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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Mark One
- ---------
X Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
- Act of 1934 for the fiscal year ended December 29, 2001.
- Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission file number 333-56551
EYE CARE CENTERS OF AMERICA, INC.
(Exact name as specified in its charter)
TEXAS 74-2337775
(State or other jurisdiction (IRS employer identification no.)
of incorporation or organization)
11103 West Avenue
San Antonio, Texas 78213-1392
(Address of principal executive offices, including ZIP Code)
(210) 340-3531
(Company's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the Company (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes X No
- -
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. N/A
---
Aggregate market value of common stock held by non-affiliates of the
registrant is $172,320. As the registrant's common stock is not traded publicly,
the per share price used in this calculation is based on the per share price as
designated by the Board of Directors ($5.00 per share).
Applicable only to Corporate Registrants: Indicate the number of shares
outstanding of each of the issuer's classes of common stock as of the latest
practicable date: 7,407,289 shares of common stock as of March 15, 2002.
Documents incorporated by reference: None
1
FORM 10-K INDEX
PART I
ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 19
ITEM 3. LEGAL PROCEEDINGS 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 20
PART II
ITEM 5. MARKET FOR REGISTRANTCOMMON STOCK AND RELATED
SHAREHOLDER MATTERS 21
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA. 21
ITEM 7. MANAGEMENTDISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 23
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 30
ITEM 11. EXECUTIVE COMPENSATION 33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 36
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K 39
2
PART I
------
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
Certain statements contained herein constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. All statements
other than statements of historical facts included in this report regarding the
Company's financial position, business strategy, budgets and plans and
objectives of management for future operations are forward-looking statements.
Although the management of the Company believes that the expectations reflected
in such forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to have been correct. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results, performance or achievements of the Company, or
industry results, to be materially different from those contemplated or
projected, forecasted, estimated or budgeted in or expressed or implied by such
forward-looking statements. Such factors include, among others, the risk and
other factors set forth under "Risk Factors" in the Company's Registration
Statement on Form S-4 filed with the Securities and Exchange Commission and
under the heading "Government Regulation" herein as well as the following:
general economic and business conditions; industry trends; the loss of major
customers or suppliers; cost and availability of raw materials; changes in
business strategy or development plans; availability and quality of management;
and availability, terms and deployment of capital. SPECIAL ATTENTION SHOULD BE
PAID TO THE FACT THAT CERTAIN STATEMENTS CONTAINED HEREIN ARE FORWARD-LOOKING
INCLUDING, BUT NOT LIMITED TO, STATEMENTS RELATING TO (I) THE COMPANY'S ABILITY
TO EXECUTE ITS BUSINESS STRATEGY (INCLUDING, WITHOUT LIMITATION, WITH RESPECT TO
NEW STORE OPENINGS AND INCREASING THE COMPANY'S PARTICIPATION IN MANAGED VISION
CARE PROGRAMS; (II) THE COMPANY'S ABILITY TO OBTAIN SUFFICIENT RESOURCES TO
FINANCE ITS WORKING CAPITAL AND CAPITAL EXPENDITURE NEEDS AND PROVIDE FOR ITS
OBLIGATIONS; (III) THE CONTINUING SHIFT IN THE OPTICAL RETAIL INDUSTRY OF MARKET
SHARE FROM INDEPENDENT PRACTITIONERS AND SMALL REGIONAL CHAINS TO LARGER OPTICAL
RETAIL CHAINS; (IV) INDUSTRY SALES GROWTH AND CONSOLIDATION; (V) IMPACT OF
REFRACTIVE SURGERY AND OTHER CORRECTIVE VISION TECHNIQUES; (VI) DEMOGRAPHIC
TRENDS; (VII) THE COMPANY'S MANAGEMENT ARRANGEMENTS WITH PROFESSIONAL
CORPORATIONS; (VIII) THE ABILITY OF THE COMPANY TO MAKE AND INTEGRATE
ACQUISITIONS; AND (IX) THE CONTINUED MEDICAL INDUSTRY EFFORT TO REDUCE MEDICAL
COSTS AND THIRD PARTY REIMBURSEMENTS.
3
GENERAL
Eye Care Centers of America, Inc. (the "Company") is the third largest
retail optical chain in the United States as measured by net revenues, operating
or managing 360 stores, 291 of which are optical superstores. The Company
operates predominately under the trade name "EyeMasters," and in certain
geographical regions under the trade names "Visionworks," "Hour Eyes," "Dr.
Bizer's VisionWorld," "Dr. Bizer's ValuVision," "Doctor's ValuVision," "Stein
Optical," "Eye DRx," "Vision World," "Doctor's VisionWorks" and "Binyon's." The
Company utilizes a strategy of clustering its stores within its targeted markets
in order to build local market leadership and strong consumer brand awareness,
as well as to achieve economies of scale in advertising, management and field
overhead. Management believes that the Company has either the number one or two
superstore market share position in fourteen of its top fifteen markets,
including Washington, D.C., Minneapolis, Dallas, Houston, Tampa/St. Petersburg,
Phoenix, Miami/Ft. Lauderdale, Portland and San Antonio. The Company generated
net revenues and EBITDA (as defined within the heading "Item 6. Selected
Consolidated Financial Data") of $336.0 million and $48.8 million, respectively,
for the fiscal year ended December 29, 2001 ("fiscal 2001").
The Company's stores, which average approximately 4,200 square feet, carry
a broad selection of branded frames at competitive prices, including designer
eyewear such as Eddie Bauer, Polo/Ralph Lauren, Laura Ashley, Guess and Chaps,
as well as its own proprietary brands. In addition, the Company's superstores
offer customers "one-hour service" on most prescriptions by utilizing on-site
processing laboratories to grind, coat and edge lenses. Moreover, optometrists
("ODs") located inside or adjacent to all of the Company's stores offer
customers convenient eye exams and provide a consistent source of optical retail
customers. In the Company's experience, over 80% of such ODs' regular eye exam
patients purchase eyewear from the Company's adjacent optical retail stores.
On July 2, 2001, the Company announced that Bernard W. Andrews retired as
Chief Executive Officer of the Company. David E. McComas, previously President
and Chief Operating Officer, succeeded Mr. Andrews as Chief Executive Officer
and became a director on July 2, 2001. Mr. Andrews continues to serve as
Chairman of the Board.
The Company's management team has focused on improving operating
efficiencies and growing the business through both strategic acquisitions and
new store openings. The Company's net revenues have increased from $140.2
million in fiscal 1995 to $336.0 million in fiscal 2001, while the Company's
store base increased from 152 to 359 over the same period, primarily as a result
of four acquisitions. The Company's senior management team owns or has the right
to acquire approximately 5.8% of the Company's common stock on a fully diluted
basis, through direct ownership and stock options.
4
BUSINESS STRATEGY
The Company plans to capitalize on the industry trends discussed herein
under the heading "Industry" by building local market leadership through the
implementation of the following key elements of its business strategy:
MAXIMIZE STORE PROFITABILITY. Management plans to continue to improve the
Company's operating margins through enhanced day-to-day store execution,
customer service and inventory asset management. The Company has implemented
various programs focused on (i) increasing sales of higher margin, value-added
and proprietary products, (ii) continuing store expense reductions, (iii)
offering extensive productivity-enhancing employee training and (iv) upgrading
the point-of-sale information system. Management believes its store clustering
strategy will enable the Company to continue to leverage local advertising and
field management costs to improve its operating margins.
REDUCTION OF DEBT. In order to improve the Company's EBITDA to total debt
ratio and reduce the amount of outstanding debt, management has initiated
strategies to generate cash. Capital expenditures have been budgeted to
correspond to the new store opening program to be implemented in 2001 through
2003. The Company closed ten unprofitable stores in the third and fourth
quarters of 2000 and will continue to evaluate appropriate actions as lease
renewals occur. Management has also focused on process improvement initiatives
that have resulted in the reduction in head counts and corporate overhead
expenses. Management is continually evaluating methods to increase store
profitability and increase working capital. Total debt has been reduced from
$291.4 million at the end of fiscal 2000 to $274.6 million at the end of fiscal
2001.
CAPITALIZE ON MANAGED VISION CARE. Management has made a strategic decision
to pursue managed vision care relationships aggressively in order to help grow
the Company's retail business and over the past five years has devoted
significant management resources to the development of its managed vision care
business. As part of its effort, the Company has (i) implemented direct
marketing programs and information systems necessary to compete for managed
vision care relationships with large employers, groups of employers and other
third party payors, (ii) developed significant relationships with certain HMOs
and insurance companies, which have strengthened the Company's ability to secure
managed vision care relationships, and (iii) been asked to participate on
numerous regional and national managed vision care panels. While the average
ticket price on products purchased under managed vision care reimbursement plans
is typically lower, managed vision care transactions generally earn comparable
operating profit margins as they require less promotional spending and
advertising support. The Company believes that the increased volume resulting
from managed vision care relationships also compensates for the lower average
ticket price. As of December 29, 2001, the Company participated in managed
vision care programs, with retail sales arising from managed vision care plans
totaling approximately 42.4% of optical sales for fiscal 2001 compared to 24% of
optical sales for fiscal 1998. Management believes that the increasing role of
managed vision care will continue to benefit the Company and other large retail
optical chains with strong local
5
market shares, broad geographic coverage and sophisticated information
management and billing systems.
EXPAND STORE BASE. In order to continue to build leadership in its targeted
markets, the Company plans to take advantage of "fill-in" opportunities in its
existing markets, as well as to enter attractive new markets where it believes
it can achieve a number one or two market share position. Consequently, the
Company currently plans to open approximately six stores in existing markets
during 2002 and four to five stores each year after 2002. Management believes
that the Company has in place the systems and infrastructure to execute its new
store opening plan. The Company uses a site selection model utilizing
proprietary software which incorporates industry and internally generated data
(such as competitive market factors, demographics and customer specific
information) to evaluate the attractiveness of new store openings. The Company
spent approximately $450,000 per new store, using a store format averaging
approximately 3,800 square feet and equipping each new store with standardized
fixtures and equipment. In addition, pre-opening costs averaged $12,000 and
initial inventory requirements for new stores averaged $60,000, of which
approximately 40% were typically financed by vendors. New stores opening in
2002 will utilize a smaller and more efficient format, with approximately 3,250
square feet and lower construction costs.
ACQUISITION HISTORY
The Company was incorporated in Texas in 1984, acquired by Sears, Roebuck
and Co. in 1987, acquired by Desai Capital Management Incorporated in 1993 and
acquired by the Thomas H. Lee Company in April 1998 (through a recapitalization
transaction). From its organization through 1988, the Company expanded its
business through the acquisition of: (i) a thirteen store Phoenix-based chain
named 20/20 Eye Care in 1986, (ii) a twelve store Texas and Louisiana-based
chain named EyeMasters in 1986, (iii) five stores in Phoenix from EyeCo. in 1988
and (iv) a twenty store Portland-based chain named Binyon's in 1988.
Since the management team implemented a strategy focused on improving
operating efficiencies and increasing the store base in early 1996, the Company
has consummated and integrated four acquisitions over the last six years:
- - In September 1996, the Company acquired Visionworks Holdings, Inc. and its
subsidiaries (collectively, "Visionworks"), a sixty store optical retailer
located along the Atlantic Coast from Florida to Washington, D.C. (the
"Visionworks Acquisition").
- - In September 1997, the Company acquired The Samit Group, Inc. and its
subsidiaries (collectively, "TSGI"), with ten Hour Eyes stores in Maryland
and Washington, D.C., and certain of the assets of Hour Eyes Doctors of
Optometry, P.C., a Virginia professional corporation formerly known as Dr.
Samit's Hour Eyes Optometrist, P.C. (the "PC"), and simultaneously entered
into long-term management agreements with the PC to manage the PC's twelve
stores in Virginia (collectively, the "Hour Eyes Acquisition").
- - In September 1998, the Company acquired certain of the assets of Dr.
Bizer's VisionWorld, PLLC and related entities (the "Bizer Entities"), a
nineteen store optical retailer located primarily in Kentucky and
Tennessee, and simultaneously entered into
6
long-term management agreements with a private optometrist ("Bizer OD") to
manage such nineteen stores (collectively, the "Bizer Acquisition").
- - In August 1999, the Company acquired from Vision Twenty-One, Inc. ("Vision
Twenty-One") substantially all of the assets used to operate an aggregate
of 76 retail eyewearoutlets (the "VTO Retail Acquisition"), of which
thirty-seven were located in Minnesota, North Dakota, Iowa, South Dakota
and Wisconsin operating under the tradename "Vision World," sixteen were
located in Wisconsin operating under the tradename "Stein Optical," and
twenty-three were located in New Jersey operating under the tradename "Eye
DRx." Simultaneously, the Company assumed the rights and obligations under
a management agreement with a private optometrist ("VTO OD", and together
with the PC and Bizer OD, the "OD PCs") to manage the nineteen Eye DRx
stores.
THE FOLLOWING TABLE SETS FORTH A SUMMARY OF THE COMPANY'S STORES OPERATING UNDER
EACH TRADE NAME, AS OF MARCH 15, 2002, RANKED BY NUMBER OF STORES:
NUMBER OF GEOGRAPHIC AVERAGE STORE
TRADE NAME STORES FOCUS FORMAT BUSINESS MIX
- ------------------------------- --------- ------------ -------------- ------------
EyeMasters 162 Southwest, Superstores Glasses
Midwest, Sq. Ft. 4,000 Managed Care
Southeast Lab
OD Subleases
Visionworks 56 Southeast Superstores Glasses
Sq. Ft. 6,100 Contacts
Lab Managed Care
OD Subleases
Vision World 37 Midwest Conventional Glasses
Sq. Ft. 2,400 Contacts
Managed Care
Dr. Bizer's VisionWorld, Dr. Bizer's 24 Southeast & Superstores Glasses
ValuVision, Doctor's ValuVision Central Sq. Ft. 5,900 Contacts
Lab Managed Care
Doctor's VisionWorks 14 Maryland & Superstores Glasses
Colorado Sq. Ft. 4,100 Contacts
Lab Managed Care
Hour Eyes 22 Mid Atlantic Conventional Glasses
Sq. Ft. 2,600 Contacts
Lab Managed Care
Stein Optical 16 Midwest Superstores Glasses
Sq. Ft. 3,400 Contacts
Lab Managed Care
Eye DRx 15 Northeast Conventional Glasses
Sq. Ft. 3,200 Contacts
Managed Care
Binyon 14 Pacific Superstores Glasses
Northwest Sq. Ft. 4,600 Managed Care
Lab
OD Subleases
Total 360
=======
7
STORE OPERATIONS
OVERVIEW. The Company believes that the location of its stores is an
essential element of its strategy to compete effectively in the optical retail
market. The Company emphasizes locations within regional shopping malls, power
centers, strip shopping centers and freestanding locations. The Company
generally targets retail space that is close to high volume retail anchor stores
frequented by middle to high-income clientele. In order to generate economies of
scale in advertising, management and field overhead expenses, the Company
attempts to cluster its stores within a direct marketing area.
The following table sets forth as of December 29, 2001 the Company's top
fifteen markets. Management's estimate of the Company's superstore market share
ranking is number one or two in fourteen of these markets as measured by sales.
DESIGNATED MARKET AREA NUMBER OF SUPERSTORES
- ---------------------------- ---------------------
Washington, D.C 21
Dallas 22
Houston 18
Tampa/St. Petersburg 13
Louisville 7
Minneapolis/St. Paul 22
Phoenix 13
Milwaukee 16
Miami/Ft. Lauderdale 9
Nashville 11
New York 14
Portland 12
San Antonio 8
Austin 6
Kansas City 8
---------------------
Total of Top Fifteen Markets 200
=====================
LOCATIONS. The Company operates 360 stores, 291 of which are superstores,
located primarily in the Southwest, Midwest and Southeast, along the Gulf Coast
and Atlantic Coast and in the Pacific Northwest regions of the United States. Of
the Company's stores, 176 are located in enclosed regional malls, 124 are in
strip shopping centers and 60 are freestanding locations.
8
The following table sets forth by location, ranked by number of stores, the
Company's store base as of March 1, 2002.
DR.
LOCATION EYEMASTERS VISIONWORKS VISION WORLD BIZER VISIONWORKS HOUR EYES STEIN EYE DRX BINYON TOTAL
- --------------- ---------- ----------- ------------ ----- ----------- --------- ----- ------- ------ -----
Texas 77 - - - - - - - - 77
Florida - 41 - - - - - - - 41
Minnesota - - 31 - - - - - - 31
Tennessee 7 - - 12 - - - - - 19
Wisconsin - - 2 - - - 16 - - 18
New Jersey - - - - - - - 15 - 15
Virginia - 1 - - - 13 - - - 14
Arizona 14 - - - - - - - - 14
Oregon - - - - - - - - 13 13
Louisiana 12 - - - - - - - - 12
North Carolina - 12 - - - - - - - 12
Maryland - - - - 5 6 - - - 11
Kentucky - - - 10 - - - - - 10
Ohio 9 - - - - - - - - 9
Colorado - - - - 9 - - - - 9
Missouri 6 - - 1 - - - - - 7
Oklahoma 5 - - - - - - - - 5
Kansas 5 - - - - - - - - 5
Nevada 4 - - - - - - - - 4
New Mexico 4 - - - - - - - - 4
Nebraska 4 - - - - - - - - 4
Utah 4 - - - - - - - - 4
Alabama 3 - - - - - - - - 3
Mississippi 3 - - - - - - - - 3
Idaho 3 - - - - - - - - 3
Washington, D.C - - - - - 3 - - - 3
Iowa 1 - 2 - - - - - - 3
South Carolina - 2 - - - - - - - 2
Washington 1 - - - - - - - 1 2
Indiana - - - 1 - - - - - 1
North Dakota - - 1 - - - - - - 1
South Dakota - - 1 - - - - - - 1
------------ ----- ----------- ----- ------- ------
Total 162 56 37 24 14 22 16 15 14 360
========== =========== ============ ===== =========== ========= ===== ======= ====== =====
STORE LAYOUT AND DESIGN. The average size of the Company's stores is
approximately 4,200 square feet. The Company has developed and implemented a
smaller and more efficient new store prototype, which is approximately 3,500
square feet in size. This new store prototype typically has approximately 450
square feet dedicated to the in-house lens processing area and 1,750 square feet
devoted to product display and fitting areas. The OD's office is generally 1,300
square feet and is, depending on state regulation, either in or adjacent to the
store. Each store follows a uniform merchandise layout plan, which is designed
to emphasize fashion, invite customer browsing and enhance the customer's
shopping experience. Frames are displayed in self-serve cases along the walls
and on tabletops located throughout the store and are organized
9
by gender suitability and frame style. The Company believes its self-serve
displays are more effective than the less customer friendly locked glass cases
or "under the shelf" trays used by some of its competitors. Above the display
racks are photographs of men and women which are designed to help customers
coordinate frame shape and color with their facial features. In-store displays
and signs are rotated periodically to emphasize key vendors and new styles.
IN-HOUSE LENS PROCESSING. Most stores have an on-site lens-processing
laboratory of approximately 450 square feet in which most prescriptions can be
prepared in one hour or less. Lens processing involves grinding, coating and
edging lenses. Some stores utilize the Company's main laboratory in San Antonio,
Texas, which has a typical turnaround of two to four days and also handles
unusual or difficult prescriptions.
ON-SITE OPTOMETRIST. Most stores have an OD, located in or adjacent to the
store, who performs eye examinations and in some cases dispenses contact lenses.
The ODs generally have the same operating hours as the Company's adjacent
stores. The ODs offer customers convenient eye exams and provide a consistent
source of optical retail customers. In the Company's experience, over 80% of
such ODs' regular eye exam patients purchase eyewear from the adjacent optical
retail store. In addition, the Company believes proficient ODs help to generate
repeat customers and reinforce the quality and professionalism of each store.
Due to the various applicable state regulations, the Company has a variety of
operating structures. Most of the ODs are either independent optometrists (the
"Independent ODs"), who lease space in or adjacent to each store from the
Company or landlord, or employees of the Company. Eighty-five of the stores are
owned by a professional corporation or other entity controlled by an OD (the "OD
PC") that employs the ODs, and the Company (through its subsidiaries) operates
the store through the provision of management services to the OD PC (including
management of the professional practice and optical retail business).
