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 JUNE 28, 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 August 11, 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 June 28, 2003 (Unaudited) 2
Condensed Consolidated Statements of Operations for the
Thirteen Weeks and Twenty-Six Weeks Ended June 29, 2002
(Unaudited) and June 28, 2003 (Unaudited) 3
Condensed Consolidated Statements of Cash Flows for the
Twenty-Six Weeks Ended June 29, 2002 (Unaudited)
and June 28, 2003 (Unaudited) 4
Notes to Condensed Consolidated Financial Statements 5-12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13-21
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Item 4. Controls and Procedures 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 23
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EYE CARE CENTERS OF AMERICA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
DECEMBER 28, JUNE 28,
2002 2003
-------------- ----------
ASSETS. . . . . . . . . . . . . . . . . (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents. . . . . . $ 3,450 $ 5,771
Accounts and notes receivable, net . 12,084 12,282
Inventory. . . . . . . . . . . . . . 24,060 27,203
Prepaid expenses and other . . . . . 3,573 2,930
-------------- ----------
Total current assets. . . . . . . . . . 43,167 48,186
PROPERTY & EQUIPMENT, net . . . . . . . 57,439 54,808
INTANGIBLE ASSETS . . . . . . . . . . . 107,588 107,478
OTHER ASSETS. . . . . . . . . . . . . . 8,862 9,734
DEFERRED INCOME TAXES . . . . . . . . . - 1,155
-------------- ----------
Total assets. . . . . . . . . . . . . . $ 217,056 $ 221,361
============== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . $ 20,256 $ 19,368
Current maturities of long-term debt 15,524 16,456
Deferred revenue . . . . . . . . . . 6,334 6,244
Accrued payroll expense. . . . . . . 7,776 5,396
Accrued interest . . . . . . . . . . 2,318 3,729
Other accrued expenses . . . . . . . 8,523 8,712
-------------- ----------
Total current liabilities . . . . . . . 60,731 59,905
LONG TERM DEBT, less current maturities 239,109 233,059
DEFERRED RENT . . . . . . . . . . . . . 4,571 4,650
DEFERRED GAIN . . . . . . . . . . . . . 1,766 1,649
-------------- ----------
Total liabilities . . . . . . . . . . . 306,177 299,263
-------------- ----------
SHAREHOLDERS' DEFICIT:
Common stock . . . . . . . . . . . . 74 74
Preferred stock. . . . . . . . . . . 54,703 58,317
Additional paid-in capital . . . . . 36,040 32,381
Accumulated deficit. . . . . . . . . (179,938) (168,674)
-------------- ----------
Total shareholders' deficit . . . . . . . (89,121) (77,902)
-------------- ----------
$ 217,056 $ 221,361
============== ==========
See Notes to Condensed Consolidated Financial Statements
2
EYE CARE CENTERS OF AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
THIRTEEN WEEKS TWENTY-SIX WEEKS
ENDED ENDED
---------------- -----------------
JUNE 29, JUNE 28, JUNE 29, JUNE 28,
2002 2003 2002 2003
-------------- ------------ ------------- ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
REVENUES:
Optical sales. . . . . . . . . . . . . . . . . $ 88,767 $ 88,857 $ 191,455 $ 190,172
Management fees. . . . . . . . . . . . . . . . 797 804 1,786 1,830
---------------- --------------- ------------ ---------
Net revenues. . . . . . . . . . . . . . . . . . . 89,564 89,661 193,241 192,002
OPERATING COSTS AND EXPENSES:
Cost of goods sold . . . . . . . . . . . . . . 27,598 28,045 59,666 58,304
Selling, general and administrative expenses.. 53,111 53,614 108,552 109,526
Amortization of intangibles. . . . . . . . . . 841 55 1,682 110
---------------- --------------- ------------ ---------
Total operating costs and expenses. . . . . . . . 81,550 81,714 169,900 167,940
---------------- --------------- ------------ ---------
INCOME FROM OPERATIONS. . . . . . . . . . . . . . 8,014 7,947 23,341 24,062
INTEREST EXPENSE, NET . . . . . . . . . . . . . . 5,565 4,919 10,635 10,240
INCOME TAX EXPENSE. . . . . . . . . . . . . . . . 283 2,123 494 2,557
