to third parties. Although such disputes are often
settled before trial, the costs associated with such arrangements may be substantial. The Company closely monitors
the progress of all threatened litigation and, where the
directors consider it appropriate; make the appropriate provisions and reserves in the Company’s financial statements.
Mater i al agr eements
There are no contracts, other than contracts entered into
the ordinary course of business, that are material to the
Company and that were entered into in the last two years,
but are still in effect.
Financi al agreements
www.clearlycontacts.ca, www.clearlycontacts.com.au,
A subsidiary of the Company has access to a secured overdraft facility, totaling SEK 25 million (approximately CAD
3.7 million) with interest payable at a rate of one percent
over the Stockholm Interbank Offered Rate. The subsidiary
uses this operating facility from time to time for working
capital purposes. As at July 31, 2009, there was no balance
outstanding pursuant to this facility.
www.clearlycontacts.co.nz, www.yourlenses.com,
Intangible and
intellec tual propert y
The Company’s customer databases are important assets to
its business. The value of these databases is predicated on
a business model which assumes that the majority of the
Company’s marketing expenditures are utilized to attract
customers for the first time and that a significant proportion of those customers will return with a lower incremental
marketing cost. These repeat customers represent the majority of the Company’s earnings. The databases allow the
Company to send e-mail reminders to customers regarding
the re ordering of contact lenses. The Company is also able
to send marketing information to current and past customers through the use of the Company’s databases. Therefore,
the Company takes precautions to ensure the security and
integrity of its customer databases.
The Company has a proprietary interest in its brand
names. The names “Coastal Contacts”, “Lenslogistics”,
“Lensway” and “Mylenses” are generally protected by
trademark legislation. The Company’s competitive position
could be affected if its name was misappropriated and its
reputation in any way compromised. There can be no assurance that the steps taken to protect the Company’s proprietary rights will be adequate to deter misappropriation of its
websites or names by others. Any misappropriation of the
Company’s names or websites could have a material adverse
effect on its business, revenue, operating results and financial condition.
The Company has obtained the rights to various
internet addresses, including www.coastalcontacts.com,
www.lensway.com, www.lensway.se, www.lensway.no,
www.mylenses.nl, www.lenzenpost.nl, www.lensway.co.uk,
www.coastallens.com and www.contactsan.com. The Company
cannot practically acquire rights to all addresses similar to
such addresses. If third parties obtain rights to use similar
addresses, these third parties may confuse the Company’s
customers and cause such customers to inadvertently place
orders with these third parties, which could result in lost
sales and could damage the Company’s brand.
The Company does not possess any patent or copyright
registrations in Canada, the United States, Europe, Asia
or any other jurisdiction. However, the Company does
have trademark registrations, either directly or through its
wholly-owned subsidiaries, in Canada, the United States,
Australia, New Zealand and the European Union, including “Coastal Contacts Inc.”, “coastalcontacts.com”, “clearlycontacts.com”, “clearlycontacts.ca”, “clearlycontacts.
com.au”, “clearlycontacts.co.nz”, “nordiclenses.com”,
­“nordiclenses.se”, “yourlenses.com”, “yourlenses.se” and
“lensway.com”.
For additional information regarding intellectual property rights, such as trademarks, websites and customer databases, see “Shareholders’ equity capital, indebtedness and
other financial information”.
Documents on displ ay
For the life of this prospectus, the following documents
may be inspected at the Company’s head office, or copies
thereof requested by sending a written request to Coastal
Contacts Inc., Suite 320-2985 Virtual Way, Vancouver,
British Columbia, V5M 4X7, Canada: The Company’s
Articles of Incorporation and by-laws, the Company’s historical financial information, which has been made public,
and all other documents and reports which are included or
referred to in this prospectus, directly or by reference, in
part or completely. Historical financial information, which
has been made public, is also available in electronic form
at the Company’s website www.coastalcontacts.com and at
SEDAR at www.sedar.com.
53
Articles of Incorporation, by-laws and corporate law The following is a summary of the rights of shareholders in Coastal Contacts based upon current Canadian
legislation and the current Coastal Contacts’ Articles of
Incorporation and by-laws. It also sets out certain differences between Canadian corporate law and Swedish corporate law with the aim to highlight material differences in
shareholders’ rights, had Coastal Contacts been a Swedish
company. The summary is of a general nature only. It does
not claim to give an exhaustive account of the aforementioned corporate documents, nor of all potentially relevant
differences between Canadian and Swedish law, material
or not. Further important information is provided in sections “Corporate Governance” and “Share capital, dividend and ownership structure”.
Gener al
The full corporate name of the Company is Coastal
Contacts Inc., being a limited liability company. The head
office is located at Suite 320-2985 Virtual Way, Vancouver,
British Columbia, V5M 4X7, Canada , telephone: +1 (604)
669 15 55 and the registered and records office is located
at Suite 1000-925 West Georgia Street, Vancouver, British
Columbia, V6C 3L2, Canada. The Company was incorporated under the Canada Business Corporations Act on
December 14, 2000, corporation registration number
382848-4. Thereafter, the Articles of Incorporation have
been amended on four occasions.
The legal form of the Company is governed by the
CBCA, its Articles of Incorporation (the “Articles”) and its
by-laws. While the Articles sets out the primary rules of the
Company, such as type of corporation and the name and
business of the corporation, more detailed provisions are set
out in the by-laws. As the Company is incorporated under
Canadian law, it is not required to comply with Swedish
corporate law (i.e. the Swedish Companies Act).
The busines s of the Company
The Articles do not restrict the business that the Company
can carry on (as set forth in the Articles of Incorporation,
Form 1, Section 6, item 6).
Under Swedish corporate law, the objectives of a corporation must be set out in the Articles of Association. These
objectives set out the demarcations of those business sections within which the corporation can operate.
54
Shar es
According to the Articles, the Company is authorized to
issue an unlimited number of common shares (referred to as
“Shares” in this prospectus) without nominal or par value.
Further, the Company is authorized to issue an unlimited
number of preferred shares. The preferred shares may be
issued in series, each series to consist of such number of
shares and to possess such rights as the Board of Directors
may by resolution fix from time to time before the issue
thereof. As at July 31, 2009, there were a total of 56,901,719
Shares issued and outstanding as fully paid and non assessable. As of the date of this prospectus, no preferred shares
have been issued.
Also under Swedish corporate law, a corporation may
issue different classes of shares, but only to the extent such
different classes of shares are specified in the articles of
association.
R ights, benefi ts and l imi tat ions
at tac hed to the shar es
Voting rights
Each shareholder is entitled to receive notice of, attend and
vote at all meetings of shareholders of the Company, except
meetings at which only a specified class of shares are entitled
to vote. Each Share entitles the holder thereof to one vote.
Meetings of shareholders
An annual meeting of shareholders of the Company shall be
held for the purpose of considering financial statements and
reports, for electing Directors and for appointing an auditor, as well as for the transaction of such other business as
may be properly brought before the meeting. Special meetings may be called at any time by the Board of Directors,
the Chairman of the Board, the managing director and the
president. Under the CBCA, shareholders holding 5 percent or more of the votes in a company may requisition the
Directors to call a meeting of shareholders.
Unless all shareholders agree, shareholders meetings are
to take place in Canada.
Under the CBCA, shareholder action without a shareholders’ meeting may only be taken by written resolution
signed by all shareholders who would be entitled to vote
thereon at a shareholders’ meeting.
Notices
Notice of the time and place of a shareholders’ meeting shall
be given by prepaid mail or delivered personally not less
than 21 days and not more than 50 days before the meeting to each shareholder who at the close of business on the
record date (as further described below) for such notice is
entered in the securities register as holder of a share carrying a right to vote.
Notice of a meeting of shareholders called for any other
purpose than consideration of the financial statements and
auditor’s report, election of board members and reappointment of the incumbent auditor shall state the nature of such
business in sufficient detail to permit the shareholders to
form a reasoned judgment thereon. It shall also state the
text of any special resolution to be submitted to the meeting.
Under Swedish corporate law, a general meeting of
shareholders must be preceded by a notice. The notice of
the annual general meeting of shareholders must be issued
no sooner than six weeks and no later than four weeks
before the date of the meeting. In general, notice of other
extraordinary general meetings must be issued no sooner
than six weeks and no later than two weeks before the meeting. Public limited companies must always notify shareholders of a general meeting by advertisement in the Swedish
Official Gazette and in a daily newspaper with nation-wide
circulation of which the name is given. The notice shall
include an agenda listing each item that the meeting is to
resolve upon.
registration). Shareholders must also, if provided for in
the articles of association, give notice of their intention to
attend the shareholders’ meeting.
Non-registered shareholders
Only shareholders of record as of the record date are entitled to receive notice and to vote at the meeting. However,
shareholders are also entitled to vote through their registered nominees by submitting a proxy to the registered
nominee with voting instructions. Such registered nominees are then required to vote according to the instructions
noted on the proxy.
Issue of Shares
Under Canadian corporate law, subject to the Articles, the
by-laws and any unanimous shareholders’ agreement, shares
may be issued at such times and to such persons and consideration as the board members may determine, provided
there is no pre-emptive right in the Company’s Articles.
Under Swedish corporate law, resolutions on new share
issues are passed by the shareholders’ meeting. A shareholders’ meeting may also authorize the board of directors to
issue new shares, provided that the authorization is within
the limits of the number of shares and share capital set out
in the corporation’s articles of association. Further, the
board of directors may resolve to issue new shares without
such authorization, provided that the resolution is conditioned upon the shareholders’ approval.
Record date
Pre-emption rights
Under Canadian corporate law, for every meeting of shareholders, the Company shall prepare a list of shareholders
entitled to receive notice of the meeting and to vote at
the meeting. The by-laws set forth that a record date (Sw.
avstämningsdag) for the determination of the persons entitled to receive notice and vote may be determined by the
board of directors. The record date shall not precede the
date of the meeting by more than 50 days and not less than
21 days. If no record date is determined, the record date
shall be at the close of business on the day immediately preceding the day the notice was given, or the day on which
this meeting is held. Canadian securities laws, however,
mandate that the Company set a record date for notice for
at least 30–60 days before the meeting. Canadian securities
laws also permit the Company to set a record date for voting, which is typically the same date as the record date for
notice. At least 25 days before the record date for notice,
notice of both the meeting and record dates must be sent
to all depositories, securities regulatory authorities and
exchanges on which its securities are listed.
Under Swedish law, in order for a shareholder to attend
and vote at a shareholders’ meeting, the holder must have
the shares registered in his own name in the register of shareholders on the fifth day prior to the date of the shareholders’ meeting (a so called voting registration or temporary
Under the CBCA, if the articles of a corporation so provide, no shares of a class are to be issued unless the shares
have first been offered to the shareholders holding shares of
that class, and those shareholders have a pre-emptive right
to acquire the offered shares in proportion to their shareholdings of that class, at the price and on the terms as those
shares are to be offered to others. However, irrespective of
any such provisions in the articles, no pre-emptive rights
exist in respect of shares issued for consideration other than
money, as a share dividend or pursuant to the exercise of
conversion privileges, options or rights previously granted
by the corporation. The Articles of the Company do not
provide for any pre-emptive rights.
Under Swedish corporate law, shareholders of any class
of shares have a pre-emption right (Sw. företrädesrätt) to
subscribe for shares issued of any class in proportion to their
shareholdings if the shares are issued for cash. The pre-emption right to subscribe for new shares may be set aside by a
resolution passed by two thirds of votes cast and of shares
represented at a shareholders’ meeting. The pre-emption
right to subscribe does not apply in respect of shares issued
for consideration other than money or of shares issued
pursuant to convertible debentures or warrants previously
granted by the corporation.
