Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 29, 2003.
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 33 - 70572
EYE CARE CENTERS OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-2337775
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification number)
11103 WEST AVENUE
SAN ANTONIO, TEXAS 78213
(Address of principal executive offices, including zip code)
(210) 340-3531
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant has (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act):
Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Class Outstanding at May 12, 2003
----- -----------------------------
Common Stock, $.01 par value 7,397,689 shares
================================================================================
EYE CARE CENTERS OF AMERICA, INC.
INDEX
PAGE
NUMBER
-------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at December 28, 2002
and March 29, 2003 (Unaudited) 2
Condensed Consolidated Statements of Income for the
Thirteen Weeks Ended March 30, 2002 (Unaudited)
and March 29, 2003 (Unaudited) 3
Condensed Consolidated Statements of Cash Flows for the
Thirteen Weeks Ended March 30, 2002 (Unaudited)
and March 29, 2003 (Unaudited) 4
Notes to Condensed Consolidated Financial Statements 5-12
Item 2. Management Discussion and Analysis of Financial Condition
and Results of Operations 13-20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Controls and Procedures 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20-21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 22
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EYE CARE CENTERS OF AMERICA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
DECEMBER 28, MARCH 29,
2002 2003
-------------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents. . . . . . $ 3,450 $ 12,326
Accounts and notes receivable, net . 12,084 13,954
Inventory. . . . . . . . . . . . . . 24,060 25,888
Prepaid expenses and other . . . . . 3,573 2,919
-------------- -----------
Total current assets. . . . . . . . . . 43,167 55,087
PROPERTY & EQUIPMENT, net . . . . . . . 57,439 56,327
INTANGIBLE ASSETS . . . . . . . . . . . 107,588 107,651
OTHER ASSETS. . . . . . . . . . . . . . 8,862 8,420
DEFERRED INCOME TAXES . . . . . . . . . - 860
-------------- -----------
Total assets. . . . . . . . . . . . . . $ 217,056 $ 228,345
============== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . $ 20,256 $ 23,243
Current maturities of long-term debt 15,524 16,599
Deferred revenue . . . . . . . . . . 6,334 6,380
Accrued payroll expense. . . . . . . 7,776 5,508
Accrued interest . . . . . . . . . . 2,318 6,340
Other accrued expenses . . . . . . . 8,523 9,920
-------------- -----------
Total current liabilities . . . . . . . 60,731 67,990
LONG TERM DEBT, less current maturities 239,109 232,821
DEFERRED RENT . . . . . . . . . . . . . 4,571 4,610
DEFERRED GAIN . . . . . . . . . . . . . 1,766 1,707
-------------- -----------
Total liabilities . . . . . . . . . . . 306,177 307,128
-------------- -----------
SHAREHOLDERS' DEFICIT:
Common stock . . . . . . . . . . . . 74 74
Preferred stock. . . . . . . . . . . 54,703 56,482
Additional paid-in capital . . . . . 36,040 34,239
Accumulated deficit. . . . . . . . . (179,938) (169,578)
-------------- -----------
Total shareholders deficit . . . . . . . (89,121) (78,783)
-------------- -----------
$ 217,056 $ 228,345
============== ===========
2
EYE CARE CENTERS OF AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands)
THIRTEEN WEEKS
ENDED
--------------------------------
MARCH 30, MARCH 29,
2002 2003
---------- ----------
(Unaudited) (Unaudited)
NET REVENUES:
Optical sales . . . . . . . . . . . . . . . . . . $ 102,688 $ 101,315
Management fee. . . . . . . . . . . . . . . . . . 989 1,026
---------------- ----------
Total net revenues . . . . . . . . . . . . . . . . . 103,677 102,341
OPERATING COSTS AND EXPENSES:
Cost of goods sold. . . . . . . . . . . . . . . . 32,068 30,259
Selling, general and administrative expenses. . . 55,441 55,912
Amortization of noncompete and other intangibles. 841 55
---------------- ----------
Total operating costs and expenses . . . . . . . . . 88,350 86,226
---------------- ----------
INCOME FROM OPERATIONS . . . . . . . . . . . . . . . 15,327 16,115
INTEREST EXPENSE, NET. . . . . . . . . . . . . . . . 5,069 5,321
INCOME TAX EXPENSE . . . . . . . . . . . . . . . . . 212 434
---------------- ----------
NET INCOME . . . . . . . . . . . . . . . . . . . . . $ 10,046 $ 10,360
================ ==========
3
EYE CARE CENTERS OF AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
THIRTEEN WEEKS
ENDED
-----------------------------
MARCH 30, MARCH 29,
2002 2003
------------ -----------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,046 $ 10,360
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.. . . . . . . . . . . . . 5,546 4,422
Amortization of debt issue costs. . . . . . . . . . . . 417 498
Deferred liabilities and other. . . . . . . . . . . . . 355 (834)
Increase in operating assets and liabilities . . . . . . . . 8,112 2,954
---------------- -----------
Net cash provided by operating activities. . . . . . . . . . . . . . 24,476 17,400
---------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment . . . . . . . . . (2,155) (3,255)
Proceeds from sale of property and equipment. . . . . . 32 -
Deposits and other. . . . . . . . . . . . . . . . . . . - (15)
---------------- -----------
Net cash used in investing activities. . . . . . . . . . . . . . . . (2,123) (3,270)
---------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt and capital leases . . . . . . . . . . (22,178) (5,226)
Payments for refinancing fees . . . . . . . . . . . . . - (28)
Distribution to affiliated OD . . . . . . . . . . . . . (85) -
---------------- -----------
Net cash used in financing activities. . . . . . . . . . . . . . . . (22,263) (5,254)
---------------- -----------
NET INCREASE IN CASH . . . . . . . . . . . . . . . . . . . . . . . . 90 8,876
CASH AND CASH EQUIVALENTS, beginning of period . . . . . . . . . . . 3,372 3,450
---------------- -----------
CASH AND CASH EQUIVALENTS, end of period . . . . . . . . . . . . . . $ 3,462 $ 12,326
================ ===========
4
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of Eye
Care Centers of America, Inc., its wholly owned subsidiaries and certain private
optometrists for whom the Company performs management services (the "ODs").
