Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 28, 2002.
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 33 - 70572
EYE CARE CENTERS OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-2337775
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification number)
11103 WEST AVENUE
SAN ANTONIO, TEXAS 78213
(Address of principal executive offices, including zip code)
(210) 340-3531
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant has (1) 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 the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Class Outstanding at October 31, 2002
----- -----------------------------
Common Stock, $.01 par value 7,407,289 shares
================================================================================
EYE CARE CENTERS OF AMERICA, INC.
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at December 29, 2001
and September 28, 2002 (Unaudited) 2
Condensed Consolidated Statements of Operations for the
Thirteen Weeks and Thirty-Nine Weeks Ended September 29, 2001
(Unaudited) and September 28, 2002 (Unaudited) 3
Condensed Consolidated Statements of Cash Flows for the
Thirty-Nine Weeks Ended September 29, 2001 (Unaudited)
and September 28, 2002 (Unaudited) 4
Notes to Condensed Consolidated Financial Statements 5-11
Item 2. Management Discussion and Analysis of Financial Condition
and Results of Operations 12-19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Control and Procedures 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 21-22
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EYE CARE CENTERS OF AMERICA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
DECEMBER 29, SEPTEMBER 28,
2001 2002
------------------- --------------------
ASSETS. . . . . . . . . . . . . . . . . (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents. . . . . . $ 3,372 $ 1,236
Accounts and notes receivable, net . 10,275 12,454
Inventory. . . . . . . . . . . . . . 24,665 25,918
Prepaid expenses and other . . . . . 3,389 2,614
Deferred income taxes. . . . . . . . 1,337 1,337
------------------- --------------------
Total current assets. . . . . . . . . . 43,038 43,559
PROPERTY & EQUIPMENT, net . . . . . . . 64,518 59,601
INTANGIBLE ASSETS, net. . . . . . . . . 109,453 107,643
OTHER ASSETS. . . . . . . . . . . . . . 8,004 6,638
------------------- --------------------
Total assets. . . . . . . . . . . . . . $ 225,013 $ 217,441
=================== ====================
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . $ 21,749 $ 18,707
Current maturities of long-term debt 13,786 24,803
Deferred revenue . . . . . . . . . . 6,557 6,801
Accrued payroll expense. . . . . . . 5,733 8,216
Accrued interest . . . . . . . . . . 3,284 5,659
Other accrued expenses . . . . . . . 8,500 8,242
------------------- --------------------
Total current liabilities . . . . . . . 59,609 72,428
DEFERRED INCOME TAXES . . . . . . . . . 1,337 1,337
LONG-TERM DEBT, less current maturities 260,777 224,813
DEFERRED RENT . . . . . . . . . . . . . 3,790 4,250
DEFERRED GAIN . . . . . . . . . . . . . 1,999 1,806
------------------- --------------------
Total liabilities . . . . . . . . . . . 327,512 304,634
------------------- --------------------
SHAREHOLDERS' DEFICIT:
Common stock . . . . . . . . . . . . 74 74
Preferred stock. . . . . . . . . . . 48,134 52,982
Additional paid-in capital . . . . . 43,474 37,889
Accumulated deficit. . . . . . . . . (194,181) (178,138)
------------------- --------------------
Total shareholders' deficit . . . . . . . (102,499) (87,193)
------------------- --------------------
$ 225,013 $ 217,441
=================== ====================
See Notes to Condensed Consolidated Financial Statements
2
EYE CARE CENTERS OF AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
THIRTEEN WEEKS THIRTY-NINE WEEKS
ENDED ENDED
---------------- -------------------
SEPT. 28, SEPT. 28, SEPT. 28, SEPT. 28,
2001 2002 2001 2002
---------------- ------------------- ------------ ----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
REVENUES:
Optical sales. . . . . . . . . . . . . . . . . $ 85,355 $ 93,000 $ 258,647 $ 284,455
Management fees. . . . . . . . . . . . . . . . 790 885 2,630 2,671
---------------- ------------------- ------------ ----------
Net revenues. . . . . . . . . . . . . . . . . . . 86,145 93,885 261,277 287,126
OPERATING COSTS AND EXPENSES:
Cost of goods sold . . . . . . . . . . . . . . 26,689 28,669 80,916 88,335
Selling, general and administrative expenses.. 51,160 55,590 155,073 164,142
Amortization of intangibles:
Goodwill . . . . . . . . . . . . . . . . . . 1,338 - 3,944 -
Noncompete and other intangibles . . . . . . 841 127 2,606 1,809
---------------- ------------------- ------------ ----------
Total operating costs and expenses. . . . . . . . 80,028 84,386 242,539 254,286
---------------- ------------------- ------------ ----------
INCOME FROM OPERATIONS. . . . . . . . . . . . . . 6,117 9,499 18,738 32,840
INTEREST EXPENSE, NET . . . . . . . . . . . . . . 7,058 5,283 21,417 15,917
INCOME TAX EXPENSE. . . . . . . . . . . . . . . . 305 384 659 879
---------------- ------------------- ------------ ----------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . $ (1,246) $ 3,832 $ (3,338) $ 16,044
================ =================== ============ ==========
See Notes to Condensed Consolidated Financial Statements
3
EYE CARE CENTERS OF AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
THIRTY-NINE
WEEKS ENDED
----------------------------------------
SEPTEMBER 29, SEPTEMBER 28,
2001 2002
-------------------- --------------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss). . . . . . . . . . . . . . . . . . . . . . $ (3,338) $ 16,044
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.. . . . . . . . . . . . . 22,097 16,075
Loan cost amortization. . . . . . . . . . . . . . . . . 1,369 1,209
Deferred liabilities and other. . . . . . . . . . . . . 473 704
Loss on disposition of property and equipment . . . . . 320 62
Increase (decrease) in operating assets and liabilities. . . 5,212 (1,167)
-------------------- --------------------
Net cash provided by operating activities. . . . . . . . . . . . . . 26,133 32,927
-------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment . . . . . . . . . (6,971) (8,417)
Payments received on notes receivable . . . . . . . . . 3 -
-------------------- --------------------
Net cash used in investing activities. . . . . . . . . . . . . . . . (6,968) (8,417)
-------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt and capital leases . . . . . . . . . . (21,219) (25,976)
Proceeds from issuance of debt. . . . . . . . . . . . . 66 -
Redemption of common stock. . . . . . . . . . . . . . . (16) (100)
Distribution to affiliated OD . . . . . . . . . . . . . (533) (570)
-------------------- --------------------
Net cash used in financing activities. . . . . . . . . . . . . . . . (21,702) (26,646)
-------------------- --------------------
NET DECREASE IN CASH . . . . . . . . . . . . . . . . . . . . . . . . (2,537) (2,136)
CASH AND CASH EQUIVALENTS, beginning of period . . . . . . . . . . . 3,971 3,372
-------------------- --------------------
CASH AND CASH EQUIVALENTS, end of period . . . . . . . . . . . . . . $ 1,434 $ 1,236
==================== ====================
See Notes to Condensed Consolidated Financial Statements
4
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of Eye
Care Centers of America, Inc., its wholly owned subsidiaries and certain private
optometrists for whom the Company performs management services (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. Unless the context
otherwise requires, the term "Company" shall refer to Eye Care Centers of
America, Inc. and its subsidiaries, collectively.