55
Dividends
Dividends are declared and paid at any time at the discretion of the Board of Directors. There are no fixed dates for
dividends. Under the CBCA, a corporation is not entitled
to declare or pay a dividend if there are reasonable grounds
for believing that the corporation is, or would after the payment be, unable to pay its liabilities as they become due or
the realizable value of the corporation’s assets would thereby
be less than the aggregate of its liabilities and stated capital of all classes. For further information on dividends, see
information on the Company’s dividend policy in sections
“Dividend and other information” and “Dividend policy”.
Under the Swedish Companies Act, only the shareholders’ meeting may authorize the payment of dividends. A
resolution to pay dividends may, with some exceptions, not
exceed the amount recommended by the board of directors.
Dividends may only be made if, after the payment of the
dividend, there is sufficient coverage for the corporation’s
restricted equity and the payment of dividends are justified,
taking into consideration the equity required by the type
of operations, the corporation’s need for consolidation and
liquidity as well as the corporation’s financial position in
general.
Distribution of assets on liquidation
Holders of Shares are entitled to receive the remaining
property of the Company upon dissolution, liquidation or
winding-up, subject to rights and privileges that may be
attached to any other class of shares of the Company.
Certain extraordinary corporate actions
Under the CBCA, certain extraordinary corporate actions,
such as certain amalgamations, continuances and sales,
leases or exchanges of all or substantially all of the property of a corporation other than in the ordinary course of
business, and other extraordinary corporate actions such as
liquidations and dissolutions, are required to be approved
by special resolution. In certain cases, a special resolution to
approve an extraordinary corporate action is also required
to be approved separately by the holders of a separate class
or series of shares.
Restrictions on changes in control
There are no provisions in the Articles or the by-laws that
would have an effect of delaying, deferring or preventing a
change in control of the Company, or any mergers, acquisitions or corporate restructurings of the Company. However,
it should be noted that as of the date of this document, the
Directors and senior executives of the Company controlled approximately 22.5 percent of the voting power in the
Company. For further information, see “Risk factors”.
Redemption provisions
Canadian Corporate law provides, subject to the articles
of a corporation, a corporation may purchase or otherwise
56
redeem any redeemable shares issued by it at prices not
exceeding the redemption price stated in the articles or calculated according to a formula stated in the articles. A corporation shall not make any payment to purchase or redeem
any redeemable shares issued by it if there are reasonable
grounds for believing that the corporation is, or would after
the payment be, unable to pay its liabilities as they become
due or the realizable value of the corporation’s assets would
after payment be less than the aggregate of its liabilities and
the amount that would be required to pay the holders of
shares that have a right to be paid, on a redemption or in a
liquidation rateably with or before the holders of the shares
to be purchased or redeemed, to the extent that the amount
has not been included in its liabilities.
Shar eholder R ights Pl an
The shareholders have approved a shareholders rights plan
(the “Rights Plan”) for the Company that provides for
the issuance of rights to purchase common shares (the
“Rights”). The Rights Plan is set out in the shareholder
rights plan agreement (the “Rights Agreement”) entered
into between the Company and Pacific Corporate Trust
Company, as agent, dated February 10, 2006. Capitalized
terms used herein and not otherwise defined have the meaning ascribed to them in the Rights Agreement.
To implement the Rights Plan, one Right was issued by
the Company pursuant to the Rights Agreement in respect
of each common share outstanding at 4.00 p.m. (Vancouver
time) on February 10, 2006 (the “Record Time”). One
Right also was issued for each additional common share
issued after the Record Time and prior to the earlier of
the Separation Time and the Expiration Time. Each Right
will entitle the holder, from and after the Separation Time
and prior to the Expiration Time, which shall be no later
than the close of the annual meeting of shareholders of the
Company following the tenth anniversary of the effective
date of the Rights Agreement, subject to renewal of the
Rights Agreement in accordance with its terms to purchase
from the Company one common share at a price equal to
one-half of the market price for the common shares of the
Company, subject to certain anti-dilution adjustments. The
Rights will not be exercisable until the Separation Time.
Upon the occurrence of a Flip-in Event, each Right held by
a non-Acquiring Person will become exercisable and may be
traded separately from the common shares.
The issuance of Rights will not change the manner in
which shareholders currently trade their common shares.
Shareholders do not have to return their share certificate(s)
in order to have the benefit of the Rights.
Until the Separation Time, the Rights will trade together
with the common shares, will be represented by the common share certificate, and will not be exercisable. After the
Separation Time, the Rights will become exercisable, will
be evidenced by Rights certificates, and will be transferable
separately from the common shares.
The Separation Time is defined in the Rights Agreement
as the close of business on the eighth Trading Day (or such
later day as may be determined by the Board) after the earlier of:
(i) the Stock Acquisition Date, which is the date of the
first public announcement that a Person has become
an Acquiring Person; and
(ii) the date of the commencement of, or first public
announcement of an intention of any Person (other
than the Company or any Subsidiary of the Company)
to commence a Take-over Bid (other than a Permitted
Bid or a Competing Permitted Bid) to acquire
Beneficial Ownership of 20 percent or more of the
Voting Shares of the Company.
A Permitted Bid is defined in the Rights Agreement as a
Take-over Bid which is made by means of a Take-over
Bid circular and which also complies with the following
requirements:
(i) the Take-over Bid is made to all registered holders of
Voting Shares;
(ii) the Take-over Bid contains, and the take-up and payment for securities tendered or deposited thereunder
is subject to, an irrevocable and unqualified condition
that no Voting Shares shall be taken up or paid for pursuant to the Take-over Bid prior to the close of business
on the date which is not less than 60 days after the date
of the Take-over Bid and only if at such date more than
50 percent of the Voting Shares held by Independent
Shareholders, including those held by the Acquiring
Person, shall have been deposited or tendered pursuant
to the Take-over Bid and not withdrawn;
(iii) the Take-over Bid contains an irrevocable and unqualified provision that, unless the Take-over Bid is withdrawn, Voting Shares may be deposited pursuant to
such Take-over Bid at any time during the period of
time specified in (ii) above and that any Voting Shares
deposited pursuant to the Take-over Bid may be withdrawn until taken up and paid for; and
(iv) the Take-over Bid contains an irrevocable and unqualified provision that if on the date on which Voting
Shares may be taken up and paid for more than 50
percent of the Voting Shares held by Independent
Shareholders shall have been deposited or tendered
pursuant to the Take-over Bid and not withdrawn, the
Offeror will make a public announcement of that fact
and the Take-over Bid will remain open for deposits
and tenders of Voting Shares for not less than ten business days from the date of such public announcement.
If an Offeror successfully completes a Permitted Bid, the
Rights Plan provides that the Rights will be redeemed at
CAD 0.001 per Right.
A Permitted Bid, even if not approved by the Board
of Directors, may be taken directly to the shareholders.
Shareholder approval will not be required for a Permitted
Bid. Instead, shareholders will initially have 60 days to tender or to deposit their shares. If more than 50 percent of
the Voting Shares (other than shares Beneficially Owned by
the Offeror) have been tendered or deposited and not withdrawn by the end of such 60 day period, the Permitted Bid
must be extended for a further period of ten business days
to allow initially disapproving shareholders to deposit their
Shares if they so choose.
If a potential Offeror does not wish to make a Permitted
Bid, it can negotiate with, and obtain prior approval of, the
Board to make a bid pursuant to a Take-over Bid circular
on terms which the Board considers fair to all shareholders. In such circumstances, the Board of Directors may
waive the application of the Rights Plan to the transaction,
thereby allowing such bid to proceed without dilution of
the Offeror, and will be deemed to have waived the application of the Rights Plan to all other contemporaneous bids
made by Take-over Bid circulars. All other waivers require
shareholder approval except in the case of inadvertent triggering of the application of the Rights Plan.
Under the Rights Agreement, a Flip-in Event is any transaction pursuant to which any Person becomes an Acquiring
Person. Except as set out below, upon the occurrence of any
Flip-in Event, from and after the close of business on the
eighth trading day following the Stock Acquisition Date:
(i) any Rights Beneficially Owned by the Acquiring
Person and Affiliates, Associates and Transferees of
the Acquiring Person or any Person acting jointly or in
concert with the Acquiring Person will become void;
and
(ii) each Right (other than Rights which are void) will
entitle the holder thereof to purchase that number
of common shares having an aggregate market price
on the date of consummation or occurrence of such
Flip-in Event equal to twice the relevant Exercise
Price.
Accordingly, a Flip-in Event that is not approved by the
Board of Directors will result in significant dilution to an
Acquiring Person. The Board of Directors may, with shareholder approval, at any time prior to the occurrence of a
Flip-in Event, elect to redeem all but not less than all of the
outstanding Rights at a redemption price of CAD 0.001
per Right.
The Company may, from time to time, supplement or
amend the Rights Agreement to correct clerical or typographical errors or to maintain the validity of the Rights
Agreement as a result of a change in law. All other amendments require shareholder approval.
Amendments to the
Art ic les or by- l aws
The rights of the shareholders can be changed by way of
amending or repealing the Articles and/or by-laws of the
Company. Under the CBCA, an amendment to the articles
57
and the by-laws of a corporation generally requires approval
by special resolution by the shareholders. A special resolution is a resolution passed by a majority of not less than
two-thirds of the votes cast by the shareholders who voted
in respect of that resolution. The Board of Directors may
amend or repeal the by-laws of the Company. In such case,
the Board of Directors is required under the CBCA to submit the amendment or repeal to the shareholders at the next
meeting of shareholders, and the shareholders may confirm,
reject or amend the amendment or repeal by an ordinary
resolution. An ordinary resolution is a resolution passed by
a majority of the votes cast by shareholders entitled to vote
on the resolution.
Under Swedish corporate law, an alteration of the articles of association requires a resolution passed by the shareholders. The number of votes required pass such resolution
depends on the type of alteration, in general two-thirds of
the votes cast and of the shareholders represented at the
meeting. Swedish corporate law does not allow the articles
of association to be altered by way of a resolution of the
board of directors.
Direc tor s and the
Board of Direc tor s
Number of Directors, etc.
Under the CBCA, a distributing corporation must have not
fewer than three board members, at least two of whom are
not officers or employees of the corporation or its affiliates.
According to the Articles, the Company shall have a minimum of three Directors and a maximum of 20 Directors.
Within that range, the number of Directors is fixed by resolution of the Board of Directors from time to time. There
are currently six Directors. A majority of the Directors shall
be Canadian residents.
Under Swedish corporate law, a public corporation shall
have a board of directors consisting of at least three board
members, unless the articles of association provide otherwise. Subject to this requirement, the number of board
members is determined by a shareholders’ meeting.
Nomination of Directors
As further described in the section “Corporate governance”,
the Company does not have a nominating committee to
propose new board nominees. However, the Compensation
and Corporate Governance Committee is responsible for
advising the Board of Directors with respect to the filling of
vacancies on the Board of Directors and making recommendations as to nominees for the Board of Directors.
Swedish corporate law does not require corporations to
have a nominating committee. However, the Swedish Code
of Corporate Governance includes such a requirement.
Under the Swedish Code, the annual general meeting of
shareholders shall either appoint the members of a nominating committee or pass a resolution specifying how the members are to be appointed. The Swedish Code includes certain
58
requirements regarding the independency of the members
of the committee. The committee is to issue a statement
fully describing the reasons for its proposals, which is to be
submitted to the shareholders’ meeting.
Appointment and removal of Directors
Election of Directors take place on shareholders meetings
by ordinary resolution, which means a resolution passed by
a majority of the votes cast by the shareholders who voted in
respect of that resolution. Shareholders may also remove any
Director, by way of an ordinary resolution at a special meeting of shareholders called for such purpose. The vacancy
created by such removal may under certain circumstances be
filled at the same meeting or, if not, by the Board.
The Articles provide for three classes of Directors with
staggered terms. Each Director holds office until the expiry
of his or her term of office or until his or her successor is
elected or appointed, unless his or her office is earlier vacated
in accordance with the Articles or under the provisions of
the CBCA. At each annual meeting of the Company, a class
of Directors is elected to hold office for a three year term.