All significant intercompany accounts and transactions have been eliminated in
consolidation. Certain reclassifications have been made to the prior period
statements to conform to the current period presentation. Unless the context
otherwise requires, the term "Company" shall refer to Eye Care Centers of
America, Inc. and its subsidiaries, collectively.
The accompanying unaudited Condensed Consolidated Financial Statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. The condensed consolidated balance sheet for the year
ended December 28, 2002 was derived from the audited financial statements as of
that date but does not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments considered necessary for a fair
presentation have been included and are of a normal, recurring nature.
Operating results for the thirteen week periods ended March 30, 2002 and March
29, 2003 are not necessarily indicative of the results that may be expected for
the fiscal year ended December 27, 2003 ("fiscal 2003"). For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Eye Care Centers of America, Inc.'s annual report on
Form 10-K for the year ended December 28, 2002 ("fiscal 2002").
2. 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
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, noncompete agreements and a strategic
alliance agreement. Goodwill must be tested for impairment at least annually
using a "two-step" approach that involves the identification of reporting units
and the estimation of fair values.
5
3. RELATED PARTY TRANSACTIONS
The Company and Thomas H. Lee Company ("THL Co.") entered into a management
agreement as of April 24, 1998 (as amended, the "Management Agreement"),
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. For the thirteen week periods
ended March 29, 2003 and March 30, 2002, the Company incurred $125,000 and
$62,500 related to the agreement, respectively.
4. INCOME TAXES
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax basis of assets and liabilities and are
measured using the enacted tax rates and laws that are expected to be in effect
when the differences are expected to reverse. The Company currently has a net
deferred tax asset related to its temporary differences. Uncertainties exist as
to the future realization of the deferred tax asset under the criteria set forth
under Statement of Financial Accounting Standards ("SFAS") Statement No. 109.
These uncertainties primarily consist of the lack of taxable income historically
generated by the Company.
5. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (DOLLARS IN THOUSANDS)
THIRTEEN THIRTEEN
WEEKS ENDED WEEKS ENDED
MARCH 30, MARCH 29,
2002 2003
------------- ------------
(UNAUDITED) (UNAUDITED)
Cash paid for interest. . . . . . . . $ 1,948 $ 706
Dividends accrued on preferred stock. $ 1,564 $ 1,779
Cash paid for taxes . . . . . . . . . $ 347 $ 419
6
6. 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 result in certain financial statement reclassifications, management does
not believe that the reclassifications will have a significant impact on the
Company's results of operations or financial position.
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 outside the normal scope of business operations.
In December 2002, SFAS 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure" was issued by the FASB. The transition guidance and
annual disclosure provisions are effective in fiscal years ending after December
15, 2002 with earlier application permitted in certain circumstances. The
interim disclosure provisions are effective for financial reports containing
financial statements for interim periods 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. 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 2003 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 for the
thirteen weeks ended March 30, 2002 and March 29, 2003 are as follows:
THIRTEEN
WEEKS ENDED
-------------------------
MARCH 30, MARCH 29,
2002 2003
----------- ----------
(UNAUDITED) (UNAUDITED)
Net income. . . . . . . . . . . $ 10,046 $ 10,360
Pro forma compensation expense. 28 37
------------- ----------
Pro forma net income. . . . . . $ 10,018 $ 10,323
============= ==========
7
7. CONDENSED CONSOLIDATING INFORMATION (UNAUDITED)
The $100.0 million in principal amount of 9 1/8% Senior Subordinated Notes
due 2008 and $30.0 million in principal amount of Floating Interest Rate
Subordinated Term Securities due 2008 (collectively, the "Notes") were issued by
the Company and are guaranteed by all of the subsidiaries of Eye Care Centers of
America, Inc. (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.
