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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 28, 2002.
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
COMMISSION FILE NUMBER 033-70572
EYE CARE CENTERS OF AMERICA, INC.
(EXACT NAME OF REGISTRANT 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
(REGISTRANT'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 REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS: 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
---
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (as
defined in Rule 12b-2 of the Act). YES __ NO X
-
AGGREGATE MARKET VALUE OF COMMON STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT IS $6,325,550. 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 ($15.13 PER SHARE).
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S
CLASSES OF COMMON STOCK AS OF THE LATEST PRACTICABLE DATE: 7,388,088 SHARES OF
COMMON STOCK AS OF MARCH 15, 2003.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
1
FORM 10-K INDEX
PART I
ITEM 1. BUSINESS 4
ITEM 2. PROPERTIES 20
ITEM 3. LEGAL PROCEEDINGS 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS 21
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA. 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 42
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 43
ITEM 11. EXECUTIVE COMPENSATION 46
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 51
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 52
ITEM 14. CONTROLS AND PROCEDURES 52
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K 54
2
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; (V) IMPACT OF REFRACTIVE SURGERY AND
OTHER CORRECTIVE VISION TECHNIQUES; (VI) DEMOGRAPHIC TRENDS; (VII) THE COMPANY'S
MANAGEMENT ARRANGEMENTS WITH PROFESSIONAL CORPORATIONS; (VIII) THE COMPANY'S
ABILITY TO OBTAIN ADDITIONAL FINANCING TO REPAY THE CREDIT FACILITY OR NOTES AT
MATURITY; AND (IX) THE CONTINUED MEDICAL INDUSTRY EFFORT TO REDUCE MEDICAL COSTS
AND THIRD PARTY REIMBURSEMENTS.
3
PART I
ITEM 1. BUSINESS
- ------------------
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 362 STORES, OF WHICH293 ARE OPTICAL SUPERSTORES WITH IN-HOUSE LENS
PROCESSING CAPABILITIES. 298 OF THE COMPANY'S OPTICAL STORES ARE OWNED
DIRECTLY BY THE COMPANY AND THE REMAINING 64 STORES ARE OWNED BY AN
OPTOMETRIST'S PROFESSIONAL ENTITY AND MANAGED BY A SUBSIDIARY OF THE COMPANY
UNDER MANAGEMENT AGREEMENTS. FOR PURPOSES OF THIS REPORT, ALL OF SUCH OPTICAL
STORES OWNED OR MANAGED BY THE COMPANY (AND ITS SUBSIDIARIES) ARE REFERRED TO
HEREIN AS THE COMPANY'S STORES. THE COMPANY STORES ARE PREDOMINATELY OPERATED
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 $363.7
MILLION AND $56.8 MILLION, RESPECTIVELY, FOR THE FISCAL YEAR ENDED DECEMBER 28,
2002 ("FISCAL 2002").
THE COMPANY'S STORES, WHICH AVERAGE APPROXIMATELY 4,200 SQUARE FEET, CARRY
A BROAD SELECTION OF BRANDED FRAMES AT COMPETITIVE PRICES, INCLUDING DESIGNER
EYEWEAR, AS WELL AS ITS OWN PROPRIETARY BRANDS AND NON-BRANDED PRODUCT.
NON-BRANDED PRODUCT CONSISTED OF APPROXIMATELY 75% AND 65% OF FRAME UNITS SOLD
IN 2002 AND 2001, RESPECTIVELY. 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 WITHIN 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.
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 INCREASED FROM $140.2 MILLION IN
FISCAL 1995 TO $363.7 MILLION IN FISCAL 2002, WHILE THE COMPANY'S STORE BASE
INCREASED FROM 152 TO 363 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 8.6% 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 NON-BRANDED PRODUCTS, (II) CONTINUING STORE EXPENSE REDUCTIONS AND (III)
OFFERING EXTENSIVE PRODUCTIVITY-ENHANCING EMPLOYEE TRAINING. 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.
IN THE FOURTH QUARTER OF 2001, MANAGEMENT IMPLEMENTED A VALUE-ORIENTED FORMAT IN
CERTAIN MARKETS BASED UPON LOCAL MARKET DEMOGRAPHICS. THIS VALUE FORMAT
INVOLVES LOWER RETAIL PRICE, HIGHER MARGIN PRODUCTS AND AN INCREASE TO
APPROXIMATELY 500 VALUE FRAMES FROM APPROXIMATELY 250 VALUE FRAMES IN THE
COMPANY'S OTHER STORES. THE COMPANY ANTICIPATES CONTINUING TO IMPLEMENT THIS
STRATEGY DURING 2003. ALSO, THE COMPANY CONTINUED TO INCREASE THE AVAILABILITY
OF ITS PROMOTIONAL DISCOUNT OFFERS, MOST NOTABLY THE TWO COMPLETE PAIR OF SINGLE
VISION EYEGLASSES FOR $99 VALUE PROMOTION.
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. DURING 2001 AND 2002, THE NEW STORE OPENING
PROGRAM WAS REDUCED TO APPROXIMATELY SEVEN TO TEN STORES EACH YEAR. 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 CASH
FLOW. TOTAL DEBT HAS BEEN REDUCED FROM $291.4 MILLION AT THE END OF FISCAL 2000
TO $254.6 MILLION AT THE END OF FISCAL 2002.
CAPITALIZE ON MANAGED VISION CARE. WHILE MANAGEMENT CONTINUES TO PURSUE
MANAGED VISION CARE RELATIONSHIPS, REVENUES FROM MANAGED VISION CARE REMAINED
CONSISTENT FROM FISCAL 2001 TO FISCAL 2002 (AND DECREASED AS A PERCENTAGE OF
REVENUES), MOSTLY DUE TO THE COMPANY'S AGGRESSIVE IN-STORE PROMOTIONAL OFFERS.
AS OF DECEMBER 28, 2002, RETAIL SALES ARISING FROM MANAGED VISION CARE PLANS
TOTALED 39.4% OF OPTICAL SALES FOR FISCAL 2002, COMPARED TO 42.4% OF OPTICAL
SALES FOR FISCAL 2001. MANAGEMENT HAS MADE A STRATEGIC DECISION TO PURSUE
FUNDED MANAGED VISION CARE RELATIONSHIPS IN ORDER TO HELP THE COMPANY'S RETAIL
BUSINESS GROW. DISCOUNT MANAGED CARE PROGRAMS WILL PLAY A LESS SIGNIFICANT ROLE
AS THE VALUE RETAIL OFFER BECOMES MORE DEVELOPED THROUGHOUT THE COMPANY'S
STORES. THE PERCENT OF PENETRATION SHOULD NORMALIZE AT 35% AS THE TRANSITION TO
THE FUNDED PROGRAMS MATERIALIZES AND THE RETAIL OFFER REPLACES DISCOUNT
ACTIVITY. AS PART OF ITS ONGOING EFFORT TO DEVELOP ITS MANAGED VISION CARE
BUSINESS, THE COMPANY HAS (I) IMPLEMENTED DIRECT MARKETING PROGRAMS AND
INFORMATION SYSTEMS NECESSARY TO COMPETE FOR MANAGED VISION CARE RELATIONSHIPS
PRIMARILY WITH FUNDED PLANS AND OTHER THIRD PARTY PAYORS, (II) DEVELOPED
SIGNIFICANT RELATIONSHIPS WITH 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
5
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.
MANAGEMENT BELIEVES THAT THE 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.
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 TWO STORES IN EXISTING MARKETS AND NINE STORES
IN ATLANTA, GEORGIA DURING 2003. THE COMPANY HAS MADE A STRATEGIC DECISION TO
AGGRESSIVELY INTRODUCE ITS STORES TO THE ATLANTA MARKET IN 2003 WITH CONTINUING
GROWTH PLANNED BEYOND 2003. MANAGEMENT BELIEVES THAT THE COMPANY HAS IN PLACE
THE SYSTEMS AND INFRASTRUCTURE TO EXECUTE ITS NEW STORE OPENING PLAN AND HAS
DEVOTED SIGNIFICANT MANAGEMENT RESOURCES TO THE DEVELOPMENT OF THE ATLANTA
MARKET. 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. IN 2002, 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 $15,000 AND INITIAL INVENTORY
REQUIREMENTS FOR NEW STORES AVERAGED $50,000. NEW STORES OPENING IN 2003 WILL
UTILIZE A SMALLER AND MORE EFFICIENT FORMAT, WITH APPROXIMATELY 2,800 SQUARE
FEET AND LOWER CONSTRUCTION COSTS.
6
THE FOLLOWING TABLE SETS FORTH A SUMMARY OF THE COMPANY'S STORES OPERATING UNDER
EACH TRADE NAME, AS OF MARCH 15, 2003, RANKED BY NUMBER OF STORES:
NUMBER OF GEOGRAPHIC AVERAGE STORE
TRADE NAME. . . . . . . . . . . STORES FOCUS FORMAT
- ------------------------------- ------------- -------------- --------------
EYEMASTERS. . . . . . . . . . . 164 SOUTHWEST, SUPERSTORES
. . . . . . . . . . . . . . MIDWEST, SQ. FT. 4,000
. . . . . . . . . . . . . . SOUTHEAST LAB
. . . . . . . . . . . . . . . OD SUBLEASES
VISIONWORKS . . . . . . . . . . 53 SOUTHEAST SUPERSTORES
. . . . . . . . . . . . . . . SQ. FT. 6,100
. . . . . . . . . . . . . . . LAB
. . . . . . . . . . . . . . . OD SUBLEASES
VISION WORLD. . . . . . . . . . 36 MIDWEST CONVENTIONAL
. . . . . . . . . . . . . . . SQ. FT. 2,300
DR. BIZER'S VISIONWORLD, DR. BIZER'S 24 SOUTHEAST & SUPERSTORES
VALUVISION, DOCTOR'S VALUVISION CENTRAL SQ. FT. 5,800
LAB
HOUR EYES . . . . . . . . . . . 22 MID ATLANTIC CONVENTIONAL
. . . . . . . . . . . . . . . SQ. FT. 2,600
. . . . . . . . . . . . . . . LAB
DOCTOR'S VISIONWORKS . . . . . 19 MARYLAND & SUPERSTORES
. . . . . . . . . . . . . . COLORADO SQ. FT. 3,900
. . . . . . . . . . . . . . . LAB
STEIN OPTICAL . . . . . . . . . 15 MIDWEST SUPERSTORES
. . . . . . . . . . . . . . . SQ. FT. 3,400
. . . . . . . . . . . . . . . LAB
EYE DRX . . . . . . . . . . . . 15 NORTHEAST CONVENTIONAL
. . . . . . . . . . . . . . . SQ. FT. 3,200
BINYON'S. . . . . . . . . . . . 14 PACIFIC SUPERSTORES
NORTHWEST . .. SQ. FT. 4,600
. . . . . . . . . . . . . . . LAB
. . . . . . . . . . . . . . . OD SUBLEASES
-------------
TOTAL . . . . . . . . . . . . . 362
=============
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.
7
THE FOLLOWING TABLE SETS FORTH AS OF DECEMBER 28, 2002 THE COMPANY'S TOP
FIFTEEN MARKETS AS MEASURED BY THE COMPANY'S SALES. MANAGEMENT'S ESTIMATE OF THE
COMPANY'S SUPERSTORE MARKET SHARE RANKING IS NUMBER ONE OR TWO IN FOURTEEN OF
THESE MARKETS.
DESIGNATED MARKET AREA . . . NUMBER OF SUPERSTORES
- ---------------------------- ---------------------
WASHINGTON, D.C. . . . . . . 21
DALLAS . . . . . . . . . . . 22
HOUSTON. . . . . . . . . . . 19
LOUISVILLE . . . . . . . . . 7
TAMPA/ST. PETERSBURG . . . . 13
MINNEAPOLIS/ST. PAUL . . . . 21
PHOENIX. . . . . . . . . . . 13
MILWAUKEE. . . . . . . . . . 15
MIAMI/FT. LAUDERDALE . . . . 9
NASHVILLE. . . . . . . . . . 11
NEW YORK . . . . . . . . . . 14
PORTLAND . . . . . . . . . . 12
SAN ANTONIO. . . . . . . . . 8
KANSAS CITY. . . . . . . . . 7
AUSTIN . . . . . . . . . . . 6
------
TOTAL OF TOP FIFTEEN MARKETS 198
======
LOCATIONS. THE COMPANY OPERATES OR MANAGES 362 STORES, 293 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, 175 ARE LOCATED IN ENCLOSED REGIONAL
MALLS, 126 ARE IN STRIP SHOPPING CENTERS AND 61 ARE FREESTANDING LOCATIONS.
8
THE FOLLOWING TABLE SETS FORTH BY LOCATION, RANKED BY NUMBER OF STORES, THE
COMPANY'S STORE BASE AS OF MARCH 15, 2003.
DR.
LOCATION EYEMASTERS VISIONWORKS VISION WORLD BIZER VISIONWORKS HOUR EYES STEIN EYE DRX BINYON TOTAL
- --------------- ---------- ----------- ------------ ----- ----------- --------- ----- ------- ------ -----
TEXAS 78 - - - - - - - - 78
FLORIDA 3 38 - - - - - - - 41
MINNESOTA - - 30 - - - - - - 30
TENNESSEE 7 - - 12 - - - - - 19
WISCONSIN - - 2 - - - 15 - - 17
ARIZONA 15 - - - - - - - - 15
NEW JERSEY - - - - - - - 15 - 15
VIRGINIA - 1 - - - 13 - - - 14
MARYLAND - - - - 7 6 - - - 13
OREGON - - - - - - - - 13 13
COLORADO - - - - 12 - - - - 12
LOUISIANA 12 - - - - - - - - 12
NORTH CAROLINA - 12 - - - - - - - 12
KENTUCKY - - - 10 - - - - - 10
OHIO 9 - - - - - - - - 9
MISSOURI 6 - - 1 - - - - - 7
OKLAHOMA 5 - - - - - - - - 5
KANSAS 4 - - - - - - - - 4
NEBRASKA 4 - - - - - - - - 4
NEVADA 4 - - - - - - - - 4
NEW MEXICO 4 - - - - - - - - 4
UTAH 4 - - - - - - - - 4
IOWA 1 - 2 - - - - - - 3
MISSISSIPPI 3 - - - - - - - - 3
WASHINGTON, D.C - - - - - 3 - - - 3
ALABAMA 2 - - - - - - - - 2
IDAHO 2 - - - - - - - - 2
SOUTH CAROLINA - 2 - - - - - - - 2
WASHINGTON 1 - - - - - - - 1 2
INDIANA - - - 1 - - - - - 1
NORTH DAKOTA - - 1 - - - - - - 1
SOUTH DAKOTA - - 1 - - - - - - 1
---------- ----------- ------------ ----- ----------- --------- ----- ------- ------ -----
TOTAL 164 53 36 24 19 22 15 15 14 362
========== =========== ============ ===== =========== ========= ===== ======= ====== =====
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 2,800
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 WITHIN 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. THE COMPANY'S SUPERSTORES 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. ADJACENT TO OR WITHIN MOST OF THE STORES IS AN OD 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.
- - AT 234 OF THE COMPANY'S STORES, THE ODS ARE INDEPENDENT OPTOMETRISTS (THE
"INDEPENDENT ODS"), WHO LEASE SPACE WITHIN OR ADJACENT TO EACH STORE. AT
EIGHTEEN OF THE COMPANY'S STORES, THE INDEPENDENT OD OWNS THE PROFESSIONAL EYE
EXAM PRACTICE AND THE COMPANY PROVIDES MANAGEMENT SERVICES TO THE STORES UNDER
BUSINESS MANAGEMENT AGREEMENTS. THESE ODS ARE INDEPENDENT AND THE COMPANY CANNOT
EXERCISE ANY CONTROL OVER SUCH INDEPENDENT ODS. MOST OF THESE ODS PAY THE
COMPANY MONTHLY RENT CONSISTING OF A PERCENTAGE OF GROSS RECEIPTS, BASE RENTAL
OR A COMBINATION OF BOTH.
- - AT FORTY-SIX OF THE COMPANY'S STORES, THE ODS ARE EMPLOYEES OF THE
COMPANY.
- - SIXTY-FOUR OF THE COMPANY'S STORES ARE OWNED BY A PROFESSIONAL
CORPORATION OR OTHER ENTITY CONTROLLED BY AN OD (THE "OD PC"). THE OD PC OWNS
BOTH THE OPTICAL DISPENSARY AND THE PROFESSIONAL EYE EXAMINATION PRACTICE. THE
OD PC EMPLOYS THE ODS AND THE COMPANY (THROUGH ITS SUBSIDIARIES) PROVIDES
MANAGEMENT SERVICES TO THESE STORES (INCLUDING THE DISPENSARY AND THE
PROFESSIONAL PRACTICE) UNDER BUSINESS MANAGEMENT AGREEMENTS. AT MOST OF THESE
LOCATIONS, THE COMPANY (THROUGH ITS SUBSIDIARIES) PROVIDES A TURNKEY OPERATION,
PROVIDING THE LEASED PREMISES, EMPLOYEES (OTHER THAN THE ODS), FURNITURE,
FIXTURES AND EQUIPMENT. IN ADDITION, THE COMPANY HAS AN OPTION TO DESIGNATE
ANOTHER OD TO PURCHASE THE OD PC (OR ITS ASSETS) AT AN AGREED UPON CALCULATION
TO DETERMINE THE PURCHASE PRICE. AT DECEMBER 28, 2002, THESE PRICES RANGE FROM
$3.0 MILLION TO $5.0 MILLION IN THE AGGREGATE. UNDER THE APPLICABLE OPTOMETRIC
AND OTHER LAWS AND REGULATIONS, THE COMPANY IS NOT PERMITTED TO CONTROL THE
PROFESSIONAL PRACTICE OF THE OD PC (E.G., SCHEDULING, EMPLOYMENT OF
OPTOMETRISTS, PROTOCOLS, EXAMINATION FEES AND OTHER MATTERS REQUIRING THE
PROFESSIONAL JUDGMENT OF THE OD). THE MANAGEMENT AGREEMENTS SPECIFICALLY
PROHIBIT THE COMPANY FROM
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ENGAGING IN ACTIVITIES THAT WOULD CONSTITUTE CONTROLLING THE OD PC'S PRACTICE
AND RESERVE SUCH RIGHTS AND DUTIES FOR THE OD PC.
INDEPENDENT ODS WHO LEASE SPACE ADJACENT TO OR WITHIN A COMPANY-OWNED STORE
REPRESENT APPROXIMATELY 62% OF THE ODS, APPROXIMATELY 24% OF THE ODS ARE
EMPLOYED BY THE OD PCS AND THE REMAINING 14% 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.
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'S STORES OFFER THE 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 25% OF THE FRAMES CARRY DESIGNER NAMES SUCH AS EDDIE BAUER,
POLO/RALPH LAUREN, LAURA ASHLEY, GUESS AND CHAPS. IN FISCAL 2002, OTHER
WELL-KNOWN FRAME MANUFACTURERS SUPPLIED OVER 10% OF THE COMPANY'S FRAMES AND
ABOUT 25% 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 2002, MANAGEMENT
IMPLEMENTED A VALUE-ORIENTED FORMAT IN VARIOUS MARKETS BASED UPON LOCAL MARKET
DEMOGRAPHICS. THIS VALUE FORMAT INVOLVES LOWER RETAIL PRICE, HIGHER MARGIN
PRODUCTS AND AN INCREASE TO APPROXIMATELY 500 VALUE FRAMES FROM APPROXIMATELY
250 VALUE FRAMES IN OTHER STORES. THE COMPANY PLANS TO CONTINUE IMPLEMENTING
THIS STRATEGY DURING 2003. 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
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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 $30.6 MILLION,
OR 8.4% OF NET REVENUES, IN FISCAL 2002. THE COMPANY UTILIZES A VARIETY OF
ADVERTISING MEDIA AND PROMOTIONS IN ORDER TO 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.
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.
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VENDORS
THE COMPANY PURCHASES A MAJORITY OF ITS LENSES FROM THREE PRINCIPAL VENDORS
AND PURCHASES FRAMES FROM OVER TWENTY DIFFERENT VENDORS. IN FISCAL 2002, FOUR
VENDORS COLLECTIVELY SUPPLIED APPROXIMATELY 60.5% OF THE FRAMES PURCHASED BY THE
COMPANY. ONE VENDOR SUPPLIED OVER 46.8% 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 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
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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.
WHILE MANAGEMENT CONTINUES TO PURSUE MANAGED VISION CARE RELATIONSHIPS,
REVENUES FROM MANAGED VISION CARE REMAINED CONSISTENT FROM FISCAL 2001 TO FISCAL
2002 (AND DECREASED AS A PERCENTAGE OF REVENUES), MOSTLY DUE TO THE COMPANY'S
AGGRESSIVE IN-STORE PROMOTIONAL OFFERS. AS OF DECEMBER 28, 2002, RETAIL SALES
ARISING FROM MANAGED VISION CARE PLANS TOTALED 39.4% OF OPTICAL SALES FOR FISCAL
2002, COMPARED TO 42.4% OF OPTICAL SALES FOR FISCAL 2001. MANAGEMENT HAS MADE A
STRATEGIC DECISION TO PURSUE FUNDED MANAGED VISION CARE RELATIONSHIPS IN ORDER
TO HELP THE COMPANY'S RETAIL BUSINESS GROW. DISCOUNT MANAGED CARE PROGRAMS WILL
PLAY A LESS SIGNIFICANT ROLE AS THE VALUE RETAIL OFFER BECOMES MORE DEVELOPED
THROUGHOUT THE COMPANY'S STORES. THE PERCENT OF PENETRATION SHOULD NORMALIZE AT
35% AS THE TRANSITION TO FUNDED PROGRAMS MATERIALIZES AND THE RETAIL OFFER
REPLACES DISCOUNT ACTIVITY. AS PART OF ITS ONGOING EFFORT TO DEVELOP ITS MANAGED
VISION CARE 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 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.