Successors to the class of Directors whose terms expire are
identified as being of the same class as the Directors they
succeed and are elected to hold office for a term expiring
at the third succeeding annual meeting of shareholders of
the Corporation. A Director appointed or elected to fill a
vacancy on the Board holds office for the unexpired term of
his predecessor.
The terms for the classes of Directors expire at the annual
meeting of shareholders to be held in the following years are
as indicated: (i) Class I – 2012; (ii) Class II – 2010; and
(iii) Class III – 2011. Daniel Mühlbach and Jeffrey Mason
are Class I Directors of the Company, Michaela Tokarski
and Curt Cranfield are Class II Directors of the Company
and Roger V. Hardy and Murray McBride are Class III
Directors of the Company. At the annual general meeting
held March 13, 2009 Daniel Mühlbach and Jeffrey Mason
were re-elected, to serve for a term of three years until the
annual meeting of shareholders of the Company to be held
in 2012.
Where the holders of any class or series of shares of a
corporation have an exclusive right to elect one or more
Directors, a Director so elected may only be removed by an
ordinary resolution at a meeting of the shareholders of that
class or series.
Under Swedish corporate law, the board of directors is,
except for any employee representatives, to be elected by
the annual general meeting of shareholders, unless the articles of association provide otherwise. The members of the
board are usually elected for the period until the end of the
next annual general meeting of shareholders. The period
for which the board is elected may not exceed four financial
years. It is possible for a board member to be re-elected for
a new term of office.
Powers of the Board of Directors and
delegation of the Board of Directors’ powers
The Board of Directors shall manage the business and
affairs of the Company. The Board of Directors may from
time to time delegate to a committee all or any of the powers conferred on the Board of Directors by the Articles or
the CBCA. Further, the Board of Directors may appoint a
Managing Director, who shall be a Canadian resident and a
Director of the Company.
Borrowing powers
The Board of Directors may from time to time on behalf of
the Company, and without authorization of the shareholders, borrow money upon the credit of the Company. It may
also, among other things, issue and pledge bonds of the
Company, whether secured or unsecured, and give guarantees on behalf of the Company.
Remuneration
Information regarding remuneration of the Board of
Directors is provided in section “Board of Directors, senior
executives and independent auditors”.
Under Swedish corporate law, the remuneration to the
board of directors is determined by the annual general meeting of shareholders, specifying the amount for each board
member. For corporations complying with the Swedish corporate governance code, the nominating committee’s proposal to the annual general meeting shall include a proposal
regarding the remuneration to each member of the board.
Right to indemnification
Under the CBCA, a corporation may under certain circumstances indemnify a board member (or an officer and certain other persons) who have acted as a board member of
another entity at the corporation’s request. The indemnity
could include all costs, charges and expenses, reasonably
incurred by him or her in respect of any civil, criminal or
administrative action or proceeding to which he or she is
made a party by reason of having been a board member
or officer of such corporation. A board member (or other
person) would only be entitled to indemnity if: (i) he or
she acted honestly and in good faith with a view to the best
interests of the corporation; and (ii) he or she had reasonable grounds for believing that his or her conduct was lawful, in the case of a criminal or administrative action or
proceeding that is enforced by a monetary penalty. Further,
such person may under certain circumstances be entitled to
indemnity covering all costs, charges and expenses reasonably incurred by him or her if he or she was substantially
successful on the merits in his or her defence of the action
or proceeding and fulfilled the conditions set out in (i) and
(ii), above. Also, a corporation may, with the approval of a
court, indemnify such person in respect of an action by or
on behalf of the corporation to procure a judgment in its
favor if he or she fulfils the conditions set out in (i) and (ii)
above. The Company’s by-laws provide for indemnification
of Directors and officers to the fullest extent authorized by
the CBCA.
Except to the extent that a Director or officer breaches
any duty to act in accordance with the Act and the regulations thereunder or, in exercising his or her powers and
discharging his or her duties, fails to either act honestly
and in good faith with a view to the best interests of the
Company or exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances, the by-laws of the Company limit the liability
of Directors and officers in that no Director or officer is
liable for the acts, receipts, neglects or defaults of any other
Director, officer or employee, or for any loss, damage or
misfortune that may result in the execution of the duties of
his or her office or in relation thereto.
Swedish corporate law does not contain specific provisions requiring that the articles of association provide for
indemnification of board members, officers or other persons. It is not uncommon, however, for listed Swedish
corporations to cater into specific insurance protection
arrangements for its board members and officers. An action
for damages on behalf of the corporation is available in certain circumstances against a founder, board member, managing director, auditor or shareholder of the corporation.
Such an action may be instituted where at the general meeting of shareholders the majority, or a minority comprising
the owners of at least one-tenth of all shares, has supported
the proposal that such an action be instituted. The action
for damages in favor of a corporation may be conducted by
owners of at least one-tenth of all shares.
Other
Information on meetings of the Board of Directors and
conflicts of interest is provided in “Corporate governance”.
Financi al statements and
audi tor’s r eport
Under Canadian corporate legislation, except where an
exemption order has been issued, the board members of
a corporation must place before the shareholders at each
annual meeting comparative financial statements for the
most recently completed financial period and the report
of the auditors’ thereon, if any. The financial statements
must include, at a minimum, a balance sheet, a statement
of retained earnings, an income statement and a statement
of changes in financial position. In addition, the board of
directors must at the same time place before the shareholders any further information respecting the financial position of the company and the results of its operations as
may be required by its articles, its bylaws or any unanimous
shareholders agreement. The board members of a corporation must approve the financial statements. Approval of the
board members must be evidenced by the manual or facsimile signature of at least one board member. A corporation
59
must send a copy of the comparative financial statements
and the auditor’s report thereon, if any, to each shareholder,
except a shareholder who has informed the corporation in
writing that he does not want them, at least 21 days before
each annual meeting of shareholders.
At the organizational meeting following incorporation,
Canadian corporate law provides that the board members
may appoint the first auditor to hold office until the first
annual meeting of shareholders. The reappointment of
the incumbent auditor is part of the regular business transacted at an annual meeting unless the shareholders waive
the appointment of an auditor. Subject to such waiver, the
shareholders appoint the auditor at each annual meeting. A
person is not qualified to be an auditor of a corporation if
he or she is not independent of the corporation, its affiliates or their respective board members or officers of such
corporation or its affiliates. Independence is a question of
fact in each case except, however, that there is, in certain
circumstances, a deemed lack of independence.
Under Swedish corporate law, the general meeting of
shareholders is to pass resolutions regarding the discharge
of the board of directors from liability. It also adopts the
balance sheet and the profit and loss statement. Further, it
makes decisions in respect of the disposition of the corporation’s profit or loss (such as payment of dividends). The
annual report must be prepared not later than five months
after the end of the financial year and then be passed to
the auditor. The annual report, together with the auditors’
report, must be presented at a shareholders annual meeting
held within six months after the end of the financial year. A
copy of the annual report and the auditors’ report must be
made available to the shareholders not less than two weeks
before the meeting. Under Swedish corporate law, only an
authorized public accountant may audit a limited company
(in some cases an approved auditor is sufficient). Auditors
are appointed by a general meeting of share holders. A registered accounting firm may be appointed auditor.
Desc r ip tion of the r ights,
benefi ts and l imi tations for
e very c ategory of shares
The holders of common shares are entitled to receive notice
of, attend at and vote at all meetings of shareholders of the
Company, except meetings at which only holders of a specified class of shares are entitled to vote. Subject to the provisions of the CBCA, the Directors have the discretion to
declare and pay dividends at any time upon the common
shares to the exclusion of all or any other classes or class of
shares, or upon all or any other classes or class of shares to
the exclusion of the common shares. The holders of common shares are entitled, subject to the rights, privileges,
restrictions and conditions attaching to any other class of
shares of the Company, to receive the remaining property of
the Company upon dissolution, liquidation or winding-up,
whether voluntary or involuntary or any other distribution
60
of the assets of the Company among its shareholders for the
purposes of winding-up its affairs.
The Directors are entitled to issue Class A preferred
shares at any time in one or more series, each series consisting of such number of shares as may be determined by the
Directors of the Company. The Directors may also set, at
their discretion: (i) the rate, amount or method of calculation of dividends, if any, and whether the same are subject
to adjustment and whether such dividends are cumulative,
partly cumulative or non-cumulative; (ii) the date, manner
and currency of payments of dividends and the dates from
which they accrue or become payable; (iii) if redeemable or
purchasable, the redemption or purchase prices and terms
and conditions of redemption or purchase, with or without provision for sinking or similar funds; (iv) the voting
rights, if any; (v) any conversion, exchange or reclassification rights; and (vi) any other terms not inconsistent with
these provisions;
The Directors are required to, by resolution duly passed
before the issue of the Class A preferred shares of each
series, fix the designation, rights, privileges, restrictions and
conditions to be attached to the Class A preferred shares of
such series.
With respect to payment of dividends and priority in the
distribution of assets in the event of liquidation, dissolution or winding-up of the Company, whether voluntary or
involuntary, or any other distribution of the assets of the
Company among its shareholders for the purpose of winding-up its affairs, the holders of Class A preferred shares of
each series is entitled to preference over the holders of common shares and over any other shares ranking junior to the
Class A preferred shares; and the Class A preferred shares
of each series may also be given such other preferences over
the common shares and any other shares ranking junior to
the Class A preferred shares as may be determined as to the
respective series authorized to be issued.
The Class A preferred shares of each series rank on a
parity with the Class A preferred shares of every other series
with respect to priority in payment of dividends and in the
distribution of assets in the event of the liquidation, dissolution or winding-up of the Company among its shareholders
for the purpose of winding-up its affairs.
Gener al meet ing of shar eholder s
The annual meeting of shareholders is held at such time in
each year and at such place as the Board of Directors, the
Chairman of the Board of Directors, the managing director, or the president determines. They also have the power
to call a special meeting of shareholders at any time. Notice
of the time and place of each meeting of shareholders must
be given at least 21 days but not more than 50 days before
the date of the meeting to each person entitled to such a
notice. A meeting of shareholders may be held without
notice at any time and place if all the shareholders entitled
to vote thereat are present in person or represented by proxy
or if those not present or represented by proxy waive notice
of or otherwise consent to such meeting being held and if
the auditors and the Directors are present or waive notice
of or otherwise consent to such meeting being held, so long
as such shareholders, auditors or Directors present are not
attending for the express purpose of objecting to the transaction of any business on the grounds that the meeting is
not lawfully called.
The only persons entitled to be present at a meeting of
shareholders are those entitled to vote thereat, the Directors
and auditors of the Company and others who, although not
entitled to vote, are entitled or required under any provision of the CBCA or the Articles or by-laws to be present
at the meeting. Any other person may be admitted only on
the invitation of the Chairman of the meeting or with the
consent of the meeting.
Management of the Company
Subject to any unanimous shareholder agreement, the
Board of Directors is empowered to appoint a president, one
or more vice presidents, a secretary, a treasurer, and such
other officers as the Board of Directors determines. The
Board of Directors may specify the duties of and delegate
to such officers powers to manage the business and affairs
of the Company.
An appointed Chairman is required to be a Director,
and the Board of Directors may assign to the Chairman
any of the powers and the duties assigned to the Managing
Director or to the president. The Managing Director, who
will be the Chief Executive Officer of the Company, must
be a resident Canadian and a Director and will have general
supervision of the business and affairs of the Company. A
vice-president will have the powers and duties as the Board
of Directors or the Chief Executive Officer may specify.
The secretary is required to enter or cause to be entered
minutes of all proceedings of all meetings of the Board
of Directors, shareholders and committees of the Board
of Directors. The secretary is also responsible for ensuring that all required notices are given to shareholders,
Directors, officers, auditors, and members of committees of
the Board of Directors. The secretary is in charge of the
corporate seal and of all books, papers, records, documents,
and instruments.