8
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
=========== ============== ======== ============== ==========
9
CONDENSED CONSOLIDATING INCOME STATEMENT
FOR THE THIRTEEN WEEKS ENDED MARCH 30, 2002
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
---------- ------------- ------- -------------- --------
Revenues:
Optical sales. . . . . . . . . . . . . . . . $ 50,379 $ 32,109 $20,200 $ - $102,688
Management fees. . . . . . . . . . . . . . . 185 7,058 - (6,254) 989
Investment earnings in subsidiaries. . . . . 9,390 - - (9,390) -
---------- ------------- ------- -------------- --------
Total net revenues. . . . . . . . . . . . . . . 59,954 39,167 20,200 (15,644) 103,677
Operating costs and expenses:
Cost of goods sold . . . . . . . . . . . . . 16,570 11,450 4,048 - 32,068
Selling, general and administrative expenses 28,793 17,964 14,938 (6,254) 55,441
Amortization of intangibles:
Noncompete and other intangibles . . . . . - 841 - - 841
---------- ------------- ------- -------------- --------
Total operating costs and expenses. . . . . . . 45,363 30,255 18,986 (6,254) 88,350
---------- ------------- ------- -------------- --------
Income from operations. . . . . . . . . . . . . 14,591 8,912 1,214 (9,390) 15,327
Interest expense, net . . . . . . . . . . . . . 4,458 609 2 - 5,069
Income tax expense. . . . . . . . . . . . . . . 87 125 - - 212
---------- ------------- ------- -------------- --------
Net income. . . . . . . . . . . . . . . . . . . $ 10,046 $ 8,178 $ 1,212 $ (9,390) $ 10,046
========== ============= ======= ============== ========
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THIRTEEN WEEKS ENDED MARCH 30, 2002
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
----------- -------------- -------- -------------- ---------
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 10,046 $ 8,178 $ 1,212 $ (9,390) $ 10,046
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . 2,860 2,686 - - 5,546
Other amortization. . . . . . . . . . . . . . . . . . . 388 29 - - 417
Deferred liabilities and other. . . . . . . . . . . . . 218 84 53 - 355
Increase/(decrease) in operating assets and liabilities 20,474 (11,181) (1,181) - 8,112
----------- -------------- -------- -------------- ---------
Net cash provided by (used in) operating activities. . . . 33,986 (204) 84 (9,390) 24,476
----------- -------------- -------- -------------- ---------
Cash flows from investing activities:
Acquisition of property and equipment . . . . . . . . . (1,586) (569) - - (2,155)
Proceeds from sale of property and equipment. . . . . . - 32 - - 32
Investment in Subsidiaries. . . . . . . . . . . . . . . (9,390) - - 9,390 -
----------- -------------- -------- -------------- ---------
Net cash used in investing activities. . . . . . . . . . . (10,976) (537) - 9,390 (2,123)
----------- -------------- -------- -------------- ---------
Cash flows from financing activities:
Payments on debt and capital leases . . . . . . . . . . (22,090) (88) - - (22,178)
Distribution to affiliated OD . . . . . . . . . . . . . - - (85) - (85)
Net cash used in financing activities. . . . . . . . . . . (22,090) (88) (85) - (22,263)
----------- -------------- -------- -------------- ---------
Net Increase/(decrease) in cash and cash equivalents . . . 920 (829) (1) - 90
Cash and cash equivalents at beginning of period . . . . . 755 2,209 408 - 3,372
----------- -------------- -------- -------------- ---------
Cash and cash equivalents at end of period . . . . . . . . $ 1,675 $ 1,380 $ 407 $ - $ 3,462
=========== ============== ======== ============== =========
10
CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 29, 2003
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
----------- -------------- -------- -------------- ----------
ASSETS
Current assets:
Cash and cash equivalents. . . . . . $ 7,928 $ 4,050 $ 348 $ - $ 12,326
Accounts and notes receivable. . . . 131,796 46,118 3,935 (167,895) 13,954
Inventory. . . . . . . . . . . . . . 16,706 7,408 1,774 - 25,888
Prepaid expenses and other . . . . . 1,842 1,029 48 - 2,919
----------- -------------- -------- -------------- ----------
Total current assets. . . . . . . . . . 158,272 58,605 6,105 (167,895) 55,087
Property and equipment. . . . . . . . . 35,231 21,096 - - 56,327
Intangibles . . . . . . . . . . . . . . 16,811 90,753 87 - 107,651
Other assets. . . . . . . . . . . . . . 8,095 325 - - 8,420
Deferred income taxes . . . . . . . . . 860 - - - 860
Investment in subsidiaries. . . . . . . (7,745) - - 7,745 -
----------- -------------- -------- -------------- ----------
Total assets. . . . . . . . . . . . . . $ 211,524 $ 170,779 $ 6,192 $ (160,150) $ 228,345
=========== ============== ======== ============== ==========
LIABILITIES AND SHAREHOLDERS DEFICIT
Current liabilities:
Accounts payable . . . . . . . . . . $ 19,679 $ 162,202 $ 9,257 $ (167,895) $ 23,243
Current portion of long-term debt. . 16,522 77 - - 16,599
Deferred revenue . . . . . . . . . . 3,769 2,700 (89) - 6,380
Accrued payroll expense. . . . . . . 2,860 2,620 28 - 5,508
Accrued interest . . . . . . . . . . 5,821 519 - - 6,340