MANAGEMENT BELIEVES THAT THE 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 THAT 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 252 OF THE COMPANY'S STORES, THE COMPANY OR ITS LANDLORD LEASES A PORTION OF
THE STORE OR ADJACENT SPACE TO INDEPENDENT ODS. AT FORTY-SIX OF THE STORES, THE
COMPANY EMPLOYS THE OPTOMETRIST. THE AVAILABILITY OF SUCH PROFESSIONAL SERVICES
INSIDE OR ADJACENT TO THE COMPANY'S STORES IS CRITICAL TO THE COMPANY'S
MARKETING STRATEGY. AT SIXTY-FOUR OF THE STORES, TO ADDRESS AND COMPLY WITH
CERTAIN REGULATORY RESTRICTIONS, THE OD PCS OWN THE STORES (INCLUDING THE
PRACTICE AND THE OPTICAL DISPENSARY) AND THE COMPANY (THROUGH ITS SUBSIDIARIES)
PROVIDES CERTAIN MANAGEMENT SERVICES SUCH AS ACCOUNTING, HUMAN RESOURCES,
MARKETING AND INFORMATION SERVICES FOR AN AGREED UPON FEE
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PURSUANT TO LONG-TERM MANAGEMENT AGREEMENTS. THE OD PCS EMPLOY THE ODS. SEE
"-GENERAL - ON-SITE OPTOMETRIST."
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 REFERRAL FEES OR
FEE-SPLITTING 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, 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.
THE HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996 ("HIPAA")
COVERS A VARIETY OF SUBJECTS WHICH WILL IMPACT THE COMPANY'S BUSINESSES AND THE
BUSINESS OF THE ODS. SOME OF THOSE AREAS INCLUDE THE PRIVACY OF PATIENT HEALTH
CARE INFORMATION, THE SECURITY OF SUCH INFORMATION AND THE STANDARDIZATION OF
ELECTRONIC DATA TRANSACTIONS FOR PURPOSES OF MEDICAL BILLING. THE DEPARTMENT OF
HEALTH AND HUMAN SERVICES HAS PROMULGATED HIPAA REGULATIONS WHICH WILL BECOME
EFFECTIVE DURING 2003. THE COMPANY HAS DEVOTED RESOURCES TO IMPLEMENT
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OPERATING PROCEDURES WITHIN THE STORES AND THE CORPORATE OFFICE TO ENSURE
COMPLIANCE WITH THE HIPAA REGULATIONS.
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 DETERMINATION THAT THE COMPANY OR
ANY OF THE ODS OR THE OD PCS IS NOT IN COMPLIANCE WITH SUCH LAWS, COULD HAVE A
MATERIAL ADVERSE EFFECT ON THE COMPANY.
TRADEMARK AND TRADE NAMES
THE COMPANY'S STORES 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.
EMPLOYEES
AS OF DECEMBER 28, 2002, THE COMPANY EMPLOYED APPROXIMATELY 4,100
EMPLOYEES. APPROXIMATELY 58 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.
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, 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 $16.2 BILLION
IN 2002, ACCORDING TO INDUSTRY SOURCES. THE OPTICAL RETAIL MARKET HAS GROWN EACH
YEAR AT AN AVERAGE ANNUAL RATE OF
16
APPROXIMATELY 5% FROM 1991 TO 1997. DURING 1998 THROUGH 2000, THE AVERAGE ANNUAL
GROWTH RATE DECREASED TO APPROXIMATELY 2%. IN 2001, THE OPTICAL RETAIL MARKET
DECLINED 4% AND THE 2% GROWTH RATE RETURNED IN 2002. A LEADING INDUSTRY
PUBLICATION PROJECTS OPTICAL RETAIL CHAINS WILL HAVE ONLY A 1.7% INCREASE IN
GROWTH AND A 2.5% OVERALL GROWTH RATE IN THE OPTICAL INDUSTRY IN 2003.
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 1993 2002
(DOLLARS IN BILLIONS)
2002
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 SHARE
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ------
LENSES/TREATMENTS $ 6.0 $ 6.5 $ 6.8 $ 7.2 $ 7.6 $ 7.9 $ 8.0 $ 8.3 $ 8.1 $ 8.5 52.5%
FRAMES. . . . . . 4.1 4.1 4.4 4.6 5.0 5.2 5.3 5.5 5.2 5.2 32.1%
SUNGLASSES. . . . 0.5 0.5 0.7 0.8 0.9 0.8 0.7 0.7 0.6 0.6 3.7%
CONTACT LENSES. . 1.7 1.8 1.9 1.9 1.9 1.9 2.0 2.0 2.0 1.9 11.7%
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ------
$12.3 $12.9 $13.8 $14.5 $15.4 $15.8 $16.0 $16.5 $15.9 $16.2 100.0%
===== ===== ===== ===== ===== ===== ===== ===== ===== ===== ======
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 2002, OPTICAL RETAIL CHAINS ACCOUNTED FOR APPROXIMATELY
40.1% OF THE TOTAL MARKET, WHILE INDEPENDENT PRACTITIONERS COMPRISED
APPROXIMATELY 57.3% AND OTHER DISTRIBUTION CHANNELS REPRESENTED APPROXIMATELY
2.6%. 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 57.3% BETWEEN 1996 AND 2002,
WHILE OPTICAL RETAIL CHAINS' MARKET SHARE INCREASED OVER THE SAME PERIOD FROM
31.3% TO 40.1%.
INDEPENDENT PRACTITIONERS. IN 2002, INDEPENDENT PRACTITIONERS REPRESENTED
$9.3 BILLION OF EYEWEAR RETAIL SALES, OR 57.3% OF THE INDUSTRY'S TOTAL OPTICAL
RETAIL SALES VOLUME OF $16.2 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 A MORE COMPETITIVE MARKETPLACE. INDEPENDENT
PRACTITIONERS' MARKET SHARE HAS DECLINED FROM APPROXIMATELY 100% IN 1974 TO
57.3% IN 2002, DROPPING 8% FROM 1996 TO 2002. FOR THE REASONS SET FORTH ABOVE,
MANAGEMENT BELIEVES THAT INDEPENDENT PRACTITIONERS
17
WILL CONTINUE TO LOSE MARKET SHARE OVER THE NEXT SEVERAL YEARS.
CHAINS. OPTICAL RETAIL CHAINS, WAREHOUSE CLUBS AND MASS MERCHANDISERS
REPRESENTED 40.1% OF THE TOTAL OPTICAL RETAIL MARKET IN 2002.
OPTICAL RETAIL CHAINS. 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 OPTICAL RETAIL 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.
OTHER. OTHER PARTICIPANTS IN THE OPTICAL RETAIL MARKET INCLUDE HMOS AND
SCHOOL-CONTROLLED DISPENSARIES. IN 2002, OTHER PARTICIPANTS REPRESENTED
APPROXIMATELY 2.6% OF THE TOTAL OPTICAL RETAIL 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 $5.8
BILLION
18
(OR APPROXIMATELY 35% OF THE MARKET) IN 2000, 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 THAT
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 57.3% BETWEEN 1996
AND 2002, WHILE OPTICAL RETAIL CHAINS' MARKET SHARE INCREASED OVER THE SAME
PERIOD FROM 31.3% TO 40.1%. 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, AND YIELD HIGHER MARGINS THAN
TRADITIONAL LENSES. THE AVERAGE RETAIL PRICE FOR ALL LENSES AND LENS TREATMENTS
HAS INCREASED FROM $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%. THE 2002 AVERAGE GROWTH RATE FOR LENSES RETURNED
TO 5% WHILE FRAMES EXPERIENCED NO GROWTH. 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
19
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 1.1 MILLION LASER VISION CORRECTION SURGERY PROCEDURES BEING PERFORMED
IN 2002. 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, 2003, THE COMPANY OPERATED OR MANAGED 362 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.
IN SUBSTANTIALLY ALL OF THE STORES THAT IT OWNS, THE COMPANY SUBLEASES (OR THE
LANDLORD LEASES) A PORTION OF SUCH STORES OR 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 LOCATION AND CHARACTER OF THE COMPANY'S STORES ARE DESCRIBED
IN ITEM 1 OF THIS ANNUAL 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.
ITEM 3. LEGAL PROCEEDINGS
THE COMPANY IS A PARTY TO ROUTINE LITIGATION IN THE ORDINARY COURSE OF ITS
BUSINESS. 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
NONE.
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 48 holders of the Common Stock.
With the exception of one holder, all holders are parties to a shareholders
agreement. See the discussion under the heading "Stockholders' Agreement"
within "ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." No dividends
were paid in fiscal 2001 or 2002 and payment of dividends is restricted by the
Indenture governing the Exchange Notes (as defined in Management Discussion and
Analysis - Liquidity and Capital Resources).
(a) (b) (c)
... . . . . . . . . . . . . . . . . . Number of
... . . . . . . . . . . . . . . . . . securities remaining
... . . . . . . . . . . . . . . . Number of . available for
... . . . . . . . . . . . . . . . securities to be Weighted- future issuance
... . . . . . . . . . . . . . . . issued upon average exercise under equity
... . . . . . . . . . . . . . . . exercise of price of compensation
... . . . . . . . . . . . . . . . outstanding outstanding plans (excluding
... . . . . . . . . . . . . . . . options, warrants options, warrants securities reflected
... . . . . . . . . . . . . . . . and rights and rights in column (a))
------------------ ------------------- ---------------------
PLAN CATEGORY
Equity compensation plans
approved by security holders . . 947,775 $ 5.54 65,065
Equity compensation plans
not approved by security holders - $ - -
------------------ ------------------- ---------------------
Total. . . . . . . . . . . . . . 947,775 $ 5.54 65,065
21
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 1998 OR FISCAL 1998, 1999 OR FISCAL 1999, 2000 OR
FISCAL 2000, 2001 OR FISCAL 2001 AND 2002 OR FISCAL 2002 RELATE TO THE FISCAL
YEARS ENDED JANUARY 2, 1999, JANUARY 1, 2000, DECEMBER 30, 2000, DECEMBER 29,
2001 AND DECEMBER 28, 2002 RESPECTIVELY.
================================================================================
JANUARY 2, JANUARY 1, DECEMBER 30, DECEMBER 29, DECEMBER 28,
1999 2000 2000 2001 2002
------------ ------------ -------------- -------------- --------------
STATEMENT OF OPERATIONS DATA:
NET REVENUES . . . . . . . . . . . . . . . . . . . $ 237,851 $ 293,795 $ 338,457 $ 336,034 $ 363,667
OPERATING COSTS AND EXPENSES:
COST OF GOODS SOLD. . . . . . . . . . . . . . . 80,636 98,184 107,449 104,446 112,471
SELLING, GENERAL AND ADMINISTRATIVE . . . . . . 132,390 170,146 204,365 203,187 213,683
RECAPITALIZATION AND OTHER EXPENSES . . . . . . 25,803 - - - -
STORE CLOSURE EXPENSE . . . . . . . . . . . . . - - 3,580 - -
AMORTIZATION OF INTANGIBLE ASSETS . . . . . . . 3,705 5,653 9,137 8,697 1,865
------------ ------------ -------------- -------------- --------------
TOTAL COSTS AND EXPENSES. . . . . . . . . . . . 242,534 273,983 324,531 316,330 328,019
------------ ------------ -------------- -------------- --------------
OPERATING INCOME (LOSS). . . . . . . . . . . . . . (4,683) 19,812 13,926 19,704 35,648
INTEREST EXPENSE, NET. . . . . . . . . . . . . . . 19,159 24,685 28,694 27,537 21,051
IN-SUBSTANCE DEFEASED BONDS INTEREST EXPENSE, NET. 2,418 - - - -
------------ ------------ -------------- -------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES. . . . . . . . . (26,260) (4,873) (14,768) (7,833) 14,597
INCOME TAX EXPENSE . . . . . . . . . . . . . . . . 13 384 766 1,239 1,258
------------ ------------ -------------- -------------- --------------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM. . . . (26,273) (5,257) (15,534) (9,072) 13,339
CUMULATIVE EFFECT OF CHANGE IN ACCT PRINCIPLE. . . - 491 - - -
EXTRAORDINARY GAIN (LOSS). . . . . . . . . . . . . (8,355) - - - 904
------------ ------------ -------------- -------------- --------------
NET INCOME (LOSS). . . . . . . . . . . . . . . . . $ (34,628) $ (5,748) $ (15,534) $ (9,072) $ 14,243
============ ============ ============== ============== ==============
OTHER FINANCIAL DATA:
DEPRECIATION AND AMORTIZATION. . . . . . . . . . . $ 16,050 $ 22,754 $ 29,600 $ 29,047 $ 20,626
CAPITAL EXPENDITURES . . . . . . . . . . . . . . . 20,656 19,920 18,932 10,559 10,668
GROSS MARGIN % . . . . . . . . . . . . . . . . . . 66.1% 66.6% 68.3% 68.9% 69.1%
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . $ 222,907 $ 261,678 $ 250,920 $ 225,013 $ 218,942
LONG TERM OBLIGATIONS. . . . . . . . . . . . . . . $ 248,757 $ 279,480 $ 285,607 $ 267,903 $ 254,633
RATIO OF EARNINGS TO FIXED CHARGES(B). . . . . . . 0.14X 0.85X 0.62X 0.79X 1.49X
MISCELLANEOUS DATA:
EBITDA - SEE BELOW . . . . . . . . . . . . . . . . $ 37,170 $ 42,386 $ 47,107 $ 48,751 $ 56,774
EBITDA MARGIN %. . . . . . . . . . . . . . . . . . 15.60% 14.40% 13.90% 14.51% 15.61%
COMPARABLE STORE SALES GROWTH (C). . . . . . . . . 1.10% 1.10% 0.90% -1.40% 5.60%
END OF PERIOD STORES . . . . . . . . . . . . . . . 270 361 361 359 363
SALES PER STORE (D). . . . . . . . . . . . . . . . $ 1,007 $ 987 $ 940 $ 935 $ 1,009
22
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, EXTRAORDINARY LOSS
(GAIN) 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 PRINCIPLES 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. THE FOLLOWING TABLE IS A RECONCILIATION OF OPERATING INCOME
(LOSS) TO EBITDA FOR EACH OF THE FISCAL PERIODS PRESENTED:
JANUARY 2, JANUARY 1, DECEMBER 30, DECEMBER 29, DECEMBER 28,
1999 2000 2000 2001 2002
------------ ------------ ------------- ------------- -------------
RECONCILIATION OF EBITDA TO OPERATING INCOME (LOSS):
OPERATING INCOME (LOSS) . . . . . . . . . . . . . . . $ (4,683) $ 19,812 $ 13,926 $ 19,704 $ 35,648
RECONCILING ITEMS:
DEPRECIATION AND AMORTIZATION. . . . . . . . . . . 16,050 22,754 29,600 29,047 20,626
RECAPITALIZATION AND OTHER EXPENSES. . . . . . . . 25,803 - - - -
STORE CLOSURE EXPENSE. . . . . . . . . . . . . . . - - 3,580 - -
OTHER. . . . . . . . . . . . . . . . . . . . . . . - (180) - - 500
------------ ------------ ------------- ------------- -------------
EBITDA . . . . . . . . . . . . . . . . . . . . . . $ 37,170 $ 42,386 $ 47,106 $ 48,751 $ 56,774
============ ============ ============= ============= =============
(A) ALL DOLLARS ARE IN THOUSANDS.
(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) 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.
(D) 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.
23
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 362 STORES, 293 OF WHICH ARE
OPTICAL SUPERSTORES. THE COMPANY OPERATES IN THE $6.5 BILLION RETAIL OPTICAL
CHAIN SECTOR OF THE $16.2 BILLION OPTICAL RETAIL MARKET. MANAGEMENT BELIEVES
THAT KEY DRIVERS OF GROWTH FOR THE COMPANY INCLUDE (I) THE SUCCESS OF THE
COMPANY'S PROMOTIONAL ACTIVITIES, (II) THE CONTINUING ROLE OF MANAGED VISION
CARE AND (III) NEW PRODUCT INNOVATIONS.
DURING FISCAL 2002, THE COMPANY EXPERIENCED A 5.6% INCREASE IN COMPARABLE
STORE SALES PRIMARILY DUE TO ITS TWO COMPLETE PAIR OF SINGLE VISION EYEWEAR FOR
$99 VALUE PROMOTION. MANAGEMENT BELIEVES THAT THIS PROMOTION WAS SUCCESSFUL
BECAUSE IT DIFFERENTIATES THE COMPANY'S STORES FROM INDEPENDENT OPTOMETRIC
PRACTITIONERS WHO TEND TO OFFER FEWER PROMOTIONS IN ORDER TO GUARD THEIR MARGINS
WHILE ALSO LEVERAGING THE COMPANY'S STRENGTH AS THE LEADER IN ITS MARKETS.
BECAUSE THE AVERAGE TICKET PRICE IS TYPICALLY LESS FOR GLASSES SOLD UNDER THE
PROMOTION, IN ORDER FOR THE COMPANY TO CONTINUE TO BE SUCCESSFUL USING THIS
STRATEGY, THE COMPANY MUST CONTINUE TO INCREASE THE NUMBER OF TRANSACTIONS AND
MUST ALSO BE SUCCESSFUL IN CONTROLLING COSTS. IN ADDITION, IT WILL BE INCUMBENT
UPON THE COMPANY TO BE ABLE TO MAINTAIN ITS BROAD SELECTION OF HIGH QUALITY,
LOWER PRICED NON-BRANDED FRAMES SO THAT IT CAN CONTINUE TO OFFER MORE VALUE TO
CUSTOMERS WHILE IMPROVING GROSS MARGINS.
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 FUNDED MANAGED VISION CARE
RELATIONSHIPS IN ORDER TO HELP THE COMPANY'S RETAIL BUSINESS GROW. DISCOUNT
MANAGED CARE PROGRAMS WILL PLAY A LESS SIGNIFICANT ROLE AS THE VALUE RETAIL
OFFER BECOMES MORE DEVELOPED THROUGHOUT THE COMPANY'S STORES. 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 2002,
APPROXIMATELY 39.4% OF THE COMPANY'S OPTICAL REVENUES WERE DERIVED FROM MANAGED
VISION CARE PROGRAMS, ALTHOUGH THE PERCENT OF PENETRATION SHOULD NORMALIZE AT
35% AS THE TRANSITION TO FUNDED PROGRAMS MATERIALIZES AND THE RETAIL OFFER
REPLACES DISCOUNT ACTIVITY. MANAGEMENT BELIEVES THAT THE 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.
THE COMPANY ENTERED INTO A RECAPITALIZATION AGREEMENT WITH THOMAS H. LEE
COMPANY IN 1998. SEE THE DISCUSSION UNDER THE HEADING "RECAPITALIZATION" WITHIN
"ITEM 1. BUSINESS."
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
24
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 REQUIRED IMPAIRMENT TESTS OF GOODWILL AS OF DECEMBER 28, 2002, AND BASED
UPON ITS ANALYSIS, THE COMPANY BELIEVES THAT NO IMPAIRMENT OF GOODWILL EXISTS.
RESULTS OF OPERATIONS
THE FOLLOWING IS A DISCUSSION OF CERTAIN FACTORS AFFECTING THE COMPANY'S
RESULTS OF OPERATIONS FROM FISCAL 2000 TO FISCAL 2002 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.
THE FOLLOWING TABLE SETS FORTH THE PERCENTAGE RELATIONSHIP TO NET REVENUES
OF CERTAIN INCOME STATEMENT DATA.
FISCAL YEAR ENDED
------------------
2000 2001 2002
------ ------ ------
NET REVENUES:
OPTICAL SALES. . . . . . . . . . . . . . . . . . 99.2% 99.0% 99.1%
MANAGEMENT FEE . . . . . . . . . . . . . . . . . 0.8 1.0 0.9
------ ------ ------
TOTAL NET REVENUES . . . . . . . . . . . . . . . 100.0 100.0 100.0
OPERATING COSTS AND EXPENSES:
COST OF GOODS SOLD (A) . . . . . . . . . . . . . 32.0 31.4 31.2
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (A) 60.9 61.1 59.3
STORE CLOSURE EXPENSES . . . . . . . . . . . . . 1.1 - -
AMORTIZATION OF INTANGIBLES. . . . . . . . . . . 2.7 2.6 0.5
------ ------ ------
TOTAL OPERATING COSTS AND EXPENSES . . . . . . . 96.7 94.1 90.2
------ ------ ------
INCOME FROM OPERATIONS . . . . . . . . . . . . . 3.3 5.9 9.8
INTEREST EXPENSE, NET. . . . . . . . . . . . . . 8.5 8.2 5.8
------ ------ ------
INCOME/(LOSS) BEFORE INCOME TAXES. . . . . . . . (5.2) (2.3) 4.0
INCOME TAX EXPENSE . . . . . . . . . . . . . . . 0.2 0.4 0.3
------ ------ ------
INCOME/(LOSS) BEFORE EXTRAORDINARY ITEM. . . . . (5.4) (2.7) 3.7
EXTRAORDINARY GAIN . . . . . . . . . . . . . . . - - 0.2
------ ------ ------
NET INCOME/(LOSS). . . . . . . . . . . . . . . . (5.4) (2.7) 3.9
====== ====== ======
(A) PERCENTAGES BASED ON OPTICAL SALES ONLY
FISCAL 2002 COMPARED TO FISCAL 2001
NET REVENUES. THE INCREASE IN NET REVENUES TO $363.7 MILLION IN 2002 FROM
$336.0 MILLION IN FISCAL 2001 WAS LARGELY THE RESULT OF AN INCREASE IN
COMPARABLE STORE SALES OF 5.6% 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 IMPROVEMENT OF PRODUCT DEPTH AND
25
SELECTION, IMPROVED IN-STOCK POSITIONS AND OVERALL OPTICAL MARKET IMPROVEMENT
CONTRIBUTED TO THE INCREASE IN SALES. THE NUMBER OF TRANSACTIONS INCREASED BY
13.7% COMPARED TO FISCAL 2001, WHICH WAS OFFSET BY A DECREASE IN AVERAGE TICKET
PRICES OF 4.7% COMPARED TO FISCAL 2001. BOTH THE INCREASE IN TRANSACTIONS AND
DECREASE IN AVERAGE TICKET PRICES WERE DUE PRIMARILY TO THE TWO COMPLETE PAIR OF
SINGLE VISION EYEGLASSES FOR $99 VALUE PROMOTION. MANAGED VISION CARE SALES
DECREASED 1.5% FOR FISCAL 2002 AS COMPARED TO FISCAL 2001. THE COMPANY OPENED
EIGHT STORES AND CLOSED FOUR STORES IN FISCAL 2002.