The treasure is responsible for keeping proper accounting records in compliance with the relevant legislation, the
depositing of money, the safekeeping of securities and the
disbursement of funds of the Company.
The Board of Directors is entitled to vary, add to or
limit the powers and duties of any officer, and may remove
any officer of the Company. The terms of employment
and the remuneration of an officer appointed by the
Board of Directors are to be determined by the Board of
Directors. Officers and Directors must disclose any interest
in any material contracts or proposed material contracts,
and Directors must refrain from voting on such material
contracts.
61
Taxation in Sweden The following summary of certain tax issues that may arise
as a result of holding Shares in the Company is based on
current Swedish tax legislation and is intended only as
general information for shareholders, who are resident
or domiciled in Sweden for tax purposes, if not otherwise
stated. The presentation does not deal comprehensively with
all tax consequences that may occur in this context. Neither
does it cover the specific rules on so-called qualified shares
in closely held companies or cases where shares are held by a
partnership or are held as current assets in a business operation. Special tax consequences that are not described below
may also apply for certain categories of taxpayers, including investment companies, mutual funds and persons who
are not resident or domiciled in Sweden. Each shareholder
is recommended to consult a tax adviser for information
with respect to the special tax consequences that may arise
as a result of holding Shares in the Company, including the
applicability and effect of foreign income tax rules, provisions contained in double taxation treaties and other rules,
which may be applicable.
Disposal of shares
Individuals
Individuals and estates of deceased Swedish individuals,
who sell their shares, are subject to capital gains tax. The
current tax rate is 30 percent of the gain. The capital gain
is calculated to equal the difference between the sales proceeds, after deduction for sales expenses, and the shares’
acquisition cost for tax purposes. The acquisition cost is
determined according to the so-called average-method.
This means that the costs for all shares of the same type
and class are added together and determined collectively,
with respect to changes to the holding. Alternatively, she
so-called standard rule according to which the acquisition
cost is equal to 20 percent of the net sales price may be
applied on the disposal of listed shares.
As a main rule, 70 percent of a capital loss is deductible against any other taxable income derived from capital.
Capital losses on listed shares and listed securities taxed in
the same manner as shares (except for listed shares in mutual
funds containing only Swedish receivables) are, however,
fully deductible against taxable capital gains on such assets
or on non-listed shares in Swedish limited liability companies and foreign legal entities.
62
If capital losses pertain to both listed and non-listed
shares, the losses pertaining to the listed shares are deductible prior to the losses on the non-listed shares. 70 percent of
any excess amount is deductible according to the main rule
of five sixths of 70 percent is deductible if the capital loss
relates to non-listed shares. Capital losses on listed shares in
mutual funds containing only Swedish receivables are currently fully deductible in the income of capital category.
If a deficit arises in the income from capital category, a
reduction of the tax on income from employment and from
business, as well as the tax on real estate, is allowed. The
tax reduction allowed amounts to 30 percent of any deficit
not exceeding SEK 100,000 and 21 percent of any deficit in
excess of SEK 100,000. Deficits may not be carried forward
to a later fiscal year.
Legal entities
Limited liability companies and other legal entities, except
for estates of deceased Swedish individuals, are taxed on all
income as income from business activities at a flat rate of
26.3 percent. Regarding the calculation of a capital gain or
loss and the acquisition cost, see section “Individuals”.
A capital loss on shares incurred by a corporate shareholder may be offset only against gains on shares or other
securities that are taxed in the same manner as shares. Such
capital losses may, under certain circumstances, also be
deductible against capital gains on such securities within
the same group of companies, provided the requirements
for group contributions are met. Capital losses on shares or
other such securities, which have not been deducted from
capital gains within a certain year, may be carried forward
and be offset against similar capital gains in future years
without any limitation in time.
For limited liability companies and economic associations, capital gains on shares in limited liability companies
and economic associations, including foreign equivalents,
held for business purposes are tax-exempt and capital losses
on such shares are non-deductible. Unlisted shares are
always considered held for business purposes. Listed shares
are considered to be held for business purposes provided
that the holding represents at least 10 percent of the voting rights or if the shares are held for business reasons.
Furthermore, capital gains on listed shares are only taxexempt if they are held not less than one year from the day
they became held for business purposes. Consequently,
capital losses on listed shares of the same type and class
have been acquired at different dates, shares acquired later
are considered to have been sold prior to shares that were
acquired earlier (last in first out). When applying the socalled average method, shares that have been held for one
year and participations that have not, are not considered to
be of the same type and class.
C a sh di v idends
Individuals
In general, dividends on shares are taxed in Sweden at a
rate of 30 percent as income from capital for individuals.
Additionally, dividends from a limited company resident
in Canada, such as the Company, are generally subject to
Canadian withholding tax at a rate of 25 percent. However,
under the tax treaty between Sweden and Canada, the tax
rate is normally reduced to 15 percent for dividends beneficially owned by a person resident in Sweden for the purpose of the treaty. The treaty rate is only applied if sufficient
information regarding the tax residency of the shareholder
is available.
The Company assumes responsibility for deducting tax
in relation to the dividends where required.
Since the dividend is generally taxable in both Sweden
and Canada, double taxation may occur. However, Canadian
withholding tax levied can be credited from Swedish tax
to the extent Swedish tax is attributable to foreign income
(overall credit).
If the foreign tax should exceed the Swedish tax attributable to foreign income one year, the credit may, subject to
certain limitations, be carried forward for up to five years.
Alternatively, the foreign tax may be deducted as a cost for
the recipient.
Legal entities
In general, dividends on shares to limited liability companies are taxed in Sweden at a rate of 26.3 percent as ordinary
income from business activities. Special rules apply to certain corporate entities.
Limited liability companies and economic associations,
except for investment companies, and some other legal entities may receive dividend free of tax on shares in limited liability companies and economic associations, including foreign equivalents, held for business purposes (for definition
of shares held for business purposes, see section “Disposal
of shares – Legal entities”). Furthermore, dividends on
listed shares held for business purposes are only tax exempt
if the shares are not disposed of within one year from the
day they were deemed to be held for business purposes. The
shares must, however, not have been held continuously for
one year at the date of distribution. If the holding period
requirement is not fulfilled later on the dividend will, however, be subjected to tax in a different fiscal year than the
dividend was received (a so-called claw-back provision).
Dividends from a limited company resident in Canada,
such as the Company, are generally subject also to Canadian
withholding tax at a rate of 25 percent. However, under
the tax treaty between Sweden and Canada, the tax rate is
normally reduced to 15 percent for dividends beneficially
owned by a legal entity resident in Sweden for the purpose
of the treaty. If such legal entity owns at least ten percent of
the votes or 25 percent of the capital in the Canadian company, the tax rate is reduced to five percent.
Since the dividend is generally taxable in both Sweden
and Canada, double taxation may occur. However, Canadian
withholding tax levied can be credited from Swedish tax
to the extent Swedish tax is attributable to foreign income
(overall credit).
If the foreign tax should exceed the Swedish tax attributable to foreign income one year, the credit may, subject to
certain limitations, be carried forward for up to five years.
Alternatively, the foreign tax may be deducted as a cost for
the recipient.
Tax considerations for shareholders
residing outside of Sweden
Individual shareholders who are not resident in Sweden are
subject to Swedish capital gains taxation upon disposal of
shares in non-Swedish corporate entities that were acquired
during residence in Sweden if they have been residents of
Sweden at any time during the calendar year of disposal
or ten calendar years preceding the year of disposal. In a
number of cases though, the applicability of this rule is limited by the applicable tax treaty for the avoidance of double
taxation. Foreign legal entities are not in general liable to
pay tax on capital gains on shares, if such gains do arise
from a permanent establishment in Sweden. Furthermore,
if a permanent establishment exists, the rules concerning
tax-exempt dividends and capital gains and non-deductible
capital losses are applicable with certain limitations.
63
Financial information The following information form part of the financial
­information referred to in this prospectus:
Principal differences between IFRS and Canadian GAAP
Presented on page 65 of this document
Unaudited interim report for the period November 1,
2008–July 31, 2009
Presented on page 66–92 of this document
Documents incorporated by reference
As outlined in the below table
64
Information
Source
Audited income statements, balance sheets, cash flow
analyses, notes and information regarding accounting
principles for the financial years ended October 31,
2006, 2007 and 2008
Consolidated financial statements October 31, 2008 and 2007
and Consolidated financial statements October 31, 2007 and
2006
Management’s discussion and analysis of financial
condition and results of operations for the years ended
October 31, 2006, 2007 and 2008
Management’s discussion and analysis of financial condition
and results of operations for the year ended October 31,
2008 and Management’s discussion and analysis of financial
condition and results of operations for the year ended
October 31, 2007
Auditor’s report for the financial years ended October 31,
2006, 2007 and 2008
Consolidated financial statements October 31, 2008 and 2007
and Consolidated financial statements October 31, 2007 and
2006
Accounting practices under Canadian GAAP differ, in certain material respects, with International Financial Reporting
Standards (“IFRS”). Examples of some differences that may impact
the Company’s financial statements are described below. The financial statement impact of the differences between Canadian GAAP
and IFRS is currently being evaluated by the Company.
Impa ir ment a s ses sment of a s se t s
Unlike Canadian GAAP, IFRS presents a single comprehensive
impairment standard for the testing of the impairment of property, plant and equipment not held for sale, intangible assets and
goodwill. This requires the identification of cash generating units
(“CGU’s”) to which goodwill, intangible and other assets that do
not generate cash flows independently are allocated for the purpose of impairment testing. Under Canadian GAAP, impairment
is tested using a different aggregation basis for goodwill, indefinite
life intangibles and other amortizing assets.
IFRS uses a one step impairment test where the recoverable
amount is the greater of fair value less costs to sell or value in use
(using discounted cash flows), for both the assessment of whether
there is impairment and the measurement of the loss for all assets
or CGU’s. For goodwill, depending on the determination of the
CGU’s within the Company, the impairment testing conducted
under IFRS may be at a lower level than the reporting unit model
used under Canadian GAAP.
Under Canadian GAAP, a two step process is used to determine
impairment of long lived assets. The first step, using undiscounted
cash flows, is undertaken to determine if impairment exists. If the
carrying value exceeds the undiscounted cash flows, the second step
measures the impairment using discounted cash flows.
Under IFRS, impairment losses are reversed if certain circumstances change. Canadian GAAP does not permit the reversal of
impairment losses.
Web si te de velopment cos t s
The Company currently capitalizes certain costs related to Web site
development. Unlike IFRS, Canadian GAAP provides no specific
guidance on the accounting for Web site development costs. IFRS
requires costs associated with Web sites developed for advertising or
promotional purposes to be expensed as incurred.
For eign cur r enc y tr ansl at ion
Under IFRS, the Company will be required to measure its assets,
liabilities, equity, revenues and expenses in its functional currency
for each foreign operation in the currency that best reflects the
economic substance of the underlying events and circumstances
relevant to the entity. All transactions in currencies other than
the functional currency are foreign currency transactions. This is
similar to Canadian GAAP, however, under IFRS, a different series
of prioritized indicators have to be considered. Consequently, it is
possible that a functional currency difference between Canadian
GAAP and IFRS could exist.
Principal differences
between IFRS
and Canadian GAAP
S toc k ba sed compensat ion
Under Canadian GAAP, a company has the option to measure
forfeitures based on actual experience or based on the estimated
number of forfeitures expected to be incurred. However, IFRS
requires an initial estimate of the number of expected forfeitures,
and subsequent adjustments are made to the estimate to reflect the
actual number of awards that vest, unless forfeitures are due to market-based vesting conditions.
Under IFRS, where awards are granted to non-employees, share
based payments are generally measured based upon the fair value of
goods or services received, measured when the goods are obtained
or the services are rendered. The measurement date under Canadian
GAAP is generally the earlier of the performance commitment date
or the performance completion date and is measured at the more
reliably measurable amount of either the fair value of the goods or
services received or the fair value of the award.