Independent ODs who lease space adjacent to or within a Company-owned store
represent approximately 70% of the ODs and most pay the Company monthly rent
consisting of a percentage of gross receipts, base rental or a combination of
both. Approximately 24% of the ODs are employed by the OD PCs and the remaining
6% are employees of the Company.
STORE MANAGEMENT. Each store has an operating plan, which maps out
appropriate staffing levels to maximize store profitability. In addition, a
general manager is responsible for the day-to-day operations of each store. In
higher volume locations, a retail manager supervises the merchandising area and
the eyewear specialists. Customer service is highly valued by the Company and is
monitored by location and associate. A lab manager trains the lab technicians
and supervises eyewear manufacturing. Sales personnel are trained to assist
customers effectively in making purchase decisions. A portion of store managers'
and territory directors' compensation is based on sales, profitability and
customer service scores at their particular stores. The stores are open during
normal retail hours, typically 10 a.m. to 9 p.m., six days a week, and typically
12:00 p.m. to 6:00 p.m. on Sundays.
10
MERCHANDISING
The Company's merchandising strategy is to offer its customers a wide
selection of high quality and fashionable frames at various price points, with
particular emphasis on offering a broad selection of competitively priced
designer and proprietary branded frames. The Company's product offering is
supported by strong customer service and advertising. The key elements of the
Company's merchandising strategy are described below.
BREADTH AND DEPTH OF SELECTION. The Company offers its customers high
quality frames, lenses, accessories and sunglasses, including designer and
proprietary brand frames. Frame assortments are tailored to match the
demographic composition of each store's market area. On average, each store
features between 1,500 and 2,000 frame stock keeping units in 350 to 400
different styles of frames, representing two to three times the assortment
provided by conventional optical retail chains or independent optical retailers.
Approximately 30% of the frames carry designer names such as Eddie Bauer,
Polo/Ralph Lauren, Laura Ashley, Guess and Chaps. In fiscal 2001, other
well-known frame manufacturers supplied over 10% of the Company's frames and
about 31% of the Company's frames were manufactured specifically for the Company
under proprietary brands. The Company believes that a broader selection of
high-quality, lower-priced proprietary brand frames allow it to offer more value
to customers while improving the Company's gross margin. In addition, the
Company also offers customers a wide variety of value-added eyewear features and
services on which it realizes a higher gross margin. These include thinner and
lighter lenses, progressive lenses and custom lens features, such as tinting,
anti-reflecting coatings, scratch-resistant coatings, ultra-violet protection
and edge polishing.
PROMOTIONAL STRATEGY. The Company's frames and lenses are generally
comparably priced or priced lower than its direct superstore competitors, with
prices varying based on geographic region. The Company employs a comprehensive
promotional strategy on a wide selection of frames and/or lenses, offering
discounts and "two for one" promotions. While the promotional strategy is fairly
common for optical retail chains, independent optometric practitioners tend to
offer fewer promotions in order to guard their margins, and mass merchandisers
tend to generally adhere to an "Every Day Low Pricing" strategy.
PRODUCT DISPLAY. The Company employs an "easy-to-shop" store layout.
Merchandise in each store is organized by gender suitability, frame style and
brand. Sales personnel are trained to assist customers in selecting frames which
complement an individual's attributes such as facial features, face shape and
skin tone. See " Store Layout and Design." In-store displays focus customer
attention on premium priced products, such as designer frames and thinner and
lighter lenses.
MARKETING
The Company actively supports its stores by aggressive local advertising in
individual geographical markets. Advertising expenditures totaled $29.0 million,
or 8.6% of net revenues, in fiscal 2001. The Company utilizes a variety of
advertising media and promotions in order to
11
establish the Company's image as a high quality, cost competitive eyewear
provider with a broad product offering. The Company's brand positioning is
supported by a marketing campaign which features the phrase "See Better, Look
Better." In addition, the Company believes that its strategy of clustering
stores in each targeted market area maximizes the benefit of its advertising
expenditures. As managed vision care becomes a larger part of the Company's
business in certain local markets, advertising expenditures as a percentage of
sales are likely to decrease in those markets, since managed vision care
programs tend to reduce the need for marketing expenditures to attract customers
to the Company's stores.
STORE EXPANSION
The Company currently plans to open approximately six new stores in
existing markets during 2002 and four to five per year after 2002. The new
stores are expected to have an on-site OD and a lens-processing laboratory. The
Company uses a site selection model utilizing proprietary software which
incorporates industry and internally generated data. The Company spends
approximately $450,000 per new store using a store format averaging
approximately 3,800 square feet and equipping each new store with standardized
fixtures and equipment. In addition, pre-opening costs average $12,000 and
initial inventory requirements for new stores average $60,000, of which
approximately 40% are typically financed by vendors.
COMPETITION
The retail optical industry is fragmented and highly competitive. The
Company competes with (i) independent practitioners (including opticians,
optometrists and ophthalmologists who operate an optical dispensary within their
practice) (ii) optical retail chains (including superstores) and (iii) mass
merchandisers and warehouse clubs. The Company's largest optical retail chain
competitors are LensCrafters and Cole National Corporation (Pearle and Cole
Vision licensed brands). From time to time, competitors have launched
aggressive promotional programs, which have temporarily impacted the Company's
ability to achieve comparable stores' sales growth and maintain gross margin.
Some of the Company's competitors are larger, have longer operating histories,
greater financial resources and greater market recognition than the Company.
VENDORS
The Company purchases a majority of its lenses from four principal vendors
and purchases frames from over twenty different vendors. In fiscal 2001, four
vendors collectively supplied approximately 65.2% of the frames purchased by the
Company. One vendor supplied over 47.6% of the Company's lens materials during
the same period. The Company has consolidated its vendors to develop strategic
relationships resulting in improved service and payment terms. While such
vendors supplied a significant share of the lenses used by the Company, lenses
are a generic product and can be purchased from a number of other vendors on
comparable terms. Management of the Company therefore does not believe that it
is dependent on such vendors or any other single vendor for frames or lenses.
Management of the Company believes that its relationships with its existing
vendors are satisfactory. Management of the Company believes
12
that significant disruption in the delivery of merchandise from one or more of
its current principal vendors would not have a material adverse effect on the
Company's operations because multiple vendors exist for all of the Company's
products.
MANAGED VISION CARE
Managed vision care has grown in importance in the optical retail industry.
Health insurers have sought a competitive advantage by offering a full range of
health insurance options, including coverage of primary eye care. Managed vision
care, including the benefits of routine annual eye examinations and eyewear
discounts, is being utilized by a growing number of managed vision care
participants. Since regular eye examinations may assist in the identification
and prevention of more serious conditions, managed vision care programs
encourage members to have their eyes examined more regularly, which in turn
typically results in more frequent eyewear replacement.
While the average ticket price on products purchased under managed vision
care reimbursement plans is typically lower, managed vision care transactions
generally earn comparable operating profit margins as they require less
promotional spending and advertising support. Management of the Company believes
that the increased volume resulting from managed vision care relationships also
compensates for the lower average ticket price.
While managed vision care encompasses many of the conventional attributes
of managed care, there are significant differences. For example, the typical
managed vision care benefit covers an annual wellness exam and eyeglasses and
treatment of eye diseases would not be covered. Moreover, less than 1% of the
Company's total revenues are derived from traditional capitated managed vision
care programs. In capitated programs, the Company is compensated by a third
party on a per member per month flat fee basis. Since the number of visits to an
OD is limited to annual or bi-annual appointments, exam utilization is more
predictable. As a result, costs to insurers are easier to quantify, generally
resulting in lower capitation risk. Even though managed vision care programs
typically limit coverage to a certain dollar amount or discount for an eyewear
purchase, the member's eyewear benefit generally allows the member to "trade
up." Management believes that the growing consumer perception of eyewear as a
fashion accessory as well as the consumer's historical practice of paying for
eyewear purchases out-of-pocket contributes to the frequency of "trading-up."
The Company has historically found that managed vision care participants who
take advantage of the eye exam benefit under the managed vision care program in
turn have typically had their prescriptions filled at adjacent optical stores.
Management has made a strategic decision to pursue managed vision care
relationships aggressively in order to help grow the Company's retail business
and over the past five years has devoted significant management resources to the
development of this business. The Company has (i) implemented direct marketing
programs and information systems necessary to compete for managed vision care
relationships with large employers, groups of employers and other third party
payors, (ii) developed significant relationships with certain HMOs and insurance
companies, which have strengthened the Company's ability to secure managed
vision care
13
relationships, and (iii) been asked to participate on numerous regional and
national managed vision care panels.
As of December 29, 2001, the Company participated in managed vision care
programs with retail sales arising from managed vision care lives totaling
approximately 42.4% of optical sales for fiscal 2001 compared to 24% of optical
sales for fiscal 1998. Management believes that the increasing role of managed
vision care will continue to benefit the Company and other large retail optical
chains. Managed vision care is likely to accelerate industry consolidation as
payors look to contract with large retail optical chains who deliver superior
customer service, have strong local brand awareness, offer competitive prices,
provide multiple convenient locations and convenient hours of operation, and
possess sophisticated information management and billing systems. Large optical
retail chains are likely to be the greatest beneficiaries of this trend as
independent practitioners do not satisfy the scale requirements of managed
vision care programs and mass merchandisers' "Every Day Low Price" strategy is
generally incompatible with the price structure required by the managed vision
care model. Most managed vision care contracts renew annually and certain
relationships are not evidenced by contracts. The non-renewal or termination of
a material contract or relationship could have a material adverse effect on the
Company.
GOVERNMENT REGULATION
The Company has several operating structures to address regulatory issues.
At 253 of the Company's stores, the Company or its landlord leases a portion of
the store or adjacent space to Independent ODs. The availability of such
professional services in or adjacent to the Company's stores is critical to the
Company's marketing strategy. At 85 of the stores, to address and comply with
certain regulatory restrictions, the OD PCs own the stores (including the
practice and the optical retail operations) and the Company (through its
subsidiaries) provides certain management services such as accounting, human
resources, marketing and information services for an agreed upon fee pursuant to
a long-term management contract. The OD PCs employ the ODs.
The delivery of health care, including the relationships among health care
providers such as optometrists and suppliers (e.g., providers of eyewear), is
subject to extensive federal and state regulation. The laws of most states
prohibit business corporations such as the Company from practicing optometry or
exercising control over the medical judgments or decisions of optometrists and
from engaging in certain financial arrangements, such as splitting fees with
optometrists.
Management of the Company believes the operations of the Company are in
material compliance with federal and state laws and regulations; however, these
laws and regulations are subject to interpretation, and a finding that the
Company is not in such compliance could have a material adverse effect upon the
Company.
The Company currently is required to maintain local and state business
licenses to operate. However, as a result of the capitation element of some of
its managed vision care relationships,
14
the Company is required to obtain insurance licenses and to comply with certain
routine insurance laws and regulations as an insurer in order to offer managed
vision care programs directly to various employee groups. These insurance laws
require that the Company make certain mandatory filings with the state relating
to pertinent financial information and quality of care standards. Violation of
any of these laws or regulations could possibly result in the Company incurring
monetary fines and/or other penalties. Management of the Company believes the
Company is currently in material compliance with these laws and regulations.
The fraud and abuse provisions of the Social Security Act and anti-kickback
laws and regulations adopted in many states prohibit the solicitation, payment,
receipt, or offering of any direct or indirect remuneration in return for, or as
an inducement to, certain referrals of patients, items or services. Provisions
of the Social Security Act also impose significant penalties for false or
improper billings to Medicare and Medicaid, and many states have adopted similar
laws applicable to any payor of health care services. In addition, the Stark
Self-Referral Law imposes restrictions on physicians' referrals for designated
health services reimbursable by Medicare or Medicaid to entities with which the
physicians have financial relationships, including the rental of space if
certain requirements have not been satisfied. Many states have adopted similar
self-referral laws which are not limited to Medicare or Medicaid reimbursed
services. Violations of any of these laws may result in substantial civil or
criminal penalties, including double and treble civil monetary penalties, and,
in the case of violations of federal laws, exclusion from participation in the
Medicare and Medicaid programs. Management of the Company believes the Company
is currently in material compliance with all of the foregoing laws and no
determination of any violation in any state has been made with respect to the
foregoing laws. Such exclusions and penalties, if applied to the Company, or a
determiniation that the Company or any of the ODs is not in compliance with such
laws, could have a material adverse effect on the Company.
TRADEMARK AND TRADE NAMES
The Company's superstores operate under the trade names "EyeMasters,"
"Binyon's," "Visionworks," "Hour Eyes," "Dr. Bizer's VisionWorld", "Dr. Bizer's
ValuVision," "Doctor's ValuVision," "Stein Optical," "Vision World," "Doctor's
VisionWorks" and "Eye DRx." In addition, "SlimLite" is the Company's trademark
for its line of lightweight plastic lenses. Other trademarks and trade names
used by the Company are "Master Eye Associates," "Master Eye Exam," "EyeMasters"
and the "eyeball" mark used in conjunction with the trade name "EyeMasters."
EMPLOYEES
As of December 29, 2001, the Company employed approximately 4,000
employees. Approximately 70 hourly paid workers in the Eye DRx stores are
affiliated with the International Union, United Automobile, Aerospace and
Agricultural Implement Workers of America, with which the Company has a contract
extending through November 30, 2003. The Company considers its relations with
its employees to be good.
15
THE RECAPITALIZATION
On March 6, 1998, ECCA Merger Corp. ("Merger Corp."), a Delaware
corporation formed by Thomas H. Lee Company ("THL Co."), and the Company entered
into a recapitalization agreement (the "Recapitalization Agreement") providing
for, among other things, the merger of such corporation with and into the
Company (the "Merger" and, together with the financing of the recapitalization
and related transactions described below, the "Recapitalization"). Upon
consummation of the Recapitalization on April 24, 1998, Thomas H. Lee Equity
Fund IV, L.P. ("THL Fund IV") and other affiliates of THL Co. (collectively with
THL Fund IV and THL Co., "THL") owned approximately 89.7% of the issued and
outstanding shares of common stock of the Company ("Common Stock"), existing
shareholders (including management) of the Company retained approximately 7.3%
of the issued and outstanding Common Stock and management purchased additional
shares representing approximately 3.0% of the issued and outstanding Common
Stock. The total transaction value of the Recapitalization was approximately
$323.8 million, including related fees and expenses, and the implied total
equity value of the Company following the Recapitalization was approximately
$107.3 million.
INDUSTRY
OVERVIEW. Optical retail sales in the United States totaled $15.9 billion
in 2001, according to industry sources. The optical retail market has grown each
year at an average annual rate of approximately 5% from 1991 to 1997. During
1998 through 2000, the average annual growth rate decreased to approximately
2.0% and in 2001, the optical retail market declined 4.0%. A leading industry
publication projects optical retail chains will have only a 2.4% increase in
growth and a 1.0% overall growth rate in the optical industry in 2002.
The following chart sets forth expenditures (based upon products sold) in
the optical retail market over the past nine years according to a leading
industry publication.
U.S. OPTICAL RETAIL SALES BY SECTOR 1992 2001
(DOLLARS IN BILLIONS)
2001
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 SHARE
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ------
Lenses/treatments $ 5.6 $ 6.0 $ 6.5 $ 6.8 $ 7.2 $ 7.6 $ 7.9 $ 8.0 $ 8.3 $ 8.1 50.9%
Frames 4.0 4.1 4.1 4.4 4.6 5.0 5.2 5.3 5.5 5.2 32.7%
Sunglasses 0.5 0.5 0.5 0.7 0.8 0.9 0.8 0.7 0.7 0.6 3.8%
Contact lenses 1.8 1.7 1.8 1.9 1.9 1.9 1.9 2.0 2.0 2.0 12.6%
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ------
$11.9 $12.3 $12.9 $13.8 $14.5 $15.4 $15.8 $16.0 $16.5 $15.9 100.0%
===== ===== ===== ===== ===== ===== ===== ===== ===== ===== ======
DISTRIBUTION. Eye care services in the United States are delivered by local
providers consisting of approximately 65,000 opticians, 31,000 optometrists and
16,500 ophthalmologists. The optical retail industry in the United States is
highly fragmented and consists of (i) independent practitioners (including
opticians, optometrists and ophthalmologists) who operate an optical dispensary
within their practice, (ii) optical retail chains and (iii) warehouse clubs and
mass merchandisers. In 2001, optical retail chains accounted for approximately
34.0%
16
of the total market, while independent practitioners comprised approximately
56.6% and other distribution channels represented approximately 9.4%. Optical
retail chains have begun consolidating the optical retail market, resulting in a
decreased market share for independent practitioners. Independent practitioners'
market share dropped from 63.0% to 56.6% between 1996 and 2001, while optical
retail chains' market share increased over the same period from 31.3% to 34.0%.
INDEPENDENT PRACTITIONERS. In 2001, independent practitioners represented
$9.0 billion of eyewear retail sales, or 56.6% of the industry's total optical
retail sales volume of $15.9 billion. Independent practitioners typically cannot
provide quick turnaround of eyeglasses because they do not have laboratories on
site and generally charge higher prices than other competitors. Moreover, their
eyewear product assortment is usually narrow, although a growing portion
includes some designer or branded products. Prior to 1974, independent
practitioners benefited from regulatory and other factors which inhibited
commercial retailing of prescription eyewear. In 1974, the Federal Trade
Commission began requiring doctors to provide their patients with copies of
their prescriptions, enabling sophisticated retailers to implement retail
marketing concepts which resulted in to a more competitive marketplace.
Independent practitioners' market share has declined from approximately 100% in
1974 to 56.6% in 2001, dropping 6.4% from 1996 to 2001. For the reasons set
forth above, management believes that independent practitioners will continue to
lose market share over the next several years.
OPTICAL RETAIL CHAINS. Optical retail chains represented 34.0% of the total
optical retail market in 2001. Over the past four years, the top one hundred
optical retail chains (in terms of net revenues) have grown at a rate faster
than the overall market. Optical retail chains include both superstores and
conventional optical stores. Optical retail chains offer quality service
provided by on-site optometrists and also carry a wide product line, emphasizing
the fashion element of eyewear, although lower-priced lenses and frames are also
available. In addition, the retail optical chains, particularly the superstores,
are generally able to offer better value and service through a reduced cost
structure, sophisticated merchandising and displays, economies of scale and
greater volume. Furthermore, they can generate greater market awareness than the
fragmented independent practitioners because optical retail chains usually
invest more in advertising and promotions. Management believes that large
optical chains are best positioned to benefit from industry consolidation trends
including the growth in managed vision care. See discussion under "Managed
Vision Care."
WAREHOUSE CLUBS AND MASS MERCHANDISERS. Warehouse clubs and mass
merchandisers usually provide eyewear in a host environment which is typically a
larger general merchandise store. This segment typically provides some of the
service elements of retail optical chains, but competes primarily on price. As a
result, its eyewear selection tends to focus on lower-priced optical products.
Moreover, this segment's low margin pricing strategy is generally incompatible
with the pricing structure required by the managed vision care model. Warehouse
clubs and mass merchandisers' market share increased from 4.2% in 1996 to 6.9%
in 2001.
OTHER. Other participants in the optical retail market include HMOs and
school-controlled dispensaries. In 2001, other participants represented
approximately 2.5% of the total optical retail
17
market.
TRENDS. Management believes that the optical retail market is being driven
by the following trends:
Demographics. Approximately 60% of the U.S. population, or 160 million
individuals, and nearly 95% of people over the age of forty-five, require some
form of corrective eyewear. In addition to their higher utilization of
corrective eyewear, the over forty-five segment spends more per pair of glasses
purchased due to their need for premium priced products like bifocals and
progressive lenses and their generally higher levels of discretionary income. In
1996, the over forty-five segment represented 58% of retail optical spending
despite representing just 33% of the U.S. population. As the "baby boom"
generation ages and life expectancies increase, management believes that this
demographic trend is likely to increase the number of eyewear customers and the
average price per purchase.