The accompanying unaudited Condensed Consolidated Financial Statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included and are of a normal,
recurring nature. Operating results for the thirteen week and thirty-nine week
periods ended September 28, 2002 are not necessarily indicative of the results
that may be expected for the fiscal year ended December 28, 2002 ("fiscal
2002"). For further information, refer to the consolidated financial statements
and footnotes thereto included in the Eye Care Centers of America, Inc.'s annual
report on Form 10-K for the year ended December 29, 2001 ("fiscal 2001").
2. CRITICAL ACCOUNTING POLICIES
Accounting policies considered particularly critical to the Company's
financial results include the allowance for accounts receivable, inventory and
goodwill. Management considers these to be critical accounting policies because
the estimation of fair values involves a high degree of judgment and
subjectivity in the assumptions utilized.
- - Accounts receivable are primarily from third party payors related to the
sale of eyewear and include receivables from insurance reimbursements, OD
management fees, credit card companies, merchandise, rent and license fee
receivables. The Company's allowance for doubtful 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 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.
- - Goodwill consists of the amounts by which the purchase price exceeds the
market value of acquired net assets, management agreements and noncompete
agreements. Goodwill must be tested for impairment at least annually using a
"two-step" approach that involves the identification of reporting units and the
estimation of fair values.
5
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 provides for fees of $250,000 or $500,000 annually based on
the Company maintaining certain leverage ratios defined in the Company's credit
agreement. After a term of ten years from the closing date, 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 thirty-nine week periods ended September 29, 2001 and September 28, 2002,
the Company incurred $187,500 and $375,000 related to the agreement,
respectively.
4. INCOME TAXES
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax basis of assets and liabilities and are
measured using the enacted tax rates and laws that are expected to be in effect
when the differences are expected to reverse. The Company currently has a net
deferred tax asset related to its temporary differences. Based upon the weight
of available evidence allowed under the criteria set forth under FAS Statement
No. 109, including the lack of carryback potential, uncertainties exist as to
the future realization of the deferred tax asset. These uncertainties include
lack of carryback potential as the Company has incurred taxable losses in past
years. The Company has established a full valuation allowance for its deferred
tax assets.
5. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (DOLLARS IN THOUSANDS)
THIRTY-NINE THIRTY-NINE
WEEKS ENDED WEEKS ENDED
SEPTEMBER 29, SEPTEMBER 28,
2001 2002
--------------- --------------
(UNAUDITED) (UNAUDITED)
Cash paid for interest. . . . . . . . $ 17,026 $ 10,368
Dividends accrued on preferred stock. $ 4,265 $ 4,847
6. NEW ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board ("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. The Company adopted SFAS No. 144 in the first quarter of fiscal 2002.
The Company has evaluated the impact of SFAS No. 144 on its consolidated
financial statements and, based upon its analysis, the Company believes that no
impairment of long-lived assets exists. In July 2001, the 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. Additionally, an acquired intangible asset should be separately
recognized if the benefit of the intangible asset is obtained through
contractual or other legal
6
rights, or if the intangible asset can be sold, transferred, licensed, rented,
or exchanged, regardless of the acquirer's intent to do so. Any impairment
resulting from the initial application of the statements is to be recorded as a
cumulative effect of accounting changes as of December 2001. The Company adopted
both statements on December 30, 2001. The Company has performed the required
impairment tests of goodwill and, based upon its analysis, the Company believes
that no impairment of goodwill exists. The Company's pro forma net income with
goodwill amortization excluded was $0.6 million for the thirty-nine weeks ended
September 29, 2001.
7. CONDENSED CONSOLIDATING INFORMATION (UNAUDITED)
The $100.0 million in principal amount of 9 1/8% Senior Subordinated Notes
due 2008 and $50.0 million in principal amount of Floating Interest Rate
Subordinated Term Securities due 2008 (collectively, the "Notes") were issued by
the Company and are guaranteed by its subsidiaries (the "Guarantor
Subsidiaries") but are not guaranteed by any of the ODs. The Guarantor
Subsidiaries are wholly owned by the Company and the guarantees are full,
unconditional, joint and several. The following condensed consolidating
financial information presents the financial position, results of operations and
cash flows of (i) Eye Care Centers of America, Inc., as parent, as if it
accounted for its subsidiaries on the equity method, (ii) the Guarantor
Subsidiaries, and (iii) the 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.