Other accrued expenses . . . . . . . 5,980 3,026 914 - 9,920
----------- -------------- -------- -------------- ----------
Total current liabilities . . . . . . . 54,631 171,144 10,110 (167,895) 67,990
Long-term debt, less current maturities 230,690 2,031 100 - 232,821
Deferred rent . . . . . . . . . . . . . 2,772 1,838 - - 4,610
Deferred gain . . . . . . . . . . . . . 1,332 375 - - 1,707
----------- -------------- -------- -------------- ----------
Total liabilities . . . . . . . . . . . 289,425 175,388 10,210 (167,895) 307,128
----------- -------------- -------- -------------- ----------
Shareholders deficit:
Common stock . . . . . . . . . . . . 74 - - - 74
Preferred stock. . . . . . . . . . . 56,482 - - - 56,482
Additional paid-in capital . . . . . 35,121 1,092 (1,974) - 34,239
Accumulated deficit. . . . . . . . . (169,578) (5,701) (2,044) 7,745 (169,578)
----------- -------------- -------- -------------- ----------
Total shareholders deficit .. . . . . . (77,901) (4,609) (4,018) 7,745 (78,783)
----------- -------------- -------- -------------- ----------
$ 211,524 $ 170,779 $ 6,192 $ (160,150) $ 228,345
=========== ============== ======== ============== ==========
11
CONDENSED CONSOLIDATING INCOME STATEMENT
FOR THE THIRTEEN WEEKS ENDED MARCH 29, 2003
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
---------- -------------- ------- -------------- --------
Revenues:
Optical sales. . . . . . . . . . . . . . . . . . $ 49,237 $ 31,377 $20,701 $ - $101,315
Management fees. . . . . . . . . . . . . . . . . 217 6,928 - (6,119) 1,026
Investment earnings in subsidiaries. . . . . . . 11,833 - - (11,833) -
---------- -------------- ------- -------------- --------
Total net revenues. . . . . . . . . . . . . . . . . 61,287 38,305 20,701 (17,952) 102,341
Operating costs and expenses:
Cost of goods sold . . . . . . . . . . . . . . . 15,643 10,420 4,196 - 30,259
Selling, general and administrative expenses . . 29,695 17,280 15,056 (6,119) 55,912
Amortization of noncompete and other intangibles - 55 - - 55
---------- -------------- ------- -------------- --------
Total operating costs and expenses. . . . . . . . . 45,338 27,755 19,252 (6,119) 86,226
---------- -------------- ------- -------------- --------
Income from operations. . . . . . . . . . . . . . . 15,949 10,550 1,449 (11,833) 16,115
Interest expense, net . . . . . . . . . . . . . . . 5,155 164 2 - 5,321
Income tax expense. . . . . . . . . . . . . . . . . 434 (579) 579 - 434
---------- -------------- ------- -------------- --------
Net income. . . . . . . . . . . . . . . . . . . . . $ 10,360 $ 10,965 $ 868 $ (11,833) $ 10,360
========== ============== ======= ============== ========
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THIRTEEN WEEKS ENDED MARCH 29, 2003
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
----------- -------------- ------ -------------- ---------
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 10,360 $ 10,965 $ 868 $ (11,833) $ 10,360
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . 2,649 1,773 - - 4,422
Amortization of debt issue costs. . . . . . . . . . . . 498 - - - 498
Deferred liabilities and other. . . . . . . . . . . . . (633) 82 (283) - (834)
Increase/(decrease) in operating assets and liabilities 14,427 (10,872) (601) - 2,954
----------- -------------- ------ -------------- ---------
Net cash provided by (used in) operating activities. . . . 27,301 1,948 (16) (11,833) 17,400
----------- -------------- ------ -------------- ---------
Cash flows from investing activities:
Acquisition of property and equipment . . . . . . . . . (2,864) (391) - - (3,255)
Investment in subsidiaries. . . . . . . . . . . . . . . (11,833) - - 11,833 -
Deposits and other. . . . . . . . . . . . . . . . . . . - (15) - - (15)
----------- -------------- ------ -------------- ---------
Net cash used in investing activities. . . . . . . . . . . (14,697) (406) - 11,833 (3,270)
----------- -------------- ------ -------------- ---------
Cash flows from financing activities:
Payments on debt and capital leases . . . . . . . . . . (5,202) (24) - - (5,226)
Payments for financing fees . . . . . . . . . . . . . . (28) - - - (28)
----------- -------------- ------ -------------- ---------
Net cash used in financing activities. . . . . . . . . . . (5,230) (24) - - (5,254)
----------- -------------- ------ -------------- ---------
Net Increase/(decrease) in cash and cash equivalents . . . 7,374 1,518 (16) - 8,876
Cash and cash equivalents at beginning of period . . . . . 554 2,532 364 - 3,450
----------- -------------- ------ -------------- ---------
Cash and cash equivalents at end of period . . . . . . . . $ 7,928 $ 4,050 $ 348 $ - $ 12,326
=========== ============== ====== ============== =========
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The Company is the third largest retail optical chain in the United States
as measured by net revenues, operating or managing 362 stores, 293 of which are
optical superstores with in-house lens processing capabilities. 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.