GROSS PROFIT. GROSS PROFIT INCREASED TO $251.2 MILLION IN FISCAL 2002 FROM
$231.6 MILLION IN FISCAL 2001, PRIMARILY AS A RESULT OF AN INCREASE IN
COMPARABLE STORE SALES AND AN INCREASE IN THE SALES OF HIGHER MARGIN PRODUCTS.
GROSS PROFIT AS A PERCENTAGE OF OPTICAL SALES INCREASED TO 68.8% ($247.8
MILLION) IN FISCAL 2002 AS COMPARED TO 68.6% ($228.1 MILLION) IN FISCAL 2001.
THIS PERCENTAGE INCREASE WAS LARGELY DUE TO AN INCREASE AS A PERCENTAGE OF SALES
IN FISCAL 2002 VERSUS FISCAL 2001 OF NON-BRANDED FRAMES WITH HIGHER MARGINS THAN
BRANDED FRAMES. NON-BRANDED FRAMES HAVE LOWER ACQUISITION COSTS THAN BRANDED
FRAMES RESULTING IN HIGHER MARGINS.
SELLING GENERAL & ADMINISTRATIVE EXPENSES (SG&A). SG&A INCREASED TO $213.7
MILLION IN FISCAL 2002 FROM $203.2 IN FISCAL 2001. SG&A AS A PERCENTAGE OF
OPTICAL SALES DECREASED TO 59.3% IN FISCAL 2002 FROM 61.1% IN FISCAL 2001. THIS
PERCENTAGE DECREASE WAS PRIMARILY DUE TO INCREASED SALES FROM MORE EFFECTIVE
ADVERTISING PROMOTIONS IN FISCAL 2002 VERSUS FISCAL 2001 WITH ADVERTISING
EXPENDITURES RISING SLIGHTLY OVER THE TWO YEARS BUT DECLINING AS A PERCENTAGE OF
SALES. IN ADDITION, WHILE DEPRECIATION DECLINED SLIGHTLY AND OCCUPANCY EXPENSES
ROSE SLIGHTLY IN FISCAL 2002 VERSUS FISCAL 2001, THEY DECLINED AS A PERCENTAGE
OF SALES WHICH WAS OFFSET BY INCREASES IN RETAIL AND DOCTOR PAYROLL.
AMORTIZATION EXPENSE. AMORTIZATION EXPENSE DECREASED TO $1.9 MILLION FOR
FISCAL 2002 FROM $8.7 MILLION IN FISCAL 2001 DUE TO THE ADOPTION OF FAS 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 $21.1 MILLION FOR
FISCAL 2002 FROM $27.5 MILLION FOR FISCAL 2001. THIS DECREASE WAS PRIMARILY DUE
TO THE OVERALL DECLINE IN MARKET INTEREST RATES IN 2002 AND RE-PAYMENT OF DEBT
DURING 2002.
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.
26
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.
LIQUIDITY AND CAPITAL RESOURCES
THE COMPANY'S CAPITAL REQUIREMENTS ARE DRIVEN PRINCIPALLY BY ITS OBLIGATIONS TO
SERVICE DEBT AND TO FUND THE FOLLOWING COSTS:
- - CONSTRUCTION OF NEW STORES
- - REPOSITIONING OF EXISTING STORES
- - PURCHASING INVENTORY AND EQUIPMENT
- - LEASEHOLD IMPROVEMENTS
THE AMOUNT OF CAPITAL AVAILABLE TO THE COMPANY WILL AFFECT ITS ABILITY TO
SERVICE ITS DEBT OBLIGATIONS AND TO CONTINUE TO GROW ITS BUSINESS THROUGH
EXPANDING THE NUMBER OF STORES AND INCREASING COMPARABLE STORE SALES.
SOURCES OF CAPITAL
THE COMPANY'S PRINCIPAL SOURCES OF CAPITAL ARE FROM CASH ON HAND, CASH FLOW
FROM OPERATING ACTIVITIES AND FUNDING FROM ITS CREDIT FACILITY. CASH FLOWS FROM
OPERATING ACTIVITIES PROVIDED NET CASH FOR 2002, 2001 AND 2000 OF $34.4 MILLION,
$27.4 MILLION AND $11.2 MILLION, RESPECTIVELY. AS OF DECEMBER 28, 2002, THE
COMPANY HAD $3.5 MILLION OF CASH AVAILABLE TO MEET THE COMPANY'S OBLIGATIONS.
PAYMENTS ON DEBT AND ISSUANCE OF DEBT HAVE BEEN THE COMPANY'S PRINCIPAL
FINANCING ACTIVITIES. CASH FLOWS USED IN FINANCING ACTIVITIES FOR 2002 AND 2001
WERE $23.6 MILLION AND $17.5 MILLION AND CASH FLOWS PROVIDED BY FINANCING
ACTIVITIES FOR 2000 WERE $8.7 MILLION.
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 PERIOD ENDED DECEMBER 2001. THE LARGEST WORKING CAPITAL
27
USAGE OCCURS ON MAY 1 AND NOVEMBER 1 OF EACH YEAR WHEN THE COMPANY'S INTEREST
PAYMENTS UNDER ITS NOTES RANGING FROM $6.0 TO $7.0 MILLION ARE PAID.
CAPITAL EXPENDITURES FOR 2002, 2001 AND 2000 WERE $10.7 MILLION, $10.6
MILLION AND $18.9 MILLION, RESPECTIVELY, AND ARE THE COMPANY'S PRINCIPAL USES OF
CASH FOR INVESTING ACTIVITIES. THE TABLE BELOW SETS FORTH THE COMPONENTS OF
THESE CAPITAL EXPENDITURES FOR 2002, 2001 AND 2000.
FISCAL YEAR ENDED
------------------
2000 2001 2002
------- ------- -------
EXPENDITURE CATEGORY:
NEW STORES. . . . . . . . . $ 7,200 $ 3,800 $ 2,900
INFORMATION SYSTEMS . . . . 2,100 1,500 1,800
LAB EQUIPMENT . . . . . . . 3,600 1,000 1,400
STORE MAINTENANCE . . . . . 3,100 2,900 4,400
OTHER . . . . . . . . . . . 2,900 1,400 200
TOTAL CAPITAL EXPENDITURES $ 18,900 $10,600 $10,700
======= ======= =======
CAPITAL EXPENDITURES FOR 2003 ARE PROJECTED TO BE APPROXIMATELY $12.0 MILLION.
LONG TERM DEBT
CREDIT FACILITY. ON DECEMBER 23, 2002, THE COMPANY ENTERED INTO A CREDIT
AGREEMENT WITH FLEET NATIONAL BANK, AS ADMINISTRATIVE AGENT, AND BANK OF
AMERICA, N.A., ACTING AS SYNDICATION AGENT, WHICH CONSISTS OF (I) A $55.0
MILLION TERM LOAN FACILITY (THE "TERM LOAN A"); (II) A $62.0 MILLION TERM LOAN
FACILITY (THE "TERM LOAN B"); AND (III) A $25.0 MILLION REVOLVING CREDIT
FACILITY (THE "REVOLVER" AND, TOGETHER WITH TERM LOAN A AND TERM LOAN B, THE
"NEW FACILITIES"). THE PROCEEDS OF THE NEW FACILITIES WERE USED TO (I) PAY
LONG-TERM DEBT OUTSTANDING UNDER THE COMPANY'S PREVIOUS CREDIT FACILITY, (II)
REDEEM $20.0 MILLION FACE VALUE OF THE NOTES AT A COST OF $17.0 MILLION, AND
(III) PAY FEES AND EXPENSES INCURRED IN CONNECTION WITH THE NEW FACILITIES. THE
NEW FACILITIES ARE AVAILABLE TO FINANCE WORKING CAPITAL REQUIREMENTS AND GENERAL
CORPORATE PURPOSES. AT DECEMBER 28, 2002, THE COMPANY HAD APPROXIMATELY $20.0
MILLION AVAILABLE UNDER THE REVOLVER.
BORROWINGS MADE UNDER THE NEW FACILITIES ACCRUE INTEREST AT THE COMPANY'S
OPTION AT THE BASE RATE OR THE LIBOR RATE, PLUS THE APPLICABLE MARGIN. THE BASE
RATE IS A FLOATING RATE EQUAL TO THE HIGHER OF (I) THE FLEET PRIME RATE AND (II)
THE OVERNIGHT FEDERAL FUNDS RATE PLUS 1/2%. THE APPLICABLE MARGINS FOR THE
REVOLVER ARE LIBOR PLUS 4.50% (BASE RATE PLUS 3.50%), TERM LOAN A ARE LIBOR PLUS
4.25% (BASE RATE PLUS 3.25%), AND TERM LOAN B ARE LIBOR PLUS 4.75% (BASE RATE
PLUS 3.75%). PRINCIPAL UNDER TERM LOAN A SHALL AMORTIZE IN ANNUAL PAYMENTS
COMMENCING ON MARCH 31, 2003 IN ANNUAL AMOUNTS OF $15.0 MILLION, $20.0 MILLION
AND $20.0 MILLION, RESPECTIVELY, FOR FISCAL YEARS 2003 THROUGH 2005. TERM LOAN B
HAS NO PRINCIPAL PAYMENTS UNTIL 2006 WHEN ANNUAL PAYMENTS WILL COMMENCE IN
ANNUAL AMOUNTS OF $20.0 MILLION AND $42.0 MILLION, RESPECTIVELY, FOR FISCAL
YEARS 2006 AND 2007.
THE NEW FACILITIES ARE COLLATERALIZED BY ALL TANGIBLE AND INTANGIBLE
ASSETS, INCLUDING THE STOCK
28
OF THE COMPANY'S SUBSIDIARIES. IN ADDITION, THE COMPANY MUST MEET CERTAIN
FINANCIAL COVENANTS INCLUDING MINIMUM EBITDA, INTEREST COVERAGE, LEVERAGE RATIO
AND CAPITAL EXPENDITURES. AS OF DECEMBER 28, 2002, THE COMPANY WAS IN COMPLIANCE
WITH THE FINANCIAL REPORTING COVENANTS.
NOTES. ON APRIL 24, 1998, THE COMPANY COMPLETED A DEBT OFFERING OF $100.0
MILLION 9/18% SENIOR SUBORDINATED NOTES DUE 2008 AND $50.0 MILLION FLOATING
INTEREST SUBORDINATED TERM SECURITIES DUE 2008 (COLLECTIVELY, THE "NOTES" OR THE
"EXCHANGE NOTES"). IN CONNECTION WITH THE NEW FACILITIES, THE COMPANY REDEEMED
$20.0 MILLION OF THE FLOATING RATE NOTES ON DECEMBER 23, 2002. INTEREST ON THE
NOTES IS 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, EQUAL TO LIBOR PLUS 3.98%. THE NOTES ARE NOT ENTITLED TO THE
BENEFIT OF ANY MANDATORY SINKING FUND.
THE NOTES ARE GUARANTEED ON A SENIOR SUBORDINATED BASIS BY ALL OF THE
COMPANY'S SUBSIDIARIES. THE NOTES AND RELATED GUARANTEES:
- - ARE GENERAL UNSECURED OBLIGATIONS OF THE COMPANY AND THE GUARANTORS;
- - ARE SUBORDINATED IN RIGHT OF PAYMENT TO ALL CURRENT AND FUTURE SENIOR
INDEBTEDNESS INCLUDING INDEBTEDNESS UNDER THE NEW FACILITIES; AND
- - RANK PARI PASSU IN RIGHT OF PAYMENT WITH ANY FUTURE SENIOR SUBORDINATED
INDEBTEDNESS OF THE COMPANY AND THE GUARANTORS AND SENIOR IN RIGHT OF
PAYMENT WITH ANY FUTURE SUBORDINATED OBLIGATIONS OF THE COMPANY AND THE
GUARANTORS.
THE COMPANY MAY REDEEM THE NOTES, AT ITS OPTION, IN WHOLE AT ANY TIME OR IN
PART FROM TIME TO TIME. THE REDEMPTION PRICES FOR THE FIXED RATE NOTES ARE SET
FORTH BELOW FOR THE 12-MONTH PERIODS BEGINNING MAY 1 OF THE YEAR SET FORTH
BELOW, PLUS IN EACH CASE, ACCRUED INTEREST TO THE DATE OF REDEMPTION:
YEAR. . . . . . . . REDEMPTION PRICE
- ------------------- -----------------
2003. . . . . . . . 104.563%
2004. . . . . . . . 103.042%
2005. . . . . . . . 101.521%
2006 AND THEREAFTER 100.000%
BEGINNING ON MAY 1, 2003, THE FLOATING RATE NOTES MAY BE REDEEMED AT 100% OF THE
PRINCIPAL AMOUNT THEREOF PLUS ACCRUED AND UNPAID INTEREST TO THE DATE OF
REDEMPTION.
THE INDENTURE GOVERNING THE NOTES CONTAINS CERTAIN COVENANTS THAT, AMONG
OTHER THINGS, LIMIT THE COMPANY AND THE GUARANTORS' ABILITY TO:
- - INCUR ADDITIONAL INDEBTEDNESS;
- - PAY DIVIDENDS OR MAKE OTHER DISTRIBUTIONS IN RESPECT OF ITS CAPITAL STOCK;
- - PURCHASE EQUITY INTERESTS OR SUBORDINATED INDEBTEDNESS;
- - CREATE CERTAIN LIENS;
29
- - ENTER INTO CERTAIN TRANSACTIONS WITH AFFILIATES;
- - CONSUMMATE CERTAIN ASSET SALES; AND
- - MERGE OR CONSOLIDATE.
PREFERRED STOCK. 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 THE 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 ANNUALLY. 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.
CONTRACTUAL OBLIGATIONS. THE COMPANY IS COMMITTED TO MAKE CASH PAYMENTS IN
THE FUTURE ON THE FOLLOWING TYPES OF AGREEMENTS:
- - LONG TERM DEBT
- - OPERATING LEASES FOR STORES AND OFFICE FACILITIES
THE FOLLOWING TABLE REFLECTS A SUMMARY OF ITS CONTRACTUAL CASH OBLIGATIONS
AS OF DECEMBER 28, 2002:
Payments due by period
---------------------------------------------------------------------
Total . . . . . . . . . . . . . . . . Total Less than 1 yr 1 to 3 yrs 3 to 5 yrs More than 5 yrs
- --------------------------------------- ------- ---------------- ----------- ----------- ---------------
Long Term Debt. . . . . . . . . . . . . $ 251,739 $ 15,000 $ 40,000 $ 67,000 $129,739
Capital Lease Obligations . . . . . . . 2,894 524 578 1,792 -
Operating Leases. . . . . . . . . . . . 168,644 29,657 53,905 40,503 44,579
Purchase Obligations. . . . . . . . . . - - - - -
Total future principal payments on debt $ 423,277 $ 45,181 $ 94,483 $ 109,295 $174,318
========== ============ =========== =========== =========
THE COMPANY HAS NO OFF-BALANCE SHEET DEBT OR UNRECORDED OBLIGATIONS AND HAS
NOT GUARANTEED THE DEBT OF ANY OTHER PARTY WITH THE EXCEPTION OF A $1.0 MILLION
LOAN THAT IS RELATED TO THE LONG-TERM BUSINESS AGREEMENT WITH THE RELATED OD PC
ENTERED INTO AT THE TIME OF THE ACQUISITION OF HOUR EYES.
FUTURE CAPITAL RESOURCES. BASED UPON CURRENT OPERATIONS AND FUTURE GROWTH,
THE COMPANY BELIEVES THAT ITS CASH FLOW FROM OPERATIONS, TOGETHER WITH
BORROWINGS CURRENTLY AVAILABLE UNDER THE REVOLVER, ARE ADEQUATE TO MEET ITS
ANTICIPATED REQUIREMENTS FOR WORKING CAPITAL, CAPITAL EXPENDITURES AND SCHEDULED
PRINCIPAL AND INTEREST PAYMENTS THROUGH THE NEXT TWELVE MONTHS. THE ABILITY OF
THE COMPANY TO SATISFY ITS FINANCIAL COVENANTS WITHIN ITS NEW FACILITIES, MEET
ITS DEBT SERVICE OBLIGATIONS AND REDUCE ITS DEBT WILL BE DEPENDENT ON THE FUTURE
PERFORMANCE OF THE
30
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. THE COMPANY BELIEVES THAT ITS ABILITY TO REPAY THE NOTES AND AMOUNTS
OUTSTANDING UNDER THE NEW FACILITIES AT MATURITY WILL LIKELY REQUIRE ADDITIONAL
FINANCING. THE COMPANY CANNOT ASSUME THAT ADDITIONAL FINANCING WILL BE AVAILABLE
TO IT. 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.
CRITICAL ACCOUNTING POLICIES
CRITICAL ACCOUNTING POLICIES ARE THOSE THAT REQUIRE MANAGEMENT TO MAKE
ASSUMPTIONS THAT ARE DIFFICULT OR COMPLEX ABOUT MATTERS THAT ARE UNCERTAIN AND
MAY CHANGE IN SUBSEQUENT PERIODS, RESULTING IN CHANGES TO REPORTED RESULTS.
THE COMPANY'S SIGNIFICANT ACCOUNTING POLICIES ARE DESCRIBED IN NOTE 2 IN
THE NOTES TO CONSOLIDATED FINANCIALS STATEMENTS. THE MAJORITY OF THESE
ACCOUNTING POLICIES DO NOT REQUIRE MANAGEMENT TO MAKE DIFFICULT, SUBJECTIVE OR
COMPLEX JUDGMENTS OR ESTIMATES OR THE VARIABILITY OF THE ESTIMATES IS NOT
MATERIAL. HOWEVER, THE FOLLOWING POLICIES COULD BE DEEMED CRITICAL. THE
COMPANY'S MANAGEMENT HAS DISCUSSED THESE CRITICAL ACCOUNTING POLICIES WITH THE
AUDIT COMMITTEE OF THE BOARD OF DIRECTORS.
- - 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.
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.
31
SEASONALITY AND ANNUAL RESULTS
THE COMPANY'S SALES FLUCTUATE SEASONALLY. HISTORICALLY, THE COMPANY'S
HIGHEST SALES AND EARNINGS OCCUR IN THE FIRST AND THIRD QUARTERS. IN ADDITION,
ANNUAL RESULTS ARE AFFECTED BY THE COMPANY'S GROWTH.
RISK FACTORS
THE COMPANY OFTEN OFFERS INCENTIVES TO CUSTOMERS WHICH LOWER PROFIT MARGINS. AT
TIMES WHEN THE COMPANY'S MAJOR COMPETITORS OFFER SIGNIFICANTLY LOWER PRICES FOR
THEIR PRODUCTS, IT IS OFTEN REQUIRED TO DO THE SAME. CERTAIN OF ITS MAJOR
COMPETITORS OFFER PROMOTIONAL INCENTIVES TO THEIR CUSTOMERS INCLUDING FREE EYE
EXAMS, "50% OFF" ON DESIGNER FRAMES AND "BUY ONE, GET ONE FREE" EYE CARE
PROMOTIONS. IN RESPONSE TO THESE PROMOTIONS, THE COMPANY HAS OFFERED THE SAME OR
SIMILAR INCENTIVES TO ITS CUSTOMERS. THIS PRACTICE HAS RESULTED IN LOWER PROFIT
MARGINS AND THESE COMPETITIVE PROMOTIONAL INCENTIVES MAY FURTHER REDUCE
REVENUES, GROSS MARGINS AND CASH FLOWS. ALTHOUGH THE COMPANY BELIEVES THAT IT
PROVIDES QUALITY SERVICE AND PRODUCTS AT COMPETITIVE PRICES, SEVERAL OF THE
OTHER LARGE RETAIL OPTICAL CHAINS HAVE GREATER FINANCIAL RESOURCES THAN THE
COMPANY. THEREFORE, THE COMPANY MAY NOT BE ABLE TO CONTINUE TO DELIVER COST
EFFICIENT PRODUCTS IN THE EVENT OF AGGRESSIVE PRICING BY ITS COMPETITORS, WHICH
WOULD REDUCE PROFIT MARGINS, NET INCOME AND CASH FLOW.
AS REFRACTIVE LASER SURGERY AND OTHER ADVANCES IN MEDICAL TECHNOLOGY GAIN MARKET
ACCEPTANCE, THE COMPANY MAY LOSE REVENUE FROM TRADITIONAL EYEWEAR CUSTOMERS.
CORNEAL REFRACTIVE SURGERY PROCEDURES SUCH AS RADIAL-KERATOTOMY,
PHOTO-REFRACTIVE KERATECTOMY, LASER IN-SITU KERATOMILEUSIS OR LASIK AND FUTURE
DRUG DEVELOPMENT, MAY CHANGE THE DEMAND FOR THE COMPANY'S PRODUCTS. AS
TRADITIONAL EYEWEAR USERS UNDERGO LASER VISION CORRECTION PROCEDURES OR OTHER
VISION CORRECTION TECHNIQUES, THE DEMAND FOR CERTAIN CONTACT LENSES AND
EYEGLASSES WILL DECREASE. TECHNOLOGICAL DEVELOPMENTS SUCH AS WAFER TECHNOLOGY
AND LENS CASTING MAY RENDER THE COMPANY'S CURRENT LENS MANUFACTURING METHOD
UNCOMPETITIVE OR OBSOLETE. DUE TO THE FACT THAT THE MARKETING AND SALE OF
EYEGLASSES AND CONTACT LENSES IS A SIGNIFICANT PART OF THE COMPANY'S BUSINESS, A
DECREASE IN CUSTOMER DEMAND FOR THESE PRODUCTS COULD HAVE A MATERIAL ADVERSE
EFFECT ON SALES OF PRESCRIPTION EYEWEAR. THERE CAN BE NO ASSURANCE THAT MEDICAL
ADVANCES AND TECHNOLOGICAL DEVELOPMENTS WILL NOT HAVE A MATERIAL ADVERSE EFFECT
ON THE COMPANY'S OPERATIONS.