Increasing Role of Managed Vision Care. Management believes that optical
retail sales through managed vision care programs, which were approximately $5.0
billion (or approximately 30% of the market) in 1997, will continue to increase
over the next several years. Managed vision care, including the benefits of
routine annual eye examinations and eyewear discounts, is being utilized by a
growing number of managed vision care participants. Since regular eye
examinations may assist in the identification and prevention of more serious
conditions, managed vision care programs encourage members to have their eyes
examined more regularly, which in turn typically results in more frequent
eyewear replacement. Management believes that large optical retail chains are
likely to be the greatest beneficiaries of this trend as payors look to contract
with chains who deliver superior customer service, have strong local brand
awareness, offer competitive prices, provide multiple convenient locations and
flexible hours of operation, and possess sophisticated information management
and billing systems.
Consolidation. Although the optical retail market in the United States is
highly fragmented, the industry has experienced consolidation through mergers
and acquisitions as well as shifting market share. In 2000, the top ten optical
retail chains represented approximately 24.5% of the total optical market as
compared to 18.0% in 1998. The remainder of the market included independent
practitioners, smaller chains, warehouse clubs and mass merchandisers.
Independent practitioners' market share dropped from 63.0% to 56.6% between 1996
and 2001, while optical retail chains' market share increased over the same
period from 31.3% to 34.0%. Management believes that the large optical retail
chains are better positioned than mass merchandisers and warehouse clubs to
benefit from this consolidation trend and that such chains will continue to gain
market share from the independent practitioners over the next several years.
New Product Innovations. Since the late 1980's, several technological
innovations have led to the introduction of new optical lenses and lens
treatments, including progressive addition lenses (no-line bifocals), high-index
and aspheric lenses (thinner and lighter lenses), polycarbonate lenses (shatter
resistant) and anti-reflective coatings. These innovative products are popular
among consumers, generally command premium prices, yielding higher margins than
traditional lenses. The average retail price for all lenses and lens treatments
has increased from
18
$88 to $106 between 1995 and 2001, reflecting, in part, the rising popularity of
these products. Similarly, during the same period, the average retail price for
eyeglass frames has increased from $57 to $82, due in large part to both
technological innovation and an evolving customer preference for higher priced,
branded frames. The 1995 to 2000 historical average growth rates for lenses and
frames were 5% and 12%, respectively, while the 2001 average growth rates were
1% and 1% respectively. Management believes this decline in the growth rate is
more related to the state of the economy than changes in consumer purchases.
Lasik Surgery. Laser In-Situ Keratomileusis, or LASIK, was introduced in
1996, leading to a dramatic increase in the popularity of laser vision
correction surgery. In 2000, eye care professionals performed an estimated 1.4
million laser vision correction surgery procedures in the U.S., representing an
increase of 50% over the approximately 950,000 procedures performed in 1999.
Industry forecasts estimate 1.8 million laser vision correction surgery
procedures being performed in 2001. Despite this rapid growth, the number of
vision correction surgery patients in 1999 represented 0.3% of the 161 million
people with refractive vision conditions in the U.S. The consumer's evaluation
process of LASIK surgery creates options other than eyeglasses and contacts.
Management believes that the increase in LASIK procedures, and the evaluation
process by potential customers (including both individuals who undergo LASIK
surgery and those who decide not to undergo LASIK surgery) has contributed to
the slower growth rates in the optical industry since 1998.
ITEM 2. PROPERTIES
As of March 15, 2002, the Company operated or managed 360 retail locations
in the United States. The Company believes its properties are adequate and
suitable for its purposes. The Company leases all of its retail locations, the
majority of which are under triple net leases that require payment by the
Company of its pro rata share of real estate taxes, utilities, and common area
maintenance charges. These leases range in terms of up to 15 years. Certain
leases require percentage rent based on gross receipts in excess of a base rent.
The Company subleases a portion of substantially all of the stores or the
landlord leases an adjacent space, to an Independent OD (or its wholly-owned
operating entity). With respect to the OD PCs, the Company subleases the entire
premises of the store to the OD PC. The terms of these leases or subleases range
from one to fifteen years, with rentals consisting of a percentage of gross
receipts, a base rental, or a combination of both. The general character of the
Company's stores is described in Item 1 of this Report.
The Company leases combined corporate offices and a retail location in San
Antonio, Texas, pursuant to a fifteen-year lease starting in August 1997. In
addition, the Company leases a combined distribution center and central
laboratory in San Antonio, pursuant to a seven-year lease commencing in February
1997. The Company believes central distribution improves efficiency through
better inventory management and streamlined purchasing.
19
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to routine litigation in the ordinary course of its
business. Except for the matters set forth below, no such pending matters,
individually or in the aggregate, are deemed to be material to the business or
financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 11, 2001, the Company held its Annual Meeting of Shareholders
in San Antonio, Texas. The following six directors were unanimously elected by
the shareholders to serve a one year term to conclude at the next Annual Meeting
of Shareholders:
Bernard W. Andrews
Anthony J. DiNovi
Warren C. Smith
Charles A. Brizius
Norman S. Matthews
Antoine G. Treuille
20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The Common Stock, par value $.01 per share, of the Company is not traded on
any established public trading market. There are 14 holders of the Common Stock.
No dividends were paid in fiscal 2000 or 2001 and payment of dividends is
restricted by the Indenture governing the Exchange Notes (as defined in
Management Discussion and Analysis - Liquidity and Capital Resources).
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected financial data and other operating
information of the Company. The selected financial data in the table are derived
from the consolidated financial statements of the Company. The following
selected financial data should be read in conjunction with the Consolidated
Financial Statements, the related notes thereto and other financial information
included elsewhere in this Annual Report on Form 10-K. All references in this
Annual Report on Form 10-K to 1997 or fiscal 1997, 1998 or fiscal 1998, 1999 or
fiscal 1999, 2000 or fiscal 2000 and 2001 or fiscal 2001 relate to the fiscal
years ended January 3, 1998, January 2, 1999, January 1, 2000, December 30, 2000
and December 29, 2001, respectively.
- --------------------------------------------------------------------------------
January 3, January 2, January 1, December 30, December 29,
1998 1999 2000 2000 2001
------------ ------------ ------------ -------------- --------------
STATEMENT OF OPERATIONS DATA:
Net revenues $ 219,611 $ 237,851 $ 293,795 $ 338,457 $ 336,034
Operating costs and expenses:
Cost of goods sold 77,134 80,636 98,184 107,449 104,446
Selling, general and administrative 120,319 132,390 170,146 204,365 203,187
Recapitalization and other expenses - 25,803 - - -
Store closure expense - - - 3,580 -
Amortization of intangible assets 2,870 3,705 5,653 9,137 8,697
------------ ------------ ------------ -------------- --------------
Total costs and expenses 200,323 242,534 273,983 324,531 316,330
------------ ------------ ------------ -------------- --------------
Operating income (loss) 19,288 (4,683) 19,812 13,926 19,704
Interest expense, net 13,738 19,159 24,685 28,694 27,537
In-substance defeased bonds interest expense, net - 2,418 - - -
------------ ------------ ------------ -------------- --------------
Income (loss) before income taxes 5,550 (26,260) (4,873) (14,768) (7,833)
Income tax expense 335 13 384 766 1,239
------------ ------------ ------------ -------------- --------------
Net income (loss) before extraordinary item 5,215 (26,273) (5,257) (15,534) (9,072)
Cumulative effect of change in acct principle - - 491 - -
Extraordinary loss - 8,355 - - -
------------ ------------ ------------ -------------- --------------
Net income (loss) $ 5,215 $ (34,628) $ (5,748) $ (15,534) $ (9,072)
============ ============ ============ ============== ==============
OTHER FINANCIAL DATA:
Depreciation and amortization $ 15,001 $ 16,050 $ 22,754 $ 29,600 $ 29,047
Capital expenditures 9,470 20,656 19,920 18,932 10,559
Gross Margin % 64.9% 66.1% 66.6% 68.3% 68.9%
Total Assets $ 180,144 $ 222,907 $ 261,678 $ 250,920 $ 225,013
Long Term Obligations(a) $ 133,263 $ 248,757 $ 279,480 $ 285,607 $ 267,903
Ratio of earnings to fixed charges(b) 1.27x 0.14x 0.85x 0.62x 0.79x
MISCELLANEOUS DATA:
EBITDA (c) $ 34,289 $ 37,170 $ 42,386 $ 47,107 $ 48,751
EBITDA margin % 15.60% 15.60% 14.40% 13.90% 14.51%
Comparable store sales growth (d) 3.80% 1.10% 1.10% 0.90% -1.40%
End of period stores 239 270 361 361 359
Sales per store (e) $ 995 $ 1,007 $ 987 $ 940 $ 935
21
(A) Long-term obligations include redeemable preferred stock of $12,117 for
fiscal 1997.
(b) In computing the ratio of earnings to fixed charges, "earnings" represents
income (loss) before income tax expense plus fixed charges. "Fixed charges"
consists of interest, amortization of debt issuance costs and a portion of
rent, which is representative of interest factor (approximately one-third
of rent expense).
(c) EBITDA represents consolidated net income (loss) before interest expense,
income taxes, depreciation and amortization (other than amortization of
store pre-opening costs), recapitalization and other expenses and store
closure expense. The Company has included information concerning EBITDA
because it believes that EBITDA is used by certain investors as one measure
of a company's historical ability to fund operations and meet its financial
obligations. EBITDA should not be considered as an alternative to, or more
meaningful than, operating income (loss) or net income (loss) in accordance
with generally accepted accounting principals as an indicator of the
Company's operating performance or cash flow as a measure of liquidity.
Additionally, EBITDA presented may not be comparable to similarly titled
measures reported by other companies.
(d) Comparable store sales growth increase is calculated comparing net revenues
for the period to net revenues of the prior period for all stores open at
least twelve months prior to each such period.
(e) Sales per store is calculated on a monthly basis by dividing total net
revenues by the total number of stores open during the period. Annual sales
per store is the sum of the monthly calculations.
(f) All dollars are in thousands.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The Company is the third largest retail optical chain in the United States
as measured by net revenues, operating or managing 360 stores, 291 of which are
optical superstores. The Company operates predominately under the trade name
"EyeMasters," and in certain geographical regions under the trade names
"Binyon's," "Visionworks," "Hour Eyes," "Dr. Bizer's VisionWorld," "Dr. Bizer's
ValuVision," "Doctor's ValuVision," "Stein Optical," "Vision World," "Doctor's
VisionWorks" and "Eye DRx." The Company operates in the $5.4 billion retail
optical chain sector of the $15.9 billion optical retail market. Management
believes that key drivers of growth for retail optical chains include (i) the
aging of the United States population, (ii) the increased role of managed vision
care, (iii) the consolidation of the industry, (iv) new product innovations and
(v) the greater frequency of eyewear purchases.
The industry is highly fragmented and is undergoing significant
consolidation. See the discussion under the heading "Industry" within "ITEM 1.
BUSINESS." The Company has consummated and integrated four acquisitions.
- - In September 1996, the Company consummated the Visionworks Acquisition.
- - In September 1997, the Company consummated the Hour Eyes Acquisition and
simultaneously entered into a long-term business management agreement with
the PC to manage an additional twelve Hour Eyes optical stores in Virginia.
- - In September 1998, the Company consummated the Bizer Acquisition and
simultaneously entered into a long-term business management agreement with
the Bizer OD to manage the nineteen stores primarily in Kentucky and
Tennessee.
- - In August 1999, the Company consummated the Vision 21 Acquisition and
simultaneously entered into a long-term management agreement with the VTO
OD to manage the nineteen Eye DRx stores in New Jersey.
Management believes that optical retail sales through managed vision care
programs will continue to increase over the next several years. As a result,
management has made a strategic decision to pursue managed vision care
relationships aggressively in order to help the Company's retail business grow
and over the past five years has devoted significant management resources to the
development of its managed vision care business. While the average ticket price
on products purchased under managed vision care reimbursement plans is typically
lower, managed vision care transactions generally require less promotional
spending and advertising support. The Company believes that the increased volume
resulting from managed vision care relationships also compensates for the lower
average ticket price. During fiscal 2001, approximately 42.4% of the Company's
total revenues were derived from managed vision care programs. Management
believes that the increasing role of managed vision care will continue to
benefit the Company and other large retail optical chains with strong local
market shares, broad geographic coverage and sophisticated information
management and billing systems.
23
The Company uses a 52 or 53 week fiscal year ending on the Saturday closest
to December 31, with monthly results on a 4-4-5 week basis each quarter. Fiscal
1998, 1999, 2000 and 2001 were 52 week fiscal years and fiscal 1997 was a
53-week year.
On March 6, 1998, Merger Corp., THL Co., and the Company entered into the
Recapitalization Agreement providing for, among other things, the merger of
Merger Corp. with and into the Company. Upon consummation of the
Recapitalization on April 24, 1998, THL owned approximately 89.7% of the issued
and outstanding shares of Common Stock of the Company, existing shareholders
(including management) of the Company retained approximately 7.3% of the issued
and outstanding Common Stock and management purchased additional shares
representing approximately 3.0% of the issued and outstanding Common Stock. The
total transaction value of the Recapitalization was approximately $323.8
million, including related fees and expenses, and the implied total equity value
of the Company following the Recapitalization was approximately $107.3 million.
In fiscal 2002, the Company adopted a new accounting standard, SFAS No. 142
"Goodwill and Other Intangibles," in which goodwill is no longer subject to
amortization over its estimated useful life. Rather, goodwill is subject to at
least an annual assessment for impairment applying a fair-value based test. The
Company's future results of operations will be positively impacted as its
amortization expense is significantly reduced; however, EBITDA will not be
impacted as the amortization charges were not previously included in the
calculation. The Company performed the first of the required impairment tests of
goodwill as of December 30, 2001, and based upon its analysis, the Company
believes that no impairment of goodwill exists.
24
The following is a discussion of certain factors affecting the Company's
results of operations from fiscal 1999 to fiscal 2001 and its liquidity and
capital resources. This discussion should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
document.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to net revenues
of certain income statement data.
Fiscal Year Ended
------------------
1999 2000 2001
------------------ ------ ------
Net Revenues:
Optical sales 99.0% 99.2% 99.0%
Management fee 1.0 0.8 1.0
------------------ ------ ------
Total net revenues 100.0 100.0 100.0
Operating costs and expenses:
Cost of goods sold (a) 33.8 32.0 31.4
Selling, general and administrative expenses (a) 58.5 60.9 61.1
Store closure expenses - 1.1 -
Amortization of intangibles 1.9 2.7 2.6
------------------ ------ ------
Total operating costs and expenses 94.2 96.7 94.1
------------------ ------ ------
Income from operations 5.8 3.3 5.9
Interest expense, net 8.4 8.5 8.2
------------------ ------ ------
Loss before income taxes (2.6) (5.2) (2.3)
Income tax expense 0.1 0.2 0.4
------------------ ------ ------
Net loss before extraordinary item (2.7) (5.4) (2.7)
Cumulative effect of change in accounting principle 0.2 - -
------------------ ------ ------
Net loss (2.9) (5.4) (2.7)
================== ====== ======
EBITDA margin 14.4% 13.9% 14.5%
(a) Percentages based on optical sales only
FISCAL 2001 COMPARED TO FISCAL 2000
Net Revenues. The decrease in net revenues to $336.0 million in 2001 from
$338.5 million in fiscal 2000 was largely the result of a decrease in comparable
store sales of 1.4%. Comparable transactions were relatively flat and average
ticket prices decreased compared to the prior year. In addition, managed vision
care sales increased in fiscal 2001 as compared to fiscal 2000. The Company
opened eight stores and closed ten stores in fiscal 2001.
Gross Profit. Gross profit increased to $231.6 million in fiscal 2001 from
$231.0 million in fiscal 2000. Gross profit as a percentage of optical sales
increased to 68.6% ($228.1 million) in fiscal 2001 as compared to 68.0% ($228.2
million) in fiscal 2000. This percentage increase was primarily due to improved
buying efficiencies, primarily in frames and contact lenses.
25
Selling General & Administrative Expenses (SG&A). SG&A decreased to $203.2
million in fiscal 2001 from $204.4 in fiscal 2000. SG&A as a percentage of
optical sales increased to 61.1% in fiscal 2001 from 60.9% in fiscal 2000. This
percentage increase was due primarily to an increase in doctor payroll expenses
and occupancy expenses offset by advertising buying efficiencies. The
advertising savings were related to a change in media buying which produced more
media coverage at a lower cost.
Amortization Expense. Amortization expense decreased to $8.7 million for
fiscal 2001 from $9.1 million in fiscal 2000.
Net Interest Expense. Net interest expense decreased to $27.5 million for
fiscal 2001 from $28.7 million for fiscal 2000. This decrease was primarily due
to the overall decline in market interest rates in 2001.
FISCAL 2000 COMPARED TO FISCAL 1999
Net Revenues. The increase in net revenues to $338.5 million in 2000 from
$293.8 million in fiscal 1999 was largely the result of the VTO Retail
Acquisition and an increase in comparable store sales of 0.9%. This acquisition
resulted in an increase in net revenues of $34.7 million for fiscal 2000.
Comparable transactions were relatively flat, and average ticket prices
increased compared to the prior year. The Company opened fifteen stores and
closed fifteen stores in fiscal 2000 for a net zero change in its store count.
Gross Profit. Gross profit increased to $231.0 million in fiscal 2000 from
$195.6 million in fiscal 1999. Gross profit as a percentage of optical sales
increased to 68.0% ($228.2 million) in fiscal 2000 as compared to 66.2% ($192.6
million) in fiscal 1999. This percentage increase was primarily due to improved
buying efficiencies, primarily in lenses.
Selling General & Administrative Expenses (SG&A). SG&A increased to $204.4
million in fiscal 2000 from $170.1 in fiscal 1999. SG&A as a percentage of
optical sales increased to 60.9% in fiscal 2000 from 58.5% in fiscal 1999. This
percentage increase was due primarily to the inclusion of doctor payroll
expenses for the stores acquired through the VTO Retail Acquisition and
increases in occupancy expenses.
Store Closure Expenses. In connection with a comprehensive operational
review during the third quarter of 2000, the Company's management identified ten
existing stores which were unprofitable and five undeveloped lease sites which
did not fit into the Company's future business plan. Management determined that
the ten existing stores should be closed and the leases at the undeveloped sites
should be terminated. Nine of these stores were closed in fiscal 2000 and the
tenth was closed in January 2001. A charge of $3.6 million was recorded to
reflect the necessary write-off of related assets and expenses to be incurred in
the closing of these locations. The charge consists of $1.4 million in goodwill
associated with two of the identified stores that were acquired by the Company
through the Company's various acquisitions, $1.4 million in leasehold
improvements at the stores and $0.8 million in estimated lease buy-out payments.
The comprehensive operating review and resulting store closures and lease
26
terminations were not part of management's constant evaluation of the
performance of its stores in which, through the course of ongoing operations, it
periodically decides not to renew certain leases or to relocate certain stores.
Amortization Expense. Amortization expense increased to $9.1 million for
fiscal 2000 from $5.7 million in fiscal 1999. This increase was due to
amortization of the goodwill, noncompete agreement and Strategic Alliance
Agreement assets related to the VTO Retail Acquisition, which were recorded
during the third quarter of fiscal 1999.
Net Interest Expense. Net interest expense increased to $28.7 million for
fiscal 2000 from $24.7 million for fiscal 1999. This increase was due to the
increased borrowings made in connection with the VTO Retail Acquisition.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities provided net cash for 2001, 2000 and
1999 of $27.4 million, $11.2 million and $15.3 million, respectively. As of
December 29, 2001, the Company had $3.4 million of cash available to meet the
Company's obligations.
Capital expenditures for 2001, 2000 and 1999 were $10.6 million, $18.9
million and $19.9 million, respectively. Capital expenditures for 2002 are
projected to be approximately $9.5 million. Capital expenditures are related to
the construction of new stores, the repositioning of existing stores in some
markets and the purchase of new computer systems for the stores. These capital
expenditures include leasehold improvements, laboratory, equipment, furniture
and fixtures, doctors' equipment, point-of-sale equipment, and computer hardware
and software.