Promot ional i tems
Under IFRS, the Company is required to treat certain items which are
provided to customers in the event of a sale as a reduction in revenue.
Under Canadian GAAP, such promotional costs are treated as an expense.
Prov isions
Under IFRS, a provision is recognized for both legal and constructive obligations when it is probable that a liability has been
incurred. This may differ from Canadian GAAP, which requires
only legal obligations to be accrued under certain standards, such as
asset retirement obligations. Also, the Canadian GAAP recognition
threshold of likely is considered a higher recognition threshold than
the IFRS term “probable”.
Under Canadian GAAP, when there is a range of possible estimates and no amount within the range is a better estimate than any
other, then the obligation is measured at the low end of the range.
However, under IFRS, the obligation in this situation is measured
at the mid-point in the range.
IFRS requires discounting where the effect of the time value of
money is material. Provisions are not discounted under Canadian GAAP.
Under IFRS, a provision for restructuring costs is recognized
when there is a formal plan and details of the restructuring have
been communicated to those affected. However, under Canadian
GAAP, restructuring costs are recognized only when a legal liability is incurred; constructive obligations do not give rise to a liability,
so a commitment to an exit or disposal plan, by itself, does not create a present obligation that meets the definition of a liability.
Income ta xes
Under IFRS, the tax effect of intercompany transfers is not eliminated on consolidation, but instead must be recorded to reflect the
differential in the tax rates between different jurisdictions. The
Company does not currently record such a difference as this is not
required under Canadian GAAP.
Certain other potential measurement and recognition differences
exist with respect to the recording of future income taxes and tax
uncertainties, which are currently being evaluated by the Company.
65
Unaudited interim report for the period November 1, 2008–July 31, 2009 INTERIM CONSOLIDATED FINANCIAL STATEMENTS
AND MANAGEMENT’S DISCUSSION AND ANALYSIS
FOR THE THREE AND NINE MONTHS ENDED JULY 31, 2009
: COA
66
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
COASTAL CONTACTS INC.
UNAUDITED
FOR THE THREE AND NINE MONTHS ENDED JULY 31, 2009
67
COASTAL CONTACTS INC.
CONSOLIDATED BALANCE SHEETS
($000’s)
July 31,
2009
(Unaudited)
ASSETS
Current
Cash and cash equivalents [note 4]
Accounts receivable
Inventory
Prepaid expenses
Future income tax
Due from related parties
Property, equipment and leasehold improvements
Intangible assets
Goodwill
LIABILITIES
Current
Accounts payable and accrued liabilities
Income tax payable
Deferred revenue
Lease inducement
Long-term lease inducement
Future income tax
SHAREHOLDERS’ EQUITY
Share capital [note 6]
Authorized:
Unlimited common shares without par value
Unlimited Class A preferred shares without par value
Issued and outstanding:
56,901,719 common shares [2008 – 58,318,643]
Contributed surplus [note 7]
Accumulated other comprehensive loss [note 8]
Deficit
14,000
7,503
12,610
1,354
108
374
35,949
15,206
7,336
9,495
1,693
157
361
34,248
2,939
9,577
7,598
56,063
3,038
11,061
7,908
56,255
18,220
455
25
60
18,760
18,787
27
67
18,881
26
3,450
22,236
79
3,825
22,785
40,248
2,085
(3,961)
(4,545)
33,827
56,063
41,250
1,600
(2,904)
(6,476)
33,470
56,255
See accompanying notes to the unaudited interim consolidated financial statements
Contingency [note 11]
Subsequent Event [note 12]
68
October 31,
2008
COASTAL CONTACTS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE EARNINGS (LOSS)
(Unaudited) ($000’s, except share and per share amounts)
Three months ended
July 31
2009
2008
Sales
Cost of sales
Gross profit
Advertising
Selling, general and administration expenses
Share-based compensation
Amortization on property, equipment
and leasehold improvements
Amortization on intangible assets
Foreign exchange (gains) losses
Interest income, net
Restructuring charges
Earnings (loss) before income taxes
Income tax expense
Net earnings (loss)
Nine months ended
_ July 31___
2009
2008
37,511
26,834
10,677
32,725
23,775
8,950
102,154
72,424
29,730
86,731
63,289
23,442
5,042
3,668
189
3,987
3,687
160
13,420
11,133
485
10,667
10,852
495
264
352
252
(12)
922
319
603
231
432
(64)
(91)
608
397
211
719
1,115
11
(68)
2,915
816
2,099
697
1,234
(259)
(477)
844
(611)
573
(1,184)
Other comprehensive earnings (loss)
Unrealized foreign exchange gains (losses)
on translation of financial statements of
self-sustaining foreign operations
Comprehensive earnings (loss)
(46)
557
(491)
(280)
(1,057)
1,042
2,257
1,073
Basic earnings (loss) per share
Diluted earnings (loss) per share
0.01
0.01
0.00
0.00
0.04
0.04
(0.02)
(0.02)
Weighted average number of common shares outstanding
Basic
Diluted
57,057,145 63,430,443
57,374,702 63,534,580
57,781,343 68,217,592
57,909,739 68,217,592
See accompanying notes to the unaudited interim consolidated financial statements
69
COASTAL CONTACTS INC.
CONSOLIDATED STATEMENTS OF DEFICIT
(Unaudited) ($000’s)
Nine months ended July 31
2009
Deficit, beginning of period
(6,476)
Net earnings (loss)
Premium on purchase of common shares for cancellation
Deficit, end of period
2,099
(70)
(1,184)
(168)
(4,176)
(4,545)
(5,430)
See accompanying notes to the unaudited interim consolidated financial statements
70
2008
COASTAL CONTACTS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) ($000’s)
Three months ended
July 31
2009
2008
OPERATING ACTIVITIES
Net earnings (loss)
Non-cash items affecting earnings:
Amortization
Amortization of deferred lease inducement
Accrued interest
Share-based compensation
Future income taxes
Unrealized foreign exchange (gains) losses
Changes in non-cash working capital:
Accounts receivable
Inventory
Prepaid expenses
Accounts payable and accrued liabilities
Income tax payable
Cash provided by operating activities
Nine months ended
July 31
2009
2008
603
211
2,099
(1,184)
616
(20)
189
96
252
663
(20)
(3)
160
(63)
(42)
1,834
(60)
485
58
263
1,931
(59)
(14)
495
(95)
(271)
67
2,090
159
(4,015)
117
154
(455)
(1,030)
(263)
3,470
(250)
2,378
(437)
(3,433)
462
89
281
1,641
(511)
(1,454)
(505)
5,005
(637)
2,701
INVESTING ACTIVITIES
Maturity of short-term investments
Repayments from (advances to) related parties
Disposition of property and equipment
Acquisition of property, equipment
and leasehold improvements
Acquisition of intangible assets
(4)
-
(2)
-
(12)
60
3,976
(6)
-
(231)
(32)
(197)
(30)
(637)
(53)
(892)
(391)
Cash provided by (used in) investing activities
(267)
(229)
(642)
2,687
FINANCING ACTIVITIES
Purchase of common shares for cancellation
Share related costs
Cash used in financing activities
(199)
(199)
-
(1,169)
(1,169)
(9,786)
(165)
(9,951)
Effect of exchange rate changes
on cash and cash equivalents
(315)
266
(1,036)
1,155
(627)
14,627
14,000
2,415
17,544
19,959
(1,206)
15,206
14,000
(3,408)
23,367
19,959
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Income tax paid in cash
237
320
834
1,457
See accompanying notes to the unaudited interim consolidated financial statements
71
COASTAL CONTACTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2009
Unaudited
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Coastal Contacts Inc. (the “Company”) is a global retailer of contact lenses, eyeglasses and related vision care
products sold primarily through its internet sites. The Company has customers in North America, Europe and the
Asia Pacific region.
These unaudited interim consolidated financial statements have been prepared by the Company in accordance
with Canadian generally accepted accounting principles (“GAAP”) for interim financial statements, and accordingly,
do not include all disclosures required for annual financial statements. These unaudited interim consolidated
financial statements reflect the same accounting principles and methods of application as those disclosed in the
notes to the Company’s audited consolidated financial statements for the year ended October 31, 2008, with the
exception of the application of the accounting policies described in Note 2. These unaudited interim consolidated
financial statements and notes thereto should be read in conjunction with the audited consolidated financial
statements and notes thereto for the year ended October 31, 2008. The consolidated financial statements include
accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been
eliminated.
The preparation of these unaudited interim consolidated financial statements and the accompanying notes
requires management to make estimates and assumptions that affect the amounts reported. In the opinion of
management, these unaudited interim consolidated financial statements reflect all adjustments necessary to state
fairly the results for the periods presented. Actual results could vary from these estimates and the operating
results for the interim periods presented are not necessarily indicative of the results expected for the full year.
2. CHANGE IN ACCOUNTING POLICIES
Effective November 1, 2008, the Company has adopted the following accounting standards issued by the Canadian
Institute of Chartered Accountants (“CICA”). These standards have been adopted on a prospective basis with no
restatement of prior period financial statements.
(a) Inventories
In March 2007, the CICA approved Handbook Section 3031, “Inventories” which replaces the existing Handbook
Section 3030, “Inventories”. This standard is effective for interim and annual financial statements relating to fiscal
years beginning on or after January 1, 2008, with earlier application encouraged. The standard provides more
guidance on the measurement and disclosure requirements for inventories. The adoption of this standard had no
impact on the consolidated financial statements.
(b) Goodwill and intangible assets
In October 2007, the CICA approved Handbook Section 3064, “Goodwill and Intangible Assets” which replaces the
existing Handbook Sections 3062, “Goodwill and Other Intangible Assets” and 3450 “Research and Development
Costs”. This standard is effective for interim and annual financial statements relating to fiscal years beginning on
or after October 1, 2008, with earlier application encouraged. The standard provides guidance on the recognition,
measurement and disclosure requirements for goodwill and intangible assets. The adoption of this standard had
no impact on the consolidated financial statements.
1
72
COASTAL CONTACTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2009
Unaudited
3. FUTURE ACCOUNTING POLICIES
Transition to International Financial Reporting Standards
In accordance with the Canadian Institute of Chartered Accountants Accounting Standards Board (AcSB), Canadian
publicly accountable enterprises will be required to prepare financial statements in accordance with International
Financial Reporting Standards (IFRS). This changeover to IFRS from Canadian GAAP will apply to the Company’s
financial statements for the year beginning on November 1, 2011. The Company will undertake the appropriate
measures to ensure compliance with these new standards by the prescribed adoption date. The Company is
currently assessing the implications of these standards on the consolidated financial statements.
4. CASH AND CASH EQUIVALENTS
The Company has the Canadian Dollar equivalent of $1.4 Million of cash on hand which is restricted pursuant to a
letter of guarantee issued by a financial institution in favor of the Norwegian Customs and Excise Service to secure
the payment of duty and value added tax collected by the Company.
5. OPERATING FACILITY
A subsidiary of the Company has access to a secured overdraft facility, totaling 25,000,000 Swedish Krona
(approximately CAD$3.7million) with interest payable at a rate of 1% above the Stockholm Interbank Offered Rate.
The subsidiary uses this operating facility from time to time for working capital purposes. As at July 31, 2009, there
was no balance outstanding pursuant to this facility.
2
73
COASTAL CONTACTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2009
Unaudited
6. SHARE CAPITAL
(a) Issued and outstanding common shares
Authorized share capital comprises an unlimited number of common shares without par value and an unlimited
amount of Class A preferred shares without par value, of which none are issued. Common shares issued and
outstanding are as follows:
Balance, beginning of period
Purchased and cancelled
Issued on exercise of options
Balance, end of period
Nine Months Ended
July 31, 2009
Nine Months Ended
October 31, 2008
#
$000’s
#
$000’s
58,318,643
(1,416,924)
56,901,719
41,250
(1,002)
40,248
71,075,212
(12,765,944)
9,375
58,318,643
50,547
(14,560)
12
41,250
On October 24, 2007, the Company initiated a Normal Course Issuer Bid for up to 4,607,285 of its common shares.