THE COMPANY MAY BE UNABLE TO SERVICE ITS INDEBTEDNESS. THE COMPANY IS HIGHLY
LEVERAGED, WITH INDEBTEDNESS THAT IS SUBSTANTIAL IN RELATION TO ITS
SHAREHOLDERS' EQUITY. AS OF DECEMBER 28, 2002, THE COMPANY'S AGGREGATE
OUTSTANDING INDEBTEDNESS WAS APPROXIMATELY $254.6 MILLION AND THE COMPANY'S
SHAREHOLDERS' EQUITY WAS A DEFICIT OF $89.1 MILLION. IN ADDITION, SUBJECT TO
CERTAIN LIMITATIONS, THE NEW FACILITIES AND THE INDENTURE GOVERNING THE EXCHANGE
NOTES (THE INDENTURE) PERMIT THE COMPANY TO INCUR OR GUARANTEE CERTAIN
ADDITIONAL INDEBTEDNESS. SEE "CONSOLIDATED FINANCIAL STATEMENTS" AND
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - LIQUIDITY AND CAPITAL RESOURCES."
THE COMPANY'S HIGH DEGREE OF LEVERAGE COULD HAVE IMPORTANT CONSEQUENCES TO
HOLDERS OF THE
32
EXCHANGE NOTES, INCLUDING, BUT NOT LIMITED TO, THE FOLLOWING: (I) THE COMPANY'S
ABILITY TO OBTAIN ADDITIONAL FINANCING FOR WORKING CAPITAL, CAPITAL
EXPENDITURES, ACQUISITIONS OR GENERAL CORPORATE PURPOSES MAY BE IMPAIRED IN THE
FUTURE; (II) A SUBSTANTIAL PORTION OF THE COMPANY'S CASH FLOW FROM OPERATIONS
MUST BE DEDICATED TO THE PAYMENT OF PRINCIPAL AND INTEREST ON ITS INDEBTEDNESS
(INCLUDING THE EXCHANGE NOTES), THEREBY REDUCING THE FUNDS AVAILABLE TO THE
COMPANY FOR ITS OPERATIONS AND OTHER PURPOSES INCLUDING ACQUISITIONS AND NEW
STORE OPENINGS; (III) THE COMPANY MAY BE SUBSTANTIALLY MORE LEVERAGED THAN
CERTAIN OF ITS COMPETITORS, WHICH MAY PLACE THE COMPANY AT A COMPETITIVE
DISADVANTAGE; (IV) THE COMPANY MAY BE HINDERED IN ITS ABILITY TO ADJUST RAPIDLY
TO CHANGING MARKET CONDITIONS; (V) THE COMPANY'S HIGH DEGREE OF LEVERAGE COULD
MAKE IT MORE VULNERABLE IN THE EVENT OF A DOWNTURN IN GENERAL ECONOMIC
CONDITIONS OR ITS BUSINESS OR CHANGING MARKET CONDITIONS AND REGULATIONS; AND
(VI) TO THE EXTENT THAT THE COMPANY'S OBLIGATIONS UNDER THE FLOATING RATE NOTES
AND THE NEW FACILITIES BEARS INTEREST AT FLOATING RATES, AN INCREASE IN INTEREST
RATES COULD ADVERSELY AFFECT, AMONG OTHER THINGS, THE COMPANY'S ABILITY TO MEET
ITS FINANCING OBLIGATIONS.
THE COMPANY'S ABILITY TO REPAY OR TO REFINANCE ITS OBLIGATIONS WITH RESPECT
TO ITS INDEBTEDNESS (INCLUDING THE EXCHANGE NOTES) WILL DEPEND ON ITS FUTURE
FINANCIAL AND OPERATING PERFORMANCE, WHICH, IN TURN, WILL BE SUBJECT TO
PREVAILING ECONOMIC AND COMPETITIVE CONDITIONS AND TO CERTAIN FINANCIAL,
BUSINESS, LEGISLATIVE, REGULATORY AND OTHER FACTORS, MANY OF WHICH ARE BEYOND
THE COMPANY'S CONTROL, AS WELL AS THE AVAILABILITY OF BORROWINGS UNDER THE NEW
FACILITIES. THESE FACTORS COULD INCLUDE OPERATING DIFFICULTIES, DIFFICULTIES IN
IDENTIFYING AND INTEGRATING ACQUISITIONS, INCREASED OPERATING COSTS, PRODUCT
PRICING PRESSURES, THE RESPONSE OF COMPETITORS, REGULATORY DEVELOPMENTS AND
DELAYS IN IMPLEMENTING STRATEGIC PROJECTS, INCLUDING STORE OPENINGS. THE
COMPANY'S ABILITY TO MEET ITS DEBT SERVICE AND OTHER OBLIGATIONS MAY DEPEND IN
SIGNIFICANT PART ON THE EXTENT TO WHICH THE COMPANY CAN IMPLEMENT SUCCESSFULLY
ITS BUSINESS STRATEGY. THERE CAN BE NO ASSURANCE THAT THE COMPANY WILL BE ABLE
TO IMPLEMENT ITS STRATEGY FULLY OR THAT THE ANTICIPATED RESULTS OF ITS STRATEGY
WILL BE REALIZED.
IF THE COMPANY IS UNABLE TO FUND ITS DEBT SERVICE OBLIGATIONS, THE COMPANY
MAY BE FORCED TO REDUCE OR DELAY CAPITAL EXPENDITURES, SELL ASSETS, OR SEEK TO
OBTAIN ADDITIONAL DEBT OR EQUITY CAPITAL, OR TO REFINANCE OR RESTRUCTURE ITS
DEBT (INCLUDING THE EXCHANGE NOTES). THE COMPANY MAY NEED ADDITIONAL FINANCING
TO REPAY THE EXCHANGE NOTES AT MATURITY. THERE CAN BE NO ASSURANCE THAT ANY OF
THESE REMEDIES CAN BE AFFECTED ON SATISFACTORY TERMS, IF AT ALL. FACTORS WHICH
COULD AFFECT THE COMPANY'S OR ITS SUBSIDIARIES' ACCESS TO THE CAPITAL MARKETS,
OR THE COST OF SUCH CAPITAL, INCLUDE CHANGES IN INTEREST RATES, GENERAL ECONOMIC
CONDITIONS AND THE PERCEPTION IN THE CAPITAL MARKETS OF THE COMPANY'S BUSINESS,
RESULTS OF OPERATIONS, LEVERAGE, FINANCIAL CONDITION AND BUSINESS PROSPECTS.
THE EXCHANGE NOTES ARE SUBORDINATED IN RIGHT OF PAYMENT TO ALL FUTURE AND
EXISTING SENIOR INDEBTEDNESS OF THE COMPANY. THE EXCHANGE NOTES AND THE
GUARANTEES ARE SUBORDINATED IN RIGHT OF PAYMENT TO ALL EXISTING AND FUTURE
SENIOR INDEBTEDNESS OF THE COMPANY, INCLUDING INDEBTEDNESS OF THE COMPANY UNDER
THE NEW FACILITIES, AND TO ALL EXISTING AND FUTURE GUARANTOR SENIOR INDEBTEDNESS
OF THE GUARANTORS, INCLUDING THE GUARANTEES OF THE GUARANTORS UNDER THE NEW
FACILITIES, RESPECTIVELY, AND THE EXCHANGE NOTES ARE ALSO EFFECTIVELY
SUBORDINATED TO ALL SECURED INDEBTEDNESS OF THE COMPANY AND THE GUARANTORS,
RESPECTIVELY, TO THE EXTENT OF THE VALUE OF THE
33
ASSETS SECURING SUCH INDEBTEDNESS. THE OBLIGATIONS UNDER THE NEW FACILITIES ARE
GUARANTEED BY THE GUARANTORS AND ARE SECURED BY SUBSTANTIALLY ALL OF THE ASSETS
OF THE COMPANY AND ALL DIRECT AND INDIRECT SUBSIDIARIES OF THE COMPANY AND A
PLEDGE OF THE CAPITAL STOCK OF EACH SUCH SUBSIDIARY (BUT NOT TO EXCEED 65% OF
THE VOTING STOCK OF FOREIGN SUBSIDIARIES). AS OF DECEMBER 28, 2002, THE
AGGREGATE AMOUNT OF SENIOR INDEBTEDNESS OF THE COMPANY WAS APPROXIMATELY $251.7
MILLION (INCLUDING A $1.0 MILLION GUARANTEE BY THE COMPANY, BUT EXCLUSIVE OF
UNUSED COMMITMENTS UNDER THE NEW FACILITIES OF APPROXIMATELY $20.0 MILLION),
$130.0 MILLION OF WHICH IS GUARANTEED BY THE GUARANTORS UNDER THE NEW
FACILITIES.
IN THE EVENT OF BANKRUPTCY, LIQUIDATION, REORGANIZATION OR ANY SIMILAR
PROCEEDING REGARDING THE COMPANY, OR ANY GUARANTOR, OR ANY DEFAULT IN PAYMENT,
THE ASSETS OF THE COMPANY OR SUCH GUARANTOR, AS APPLICABLE, WILL BE AVAILABLE TO
PAY OBLIGATIONS ON THE EXCHANGE NOTES ONLY AFTER THE SENIOR INDEBTEDNESS OF THE
COMPANY OR THE GUARANTOR SENIOR INDEBTEDNESS OF SUCH GUARANTOR, AS APPLICABLE,
HAS BEEN PAID IN FULL, AND THERE MAY NOT BE SUFFICIENT ASSETS REMAINING TO PAY
AMOUNTS DUE ON ALL OR ANY OF THE EXCHANGE NOTES. MOREOVER, UNDER CERTAIN
CIRCUMSTANCES, IF ANY NONPAYMENT DEFAULT EXISTS WITH RESPECT TO DESIGNATED
SENIOR INDEBTEDNESS WHICH WOULD PERMIT THE HOLDERS OF SUCH DESIGNATED SENIOR
INDEBTEDNESS TO ACCELERATE THE MATURITY THEREOF, THE COMPANY MAY NOT MAKE ANY
PAYMENTS ON THE EXCHANGE NOTES FOR A SPECIFIC TIME, UNLESS SUCH DEFAULT IS CURED
OR WAIVED, OR SUCH DESIGNATED SENIOR INDEBTEDNESS IS PAID IN FULL. THE HOLDERS
OF THE EXCHANGE NOTES WILL HAVE NO DIRECT CLAIM AGAINST THE GUARANTORS OTHER
THAN THE CLAIM CREATED BY THE GUARANTEES. THE RIGHTS OF HOLDERS OF THE EXCHANGE
NOTES TO PARTICIPATE IN ANY DISTRIBUTION OF ASSETS OF ANY GUARANTOR UPON
LIQUIDATION, BANKRUPTCY OR REORGANIZATION MAY, AS IS THE CASE WITH OTHER
UNSECURED CREDITORS OF THE COMPANY, BE SUBJECT TO PRIOR CLAIMS AGAINST SUCH
GUARANTOR. THE GUARANTEES MAY THEMSELVES BE SUBJECT TO LEGAL CHALLENGE IN THE
EVENT OF THE BANKRUPTCY OR INSOLVENCY OF A GUARANTOR, OR IN CERTAIN OTHER
CIRCUMSTANCES. IF SUCH A CHALLENGE WERE UPHELD, THE GUARANTEES WOULD BE
INVALIDATED AND UNENFORCEABLE.
THE COMPANY IS RESTRICTED BY THE TERMS OF ITS INDEBTEDNESS FROM TAKING MANY
CORPORATE ACTIONS THAT MAY BE IMPORTANT TO ITS FUTURE SUCCESS. THE INDENTURE
RESTRICTS, AMONG OTHER THINGS, THE COMPANY'S AND ITS SUBSIDIARIES' ABILITY TO:
INCUR ADDITIONAL INDEBTEDNESS; INCUR LIENS; PAY DIVIDENDS OR MAKE CERTAIN OTHER
RESTRICTED PAYMENTS; CONSUMMATE CERTAIN ASSET SALES; ENTER INTO CERTAIN
TRANSACTIONS WITH AFFILIATES; INCUR INDEBTEDNESS THAT IS SUBORDINATE IN RIGHT OF
PAYMENT TO ANY SENIOR INDEBTEDNESS AND SENIOR IN RIGHT OF PAYMENT TO THE
EXCHANGE NOTES; CREATE OR CAUSE TO EXIST RESTRICTIONS ON THE ABILITY OF A
SUBSIDIARY TO PAY DIVIDENDS OR MAKE CERTAIN PAYMENTS TO THE COMPANY; MERGE OR
CONSOLIDATE WITH ANY OTHER PERSON OR SELL, ASSIGN, TRANSFER, LEASE, CONVEY OR
OTHERWISE DISPOSE OF ALL OR SUBSTANTIALLY ALL OF THE ASSETS OF THE COMPANY. IN
ADDITION, THE NEW FACILITIES CONTAIN OTHER AND MORE RESTRICTIVE COVENANTS AND
PROHIBITS THE COMPANY IN ALL CIRCUMSTANCES FROM PREPAYING CERTAIN OF ITS
INDEBTEDNESS (INCLUDING THE EXCHANGE NOTES). THE NEW FACILITIES ALSO REQUIRE THE
COMPANY TO MAINTAIN SPECIFIED FINANCIAL RATIOS. THE COMPANY'S ABILITY TO MEET
THOSE FINANCIAL RATIOS CAN BE AFFECTED BY EVENTS BEYOND ITS CONTROL, AND THERE
CAN BE NO ASSURANCE THAT THE COMPANY WILL MEET THOSE TESTS. A BREACH OF ANY OF
THESE COVENANTS COULD RESULT IN A DEFAULT UNDER THE NEW FACILITIES AND/OR THE
INDENTURE. UPON THE OCCURRENCE OF AN EVENT OF DEFAULT UNDER THE NEW FACILITIES,
THE LENDERS COULD ALSO ELECT TO DECLARE ALL AMOUNTS OUTSTANDING UNDER THE NEW
FACILITIES, TOGETHER WITH ACCRUED INTEREST, TO BE IMMEDIATELY DUE AND
34
PAYABLE. IF THE COMPANY WERE UNABLE TO REPAY THOSE AMOUNTS, THE LENDERS COULD
PROCEED AGAINST THE COLLATERAL GRANTED TO THEM TO SECURE THAT INDEBTEDNESS OR
AGAINST THE GUARANTEES OF THE GUARANTORS OF THE NEW FACILITIES. IF THE DEBT
OUTSTANDING UNDER THE NEW FACILITIES WERE TO BE ACCELERATED, THERE CAN BE NO
ASSURANCE THAT THE ASSETS OF THE COMPANY AND ITS SUBSIDIARIES WOULD BE
SUFFICIENT TO REPAY THE OBLIGATIONS UNDER THE NEW FACILITIES, OTHER SENIOR
INDEBTEDNESS, GUARANTOR SENIOR INDEBTEDNESS OR THE EXCHANGE NOTES. SUBSTANTIALLY
ALL THE ASSETS OF THE COMPANY AND ITS SUBSIDIARIES SECURE THE NEW FACILITIES.
SEE "LIQUIDITY AND CAPITAL RESOURCES."
THE COMPANY IS SUBJECT TO A VARIETY OF STATE, LOCAL AND FEDERAL REGULATIONS THAT
AFFECT THE HEALTH CARE INDUSTRY, WHICH MAY AFFECT ITS ABILITY TO GENERATE
REVENUE OR SUBJECT IT TO ADDITIONAL EXPENSES. THE COMPANY OR ITS LANDLORD LEASES
A PORTION OF EACH OF THE COMPANY'S STORES OR ADJACENT SPACE TO AN INDEPENDENT
OPTOMETRIST. THE AVAILABILITY OF SUCH PROFESSIONAL SERVICES WITHIN OR ADJACENT
TO THE COMPANY'S STORES IS CRITICAL TO THE COMPANY'S MARKETING STRATEGY. 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 MANY STATES PROHIBIT
BUSINESS CORPORATIONS SUCH AS THE COMPANY FROM PRACTICING MEDICINE OR EXERCISING
CONTROL OVER THE MEDICAL JUDGMENTS OR DECISIONS OF PHYSICIANS AND FROM ENGAGING
IN CERTAIN FINANCIAL ARRANGEMENTS, SUCH AS SPLITTING FEES WITH PHYSICIANS. THESE
LAWS AND THEIR INTERPRETATIONS VARY FROM STATE TO STATE AND ARE ENFORCED BY BOTH
COURTS AND REGULATORY AUTHORITIES, EACH WITH BROAD DISCRETION. THE COMPANY HAS
ADDRESSED THESE PROHIBITIONS WITH THREE DISTINCT OPERATING STRUCTURES. WITH
RESPECT TO 198 OF ITS STORES, THE COMPANY SUBLEASES A PORTION OF THE SPACE
WITHIN OR ADJACENT TO ITS STORE TO AN INDEPENDENT OD. IN FORTY-SIX OF THE
STORES, THE COMPANY DIRECTLY EMPLOYS THE OPTOMETRIST. IN SIXTY-FOUR OF THE
COMPANY'S STORES, THE COMPANY HAS STRUCTURED ITS BUSINESS RELATIONSHIPS WITH
INDEPENDENT OPTOMETRISTS BY SUBLEASING THE ENTIRE PREMISES TO THE OD PC AND
ENTERING INTO A LONG-TERM MANAGEMENT AGREEMENT TO MANAGE THE OPTOMETRIST'S
ENTIRE PRACTICE (WHICH INCLUDES THE OPTICAL DISPENSARY AS WELL AS THE
PROFESSIONAL EYE EXAMINATION PRACTICE). VIOLATIONS OF THESE LAWS COULD RESULT IN
CENSURE OR DELICENSING OF OPTOMETRISTS, CIVIL OR CRIMINAL PENALTIES, INCLUDING
LARGE CIVIL MONETARY PENALTIES, OR OTHER SANCTIONS. IN ADDITION, A DETERMINATION
IN ANY STATE THAT THE COMPANY IS ENGAGED IN THE CORPORATE PRACTICE OF MEDICINE
OR ANY UNLAWFUL FEE-SPLITTING ARRANGEMENT COULD RENDER ANY SERVICE AGREEMENT
BETWEEN THE COMPANY AND OPTOMETRISTS LOCATED IN SUCH STATE UNENFORCEABLE OR
SUBJECT TO MODIFICATION, WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON THE
COMPANY. THE COMPANY BELIEVES IT IS CURRENTLY IN MATERIAL COMPLIANCE WITH EACH
OF THESE LAWS; HOWEVER, COURTS AND REGULATORY AUTHORITIES WILL DETERMINE THAT
THESE OPERATING STRUCTURES COMPLY WITH APPLICABLE LAWS AND REGULATIONS. SEE
"BUSINESS - GOVERNMENT REGULATION."
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-
35
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. SUCH EXCLUSIONS AND PENALTIES, IF APPLIED TO THE COMPANY,
COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY. 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.
THE COMPANY'S FUTURE SUCCESS WILL DEPEND ON ITS ABILITY TO ENTER INTO MANAGED
CARE CONTRACTS. AS AN INCREASING PERCENTAGE OF PATIENTS ENTER INTO HEALTH CARE
COVERAGE ARRANGEMENTS WITH MANAGED CARE PAYORS, THE COMPANY BELIEVES THAT ITS
SUCCESS WILL BE, IN PART, DEPENDENT UPON THE COMPANY'S ABILITY TO NEGOTIATE
CONTRACTS WITH EMPLOYER GROUPS AND OTHER PRIVATE THIRD PARTY PAYORS. MANY OF THE
EXISTING MANAGED CARE CONTRACTS MAY BE TERMINATED WITH LITTLE OR NO NOTICE.
THERE IS NO CERTAINTY THAT THE COMPANY WILL BE ABLE TO ESTABLISH OR MAINTAIN
SATISFACTORY RELATIONSHIPS WITH MANAGED CARE AND OTHER THIRD PARTY PAYORS, MANY
OF WHICH ALREADY HAVE EXISTING PROVIDER STRUCTURES IN PLACE AND MAY NOT BE ABLE
OR WILLING TO CHANGE THEIR PROVIDER NETWORKS. THE INABILITY OF THE COMPANY TO
MAINTAIN ITS CURRENT RELATIONSHIPS OR ENTER INTO SUCH ARRANGEMENTS IN THE FUTURE
COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY.
THE COMPANY'S CONTRACTUAL ARRANGEMENTS WITH MANAGED CARE COMPANIES ON THE
ONE HAND, AND THE NETWORKS OF OPTOMETRISTS AND OTHER PROVIDERS ON THE OTHER, ARE
SUBJECT TO FEDERAL AND STATE REGULATIONS, INCLUDING BUT NOT LIMITED TO THE
FOLLOWING:
INSURANCE LICENSURE. MOST STATES IMPOSE STRICT LICENSURE REQUIREMENTS ON HEALTH
INSURANCE COMPANIES, HMOS AND OTHER COMPANIES THAT ENGAGE IN THE BUSINESS OF
INSURANCE. IN MOST STATES, THESE LAWS DO NOT APPLY TO NETWORKS PAID ON A
DISCOUNTED FEE-FOR-SERVICE ARRANGEMENTS OR ON A CAPITATED BASIS. IN THE EVENT
THAT THE COMPANY IS REQUIRED TO BECOME LICENSED UNDER THESE LAWS, THE LICENSURE
PROCESS CAN BE LENGTHY AND TIME CONSUMING. IN ADDITION, MANY OF THE LICENSING
REQUIREMENTS MANDATE STRICT FINANCIAL AND OTHER REQUIREMENTS WHICH THE COMPANY
MAY NOT BE ABLE TO MEET.