On April 24, 1998, the Company entered into a credit agreement (the "Credit
Facility") which consists of (i) the $55.0 million term loan facility (the "Term
Loan Facility"); (ii) the $35.0 million revolving credit facility (the
"Revolving Credit Facility"); and (iii) the $100.0 million acquisition facility
(the "Acquisition Facility"). The proceeds of the Credit Facility were used to
pay long term debt outstanding under the previous credit facility. At December
29, 2001, the Company had $33.0 million outstanding under the Term Loan
Facility, $21.5 million outstanding under the Revolving Credit Facility, and
$67.9 million outstanding under the Acquisition Facility which funded the Bizer
Acquisition and the VTO Retail Acquisition. On December 27, 2000, the Company
amended the Credit Facility. As a result of the amendment to the Credit
Facility, interest on borrowings was increased by 100 basis points from the
original interest rates under the amended Credit Facility and various financial
covenants and scheduled principal payments were revised. Borrowings made under
the Credit Facility (as amended) bear interest at a rate equal to, at the
Company's option, LIBOR plus 2.25% to 3.25% or the Base Rate (as defined in the
Credit Facility) plus 1.25% to 2.25%. At December 29, 2001, the Company's
Credit Facility bore interest at LIBOR plus 3.25% and the Base Rate plus 2.25%.
Under the amended Credit Facility, the Term Loan Facility matures five years
from the closing date of the Credit Facility, the $33.0 million outstanding
balance will amortize quarterly in aggregate annual principal amounts of
approximately, $12.8 million and $20.2 million, respectively, for fiscal years
2002 through 2003.
27
In connection with the Recapitalization, the Company completed a debt
offering of (the Initial Notes, consisting of the Fixed Rate Notes and the
Floating Rate Notes. Interest on the Initial Notes' was payable semiannually on
each May 1 and November 1, commencing on November 1, 1998. Interest on the Fixed
Rate Notes accrued at the rate of 9 1/8% per annum. The Floating Rate Notes bore
interest at a rate per annum, reset semiannually, and equal to LIBOR (as defined
in the Indenture) plus 3.98%. The Initial Notes were not entitled to the benefit
of any mandatory sinking fund. For discussion of restrictions on subsidiaries,
see Note 8 to the December 29, 2001 Consolidated Financial Statements.
The Company filed a registration statement with the Securities and Exchange
Commission with respect to an offer to exchange the Initial Notes for notes
which have terms substantially identical in all material respects to the Initial
Notes, except such notes are freely transferable by the holders thereof and are
issued without any covenant regarding registration (the "Exchange Notes"). The
registration statement was declared effective on January 28, 1999. The exchange
period ended March 4, 1999. The Exchange Notes are the only notes of the Company
which are currently outstanding.
During 1998, the Company issued 300,000 shares of a new series of preferred
stock (the "Preferred Stock"), par value $.01 per share. Dividends on shares of
Preferred Stock are cumulative from the date of issue (whether or not declared)
and will be payable when and as may be declared from time to time by the Board
of Directors of the Company. Such dividends accrue on a daily basis from the
original date of issue at an annual rate per share equal to 13% of the original
purchase price per share, with such amount to be compounded quarterly. The
Preferred Stock will be redeemable at the option of the Company, in whole or in
part, at $100 per share plus (i) the per share dividend rate and (ii) all
accumulated and unpaid dividends, if any, to the date of redemption, upon
occurrence of an offering of equity securities, a change of control or certain
sales of assets.
The Company anticipates that cash from operations and funds available under
the Revolving Credit Facility will be sufficient to finance the Company's
continuing operations and projected capital expenditures and to make all
required payments of principal and interest on the Exchange Notes through the
next twelve months. The ability of the Company to satisfy its financial
covenants within its amended Credit Facility, meet its debt service obligations
and reduce its debt will be dependent on the future performance of the Company,
which inturn, will be subject to general economic conditions and to financial,
business, and other factors, including factors beyond the Company's control. The
Company believes that its ability to repay the Exchange Notes and amounts
outstanding under the Revolving Credit Facility and the Acquisition Facility at
maturity will likely require additional financing.
INFLATION
The impact of inflation on the Company's operations has not been
significant to date. While the Company does not believe its business is highly
sensitive to inflation, there can be no assurance that a high rate of inflation
would not have an adverse impact on the Company's operations.
28
SEASONALITY AND QUARTERLY RESULTS
The Company's sales fluctuate seasonally. Historically, the Company's
highest sales and earnings occur in the first and third quarters. In addition,
quarterly results are affected by the Company's growth: new store openings, the
Visionworks Acquisition, the Hour Eyes Acquisition, the Bizer Acquisition and
VTO Retail Acquisition. Hence, quarterly results are not necessarily indicative
of results for the entire year.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various market risks. Market risk is the
potential loss arising from adverse changes in market prices and rates. The
Company does not enter into derivative or other financial instruments for
trading or speculative purposes.
INTEREST RATE RISK
The Company's primary market risk exposure is interest rate risk, with
specific vulnerability to changes in LIBOR. As of December 29, 2001, $172.0
million of the Company's long-term debt bore interest at variable rates.
Accordingly, the Company's net income is affected by changes in interest rates.
Assuming a two hundred basis point change in the 2001 average interest rate
under the $172.0 million in borrowings, the Company's 2001 interest expense
would have changed approximately $3.4 million.
In the event of an adverse change in interest rates, management could take
actions to mitigate its exposure. However, due to the uncertainty of the actions
that would be taken and their possible effects, this analysis assumes no such
actions. Further, this analysis does not consider the effects of the change in
the level of overall economic activity that could exist in such an environment.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are set forth in this
annual report on Form 10-K commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The table below sets forth the names, ages and positions of the executive
officers and directors of the Company.
NAME AGE POSITION
- ---- --- --------
David E. McComas 59 President and Chief Executive Officer
Alan E. Wiley 54 Executive Vice President, Chief Financial Officer,
President of Managed Vision Care, Secretary and Treasurer
George E. Gebhardt 51 Executive Vice President of Merchandising, Marketing and Distribution
Bernard W. Andrews 60 Chairman
Charles A. Brizius 33 Director
Anthony J. DiNovi 39 Director
Norman S. Matthews 68 Director
Warren C. Smith, Jr. 45 Director
Antoine G. Treuille 52 Director
Directors of the Company are elected at the annual shareholders' meeting
and hold office until their successors have been elected and qualified. The
officers of the Company are chosen by the Board of Directors and hold office
until they resign or are removed by the Board of Directors.
David E. McComas has served as the President and Chief Executive Officer of
the Company since July 2001. From July 1998 to July 2001, Mr. McComas served as
the President and Chief Operating Officer of the Company. Prior to joining the
Company in July 1998, Mr. McComas was Western Region President and Corporate
Vice President, Circuit City Stores, Inc., and was responsible for ten Western
States and Hawaii since 1994. Prior to 1994, Mr. McComas was General Manager of
Circuit City Stores, Inc. Mr. McComas has over thirty years of store management
experience including positions with Montgomery Ward Holding Corporation and
Sears, Roebuck & Co. Since 1996, Mr. McComas has served as a Director of West
Marine, Inc.
Alan E. Wiley has served as Executive Vice President and Chief Financial
Officer of the Company since November 1998 and as President of Managed Vision
Care, Inc. since July 2001. From 1992 until November 1998, Mr. Wiley served as
the Senior Executive Vice President, Secretary, Chief Financial and
Administrative Officer and a Director of The Cato Corporation. From 1981 through
1990, Mr. Wiley held senior administrative and financial positions with British
American Tobacco, U.S., in various companies of the specialty retail division.
George E. Gebhardt has served as the Company's Executive Vice President of
Merchandising, since September 1996 when the Company purchased his former
employer, Visionworks. He assumed the responsibilities of the Company's
Marketing in June 1998. Mr. Gebhardt was with Visionworks from February 1994 to
September 1996 serving in various positions, most recently Senior Vice President
of Merchandising and Marketing. Prior to that,
30
Mr. Gebhardt spent over thirteen years with Eckerd Corporation in various
operational positions including Senior Vice President, General Manager of Eckerd
Vision Group. Mr. Gebhardt also spent seven years working for Procter & Gamble
serving in various positions including Unit Sales Manager of Procter & Gamble's
Health and Beauty Care Division.
Bernard W. Andrews retired as Chief Executive Officer in July 2001 and now
serves as the Company's Chairman of the Board, a position he has held since the
consummation of the Recapitalization. Mr. Andrews joined the Company as Director
and Chief Executive Officer in March 1996. From January 1994 to April 1995, Mr.
Andrews was President and Chief Operating Officer as well as a Director of
Montgomery Ward-Retail. He was an Executive Vice President and a Director of
Circuit City Stores, Inc., from October 1990 to January 1994. Mr. Andrews was
with Montgomery Ward-Retail from October 1983 to May 1990, serving as
President-Hardlines, Executive Vice President-Marketing and Vice President-Home
Fashions. Prior to 1983, Mr. Andrews spent twenty years with Sears, Roebuck &
Co. in a number of merchandising, marketing and operating positions.
Norman S. Matthews has served as a Director of the Company since October
1993 and served as Chairman from December 1996 to April 1998. Mr. Matthews is
Chairman of the Executive Committee of the Company's Board of Directors. From
1988 to the present, Mr. Matthews has been an independent retail consultant and
venture capitalist. Mr. Matthews was President of Federated Department Stores
from 1987 to 1988, and served as Vice Chairman from 1983 to 1987. He is the
Chairman of Galyan's Trading Company and is also a Director of Finlay
Enterprises, Inc., Toys "R" Us, Inc., The Progressive Corporation, Sunoco, Inc.
and Lechters, Inc.
Antoine G. Treuille has served as a Director of the Company since October
1993. In 1999, Mr. Treuille became Managing Director of Mercantile Capital
Partners, a private equity investment fund. He was previously Managing Director
of Financo, Inc., an investment bank, from March 1998 until 1999. Mr. Treuille
has served as President of Charter Pacific Corp. since May 1996. Prior to this
position, Mr. Treuille served as Senior Vice President of Desai Capital
Management Inc. From September 1985 to April 1992, he served as Executive Vice
President with the investment firm of Entrecanales, Inc. Mr. Treuille also
serves as a Director of ERAMET and Special Metals Corp.
Anthony J. DiNovi has served as a Director of the Company since the
consummation of the Recapitalization. Mr. DiNovi has been employed by Thomas H.
Lee Company since 1988 and currently serves as a Managing Director. Mr. DiNovi
is a Managing Director and Member of THL Equity Advisors IV, LLC, the general
partner of Thomas H. Lee Equity Fund IV, LP. Mr. DiNovi also serves as a
Director of Fisher Scientific International, Inc., Fair Point Communications,
Inc., US LEC Corporation, Vertis, Inc. and various private companies.
Warren C. Smith, Jr., has served as a Director of the Company since the
consummation of the Recapitalization. Mr. Smith has been employed by Thomas H.
Lee Company since 1990 and currently serves as a Managing Director. Mr. Smith is
a Managing Director and Member of THL Equity Advisors IV, LLC, the general
partner of Thomas H. Lee Equity Fund IV, LP. Mr. Smith also serves as a Director
of Rayovac Corporation and Finlay Enterprises, Inc.
31
Charles A. Brizius has served as a Director of the Company since the
consummation of the Recapitalization. Mr. Brizius worked at Thomas H. Lee
Company from 1993 to 1995, rejoined in 1997 and currently serves as a Vice
President. Mr. Brizius is a Member of THL Equity Advisors IV, LLC, the general
partner of Thomas H. Lee Equity Fund IV, LP. From 1991 to 1993, Mr. Brizius
worked at Morgan Stanley & Co. Incorporated in the Corporate Finance Department.
Mr. Brizius also serves as a Director of TransWestern Publishing, L.P., United
Industries Corporation and Big V Supermarkets, Inc.
32
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the
compensation paid during the last three years to the Company's Chief Executive
Officer and the four other most highly compensated executive officers serving as
executive officers at the end of fiscal 2001 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION
-------------
COMPENSATION AWARDS
------------- ------------
OTHER ANNUAL SECURITIES ALL OTHER
COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($)(A) BONUS($)(B) ($)(C) OPTIONS(#) ($)(D)
- -------------------------------- ---- ------------- ----------- ------------- ------------- -------------
David E. McComas 2001 399,109 112,500 - - -
President and Chief 2000 349,836 - - - -
Executive Officer 1999 340,800 75,000 - - -
Alan E. Wiley 2001 258,038 68,750 - - -
Executive Vice President, 2000 241,982 - - - -
Chief Financial Officer, 1999 226,269 73,508 75,991 - -
President of Managed Vision
Care, Secretary and Treasurer
George E. Gebhardt 2001 223,692 25,000 - - -
Executive Vice President of 2000 215,192 - - - -
Merchandising, Marketing and 1999 206,769 40,000 - - -
Distribution
Bernard W. Andrews 2001 359,616 - - - 6,236
Chairman of the Board 2000 582,695 - - - 5,654
1999 530,774 100,000 - - 5,211
Michele Benoit (e) 2001 152,231 - - - -
Senior Vice President of 2000 147,077 - - - -
Human Resources 1999 140,923 25,000 - - -
____________
(a) Represents annual salary, including any compensation deferred by the Named
Executive Officer pursuant to the Company 401(k) defined contribution plan.
(b) Represents annual bonus earned by the Named Executive Officer for the
relevant fiscal year.
(c) Except with Respect to Mr. Alan E. Wiley for 1999, the dollar value of the
perquisites and other personal benefits, securities or property paid to
each Named Executive Officer did not exceed the lesser of $50,000 or 10% of
reported annual salary and bonus received by the Named Executive Officer.
Of the total other annual compensation received by Mr. Wiley in 1999,
$68,791 related to relocation expenses paid by the Company on behalf of Mr.
Wiley.
(d) During 2001, 2000 and 1999, the Company paid $6,236, $5,654 and $5,211,
respectively, for premiums for term life insurance for Mr. Andrews.
(e) Ms. Benoit tendered her resignation in January 2002.
33
STOCK OPTION GRANTS. The Named Executive Officers have not been granted
any options or SARs in fiscal 2001.
STOCK OPTION EXERCISES AND HOLDINGS TABLE. On June 15, 2001, the Company
entered into Option Cancellation Agreements (the "Cancellation Agreements") with
certain employees and directors (the "Optionees") to cancel all outstanding
options which were granted under the Company's 1998 Stock Option Plan (the
"Plan") due to changes in the fair market value of the Company's common stock.
The Cancellation Agreements provided that a new grant would be made no earlier
than six months and a day after the cancellation of the options and such grant
was made on January 8, 2002. Therefore, the Named Executive Officers did not
hold any unexercised options as of December 29, 2001.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has an Executive Committee of which Norman S.
Matthews is chairman and Anthony DiNovi and Warren Smith are members.
The Board of Directors has a Compensation Committee currently consisting of
Messrs. Matthews, DiNovi and Smith. The Compensation Committee makes
recommendations concerning the salaries and incentive compensation of employees
of and consultants to the Company.
The Board of Directors has an Audit Committee currently consisting of
Messrs. DiNovi, Smith, Treuille and Brizius. The Audit Committee is responsible
for reviewing the results and scope of audits and other services provided by the
Company's independent auditors.
DIRECTOR COMPENSATION
The Company and THL Co. entered into a management agreement as of the
closing date of the Recapitalization pursuant to which THL Co. receives, among
other things, $250,000 per year ($500,000 before the amendment on December 31,
2000), plus expenses for management and other consulting services provided to
the Company. See "Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
The Company entered into a three year consulting agreement (the "Consulting
Agreement"), effective as of the closing of the Recapitalization, with Norman S.
Matthews, which provides for the payment of an annual consulting fee of $50,000.
The Consulting Agreement provides for the grant to Mr. Matthews, concurrently
with the closing of the Recapitalization, of an option to purchase 110,000
shares as of the closing of the Recapitalization, subject to a vesting schedule
which will be one-half time based and one-half performance based, at an exercise
price equal to approximately $10.41 per share, the same price paid by THL in
connection with the Recapitalization. These options were cancelled in connection
with the Cancellation Agreements in 2001 and replacement options were issued on
January 8, 2002. Antoine Treuille was granted a replacement option to purchase
15,000 shares of Common Stock and Norman Matthews was granted a replacement
option to purchase 111,412 shares of Common Stock. The replacement
34
options are at an exercise price of $5.00 per share and vest 50% on the date of
grant, and an additional 25% will vest on each of the first and second
anniversary of the date of grant. In addition, Antoine Treuille receives $10,000
per year for his services. Mr. Treuille received 5,000 options in 1998, 1999 and
2000 at an exercise price of $10.41, $10.41 and $12.85 per share, respectively,
subject to a vesting schedule of equal amounts over four years. These options
were cancelled in connection with the Cancellation Agreements in 2001 and
replacement options were issued in January 2002. The replacement options are
subject to a three year vesting schedule and are at an exercise price of $5.00
per share. Except with respect to the consulting fee paid to Mr. Matthews, the
annual payment paid to Mr. Treuille and the management fee paid to THL Co.,
during fiscal 2001 none of the directors of the Company received any
compensation for their services as directors of the Company.
EMPLOYMENT AGREEMENTS
On July 2, 2001, the Company announced that Bernard W. Andrews retired as
Chief Executive Officer of the Company. David E. McComas, previously President
and Chief Operating Officer succeeded Mr. Andrews as Chief Executive Officer and
became a director, on July 2, 2001. Mr. Andrews continues to serve as Chairman
of the Board.
Mr. McComas entered into an employment agreement with the Company,
effective July 2, 2001, which provides for his employment with the Company for
an initial term of two years, and thereafter renewing for consecutive one year
terms unless terminated by either party. Mr. McComas is entitled to a base
salary of $450,000 during the first year and $500,000 during the second year.
Mr. McComas will be eligible to receive an annual performance bonus upon the
achievement by the Company of certain EBITDA targets as determined from year to
year by the Board of Directors.
Mr. McComas is entitled to receive severance of his base salary upon
termination by the Company without cause, as defined within the employment
agreement. Severance shall be paid over twelve months. Mr. McComas is also
subject to a standard restrictive covenants agreement (including
non-competition, non-solicitation, and non-disclosure covenants) during the term
of his employment and for a period of one year following termination for any
reason.
Mr. McComas received non-qualified options to purchase 220,000 shares of
Common Stock at an exercise price of $5.00 per share on January 8, 2002. These
options vest over a four year period.
Under the terms of his employment agreement, Mr. Andrews purchased $1.0
million of Common Stock at the same price that THL paid in connection with the
Recapitalization. Mr. Andrews paid for these shares by delivering a promissory
note with an original purchase amount of $1.0 million, which shall accrue
interest at a fixed rate equal to the Company's initial borrowing rate. The
repayment of such note is secured by Mr. Andrews' shares of Common Stock.
The remaining executive officers are each subject to annual employment
agreements that
35
automatically renew unless either party gives thirty days notice. Each executive
officer is eligible to participate in the Company's Incentive Plan for Key
Management, whereby they may receive a certain percentage of their base
compensation upon the achievement of certain EBITDA levels as determined by the
Board of Directors.
Upon termination without cause, as defined in the employment agreement, the
executive officers are eligible for a range of nine to twelve months of
severance. The employment agreements also contain standard restrictive
covenants such as non-competition, non-solicitation and non-disclosure during
the term of employment and for a period of two years following termination for
any reason.
STOCK OPTION PLAN
The Company has granted stock options to certain officers under the
Company's 1998 stock option plan. On June 15, 2001, the Company entered into
Option Cancellation Agreements (the "Cancellation Agreements") with certain
employees and directors (the "Optionees") to cancel all outstanding options
which were granted under the Company's 1998 Stock Option Plan (the "Plan") due
to changes in the fair market value of the Company's common stock. The
Cancellation Agreements provided that a new grant would be made no earlier than
six months and a day after the cancellation of the options and such grant was
made on January 8, 2002. As of March 15, 2002, options to purchase 881,775
shares of Common Stock were outstanding. Of the outstanding options, 854,775
were replacement options issued in relation to the Cancellation Agreements.