The bid was terminated on October 24, 2008. As at October 24, 2008, a total 1,266,500 shares had been
purchased at an average price of $1.10 per share. All of these shares have been cancelled. The excess premium of
the purchase price over the average stated capital of the shares has been charged to deficit.
On February 25, 2008, the Company purchased and cancelled 6,837,344 common shares pursuant to an Issuer Bid.
The shares were purchased at $1.25 per share, for a total cost of $8.5 million and associated expenses. The excess
of the purchase price over the average stated capital of the shares has been charged to deficit.
On August 1, 2008, the Company purchased 5,000,000 of its common shares at $1.00 per share, for a total of
$5,000,000, plus associated expenses, pursuant to an offer to purchase dated June 19, 2008. All of these shares
have been cancelled. The excess premium of the purchase price over the average stated capital of the shares has
been charged to deficit.
On December 19, 2008, the Company renewed the Normal Course Issuer Bid for a maximum eligible purchase of
3,634,369 common shares. As at July 31, 2009, the Company had purchased 1,416,924 common shares for an
average price of $0.83 per share. All of these shares have been cancelled. The excess premium of the purchase
price over the average stated capital of the shares has been charged to deficit.
As at July 31, 2009, 403,714 (October 31, 2008 – 807,428) common shares were subject to voluntary pooling
restrictions.
3
74
COASTAL CONTACTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2009
Unaudited
6. SHARE CAPITAL (continued)
(b) Share purchase options
The shareholders of the Company have adopted a stock option plan (the “Option Plan”) for its directors, officers,
employees and service providers. The Option Plan provides that options to purchase common shares may be
granted to eligible persons on terms determined within the limitations set out in the Option Plan. The maximum
number of common shares to be reserved for issuance at any one time under the Option Plan and any other
employee incentive plan is 10% of the then issued and outstanding common shares. The exercise price for a share
purchase option granted under the Option Plan may not be less than that permitted by applicable regulatory
authorities. Options granted may be subject to vesting requirements. Non-assignable options will be granted for a
period which may not exceed five years from the date of the grant and will expire within 90 days upon the
participant ceasing to be a director, officer or an employee of the Company. The Option Plan is administered by
the Company’s Compensation and Corporate Governance Committee.
The following table contains information with respect to Company share options:
#
Options outstanding, November 1, 2008
Granted
Forfeited
Options outstanding, July 31, 2009
3,176,271
1,540,000
(45,834)
4,670,437
$
0.69 - 1.14
0.80 - 1.50
0.99 - 1.00
0.69 - 1.50
4
75
COASTAL CONTACTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2009
Unaudited
6. SHARE CAPITAL (continued)
The following table summarizes information about Company share purchase options outstanding as at July 31,
2009:
Range of exercise
price
$
$0.69
$0.80 - $0.99
$1.00 - $1.14
$1.50
Share purchase options Outstanding
Weighted
Number of
Weighted
common
average
average
shares
remaining
exercise
issuable
contractual
price
life (years)
$
50,000
2,327,500
2,142,937
150,000
4,670,437
4.23
3.12
2.60
4.76
3.40
0.69
0.85
1.07
1.50
0.97
Share purchase options Exercisable
Weighted average
Number of
common
exercise price
shares
$
issuable
8,333
950,245
1,019,535
15,000
1,993,113
0.69
0.86
1.06
1.50
0.97
The fair value of the option grants are estimated on the date of the grant using the Black-Scholes option-pricing
model with the following weighted average assumptions:
Dividend yield
Expected volatility
Risk free interest rate
Expected lives
2009
2008
0%
57%
2.49%
5.0 years
0%
57%
3.12%
5.0 years
7. CONTRIBUTED SURPLUS
$000’s
Balance - November 1, 2008
Share-based compensation
1,600
485
Balance – July 31, 2009
2,085
5
76
COASTAL CONTACTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2009
Unaudited
8. ACCUMULATED OTHER COMPREHENSIVE LOSS
$000’s
Balance - November 1, 2008
Unrealized foreign exchange gains (losses) on translation of financial
statements of self-sustaining foreign operations
(2,904)
Balance - July 31, 2009
(3,961)
(1,057)
9. RELATED PARTY TRANSACTIONS
Promissory notes receivable
July 31,
October 31,
2009
$000’s
2008
$000’s
374
361
As at July 31, 2009, there were five promissory notes outstanding, ranging in value from $0.01 million to $0.1
million and totalling $0.32 million. Accumulated interest totals $0.05 million. These loans are payable on demand
and bear interest at a rate of 5% per annum. The debtors are personally liable for the amounts owed.
6
77
COASTAL CONTACTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2009
Unaudited
10. SEGMENTED INFORMATION
The Company operates in one business segment, the sale of contact lenses, glasses and related vision care
products. The Company ships product from North America and Europe to customers in North America, Europe and
Asia.
Geographical information is based on the location of the customers in which the Company sells its products.
Intercompany revenues have been excluded. Certain comparative figures have been adjusted to reflect this
reporting.
All figures below are presented in Canadian Dollars.
Sweden
$000’s
Canada
$000’s
Norway
$000’s
USA
$000’s
Other
$000’s
Total
$000’s
Revenue
Three months ended July 31, 2009
Three months ended July 31, 2008
8,174
9,168
6,847
3,710
5,367
5,536
5,046
4,375
12,077
9,936
37,511
32,725
Nine months ended July 31, 2009
Nine months ended July 31, 2008
22,661
23,031
17,085
9,387
14,506
14,307
14,476
12,429
33,426
27,577
102,154
86,731
Property, equipment and
leasehold improvements
As at July 31, 2009
As at October 31, 2008
1,346
1,703
1,593
1,335
-
-
-
2,939
3,038
Intangible assets
As at July 31, 2009
As at October 31, 2008
3,515
4,086
1,018
1,396
-
-
5,176
5,579
9,709
11,061
Goodwill
As at July 31, 2009
As at October 31, 2008
5,479
5,721
-
-
-
2,119
2,187
7,598
7,908
11. CONTINGENCY
On September 6, 2007, the Company received a petition filed by the College of Opticians of British Columbia (the
“Opticians”) in the Supreme Court of British Columbia. The Opticians sought an order to restrict Coastal Contacts
Inc. from selling contact lenses to members of the public in British Columbia. On April 25, 2008, the Supreme Court
of British Columbia denied the petition filed by the Opticians.
On May 26, 2008, the Company received a notice of appeal filed by the Opticians with the British Columbia Court
of Appeal seeking to overturn the ruling by the Supreme Court of British Columbia.
On August 14, 2008 the Company filed a statement of claim against the Opticians for certain statements made
relating to the sale of contact lenses. The Company is unable to predict the outcome of the claim at this time.
7
78
COASTAL CONTACTS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2009
Unaudited
11. CONTINGENCY (continued)
On May 13, 2009, the appeal filed by the opticians was heard by the British Columbia Court of Appeal and
defended against by the Company. A decision has not been rendered by the British Columbia court of Appeal, nor
can the date of a decision be estimated. Management of the Company believes the original petition and
subsequent appeal is without merit.
12. SUBSEQUENT EVENT
On August 1, 2009, the Company established an employee share ownership plan (ESOP) whereby the Company
matches dollar contributions made by eligible employees. The contributions are limited to 8% of gross salary and a
maximum of $7,500 per participant per year. The contributions are used to purchase voting shares of the
Company through the open market. Approximately one half of our employees are eligible to participate in the
ESOP.
13. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform to the current period’s presentation.
8
79
Management’s Discussion and Analysis of Financial Condition and Results of Operations for the
three and nine months ended July 31, 2009
September 9, 2009
This Management’s Discussion and Analysis of Financial Condition and Results of Operations
(“MD&A”) is dated as of September 9, 2009 and should be read in conjunction with Coastal Contacts
Inc.’s (the “Company”, “our”, “we”, “us”, “Coastal Contacts” or “Coastal”) unaudited interim
consolidated financial statements for the period ended July 31, 2009 and the corresponding notes
thereto. We prepare our consolidated financial statements in accordance with Canadian generally
accepted accounting principles (“GAAP”) and use Canadian dollars as our reporting currency.
Forward-looking statements
All statements made in this management’s discussion and analysis, other than statements of
historical fact, are forward-looking statements. The words “may”, “would”, “could”, “will”, “intend”,
“plan”, “anticipate”, “believe”, “estimate”, “expect”, “goal”, “target”, “should,” “likely,” “potential,”
“continue,” “project,” “forecast,” “prospects,” and similar expressions typically are used to identify
forward-looking statements. Examples of such forward-looking statements within this document
include statements relating to: our ability to achieve consistent and sustainable growth through the
continued development of our core business; the execution of our growth initiatives including
expansion into new markets and expansion of market share within existing markets; our perception
of the contact lens industry or market and anticipated trends in that market in any of the countries in
which we do business; our anticipated ability to procure products, or the terms under which we may
procure our products; our anticipated business operations, inventory levels, ability to handle specific
order and call volumes, ability to fill and timely ship orders, ability to achieve greater marketing
efficiency or similar statements; the anticipated outcome of ongoing litigation; our relationships with
suppliers; our anticipated results of operations, including but not limited to anticipated sales,
revenues, earnings, tax benefits or similar matters; sufficiency of cash flows; and our perceptions
regarding volatility in and impact of foreign currency exchange rates.
Forward-looking statements are based on the then-current expectations, beliefs, assumptions,
estimates and forecasts about our business and the industry and markets in which we operate.
Forward-looking statements are not guarantees of future performance and involve risks,
uncertainties and assumptions which are difficult to predict. Assumptions underlying our
expectations regarding forward-looking statements or information contained in this MD&A include,
among others: that we will maintain our position in the markets we operate in and expand into other
markets in a favourable manner; that we will have sufficient capital to continue making investments
in advertising and personnel to support our business and new product lines, including our
prescription eyeglass business; that we will be able to generate and maintain sufficient cash flows to
support our operations; that we will be successful in defending against the appeal by, and in
prosecuting our claim against, the College of Opticians in British Columbia; that we will be able to
establish and/or maintain necessary relationships with suppliers; and that we will retain key
personnel. The foregoing list of assumptions is not exhaustive.
Persons reading this MD&A are cautioned that forward-looking statements or information are only
predictions, and that our actual future results or performance may be materially different due to a
number of factors. These factors include, but are not limited to: changes in the market; potential
downturns in economic conditions; consumer credit risk; our ability to implement our business
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strategies; competition; limited suppliers; inventory risk; disruption in our distribution facilities;
mergers and acquisitions; foreign currency exchange rate fluctuations; regulatory requirements;
demand for contact lenses and related vision care products; competition and dependence on the
internet and other risks detailed in our filings with the Canadian securities regulatory authorities.
Reference should be made to the section entitled “Risk Factors” contained in our most recently filed
Annual Information Form dated January 29, 2009, for a detailed description of the risks and
uncertainties relating to our business. These risks, as well as others, could cause actual results and
events to vary significantly. Accordingly, readers should not place undue reliance on forward-looking
statements and information, which are qualified in their entirety by this cautionary statement. These
forward-looking statements are made as of the date of this MD&A and we expressly disclaim any
intent or obligation to update these forward-looking statements, unless we specifically state
otherwise and except as required by applicable law.
Overview
Coastal Contacts is the leading worldwide provider of direct to consumer of vision care products,
with customers in North America, Europe and the Asia Pacific region. Since our inception in 2000, our
business has grown to 1.3 million orders shipped in our last four fiscal quarters representing over
$134 million in revenues. This equates to revenue growth of over 230% over the last five fiscal years.