7
CONDENSED CONSOLIDATING BALANCE SHEETS
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, net . 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, net . . . . . . 37,568 26,950 - - 64,518
Intangibles, net. . . . . . . . . . . . 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 SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable . . . . . . . . . . $ 17,551 $ 145,646 $ 7,820 $ (149,268) $ 21,749
Current maturities 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
----------- -------------- -------- -------------- ----------
Shareholders' deficit:
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 shareholders' deficit . . . . . . . (102,292) (21,737) (4,300) 25,830 (102,499)
----------- -------------- -------- -------------- ----------
$ 177,019 $ 166,910 $ 4,522 $ (123,438) $ 225,013
=========== ============== ======== ============== ==========
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER 29, 2001
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
----------- -------------- -------- -------------- ----------
Revenues:
Optical sales. . . . . . . . . . . . . . . . $ 128,667 $ 84,248 $45,732 $ - $258,647
Management fees. . . . . . . . . . . . . . . 800 17,215 - (15,385) 2,630
Investment earnings in subsidiaries. . . . . 10,511 - - (10,511) -
----------- ------------- -------- -------------- ---------
Net revenues. . . . . . . . . . . . . . . . . . 139,978 101,463 45,732 (25,896) 261,277
Operating costs and expenses:
Cost of goods sold . . . . . . . . . . . . . 41,921 29,809 9,186 - 80,916
Selling, general and administrative expenses 81,378 51,621 37,459 (15,385) 155,073
Amortization of intangibles:
Goodwill . . . . . . . . . . . . . . . . . 792 3,149 3 - 3,944
Noncompete and other intangibles . . . . . - 2,606 - - 2,606
----------- ------------- -------- -------------- ---------
Total operating costs and expenses. . . . . . . 124,091 87,185 46,648 (15,385) 242,539
----------- ------------- -------- -------------- ---------
Income from operations. . . . . . . . . . . . . 15,887 14,278 (916) (10,511) 18,738
Interest expense, net . . . . . . . . . . . . . 18,936 2,475 6 - 21,417
Income tax expense. . . . . . . . . . . . . . . 289 370 - - 659
----------- ------------- -------- -------------- ---------
Net income (loss) . . . . . . . . . . . . . . . $ (3,338) $ 11,433 $ (922) $ (10,511) $ (3,338)
=========== ============= ======== ============== =========
8
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THIRTEEN WEEKS ENDED SEPTEMBER 29, 2001
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
----------- ------------- -------- -------------- ---------
Revenues:
Optical sales. . . . . . . . . . . . . . . . $ 42,607 $ 27,152 $15,596 $ - $ 85,355
Management fees. . . . . . . . . . . . . . . 272 5,687 - (5,169) 790
Investment earnings in subsidiaries. . . . . 2,859 - - (2,859) -
----------- ------------- -------- -------------- ---------
Net revenues. . . . . . . . . . . . . . . . . . 45,738 32,839 15,596 (8,028) 86,145
Operating costs and expenses:
Cost of goods sold . . . . . . . . . . . . . 13,618 9,925 3,146 - 26,689
Selling, general and administrative expenses 26,587 16,985 12,757 (5,169) 51,160
Amortization of intangibles:
Goodwill . . . . . . . . . . . . . . . . . 264 1,073 1 - 1,338
Noncompete and other intangibles . . . . . - 841 - - 841
----------- ------------- -------- -------------- ---------
Total operating costs and expenses. . . . . . . 40,469 28,824 15,904 (5,169) 80,028
----------- ------------- -------- -------------- ---------
Income from operations. . . . . . . . . . . . . 5,269 4,015 (308) (2,859) 6,117
Interest expense, net . . . . . . . . . . . . . 6,334 722 2 - 7,058
Income tax expense. . . . . . . . . . . . . . . 181 124 - - 305
----------- ------------- -------- -------------- ---------
Net income (loss) . . . . . . . . . . . . . . . $ (1,246) $ 3,169 $ (310) $ (2,859) $ (1,246)
=========== ============= ======== ============== =========
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER 29, 2001
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
----------- -------------- ------- -------------- ---------
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . $ (3,338) $ 11,433 $ (922) $ (10,511) $ (3,338)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . 10,402 11,691 4 - 22,097
Loan cost amortization . . . . . . . . . . . . . . . . . (29) 1,398 - - 1,369
Deferred liabilities and other . . . . . . . . . . . . . (7) 512 (32) - 473
Loss on disposition of property and equipment . . . . . 52 268 - - 320
Increase/(decrease) in operating assets and liabilities. 23,573 (19,904) 1,543 - 5,212
----------- -------------- ------- -------------- ---------
Net cash provided by operating activities . . . . . . . . . 30,653 5,398 593 (10,511) 26,133
----------- -------------- ------- -------------- ---------
Cash flows from investing activities:
Acquisition of property and equipment. . . . . . . . . . (4,207) (2,764) - - (6,971)
Payments received on notes receivable. . . . . . . . . . - 3 - - 3
Investment in Subsidiaries . . . . . . . . . . . . . . . (7,652) (2,859) - 10,511 -
----------- -------------- ------- -------------- ---------
Net cash used in investing activities . . . . . . . . . . . (11,859) (5,620) - 10,511 (6,968)
----------- -------------- ------- -------------- ---------
Cash flows from financing activities:
Payments on debt and capital leases. . . . . . . . . . . (20,842) (377) - - (21,219)
Proceeds from issuance of debt . . . . . . . . . . . . . - 66 - - 66
Redemption of common stock . . . . . . . . . . . . . . . (16) - - - (16)
Distribution to affiliated OD. . . . . . . . . . . . . . - - (533) - (533)
----------- -------------- ------- -------------- ---------