The Company's management team has focused on improving operating
efficiencies and growing the business through both strategic acquisitions and
new store openings. During the first quarter of fiscal 2003, the Company
continued to focus on its value retail promotion of two complete pair of single
vision eyewear for $99. Management believes this promotion has been successful
because it leverages the Company's strength as the leader in its markets and
also differentiates the Company's stores from independent optometric
practitioners who tend to offer fewer promotions in order to guard their
margins. 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. The Company experienced a 1.4%
decrease in net revenues compared to the first quarter of fiscal 2002, which was
largely the result of a 1.4% decrease in transaction volume compared to the
first quarter of fiscal 2002. The decrease in transaction volume was largely the
result of the high percentage of the Company's stores that were located in
weather impacted markets which caused the Company to have fewer operating days
versus the first quarter of fiscal 2002 and an overall decline in the optical
market. Gross profit improved by 0.7% compared to the quarter ended March 30,
2002 largely due to a continuation of improved buying efficiencies and a
favorable mix of non-branded frames which have higher margins than branded
frames.
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
format 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 the thirteen weeks ended
March 29, 2003 approximately 35.1% of the Company's total revenues were derived
from managed vision care programs, compared to 35.7% for the thirteen weeks
ended March 30, 2002, however, the percent of penetration is expected to
normalize at around 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.
13
Results of Operations
The following table sets forth for the periods indicated certain statement of
income data as a percentage of net revenues:
THIRTEEN
WEEKS ENDED
----------------------------------
MARCH 30, MARCH 29,
2002 2003
--------- ----------
STATEMENT OF INCOME DATA:
NET REVENUES:
Optical sales. . . . . . . . . . . . . . . . 99.0 % 99.0 %
Management fee . . . . . . . . . . . . . . . 1.0 1.0
------- -------
Total net revenues. . . . . . . . . . . . . . . 100.0 100.0
OPERATING COSTS AND EXPENSES:
Cost of goods sold . . . . . . . . . . . . . 31.2 * 29.9 *
Selling, general and administrative expenses 54.0 * 55.2 *
Amortization of intangibles. . . . . . . . . 0.8 0.1
------- -------
Total operating costs and expenses. . . . . . . 85.2 84.3
------- -------
INCOME FROM OPERATIONS. . . . . . . . . . . . . 14.8 15.7
INTEREST EXPENSE, NET . . . . . . . . . . . . . 4.9 5.2
INCOME TAX EXPENSE. . . . . . . . . . . . . . . 0.2 0.4
------- -------
NET INCOME. . . . . . . . . . . . . . . . . . . 9.7 % 10.1 %
======= =======
* Percentages based on optical sales only
THE THIRTEEN WEEKS ENDED MARCH 29, 2003 COMPARED TO THE THIRTEEN WEEKS ENDED
MARCH 30, 2002.
Net Revenues. The decrease in net revenues to $102.3 million for the thirteen
weeks ended March 29, 2003 from $103.7 million for the thirteen weeks ended
March 30, 2002 was largely the result of decreased comparable store sales of
3.1% compared to the first quarter of fiscal 2002. Transaction volume decreased
by 1.4% compared to the first quarter of fiscal 2002 and average ticket prices
declined by 1.8% compared to the first quarter of fiscal 2002. The decrease in
comparable store sales, transactions and average ticket prices was the result of
weak consumer demand, severe winter weather in many regions of the United States
which caused the Company to have fewer operating days versus the first quarter
of fiscal 2002 and general economic weakness. The Company closed one store in
the first quarter of fiscal 2003.