ANY WILLING PROVIDER LAWS. SOME STATES HAVE ADOPTED, AND OTHERS ARE
CONSIDERING, LEGISLATION THAT REQUIRES MANAGED CARE PAYORS TO INCLUDE ANY
PROVIDER WHO IS WILLING TO ABIDE BY THE TERMS OF THE MANAGED CARE PAYOR'S
CONTRACTS AND/OR PROHIBIT TERMINATION OF PROVIDERS WITHOUT CAUSE. SUCH LAWS
WOULD LIMIT THE ABILITY OF THE COMPANY TO DEVELOP EFFECTIVE MANAGED CARE
PROVIDER NETWORKS IN SUCH STATES.
ANTITRUST LAWS. THE COMPANY AND ITS NETWORKS OF PROVIDERS ARE SUBJECT TO A
RANGE OF ANTITRUST LAWS THAT PROHIBIT ANTI-COMPETITIVE CONDUCT, INCLUDING
PRICE-FIXING, CONCERTED REFUSALS TO DEAL AND DIVISIONS OF MARKETS. THERE CAN BE
NO ASSURANCE THAT THERE WILL NOT BE A CHALLENGE TO THE COMPANY'S OPERATIONS ON
THE BASIS OF AN ANTITRUST VIOLATION IN THE FUTURE.
ANY TERMINATION OF THE COMPANY'S LONG TERM PROFESSIONAL CORPORATION MANAGEMENT
AGREEMENTS OR A DISPUTE WITH THE OD PCS WOULD HARM ITS BUSINESS. SIXTY-FOUR OF
THE STORES ARE SUBLEASED TO AN OD PC THAT EMPLOYS THE ODS, AND THE COMPANY
(THROUGH ITS SUBSIDIARIES)
36
OPERATES THE STORE THROUGH THE PROVISION OF MANAGEMENT SERVICES TO THE OD PC
(INCLUDING MANAGEMENT OF THE PROFESSIONAL PRACTICE AND OPTICAL RETAIL BUSINESS).
EACH OF THE OD PCS OWN BETWEEN TWELVE AND TWENTY-FOUR STORES. EACH OF THESE
RELATIONSHIPS IS MATERIAL TO THE COMPANY. IN ADDITION, THE COMPANY HAS A RIGHT
TO, AND WITH RESPECT TO THE HOUR EYE'S LOCATIONS THE OD PC HAS THE RIGHT TO
CAUSE THE COMPANY TO, DESIGNATE ANOTHER OPTOMETRIST TO PURCHASE THE STOCK OR
ASSETS OF THE OD PC AT AN AGREED UPON CALCULATION TO DETERMINE THE PURCHASE
PRICE. AT DECEMBER 28, 2002, THESE PRICES RANGE FROM $3.0 MILLION TO $5.0
MILLION IN THE AGGREGATE. WHILE THESE CONTRACTS ARE LONG-TERM COMMITMENTS, NO
ASSURANCES CAN BE GIVEN AS TO THE LIKELIHOOD OF AN AGREEMENT BEING TERMINATED BY
AN OD OR A DISPUTE ARISING BETWEEN THE COMPANY AND THE OD AND TO THE RESULTING
IMPACT ON THE COMPANY'S REVENUES AND CASHFLOWS. A FINDING THAT THE OD PC DOES
NOT COMPLY WITH APPLICABLE LAWS, A DISPUTE WITH AN OD PC OR THE TERMINATION OF A
MANAGEMENT RELATIONSHIP COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY.
PROPOSED AND FUTURE HEALTH CARE REFORM INITIATIVES COULD HARM THE COMPANY.
THERE HAVE BEEN NUMEROUS INITIATIVES AT THE FEDERAL AND STATE LEVELS FOR
COMPREHENSIVE REFORMS AFFECTING THE PAYMENT FOR AND AVAILABILITY OF HEALTHCARE
SERVICES. THE COMPANY BELIEVES THAT SUCH INITIATIVES WILL CONTINUE DURING THE
FORESEEABLE FUTURE. ASPECTS OF CERTAIN OF THESE REFORMS AS PROPOSED IN THE PAST
OR OTHERS THAT MAY BE INTRODUCED COULD, IF ADOPTED, ADVERSELY AFFECT THE
COMPANY.
THE FOLLOWING, AMONG OTHERS, ARE POTENTIAL GOVERNMENTAL INITIATIVES WHICH
MAY HAVE AN ADVERSE EFFECT ON THE COMPANY.
LICENSURE. THE COMPANY MUST OBTAIN LICENSES OR CERTIFICATIONS TO OPERATE ITS
BUSINESS IN CERTAIN STATES. TO OBTAIN AND MAINTAIN SUCH LICENSES, THE COMPANY
MUST SATISFY CERTAIN LICENSURE STANDARDS. CHANGES IN LICENSURE STANDARDS COULD
INCREASE THE COMPANY'S COSTS OR PREVENT THE COMPANY FROM PROVIDING CERTAIN
SERVICES, BOTH OF WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY. SEE
"BUSINESS."
FRAUD AND ABUSE AND STARK LAWS. THERE ARE A VARIETY OF FEDERAL AND STATE LAWS
THAT AFFECT FINANCIAL AND SERVICE ARRANGEMENTS BETWEEN HEALTH CARE PROVIDERS.
THE MEDICARE AND MEDICAID ANTI-FRAUD AND ABUSE LAWS, AS WELL AS THE LAWS OF
CERTAIN STATES, PROHIBIT HEALTH CARE PROVIDERS FROM OFFERING, PAYING, SOLICITING
OR RECEIVING ANY PAYMENTS, DIRECTLY OR INDIRECTLY, IN CASH OR IN KIND, WHICH ARE
DESIGNED TO INDUCE OR ENCOURAGE THE REFERRAL OF PATIENTS TO, OR THE
RECOMMENDATION OF, A PARTICULAR PROVIDER FOR MEDICAL PRODUCTS AND SERVICES.
IN ADDITION, FEDERAL LAW, AS WELL AS THE LAWS OF CERTAIN STATES, PROHIBIT A
PHYSICIAN, INCLUDING AN OPTOMETRIST OR OPHTHALMOLOGIST, WHO HAS A FINANCIAL
RELATIONSHIP THROUGH AN INVESTMENT INTEREST OR COMPENSATION ARRANGEMENT (OR
WHOSE IMMEDIATE FAMILY MEMBER HAS SUCH A FINANCIAL RELATIONSHIP) WITH A PROVIDER
OF DESIGNATED HEALTH SERVICES FROM MAKING REFERRALS TO THAT PROVIDER FOR SUCH
SERVICES, UNLESS THE FINANCIAL RELATIONSHIP QUALIFIES FOR AN EXCEPTION UNDER THE
APPLICABLE LAW. THE FEDERAL LAW, AS WELL AS THE LAWS OF CERTAIN STATES, ALSO
PROHIBIT THE PROVIDER OF SUCH SERVICES FROM BILLING FOR SERVICES PROVIDED AS THE
RESULT OF A PROHIBITED REFERRAL. UNDER THE FEDERAL LAW, DESIGNATED HEALTH
SERVICES IN CERTAIN INSTANCES INCLUDE EYE GLASSES AND LENSES. THE FEDERAL
GOVERNMENT HAS ISSUED PROPOSED REGULATIONS WHICH FURTHER DESCRIBE PROHIBITED
REFERRALS, THE NATURE OF FINANCIAL RELATIONSHIPS AND PERMITTED EXCEPTIONS. THE
COMPANY BELIEVES THAT IT IS IN
37
MATERIAL COMPLIANCE WITH THESE REGULATIONS AS PROPOSED. THE FEDERAL GOVERNMENT
HAS NOT YET ISSUED FINAL REGULATIONS.
THE COMPANY HAS FINANCIAL RELATIONSHIPS WITH NUMEROUS PHYSICIANS TO WHICH
THESE LAWS AND REGULATIONS APPLY. WHILE THE COMPANY REVIEWS SUCH ARRANGEMENTS
FOR COMPLIANCE WITH APPLICABLE LAWS AND REGULATIONS, THE COMPANY HAS NOT
REQUESTED, AND HAS NOT RECEIVED, FROM ANY GOVERNMENTAL AGENCY AN ADVISORY
OPINION FINDING THAT SUCH RELATIONSHIPS ARE IN COMPLIANCE WITH APPLICABLE LAWS
AND REGULATIONS, AND ALL SUCH FINANCIAL RELATIONSHIPS MAY NOT BE FOUND TO COMPLY
WITH SUCH LAWS AND REGULATIONS. IT IS ALSO POSSIBLE THAT FUTURE INTERPRETATIONS
OF SUCH LAWS AND REGULATIONS WILL REQUIRE MODIFICATIONS TO THE COMPANY'S
BUSINESS ARRANGEMENTS.
VIOLATIONS OF THESE LAWS AND REGULATIONS MAY RESULT IN SUBSTANTIAL CIVIL OR
CRIMINAL PENALTIES, INCLUDING DOUBLE AND TREBLE MONETARY PENALTIES, AND, IN THE
CASE OF VIOLATIONS OF FEDERAL LAWS AND REGULATIONS, EXCLUSION FROM THE MEDICARE
AND MEDICAID PROGRAMS. SUCH EXCLUSIONS AND PENALTIES, IF APPLIED TO THE COMPANY,
COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY.
CHANGES IN REIMBURSEMENT. GOVERNMENT REVENUE SOURCES ARE SUBJECT TO STATUTORY
AND REGULATORY CHANGES, ADMINISTRATIVE RULINGS, INTERPRETATIONS OF POLICY,
DETERMINATIONS BY FISCAL INTERMEDIARIES AND CARRIERS, AND GOVERNMENT FUNDING
LIMITATIONS, ALL OF WHICH MAY MATERIALLY INCREASE OR DECREASE THE RATES OF
PAYMENT AND CASH FLOW TO THE COMPANY. THERE IS NO ASSURANCE THAT PAYMENTS MADE
UNDER SUCH PROGRAMS WILL REMAIN AT LEVELS COMPARABLE TO THE PRESENT LEVELS OR BE
SUFFICIENT TO COVER ALL OPERATING AND FIXED COSTS. GOVERNMENT OR THIRD PARTY
PAYORS MAY RETROSPECTIVELY AND/OR PROSPECTIVELY ADJUST PREVIOUS PAYMENTS TO THE
COMPANY IN AMOUNTS WHICH WOULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY.
THE COMPANY IS VULNERABLE TO POSSIBLE FRANCHISE CLAIMS. TWO OPTOMETRISTS
ASSERTED CLAIMS ARISING OUT OF THE NONRENEWAL OF THEIR SUBLEASES OF OFFICE SPACE
WITH THE COMPANY AND THEIR TRADEMARK LICENSE AGREEMENTS WITH ENCLAVE ADVANCEMENT
GROUP, INC., A SUBSIDIARY OF THE COMPANY ("ENCLAVE"). SUCH OPTOMETRISTS
CONTENDED THAT THE LEASING OF SPACE FROM THE COMPANY, COUPLED WITH THE LICENSE
FROM ENCLAVE OF CERTAIN TRADEMARKS, CONSTITUTED A FRANCHISE, AND SUCH
OPTOMETRISTS HAVE ALLEGED VARIOUS CLAIMS ARISING OUT OF THIS CONTENTION. THIS
CLAIM WAS SETTLED IN MAY, 1998. WHILE THE COMPANY BELIEVES THAT THE STRUCTURE OF
THE RELATIONSHIPS AMONG THE COMPANY, ENCLAVE AND THE OPTOMETRISTS WERE OPERATING
NEAR THE COMPANY'S RETAIL STORES DOES NOT CONSTITUTE A FRANCHISE, NO ASSURANCE
CAN BE GIVEN THAT A CLAIM, ACTION OR PROCEEDING WILL NOT BE BROUGHT AGAINST THE
COMPANY OR ENCLAVE ASSERTING THAT A FRANCHISE EXISTS.
THE COMPANY RELIES ON THIRD-PARTY REIMBURSEMENT, THE FUTURE REDUCTION OF WHICH
WOULD HARM ITS BUSINESS. THE COST OF A SIGNIFICANT PORTION OF MEDICAL CARE IN
THE UNITED STATES IS FUNDED BY GOVERNMENT AND PRIVATE INSURANCE PROGRAMS, SUCH
AS MEDICARE, MEDICAID AND CORPORATE HEALTH INSURANCE PLANS. ACCORDING TO
GOVERNMENTAL PROJECTIONS, IT IS EXPECTED THAT MORE MEDICAL BENEFICIARIES WHO ARE
SIGNIFICANT CONSUMERS OF EYE CARE SERVICES WILL ENROLL IN MANAGEMENT CARE
ORGANIZATIONS. THE HEALTH CARE INDUSTRY IS EXPERIENCING A TREND TOWARD
COST-CONTAINMENT WITH GOVERNMENTAL AND PRIVATE THIRD PARTY PAYORS SEEKING TO
IMPOSE LOWER REIMBURSEMENT, UTILIZATION RESTRICTIONS AND RISK-BASED COMPENSATION
ARRANGEMENTS. PRIVATE THIRD-PARTY REIMBURSEMENT PLANS ARE ALSO DEVELOPING
INCREASINGLY SOPHISTICATED METHODS OF CONTROLLING HEALTH CARE COSTS THROUGH
38
REDESIGN OF BENEFITS AND EXPLORATIONS OF MORE COST-EFFECTIVE METHODS OF
DELIVERING HEALTH CARE. ACCORDINGLY, THERE CAN BE NO ASSURANCE THAT
REIMBURSEMENT FOR PURCHASE AND USE OF EYE CARE SERVICES WILL NOT BE LIMITED OR
REDUCED AND THEREBY ADVERSELY AFFECT FUTURE SALES BY THE COMPANY.
THE COMPANY MAY BE EXPOSED TO A SIGNIFICANT RISK FROM LIABILITY CLAIMS IF IT IS
UNABLE TO OBTAIN INSURANCE, AT ACCEPTABLE COSTS, TO PROTECT IT AGAINST POTENTIAL
LIABILITY CLAIMS. THE PROVISION OF PROFESSIONAL EYE CARE SERVICES ENTAILS AN
INHERENT RISK OF PROFESSIONAL MALPRACTICE AND OTHER SIMILAR CLAIMS. THE COMPANY
DOES NOT INFLUENCE OR CONTROL THE PRACTICE OF OPTOMETRY BY THE OPTOMETRISTS THAT
IT EMPLOYS OR AFFILIATES WITH, NOR DOES IT HAVE RESPONSIBILITY FOR THEIR
COMPLIANCE WITH CERTAIN REGULATORY AND OTHER REQUIREMENTS DIRECTLY APPLICABLE TO
THESE INDIVIDUAL PROFESSIONALS. AS A RESULT OF THE RELATIONSHIP BETWEEN THE
EMPLOYED AND AFFILIATED OPTOMETRISTS AND THE COMPANY, HOWEVER, THE COMPANY MAY
BECOME SUBJECT TO PROFESSIONAL MALPRACTICE ACTIONS OR CLAIMS UNDER VARIOUS
THEORIES RELATING TO THE PROFESSIONAL SERVICES PROVIDED BY THESE INDIVIDUALS.
THE COMPANY MAY NOT BE ABLE TO CONTINUE TO OBTAIN ADEQUATE LIABILITY INSURANCE
AT REASONABLE RATES, IN WHICH EVENT, ITS INSURANCE MAY NOT BE ADEQUATE TO COVER
CLAIMS ASSERTED AGAINST IT, IN WHICH EVENT, ITS FUTURE CASH POSITION COULD BE
REDUCED AND ITS ABILITY TO CONTINUE OPERATIONS COULD BE JEOPARDIZED.
IF THE COMPANY IS UNABLE TO MAKE A CHANGE OF CONTROL PAYMENT, IT WILL BE IN
DEFAULT UNDER THE INDENTURE. UPON THE OCCURRENCE OF A CHANGE OF CONTROL,
SUBJECT TO CERTAIN CONDITIONS, THE COMPANY WILL BE REQUIRED TO MAKE AN OFFER TO
PURCHASE ALL OF THE OUTSTANDING EXCHANGE NOTES AT A PRICE EQUAL TO 101% OF THE
PRINCIPAL AMOUNT THEREOF AT THE DATE OF PURCHASE PLUS ACCRUED AND UNPAID
INTEREST, IF ANY, TO THE DATE OF PURCHASE. IF A CHANGE OF CONTROL WERE TO OCCUR,
THERE CAN BE NO ASSURANCE THAT THE COMPANY WOULD HAVE SUFFICIENT FUNDS TO PAY
THE REPURCHASE PRICE FOR ALL EXCHANGE NOTES TENDERED BY THE HOLDERS THEREOF;
SUCH FAILURE WOULD RESULT IN AN EVENT OF DEFAULT UNDER THE INDENTURE. THE
OCCURRENCE OF A CHANGE OF CONTROL WOULD CONSTITUTE A DEFAULT UNDER THE NEW
FACILITIES AND MIGHT CONSTITUTE A DEFAULT UNDER THE OTHER AGREEMENTS GOVERNING
INDEBTEDNESS THAT THE COMPANY OR ITS SUBSIDIARIES MAY ENTER INTO FROM TIME TO
TIME. IN ADDITION, THE NEW FACILITIES PROHIBITS THE PURCHASE OF THE NOTES BY THE
COMPANY IN THE EVENT OF A CHANGE OF CONTROL, UNLESS AND UNTIL SUCH TIME AS THE
INDEBTEDNESS UNDER THE NEW FACILITIES IS REPAID IN FULL. THE COMPANY'S FAILURE
TO PURCHASE THE NOTES IN SUCH INSTANCE WOULD RESULT IN A DEFAULT UNDER EACH OF
THE INDENTURE AND THE NEW FACILITIES. THE INABILITY TO REPAY THE INDEBTEDNESS
UNDER THE NEW FACILITIES, IF ACCELERATED, COULD HAVE A MATERIAL ADVERSE
CONSEQUENCES TO THE COMPANY AND TO HOLDERS OF THE EXCHANGE NOTES. FUTURE
INDEBTEDNESS OF THE COMPANY MAY ALSO CONTAIN PROHIBITIONS OF CERTAIN EVENTS OR
TRANSACTIONS THAT COULD CONSTITUTE A CHANGE OF CONTROL OR REQUIRE SUCH
INDEBTEDNESS TO BE REPURCHASED UPON A CHANGE OF CONTROL. SEE "LIQUIDITY AND
CAPITAL RESOURCES."
IF THE COMPANY FAILS TO MAKE TIMELY PAYMENTS ON ANY OF ITS INDEBTEDNESS, AN
EVENT OF DEFAULT UNDER THE INDENTURE WOULD BE TRIGGERED THE FAILURE TO PAY
PRINCIPAL AT MATURITY UNDER THE TERMS OF ANY INDEBTEDNESS, AFTER GIVING EFFECT
TO ANY APPLICABLE GRACE PERIOD OR EXTENSIONS THEREOF, BY THE COMPANY, RESULTING
IN A DEFAULT UNDER SUCH INDEBTEDNESS, WOULD RESULT IN AN EVENT OF DEFAULT UNDER
THE EXCHANGE NOTES. IF SUCH AN EVENT OF DEFAULT WERE TO OCCUR, THERE CAN BE NO
ASSURANCE THAT THE COMPANY WOULD HAVE SUFFICIENT FUNDS TO PAY THE REPURCHASE
PRICE FOR ALL EXCHANGE NOTES TENDERED BY THE HOLDERS THEREOF. FUTURE
INDEBTEDNESS OF THE COMPANY MAY ALSO CONTAIN
39
PROHIBITIONS OF CERTAIN EVENTS OR TRANSACTIONS THAT WOULD CONSTITUTE A CHANGE OF
CONTROL OR REQUIRE SUCH INDEBTEDNESS TO BE REPURCHASED UPON A CHANGE OF CONTROL.
IN BANKRUPTCY, THE EXCHANGE NOTES MAY BE INVALIDATED OR SUBORDINATED TO OTHER
DEBTS OF THE COMPANY. UNDER APPLICABLE PROVISIONS OF FEDERAL BANKRUPTCY LAW OR
COMPARABLE PROVISIONS OF STATE FRAUDULENT CONVEYANCE LAW, IF, AMONG OTHER
THINGS, THE COMPANY OR THE GUARANTORS, AT THE TIME IT INCURRED THE INDEBTEDNESS
EVIDENCE BY THE EXCHANGE NOTES OR THE GUARANTEES, AS THE CASE MAY BE, (I) (A)
WAS OR IS INSOLVENT OR RENDERED INSOLVENT BY REASON OF SUCH OCCURRENCE OF (B)
WAS OR IS ENGAGED IN A BUSINESS OR TRANSACTION OF WHICH THE ASSETS REMAINING
WITH THE COMPANY OR THE GUARANTORS WERE UNREASONABLY SMALL OR CONSTITUTE
UNREASONABLY SMALL CAPITAL OR (C) INTENDED OR INTENDS TO INCUR, OR BELIEVED,
BELIEVES OR SHOULD HAVE BELIEVED THAT IT WOULD INCUR, DEBTS BEYOND ITS ABILITY
TO REPAY SUCH DEBTS AS THEY MATURE AND (II) THE COMPANY OR THE GUARANTOR
RECEIVED OR RECEIVES LESS THAN THE REASONABLY EQUIVALENT VALUE OR FAIR
CONSIDERATION FOR THE INCURRENCE OF SUCH INDEBTEDNESS, THE EXCHANGE NOTES AND
THE GUARANTEES COULD BE INVALIDATED OR SUBORDINATED TO ALL OTHER DEBTS OF THE
COMPANY OR THE GUARANTORS, AS THE CASE MAY BE. THE EXCHANGE NOTES OR GUARANTEES
COULD ALSO BE INVALIDATED OR SUBORDINATED IF IT WERE FOUND THAT THE COMPANY OR
THE GUARANTOR, AS THE CASE MAY BE, INCURRED INDEBTEDNESS IN CONNECTION WITH THE
EXCHANGE NOTES OR THE GUARANTEES WITH THE INTENT OF HINDERING, DELAYING OR
DEFRAUDING CURRENT OR FUTURE CREDITORS OF THE COMPANY OR THE GUARANTORS, AS THE
CASE MAY BE. IN ADDITION, THE PAYMENT OF INTEREST AND PRINCIPAL BY THE COMPANY
PURSUANT TO THE EXCHANGE NOTES OR THE PAYMENT OF AMOUNTS BY THE GUARANTORS
PURSUANT TO THE GUARANTEES COULD BE VOIDED AND REQUIRED TO BE RETURNED TO THE
PERSON MAKING SUCH PAYMENT, OR TO A FUND FOR THE BENEFIT OF THE CREDITORS OF THE
COMPANY OR THE GUARANTORS, AS THE CASE MAY BE.