Net cash used in financing activities . . . . (20,858) (311) (533) - (21,702)
----------- -------------- ------- -------------- ---------
Net decrease in cash and cash equivalents . . . . . . . . . (2,064) (533) 60 - (2,537)
Cash and cash equivalents at beginning of period. . . . . . 2,215 1,187 569 - 3,971
----------- -------------- ------- -------------- ---------
Cash and cash equivalents at end of period. . . . . . . . . $ 151 $ 654 $ 629 $ - $ 1,434
=========== ============== ======= ============== =========
9
CONDENSED CONSOLIDATING BALANCE SHEETS
SEPTEMBER 28, 2002
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
----------- -------------- -------- -------------- ----------
ASSETS
Current assets:
Cash and cash equivalents. . . . . . $ 707 $ 189 $ 340 $ - $ 1,236
Accounts and notes receivable, net . 91,453 38,160 8,014 (125,173) 12,454
Inventory. . . . . . . . . . . . . . 16,480 7,471 1,967 - 25,918
Prepaid expenses and other . . . . . 1,620 946 48 - 2,614
Deferred income taxes. . . . . . . . 1,337 - - - 1,337
----------- -------------- -------- -------------- ----------
Total current assets. . . . . . . . . . 111,597 46,766 10,369 (125,173) 43,559
Property and equipment, net . . . . . . 36,165 23,436 - - 59,601
Intangibles, net. . . . . . . . . . . . 16,693 90,863 87 - 107,643
Other assets. . . . . . . . . . . . . . 6,070 568 - - 6,638
Investment in subsidiaries. . . . . . . (3,368) - - 3,368 -
----------- -------------- -------- -------------- ----------
Total assets. . . . . . . . . . . . . . $ 167,157 $ 161,633 $10,456 $ (121,805) $ 217,441
=========== ============== ======== ============== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable . . . . . . . . . . $ 15,301 $ 115,000 $13,579 $ (125,173) $ 18,707
Current maturities of long-term debt 24,718 85 - - 24,803
Deferred revenue . . . . . . . . . . 3,875 2,808 118 - 6,801
Accrued payroll expense. . . . . . . 5,596 2,592 28 - 8,216
Accrued interest . . . . . . . . . . 5,162 497 - - 5,659
Other accrued expenses . . . . . . . 1,072 6,268 902 - 8,242
----------- -------------- -------- -------------- ----------
Total current liabilities . . . . . . . 55,724 127,250 14,627 (125,173) 72,428
Deferred income taxes . . . . . . . . . 1,337 - - - 1,337
Long-term debt, less current maturities 192,635 32,078 100 - 224,813
Deferred rent . . . . . . . . . . . . . 2,483 1,767 - - 4,250
Deferred gain . . . . . . . . . . . . . 1,394 412 - - 1,806
----------- -------------- -------- -------------- ----------
Total liabilities . . . . . . . . . . . 253,573 161,507 14,727 (125,173) 304,634
----------- -------------- -------- -------------- ----------
Shareholders' deficit:
Common stock . . . . . . . . . . . . 74 - - - 74
Preferred stock. . . . . . . . . . . 52,982 - - - 52,982
Additional paid-in capital . . . . . 38,666 1,092 (1,869) - 37,889
Accumulated deficit. . . . . . . . . (178,138) (966) (2,402) 3,368 (178,138)
----------- -------------- -------- -------------- ----------
Total shareholders' equity (deficit). . . (86,416) 126 (4,271) 3,368 (87,193)
----------- -------------- -------- -------------- ----------
$ 167,157 $ 161,633 $10,456 $ (121,805) $ 217,441
=========== ============== ======== ============== ==========
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 2002
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
---------- ------------- ------- -------------- --------
Revenues:
Optical sales. . . . . . . . . . . . . . . . $ 139,951 $ 89,959 $54,545 $ - $284,455
Management fees. . . . . . . . . . . . . . . 484 19,135 - (16,948) 2,671
Investment earnings in subsidiaries. . . . . 22,461 - - (22,461) -
---------- ------------- ------- -------------- --------
Net revenues. . . . . . . . . . . . . . . . . . 162,896 109,094 54,545 (39,409) 287,126
Operating costs and expenses:
Cost of goods sold . . . . . . . . . . . . . 46,353 31,073 10,909 - 88,335
Selling, general and administrative expenses 86,243 52,165 42,682 (16,948) 164,142
Amortization of intangibles:
Noncompete and other intangibles . . . . . - 1,809 - - 1,809
---------- ------------- ------- -------------- --------
Total operating costs and expenses. . . . . . . 132,596 85,047 53,591 (16,948) 254,286
---------- ------------- ------- -------------- --------
Income from operations. . . . . . . . . . . . . 30,300 24,047 954 (22,461) 32,840
Interest expense, net . . . . . . . . . . . . . 14,173 1,738 6 - 15,917
Income tax expense. . . . . . . . . . . . . . . 83 446 350 - 879
---------- ------------- ------- -------------- --------
Net income. . . . . . . . . . . . . . . . . . . $ 16,044 $ 21,863 $ 598 $ (22,461) $ 16,044
========== ============= ======= ============== ========
10
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THIRTEEN WEEKS ENDED SEPTEMBER 28, 2002
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
---------- ------------- -------- -------------- --------
Revenues:
Optical sales. . . . . . . . . . . . . . . . 45,972 $ 28,821 $18,207 $ - $ 93,000
Management fees. . . . . . . . . . . . . . . 143 6,310 - (5,568) 885
Investment earnings in subsidiaries. . . . . 7,297 - - (7,297) -
---------- ------------- -------- -------------- --------
Net revenues. . . . . . . . . . . . . . . . . . 53,412 35,131 18,207 (12,865) 93,885
Operating costs and expenses:
Cost of goods sold . . . . . . . . . . . . . 15,280 9,774 3,615 - 28,669
Selling, general and administrative expenses 29,455 17,238 14,465 (5,568) 55,590
Amortization of intangibles:
Noncompete and other intangibles . . . . . - 127 - - 127
---------- ------------- -------- -------------- --------
Total operating costs and expenses. . . . . . . 44,735 27,139 18,080 (5,568) 84,386
---------- ------------- -------- -------------- --------