Subject to acceleration under certain circumstances, these options vest over a
four-year period with 40% vesting on the date of grant and an additional 20%
vesting on each of the first, second and third anniversaries of the date of
grant. The remaining 27,000 outstanding options were granted in the normal
course of business under the Company's 1998 stock option plan. Subject to
acceleration under certain circumstances, these options vest over a four-year
period with 10%, 15%, 25% and 50% vesting on each of the anniversaries of the
date of grant. The per option exercise price is $5.00. Generally, all unvested
options will be forfeited upon termination of employment.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. During 2001,
the Compensation Committee consisted of Messrs. Matthews, DiNovi and Smith, none
of whom were an officer or employee of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the anticipated
beneficial ownership of shares of the Common Stock as of March 15, 2002 by
persons who are beneficial owners of more than 5% of the Common Stock, by each
director, by each executive officer of the Company and by all directors and
executive officers as a group, as determined in accordance with Rule 13d-3 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All shares
of the Common Stock are voting stock.
36
SHARES OF PERCENTAGE
NAME OF BENEFICIAL OWNER(A) COMMON STOCK OF CLASS
- --------------------------- ------------ ----------
Affiliates of THL Co.(b) 6,664,800 90.1%
Equity-Linked Investors-II (c) 383,616 5.2
Bernard W. Andrews (e) 223,068 *
David E. McComas (f) 112,015 *
Norman S. Matthews (g) 75,398 *
Antoine G. Treuille (h) 14,028 *
George E. Gebhardt (i) 48,999 *
Alan E. Wiley(j) 35,606 *
Anthony J. DiNovi (b) 6,664,800 90.1
Warren C. Smith (b) 6,664,800 90.1
Charles A. Brizius (b) 6,664,800 90.1
All directors and executive officers of the Company as a group (11)(b)(d) 7,173,914 94.1
* Less than 1%.
(a) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and reflects general voting power and/or
investment power with respect to securities.
(b) The business address for such person(s) is c/o Thomas H. Lee Company, 75
State Street, Suite 2600, Boston, Massachusetts 02109. Of the securities
held by affiliates of Thomas H. Lee Company, 5,664,330 are held by the
Thomas H. Lee Equity Fund IV, L.P., 195,133 are held by the Thomas H. Lee
Foreign Fund IV, L.P., 551,323 are held by Thomas H. Lee Foreign Fund IV-B,
L.P. and 254,014 are held by others. All such voting securities may be
deemed to be beneficially owned by THL Equity Advisors IV, LLC ("Advisors")
the general partner of THL Fund IV, Thomas H. Lee, Messrs. DiNovi, Smith
and the other managing directors and by Mr. Brizius and the other officers
of THL Co., in each case pursuant to the definition of beneficial ownership
provided in footnote (a). Each of such persons disclaims beneficial
ownership of such shares.
(c) Equity-Linked Investors-II is an investment partnership managed by Desai
Capital Management Incorporated. The business address for such person is
c/o Desai Capital Management, Incorporated, 540 Madison Avenue, New York,
New York 10022.
(d) Includes 214,154 shares issuable pursuant to presently exercisable options
(or those exercisable prior to May 1, 2002).
(e) Includes 30,948 shares issuable pursuant to presently exercisable options
(or those exercisable prior to May 1, 2002). Excludes 250,327 shares
issuable pursuant to options which are not currently exercisable (or
exercisable prior to May 1, 2002).
(f) Includes 88,000 shares issuable pursuant to presently exercisable options
(or those exercisable prior to May 1, 2002). Excludes 112,000 shares
issuable pursuant to options which are not currently exercisable (or
exercisable prior to May 1, 2001).
(g) Includes 55,706 shares issuable pursuant to presently exercisable options
(or those exercisable prior to May 1, 2002). Excludes 55,706 shares
issuable pursuant to options which are not currently exercisable (or
exercisable prior to May 1, 2001).
(h) Includes 7,500 shares issuable pursuant to presently exercisable options
(or those exercisable prior to May 1, 2002). Excludes 7,500 shares issuable
pursuant to options which are not currently exercisable (or exercisable
prior to May 1, 2002).
(i) Includes 14,000 shares issuable pursuant to presently exercisable options
(or those exercisable prior to May 1, 2002). Excludes 36,000 shares
issuable pursuant to options which are not currently exercisable (or
exercisable prior to May 1, 2002).
(j) Includes 26,000 shares issuable pursuant to presently exercisable options
or those exercisable prior to May 1, 2002). Excludes 39,000 shares issuable
pursuant to options which are not currently exercisable (or exercisable
prior to May 1, 2001).
37
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT AGREEMENT
The Company and THL Co. entered into a management agreement as of the
closing date of the Recapitalization (the "Management Agreement"), pursuant to
which (i) THL Co. received a financial advisory fee of $6.0 million in
connection with structuring, negotiating and arranging the Recapitalization and
structuring, negotiating and arranging the debt financing and (ii) THL Co. would
receive $500,000 per year plus expenses for management and other consulting
services provided to the Company, including one percent (1%) of the gross
purchase price for acquisitions for its participation in the negotiation and
consummation of any such acquisition. As of December 31, 2000, the Management
Agreement was amended to reduce the fees to $250,000 per year plus expenses for
management and other consulting services provided to the Company. However, such
fee may be increased dependent upon the Company attaining certain leverage
ratios. The Management Agreement continues unless and until terminated by
mutual consent of the parties in writing, for so long as THL Co. provides
management and other consulting services to the Company. The Company believes
that the terms of the Management Agreement are comparable to those that would
have been obtained from unaffiliated sources.
STOCKHOLDERS' AGREEMENT
The Company entered into a Stockholders' Agreement (the "Stockholders'
Agreement") among THL and the other shareholders of the Company upon the
consummation of the Recapitalization. Pursuant to the Stockholders' Agreement,
the shareholders are required to vote their shares of capital stock of the
Company to elect a Board of Directors of the Company consisting of directors
designated by THL. The Stockholders' Agreement also grants THL the right to
require the Company to effect the registration of shares of Common Stock it (or
its affiliates) holds for sale to the public, subject to certain conditions and
limitations. If the Company proposes to register any of its securities under the
Securities Act of 1933, as amended, whether for its own account or otherwise,
the shareholders are entitled to notice of such registration and are entitled to
include their shares in such registration, subject to certain conditions and
limitations. All fees, costs and expenses of any registration effected on behalf
of such shareholders under the Stockholders' Agreement (other than underwriting
discounts and commissions) will be paid by the Company.
38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report.
Page
of 10-K
-------
1. FINANCIAL STATEMENTS
Report of Independent Auditors F-2
Consolidated Balance Sheets at December 30, 2000 and December 29, 2001 F-3
Consolidated Statements of Operations for the Years Ended January1, 2000,
December 30, 2000 and December 29, 2001 F-4
Consolidated Statements of ShareholdersDeficit January1, 2000,
December 30, 2000 and December 29, 2001 F-5
Consolidated Statements of Cash Flows January1, 2000,
December 30, 2000 and December 29, 2001 F-6
Notes to the Consolidated Financial Statements F-8
2. FINANCIAL STATEMENT SCHEDULES
Schedule II Consolidated Valuation and Qualifying Accounts For the Years Ended
January1, 2000, December 30, 2000 and December 29, 2001 F-39
3. EXHIBITS
2.1 Stock Purchase Agreement dated August15, 1996 by and between Eye Care
Centers of America, Inc., Visionworks Holdings, Inc. and the Sellers listed
therein. (a)
2.2 Stock Purchase Agreement, dated September30 1997, by and among Eye
Care Centers of America, Inc., a Texas corporation, Robert A. Samit, O. D.
and Michael Davidson, O. D. (a)
2.3 Recapitalization Agreement dated as of March6, 1998 among ECCA
Merger Corp., Eye Care Centers of America, Inc. and the sellers Listed
therein. (a)
2.4 Amendment No. 1 to the Recapitalization Agreement dated as of April23,
1998 among ECCA Merger Corp., Eye Care Centers of America, Inc, and
the sellers listed therein. (a)
2.5 Amendment No. 2 to the Recapitalization Agreement dated as of April24,
1998 among ECCA Merger Corp., Eye Care Centers of America, Inc. and
the sellers listed therein. (a)
39
2.6 Articles of Merger of ECCA Merger Corp. with and into Eye Care Centers
of America, Inc. dated April24, 1998. (a)
2.7 Master Asset Purchase Agreement, dated as of August22, 1998,
by and among Eye Care Centers of America, Inc., Mark E. Lynn, Dr. Mark Lynn &
Associates, PLLC, Dr. BizerVision World, PLLC and its affiliates. (a)
Amendment No. 1 to Retail Business Management Agreement by and
between Visionary Retail Management, Inc. and Dr. Mark Lynn &
Associates, PLLC dated June 1, 1999. (j) Amendment No. 1 to Professional
Business Management Agreement by and between Visionary MSO, Inc. and
Dr. Mark Lynn & Associates, PLLC dated June 1, 1999. (j) Amendment No.
1 to Professional Business Management Agreement by and between
Visionary MSO, Inc. and Dr. Mark Lynn & Associates, PLLC dated August
1, 2000. (j) Amendment No. 1 to Retail Business Management Agreement
by and between Visionary Retail Management, Inc. and Dr. Mark Lynn &
Associates, PLLC dated August 31, 2000. (j)
2.8 Letter Agreement, dated October1, 1998, amending and modifying that
certain Master Asset Purchase Agreement, dated as of August22, 1998, by
and among Eye Care Centers of America, Inc.; Mark E. Lynn; Dr. Mark
Lynn & Associates, PLLC, Dr. BizerVisionWorld, PLLC and its affiliates. (a)
2.9 Asset Purchase Agreement, dated July 7,1999, by and among Eye Care
Centers of America, Inc., Vision Twenty-One, Inc., and The Complete
Optical Laboratory, Ltd., Corp. (c) Amendment No. 2 to Business
Management Agreement by and between Charles M. Cummins, O.D., P.A.
and Eye Drx Retail Management, Inc. dated February 29, 2000. (j)
Amendment No. 3 to Business Management Agreement by and between
Charles M. Cummins, O.D., P.A. and Eye Drx Retail Management, Inc.
dated May 1, 2000. (j) Amendment No. 4 to Business Management
Agreement by and between Charles M. Cummins, O.D., P.A. and Eye Drx
Retail Management, Inc. dated February 1, 2001. (j)
2.10 Letter Agreement, dated August 31,1999, amending and modifying that
certain Asset Purchase Agreement, dated July 7,1999 by and among Eye
Care Centers of America, Inc., Vision Twenty-One, Inc., and The Complete
Optical Laboratory, Inc., Corp. (d)
2.11 Agreement Regarding Strategic Alliance. (d)
3.1 Restated Articles of Incorporation of Eye Care Centers of America Inc. (a)
3.2 Statement of Resolution of the Board of Directors of Eye Care Centers of
America, Inc. designating a series of Preferred Stock. (a)
3.3 Amended and Restated By-laws of Eye Care Centers of America, Inc. (a)
4.1 Indenture dated as of April 24, 1998 among Eye Care Centers of America,
Inc., the Guarantors named therein and United States Trust Company of New
York, as Trustee for the 9 1/8% Senior Subordinated Notes Due 2008 and
Floating Interest Rate Subordinated Term Securities. (a)
40
4.2 Form of Fixed Rate Exchange Note (included in Exhibit 4.1 hereto). (a)
4.3 Form of Floating Rate Exchange Note (included in Exhibit 4.1 hereto). (a)
4.4 Form of Guarantee (included in Exhibit 4.1 hereto). (a)
4.5 Registration Rights Agreement dated April24, 1998 between Eye Care
Centers of America, Inc., the subsidiaries of the Company named as
guarantors therein, BT Alex. Brown Incorporated and Merrill Lynch,
Pierce, Fenner & Smith Incorporated. (a)
10.1 Form of StockholdersAgreement dated as of April24, 1998 by and among
Eye Care of America, Inc. and the shareholders listed therein. (a)
10.2 1998 Stock Option Plan. (a)
10.3 Employment Agreement dated July 2, 2001 by and between Eye Care
Centers of America, Inc. and David E. McComas. (k)
10.4 Stock Option Agreement dated July 2, 2001 by and between Eye Care
Centers of America, Inc and Alan E. Wiley. (k)
10.5 Form of Employment Agreement dated January1, 1998 between Eye Care
Centers of America, Inc. and George Gebhardt. (a)
10.6 Management Agreement, dated as of April24, 1998, by and between
Thomas H. Lee Company and Eye Care Centers of America, Inc. (a)
10.7 Retail Business Management Agreement, dated September30, 1997, by and
between Dr. Samit's Hour Eyes Optometrist, P.C., a Virginia professional
corporation, and Visionary Retail Management, Inc., a Delaware corporation.
* (a) Amendment No. 1 to the Retail Business Management Agreement, dated
June 2000, by and between Hour Eyes Doctors of Optometry, P.C., formerly
known as Dr. Samit's Hour Eyes Optometrist, P.C., and Visionary Retail
Management, Inc. (j)
10.8 Professional Business Management Agreement dated September30, 1997, by and
between Dr. Samit's Hour Eyes Optometrists, P.C., a Virginia professional
corporation, and Visionary MSO, Inc., a Delaware corporation. * (a)
Amendment No. 1 to the Professional Business Management Agreement, dated
June 2000, by and between Hour Eyes Doctors of Optometry, P.C., formerly
known as Dr. Samit's Hour Eyes Optometrist, P.C., and Visionary MSO, Inc.
(j)
10.9 Contract for Purchase and Sale dated May29, 1997 by and between Eye
Care Centers of America, Inc. and JDB Real Properties, Inc. (a)
10.10 Contract for Purchase and Sale dated May29, 1997 by and between Eye
Care Centers of America, Inc. and JDB Real Properties, Inc. (a)
10.11 Amendment to Contract for Purchase and Sale dated July3, 1997 by and
between Eye Care Centers of America, Inc. and JDB Real Properties,
Inc. (a)
41
10.12 Second Amendment to Contract for Purchase and Sale dated July10, 1997
by and between Eye Care Centers of America, Inc. and JDB Real
Properties, Inc. (a)
10.13 Third Amendment to Contract for Purchase and Sale by and between Eye
Care Centers of America, Inc., John D. Byram, Dallas Mini #262. Ltd. and
Dallas Mini #343, Ltd. (a)
10.14 Commercial Lease Agreement dated August19, 1997 by and between John
D. Byram, Dallas Mini #262, Ltd. and Dallas Mini #343, Ltd. and Eye Care
Centers of America, Inc. (a)
10.15 Master Lease Agreement, dated August12, 1997, by and between Pacific
Financial Company and Eye Care Centers of America, Inc., together with all
amendments, riders and schedules thereto. (a)
10.16 Credit Agreement, dated as of April23, 1998, among Eye Care Centers of
America, Inc., Various Lenders, Bankers Trust Company, as Administrative
Agent, and Merrill Lynch Capital Corporation, as Syndication Agent. (a)
10.17 First Amendment to Credit Agreement, dated as of December, 27, 2000,
among Eye Care Centers of America, Inc., Various Lenders, Bankers Trust
Company, as Administrative Agent, and Merrill Lynch Capital Corporation,
as Syndication Agent. (i)
10.18 Purchase Agreement, dated as of April24, 1998, by and among Eye Care
Centers of America, Inc., the subsidiaries of Eye Care Centers of America,
Inc. named therein, BT Alex. Brown Incorporated and Merrill Lynch,
Pierce, Fenner & Smith Incorporated. (a)
10.19 Secured Promissory Note, dated April24, 1998, issued by Bernard W.
Andrews in favor of Eye Care Centers of America, Inc. (a)
10.20 Form of Stock Option Cancellation Agreement dated June 15, 2001 by
and between Eye Care Centers of America, Inc., and the employees
granted options under the Company1998 Stock Option Plan. (k)
10.21 Form of Stock Option Cancellation Agreement dated June 15, 2001 by
and between Eye Care Centers of America, Inc., and the board of
directors granted options under the Company1998 Stock Option Plan. (k)
10.22 Retail Business Management Agreement, dated October1, 1998, by and
between Visionary Retail Management, Inc., a Delaware corporation, and
Dr. Mark Lynn & Associates, PLLC, a Kentucky professional
limited liability company. * (b)
10.23 Professional Business Management Agreement, dated October1, 1998, by
and between Visionary MSO, Inc., a Delaware Corporation, and Dr. Mark
Lynn & Associates, PLLC, a Kentucky professional limited liability company. * (b)
10.24 Form of Stock Option Agreement. (l)
42
10.25 Professional Business Management Agreement dated February 27, 2000,
by and between Eye Care Centers of America, Inc. a Texas corporation
and S.L. Christensen, O.D. and Associates, P.C., an Arizona professional
corporation. (f)
10.26 Professional Business Management Agreement dated June 19, 2000, by
and between Visionary Retail Management, Inc., a Delaware corporation,
and Dr. Tom Sowash, O.D. and Associates, LLC, a Colorado limited liability
company. (g)
10.27 Settlement Agreement dated September 21, 2000 between Eye Care
Centers of America, Inc., a Texas corporation, and Vision Twenty-One,
Inc. (h)
10.28 Stock Option Agreement dated January 8, 2002 by and between Eye Care
Centers of America, Inc and Norman Matthews. (l)
10.29 Stock Option Agreement dated January 8, 2002 by and between Eye Care
Centers of America, Inc and Antoine Treuille. (l)
12.1 Statement re Computation of Ratios (l)
21.1 List of subsidiaries of Eye Care Centers of America, Inc. (l)
24.1 Powers of Attorney (contained on the signature pages of this report). (l)
* Portions of this Exhibit have been omitted pursuant to an application for
an order declaring confidential treatment filed with the Securities and
Exchange Commission.
(a) Incorporated by reference from the Registration Statement on Form S-4 (File
No. 333 - 56551).
(b) Previously provided with, and incorporated by reference from, the Company's
annual Report on Form 10-K for the year ended January 2,1999.
(c) Previously provided with, and incorporated by reference from, the Company's
quarterly Report on Form 10-Q for the quarter ended July 3,1999.
(d) Previously, provided with, and incorporated by reference from, the Company's
quarterly Report on Form 10-Q for the quarter ended October 2,1999.
(e) Previously provided with, and incorporated by reference from, the Company's
annual Report on Form 10-K for the year ended January 1,2000.
(f) Previously, provided with, and incorporated by reference from, the Company's
quarterly Report on Form 10-Q for the quarter ended April 1, 2000.
(g) Previously, provided with, and incorporated by reference from, the Company's
quarterly Report on Form 10-Q for the quarter ended July 1, 2000.
(h) Previously, provided with, and incorporated by reference from, the Company's
quarterly Report on Form 10-Q for the quarter ended September 30, 2000.
(i) Previously, provided with, and incorporated by reference from, the Company's
Report on Form 8-K as of December 27, 2000.
(j) Previously, provided with, and incorporated by reference from, the Company's
annual Report on Form 10-K for the year ended December 30, 2000.
(k) Previously, provided with, and incorporated by reference from, the Company's
quarterly Report on Form 10-Q for the quarter ended June 30, 2001.
(l) Filed herewith.
43
(b) The Company filed no current reports on Form 8-K with the Securities and
Exchange Commission during the thirteen weeks ended December 29, 2001.
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15 (D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT
TO SECTION 12 OF THE ACT.
No annual report or proxy materials have been sent to security holders of the
Company.
44
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SAN
ANTONIO, STATE OF TEXAS, ON MARCH XX, 2002.
EYE CARE CENTERS OF AMERICA, INC.
By: /S/ DAVID E. MCCOMAS
DAVID E. MCCOMAS
CHIEF EXECUTIVE OFFICER AND PRESIDENT
-----------------------------------------
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Bernard W. Andrews and Alan E. Wiley and each of
them, with the power to Act without the other, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him or in his name, place and stead, in any and all capacities to sign any
and all amendments to this report, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every Act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed by the following persons in the capacities and on the dates
indicated.