14
Gross Profit. Gross profit increased to $72.1 million for the thirteen weeks
ended March 29, 2003 from $71.6 million for the thirteen weeks ended March 30,
2002. Gross profit as a percentage of optical sales increased to 70.1% for the
thirteen weeks ended March 29, 2003 as compared to 68.8% for the thirteen weeks
ended March 30, 2002. This percentage increase was largely due to a continuation
of improved buying efficiencies and a favorable mix in non-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 $55.9
million for the thirteen weeks ended March 29, 2003 from $55.4 million for the
thirteen weeks ended March 30, 2002. SG&A, as a percentage of optical sales,
increased to 55.2% for the thirteen weeks ended March 29, 2003 from 54.0% for
the thirteen weeks ended March 30, 2002. This percentage increase was primarily
due to the addition of noncomparable doctor practices in three of the Company's
markets which has resulted in increased doctor payroll expenditures. In
addition, the Company closed three stores and opened seven new stores since the
first quarter of fiscal 2002 which has resulted in increased occupancy
expenditures.
Amortization Expense. Amortization expense decreased to $0.1 million for the
thirteen weeks ended March 29, 2003 from $0.8 million for the thirteen weeks
ended March 30, 2002. This decrease was largely due to intangible balances that
have been fully amortized compared to the first quarter of fiscal 2002.
Net Interest Expense. Net interest expense increased to $5.3 million for the
thirteen weeks ended March 29, 2003 from $5.1 million for the thirteen weeks
ended March 30, 2002. This increase was due to the increase in the variable
interest rate that occurred in conjunction with the New Facilities. See the
discussion under the heading "Liquidity and Capital Resources" for terms of the
New Facilities.
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
flows from operating activities and funding from the New Facilities (as
hereinafter defined). Cash flows from operating activities provided net cash of
$24.5 million for the thirteen weeks ended March 29, 2003 and $17.5 million for
the thirteen weeks ended March 30, 2002. As of March 29, 2003 the Company had
$12.3 million of cash available to meet its obligations.
Payments on debt and incurrence of additional debt have been the Company's
principal financing activities. Cash flows from financing activities used net
cash of $5.3 million for the thirteen weeks ended March 29, 2003 compared to
$22.2 million for the thirteen weeks ended March 30, 2002 as a result of a
15
larger revolver balance available for paydown in the first quarter of fiscal
2002 as compared to the first quarter of fiscal 2003.
Working capital of the Company primarily consists of cash and cash
equivalents, accounts receivable, inventory, accounts payable and accrued
expenses. The largest expenditures of working capital occur each year on May 1
and November 1 when the Company makes interest payments under its Notes, which
typically range between $5.0 to $6.0 million per payment.
Capital expenditures were $3.3 million for the thirteen weeks ended March
29, 2003 compared to $2.2 million for the thirteen weeks ended March 30, 2002.
Capital expenditures for all of 2003 are projected to be approximately $12.0
million. Of the planned 2003 capital expenditures, approximately $4.3 million is
related to commitments to new stores and approximately $7.7 million is expected
to be for systems and maintenance of existing facilities.
LONG-TERM DEBT
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
previous 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 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 the overnight Federal Funds Rate
plus 1/2% or the Fleet prime rate. The margins applicable to the Base Rate and
LIBOR for each of the New Facilities are set forth in the following table.
NEW FACILITY BASE RATE MARGIN LIBOR MARGIN
- ------------ ----------------- -------------
Term Loan A. 3.25% 4.25%
- ------------ ----------------- -------------
Term Loan B. 3.75% 4.75%
- ------------ ----------------- -------------
Revolver . . 3.50% 4.50%
- ------------ ----------------- -------------
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 March 29, 2003 related to the New Facilities
was $4.5 million.
At March 29, 2003, the Company had $129.8 million in notes payable
outstanding evidenced by the Exchange Notes (as hereinafter defined), $55.0
million and $62.0 million in term loans outstanding under the Term Loan A and
Term Loan B, respectively, and $2.6 million in capital lease and equipment
obligations. The $25.0 million revolving credit facility was fully available to
finance working capital requirements and general corporate purposes as of March
29, 2003. In addition, the Company has agreed to guarantee a $1.0 million loan
made to an Hour Eyes doctor in connection with the Company's acquisition of Hour
Eyes and the related long-term business management agreement (the "Hour Eyes
16
Loan"). On or about April 24, 2003, the Hour Eyes Loan was paid off with
proceeds from a loan directly from the Company to the Hour Eyes doctor.
The New Facilities are collateralized by all tangible and intangible assets
of the Company, including the stock of its subsidiaries. In addition, the
Company must meet certain financial covenants including minimum EBITDA, interest
coverage, leverage ratio and capital expenditures. As of March 29, 2003, the
Company was in compliance with all of the financial covenants.