Income from operations. . . . . . . . . . . . . 8,677 7,992 127 (7,297) 9,499
Interest expense, net . . . . . . . . . . . . . 4,825 456 2 - 5,283
Income tax expense. . . . . . . . . . . . . . . 20 14 350 - 384
---------- ------------- -------- -------------- --------
Net income (loss) . . . . . . . . . . . . . . . $ 3,832 $ 7,522 $ (225) $ (7,297) $ 3,832
========== ============= ======== ============== ========
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 2002
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
----------- -------------- ------ -------------- ---------
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 16,044 $ 21,863 $ 598 $ (22,461) $ 16,044
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . 8,648 7,427 - - 16,075
Loan cost amortization. . . . . . . . . . . . . . . . . 1,128 81 - - 1,209
Deferred liabilities and other. . . . . . . . . . . . . 256 330 118 - 704
Loss on disposition of property and equipment. . . . . 30 32 - - 62
Increase/(decrease) in operating assets and liabilities 15,262 (16,215) (214) - (1,167)
----------- -------------- ------ -------------- ---------
Net cash provided by operating activities. . . . . . . . . 41,368 13,518 502 (22,461) 32,927
----------- -------------- ------ -------------- ---------
Cash flows from investing activities:
Acquisition of property and equipment . . . . . . . . . (6,282) (2,135) - - (8,417)
Investment in Subsidiaries. . . . . . . . . . . . . . . (9,390) (13,071) - 22,461 -
----------- -------------- ------ -------------- ---------
Net cash used in investing activities. . . . . . . . . . . (15,672) (15,206) - 22,461 (8,417)
----------- -------------- ------ -------------- ---------
Cash flows from financing activities:
Payments on debt and capital leases . . . . . . . . . . (25,644) (332) - - (25,976)
Distribution to affiliated OD . . . . . . . . . . . . . - - (570) - (570)
Buyback of common stock . . . . . . . . . . . . . . . . (100) - - - (100)
----------- -------------- ------ -------------- ---------
Net cash used in financing activities. . . . . . . . . . . (25,744) (332) (570) - (26,646)
----------- -------------- ------ -------------- ---------
Net decrease in cash and cash equivalents. . . . . . . . . (48) (2,020) (68) - (2,136)
Cash and cash equivalents at beginning of period . . . . . 755 2,209 408 - 3,372
----------- -------------- ------ -------------- ---------
Cash and cash equivalents at end of period . . . . . . . . $ 707 $ 189 $ 340 $ - $ 1,236
=========== ============== ====== ============== =========
11
ITEM 2. 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 362 stores, 295 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 VisionWorld," "Doctor's ValuVision," "Stein Optical,"
"Vision World," "Doctor's VisionWorks" and "Eye DRx." The Company operates in
the $5.4 billion optical retail 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 resulting from
the continuing shift in the optical retail industry of market share from
independent practitioners to larger optical retail chains and (iv) new product
innovations. Unless otherwise indicated, all dollar amounts are in thousands.
The industry is highly fragmented and has undergone significant
consolidation. Since September 1996, the Company has consummated and integrated
four acquisitions.
- - In September 1996, the Company acquired Visionworks Holdings, Inc. and its
subsidiaries, a sixty store optical retailer located along the Atlantic Coast
from Florida to Washington, D.C.
- - In September 1997, the Company acquired The Samit Group, Inc. and its
subsidiaries 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.
- - In September 1998, the Company acquired (the "Bizer Acquisition") certain
of the assets of Dr. Bizer's VisionWorld, PLLC and related entities, a nineteen
store optical retailer located primarily in Kentucky and Tennessee, and
simultaneously entered into long-term management agreements with a private
optometrist to manage such optometrist's nineteen stores.
- - 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
seventy-six retail eyewear outlets (the "VTO Retail Acquisition"), of which
thirty-seven were located in Minnesota, North Dakota, Iowa, South Dakota and
Wisconsin operating under the trade name "Vision World," sixteen were located in
Wisconsin operating under the trade name "Stein Optical," and twenty-three were
located in New Jersey operating under the trade name "Eye DRx." Simultaneously,
the Company assumed the rights and obligations under a management agreement with
a private optometrist to manage the nineteen Eye DRx stores.
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 contracts
aggressively in order to help the Company's retail business grow and 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 than non-managed vision care
purchases, managed vision care transactions generally earn comparable operating
profit margins, as they require less promotional spending and advertising
support.
12
The Company believes that the increased volume resulting from managed
vision care contracts compensates for the lower average ticket price. During the
thirty-nine weeks ended September 28, 2002, approximately 35.4% of the Company's
total revenues were derived from managed vision care programs, compared to 38.4%
for the thirty-nine weeks ended September 29, 2001. Managed vision care sales
decreased as a percent of the Company's total revenues due to a large increase
in non-managed vision care sales. Despite its decrease as a percentage of the
Company's total revenues, managed vision care sales increased 1.7% compared to
the first three quarters of fiscal 2001. 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 share, broad geographic coverage
and sophisticated information management and billing systems.