THE MEASURES OF INSOLVENCY FOR PURPOSES OF THE FOREGOING CONSIDERATIONS
WILL VARY DEPENDING UPON THE LAW APPLIED IN ANY PROCEEDING WITH RESPECT TO THE
FOREGOING. GENERALLY, HOWEVER, THE COMPANY OR THE GUARANTORS WOULD BE CONSIDERED
INSOLVENT IF (I) THE SUM OF ITS DEBTS, INCLUDING CONTINGENT LIABILITIES, WERE
GREATER THAN THE SUM OF ALL OF ITS ASSETS AT A FAIR VALUATION OR IF THE PRESENT
FAIR SALEABLE VALUE OF ITS ASSETS WERE LESS THAN THE AMOUNT THAT WOULD BE
REQUIRED TO PAY ITS PROBABLE LIABILITY ON ITS EXISTING DEBTS, INCLUDING
CONTINGENT LIABILITIES, AS THEY BECOME ABSOLUTE AND MATURE OR (II) IT COULD NOT
PAY ITS DEBTS AS THEY BECOME DUE.
TO THE EXTENT THE GUARANTEES WERE VOIDED AS A FRAUDULENT CONVEYANCE OR HELD
UNENFORCEABLE FOR ANY OTHER REASON, HOLDERS OF EXCHANGE NOTES WOULD CEASE TO
HAVE ANY CLAIM IN RESPECT OF THE GUARANTORS AND WOULD BE CREDITORS SOLELY OF THE
COMPANY. IN SUCH EVENT, THE CLAIMS OF HOLDERS OF EXCHANGE NOTES AGAINST THE
GUARANTORS WOULD BE SUBJECT TO THE PRIOR PAYMENT OF ALL LIABILITIES AND
PREFERRED STOCK CLAIMS OF THE GUARANTORS. THERE CAN BE NO ASSURANCE THAT, AFTER
PROVIDING FOR ALL PRIOR CLAIMS AND PREFERRED STOCK INTERESTS, IF ANY, THERE
WOULD BE SUFFICIENT ASSETS TO SATISFY THE CLAIMS OF HOLDERS OF EXCHANGE NOTES
RELATING TO ANY VOIDED PORTIONS OF THE GUARANTEES.
THL CONTROLS THE COMPANY AND MAY HAVE INTERESTS THAT DIVERGE FROM THOSE OF THE
HOLDERS OF THE EXCHANGE NOTES. THL OWNS APPROXIMATELY 90.2% OF THE ISSUED AND
OUTSTANDING COMMON STOCK. ACCORDINGLY, THL CONTROLS THE COMPANY AND HAS ELECTED
A MAJORITY OF ITS DIRECTORS, APPOINTED NEW MANAGEMENT AND APPROVED ANY ACTION
REQUIRING THE APPROVAL OF THE HOLDERS OF
40
COMMON STOCK, INCLUDING ADOPTING AMENDMENTS TO THE COMPANY'S CHARTER AND
APPROVING MERGERS OR SALES OF SUBSTANTIALLY ALL OF THE COMPANY'S ASSETS. THE
DIRECTORS ELECTED BY THL HAVE THE AUTHORITY TO MAKE DECISIONS AFFECTING THE
CAPITAL STRUCTURE OF THE COMPANY, INCLUDING THE ISSUANCE OF ADDITIONAL CAPITAL
STOCK, THE IMPLEMENTATION OF STOCK REPURCHASE PROGRAMS AND THE DECLARATION OF
DIVIDENDS. THERE CAN BE NO ASSURANCE THAT THE INTERESTS OF THL DOES OR WILL NOT
CONFLICT WITH THE INTERESTS OF THE HOLDERS OF THE EXCHANGE NOTES. SEE "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."
THE COMPANY DEPENDS ON THE ABILITY AND EXPERIENCE OF CERTAIN MEMBERS OF ITS
MANAGEMENT TEAM AND THEIR DEPARTURE MAY HURT ITS FINANCIAL PERFORMANCE. THE
COMPANY RELIES ON THE SKILLS OF CERTAIN MEMBERS OF ITS SENIOR MANAGEMENT TEAM TO
GUIDE OPERATIONS, THE LOSS OF WHICH COULD HAVE AN ADVERSE EFFECT ON ITS
OPERATIONS. FURTHERMORE, THE MEMBERS OF ITS SENIOR MANAGEMENT TEAM, OTHER THAN
MR. MCCOMAS, HAVE ANNUAL EMPLOYMENT AGREEMENTS WITH THE COMPANY THAT
AUTOMATICALLY RENEW UNLESS EITHER PARTY GIVES THIRTY DAY NOTICE. ACCORDINGLY,
KEY EXECUTIVES MAY NOT CONTINUE TO WORK FOR THE COMPANY, AND IT MAY NOT HAVE
ADEQUATE TIME TO HIRE QUALIFIED REPLACEMENTS WHICH COULD HAVE A MATERIAL ADVERSE
EFFECT ON THE COMPANY.
THE EXCHANGE NOTES ARE NOT PUBLICLY TRADED AND THEREFORE MAY NOT BE A LIQUID
INVESTMENT. THERE IS NO EXISTING MARKET FOR THE EXCHANGE NOTES AND THERE CAN BE
NO ASSURANCES AS TO THE LIQUIDITY OF ANY MARKETS THAT MAY DEVELOP FOR THE
EXCHANGE NOTES, THE ABILITY OF HOLDERS OF THE EXCHANGE NOTES TO SELL THEIR
EXCHANGE NOTES, OR THE PRICE AT WHICH HOLDERS WOULD BE ABLE TO SELL THEIR
EXCHANGE NOTES. FUTURE TRADING PRICES OF THE EXCHANGE NOTES WILL DEPEND ON MANY
FACTORS, INCLUDING AMONG OTHER THINGS, PREVAILING INTEREST RATES, THE COMPANY'S
OPERATING RESULTS AND THE MARKET FOR SIMILAR SECURITIES.
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 28, 2002, $152.1
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 2002 AVERAGE INTEREST RATE
UNDER THE $152.1 MILLION IN BORROWINGS, THE COMPANY'S 2002 INTEREST EXPENSE
WOULD HAVE CHANGED APPROXIMATELY $3.0 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
41
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.
42
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 . . . . . . . . . . . . . 60 PRESIDENT AND CHIEF EXECUTIVE OFFICER
ALAN E. WILEY. . . . . . . . . . . . . . . 55 EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER,
PRESIDENT OF MANAGED VISION CARE, SECRETARY AND TREASURER
GEORGE E. GEBHARDT . . . . . . . . . . . . 52 EXECUTIVE VICE PRESIDENT OF MERCHANDISING, MARKETING AND
REAL ESTATE/CONSTRUCTION
ROBERT T. COX. . . . . . . . . . . . . . . 37 VICE PRESIDENT OF HUMAN RESOURCES
BERNARD W. ANDREWS . . . . . . . . . . . . 61 CHAIRMAN
NORMAN S. MATTHEWS . . . . . . . . . . . . 69 DIRECTOR
ANTOINE G. TREUILLE. . . . . . . . . . . . 53 DIRECTOR
ANTHONY J. DINOVI. . . . . . . . . . . . . 40 DIRECTOR
WARREN C. SMITH, JR. . . . . . . . . . . . 46 DIRECTOR
CHARLES A. BRIZIUS . . . . . . . . . . . . 34 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 AND
43
REAL ESTATE/CONSTRUCTION IN APRIL 2002. 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, 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.
ROBERT T. COX HAS SERVED AS THE VICE PRESIDENT OF HUMAN RESOURCES SINCE
APRIL 2002. FROM JANUARY 1999 THROUGH APRIL 2002, MR. COX SERVED AS THE DIVISION
HUMAN RESOURCE MANAGER FOR THE HOME DEPOT IN THE PHOENIX, ARIZONA AND
SURROUNDING MARKETS. FROM DECEMBER 1987 THROUGH DECEMBER 1998, MR. COX HELD
SEVERAL HUMAN RESOURCES POSITIONS TO INCLUDE REGIONAL HUMAN RESOURCE MANAGER
WITH WESTERN AUTO SUPPLY CO. (A DIVISION OF SEARS ROEBUCK & CO.). MR. COX HAS
OVER TWENTY YEARS OF RETAIL EXPERIENCE.
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. MR. TREUILLE HAS SERVED AS PRESIDENT
OF CHARTER PACIFIC CORP. SINCE MAY 1996. HE WAS PREVIOUSLY MANAGING DIRECTOR OF
FINANCO, INC., AN INVESTMENT BANK, FROM MARCH 1998 UNTIL 1999. PRIOR TO HIS
CURRENT 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
44
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.
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.
45
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 2002 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
ANNUAL -------------
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. . . . . . . . . . . 2002 474,038 650,000 - 233,000 -
President and Chief. . . . . . . . 2001 399,109 112,500 - - -
Executive Officer. . . . . . . . . 2000 349,836 - - - -
Alan E. Wiley . . . . . . . . . . . . 2002 287,692 319,000 - 71,500 -
Executive Vice President,. . . . . 2001 258,038 68,750 - - -
Chief Financial Officer, . . . . . 2000 241,982 - - - -
President of Managed Vision Care,
Secretary and Treasurer
George E. Gebhardt. . . . . . . . . . 2002 237,692 264,000 - 56,500 -
Executive Vice President of. . . . 2001 223,692 25,000 - - -
Merchandising, Marketing and . . . 2000 215,192 - - - -
Construction/Real Estate
Bernard W. Andrews. . . . . . . . . . 2002 132,308 - - 281,275
Chairman of the Board. . . . . . . 2001 359,616 - - - 6,236
2000 582,695 - - - 5,654
Robert T. Cox (e) . . . . . . . . . . 2002 86,538 98,214 42,701 17,000 -
Vice President of Human. . . . . . 2001 - - - - -
Resources. . . . . . . . . . . . . 2000 - - - - -
____________
(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. Robert T. Cox for 2002, 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. Cox in 2002, $42,701
related to relocation expenses paid by the Company on behalf of Mr. Cox.
(d) During 2001 and 2000, the Company paid $6,236 and $5,654, respectively, for
premiums for term life insurance for Mr. Andrews.
(e) Represents partial year compensation as Mr. Cox's employment commenced
on 4/15/02.
46
STOCK OPTION GRANTS. On June 15, 2001, the Company entered into Option
Cancellation Agreements (the "Cancellation Agreements") with certain employees
and directors (the "Optionees") to cancel all outstanding options which were
granted under the Company's 1998 Stock Option Plan (the "Plan") due to changes
in the fair market value of the Company's common stock. The Cancellation
Agreements provided that a new grant would be made no earlier than six months
and a day after the cancellation of the options and such grant was made on
January 8, 2002. The following table sets forth information with respect to the
Named Executive Officers concerning options granted during fiscal 2002. The
Named Executive Offices have not been granted any SARs in fiscal 2002.
POTENTIAL REALIZED
INDIVIDUAL GRANTS VALUE AT ASSUMED
ANNUAL RATES
OF STOCK
PRICE
APPRECIATION
-------------
NUMBER OF %OF TOTAL
SECURITIES OPTIONS EXERCISE
UNDERLYING GRANTED TO OR BASE
OPTIONS EMPLOYEES IN PRICE EXPIRATION
NAME . . . . . . . GRANTED(#) FISCAL YEAR ($/SH) DATE 5% 10%
- ---------- ------- ---------- -------- ---------- ------- ------
David E. McComas 220,000 22.2% $5.00 1/12 $1,706,461 $2,593,742
13,000 1.3% $15.13 12/12 $ 305,131 $463,785
Alan E. Wiley 65,000 6.6% $5.00 1/12 $ 504,182 $766,333
6,500 0.7% $15.13 12/12 $ 152,565 $231,892
George E. Gebhardt 50,000 5.1% $5.00 1/12 $ 387,832 $589,487
6,500 0.7% $15.13 12/12 $ 152,565 $231,892
Bernard W. Andrews 281,275 29.8% $5.00 1/12 $2,181,749 $3,316,159
Robert T. Cox 15,000 1.5% $5.00 1/12 $ 116,350 $176,846
2,000 0.2% $15.13 12/12 $ 46,943 $71,351
____________
STOCK OPTION EXERCISES AND HOLDINGS TABLE. The following table sets forth
information with respect to the Named Executive Officers concerning unexercised
options held as of December 28, 2002. The Named Executive Officers have not
been granted any SARs.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
... . . . . . . . . . . NUMBER OF
... . . . . . . . . . . SECURITIES VALUE OF
... . . . . . . . . . . UNDERLYING UNEXERCISED
... . . . . . . . . . . UNEXERCISED IN-THE-MONEY
... . . . . . . . . . . OPTIONS AT OPTIONS AT
... . . . . . . . . FY-END (#) FY-END ($)
SHARES VALUE ----------------- ----------------------
... . . . . . . . . ACQUIRED ON REALIZED EXERCISABLE/ EXERCISABLE/
NAME . . . . . . . EXERCISE (#) ($) UNEXERCISABLE UNEXERCISABLE
- ------------------ ------------ --------- ------------------ ----------------------
David E. McComas . . . 88,000 / 145,000 891,440 / $1,337,160
Alan E. Wiley. . . . . 26,000 / 45,500 $263,380 / $395,070
George E. Gebhardt . . 14,000 / 42,500 $141,820 / $364,680
Bernard W. Andrews . . 112,510 / 168,765 $1,139,726 / $1,709,589
Robert T. Cox. . . . . - / 17,000 - / $151,950
____________
47
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, $500,000 per year, plus expenses for management and other
consulting services provided to the Company. See "Item 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."
The Company has entered into a consulting agreement 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 111,412 replacement options were
issued on January 8, 2002. The replacement 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.
Antoine Treuille receives $10,000 per year for his services. Mr. Treuille
received 5,000 options in 1998, 1999 and 2000, respectively, 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 15,000 replacement
options were issued in January 2002. The replacement 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.
Subsequent to the January 8, 2002 reissuance, Mr. Treuille received an
additional 5,000 options that are also subject to a three year vesting schedule
and are at an exercise price of $5.00 per share.
48
As of the closing of the Recapitalization, Bernard 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. Mr.
Andrews received 281,275 options with the January 8, 2002 option reissuance. The
options are subject to a three year vesting schedule and are at an exercise
price of $5.00 per share. Mr. Andrews' employment contract was terminated in
July 2002 and under the termination contract he continues to received annual
employment compensation of $100,000.
Except with respect to the consulting fee paid to Mr. Matthews, the annual
payments paid to Mr. Treuille and Mr. Andrews, and the management fee paid to
THL Co., during fiscal 2002 none of the directors of the Company received any
compensation for their services as directors of the Company.
EMPLOYMENT AGREEMENTS
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 was amended on December 29, 2002 to extend
through fiscal 2004. Mr. McComas is entitled to a base salary of $450,000 during
the first year, $500,000 during the second year, $550,000 during fiscal 2003 and
$600,000 in fiscal 2004. 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 twenty-four 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 three year period. Subsequent to the January 8, 2002
reissuance, Mr. McComas received an additional option to purchase 13,000 shares
that are subject to a four year vesting schedule and are at an exercise price of
$15.13 per share.
The remaining executive officers are each subject to annual employment
agreements that 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
49
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.
CODE OF ETHICS
The Company requires all its employees who hold positions of significant
responsibility to annually review and agree to uphold its Business Conduct and
Ethics Policy. All executive and financial officers and members of management
are included in this annual update. The policy states the Company's expectation
that all employees are required to observe the highest standards of business
ethics and strict adherence to all laws. It further details codes of conduct
with respect to conflicts of interest and compliance with generally accepted
accounting principles and controls. In addition, the Company's senior
management and financial management have certified their understanding of their
responsibility with regard to ensuring the Company is in compliance with
generally accepted accounting principles.
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, 2003, options to purchase 947,775
shares of Common Stock were outstanding. Of the outstanding options, 816,775
were options issued in relation to the Cancellation Agreements. Subject to
acceleration under certain circumstances, these options vest over a three-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 131,000 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 ranges from $5.00 to $15.13. Generally, all
unvested options will be forfeited upon termination of employment.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. During 2002,
the Compensation Committee consisted of Messrs. Matthews, DiNovi and Smith, none
of whom were an officer or employee of the Company. See discussion under "ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
50
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, 2003 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.
SHARES OF PERCENTAGE
NAME OF BENEFICIAL OWNER(A) . . . . . . . . . . . . . . . . . . . . . . . COMMON STOCK OF CLASS
- ------------------------------------------------------------------------- ------------ -----------
Affiliates of THL Co.(b). . . . . . . . . . . . . . . . . . . . . . . . . 6,664,800 90.2%
Equity-Linked Investors-II (c). . . . . . . . . . . . . . . . . . . . . . 383,616 5.2
Bernard W. Andrews (e). . . . . . . . . . . . . . . . . . . . . . . . . . 360,885 *
David E. McComas (f). . . . . . . . . . . . . . . . . . . . . . . . . . . 156,015 *
Norman S. Matthews (g). . . . . . . . . . . . . . . . . . . . . . . . . . 103,251 *
Antoine G. Treuille (h) . . . . . . . . . . . . . . . . . . . . . . . . . 17,778 *
George E. Gebhardt (i). . . . . . . . . . . . . . . . . . . . . . . . . . 57,499 *
Alan E. Wiley(j). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,606 *
Anthony J. DiNovi (b) . . . . . . . . . . . . . . . . . . . . . . . . . . 6,664,800 90.2
Warren C. Smith (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,664,800 90.2
Charles A. Brizius (b). . . . . . . . . . . . . . . . . . . . . . . . . . 6,664,800 90.2
All directors and executive officers of the Company as a group (11)(b)(d) 7,408,834 94.4
* 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 (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 457,074 shares issuable pursuant to presently exercisable options
(or those exercisable prior to May 1, 2003).
(e) Includes 168,765 shares issuable pursuant to presently exercisable options
(or those exercisable prior to May 1, 2003). Excludes 112,510 shares
issuable pursuant to options which are not currently exercisable (or
exercisable prior to May 1, 2003).
(f) Includes 132,000 shares issuable pursuant to presently exercisable options
(or those exercisable prior to May 1, 2003). Excludes 101,000 shares
issuable pursuant to options which are not currently exercisable (or
exercisable prior to May 1, 2003).
(g) Includes 83,559 shares issuable pursuant to presently exercisable options
(or those exercisable prior to May 1, 2003). Excludes 27,853 shares
issuable pursuant to options which are not currently exercisable (or
exercisable prior to May 1, 2003).
(h) Includes 11,250 shares issuable pursuant to presently exercisable options
(or those exercisable prior to May 1, 2003). Excludes 8,750 shares issuable
pursuant to options which are not currently exercisable (or exercisable
prior to May 1, 2003).
(i) Includes 22,500 shares issuable pursuant to presently exercisable options
(or those exercisable prior to May 1, 2003). Excludes 34,000 shares
issuable pursuant to options which are not currently exercisable (or
exercisable prior to May 1, 2003).
(j)Includes 39,000 shares issuable pursuant to presently exercisable options or
those exercisable prior to May 1, 2003). Excludes 32,500 shares issuable
pursuant to options which are not currently exercisable (or exercisable
prior to May 1, 2003).
51
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.
ITEM 14. CONTROLS AND PROCEDURES
The Company has established and maintains disclosure controls and
procedures that are designed to ensure that material information relating to the
Company and its subsidiaries required to be disclosed in the reports that it
files or submits under the Securities and Exchange Act of 1934 is recorded,
processed, summarized, and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms, and that such information
is accumulated and communicated to the Company's management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure. Within the 90 days prior to the date of
this annual report, the Company carried out an
52
evaluation, under the supervision and with the participation of management,
including the Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of disclosure controls and procedures.
Based on that evaluation of these disclosure controls and procedures, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective as of the date of such
evaluation.