SIGNATURE TITLE DATE
Chief Executive Officer and
/S/ David E. McComas President March XX, 2002
- ----------------------------
DAVID E. MCCOMAS (Principal Executive Officer)
Executive Vice President and
/S/ Alan E. Wiley Chief Financial Officer March XX, 2002
- ----------------------------
ALAN E. WILEY (Principal Financial and
Accounting Officer)
/S/ Bernard W. Andrews Chairman of the Board March XX, 2002
- ----------------------------
BERNARD W. ANDREWS
/S/ Norman S. Matthews Director March XX, 2002
- ----------------------------
NORMAN S. MATTHEWS
/S/ Antoine G. Treuille Director March XX, 2002
- ----------------------------
ANTOINE G. TREUILLE
/S/ Anthony J. DiNovi Director March XX, 2002
- ----------------------------
ANTHONY J. DINOVI
/S/ Warren C. Smith, Jr. Director March XX, 2002
- ----------------------------
WARREN C. SMITH, JR.
/S/ Charles A. Brizius Director March XX, 2002
- ----------------------------
CHARLES A. BRIZIUS
45
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
EYE CARE CENTERS OF AMERICA, INC. AND SUBSIDIARIES
Report of Independent Auditors F-2
Consolidated Balance Sheets at December 30, 2000 and
December 29, 2001 F-3
Consolidated Statements of Operations for the Years Ended
January 1, 2000, December 30, 2000 and December 29, 2001 F-4
Consolidated Statements of Shareholders' Deficit as of
January 1, 2000, December 30, 2000 and December 29, 2001 F-5
Consolidated Statements of Cash Flows for the Years Ended
January 1, 2000, December 30, 2000 and December 29, 2001 F-6
Notes to the Consolidated Financial Statements F-8
Schedule II - Consolidated Valuation and Qualifying
Accounts - For the Years Ended January 1, 2000,
December 30, 2000 and December 29, 2001 F-39
EYE CARE CENTERS OF AMERICA, INC.
AUDIT OPINION
Report of Independent Auditors
Board of Directors and Shareholders
Eye Care Centers of America, Inc.
San Antonio, Texas
We have audited the accompanying consolidated balance sheets of Eye Care Centers
of America, Inc. and Subsidiaries as of December 29, 2001 and December 30, 2000,
and the related consolidated statements of operations, shareholders' deficit,
and cash flows for the fiscal years ended December 29, 2001, December 30, 2000,
January 1, 2000. Our audits also included the financial statement schedule
listed in the index at Item 14. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Eye
Care Centers of America, Inc. and Subsidiaries at December 29, 2001 and December
30, 2000, and the consolidated results of their operations and their cash flows
for the fiscal years ended December 29, 2001, December 30, 2000, January 1,
2000, in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
By: /S/ ERNST & YOUNG LLP
San Antonio, Texas
March 5, 2002
A Member Practice of Ernst & Young Global
F2
EYE CARE CENTERS OF AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS UNLESS INDICATED OTHERWISE)
DECEMBER 30, 2000 DECEMBER 29, 2001
------------------- -------------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,971 $ 3,372
Accounts and notes receivable, less allowance for doubtful accounts of
$3,937 in fiscal 2000 and $4,856 in fiscal 2001 14,096 10,275
Inventory, less reserves of $1,004 in fiscal 2000 and $1,099 in fiscal 2001 25,690 24,665
Prepaid expenses and other 3,796 3,389
Deferred income taxes 1,297 1,337
------------------- -------------------
Total current assets 48,850 43,038
Property and equipment, net of accumulated depreciation and amortization of
$87,503 in fiscal 2000 and $106,877 in fiscal 2001 73,987 64,518
Intangibles, net of accumulated amortization of $24,840 in fiscal 2000 and
$33,537 in fiscal 2001 118,237 109,453
Other Assets 9,846 8,004
------------------- -------------------
Total Assets $ 250,920 $ 225,013
=================== ===================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 20,860 $ 21,749
Current portion of long-term debt 13,070 13,786
Deferred revenue 6,658 6,557
Accrued payroll expense 4,527 5,733
Accrued interest 4,029 3,284
Other accrued expenses 8,887 8,500
------------------- -------------------
Total current liabilities 58,031 59,609
Deferred income taxes 1,297 1,337
Long-term debt, less current maturities 278,306 260,777
Deferred rent 3,771 3,790
Deferred gain 2,233 1,999
------------------- -------------------
Total liabilities 343,638 327,512
------------------- -------------------
Commitments and contingencies
Shareholders' deficit:
Common stock, par value $.01 per share; 20,000,000 shares authorized,
issued and outstanding 7,410,133 in fiscal 2000 and 7,410,133 in
fiscal 2001 74 74
Preferred stock, par value $.01 per share, 300,000 shares authorized,
issued and outstanding in 2000 and 2001 42,354 48,134
Additional paid-in capital 49,963 43,474
Accumulated deficit (185,109) (194,181)
------------------- -------------------
Total shareholders' deficit (92,718) (102,499)
------------------- -------------------
$ 250,920 $ 225,013
=================== ===================
The accompanying notes are an integral part of these consolidated financial statements.
F3
EYE CARE CENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS UNLESS INDICATED OTHERWISE)
FISCAL YEAR ENDED
---------------------
JANUARY 1, 2000 DECEMBER 30, 2000 DECEMBER 29, 2001
--------------------- ------------------ ------------------
Revenues:
Optical sales $ 290,789 $ 335,624 $ 332,550
Management fees 3,006 2,833 3,484
--------------------- ------------------ ------------------
Net revenues 293,795 338,457 336,034
Operating costs and expenses:
Cost of goods sold 98,184 107,449 104,446
Selling, general and administrative expenses 170,146 204,365 203,187
Store closure expense - 3,580 -
Amortization of intangibles:
Goodwill 4,994 5,214 5,319
Noncompete and other intangibles 659 3,922 3,378
--------------------- ------------------ ------------------
Total operating costs and expenses 273,983 324,530 316,330
--------------------- ------------------ ------------------
Income from operations 19,812 13,927 19,704
Interest expense, net 24,685 28,695 27,537
--------------------- ------------------ ------------------
Loss before income taxes (4,873) (14,768) (7,833)
Income tax expense 384 766 1,239
--------------------- ------------------ ------------------
Net loss before cumulative effect of change in
accounting principle (5,257) (15,534) (9,072)
Cumulative effect of change in accounting principle 491 - -
--------------------- ------------------ ------------------
Net loss $ (5,748) $ (15,534) $ (9,072)
===================== ================== ==================
The accompanying notes are an integral part of these consolidated financial statements.
F4
EYE CARE CENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
(DOLLAR AMOUNTS IN THOUSANDS UNLESS INDICATED OTHERWISE)
Additional Total
Common Stock Paid-In Preferred Accumulated Shareholders'
Shares Amount Capital Stock Deficit Deficit
-------------- -------- ------------ ---------- ------------- ---------------
Balance at January 2, 1999 7,451,030 $ 75 $ 60,958 $ 32,793 $ (163,827) $ (70,001)
Dividends accrued on preferred stock - - (4,475) 4,475 - -
Interest receivable on loan to shareholder - - (164) - - (164)
Distribution to affiliated OD - - (331) - - (331)
Stock buyback (42,266) (1) (439) - - (440)
Issuance of common stock 18,181 - 189 - - 189
Net loss - - - - (5,748) (5,748)
-------------- -------- ------------ ---------- ------------- ---------------
Balance at January 1, 2000 7,426,945 $ 74 $ 55,738 $ 37,268 $ (169,575) $ (76,495)
Dividends accrued on preferred stock - - (5,086) 5,086 - -
Interest receivable on loan to shareholder - - (90) - - (90)
Distribution to affiliated OD - - (365) - - (365)
Stock buyback (16,812) - (234) - - (234)
Net loss - - - - (15,534) (15,534)
-------------- -------- ------------ ---------- ------------- ---------------
Balance at December 30, 2000 7,410,133 $ 74 $ 49,963 $ 42,354 $ (185,109) $ (92,718)
Dividends accrued on preferred stock - - (5,780) 5,780 - -
Interest receivable on loan to shareholder - - (90) - - (90)
Distribution to affiliated OD - - (603) - - (603)
Stock buyback - - (16) - - (16)
Net loss - - - - (9,072) (9,072)
-------------- -------- ------------ ---------- ------------- ---------------
Balance at December 29, 2001 7,410,133 $ 74 $ 43,474 $ 48,134 $ (194,181) $ (102,499)
============== ======== ============ ========== ============= ===============
The accompanying notes are an integral part of these consolidated financial statements.
F5
EYE CARE CENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS UNLESS INDICATED OTHERWISE)
FISCAL YEAR ENDED
------------------
JANUARY 1, DECEMBER 30, DECEMBER 29,
2000 2000 2001
------------------- -------------- --------------
Cash flows from operating activities:
Net loss $ (5,748) $ (15,534) $ (9,072)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation 16,610 20,464 20,350
Amortization of intangibles 5,653 9,136 8,697
Amortization of debt issue costs 1,551 1,784 1,956
Cumulative effect of change in accounting principle 491 - -
Amortization of deferred gain (455) (234) (234)
Deferred revenue 801 526 (101)
Deferred rent 353 172 19
Other (176) - -
Loss on disposition of property and equipment 725 118 268
Expenses to affect capital lease retirement (431) - -
Changes in operating assets and liabilities:
Accounts and notes receivable (3,678) (4,452) 3,070
Inventory 319 4,457 1,025
Prepaid expenses and other (1,408) (3,476) (337)
Accounts payable and accrued liabilities 647 (1,745) 1,729
------------------- -------------- --------------
Net cash provided by operating activities 15,254 11,216 27,370
------------------- -------------- --------------
Cash flows from investing activities:
Acquisition of property and equipment (19,920) (18,932) (10,559)
Net outflow for the VTO Retail Acquisition (38,845) (87) -
Proceeds from sale of property and equipment 100 54 68
Purchase of retail outlet (368) - -
Payment received on notes receivable 177 33 3
------------------- -------------- --------------
Net cash used in investing activities (58,856) (18,932) (10,488)
------------------- -------------- --------------
The accompanying notes are an integral part of these consolidated financial statements.
F6
EYE CARE CENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS UNLESS INDICATED OTHERWISE)
FISCAL YEAR ENDED
------------------
JANUARY 1, DECEMBER 30, DECEMBER 29,
2000 2000 2001
------------------- -------------- --------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt $ 48,618 $ 17,000 $ 66
Distribution to affiliated OD (331) (365) (603)
Proceeds from the issuance of common stock 189 - -
Payments related to debt issuance (875) - -
Stock buyback (440) (234) (16)
Payments on debt and capital leases (5,731) (7,669) (16,928)
------------------- -------------- --------------
Net cash provided by (used in) financing activities 41,430 8,732 (17,481)
------------------- -------------- --------------
Net (decrease) increase in cash and cash equivalents (2,172) 1,016 (599)
Cash and cash equivalents at beginning of period 5,127 2,955 3,971
------------------- -------------- --------------
Cash and cash equivalents at end of period $ 2,955 $ 3,971 $ 3,372
=================== ============== ==============
Supplemental cash flow disclosures:
Cash paid during the period for:
Interest $ 22,660 $ 25,436 $ 26,150
Taxes 505 304 358
Noncash investing and financing activities:
Additions of property and equipment 1,476 665 -
Dividends accrued on preferred stock 4,475 5,086 5,780
Adjustment of noncompete agreement
to goodwill - 5,575 -
The accompanying notes are an integral part of these consolidated financial statements.
F7
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands unless indicated otherwise)
1. DESCRIPTION OF BUSINESS AND ORGANIZATION
Description of Business. Eye Care Centers of America, Inc. (the "Company")
operates optical retail stores which sell prescription eyewear, contact lenses,
sunglasses and ancillary optical products, and feature on-site laboratories. The
Company's operations are located in 32 states, primarily in the Pacific
Northwest, Southwest, Midwest and Southeast, in the Mid-Atlantic States and
along the Gulf and East Coasts.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The financial statements include the accounts of the
Company, its wholly owned subsidiaries and certain private optometrists with
practices managed by subsidiaries of the Company (the "ODs"). All significant
intercompany accounts and transactions have been eliminated in consolidation.
Certain reclassifications have been made to the prior period statements to
conform to the current period presentation.
Use of Estimates. In preparing financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions. These estimates and assumptions affect the reported
amount of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and revenues and expenses
during the reporting period. Actual results could differ from these estimates.
Reporting Periods. The Company uses a 52/53 week reporting format. The
fiscal years ended 1999, 2000 and 2001 consisted of 52 weeks. Fiscal year 1999
ended January 1, 2000 ("fiscal 1999"), fiscal year 2000 ended December 30, 2000
("fiscal 2000") and fiscal year 2001 ended December 29, 2001 ("fiscal 2001").
Cash and Cash Equivalents. All short-term investments that mature in less
than 90 days when purchased are considered cash equivalents for purposes of
disclosure in the consolidated balance sheets and consolidated statements of
cash flows. Cash equivalents are stated at cost, which approximates market
value.
Accounts and Notes Receivable. Accounts receivable are primarily from third
party payors related to the sale of eyewear and include receivables from
insurance reimbursements, credit card companies, merchandise, rent and license
fee receivables. Notes receivable are from certain optometrists that have
purchased optical equipment from the Company. Merchandise receivables result
from product returned to vendors pending credit or exchange for new product. The
Company's allowance for doubtful
F8
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands unless indicated otherwise)
accounts primarily consists of amounts owed to
the Company by third party insurance payors. This estimate is based on the
historical ratio of collections to billings.
Inventory. Inventory consists principally of eyeglass frames, ophthalmic
lenses and contact lenses and is stated at the lower of cost or market. Cost is
determined using the weighted average method which approximates the first-in,
first-out (FIFO) method. The Company's inventory reserves are an estimate based
on product with low turnover or deemed by management to be unsaleable.
The Company purchases a majority of its lenses from four principal vendors
and purchases frames from over twenty different vendors. In fiscal 2001, four
vendors collectively supplied approximately 65.2% of the frames purchased by the
Company. One vendor supplied over 47.6% of the Company's lens materials during
the same period. While such vendors supplied a significant share of the lenses
used by the Company, lenses are a generic product and can be purchased from a
number of other vendors on comparable terms. The Company therefore does not
believe that it is dependent on such vendors or any other single vendor for
frames or lenses. The Company believes that its relationships with its existing
vendors are satisfactory. The Company believes that significant disruption in
the delivery of merchandise from one or more of its current principal vendors
would not have a material adverse effect on the Company's operations because
multiple vendors exist for all of the Company's products.
Prepaid Expenses - Store Preopening Costs. In April 1998, the AICPA issued
Statement of Position 98-5, Reporting on the Costs of Start-Up Activities ("SOP
98-5"). SOP 98-5 requires that start-up costs, including organizational costs,
be expensed as incurred. The SOP broadly defines start-up activities as those
one-time activities related to opening a new facility, introducing a new product
or services, conducting business in a new territory, conducting business with a
new class of customer or beneficiary, initiating a new process in an existing
facility, or commencing some new operation. The Company adopted this SOP for the
fiscal year ended January 1, 2000. The effect of the adoption of the SOP on the
Company's results of operations was a write off of previously capitalized
pre-opening and organization costs of $491, which was reflected as a cumulative
effect of change in accounting principle during the first quarter of fiscal
1999.
Property and Equipment. Property and equipment is recorded at cost. For
property and equipment acquired through acquisitions, balances are adjusted to
reflect their fair market value, as determined by an independent appraisal. For
financial statement purposes, depreciation of building, furniture and equipment
is calculated using the straight-line method over the estimated useful lives of
the assets. Leasehold improvements are amortized on a straight-line method over
the shorter of the life of the
F9
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands unless indicated otherwise)
lease or the estimated useful lives of the
assets. Depreciation of capital leased assets is included in depreciation
expense and is calculated using the straight-line method over the term of the
lease.
Estimated useful lives are as follows:
Building 20 years
Furniture and equipment 3 to 10 years
Leasehold improvements5 5 to 10 years
Maintenance and repair costs are charged to expense as incurred.
Expenditures for significant betterments are capitalized.
Intangibles. Intangibles principally consist of the amounts of excess
purchase price over the market value of acquired net assets ("goodwill"),
management agreements, noncompete agreements, and a strategic alliance
agreement. In July 2001, the Financial Standards Board ("FASB") issued SFAS
No.'s 141 and 142, "Business Combinations" and "Goodwill and Other Intangibles."
FASB 141 requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. Under FASB 142, goodwill is no longer
subject to amortization over its estimated useful life. Rather, goodwill is
subject to at least an annual assessment for impairment applying a fair-value
based test. Any impairment resulting from the initial application of the
statements is to be recorded as a cumulative effect of accounting change as of
December 2001. Additionally, an acquired intangible asset should be separately
recognized if the benefit of the intangible asset is obtained through
contractual or other legal rights, or if the intangible asset can be sold,
transferred, licensed, rented, or exchanged, regardless of the acquirer's intent
to do so. The Company adopted both statements on December 30, 2001. The Company
performed the first of the required impairment tests of goodwill as of December
30, 2001, and based upon its analysis, the Company believes that no impairment
of goodwill exists. The Company's pro forma net loss with goodwill excluded for
fiscal years 1999, 2000 and 2001 are as follows:
FISCAL FISCAL FISCAL
1999 2000 2001
-------- --------- --------
Pro forma Net Loss $ (754) $(10,320) $(3,753)
Other Assets. Other assets consist primarily of deferred debt financing
costs. These costs are being amortized into expense over the life of the
associated debt.
F10
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands unless indicated otherwise)
Long-Lived Assets. In August 2001, the FASB issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144
supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" and other related accounting guidance.
SFAS No. 144 is effective for financial statements issued for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years, with early application encouraged. The provisions of this Statement
generally are to be applied prospectively. The Company will adopt SFAS No. 144
in the first quarter of fiscal 2002. The Company is evaluating the impact of
the adoption of SFAS No. 144 on its consolidated financial statements.
Deferred Revenue - Replacement Certificates and Warranty Contracts. At the
time of a frame sale, some customers purchase a warranty contract covering
eyewear defects or damage during the 12-month period subsequent to the date of
the sale. Revenue relating to these contracts is deferred and recognized on a
straight-line basis over the life of the warranty contract (one year). Costs
incurred to fulfill the warranty are expensed when incurred.
Certain frame purchases include a one-year warranty period without
requiring the separate purchase of a warranty contract. Reserves are established
for the expected cost of repair related to these frame sales. At the end of
fiscal 2000 and 2001 the Company has established a reserve of approximately $809
and $841, respectively, related to these warranties which is included in other
accrued expenses on the accompanying balance sheet.
Income Taxes. The Company records income taxes under FASB No. 109 using the
liability method. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
Revenue Recognition. Sales and related costs are recognized by the Company
upon the sale of products at company-owned retail locations. Licensing fees
collected from independent optometrists for using the Company's trade name
"Master Eye Associates," insurance premiums and management fees are recognized
when earned. Historically, the Company's highest sales occur in the first and
third quarters.
Advertising Costs. Advertising costs of the Company include costs related
to broadcast and print media advertising expenses. The Company expenses
production costs and media advertising costs the first time the advertising
takes place. For the fiscal years
F11
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands unless indicated otherwise)
ended 1999, 2000 and 2001 advertising costs amounted to approximately $26,860,
$30,880 and $28,988, respectively.
Interest Expense, Net. Interest expense, net consists of the following:
YEAR-ENDED
----------------
JANUARY 1, 2000 DECEMBER 30, 2000 DECEMBER 29, 2001
---------------- ------------------ ------------------
Interest expense $ 25,385 $ 29,585 $ 28,125
Interest income (407) (269) (268)
Interest capitalized (293) (621) (320)
---------------- ------------------ ------------------
Interest expense, net $ 24,685 $ 28,695 $ 27,537
================ ================== ==================
Stock Based Compensation. The Company grants stock options for a fixed
number of shares to employees with an exercise price equal to the fair value of
the shares at the date of grant. In accordance with FASB No. 123, "Accounting
for Stock-Based Compensation," the Company has continued to account for stock
option grants in accordance with APB Opinion No. 25, "Accounting for Stock
Issues to Employees," and, accordingly, recognized no compensation expense for
the stock option grants.