13
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain statements of income data
as a percentage of net revenues:
THIRTEEN THIRTY-NINE
WEEKS ENDED WEEKS ENDED
--------------------------------------------------------------
SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 28,
2001 2002 2001 2002
-------------- -------------- -------------- --------------
STATEMENTS OF INCOME DATA:
NET REVENUES:
Optical sales . . . . . . . . . . . . . 99.1 % 99.1 % 99.0 % 99.1 %
Management fees . . . . . . . . . . . . 0.9 0.9 1.0 0.9
-------------- -------------- -------------- --------------
Total net revenues . . . . . . . . . . . . 100.0 100.0 100.0 100.0
OPERATING COSTS
AND EXPENSES:
Cost of goods sold. . . . . . . . . . . 31.3 * 30.8 * 31.3 * 31.1 *
Selling, general and administrative
expenses. . . . . . . . . . . . . . . . 59.9 * 59.8 * 60.0 * 57.7 *
Amortization of intangibles:
Goodwill . . . . . . . . . . . . . . 1.5 - 1.5 -
Noncompete and other intangibles . . 1.0 0.1 1.0 0.6
-------------- -------------- -------------- --------------
Total operating costs and expenses . . . . 92.9 89.9 92.8 88.6
-------------- -------------- -------------- --------------
INCOME FROM OPERATIONS . . . . . . . . . . 7.1 10.1 7.2 11.4
INTEREST EXPENSE, NET. . . . . . . . . . . 8.2 5.6 8.2 5.5
INCOME TAX EXPENSE . . . . . . . . . . . . 0.4 0.4 0.3 0.3
-------------- -------------- -------------- --------------
NET INCOME (LOSS). . . . . . . . . . . . . (1.5) % 4.1 % (1.3) % 5.6 %
============== ============== ============== ==============
* Percentages based on optical sales only
THE THIRTEEN WEEKS ENDED SEPTEMBER 28, 2002 COMPARED TO THE THIRTEEN WEEKS ENDED
SEPTEMBER 29, 2001.
Net Revenues. The increase in net revenues to $93.9 million for the thirteen
weeks ended September 28, 2002 from $86.1 million for the thirteen weeks ended
September 29, 2001 was largely the result of an increase in comparable store
sales of 5.7% primarily due to the continuation of the two complete pair of
single vision eyeglasses for $99 value promotion started in the fourth quarter
of 2001. Additionally, the introduction of new product, improved in-stock
positions and overall optical market improvement contributed to the increase in
sales. The number of transactions increased by 13.2% compared to the third
quarter of fiscal 2001, which was offset by a decrease in average ticket prices
of 4.0% compared to the third quarter of fiscal 2001. Both the increase in
transactions and the decrease in average ticket prices were due primarily to the
two complete pair of single vision eyeglasses for $99 value promotion. The
Company opened two stores during the third quarter of 2002.
14
Gross Profit. Gross profit increased to $64.3 million for the thirteen weeks
ended September 28, 2002 from $58.7 million for the thirteen weeks ended
September 29, 2001. Gross profit as a percentage of optical sales increased to
69.2% for the thirteen weeks ended September 28, 2002 as compared to 68.7% for
the thirteen weeks ended September 29, 2001. This percentage increase was
largely due to an increase as a percentage of sales in the third quarter of 2002
versus the third quarter of 2001 of non-branded product with higher margins than
branded product. Non-branded product has a lower acquisition cost than branded
product resulting in higher margins.
Selling General & Administrative Expenses (SG&A). SG&A increased to $55.6
million for the thirteen weeks ended September 28, 2002 from $51.2 million for
the thirteen weeks ended September 29, 2001. SG&A as a percentage of optical
sales decreased to 59.8% for the thirteen weeks ended September 28, 2002 from
59.9% for the thirteen weeks ended September 29, 2001. This percentage decrease
was primarily due to increased sales from more effective advertising promotions
in the third quarter of fiscal 2002 versus the third quarter of fiscal 2001 with
advertising expenditures remaining comparable over the two periods. In
addition, depreciation and occupancy expenses have remained consistent in the
third quarter of 2002 versus the third quarter of 2001 resulting in lower
percentages of sales which were offset in part by increases in retail payroll.
Amortization Expense. Amortization expense decreased to $0.1 million for the
thirteen weeks ended September 28, 2002 from $2.2 million for the thirteen weeks
ended September 29, 2001. This decrease was due to the adoption of FASB 142
which disallows the amortization of goodwill over its useful life and instead
requires an annual assessment for impairment.
Net Interest Expense. Net interest expense decreased to $5.3 million for the
thirteen weeks ended September 28, 2002 from $7.1 million for the thirteen weeks
ended September 29, 2001. This decrease was due to the decrease in outstanding
debt and the decrease in applicable interest rates.
Net Income. Net income increased to $3.8 million for the thirteen weeks ended
September 28, 2002 from a net loss of $1.2 million for the thirteen weeks ended
September 29, 2001.
THE THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 2002 COMPARED TO THE THIRTY-NINE WEEKS
ENDED SEPTEMBER 29, 2001.
Net Revenues. The increase in net revenues to $287.1 million for the
thirty-nine weeks ended September 28, 2002 from $261.3 million for the
thirty-nine weeks ended September 29, 2001 was largely the result of an increase
in comparable store sales of 8.5% primarily due to the continuation of the two
complete pair of single vision eyeglasses for $99 value promotion started in the
fourth quarter of fiscal 2001. Additionally, the introduction of new product,
improved in-stock positions and overall optical market improvement contributed
to the increase in sales. The number of transactions increased by 15.7%
compared to the thirty-nine weeks ended September 29, 2001, which was offset by
a decrease in average ticket prices of 4.4% compared to the thirty-nine weeks
ended September 29, 2001. In addition, managed vision care sales increased 1.7%
for the thirty-nine weeks ended September 28, 2002 as compared to the
thirty-nine weeks ended September 29, 2001. Both the increase in transactions
and the decrease in average ticket prices were due primarily to the two complete
pair of single vision eyeglasses for $99 value promotion. The Company opened
seven stores and closed four stores during the thirty-nine weeks ended September
28, 2002.