The Chief Executive Officer and Chief Financial Officer have also concluded
that there were no significant changes in the Company's internal controls or in
other factors that could significantly affect the internal controls subsequent
to the date that the Company completed its evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
53
PART IV
ITEM 15. 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 29, 2001 and December 28, 2002 . . . . . . . . . F-3
Consolidated Statements of Operations for the Years Ended December 30, 2000,
December 29, 2001 and December 28, 2002. . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Shareholders' Deficit as of December 30, 2000,
December 29, 2001 and December 28, 2002. . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for the Years ended December 30, 2000,
December 29, 2001 and December 28, 2002. . . . . . . . . . . . . . . . . . . . . . . . . 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
December 30, 2000, December 29, 2001 and December 28, 2002 . . . . . . . . . . . . . . . F-40
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)
54
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)
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)
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)
2.12 Fiscal 2002 Incentive Plan for Key Management. (n)
2.13 Fiscal 2003 Incentive Plan for Key Management. (p)
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. (n)
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)
55
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 Employment Agreement dated January1, 2003 between Eye Care Centers of
America, Inc. and George Gebhardt. (p)
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. 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. 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. 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)
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)
56
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) Amendment to Retail Business Management Agreement by and between
Visionary Retail Management, Inc. and Dr. Mark Lynn & Associates, PLLC
dated June 1, 1999. (j) Amendment to Retail Business Management Agreement
by and between Visionary Retail Management, Inc. and Dr. Mark Lynn &
Associates, PLLC dated August 31, 2000. (j)
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)
Amendment to Professional Business Management Agreement by and between
Visionary MSO, Inc. and Dr. Mark Lynn & Associates, PLLC dated June 1,
1999. (j) Amendment Professional Business Management Agreement by and
between Visionary MSO, Inc. and Dr. Mark Lynn & Associates, PLLC dated
August 1, 2000. (j)
57
10.24 Form of Stock Option Agreement. (l)
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)
10.30 Amended and Restated Credit Agreement among Eye Care Centers of America,
Inc., Various Lenders, Fleet National Bank, as Administrative Agent, Bank
of America, N.A., as Syndication Agent and Fleet Securities, Inc., Bank of
America Securities, LLC, as Co-Lead Arrangers Dated as of December 23,
2002. (o)
10.31 Stock Option Agreement dated October 31, 2002 by and between Eye Care
Centers of America, Inc and Antoine Treuille. (p)
10.32 Termination Agreement, dated as of July 1, 2002 among Eye Care Centers of
America, Inc. and Bernard W. Andrews. (m)
10.33 Business Management Agreement by and between Vision Twenty-One, Inc. and
Charles M. Cummins, O.D. and Elliot L. Shack, O.D., P.A. dated January 1,
1998. (p)Amendment No. 1 to Business Management Agreement by and between
Charles M. Cummins, O.D., P.A., and Eye Drx Retail Management, Inc. dated
August 31, 1999. (p) 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) Amendment No. 5 to
Business Management Agreement by and between Charles M. Cummins, O.D. P.A.
and Eye Drx Retail Management, Inc. dated February 28, 2002. (p) Amendment
No. 6 to Business Management Agreement by and between Charles M. Cummins
O.D., P.A and Eye Drx Retail Management, Inc. dated February 28, 2003. (p)
58
10.34 Employment Agreement dated April 15, 2002 between Eye Care Centers of
America, Inc. and Robert Cox. (p)
12.1 Statement re Computation of Ratios (p)
21.1 List of subsidiaries of Eye Care Centers of America, Inc. (p)
24.1 Powers of Attorney (contained on the signature pages of this report). (p)
99.1 Business Conduct and Ethics Policy. (p)
99.2 Ethics for Financial Management. (p)
* 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
annual Report on Form 10-Q for the quarter ended July 3,1999.
(d) Previously provided with, and incorporated by reference from, the Company's
annual 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
annual Report on Form 10-Q for the quarter ended April 1, 2000.
(g) Previously provided with, and incorporated by reference from, the Company's
annual Report on Form 10-Q for the quarter ended July 1, 2000.
(h) Previously provided with, and incorporated by reference from, the Company's
annual 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
annual Report on Form 10-Q for the quarter ended June 30, 2001.
(l) Previously provided with, and incorporated by reference from, the Company's
annual Report on Form 10-K for the year ended December 29, 2001
(m) Previously provided with, and incorporated by reference from, the Company's
annual Report on Form 10-Q for the quarter ended June 29, 2002.
(n) Previously provided with, and incorporated by reference from, the Company's
annual Report on Form 10-Q for the quarter ended September 28, 2002.
(o) Previously provided with, and incorporated by reference from, the Company's
Report on Form 8-K as of December 31, 2002.
(p) Filed herewith.
(B) The Company filed a report on Form 8-K dated December 31, 2002 under Item
5. Other Events that reported the Company has entered into senior secured
credit facilities with Fleet National Bank, acting as the administrative
agent, and Bank of America, N.A., acting as the syndication agent.
59
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.
60
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 27, 2003.
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 Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE . . . . . . . . . . . TITLE DATE
Chief Executive Officer and
/S/ David E. McComas. . . . President March 27, 2003
- -------------------------------
DAVID E. MCCOMAS. . . . . . . . (Principal Executive Officer)
Executive Vice President and
/S/ Alan E. Wiley . . . . . Chief Financial Officer March 27, 2003
- -------------------------------
ALAN E. WILEY . . . . . . . . . (Principal Financial and
Accounting Officer)
/S/ Bernard W. Andrews. . . Chairman of the Board March 27, 2003
- -------------------------------
BERNARD W. ANDREWS
/S/ Norman S. Matthews. . . Director March 27, 2003
- -------------------------------
NORMAN S. MATTHEWS
/S/ Antoine G. Treuille . . Director March 27, 2003
- -------------------------------
ANTOINE G. TREUILLE
/S/ Anthony J. DiNovi . . . Director March 27, 2003
- -------------------------------
ANTHONY J. DINOVI
/S/ Warren C. Smith, Jr.. . Director March 27, 2003
- -------------------------------
WARREN C. SMITH, JR.
/S/ Charles A. Brizius. . . Director March 27, 2003
- -------------------------------
CHARLES A. BRIZIUS
61
I, David E. McComas, certify that:
1. I have reviewed this annual report on Form 10-K of Eye Care Centers of
America, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and c) presented in
this annual 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
annual report whether 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: March 27, 2003
By: /S/ David E. McComas
_______________________
David E. McComas
President and Chief Executive Officer
62
I, Alan E Wiley, certify that:
1. I have reviewed this annual report on Form 10-K of Eye Care Centers of
America, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and c) presented in
this annual 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
annual report whether 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: March 27, 2003
By: /S/ Alan E. Wiley
_______________________
Alan E. Wiley
Executive Vice President and Chief Financial Officer
63
Report of Independent Auditors F-2
Consolidated Balance Sheets at December 29, 2001 and
December 28, 2002 F-3
Consolidated Statements of Operations for the Years Ended
December 30, 2000, December 29, 2001 and December 28, 2002 F-4
Consolidated Statements of Shareholders' Deficit as of
December 30, 2000, December 29, 2001 and December 28, 2002 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 30, 2000, December 29, 2001 and December 28, 2002 F-6
Notes to the Consolidated Financial Statements F-8
Schedule II - Consolidated Valuation and Qualifying
Accounts - For the Years Ended December 30, 2000,
December 29, 2001 and December 28, 2002 F-40
F1
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 28, 2002 and December 29, 2001,
and the related consolidated statements of operations, shareholders' deficit,
and cash flows for each of the fiscal years ended December 28, 2002, December
29, 2001 and December 30, 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 28, 2002 and December
29, 2001, and the consolidated results of their operations and their cash flows
for the fiscal years ended December 28, 2002, December 29, 2001 and December 30,
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.
As discussed in Note 2 to the consolidated financial statements, effective
December 30, 2001, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and other Intangible Assets."
By: /S/ ERNST & YOUNG LLP
San Antonio, Texas
February 26, 2003
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 29, DECEMBER 28,
2001 2002
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . $ 3,372 $ 3,450
Accounts receivable, less allowance for doubtful accounts of
$4,856 in fiscal 2001 and $4,291 in fiscal 2002. . . . . . . . . . . . 10,275 12,084
Inventory, less reserves of $1,099 in fiscal 2001 and $677 in fiscal 2002 24,665 24,060
Prepaid expenses and other. . . . . . . . . . . . . . . . . . . . . . . . 3,389 3,573
-------------- --------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . 41,701 43,167
Property and equipment, net of accumulated depreciation and amortization of
$106,877 in fiscal 2001 and $125,225 in fiscal 2002 . . . . . . . . . . . 64,518 57,439
Intangibles, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109,453 107,588
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,004 8,862
-------------- --------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 223,676 $ 217,056
============== ==============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,749 $ 20,256
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . 13,786 15,524
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,557 6,334
Accrued payroll expense . . . . . . . . . . . . . . . . . . . . . . . . . 5,733 7,776
Accrued interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,284 2,318
Other accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 8,500 8,523
-------------- --------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . 59,609 60,731
Long-term debt, less current maturities. . . . . . . . . . . . . . . . . . . 260,777 239,109
Deferred rent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,790 4,571
Deferred gain. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,999 1,766
-------------- --------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 326,175 306,177
-------------- --------------
Commitments and contingencies
Shareholders' deficit:
Common stock, par value $.01 per share; 20,000,000 shares authorized,
issued and outstanding 7,407,289 in fiscal 2001 and 7,397,689 in
fiscal 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 74
Preferred stock, par value $.01 per share, 300,000 shares authorized,
issued and outstanding in 2001 and 2002 . . . . . . . . . . . . . . . . 48,134 54,703
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . 43,474 36,040
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . (194,181) (179,938)
-------------- --------------
Total shareholders' deficit . . . . . . . . . . . . . . . . . . . . . . (102,499) (89,121)
-------------- --------------
$ 223,676 $ 217,056
============== ==============
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
-------------------
DECEMBER 30, DECEMBER 29, DECEMBER 28,
2000 2001 2002
------------------- -------------- -------------
Revenues:
Optical sales . . . . . . . . . . . . . . . . $ 335,624 $ 332,550 $ 360,266
Management fees . . . . . . . . . . . . . . . 2,833 3,484 3,401
------------------- -------------- -------------
Net revenues. . . . . . . . . . . . . . . . 338,457 336,034 363,667
Operating costs and expenses:
Cost of goods sold. . . . . . . . . . . . . . 107,449 104,446 112,471
Selling, general and administrative expenses. 204,365 203,187 213,683
Store closure expense . . . . . . . . . . . . 3,580 - -
Amortization of intangibles:
Goodwill . . . . . . . . . . . . . . . . . 5,214 5,319 -
Noncompete and other intangibles . . . . . 3,922 3,378 1,865
------------------- -------------- -------------
Total operating costs and expenses . . . 324,530 316,330 328,019
------------------- -------------- -------------
Income from operations . . . . . . . . . . . . . 13,927 19,704 35,648
Interest expense, net. . . . . . . . . . . . . . 28,695 27,537 21,051
------------------- -------------- -------------
Net income (loss) before income taxes. . . . . . (14,768) (7,833) 14,597
Income tax expense . . . . . . . . . . . . . . . 766 1,239 1,258
------------------- -------------- -------------
Net income (loss) before extraordinary gain. . . (15,534) (9,072) 13,339
Extraordinary gain . . . . . . . . . . . . . . . - - 904
------------------- -------------- -------------
Net income (loss). . . . . . . . . . . . . . . . $ (15,534) $ (9,072) $ 14,243
=================== ============== =============
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 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. . . . . . . . . . . . . . . (2,844) - (16) - - (16)
Net loss . . . . . . . . . . . . . . . . . - - - - (9,072) (9,072)
-------------- -------- ----------- ------------ --------------- ----------
Balance at December 29, 2001 . . . . . . . 7,407,289 $ 74 $ 43,474 $ 48,134 $ (194,181) $(102,499)
Dividends accrued on preferred stock . . . - - (6,569) 6,569 - -
-
Interest receivable on loan to shareholder - - (90) - - (90)
-
Distribution to affiliated OD. . . . . . . - - (675) - - (675)
-
Stock buyback. . . . . . . . . . . . . . . (9,600) - (100) - - (100)
Net income . . . . . . . . . . . . . . . . - - - - 14,243 14,243
-------------- -------- ----------- ------------ --------------- ----------
Balance at December 28, 2002 . . . . . . . 7,397,689 $ 74 $ 36,040 $ 54,703 $ (179,938) $ (89,121)
============== ======== =========== ============ =============== ==========
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
-------------------
DECEMBER 30, DECEMBER 29, DECEMBER 28,
2000 2001 2002
------------------- -------------- --------------
Cash flows from operating activities:
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . $ (15,534) $ (9,072) $ 14,243
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . 20,464 20,350 18,761
Amortization of intangibles . . . . . . . . . . . . . . . . 9,136 8,697 1,865
Amortization of debt issue costs. . . . . . . . . . . . . . 1,784 1,956 1,901
Amortization of deferred gain . . . . . . . . . . . . . . . (234) (234) (233)
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . 526 (101) (223)
Deferred rent . . . . . . . . . . . . . . . . . . . . . . . 172 19 781
Loss on disposition of property and equipment . . . . . . . 118 268 62
Extraordinary gain . . . . . . . . . . . . . . . . . . . . . - - (904)
Changes in operating assets and liabilities:
Accounts and notes receivable . . . . . . . . . . . . . . . (4,452) 3,070 (1,899)
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . 4,457 1,025 605
Prepaid expenses and other. . . . . . . . . . . . . . . . . (3,476) (337) (203)
Accounts payable and accrued liabilities. . . . . . . . . . (1,745) 1,729 (393)
------------------- -------------- --------------
Net cash provided by operating activities. . . . . . . . . . . . 11,216 27,370 34,363
------------------- -------------- --------------
Cash flows from investing activities:
Acquisition of property and equipment . . . . . . . . . . . . (18,932) (10,559) (10,668)
Net outflow for the VTO Retail Acquisition. . . . . . . . . . (87) - -
Proceeds from sale of property and equipment. . . . . . . . . 54 68 -
Payment received on notes receivable. . . . . . . . . . . . . 33 3 -
------------------- -------------- --------------
Net cash used in investing activities. . . . . . . . . . . . . . (18,932) (10,488) (10,668)
------------------- -------------- --------------
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
-------------------
DECEMBER 30, DECEMBER 29, DECEMBER 28,
2000 2001 2002
------------------- -------------- --------------
Cash flows from financing activities:
Payments on debt related to refinancing . . . . . $ (7,669) $ (16,928) $ (118,346)
Proceeds from issuance of long-term debt. . . . . 17,000 66 124,000
Payments on debt and capital leases . . . . . . . - - (23,708)
Payments for refinancing fees . . . . . . . . . . - - (4,788)
Distribution to affiliated OD . . . . . . . . . . (365) (603) (675)
Stock buyback . . . . . . . . . . . . . . . . . . (234) (16) (100)
Net cash provided by (used in) financing activities 8,732 (17,481) (23,617)
------------------- -------------- --------------
Net (decrease) increase in cash and cash equivalents 1,016 (599) 78
Cash and cash equivalents at beginning of period . . 2,955 3,971 3,372
------------------- -------------- --------------
Cash and cash equivalents at end of period . . . . . $ 3,971 $ 3,372 $ 3,450
=================== ============== ==============
Supplemental cash flow disclosures:
Cash paid during the period for:
Interest $ 25,436 $ 26,150 $ 19,401
Taxes 304 358 687
Noncash investing and financing activities:
Additions of property and equipment 665 - 1,076
Dividends accrued on preferred stock 5,086 5,780 6,569
Adjustment of noncompete agreement to goodwill 5,575 - -
Store closure expense 3,580 - -
The accompanying notes are an integral part
of these consolidated financial statements
F7
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 2000, 2001 and 2002 consisted of 52 weeks. Fiscal year 2000
ended December 30, 2000 ("fiscal 2000"), fiscal year 2001 ended December 29,
2001 ("fiscal 2001") and fiscal year 2002 ended December 28, 2002 ("fiscal
2002").
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 Receivable. Accounts receivable are primarily from third party
payors related to the sale of eyewear and include receivables from insurance
reimbursements, credit card companies, ODs, merchandise, rent and license fee
receivables. Merchandise receivables result from product returned to vendors
pending credit or exchange for new product. 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.
F8
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 currently uses four principal vendors to supply its lens
inventory and more than twenty different vendors to supply its frame inventory.
In fiscal 2002, two of the principal lens vendors supplied over 67.9% of the
Company's lens materials while four frame vendors collectively supplied
approximately 60.5% of the frames purchased by the Company during the same
period. While such vendors supplied a significant share of the inventory used by
the Company, lenses and frames 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
lenses or frames. 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.
Property and Equipment. Property and equipment is recorded at cost. 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 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 improvements 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"),
noncompete agreements, and a strategic alliance agreement. In July 2001, the
Financial Standards Board ("FASB")
F9
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 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 its annual assessment of goodwill on a consolidated basis as of
December 28, 2002, 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 2000 and 2001 are as follows:
FISCAL FISCAL
2000 2001
--------- --------
Pro forma net loss $(10,320) $(3,753)
Other Assets. Other assets consist primarily of deferred debt financing
costs. These costs are amortized into expense over the life of the associated
debt.
Long-Lived Assets. In August 2001, the Financial Accounting Standards Board
(FASB) issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." This Standard requires the recognition and measurement of the
impairment of long-lived assets to be held and used and the measurement of
long-lived assets to be disposed of by sale. The Company adopted SFAS No. 144 in
the first quarter of fiscal 2002. Based upon its analysis, the Company believes
there was no impact on its results of operations or financial condition as a
result of the adoption of this Standard.
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.
F10
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 2001 and 2002 the Company has established a reserve based on historical
experience of approximately $841 and $861, 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 when incurred. For the fiscal years
ended 2000, 2001 and 2002 advertising costs amounted to approximately $30,880,
$28,988 and $30,629, respectively.
New Accounting Pronouncements. On April 30, 2002, SFAS 145, "Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections" was approved by the FASB. As a result, gains and losses
from extinguishment of debt are classified as extraordinary items only if they
meet the criteria in Accounting Principles Board Opinion 30. The provisions of
this Statement shall be applied in fiscal years beginning after May 15, 2002.
While the adoption of SFAS 145 will likely result in certain financial statement
reclassifications, management does not believe that the adoption of SFAS 145
will have a significant impact on the Company's results of operations or
financial position.
F11
On July 30, 2002, SFAS 146, "Accounting for Costs Associated with Exit or
Disposal Activities" was issued by the FASB. This standard requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing or other exit or disposal activity. SFAS
146 is to be applied prospectively to exit or disposal activities initiated
after December 31, 2002. The Company adopted SFAS 146 on December 29, 2002 and
the adoption of SFAS 146 did not have a significant impact on its results of
operations or financial position as it currently has no plans to exit or dispose
of activities.
In December 2002, SFAS 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure" was issued by the FASB. The FASB has not yet
announced the effective date for adoption of SFAS 148, however, the disclosure
requirements are required in fiscal years beginning after December 15, 2002.
This standard amends SFAS 123 to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based employee
compensation. In addition, this standard amends the disclosure requirements of
SFAS 123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. As there were no options
outstanding as of December 29, 2001, pro forma disclosures are only applicable
to fiscal 2000 and 2002. For purposes of pro forma disclosures, the estimated
fair value of the options is amortized to expense over the options' vesting
period. The pro forma calculations include only the effects of 1998 through 2002
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. The Company's pro forma net income (loss) for fiscal years 2000 and 2002
are as follows:
FISCAL FISCAL
2000 2002
--------- -------
Pro forma net income (loss) $(15,801) $14,122
F12
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.
Interest Expense, Net. Interest expense, net consists of the following:
YEAR-ENDED
-------------
DECEMBER 30, DECEMBER 29, DECEMBER 28,
2000 2001 2002
------------- ------------- -------------
Interest expense. . . $ 29,585 $ 28,125 $ 21,481
Interest income . . . (269) (268) (178)
Interest capitalized. (621) (320) (252)
------------- ------------- -------------
Interest expense, net $ 28,695 $ 27,537 $ 21,051
============= ============= =============
Derivatives. The Company's swap agreements matured on May 1, 2001. 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 provides for fees of $250 or $500 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 fiscal years 2000, 2001 and 2002 the Company incurred $500, $250 and
$500, respectively, related to the Management Agreement.
F13
4. PREPAID EXPENSES AND OTHER
Prepaid expenses and other consists of the following:
DECEMBER 29, DECEMBER 28,
2001 2002
------------ ------------
Prepaid insurance. . . $ 275 $ 568
Prepaid store supplies 797 843
Prepaid advertising. . 1,892 1,861
Other. . . . . . . . . 425 301
------------ ------------
$ 3,389 $ 3,573
============ ============
5. PROPERTY AND EQUIPMENT
Property and equipment, net, consists of the following:
DECEMBER 29, DECEMBER 28,
2001 2002
------------- -------------
Land . . . . . . . . . . . . . . . . . . . . . $ 638 $ 638
Building . . . . . . . . . . . . . . . . . . . 2,240 2,240
Furniture and equipment. . . . . . . . . . . . 108,471 116,126
Leasehold improvements . . . . . . . . . . . . 60,046 63,660
------------- -------------
171,395 182,664
Less accumulated depreciation and amortization (106,877) (125,225)
------------- -------------
Property and equipment, net. . . . . . . . . . $ 64,518 $ 57,439
============= =============
F14
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 29, DECEMBER 28,
2001 2002
------------- -------------
Noncompete and strategic alliance agreements $ 10,187 $ 10,187
Less accumulated amortization. . . . . . . . (8,157) (10,022)
------------- -------------
Net . . . . . . . . . . . . . . . . . . . 2,030 165
Goodwill and other . . . . . . . . . . . . . 107,423 107,423
------------- -------------
Intangibles, net . . . . . . . . . . . . . . $ 109,453 $ 107,588
============= =============
7. OTHER ACCRUED EXPENSES
Other accrued expenses consists of the following:
DECEMBER 29, DECEMBER 28,
2001 2002
------------ ------------
Insurance . . . . . . . $ 835 $ 1,654
Income tax payable. . . 938 1,175
Store expenses. . . . . 1,240 930
Warranties. . . . . . . 841 861
Advertising . . . . . . 634 839
Payroll & sales/use tax 771 829
Other . . . . . . . . . 1,022 752
Professional fees . . . 624 746
Property taxes. . . . . 546 441
Third party liability . 414 196
Severance & legal fees. 350 100
Construction. . . . . . 156 -
Store closures. . . . . 129 -
------------ ------------
$ 8,500 $ 8,523
============ ============
F15
8. LONG-TERM DEBT
Credit Facilities. In April 1998, the Company entered into a credit
agreement which provided for $55.0 million in term loans, $100.0 million in
acquisition facilities, and $35.0 million in revolving credit facilities ("Old
Credit Facility"). On December 23, 2002, the Company entered into a credit
agreement which consists of (i) the $55.0 million term loan facility (the "Term
Loan A"); (ii) the $62.0 million term loan facility (the "Term Loan B"); and
(iii) the $25.0 million revolving credit facility (the "Revolver" and together
with the Term Loan A and Term Loan B, the "New Facilities"). The proceeds of the
New Facilities were used to (i) pay long-term debt outstanding under the Old
Credit Facility, (ii) redeem $20.0 million face value of subordinated debt at a
cost of $17.0 million, and (iii) pay fees and expenses incurred in connection
with the New Facilities. Thereafter, the New Facilities are available to finance
working capital requirements and general corporate purposes.