Derivatives. The Company adopted Statement of Financial Standards No. 133
(FAS 133), "Accounting for Derivative Instruments and Hedging Activities," and
its amendments, Statements 137 and 138, on December 31, 2000. FAS 133 requires
that all derivative instruments be recorded on the balance sheet at fair value.
The Company's swap agreements matured on May 1, 2001, therefore the Company does
not currently hold any derivative instruments.
3. RELATED PARTY TRANSACTIONS
The Company and Thomas H. Lee Company ("THL Co.") entered into a management
agreement as of April 24, 1998 (as amended, the "Management Agreement"). The
Management Agreement was amended as of December 31, 2000 to reduce the
management fees to $250,000 per year plus expenses for management and other
consulting services provided to the Company. After a term of ten years from
April
F12
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands unless indicated otherwise)
24, 1998, the Management Agreement is automatically renewable on an annual
basis unless either party serves notice of termination at least ninety days
prior to the renewal date. For the fiscal years 1999, 2000 and 2001 the Company
incurred $500, $500 and $250, respectively, related to the Management Agreement.
4. PREPAID EXPENSES AND OTHER
Prepaid expenses and other consists of the following:
DECEMBER 30, 2000 DECEMBER 29, 2001
----------------- -----------------
Prepaid insurance $ 486 $ 275
Prepaid store supplies 882 797
Prepaid advertising 2,111 1,892
Other 317 425
----------------- -----------------
$ 3,796 $ 3,389
================= =================
5. PROPERTY AND EQUIPMENT
Property and equipment, net consists of the following:
DECEMBER 30, 2000 DECEMBER 29, 2001
------------------ ------------------
Land $ 638 $ 638
Building 2,241 2,240
Furniture and equipment 103,564 108,471
Leasehold improvements 55,047 60,046
------------------ ------------------
161,490 171,395
Less accumulated depreciation and amortization (87,503) (106,877)
------------------ ------------------
Property and equipment, net $ 73,987 $ 64,518
================== ==================
F13
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands unless indicated otherwise)
6. INTANGIBLE ASSETS
The following is a summary of the components of intangible assets along with
the related accumulated amortization for the fiscal years then ended.
DECEMBER 30, 2000 DECEMBER 29, 2001
------------------ ------------------
Goodwill and other $ 125,149 $ 124,815
Management agreement 7,988 7,988
Less accumulated amortization (20,226) (25,380)
------------------ ------------------
Net 112,911 107,423
------------------ ------------------
Noncompete and strategic alliance agreements 9,940 10,187
Less accumulated amortization (4,614) (8,157)
------------------ ------------------
Net 5,326 2,030
------------------ ------------------
Intangibles, net $ 118,237 $ 109,453
================== ==================
F14
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands unless indicated otherwise)
7. OTHER ACCRUED EXPENSES
Other accrued expenses consists of the following:
DECEMBER 30, 2000 DECEMBER 29, 2001
----------------- -----------------
Store expenses $ 1,348 $ 1,240
Other 653 1,022
Income tax payable - 938
Warranties 809 841
Insurance 1,193 835
Payroll & sales/use tax 700 771
Advertising 143 634
Professional fees 1,388 624
Property taxes 537 546
Third party liability 286 414
Severance - 350
Construction 601 156
Store Closures 644 129
Lease termination fees 585 -
----------------- -----------------
$ 8,887 $ 8,500
================= =================
8. LONG-TERM DEBT
Credit Facility. On April 24, 1998, the Company entered into a credit
agreement (the "Credit Facility") which consists of (i) the $55.0 million term
loan facility (the "Term Loan Facility"); (ii) the $35.0 million revolving
credit facility (the "Revolving Credit Facility"); and (iii) the $100.0 million
acquisition facility (the "Acquisition Facility"). The proceeds of the Credit
Facility were used to pay long-term debt outstanding under the previous credit
facility. At December 29, 2001 the Company had $33.0 million in term loans
outstanding under the Term Loan Facility, $21.5 million outstanding under the
Revolving Credit Facility, $67.9 million outstanding under the Acquisition
Facility which funded the Bizer Acquisition and the VTO Retail Acquisition,
$149.7 million in notes payable outstanding evidenced by the Notes and $2.5
million in capital lease and equipment obligations. On December 27, 2000 the
Company amended the Credit Facility.
F15
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands unless indicated otherwise)
As a result of the amendment to the Credit Facility, interest on borrowings was
increased by 100 basis points from the original interest rates under the Credit
Facility and various financial covenants and scheduled principal payments were
revised. Borrowings made under the Credit Facility (as amended) bear interest at
a rate equal to, at the Company's option, LIBOR plus 2.25% to 3.25% or the Base
Rate (as defined in the Credit Facility) plus 1.25% to 2.25%. At December 29,
2001 the Company's Credit Facility bore interest at LIBOR plus 3.25% and the
Base Rate plus 2.25%. Under the amended Credit Facility, the Term Loan Facility
matures five years from the closing date of the Credit Facility, the $33.0
million outstanding balance will amortize in annual principal amounts of
approximately $12.8 million and $20.2 million, respectively, for fiscal years
2002 and 2003 and the Acquisition Facility will amortize in annual principal
amounts of approximately $0.7 million and $67.0 million, respectively, for
fiscal years 2002 and 2003.
The Credit Facility contains additional restrictive covenants including a
limitation on capital requirements, minimum interest coverage, maximum leverage
ratio, minimum net worth and working capital requirements. As of December 29,
2001 the Company was in compliance with the financial reporting covenants.
On April 24, 1998, the Company completed a debt offering consisting of
$100.0 million aggregate principal amount of its 9 1/8% Senior Subordinated
Notes due 2008 (the "Fixed Rate Notes") and $50.0 million aggregate principal
amount of its Floating Interest Rate Subordinated Term Securities due 2008 (the
"Floating Rate Notes" and, together with the Fixed Rate Notes, the "Initial
Notes"). Interest on the Initial Notes will be payable semiannually on each May
1 and November 1, commencing on November 1, 1998. Interest on the Fixed Rate
Notes accrues at the rate of 9 1/8% per annum. The Floating Rate Notes bear
interest at a rate per annum, reset semiannually, and equal to LIBOR plus 3.98%.
The Fixed Rate Notes and Floating Rate Notes will not be entitled to the benefit
of any mandatory sinking fund.
The Company filed a registration statement with the Securities and Exchange
Commission with respect to an offer to exchange the Initial Notes for notes
which have terms substantially identical in all material respects to the Initial
Notes, except such notes are freely transferable by the holders thereof and are
issued without any covenant regarding registration (the "Exchange Notes"). The
registration statement was declared effective on January 28, 1999. The exchange
period ended March 4, 1999. The Exchange Notes are the only notes of the Company
which are currently outstanding.
The Exchange Notes are senior uncollateralized obligations of the Company
and will rank pari passu with all other indebtedness of the Company that by its
terms other
F16
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands unless indicated otherwise)
indebtedness is not subordinate to the Exchange Notes. In connection with the
issuance of the Exchange Notes, the Company incurred approximately $11.2 million
in debt issuance costs. These amounts are classified within other assets in the
accompanying balance sheets and are being amortized over the life of the
Exchange Notes. The unamortized amount of debt issuance costs as of December 29,
2001 related to the Exchange Notes was $6.4 million.
The Exchange Notes contain various restrictive covenants which apply to
both the Company and the Guarantor Subsidiaries (defined herein), including
limitations on additional indebtedness, restriction on dividends and sale of
assets other than in the normal course of business.
Capital Leases. The Company has an agreement whereby it leases land and
buildings at five operating locations. Additionally, in connection with the
acquisition of Bizer, the Company assumed agreements to sublease equipment at
the related operating locations. The Company has accounted for the equipment
subleases and the five property leases as capital leases and has recorded the
assets, as shown below, and the future obligations on the balance sheet at $2.5
million.
DECEMBER 30, 2000 DECEMBER 29, 2001
----------------- -----------------
Buildings and equipment 3,031 2,466
----------------- -----------------
$ 3,031 $ 2,466
================= =================
F17
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands unless indicated otherwise)
The Company's scheduled future minimum lease payments for the next five fiscal
years under the property and equipment capital leases are as follows:
2002 $1,065
2003 757
2004 803
2005 829
2006 833
Beyond 2006 2,064
------
Total minimum lease payments 6,351
------
Amounts representing interest 3,885
------
Present value of minimum lease payments $2,466
======
Long-term debt outstanding, including capital lease obligations,
consists of the following:
DECEMBER 30, DECEMBER 29,
2000 2001
-------------- --------------
Exchange Notes, face amount of $150,000,
net of unamortized debt discount of $358
and $309, respectively $ 149,642 $ 149,691
Credit facility 114,203 100,853
Capital lease and other obligations 3,031 2,519
Revolving credit facility 24,500 21,500
-------------- --------------
291,376 274,563
Less current portion (13,070) (13,786)
$ 278,306 $ 260,777
============== ==============
F18
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands unless indicated otherwise)
Future principal maturities for long-term debt and capital lease obligations
are as follows:
2002 $ 13,786
2003 108,997
2004 148
2005 233
2006 308
Beyond 2006 151,091
--------
Total future principal payments on debt $274,563
========
As of the end of fiscal 2001, the fair value of the Company's Exchange
Notes was approximately $66.8 million and the fair value of the capital lease
obligations was approximately $2.5 million. The estimated fair value of
long-term debt is based primarily on quoted market prices for the same or
similar issues and the estimated fair value of the capital lease obligation is
based on the present value of estimated future cash flows. The carrying amount
of the variable rate Credit Facility approximates its fair value.
9. CONDENSED CONSOLIDATING INFORMATION (UNAUDITED)
The Exchange Notes described in Note 8 were issued by Eye Care Centers of
America, Inc. ("ECCA") and are guaranteed by EAGI, MVC, VHI and Holdings but are
not guaranteed by ODs. The guarantor subsidiaries are wholly owned by the
Company and the guarantees are full, unconditional and joint and several. The
following condensed consolidating financial information presents the financial
position, results of operations and cash flows of (i) ECCA, as parent, as if it
accounted for its subsidiaries on the equity method, (ii) EAGI, MVC, VHI and
Holdings (the "Guarantor Subsidiaries"), and (iii) ODs. There were no
transactions between the Guarantor Subsidiaries during any of the periods
presented. Separate financial statements of the Guarantor Subsidiaries are not
presented herein as management does not believe that such statements would be
material to investors.
F19
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands unless indicated otherwise)
CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JANUARY 1, 2000
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
--------- -------------- ------- -------------- --------------
Revenues:
Optical sales $157,171 $ 93,499 $40,119 $ - $ 290,789
Management fees - 12,748 - (9,742) 3,006
Investment earnings in subsidiaries (739) - - 739 -
--------- -------------- ------- -------------- --------------
Net revenues 156,432 106,247 40,119 (9,003) 293,795
Operating costs and expenses:
Cost of goods sold 52,437 35,591 10,156 - 98,184
Selling, general and administrative expenses 86,603 64,265 29,020 (9,742) 170,146
Amortization of intangibles:
Goodwill 1,051 3,939 4 - 4,994
Noncompete and other intangibles 35 624 - - 659
--------- -------------- ------- -------------- --------------
Total operating costs and expenses 140,126 104,419 39,180 (9,742) 273,983
--------- -------------- ------- -------------- --------------
Income (loss) from operations 16,306 1,828 939 739 19,812
Interest expense, net 21,740 2,937 8 - 24,685
--------- -------------- ------- -------------- --------------
Income (loss) before income taxes (5,434) (1,109) 931 739 (4,873)
Income tax expense (51) 48 387 - 384
--------- -------------- ------- -------------- --------------
Net income (loss) before cumulative effect of change in
accounting principle (5,383) (1,157) 544 739 (5,257)
Cumulative effect of change in accounting principle 365 126 - - 491
--------- -------------- ------- -------------- --------------
Net income (loss) $ (5,748) $ (1,283) $ 544 $ 739 $ (5,748)
========= ============== ======= ============== ==============
F20
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands unless indicated otherwise)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JANUARY 1, 2000
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
--------- -------------- -------- -------------- --------------
Cash flows from operating activities:
Net income (loss) $ (5,748) $ (1,283) $ 544 $ 739 $ (5,748)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 11,164 5,446 - - 16,610
Amortization of intangibles 1,050 4,599 4 - 5,653
Other amortization 1,551 - - - 1,551
Cumulative effect of change in accounting
principle 365 126 - - 491
Amortization of deferred gain (326) (129) - - (455)
Deferred revenue 716 85 - - 801
Deferred rent 200 153 - - 353
Other - (176) - - (176)
(Gain) loss on disposition of property and
equipment 387 338 - - 725
Expenses to affect capital lease retirement - (431) - - (431)
Changes in operating assets and liabilities:
Accounts and notes receivable (28,417) 14,460 (2,464) 12,743 (3,678)
Inventory 524 (201) (4) - 319
Prepaid expenses and other (557) (851) - - (1,408)
Accounts payable and accrued liabilities (11,850) 23,337 1,903 (12,743) 647
--------- -------------- -------- -------------- --------------
Net cash provided by (used in) operating activities (30,941) 45,473 (17) 739 15,254
--------- -------------- -------- -------------- --------------
Cash flows from investing activities:
Acquisition of property and equipment (15,228) (4,692) - - (19,920)
Net outflow for The VTO Retail Acquisition - (38,845) - - (38,845)
Proceeds from sale of property and equipment 170 (70) - - 100
Purchase of retail outlet (368) - - - (368)
Payment received on notes receivable 4 173 - - 177
Investment in Subsidiaries 739 - - (739) -
--------- -------------- -------- -------------- --------------
Net cash used in investing activities (14,683) (43,434) - (739) (58,856)
--------- -------------- -------- -------------- --------------
F21
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands unless indicated otherwise)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JANUARY 1, 2000
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
-------- -------------- ------ ------------- --------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 48,618 - - - 48,618
Distribution to affiliated OD - - (331) - (331)
Proceeds from the issuance of common stock 189 - - - 189
Payments related to debt issuance - (875) - - (875)
Stock buyback (440) - - - (440)
Payments on debt and capital leases (5,000) (731) - - (5,731)
-------- -------------- ------ ------------- --------------
Net cash provided by (used in) financing activities 43,367 (1,606) (331) - 41,430
-------- -------------- ------ ------------- --------------
Net increase (decrease) in cash and cash equivalents (2,257) 433 (348) - (2,172)
Cash and cash equivalents at beginning of period 3,119 1,223 785 - 5,127
-------- -------------- ------ ------------- --------------
Cash and cash equivalents at end of period $ 862 $ 1,656 $ 437 $ - $ 2,955
======== ============== ====== ============= ==============
F22
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands unless indicated otherwise)
CONSOLIDATING BALANCE SHEET
FOR THE YEAR ENDED DECEMBER 30, 2000
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
---------- -------------- -------- -------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,215 $ 1,187 $ 569 $ - $ 3,971
Accounts and notes receivable 126,619 32,736 4,403 (149,662) 14,096
Inventory 14,782 9,242 1,666 - 25,690
Prepaid expenses and other 2,284 1,466 46 - 3,796
Deferred income taxes 1,297 - - - 1,297
---------- -------------- -------- -------------- --------------
Total current assets 147,197 44,631 6,684 (149,662) 48,850
Property and equipment 44,215 29,772 - - 73,987
Intangibles 17,749 100,397 91 - 118,237
Other assets 8,921 925 - - 9,846
Investment in subsidiaries (16,124) - - 16,124 -
---------- -------------- -------- -------------- --------------
Total Assets $ 201,958 $ 175,725 $ 6,775 $ (133,538) $ 250,920
========== ============== ======== ============== ==============
LIABILITIES AND SHAREHOLDERSDEFICIT
Current liabilities:
Accounts payable $ 16,114 $ 145,517 $ 8,891 $ (149,662) $ 20,860
Current portion of long-term debt 12,511 559 - - 13,070
Deferred revenue 3,976 2,676 6 - 6,658
Accrued payroll expense 1,754 2,769 4 - 4,527
Accrued interest 3,542 487 - - 4,029
Other accrued expenses 5,906 2,776 205 - 8,887
---------- -------------- -------- -------------- --------------
Total current liabilities 43,803 154,784 9,106 (149,662) 58,031
Deferred income taxes 1,297 - - - 1,297
Long-term debt, less current maturities 245,749 32,457 100 - 278,306
Deferred rent 2,533 1,238 - - 3,771
Deferred gain 1,690 543 - - 2,233
---------- -------------- -------- -------------- --------------
Total liabilities 295,072 189,022 9,206 (149,662) 343,638
---------- -------------- -------- -------------- --------------
Shareholdersdeficit:
Common stock 74 - - - 74
Preferred stock 42,354 - - - 42,354
Additional paid-in capital 49,567 1,092 (696) - 49,963
Accumulated deficit (185,109) (14,389) (1,735) 16,124 (185,109)
---------- -------------- -------- -------------- --------------
Total shareholdersdeficit (93,114) (13,297) (2,431) 16,124 (92,718)
---------- -------------- -------- -------------- --------------
$ 201,958 $ 175,725 $ 6,775 $ (133,538) $ 250,920
========== ============== ======== ============== ==============
F23
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands unless indicated otherwise)
CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 30, 2000
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
--------- -------------- -------- -------------- --------------
Revenues:
Optical sales $167,555 $ 113,510 $54,559 $ - $ 335,624
Management fees 808 20,939 - (18,914) 2,833
Investment earnings in subsidiaries (14,583) - - 14,583 -
--------- -------------- -------- -------------- --------------
Net revenues 153,780 134,449 54,559 (4,331) 338,457
Operating costs and expenses:
Cost of goods sold 54,379 42,422 10,648 - 107,449
Selling, general and administrative expenses 93,393 84,395 45,491 (18,914) 204,365
Store closure expense 3,580 - - - 3,580
Amortization of intangibles:
Goodwill 1,056 4,154 4 - 5,214
Noncompete and other intangibles - 3,922 - 3,922
--------- -------------- -------- --------------
Total operating costs and expenses 152,408 134,893 56,143 (18,914) 324,530
--------- -------------- -------- -------------- --------------
Income (loss) from operations 1,372 (444) (1,584) 14,583 13,927
Interest expense, net 17,066 11,621 8 - 28,695
--------- -------------- -------- -------------- --------------
Income (loss) before income taxes (15,694) (12,065) (1,592) 14,583 (14,768)
Income tax expense (160) 176 750 - 766
--------- -------------- -------- -------------- --------------
Net income (loss) $(15,534) $ (12,241) $(2,342) $ 14,583 $ (15,534)
========= ============== ======== ============== ==============
F24
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands unless indicated otherwise)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 30, 2000
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
--------- -------------- -------- -------------- --------------
Cash flows from operating activities:
Net income (loss) $(15,534) $ (12,241) $(2,342) $ 14,583 $ (15,534)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 12,988 7,476 - - 20,464
Amortization of intangibles 1,056 8,076 4 - 9,136
Other amortization 1,507 277 - - 1,784
Amortization of deferred gain (159) (75) - - (234)
Deferred revenue (237) 757 6 - 526
Deferred rent 61 111 - - 172
(Gain) loss on disposition of property and
equipment 118 - - - 118
Changes in operating assets and liabilities:
Accounts and notes receivable (15,189) (30,059) (1,794) 42,590 (4,452)
Inventory 1,681 3,089 (313) - 4,457
Prepaid expenses and other 5,084 (8,558) (2) - (3,476)
Accounts payable and accrued liabilities (2,136) 38,043 4,938 (42,590) (1,745)
--------- -------------- -------- -------------- --------------
Net cash provided by (used in) operating activities (10,760) 6,896 497 14,583 11,216
--------- -------------- -------- -------------- --------------
Cash flows from investing activities:
Acquisition of property and equipment (12,290) (6,642) - - (18,932)
Net outflow for The VTO Retail Acquisition - (87) - - (87)
Proceeds from sale of property and equipment 54 - - - 54
Payment received on notes receivable - 33 - - 33
Investment in Subsidiaries 14,583 - - (14,583) -
--------- -------------- -------- -------------- --------------
Net cash provided by ( used in) investing activities 2,347 (6,696) - (14,583) (18,932)
--------- -------------- -------- -------------- --------------
F25
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands unless indicated otherwise)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 30, 2000
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