Our business is designed to offer lower prices and superior levels of service when compared to the
traditional retail optical shops, the majority of which are owner managed locations. In our operating
facilities in North America and Europe, we maintain eyeglass assembly facilities and significant
contact lens inventories, which allow us to provide our customers with a broad product offering,
faster delivery times and competitive prices.
Specifically, our direct to consumer approach has been designed to reduce the time and effort
consumers must devote to the purchase of contacts and prescription eyeglasses. Through our
websites such as www.coastalcontacts.com or www.lensway.com, or our toll free phone numbers,
our customers can order quickly and easily, and have their contacts and prescription eyeglasses
delivered to their home or office, often at significantly lower prices than traditional retail
establishments.
Recent market data estimates the global market for soft contact lenses at more than $5.0 billion in
2008. Similarly, recent market data estimates the global market for prescription eyeglasses exceeds
$37 Billion.
During fiscal 2008 we entered the online prescription eyeglasses market without expensive retail
space and we are therefore able to operate with a lean cost structure compared to traditional optical
channels. We have also sourced product directly from manufacturers in Asia and abroad, allowing us
to further reduce costs by eliminating distribution steps. Our low overhead burden and efficient
purchasing allows us to deliver eyeglasses to customers at lower retail prices. Leveraging our
database of two million vision corrected customers and providing more products and services to
them is a particular opportunity for us.
We have now successfully executed a strategy of global market diversification, achieving the largest
market share of any online optical retailer in many markets. We are focused on achieving consistent
and sustainable growth through the continued development of our business. Our growth strategies
include expansion into new markets, expansion of market share within existing markets, the
momentum of new products, such as prescription eyeglasses and strategic acquisitions.
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Results of Operations – three and nine months ended July 31, 2009 compared to the three and nine
months ended July 31, 2008
For the three months
ended July 31,
($000’s)
For the nine months
ended July 31,
2009
2008
2009
2008
Sales
37,511
32,725
102,154
86,731
Gross profit
10,677
8,950
29,730
23,442
Income (loss) before taxes
922
608
2,915
(611)
Net income (loss)
603
211
2,099
(1,184)
1,967
1,276
5,177
1,923
Adjusted EBITDA 1
Sales increased by $4.8 million in the third quarter of 2009 to $37.5 million (370,882 orders shipped)
from $32.7 million (323,786 orders shipped) in the third quarter of 2008. Sales grew 20% as a result
of an increase in shipped orders (15%) and an increase in average revenue per order (5%), while
foreign currency exchange rate fluctuations caused revenue to decline by 5%. Sales increased by
$15.4 million over the first nine months of 2009 to $102.2 million from $86.7 million in the first nine
months of 2008. This represents 24% growth resulting from an increase in shipped orders (12%) and
an increase in average revenue per order (12%), while foreign exchange rate fluctuations caused
revenue to decline modestly by 6%.
The following table illustrates the impact of foreign exchange rate fluctuations on our revenues for
the current reporting period:
Currency
Revenue in Local Currency (000's)
Revenue in CAD Dollars (000's)
Three months ended July 31, 2009
Three months ended July 31, 2009
2008
2009
Delta (%)
2008
2009
Delta (%)
USD
4,332
4,455
+3%
$
4,375
$
5,046
+15%
SEK
54,541
55,832
+2%
$
9,168
$
8,174
-11%
NOK
27,974
30,320
+8%
$
5,536
$
5,367
-3%
EUR
2,780
3,010
+8%
$
4,387
$
4,747
+8%
CAD
3,710
6,847
+85%
$
3,710
$
6,847
+85%
OTHER
$
5,549
$
7,330
+32%
Total
$
32,725
$
37,511
+15%
1
Adjusted EBITDA, shipped orders, reorders and reorder rate(s) are non-GAAP measures that do not have a standardized meaning prescribed by Canadian
GAAP and are therefore unlikely to be comparable to similar measures presented by other companies. Refer to Supplemental Non-GAAP measures on page 12
for further information and a reconciliation of net income to adjusted EBITDA.
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Our gross margin in the three months ended July 31, 2009 was 28%, versus 27% in the same period in
2008. For the nine months ended July 31, 2009, our gross margin increased to 29% from 27% when
compared to the same period in 2008. These increases were primarily a result of product mix,
geographic mix of revenues and increased pricing in certain markets.
Advertising expenses increased to $5.0 million (13% of sales) in the third quarter of 2009, compared
to $4.0 million (12% of sales) during the same period in 2008. During the nine months ended July 31,
2009, advertising expenses increased to $13.4 million (13% of sales), compared to $10.7 million (12%
of sales) during the same period in 2008.
Advertising investments are made with the goal of sustaining the market leader position we have
achieved in some markets and establishing similar leadership positions in the emerging markets in
which we participate. We direct a large proportion of our marketing investments in regions and
product categories that we believe may result in retail pricing strength and advertising efficiencies
once the markets mature.
In addition to size and market position, our reorder rate, which is in excess of 70%, further enhances
advertising efficiencies and creates a profitable and recurring revenue stream. We are replicating
this model in new regions and with new products, by offering similar levels of service, and by
investing in similar brand-building marketing techniques.
Selling, general and administrative (“SG&A”) expenses were reduced to 10% of sales in the third fiscal
quarter of 2009 and remained constant in dollar terms at $3.7 million over the same period. SG&A
expenses increased 3% to $11.1 million in the nine months ended July 31, 2009, from $10.9 million in
2008.
In the quarter and nine months ended July 31, 2009 we recognized foreign currency exchange losses
on the translation of our monetary assets of $0.25 million and $0.01 million, respectively, compared
to gains of $0.06 million and $0.26 million in the same periods of the previous year. Foreign
exchange rates continue to be particularly volatile compared to historical averages and could
materially impact our forecasted and actual operating results in the future.
Amortization for the quarter ended July 31, 2009 decreased by $0.05 million from the same quarter
of the previous year to $0.6 million. Amortization decreased by $0.1 million in the nine months
ended July 31, 2009 compared to the same period in 2008.
Our income tax expense decreased by $0.1 million in the third quarter of fiscal 2009 compared to the
same period of fiscal 2008. Certain operations generate taxable income, while in certain other
jurisdictions we have incurred losses historically that can be applied against current and future
taxable earnings to reduce our tax liability on those earnings. As we may generate more taxable
income in regions where we have losses available to carry forward, our overall tax rate, as a
percentage of our earnings decreases and will continue to do so until these losses are fully utilized.
As we remain uncertain of realizing the future benefit of those losses, we have taken a valuation
allowance against these future tax assets. Consequently, our consolidated tax expense, as a
percentage of income before income taxes, will vary from quarter to quarter in line with the mix of
net income within each taxable jurisdiction.
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Liquidity and Capital Resources
At July 31, 2009 we had cash and cash equivalents of $14.0 million, as compared to $15.2 million at
October 31, 2008.
Cash provided by operating activities for the three months ending July 31, 2009 was $0.2 million, as
compared with $2.4 million provided in the same period last year. We generated $1.7 million in the
quarter through earnings excluding non cash items and consumed $1.6 million from working capital
fluctuations. Accounts receivable declined by $0.5 million and inventory declined by $2.1 million in
the quarter, as we consumed extraordinary inventory purchases made late in the second fiscal
quarter of 2009 to take advantage of favourable pricing opportunities. Also during the quarter, we
consumed $4.0 million to drawdown payables, much of which related to the payables accrued late in
the second fiscal quarter of 2009 in relation to the inventory purchases previously mentioned. In the
nine months ending July 31, 2009, $1.6 million was generated from operating activities compared to
$2.7 million in the nine months ending July 31, 2008.
We used $0.3 million during the third quarter of 2009 and $0.6 million in the nine months ending July
31, 2009 to purchase equipment relating to our growing prescription eyeglass business. This
compares to $0.2 million used in the same quarter in 2008 to purchase equipment and leasehold
improvements predominantly in relation to our prescription eyeglasses business and $2.7 million of
cash provided in the comparative nine month period of 2008 as short term investments totaling $4.0
million matured and exceeded spending on property, equipment and website development.
We used $0.2 million in the third quarter of the 2009 fiscal year to purchase 0.2 million of our
common shares for cancellation under a normal course issuer bid (“NCIB”). We did not purchase any
common shares in the comparative period last year. For the nine months ended July 31, 2009, we
used $1.2 million to buy back 1.4 million of our common shares, compared to $10.0 million used in
the same period of 2008 to purchase 7.9 million of our common shares.
We believe that existing available cash, together with cash flow from operating activities and our
existing, but currently unused operating facility will be sufficient to support the NCIB and our
operations to the end of the 2010 fiscal year.
We continue to expand our product offerings and seek strategic acquisitions. We may seek
additional sources of financing, including equity offerings that would be dilutive to the interests of
current shareholders, for accelerated growth, acquisitions of companies or assets or other activities,
and there can be no assurance that such funds will be available on satisfactory terms or at all. Failure
to obtain such financing could delay or prevent our planned growth, which could adversely affect our
business, financial condition and results of operations.
Critical Accounting Estimates
The Company prepares its consolidated financial statements in accordance with Canadian GAAP. The
preparation of consolidated financial statements in conformity with GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements as well as the
reported amounts of revenues and expenses during the reporting period. Estimates are based upon
historical experience and other assumptions that are believed to be reasonable under the
circumstances. These estimates are evaluated on an on-going basis and form the basis for making
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decisions regarding the carrying value of assets and liabilities and the reported amount of revenues
and expenses. Actual results may differ from these estimates under different assumptions.
We have identified the following as critical accounting estimates, which are defined as those that are
reflective of significant judgments and uncertainties, are the most pervasive and important to the
presentation of our financial condition and results of operations and could potentially result in
materially different results under different assumptions and conditions.
Revenue Recognition
Revenue from product sales is recognized when the product has been shipped to the customer. At
this point, the amount of sales revenue is determinable, no significant vendor obligations remain and
the collection of the revenue is reasonably assured.
Deferred revenue includes revenue collected in advance of the product being shipped to the
customer.
Accounting for Long-lived Assets
The ability to realize long-lived assets which are primarily comprised of customer lists and website
creation costs are evaluated periodically as events or circumstances indicate a possible inability to
recover their carrying amount. Such evaluation is based on assessment of reorder rates and various
analyses, including undiscounted cash flow and profitability projections that incorporate, as
applicable, the impact on the existing business. The analyses necessarily involve significant
management judgment. Any impairment loss, if indicated, is measured as the amount by which the
carrying amount of the asset exceeds the estimated fair value of the asset.
Accounting for Goodwill and Intangible Assets with Indefinite Lives
Goodwill represents the excess of the purchase price over the fair value of the net assets acquired.
Goodwill is not amortized and we perform an annual impairment test of our recorded goodwill. In
addition, we test our other indefinite-lived intangible assets for impairment. These impairment tests
can be significantly altered by estimates of future performance, long-term discount rates used or
market price valuation multiples. The analyses necessarily involve significant management judgment.
These estimates will likely change over time. Goodwill and intangible assets with indefinite lives
totaled $17.2 million and $19.0 million at July 31, 2009 and October 31, 2008, respectively. The
change in total goodwill and intangible assets with indefinite lives during the three and nine months
ended July 31, 2009 resulted from the foreign currency exchange rate impact on these assets held in
self sustaining subsidiaries. The impact of this change is unrealized and reflected in the Company’s
comprehensive earnings.
Allowance for Doubtful Accounts
We offer credit to customers in most of the regions that we operate in. Credit customers do not
have to pay for the order until the goods are received – generally estimated to be less than 15 days.
The majority of the individual receivable balances are small amounts of less than $150 and there are
a large number of records. Given the composition of the receivable portfolio, using a specific balance
approach to determine an allowance for doubtful accounts for the bulk of the receivables is not
feasible. Consequently, management estimates an allowance for doubtful accounts based on the
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aging of the receivable portfolio. The analyses necessarily involve significant management judgment.