NOTES. In 1998, the Company issued $100.0 million aggregate principal
amount of its 9 1/8% Senior Subordinated Notes due 2008 (the "Fixed Rate Notes")
and $50.0 million aggregate principal amount of its Floating Interest Rate
Subordinated Term Securities due 2008 (the "Floating Rate Notes" and, together
with the Fixed Rate Notes, the "Notes"). In connection with the New Facilities,
the Company redeemed $20.0 million of the Floating Rate Notes. Interest on the
Notes is payable semiannually on each May 1 and November 1 of each year until
maturity. Interest on the Fixed Rate Notes accrues at the rate of 9 1/8% per
annum. The Floating Rate Notes bear interest at a rate per annum, reset
semiannually, and equal to LIBOR plus 3.98%. The Fixed Rate Notes and Floating
Rate Notes are not entitled to the benefit of any mandatory sinking fund.
The Notes are 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's 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;
17
- - enter into certain transactions with affiliates;
- - consummate certain asset sales; and
- - merge or consolidate.
PREFERRED STOCK. In 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 are 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; and
- - Operating leases for stores and office facilities
The following table reflects a summary of the Company's contractual
obligations as of March 29, 2003.
Payments due by period
----------------------------------------
Less than 1 1 to 3 3 to 5 More than 5
Total Year Years Years Years
--------- -------- ------- -------- --------
Long Term Debt. . . . . . . . . $ 246,965 $16,442 $ 38,771 $ 62,000 $129,752
Capital Lease Obligations . . . 2,455 157 506 1,792 -
Operating Leases. . . . . . . . 171,950 32,033 56,096 41,321 42,500
Purchase Obligations. . . . . . - - - - -
Total future principal payments
on contractual obligations . $ 421,370 $48,632 $ 95,373 $105,113 $172,252
========= ======= ======== ======== ========
The Company has no off-balance sheet debt unrecorded obligations and has
not guaranteed the debt of any other party.
FUTURE CAPITAL RESOURCES. Based upon current operations, anticipated cost
savings 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 (12) months. The ability of the Company to satisfy its financial
covenants under the New Facilities, to meet its debt service obligations and to
reduce its debt will depend on the future performance of the Company, which in
turn, will be subject to general economic conditions and to financial, business,
and other factors, including factors beyond the Company's control. In the event
the Company does not satisfy its financial covenants within the New Facilities,
the Company may attempt to renegotiate the terms of its New Facilities with its
lender for further amendments to, or waivers of, the financial covenants of the
New Facilities. The Company believes that its ability to repay the Term Loan A
and Term Loan B and amounts outstanding under the Revolver and the Acquisition
Facility at maturity will likely require additional financing. The Company
cannot assume that additional financing will be available to it. A
18
portion of the Company's debt bears interest at floating rates; therefore, its
financial condition is and will continue to be affected by changes in prevailing
interest rates.
INFLATION
The impact of inflation on the Company's operations has not been
significant to date. While the Company does not believe its business is highly
sensitive to inflation, there can be no assurance that a high rate of inflation
would not have an adverse impact on the Company's operations.
SEASONALITY AND QUARTERLY RESULTS
The Company's sales fluctuate seasonally. Historically, the Company's
highest sales and earnings occur in the first and third fiscal quarters;
however, the opening of new stores may affect seasonal fluctuations. Hence,
quarterly results are not necessarily indicative of results for the entire year.
FORWARD-LOOKING STATEMENTS
Certain statements contained herein constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. All statements
other than statements of historical facts included in this report regarding the
Company's financial position, business strategy, budgets and plans and
objectives of management for future operations are forward-looking statements.
Although the management of the Company believes that the expectations reflected
in such forward-looking statements are reasonable, it can give no assurance that
such expectations will prove to have been correct. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors that
may cause the actual results, performance or achievements of the Company, or
industry results, to be materially different from those contemplated or
projected, forecasted, estimated or budgeted in or expressed or implied by such
forward-looking statements. Such factors include, among others, the risk and
other factors set forth under "Risk Factors" in the Company's Annual Report on
Form 10-K for fiscal 2002 as well as the following: general economic and
business conditions; industry trends; the loss of major customers, suppliers or
managed vision care contracts; cost and availability of raw materials; changes
in business strategy or development plans; availability and quality of
management; and availability, terms and deployment of capital. SPECIAL ATTENTION
SHOULD BE PAID TO THE FACT THAT CERTAIN STATEMENTS CONTAINED HEREIN ARE
FORWARD-LOOKING INCLUDING, BUT NOT LIMITED TO, STATEMENTS RELATING TO (I) THE
COMPANY'S ABILITY TO EXECUTE 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
19
MATURITY AND (IX) THE CONTINUED MEDICAL INDUSTRY EFFORTS TO REDUCE MEDICAL COSTS
AND THIRD PARTY REIMBURSEMENTS.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various market risks. Market risk is the
potential loss arising from adverse changes in market prices and rates. The
Company does not enter into derivative or other financial instruments for
trading or speculative purposes. There have been no material changes in the
Company's market risk during the first quarter of fiscal 2003. For further
discussion, refer to the Eye Care Centers of America, Inc.'s annual report on
Form 10-K for the year ended December 28, 2002.