Gross Profit. Gross profit increased to $196.1 million for the thirty-nine
weeks ended September 28, 2002 from $177.7 million for the thirty-nine weeks
ended September 29, 2001. Gross profit as a percentage of optical sales
increased to 68.9% for the thirty-nine weeks ended September 28, 2002 as
compared to 68.7% for the thirty-nine weeks ended September 29, 2001. This
percentage increase was
15
due to a continuation of improved buying efficiencies and an increase as a
percentage of sales of non-branded product with higher margins than branded
label product. Non-branded product has a lower acquisition cost than branded
product resulting in higher margins.
Selling General & Administrative Expenses (SG&A). SG&A increased to $164.1
million for the thirty-nine weeks ended September 28, 2002 from $155.1 million
for the thirty-nine weeks ended September 29, 2001. SG&A as a percentage of
optical sales decreased to 57.7% for the thirty-nine weeks ended September 28,
2002 from 60.0% for the thirty-nine weeks ended September 29, 2001. This
percentage decrease was primarily due to increased sales from more effective
advertising promotions in fiscal 2002 versus fiscal 2001 with advertising
expenditures remaining comparable over the two periods. In addition,
depreciation expense has remained consistent in fiscal 2002 versus fiscal 2001
resulting in a lower percentage of sales which was offset by increases in retail
payroll and management compensation.
Amortization Expense. Amortization expense decreased to $1.8 million for the
thirty-nine weeks ended September 28, 2002 from $6.6 million for the thirty-nine
weeks ended September 29, 2001. This decrease was due to the adoption of FASB
142 which disallows the amortization of goodwill over its useful life and
instead requires an annual assessment for impairment.
Net Interest Expense. Net interest expense decreased to $15.9 million for the
thirty-nine weeks ended September 28, 2002 from $21.4 million for the
thirty-nine weeks ended September 29, 2001. This decrease was due to the
decrease in outstanding debt and the decrease in applicable interest rates.
Net Income. Net income increased to $16.0 million for the thirty-nine weeks
ended September 28, 2002 from a net loss of $3.3 million for the thirty-nine
weeks ended September 29, 2001.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities provided net cash of $32.9 million for
the thirty-nine weeks ended September 28, 2002 as compared to $26.1 million for
the thirty-nine weeks ended September 29, 2001. As of September 28, 2002, the
Company had $1.2 million of cash available to meet the Company's obligations.
Working capital of the company primarily consists of cash and cash equivalents,
accounts receivable, inventory, accounts payable and accrued expenses. The level
of working capital has remained relatively consistent to the periods ending
September 2001 and December 2001. The largest working capital usage occurs on
May 1 and November 1 of each year when the Company's bond interest payments
ranging from $6.0 to $7.0 million are paid. Working capital is primarily funded
by cash flows from operations and the Company's $29 million available in its
Revolving Credit Facility (see description below) and management does not
anticipate any significant changes in working capital.
Capital expenditures are related to the construction of new stores,
repositioning of existing stores in some markets, new computer systems for
stores and maintenance of existing facilities. Capital expenditures for the
thirty-nine weeks ended September 28, 2002 were $8.4 million. The aggregate
capital expenditures for 2002 are anticipated to be approximately $9.5 million,
of which approximately $3.3 million are related to commitments to new stores and
approximately $6.2 million are expected to be for systems and improvements to
existing facilities.
On April 24, 1998, the Company entered into a credit agreement (as amended,
the "Credit Facility") which consists of (i) a $55.0 million term loan facility
(the "Term Loan Facility"); (ii) a $35.0 million revolving credit facility (the
"Revolving Credit Facility"); and (iii) a $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 September
28, 2002, the Company had $23.5 million outstanding under the Term Loan
Facility, $6.0 million outstanding under the Revolving Credit Facility, $67.3
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 $3.1 million
16
in capital lease and equipment obligations. 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 September 28, 2002, the Company's
Credit Facility bore interest at LIBOR plus 3.00% and the Base Rate plus 2.25%.
Under the Credit Facility (as amended), the Term Loan Facility matures on
November 15, 2003, the $23.5 million outstanding balance will amortize in annual
principal amounts of approximately $3.2 million and $20.3 million, respectively,
during fiscal years 2002 and 2003 and the Acquisition Facility will amortize in
annual principal amounts of approximately $0.3 million and $67.0 million,
respectively, during fiscal years 2002 and 2003.
Future principal maturities for debt as of September 28, 2002
are as follows:
Credit Facility Notes Other Total
---------------- ------- ----- --------
2002. . . . . . . . . . . . . . . . . . $ 3,491 - 498 $ 3,989
2003. . . . . . . . . . . . . . . . . . 93,270 - 541 93,811
2004. . . . . . . . . . . . . . . . . . - - 148 148
2005. . . . . . . . . . . . . . . . . . - - 233 233
2006. . . . . . . . . . . . . . . . . . - - 308 308
Beyond 2006 . . . . . . . . . . . . . . - 149,727 1,400 151,127
---------------- ------- ----- --------
Total future principal payments on debt $ 96,761 149,727 3,128 $249,616
================ ======= ===== ========
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 September 28,
2002 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 "Notes").
Interest on the 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 are not entitled to the benefit of any mandatory sinking
fund.
The Notes are senior uncollateralized obligations of the Company and rank
pari passu with all other indebtedness of the Company that by its terms other
indebtedness is not subordinate to the Notes. In connection with the issuance of
the 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 Notes.
The 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.