These analyses can be significantly altered by estimates of the probability of future collection or
changes in payment patterns of customers. The allowance for doubtful accounts was $0.9 million and
$0.8 million at July 31, 2009 and October 31, 2008, respectively.
Share-based Compensation
The fair value of each share purchase option grant is estimated on the date of the grant using the
Black-Scholes option-pricing model. The amount of share-based compensation associated with any
share purchase options that are granted will be estimated and expensed, based on the vesting
schedule, using assumptions involving the estimated dividend yield, expected volatility, the risk-free
interest rate and the expected lives of the share purchase options.
Income Taxes
We account for income taxes using the liability method of accounting. Under the liability method,
future income tax assets and liabilities are determined based on differences between the carrying
amounts of balance sheet items and their corresponding tax values. The determination of the
income tax provision requires management to interpret regulatory requirements and to make certain
judgements. While income tax filings are subject to audits and assessments, management believes
that adequate provision has been made for all income tax obligations. However, changes in the
interpretations or judgements may result in an increase or decrease in our income tax provision in
the future. The amount of any such increase or decrease cannot be reasonably estimated.
Change in Accounting Policies
Effective November 1, 2008, the Company has adopted the following accounting standards issued
by the Canadian Institute of Chartered Accountants (“CICA”). These standards have been adopted on
a prospective basis with no restatement of prior period financial statements.
Inventories
In March 2007, the CICA approved Handbook Section 3031, “Inventories” which replaces the existing
Handbook Section 3030, “Inventories”. This standard is effective for interim and annual financial
statements relating to fiscal years beginning on or after January 1, 2008, with earlier application
encouraged. The standard provides more guidance on the measurement and disclosure
requirements for inventories. The adoption of this standard only impacted disclosures in the financial
statements.
Goodwill and intangible assets
In October 2007, the CICA approved Handbook Section 3064, “Goodwill and Intangible Assets” which
replaces the existing Handbook Sections 3062, “Goodwill and Other Intangible Assets” and 3450
“Research and Development Costs”. This standard is effective for interim and annual financial
statements relating to fiscal years beginning on or after October 1, 2008, with earlier application
encouraged. The standard provides guidance on the recognition, measurement and disclosure
requirements for goodwill and intangible assets. The adoption of this standard only impacted
disclosures in the financial statements.
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Future Accounting Policies
Transition to International Financial Reporting Standards
In accordance with the Canadian Institute of Chartered Accountants Accounting Standards Board
(AcSB), Canadian publicly accountable enterprises will be required to prepare financial statements in
accordance with International Financial Reporting Standards (IFRS). This changeover to IFRS from
Canadian GAAP will apply to the Company’s financial statements for the year beginning on November
1, 2011. The Company will undertake the appropriate measures to ensure compliance with these
new standards by the prescribed adoption date. The Company is currently assessing the implications
of these standards on the consolidated financial statements.
Common Shares
As at July 31, 2009, we had 56,901,719 common shares and 4,670,437 options outstanding. Of these
securities, 403,714 common shares are subject to voluntary pooling agreements and 2,677,324
options have not yet vested as of July 31, 2009.
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Quarterly Financial Information
(in $000’s, except per share amounts)
Quarter ended
July 31,
2009
Apr. 30,
2009
Jan. 31,
2009
Oct. 31,
2008
July 31,
2008
Sales
37,511
33,301
31,342
32,027
32,725
28,632
25,375
26,657
603
528
968
397
211
(692)
(701)
257
Weighted
Average # of
shares - Basic
57,057
57,975
58,318
58,451
63,430
65,092
71,275
72,015
Weighted
Average # of
shares – Diluted
57,374
57,988
58,320
58,605
63,535
65,353
71,275
72,194
Basic Earnings
(Loss) per share
0.01
0.01
0.02
0.01
0.00
(0.01)
(0.01)
0.00
Diluted Earnings
(Loss) per share
0.01
0.01
0.02
0.01
0.00
(0.01)
(0.01)
0.00
Net Income
(loss)
Apr. 30,
2008
Jan. 31,
2008
Oct. 31,
2007
Seasonality may impact our revenue distribution throughout the year. Our sales have generally been
stronger during the spring, summer and fall months.
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Related Party Balances
As at July 31, 2009, there were five promissory notes outstanding, receivable from officers, ranging in
value from $0.01 million to $0.1 million and totaling $0.32 million (October 31, 2008: $0.32 million)
and, accumulated interest totaled $ 0.05 million (October 31, 2008: $0.04 million). These loans are
payable on demand and bear interest at a rate of 5% per annum. The debtors are personally liable
for the amounts owed.
Contractual Obligations
The Company is committed to minimum annual payments, primarily related to lease costs on its
premises, as follows:
$000’s
2009
2010
2011
2012
2013 and thereafter
680
1,107
822
537
537
3,683
Operating costs on leases have been excluded. We have no obligations for annual payments related
to long-term debt or capital lease obligations.
Contingent Liabilities
In September 2007, we received a petition filed by the College of Opticians of British Columbia (the
“Opticians”) in the Supreme Court of British Columbia. The Opticians sought an order to prevent us
from selling contact lenses to members of the public in British Columbia. In April, 2008, the Supreme
Court of British Columbia denied the petition filed by the Opticians.
In May 2008, we received a notice of appeal filed by the Opticians with the British Columbia Court of
Appeal seeking to overturn the ruling by the Supreme Court of British Columbia. In August 2008, we
filed a statement of claim against the Opticians for certain statements made relating to the sale of
contact lenses. The Company is unable to predict the outcome of the claim at this time.
In May 2009, the appeal filed by the Opticians was heard by the British Columbia Court of Appeal and
defended against by the Company. A decision has not been rendered by the British Columbia Court
of Appeal, nor can a date of a decision be estimated. Although the outcome of the appeal cannot be
determined at this time, management of the Company believes the original petition and subsequent
appeal is without merit.
In the ordinary course of our business, inquiries are made periodically by regulatory authorities and
assertions are made. We review these and respond to them in due course. To date, no reservation
or provision has been made in the financial statements in connection with these matters.
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Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements as defined by applicable securities
regulations in Canada at July 31, 2009 that have, or are reasonably likely to have, a current or future
material effect on our results of operations or financial condition.
Critical Suppliers
We currently purchase significant amounts of inventory from a limited number of major suppliers.
We believe that alternative suppliers are available should those suppliers refuse or be unable to
provide us with products.
Disclosure Controls and Procedures
Disclosure controls and procedures are designed to provide reasonable assurance that all relevant
information is gathered and reported to senior management, including the Chief Executive Officer
(“CEO”) and Chief Financial Officer (“CFO”), on a timely basis so that appropriate decisions can be
made regarding public disclosure.
As of July 31, 2009, an evaluation of the design of the Company’s disclosure controls and procedures
as defined in National Instrument 52-109 was carried out. Based on that evaluation, the CEO and
CFO concluded that the design and operation of those disclosure controls and procedures were
effective.
Internal Contols over Financial Reporting
Management is responsible for certifying the design of the Company’s internal control over financial
reporting as required by National Instrument 52-109.
Our internal control over financial reporting is intended to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with applicable generally accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures that pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of
the assets of the company; provide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Management, including the CEO and CFO, carried out an evaluation of the design of our internal
controls over financial reporting as at July 31, 2009. Management believes the design to be sufficient
for the nature and size of the Company’s business, to provide reasonable assurance regarding the
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reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with Canadian generally accepted accounting principles.
During the third quarter of 2009, management did not make changes to its system of internal
controls that materially affect internal controls over financial reporting.
Supplemental Non-GAAP Measures
We report our results in accordance with Canadian GAAP, however, we present Adjusted EBITDA and
the number of orders shipped, reorders and the reorder rate, which is defined as the percentage of
orders in the quarter shipped to customers that we estimate have ordered from us in the past. We
believe that our investors may use these figures to make more informed investment decisions about
us.
Adjusted EBITDA is a non-GAAP measure that does not have any standardized meaning prescribed by
Canadian GAAP and is therefore unlikely to be comparable to similar measures presented by other
companies. Adjusted EBITDA should be considered in addition to, and not as a substitute for, net
income, cash flows and other measures of financial performance and liquidity reported in accordance
with Canadian GAAP.
Adjusted EBITDA is a measure we believe is useful in assessing performance and highlighting trends
on an overall basis. Adjusted EBITDA differs from the most comparable GAAP measure, net income,
primarily because it does not include interest, income taxes, amortization, unrealized foreign
currency exchange gains and losses and share-based compensation expense.
The following table provides a reconciliation of net income to Adjusted EBITDA:
For the nine months
ended July 31,
For the three months
ended July 31,
($000’s)
2009
2008
2009
2008
Net earnings
603
211
2,099
(1,184)
Depreciation and amortization
616
663
1,834
1,931
Interest income, net
(12)
(91)
(68)
(477)
Income tax expense
319
397
816
573
Share-based compensation
Foreign exchange (gain) loss
189
252
160
(64)
485
11
495
(259)
Restructuring cost
Adjusted EBITDA
-
-
-
844
1,967
1,276
5,177
1,923
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Beginning in the third fiscal quarter of 2009, the Company will exclude unrealized foreign exchange
gains and losses from Adjusted EBITDA in order to better reflect the operating performance of the
business and measure the business more consistently with how management monitors the business.
The following table reconciles previously reported adjusted EBITDA to the current methodology:
Q1 08
Q2 08
Q3 08
Q4 08
Q1 09
Q2 09
FY 2007
FY 2008
Adjusted EBITDA Historical Method
Unrealized FX (Gain) or Loss
(76)
(245)
917
50
1,340
(64)
1,297
367
2,025
(202)
1,424
(39)
4,230
(37)
3,495
102
Adjusted EBITDA New Method
(321)
967
1,276
1,664
1,823
1,385
4,193
3,597
Additional Information
Additional information relating to the Company, including the Company’s most recently filed annual
information form, dated January 29, 2009, can be found on SEDAR at www.sedar.com.
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Addresses
Head Office
Swedish Auditor
Coastal Contacts Inc.
KPMG
Suite 320-2985 Virtual Way
Vancouver, British Columbia
V5M 4X7
Canada
Telephone: +1 (604) 669 15 55
Fax: +1 (604) 669 68 55
Tegelbacken 4A
P.O. Box 16106
SE-103 23 Stockholm
Sweden
Telephone: +46 (0)8 723 91 00
Fax: +46 (0)8 10 52 58
Financial adv iser
C anadi an Auditor
E. Öhman J:or Fondkommission AB
KPMG LLP
Berzelii Park 9
P.O. Box 7415
SE-103 91 Stockholm
Sweden
Telephone: +46 (0)8 402 50 00
Fax: +46 (0)8 402 51 90
Box 10426
777 Dunsmuir Street
Vancouver, British Columbia
V7Y 1K3
Canada
Telephone: +1 (604) 691-3000
Fax: +1 (604) 691-3031
Swedish legal counsel
Kilpatrick Stockton
Euroclear Sweden
Hovslagargatan 5B
Box 5421
SE-114 84 Stockholm
Sweden
Telephone: +46 (0)8 505 646 00
Fax: +46 (0)8 505 646 99
Euroclear Sweden AB
C anadian legal counsel
Sangra Moller LLP
1000 Cathedral Place
925 West Georgia Street
Vancouver, British Columbia
V6C 3L2
Canada
Telephone: +1 (604) 662 88 08
Fax: +1 (604) 669 88 03
D e s ig n & P ro d u c t io n: S a n d s n a s C o mm u n ic at io n L L C , 20 0 9
Regeringsgatan 65
P.O. Box 7822
SE-103 97 Stockholm
Sweden
Telephone: +46 (0)8 402 90 00
www.coastalcontacts.com
www.lensway.se