-------- -------------- ------ ------------- --------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 17,000 - - - 17,000
Distribution to affiliated OD - - (365) - (365)
Redemption of common stock (234) - - - (234)
Payments on debt and capital leases (7,000) (669) - - (7,669)
-------- -------------- ------ ------------- --------------
Net cash provided by (used in) financing activities 9,766 (669) (365) - 8,732
-------- -------------- ------ ------------- --------------
Net increase (decrease) in cash and cash equivalents 1,353 (469) 132 - 1,016
Cash and cash equivalents at beginning of period 862 1,656 437 - 2,955
-------- -------------- ------ ------------- --------------
Cash and cash equivalents at end of period $ 2,215 $ 1,187 $ 569 $ - $ 3,971
======== ============== ====== ============= ==============
F26
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands unless indicated otherwise)
CONSOLIDATING BALANCE SHEET
FOR THE YEAR ENDED DECEMBER 29, 2001
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
---------- -------------- -------- -------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 755 $ 2,209 $ 408 $ - $ 3,372
Accounts and notes receivable 121,675 35,434 2,434 (149,268) 10,275
Inventory 15,371 7,747 1,547 - 24,665
Prepaid expenses and other 2,152 1,191 46 - 3,389
Deferred income taxes 1,337 - - - 1,337
---------- -------------- -------- -------------- --------------
Total current assets 141,290 46,581 4,435 (149,268) 43,038
Property and equipment 37,568 26,950 - - 64,518
Intangibles 16,693 92,673 87 - 109,453
Other assets 7,298 706 - - 8,004
Investment in subsidiaries (25,830) - - 25,830 -
---------- -------------- -------- -------------- --------------
Total Assets $ 177,019 $ 166,910 $ 4,522 $ (123,438) $ 225,013
========== ============== ======== ============== ==============
LIABILITIES AND SHAREHOLDERSDEFICIT
Current liabilities:
Accounts payable $ 17,551 $ 145,646 $ 7,820 $ (149,268) $ 21,749
Current portion of long-term debt 13,431 355 - - 13,786
Deferred revenue 3,620 2,937 - 6,557
Accrued payroll expense 2,940 2,789 4 - 5,733
Accrued interest 2,989 295 - - 3,284
Other accrued expenses 4,894 2,708 898 - 8,500
---------- -------------- -------- -------------- --------------
Total current liabilities 45,425 154,730 8,722 (149,268) 59,609
Deferred income taxes 1,337 - - - 1,337
Long-term debt, less current maturities 228,537 32,140 100 - 260,777
Deferred rent 2,482 1,308 - - 3,790
Deferred gain 1,530 469 - - 1,999
---------- -------------- -------- -------------- --------------
Total liabilities 279,311 188,647 8,822 (149,268) 327,512
---------- -------------- -------- -------------- --------------
Shareholdersdeficit:
Common stock 74 - - - 74
Preferred stock 48,134 - - - 48,134
Additional paid-in capital 43,681 1,092 (1,299) - 43,474
Accumulated deficit (194,181) (22,829) (3,001) 25,830 (194,181)
---------- -------------- -------- -------------- --------------
Total shareholdersdeficit (102,292) (21,737) (4,300) 25,830 (102,499)
---------- -------------- -------- -------------- --------------
$ 177,019 $ 166,910 $ 4,522 $ (123,438) $ 225,013
========== ============== ======== ============== ==============
F27
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands unless indicated otherwise)
CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 29, 2001
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
--------- -------------- -------- -------------- --------------
Revenues:
Optical sales $163,733 $ 109,196 $59,621 $ 332,550
Management fees 758 20,714 (17,988) 3,484
Investment earnings in subsidiaries (9,844) 9,844 -
--------- -------------- --------------
Net revenues 154,647 129,910 59,621 (8,144) 336,034
Operating costs and expenses:
Cost of goods sold 54,311 38,275 11,860 104,446
Selling, general and administrative expenses 91,855 80,706 48,614 (17,988) 203,187
Amortization of intangibles:
Goodwill 1,056 4,259 4 - 5,319
Noncompete and other intangibles - 3,378 - - 3,378
--------- -------------- -------- -------------- --------------
Total operating costs and expenses 147,222 126,618 60,478 (17,988) 316,330
--------- -------------- -------- -------------- --------------
Income (loss) from operations 7,425 3,292 (857) 9,844 19,704
Interest expense, net 15,857 11,672 8 - 27,537
--------- -------------- -------- -------------- --------------
Income (loss) before income taxes (8,432) (8,380) (865) 9,844 (7,833)
Income tax expense 640 199 400 - 1,239
--------- -------------- -------- -------------- --------------
Net income (loss) $ (9,072) $ (8,579) $(1,265) $ 9,844 $ (9,072)
========= ============== ======== ============== ==============
F28
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands unless indicated otherwise)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 29, 2001
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
-------- -------------- -------- -------------- --------------
Cash flows from operating activities:
Net income (loss) $(9,072) $ (8,579) $(1,265) $ 9,844 $ (9,072)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation 12,532 7,818 - - 20,350
Amortization of intangibles 1,056 7,636 5 - 8,697
Other amortization 1,956 - - - 1,956
Amortization of deferred gain (160) (74) - - (234)
Deferred revenue (356) 261 (6) - (101)
Deferred rent (51) 70 - - 19
(Gain) loss on disposition of property and -
equipment 137 131 - - 268
Changes in operating assets and liabilities: -
Accounts and notes receivable 4,866 (3,370) 1,968 (394) 3,070
Inventory (589) 1,495 119 - 1,025
Prepaid expenses and other (290) (47) - - (337)
Accounts payable and accrued liabilities 1,057 657 (379) 394 1,729
-------- -------------- -------- -------------- --------------
Net cash provided by operating activities 11,086 5,998 442 9,844 27,370
-------- -------------- -------- -------------- --------------
Cash flows from investing activities:
Acquisition of property and equipment (6,059) (4,500) - - (10,559)
Proceeds from sale of property and equipment 25 43 - - 68
Payment received on notes receivable - 3 - - 3
Investment in Subsidiaries 9,844 - - (9,844) -
-------- -------------- -------- -------------- --------------
Net cash provided by ( used in) investing activities 3,810 (4,454) - (9,844) (10,488)
-------- -------------- -------- -------------- --------------
F29
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands unless indicated otherwise)
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 29, 2001
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
--------- -------------- ------ ------------- --------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt - 66 - - 66
Distribution to affiliated OD - - (603) - (603)
Redemption of common stock (15) (1) - - (16)
Payments on debt and capital leases (16,341) (587) - - (16,928)
--------- -------------- ------ ------------- --------------
Net cash used in financing activities (16,356) (522) (603) - (17,481)
--------- -------------- ------ ------------- --------------
Net increase (decrease) in cash and cash equivalents (1,460) 1,022 (161) - (599)
Cash and cash equivalents at beginning of period 2,215 1,187 569 - 3,971
--------- -------------- ------ ------------- --------------
Cash and cash equivalents at end of period $ 755 $ 2,209 $ 408 $ - $ 3,372
========= ============== ====== ============= ==============
F30
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands unless indicated otherwise)
11. PREFERRED STOCK
During 1998, the Company issued 300,000 shares of Preferred Stock, par
value $ .01 per share. Dividends on shares of Preferred Stock are cumulative
from the date of issue (whether or not declared) and will be payable when and as
may be declared from time to time by the Board of Directors of the Company. Such
dividends accrue on a daily basis from the original date of issue at an annual
rate per share equal to 13% of the original purchase price per share, with such
amount to be compounded quarterly. Cumulative preferred dividends in arrears
were $12.4 and $18.2 million as of December 30, 2000 and December 29, 2001,
respectively. The Preferred Stock will be redeemable at the option of the
Company, in whole or in part, at $100 per share plus (i) the per share dividend
rate and (ii) all accumulated and unpaid dividends, if any, to the date of
redemption, upon occurrence of an offering of equity securities, a change of
control or certain sales of assets. The Preferred Stock has no voting rights.
12. SHAREHOLDERS' DEFICIT
1998 Executive Stock Option Plan. On April 25, 1998, the Company authorized
a non-qualified stock option plan whereby key executives and senior officers may
be offered options to purchase the Company's Common Stock. Under the plan, the
exercise price set by the Board of Directors of the Company must at least equal
the fair market value of the Company's Common Stock at the date of grant. The
options begin vesting one year after the date of grant in four installments of
10%, 15%, 25% and 50% provided the optionee is an employee of the Company on the
anniversary date and shall expire 10 years after the date of grant. Under
certain specified conditions the vesting schedule may be altered. During fiscal
2000, the Company granted options to purchase 66,500 shares at an option price
of $12.85 per share under this plan. During fiscal 2001, the Company entered
into Option Cancellation Agreements (the "Cancellation Agreements") with certain
employees and directors (the "Optionees") to cancel all outstanding options
which were granted through the cancellation date under the Company's 1998 Stock
Option Plan (the "Plan") due to changes in the fair market value of the
Company's common stock. The Company provided all of the Optionees with an option
cancellation notice detailing the Company's offer for the Optionees to cancel
and terminate their respective options in exchange for the commitment of the
Company to grant new options under the Plan (the "New Options"), such new grant
to be made no earlier than six months and a day after the effective date of the
cancellation of the options and at an exercise price equal to the fair market
value of the common stock as of the effective date of the grant of the New
Options. The Cancellation Agreements provide that, in January 2002 (the "Grant
Date"), the Company will grant to each of the Optionees a New Option to purchase
the number of
F31
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands unless indicated otherwise)
shares of common stock subject to the options being terminated and cancelled,
such New Option to have an exercise price equal to the fair market value of the
common stock as of the Grant Date, as will then be determined by the Board of
Directors in its sole discretion. The vesting period for the New Options granted
to employees will be 40% on the Grant Date, and an additional 20% will vest on
each of the first, second and third anniversary of the Grant Date. The vesting
period for the New Options granted to outside directors will be 50% vested on
the Grant Date, and an additional 25% will vest on each of the first and second
anniversary of the Grant Date. The grant of the New Options is also subject to
certain employment and "active" status restrictions listed in the Cancellation
Agreements.
Following is a summary of activity in the plan for fiscal years 1999, 2000 and
2001.
AVERAGE OPTION
PRICE OPTIONS OPTIONS
PER SHARE($) OUTSTANDING EXERCISABLE
--------------- ------------ ------------
Outstanding January2, 1999 469,500 -
Granted 10.41 122,000 -
Became exercisable - 39,550
Canceled or expired 10.41 (76,500) (250)
------------ ------------
Outstanding January 1, 2000 515,000 39,300
Granted 12.85 66,500 -
Became exercisable - 61,950
Canceled or expired 10.41 (98,500) (6,800)
------------ ------------
Outstanding December 30, 2000 483,000 94,450
Granted 12.85 11,000 -
Became exercisable - 4,650
Canceled or expired 10.41 & 12.85 (494,000) (99,100)
------------ ------------
Outstanding December 29, 2001 - -
============ ============
The Company has elected to follow Accounting Principles Board Opinion No.
25 "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair
F32
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands unless indicated otherwise)
value accounting provided for under FASB Statement No. 123 "Accounting for
Stock-Based Compensation," requires use of option valuation models that were not
developed for use in valuing employee stock options of privately held companies.
Under APB 25, because the exercise price of the Company's employee stock options
equals the estimated fair value of the underlying stock on the date of grant, no
compensation expense is recognized.
The fair value for these options was estimated at the date of the grant
using the minimum value method with the following assumptions for 1999 and 2000
respectively: risk-free interest rates of 6%; no dividend yield; and a
weighted-average expected life of the options of 4 years.
Option valuation models require the input of highly subjective assumptions.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. As there were
no options outstanding as of December 29, 2001, pro forma disclosure is not
applicable for fiscal 2001. The Company's pro forma net loss for fiscal years
1999 and 2000 are as follows:
FISCAL FISCAL
1999 2000
-------- ---------
Pro forma Net Loss $(5,987) $(15,801)
The pro forma calculations include only the effects of 1998 through 2000
grants as all grants previous to 1998 were exercised. As such, the impacts are
not necessarily indicative of the effects on reported net income of future
years.
F33
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands unless indicated otherwise)
13. INCOME TAXES
The provision for income taxes is comprised of the following:
YEAR ENDED
-----------
JANUARY 1, DECEMBER 30, DECEMBER 29,
2000 2000 2001
----------- ------------- -------------
Current $ 384 $ 766 $ 1,239
Deferred - - -
----------- ------------- -------------
$ 384 $ 766 $ 1,239
=========== ============= =============
The reconciliation between the federal statutory tax rate at 34% and the
Company's effective tax rate is as follows:
JANUARY 1, DECEMBER 30, DECEMBER 29,
2000 2000 2001
----------- -------------- --------------
Expected tax expense (benefit) $ (1,657) $ (5,021) $ (2,663)
Goodwill 1,079 1,772 1,483
NOL and other adjustments (4,461) - -
Nondeductible meals and donations 32 33 30
Change in valuation allowance 5,384 2,992 1,739
Other 7 990 650
----------- -------------- --------------
$ 384 $ 766 $ 1,239
=========== ============== ==============
The above reconciliation takes into account certain entities that are
consolidated for financial accounting purposes but are not consolidated for tax
purposes, therefore, the net operating loss carryforward cannot offset the
income from the non-consolidated entities.
F34
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands unless indicated otherwise)
The components of the net deferred tax assets are as follows:
DECEMBER 30, DECEMBER 29,
2000 2001
-------------- --------------
Total deferred tax liabilities, current $ (737) $ (707)
Total deferred tax liabilities, long-term (560) (630)
Total deferred tax assets, current 1,201 3,201
Total deferred tax assets, long-term 25,299 25,078
Valuation allowance (25,203) (26,942)
-------------- --------------
Net deferred tax assets $ - $ -
============== ==============
The sources of the difference between the financial accounting and tax
Company's assets and liabilities which give rise to the deferred
tax assets and deferred tax liabilities are as follows:
DECEMBER 30, DECEMBER 29,
2000 2001
-------------- --------------
Deferred tax assets:
Deferred rent $ 866 $ 873
Allowance for bad debts 1,001 1,314
Deferred revenue 1,079 958
Net operating loss and credit carryforwards 12,857 10,934
Inventory basis differences 487 619
Accrued salaries 617 928
Property and equipment 7,065 9,275
Recapitalization expenses 1,510 1,510
Other 1,018 1,868
-------------- --------------
Total deferred tax assets 26,500 28,279
Valuation allowance (25,203) (26,942)
-------------- --------------
Net deferred tax assets $ 1,297 $ 1,337
============== ==============
Deferred tax liabilities:
Prepaid expense $ 718 $ 699
Store pre-opening costs 269 269
Deferred financing costs 300 164
Other 10 205
-------------- --------------
Net deferred tax liability $ 1,297 $ 1,337
============== ==============
F35
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands unless indicated otherwise)
At December 30, 2000 and December 29, 2001, the Company had, subject to the
limitations discussed below, net operating loss carryforward for tax purposes of
$37,492 and $32,158, respectively. These loss carryforwards will expire from
2008 through 2018 if not utilized.
Uncertainties exist as to the future realization of the deferred tax asset
under the criteria set forth under FASB Statement No. 109. These uncertainties
primarily consist of the lack of taxable income historically generated by the
Company. Therefore, the Company has established a valuation allowance for
deferred tax assets of $25,203 at December 30, 2000 and $26,942 at December 29,
2001.
14. EMPLOYEE BENEFITS
401(k) Plan. The Company maintains a defined contribution plan whereby
substantially all employees who have been employed for at least six consecutive
months are eligible to participate. Contributions are made by the Company as a
percentage of employee contributions. In addition, discretionary contributions
may be made at the direction of the Company's Board of Directors. Total Company
contributions were approximately $165, $174 and $227 for fiscal years 1999, 2000
and 2001, respectively.
15. LEASES
The Company is obligated as lessee under operating leases for substantially
all of the Company's retail facilities as well as certain warehouse space. In
addition to rental payments, the leases generally provide for payment by the
Company of property taxes, insurance, maintenance and it's pro rata share of
common area maintenance. These leases range in terms of up to 15 years. Certain
leases also provide for additional rent in excess of the base rentals calculated
as a percentage of sales.
The Company subleases a portion of substantially all of the stores to an
independent optometrist or a corporation controlled by an independent
optometrist. The terms of these leases or subleases are principally one to
fifteen years with rentals consisting of a percentage of gross receipts, base
rentals, or a combination of both. Certain of these leases contain renewal
options.
Certain of the Company's lease agreements contain provisions for scheduled
rent increases or provide for occupancy periods during which no rent payment is
required. For financial statement purposes, rent expense is recorded based on
the total rentals due over the entire lease term and charged to rent expense on
a straight-line basis the difference
F36
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands unless indicated otherwise)
between the actual cash rentals paid and rent expenses recorded for financial
statement purposes is recorded as a deferred rent obligation. At the end of
fiscal years 2000 and 2001, deferred rent obligations aggregated approximately
$3.8 million and $3.8 million, respectively.
Rent expense for all locations, net of lease and sublease income, is as
follows. For the purposes of this table, base rent expense includes common area
maintenance costs. Common area maintenance costs were approximately 20, 20 and
21 percent of base rent expense for fiscal years 1999, 2000 and 2001,
respectively.
JANUARY 1, DECEMBER 30, DECEMBER 29,
2000 2000 2001
----------- -------------- --------------
Base rent expense $ 31,604 $ 37,331 $ 38,666
Rent as a percent of sales 239 537 266
Lease and sublease income (4,282) (4,512) (4,259)
----------- -------------- --------------
Rent expense, net $ 27,561 $ 33,356 $ 34,673
=========== ============== ==============
Future minimum lease payments, excluding common area maintenance costs, net
of future minimum lease and sublease income under noncancelable operating leases
for the next five years and beyond are as follows:
OPERATING LEASE AND OPERATING
RENTAL SUBLEASE LEASE,
PAYMENTS INCOME NET
---------- ---------- ----------
2002 $ 31,233 $ (1,808) $ 29,425
2003 28,372 (1,128) 27,244
2004 25,824 (885) 24,939
2005 22,814 (677) 22,137
2006 18,898 (281) 18,617
Beyond 2006 49,417 (38) 49,379
---------- ---------- ----------
Total minimum lease payments/(receipts) $ 176,558 $ 4,817 $ 171,741
========== ========== ==========
F37
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands unless indicated otherwise)
16. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position or consolidated results of operations.
17. SUBSEQUENT EVENTS
Since the end of fiscal 2001, investment funds managed by the majority
shareholder of the Company purchased $20.5 million face value of the Initial
Notes. The investments were made independent of the Company and therefore the
Company's financial statements will not be affected, interest related to these
notes will not be forgiven by the majority shareholder and the Company's debt
obligation will not be reduced. For income tax purposes only, the Company will
be required to recognize approximately $8.0 million in taxable income in fiscal
2002 and will amortize the gain related to these transactions to interest
expense over the remaining life of the Initial Notes. This taxable income will
be offset by the Company's federal net operating loss carryforward of
approximately $32.2 million as of the end of fiscal 2001.
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SCHEDULE II
EYE CARE CENTERS OF AMERICA, INC.
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
CHARGED TO/ CHARGED TO/
BALANCE AT CREDITED CREDITED DEDUCTIONS BALANCE
BEGINNING OF FROM COST FROM OTHER FROM AT CLOSE
PERIOD AND EXPENSES ACCOUNTS RESERVE OF PERIOD
------------ ------------- ----------- ---------- ---------
Allowance for doubtful accounts of
current receivables:
Year ended January1, 2000 559,000 912,000 - - 1,471,000
Year ended December 30, 2000 1,471,000 2,466,000 - - 3,937,000
Year ended December 29, 2001 3,937,000 919,000 - - 4,856,000
Inventory obsolescence reserves:
Year ended January1, 2000 852,000 (152,000) - - 700,000
Year ended December 30, 2000 700,000 304,000 - - 1,004,000
Year ended December 29, 2001 1,004,000 95,000 - - 1,099,000
F39