17
Based upon current operations and future growth, the Company believes that
its cash flow from operations, together with borrowings currently available
under the Revolving Credit Facility, are adequate to meet its anticipated
requirements for working capital, capital expenditures and scheduled principal
and interest payments through the next twelve (12) months. The ability of the
Company to satisfy its financial covenants within its Credit Facility (as
amended), meet its debt service obligations and reduce its debt will be
dependent on the future performance of the Company, which in turn, will be
subject to general economic conditions and to financial, business, and other
factors, including factors beyond the Company's control. In the event the
Company does not satisfy its financial covenants within the Credit Facility, the
Company may attempt to renegotiate the terms of its Credit Facility with its
lender for further amendments to, or waivers of, the financial covenants of the
Credit Facility. The Company believes that its ability to repay the Notes and
amounts outstanding under the Revolving Credit Facility and the Acquisition
Facility at maturity will likely require additional financing. The Company has
entered into discussions with Bank of America Securities, LLC and Fleet National
Bank, Inc. to refinance the Credit Facility. There are no assurances that the
Company will be successful in refinancing the Credit Facility or obtaining any
other additional financing necessary to repay the notes or the amounts
outstanding under the Credit Facility. A portion of the Company's debt bears
interest at floating rates; therefore, its financial condition is and will
continue to be affected by changes in prevailing interest rates.
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.
SEASONALITY AND QUARTERLY RESULTS
The Company's sales fluctuate seasonally. Historically, the Company's
highest sales and earnings occur in the first and third fiscal quarters;
however, the opening of new stores may affect seasonal fluctuations. Hence,
quarterly results are not necessarily indicative of results for the entire year.
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 Commission and under the heading
"Government Regulation" in the Company's Annual Report on Form 10-K for 2001 as
well as the following: general economic and business conditions; industry
trends; the loss of major customers, suppliers or managed vision care contracts;
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
18
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 COMPANY'S ABILITY TO OBTAIN ADDITIONAL FINANCING TO
REPAY THE CREDIT FACILITY OR NOTES AT MATURITY AND (X) THE CONTINUED MEDICAL
INDUSTRY EFFORTS TO REDUCE MEDICAL COSTS AND THIRD PARTY REIMBURSEMENTS.
ITEM 3. 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. There have been no material changes in the
Company's market risk during the third quarter of fiscal 2002. For further
discussion, refer to the Eye Care Centers of America, Inc.'s annual report on
Form 10-K for the year ended December 29, 2001.
The Company's primary market risk exposure is interest rate risk, with
specific vulnerability to changes in LIBOR. As of September 28, 2002, $145.8
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 $145.8 million in borrowings, the Company's 2001 interest expense
would have changed approximately $2.9 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.
19
ITEM 4. CONTROLS AND PROCEDURES
a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of September 28, 2002, an evaluation was performed under the supervision
and with the participation of the Company's management, including the CEO and
CFO, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on that evaluation, the Company's
management, including the CEO and CFO, concluded that the Company's disclosure
controls and procedures were effective as of September 28, 2002.
b) CHANGES IN INTERNAL CONTROLS
There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect internal controls subsequent
to September 28, 2002.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to routine litigation in the ordinary course of its
business. There have been no such pending matters, individually or in the
aggregate, that the management of the Company has deemed to be material to the
business or financial condition of the Company that have arisen during the third
quarter of fiscal 2002. For further discussion, refer to the Company's annual
report on Form 10-K for the year ended December 29, 2001.
20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report.
2.1 Stock Purchase Agreement, dated August 15, 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 September 30, 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 March 6, 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 April 23,
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 April 24,
1998, among ECCA Merger Corp., Eye Care Centers of America, Inc. and
the sellers listed therein. (a)
2.6 Articles of Merger of ECCA Merger Corp. with and into Eye Care Centers
of America, Inc., dated April 24, 1998. (a)
2.7 Master Asset Purchase Agreement, dated as of August 22, 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)
2.8 Letter Agreement, dated October 1, 1998, amending and modifying that
certain Master Asset Purchase Agreement, dated as of August 22, 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. * (b)
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. (c)
2.11 Fiscal 2002 Incentive Plan for Key Management (f).
21
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. (f)
4.2 Form of Fixed Rate Exchange Note. (d)
4.3 Form of Floating Rate Exchange Note. (d)
4.4 Form of Guarantee. (d)
4.5 Registration Rights Agreement, dated April 24, 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 Credit Agreement, dated as of April 23, 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)
10.2 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. (e)
10.3 Termination Agreement, dated as of July 1, 2002 among Eye Care Centers of
America, Inc. and Bernard W. Andrews. (d)
99.1 CEO-Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002. (f)
99.2 CFO-Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002. (f)
* 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) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended July 3, 1999.
(c) Previously provided with, and incorporated by reference from, the Company's
Quarterly Report on Form 10-Q for the quarter ended October 2, 1999.
(d) Previously provided with, and incorporated by reference from, the Company's
Quarterly Report on Form 10-Q for the quarter ended September 29, 2001.
(e) Previously filed on Form 8-K dated December 27, 2000.
(f) Filed herewith
(B) The Company filed a report on Form 8-K dated August 1, 2002 under Item 5.
Other Events that reported the Company has entered into discussions with
Bank of America, LLC and Fleet National Bank, Inc. to refinance its
existing senior credit facilities.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
EYE CARE CENTERS OF AMERICA, INC.
November 12, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . /s/ Alan E. Wiley
- ------------------- -----------------
Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Alan E. Wiley
Executive Vice President
Chief Financial Officer
Secretary and Treasurer
I, David E. McComas, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Eye Care Centers of
America, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
/s/ David E. McComas
----------------------
David E. McComas
President and Chief Executive Officer
I, Alan E Wiley, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Eye Care Centers of
America, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002
/s/ Alan E. Wiley
-------------------
Alan E. Wiley
Executive Vice President and Chief Financial Officer