The Company's primary market risk exposure is interest rate risk. As of
March 29, 2003, $147.1 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 with specific vulnerability to changes in LIBOR. For every two
hundred basis point change in the average interest rate under the $147.1 million
in long-term borrowings, the Company's annual interest expense would change by
approximately $2.9 million.
In the event of an adverse change in interest rates, management could take
actions to mitigate its exposure. However, due to the uncertainty of the actions
that would be taken and their possible effects, this analysis assumes no such
actions. Further, this analysis does not consider the effects of the change in
the level of overall economic activity that could exist in such an environment.
ITEM 4. 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 quarterly report, the Company carried out an 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to routine litigation in the ordinary course of its
business. There have been no such pending matters, individually or in the
aggregate, that the management of the Company has deemed to be material to the
business or financial condition of the Company that have arisen during the
20
first quarter of fiscal 2003. For further discussion, refer to the Company's
annual report on Form 10-K for the year ended December 28, 2002.
ITEM 5. OTHER INFORMATION
Effective April 30, 2003, Eye Care Centers of America, Inc. ("Parent")
completed an internal restructuring of certain of its operations (the "Internal
Restructuring"). The operations and assets of the Parent's subsidiaries
existing prior to the Internal Restructuring (which, prior to the Internal
Restructuring, comprised approximately 51.5% of the total revenues and 61.2% of
the total assets of the Company, on a consolidated basis) were not affected by
the Internal Restructuring, and the Company's ownership of these subsidiaries
remained unchanged. Generally, the Internal Restructuring resulted in the
operating assets held by the Company being transferred to various newly-formed,
wholly-owned subsidiaries. As a result of the Internal Restructuring, Parent
will hold the stock of its subsidiaries and will not have any store, lab or
distribution operations.
The purposes of the Internal Restructuring included the following:
- - to permit greater flexibility in the management and financing of existing
and future business operations;
- - to facilitate the Company's entry into new businesses;
- - to enable the Company to achieve certain tax benefits; and
- - to further the objectives of the Company's businesses, and any additional
businesses acquired in the future, on a more self-sufficient, independent
economic basis while decreasing the risk that liabilities attributable to
any one of the Company's businesses could be imposed upon one or more of
the Company's unrelated businesses.
21
3.1 Restated Articles of Incorporation of Eye Care Centers of America Inc. (a)
3.2 Statement of Resolution of the Board of Directors of Eye Care Centers of
America, Inc. designating a series of Preferred Stock. (a)
3.3 Amended and Restated By-laws of Eye Care Centers of America, Inc. (a)
4.1 Indenture, dated as of April 24, 1998, among Eye Care Centers of America,
Inc., the Guarantors named therein and United States Trust Company of New
York, as Trustee for the 9 1/8% Senior Subordinated Notes Due 2008 and
Floating Interest Rate Subordinated Term Securities. (c)
4.2 Form of Fixed Rate Exchange Note. (b)
4.3 Form of Floating Rate Exchange Note. (b)
4.4 Form of Guarantee. (b)
4.5 Registration Rights Agreement, dated April 24, 1998, between Eye Care
Centers of America, Inc., the subsidiaries of the Company named as
guarantors therein, BT Alex. Brown Incorporated and Merrill Lynch, Pierce,
Fenner & Smith Incorporated. (a)
10.4 Promisory note dated as of April 24, 2003 among Eye Care Centers of
America, Inc. and Daniel Poth, O.D. (d)
(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
Quarterly Report on Form 10-Q for the quarter ended September 29, 2001.
(c) Previously provided with, and incorporated by reference from, the Company's
Quarterly Report on Form 10-Q for the quarter ended September 28, 2002.
(d) Filed herewith
(b) The company filed no current reports on Form 8-K with the Securities and
Exchange Commission during the thirteen weeks ended March 29, 2003.
22
SIGNATURES
EYE CARE CENTERS OF AMERICA, INC.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 13, 2003
/s/ Alan E. Wiley
- ----------------------------------------------------
Alan E. Wiley
Executive Vice President and Chief Financial Officer
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: May 13, 2003
/S/ DAVID E. MCCOMAS
- -----------------------
David E. McComas
President and Chief Executive Officer
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: May 13, 2003
/S/ ALAN E. WILEY
- --------------------
Alan E. Wiley
Executive Vice President and Chief Financial Officer