Borrowings made under the New Facilities shall accrue interest at the
Company's option at the Base Rate or the LIBOR rate, plus the applicable margin.
Base Rate shall mean a floating rate equal to the higher of (i) the Fleet prime
rate and (ii) the overnight Federal Funds Rate plus 1/2%. Pricing for the
Revolver will be at LIBOR plus 4.50% (Base Rate plus 3.50%), Term Loan A will be
at LIBOR plus 4.25% (Base Rate plus 3.25%), and Term Loan B will be at LIBOR
plus 4.75% (Base Rate plus 3.75%). The Term Loan A shall amortize in quarterly
payments commencing on March 31, 2003 in annual principal amounts of $15.0
million, $20.0 million and $20.0 million, respectively, for fiscal years 2003
through 2005. The Term Loan B shall have no payments until 2006 when quarterly
payments will commence in annual principal amounts of $20.0 million and $42.0
million, respectively, for fiscal years 2006 and 2007.
In connection with the borrowings made under the New Facilities, the
Company incurred approximately $4.8 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 New Facilities. The unamortized
amount of debt issuance costs as of December 28, 2002 related to the New
Facilities was $4.8 million.
At December 28, 2002, the Company had $55.0 million and $62.0 million in
term loans outstanding under the Term Loan A and Term Loan B, respectively, $5.0
million outstanding under the Revolver, $129.7 million in notes payable
outstanding evidenced by the Exchange Notes and $2.9 million in capital lease
and equipment obligations. In addition, the Company has agreed to guarantee a
$1.0 million loan that is related to the long-term business agreement entered
into at the time of the acquisition of Hour Eyes.
F16
The New Facilities are collateralized by all tangible and intangible
assets, including the stock of the Company's subsidiaries. In addition, the
Company must meet certain financial covenants including minimum EBITDA, interest
coverage, leverage ratio and capital expenditures. As of December 28, 2002, the
Company was in compliance with the financial 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"). In connection with the New Facilities, the Company redeemed $20.0
million of the Floating Rate Notes on December 23, 2002. 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 rank pari passu with all other indebtedness of the Company that by its terms
other 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 28,
2002 related to the Exchange Notes was $3.5 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.
Extraordinary Gain. On December 23, 2002, the Company retired $20.0
million face value of subordinated debt at a cost of $17.0 million and $0.5
million of related capitalized loan costs resulting in an extraordinary gain of
$2.5 million. In addition, the Company wrote-off $1.6 million of capitalized
loan costs related to the Old Credit Facility resulting in an extraordinary loss
of $1.6 million. As a result, the Company has recognized an extraordinary gain
net of tax of $0.9 million in its financial statements.
F17
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
and $2.1 million, respectively.
DECEMBER 29, DECEMBER 28,
2001 2002
------------ ------------
Buildings and equipment $ 2,466 $ 2,501
============ ============
The Company scheduled future minimum lease payments for the next five fiscal
years under the property and equipment capital leases are as follows:
2003. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 757
2004. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 803
2005. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 829
2006. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 833
2007. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 833
Beyond 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,231
------
Total minimum lease payments. . . . . . . . . . . . . . . . . . . 5,286
Amounts representing interest . . . . . . . . . . . . . . . . . . 3,159
------
Present value of minimum lease payments . . . . . . . . . . . . . $2,127
======
F18
Long-term debt outstanding, including capital lease obligations,
consists of the following:
DECEMBER 29, DECEMBER 28,
2001 2002
-------------- --------------
Exchange Notes, face amount of $150,000
and $130,000, respectively, net of unamortized
debt discount of $309 and $261, respectively . $ 149,691 $ 129,739
New credit facility. . . . . . . . . . . . . . . - 117,000
Old credit facility. . . . . . . . . . . . . . . 100,853 -
Capital lease and other obligations. . . . . . . 2,519 2,894
Revolving credit facility. . . . . . . . . . . . 21,500 5,000
-------------- --------------
274,563 254,633
Less current portion . . . . . . . . . . . . . . (13,786) (15,524)
$ 260,777 $ 239,109
============== ==============
Future principal maturities for long-term debt and capital lease obligations
are as follows:
2003. . . . . . . . . . . . . . . . . . $ 15,524
2004. . . . . . . . . . . . . . . . . . 20,246
2005. . . . . . . . . . . . . . . . . . 20,332
2006. . . . . . . . . . . . . . . . . . 20,400
2007. . . . . . . . . . . . . . . . . . 48,392
Beyond 2007 . . . . . . . . . . . . . . 129,739
--------
Total future principal payments on debt $254,633
========
As of the end of fiscal 2002, the fair value of the Company's Exchange
Notes was approximately $107.9 million and the fair value of the capital lease
obligations was approximately $2.1 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
F19
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 Enclave Advancement Group, Inc.,
Managed Vision Care, Inc., Visionworks Holdings, Inc. and Eye Care Holdings (the
"Guarantor Subsidiaries") 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) 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.
F20
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
----------- -------------- -------- -------------- ---------
Loss before income taxes. . . . . . . . (15,694) (12,065) (1,592) 14,583 (14,768)
Income tax expense . . . . . . . . . . . . . . . (160) 176 750 - 766
----------- -------------- -------- -------------- ---------
Net loss. . . . . . . . . . . . . . . . $ (15,534) $ (12,241) $(2,342) $ 14,583 $(15,534)
=========== ============== ======== ============== =========
F21
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 loss . . . . . . . . . . . . . . . . . . $ (15,534) $ (12,241) $(2,342) $ 14,583 $(15,534)
Adjustments to reconcile net loss to net cash
provided by (used in) 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
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)
----------- -------------- -------- -------------- ---------
F22
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
=========== ============== ====== ============= =========
F23
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
----------- -------------- -------- -------------- ----------
Total current assets. . . . . . . . . . 139,953 46,581 4,435 (149,268) 41,701
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. . . . . . . . . . . . . . $ 175,682 $ 166,910 $ 4,522 $ (123,438) $ 223,676
=========== ============== ======== ============== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
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
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 . . . . . . . . . . . 277,974 188,647 8,822 (149,268) 326,175
----------- -------------- -------- -------------- ----------
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)
----------- -------------- -------- -------------- ----------
$ 175,682 $ 166,910 $ 4,522 $ (123,438) $ 223,676
=========== ============== ======== ============== ==========
F24
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
----------- -------------- -------- -------------- ---------
Loss before income taxes. . . . . . . . . . . . (8,432) (8,380) (865) 9,844 (7,833)
Income tax expense. . . . . . . . . . . . . . . 640 199 400 - 1,239
----------- -------------- -------- -------------- ---------
Net loss. . . . . . . . . . . . . . . . . . . . $ (9,072) $ (8,579) $(1,265) $ 9,844 $ (9,072)
=========== ============== ======== ============== =========
F25
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 loss . . . . . . . . . . . . . . . . . . . . . . $ (9,072) $ (8,579) $(1,265) $ 9,844 $ (9,072)
Adjustments to reconcile net 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
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)
----------- -------------- -------- -------------- ---------
F26
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
=========== ============== ====== ============= =========
F27
CONSOLIDATING BALANCE SHEET
FOR THE YEAR ENDED DECEMBER 28, 2002
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
----------- -------------- -------- -------------- ----------
ASSETS
Current assets:
Cash and cash equivalents. . . . . . $ 554 $ 2,532 $ 364 $ - $ 3,450
Accounts and notes receivable. . . . 134,896 42,366 3,245 (168,423) 12,084
Inventory. . . . . . . . . . . . . . 14,715 7,491 1,854 - 24,060
Prepaid expenses and other . . . . . 2,289 1,236 48 - 3,573
----------- -------------- -------- -------------- ----------
Total current assets. . . . . . . . . . 152,454 53,625 5,511 (168,423) 43,167
Property and equipment. . . . . . . . . 35,016 22,423 - - $ 57,439
Intangibles . . . . . . . . . . . . . . 16,693 90,808 87 - 107,588
Other assets. . . . . . . . . . . . . . 8,552 310 - - 8,862
Investment in subsidiaries. . . . . . . (19,578) - - 19,578 -
----------- -------------- -------- -------------- ----------
Total Assets. . . . . . . . . . . . . . $ 193,137 $ 167,166 $ 5,598 $ (148,845) $ 217,056
=========== ============== ======== ============== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable . . . . . . . . . . $ 9,696 $ 170,349 $ 8,634 $ (168,423) $ 20,256
Current portion of long-term debt. . 15,374 83 - - 15,524
Deferred revenue . . . . . . . . . . 3,511 2,629 194 - 6,334
Accrued payroll expense. . . . . . . 4,956 2,792 28 - 7,776
Accrued interest . . . . . . . . . . 1,798 520 - - 2,318
Other accrued expenses . . . . . . . 4,878 2,632 1,013 - 8,523
----------- -------------- -------- -------------- ----------
Total current liabilities . . . . . . . 40,213 179,005 9,869 (168,423) 60,731
Long-term debt, less current maturities 237,028 2,048 100 - 239,109
Deferred rent . . . . . . . . . . . . . 2,763 1,808 - - 4,571
Deferred gain . . . . . . . . . . . . . 1,372 394 - - 1,766
----------- -------------- -------- -------------- ----------
Total liabilities . . . . . . . . . . . 281,376 183,255 9,969 (168,423) 306,177
----------- -------------- -------- -------------- ----------
Shareholders' deficit:
Common stock . . . . . . . . . . . . 74 - - - 74
Preferred stock. . . . . . . . . . . 54,703 - - - 54,703
Additional paid-in capital . . . . . 36,922 1,092 (1,974) - 36,040
Accumulated deficit. . . . . . . . . (179,938) (17,181) (2,397) 19,578 (179,938)
----------- -------------- -------- -------------- ----------
Total shareholders' deficit . . . . . . (88,239) (16,089) (4,371) 19,578 (89,121)
----------- -------------- -------- -------------- ----------
$ 193,137 $ 167,166 $ 5,598 $ (148,845) $ 217,056
=========== ============== ======== ============== ==========
F28
CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 28, 2002
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
----------- ------------- ------- -------------- ---------
Revenues:
Optical sales. . . . . . . . . . . . . . . . . . $ 175,733 $ 114,834 $69,699 $ - 360,266
Management fees. . . . . . . . . . . . . . . . . 554 22,319 - (19,472) 3,401
Investment earnings in subsidiaries. . . . . . . 6,251 - - (6,251) -
----------- ------------- ------- -------------- ---------
Net revenues. . . . . . . . . . . . . . . . . . . . 182,538 137,153 69,699 (25,723) 363,667
Operating costs and expenses:
Cost of goods sold . . . . . . . . . . . . . . . 58,914 39,535 14,022 - 112,471
Selling, general and administrative expenses . . 97,663 80,926 54,566 (19,472) 213,683
Amortization of noncompete and other intangibles - 1,865 - - 1,865
----------- ------------- ------- -------------- ---------
Total operating costs and expenses. . . . . . . . . 156,577 122,326 68,588 (19,472) 328,019
----------- ------------- ------- -------------- ---------
Income from operations. . . . . . . . . . . . . . . 25,961 14,827 1,111 (6,251) 35,648
Interest expense, net . . . . . . . . . . . . . . . 12,495 8,548 8 - 21,051
----------- ------------- ------- -------------- ---------
Income before income taxes. . . . . . . . . . . . . 13,466 6,279 1,103 (6,251) 14,597
Income tax expense. . . . . . . . . . . . . . . . . 339 419 500 - 1,258
----------- ------------- ------- -------------- ---------
Net income before extraordinary item. . . . . . . . 13,127 5,860 603 (6,251) 13,339
Extraordinary (gain) loss . . . . . . . . . . . . . (1,116) 212 - - (904)
----------- ------------- ------- -------------- ---------
Net income. . . . . . . . . . . . . . . . . . . . . $ 14,243 $ 5,648 $ 603 $ (6,251) $ 14,243
=========== ============= ======= ============== =========
F29
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 28, 2002
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
----------- -------------- ------ -------------- ---------
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . $ 14,243 $ 12,234 $ 603 $ (12,837) $ 14,243
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation. . . . . . . . . . . . . . . . . 11,363 7,398 - - 18,761
Amortization of intangibles . . . . . . . . . - 1,865 - - 1,865
Amortization of debt issue costs. . . . . . . 1,901 - - - 1,901
Amortization of deferred gain . . . . . . . . (158) (75) - - (233)
Deferred revenue. . . . . . . . . . . . . . . (109) (308) 194 - (223)
Deferred rent . . . . . . . . . . . . . . . . 281 500 - - 781
Loss on disposition of property and equipment 30 32 - - 62
Extraordinary (gain) loss . . . . . . . . . . (1,290) 386 - - (904)
Changes in operating assets and liabilities:
Accounts and notes receivable . . . . . . . . (13,311) (6,932) (811) 19,155 (1,899)
Inventory . . . . . . . . . . . . . . . . . . 656 256 (307) - 605
Prepaid expenses and other. . . . . . . . . . (166) (35) (2) - (203)
Accounts payable and accrued liabilities. . . (459) 18,268 954 (19,156) (393)
----------- -------------- ------ -------------- ---------
Net cash provided by operating activities. . . . 12,981 33,589 631 (12,838) 34,363
----------- -------------- ------ -------------- ---------
Cash flows from investing activities:
Acquisition of property and equipment . . . . (7,765) (2,903) - - (10,668)
Investment in subsidiaries. . . . . . . . . . (12,838) - - 12,838 -
----------- -------------- ------ -------------- ---------
Net cash used in investing activities. . . . . . (20,603) (2,903) - 12,838 (10,668)
----------- -------------- ------ -------------- ---------
F30
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 28, 2002
. Guarantor . . Consolidated
Parent Subsidiaries ODs Eliminations Company
--------- -------------- ------ ------------- --------------
Cash flows from financing activities:
Payments on debt related to refinancing . . . . . (88,346) (30,000) - - (118,346)
Proceeds from issuance of long-term debt. . . . . 124,000 - - - 124,000
Payments on debt and capital leases . . . . . . . (23,345) (363) - - (23,708)
Payments for refinancing fees . . . . . . . . . . (4,788) - - - (4,788)
Distribution to affiliated OD . . . . . . . . . . - - (675) - (675)
Stock buyback . . . . . . . . . . . . . . . . . . (100) - - - (100)
--------- -------------- ------ ------------- --------------
Net cash provided by (used in) financing activities. 7,421 (30,363) (675) - (23,617)
--------- -------------- ------ ------------- --------------
Net increase (decrease) in cash and cash equivalents (201) 323 (44) - 78
Cash and cash equivalents at beginning of period . . 755 2,209 408 - 3,372
--------- -------------- ------ ------------- --------------
Cash and cash equivalents at end of period . . . . . $ 554 $ 2,532 $ 364 $ - $ 3,450
========= ============== ====== ============= ==============
F31
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 $18.2 and $24.8 million as of December 29, 2001 and December 28, 2002,
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 provided that, in January 2002 (the "Grant
Date"), the Company granted to each of the Optionees a New Option to purchase
the number of shares of common stock subject to the options being terminated and
cancelled and that
F32
such New Option will have an exercise price equal to the fair market value of
the common stock as of the Grant Date. 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
exercise price at the Grant Date was $5.00 per share. Subsequent grants of
131,000 options were made throughout the remainder of fiscal 2002. Such grants
begin vesting one year after the date of the grant in four installments of 10%,
15%, 25% and 50% and have an exercise price of $5.00 to $15.13 per share, based
on the fair market value at the Grant Date.
Following is a summary of activity in the plan for fiscal years 2000, 2001 and
2002.
AVERAGE OPTION
PRICE OPTIONS OPTIONS
PER SHARE($) OUTSTANDING EXERCISABLE
--------------- ------------ ------------
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 - -
------------ ------------
Granted . . . . . . . . . . . 5.00 & 15.13 988,775 -
Became exercisable. . . . . . 341,310 -
Canceled or expired . . . . . (41,000) (15,200)
------------ ------------
Outstanding December 28, 2002 947,775 326,110
============ ============
During fiscal 2001, the Company granted two directors options to purchase
15,000 and 111,142 shares, respectively. Each option is exercisable at $5.00 per
share and begins vesting on the date of the grant in three installments of 50%
25% and 25%, with such options expiring 10 years from the date of grant. A
subsequent grant of 5,000 options was made to one director in October 2002. Each
option is exercisable at $5.00 per share and
F33
begins vesting one year after the date of the grant in four installments of 25%,
25%, 25% and 25%, with such options expiring 10 years from the date of grant.
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 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 2000 and 2002
respectively: risk-free interest rates of 6% and 3%; respectively, 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.
F34
13. INCOME TAXES
The provision for income taxes is comprised of the following:
YEAR ENDED
-------------
DECEMBER 30, DECEMBER 29, DECEMBER 28,
2000 2001 2002
------------- ------------- -------------
Current. $ 766 $ 1,239 $ 1,258
Deferred - - -
------------- ------------- -------------
$ 766 $ 1,239 $ 1,258
============= ============= =============
The reconciliation between the federal statutory tax rate at 34% and the Company
effective tax rate is as follows:
DECEMBER 30, DECEMBER 29, DECEMBER 28,
2000 2001 2002
-------------- -------------- --------------
Expected tax expense (benefit) . . $ (5,021) $ (2,663) $ 5,270
Goodwill . . . . . . . . . . . . . 1,772 1,483 (811)
Nondeductible meals and donations. 33 30 35
Other. . . . . . . . . . . . . . . 990 650 2,027
Change in valuation allowance. . . 2,992 1,739 (5,263)
-------------- -------------- --------------
$ 766 $ 1,239 $ 1,258
============== ============== ==============
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.
F35
The components of the net deferred tax assets are as follows:
DECEMBER 29, DECEMBER 28,
2001 2002
-------------- --------------
Total deferred tax liabilities, current. . . . . . . . . . $ (707) $ (705)
Total deferred tax liabilities, long-term. . . . . . . . . (630) (1,172)
Total deferred tax assets, current . . . . . . . . . . . . 3,201 2,117
Total deferred tax assets, long-term . . . . . . . . . . . 25,078 21,439
Valuation allowance. . . . . . . . . . . . . . . . . . . . (26,942) (21,679)
-------------- --------------
Net deferred tax assets. . . . . . . . . . . . . . . . . . . . . . $ - $ -
============== ==============
The sources of the difference between the financial accounting and
tax Company assets and liabilities which give rise to the deferred
tax assets and deferred tax liabilities are as follows:
DECEMBER 29, DECEMBER 28,
2001 2002
-------------- --------------
Deferred tax assets:
Deferred rent. . . . . . . . . . . . . . . . . . . . . . . $ 873 $ 1,138
Allowance for bad debts. . . . . . . . . . . . . . . . . . 1,314 1,121
Deferred revenue . . . . . . . . . . . . . . . . . . . . . 958 921
Net operating loss and credit carryforward. . . . . . . . 10,934 5,769
Inventory basis differences. . . . . . . . . . . . . . . . 619 482
Accrued salaries . . . . . . . . . . . . . . . . . . . . . 928 611
Property and equipment . . . . . . . . . . . . . . . . . . 9,275 9,791
Gain on debt purchase. . . . . . . . . . . . . . . . . . . - 2,315
Recapitalization expenses. . . . . . . . . . . . . . . . . 1,510 -
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,868 1,417
-------------- --------------
Total deferred tax assets. . . . . . . . . . . . . . . . . . . . . 28,279 23,565
Deferred tax liabilities:
Prepaid expense. . . . . . . . . . . . . . . . . . . . . . $ 699 $ 705
Store pre-opening costs. . . . . . . . . . . . . . . . . . 269 269
Deferred financing costs . . . . . . . . . . . . . . . . . 164 612
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . 205 300
-------------- --------------
Total deferred tax liability . . . . . . . . . . . . . . . . . . . 1,337 1,886
-------------- --------------
Net deferred tax assets. . . . . . . . . . . . . . . . . . 26,942 21,679
Valuation allowance. . . . . . . . . . . . . . . . . . . . (26,942) (21,679)
Net deferred tax assets. . . . . . . . . . . . . . . . . . . . . . $ - $ -
============== ==============
F36
At December 29, 2001 and December 28, 2002, the Company had, subject to the
limitations discussed below, net operating loss carryforward for tax purposes of
$32,158 and $16,967, 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 $26,942 at December 29, 2001 and $21,679 at December 28,
2002.
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 $174, $227 and $220 for fiscal years 2000, 2001
and 2002, 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 seven
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 between the actual cash rentals paid and
rent expenses recorded for financial statement
F37
purposes is recorded as a deferred rent obligation. At the end of fiscal years
2001 and 2002, deferred rent obligations aggregated approximately $3.8 million
and $4.6 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, 21 and
21 percent of base rent expense for fiscal years 2000, 2001 and 2002,
respectively.
DECEMBER 30, DECEMBER 29, DECEMBER 28,
2000 2001 2002
-------------- -------------- --------------
Base rent expense. . . . . $ 37,331 $ 38,666 $ 40,364
Rent as a percent of sales 537 266 436
Lease and sublease income. (4,512) (4,259) (4,435)
-------------- -------------- --------------
Rent expense, net. . . . . $ 33,356 $ 34,673 $ 36,365
============== ============== ==============
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
---------- ----------- ----------
2003. . . . . . . . . . . . . . . . . . $ 31,707 $ (2,050) $ 29,657
2004. . . . . . . . . . . . . . . . . . 29,358 (1,071) 28,287
2005. . . . . . . . . . . . . . . . . . 26,453 (835) 25,618
2006. . . . . . . . . . . . . . . . . . 22,465 (568) 21,897
2007. . . . . . . . . . . . . . . . . . 18,945 (339) 18,606
Beyond 2007 . . . . . . . . . . . . . . 45,013 (434) 44,579
---------- ----------- ----------
Total minimum lease payments/(receipts) $ 173,941 $ (5,297) $ 168,644
========== =========== ==========
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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.
F39
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 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
Year ended December 28, 2002 4,856,000 - - (565,000) 4,291,000
Inventory obsolescence reserves:
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
Year ended December 28, 2002 1,099,000 - - (422,000) 677,000
F40