---------------- --------------- ------------ ---------
NET INCOME. . . . . . . . . . . . . . . . . . . . $ 2,166 $ 905 $ 12,212 $ 11,265
================ =============== ============ =========
See Notes to Condensed Consolidated Financial Statements
3
EYE CARE CENTERS OF AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
TWENTY-SIX
WEEKS ENDED
---------------
JUNE 29, JUNE 28,
2002 2003
----------- -----------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 12,212 $ 11,265
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization. . . . . . . . . . . . . 11,134 8,739
Amortization of debt issue costs . . . . . . . . . . . 836 996
Deferred liabilities and other . . . . . . . . . . . . 312 (1,283)
Loss on disposition of property and equipment. . . . . 63 18
Increase (decrease) in operating assets and liabilities . . 1,001 (5,236)
--------------- ---------------
Net cash provided by operating activities.. . . . . . . . . . . . . 25,558 14,499
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment. . . . . . . . . (6,191) (6,077)
Notes receivable . . . . . . . . . . . . . . . . . . . - (1,026)
Proceeds from sale of property and equipment . . . . . - 43
Payments received on notes receivable. . . . . . . . . - 25
--------------- ---------------
Net cash used in investing activities . . . . . . . . . . . . . . . (6,191) (7,035)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt and capital leases. . . . . . . . . . (20,387) (5,143)
Distribution to affiliated OD. . . . . . . . . . . . . (410) -
--------------- ---------------
Net cash used in financing activities . . . . . . . . . . . . . . . (20,797) (5,143)
--------------- ---------------
NET INCREASE (DECREASE) IN CASH . . . . . . . . . . . . . . . . . . (1,430) 2,321
CASH AND CASH EQUIVALENTS, beginning of period. . . . . . . . . . . 3,372 3,450
--------------- ---------------
CASH AND CASH EQUIVALENTS, end of period. . . . . . . . . . . . . . $ 1,942 $ 5,771
=============== ===============
See Notes to Condensed Consolidated Financial Statements
4
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of Eye
Care Centers of America, Inc., its wholly owned subsidiaries and certain private
optometrists for whom the Company performs management services (the "ODs").
All significant intercompany accounts and transactions have been eliminated in
consolidation. Certain reclassifications have been made to the prior period
statements to conform to the current period presentation. Unless the context
otherwise requires, the term "Company" shall refer to Eye Care Centers of
America, Inc. and its subsidiaries, collectively.
The accompanying unaudited Condensed Consolidated Financial Statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. 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 and twenty-six week periods ended June
28, 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 payable thereunder to
$250,000 per year plus expenses for management and other consulting services
provided to the Company. However, the fees payable under the Management
Agreement may be increased to an amount up to $500,000 annually depending 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 both the twenty-six week periods ended June 29, 2002
and June 28, 2003 the Company incurred an expense of $250,000 related to the
Management Agreement.
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)
TWENTY-SIX
WEEKS ENDED
-------------------------
JUNE 29, JUNE 28,
2002 2003
(UNAUDITED) .(UNAUDITED)
---------- ---------
Cash paid for interest. . . . . . . . $ 9,961 $ 7,637
Dividends accrued on preferred stock. $ 3,180 $ 2,201
Cash paid for taxes . . . . . . . . . $ 463 $ 1,422
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
6
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 (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 twenty-six weeks ended June 29, 2002 and June 28, 2003 are as follows:
TWENTY-SIX
WEEKS ENDED
-------------------------
JUNE 29, JUNE 28,
2002 2003
(UNAUDITED) .(UNAUDITED)
---------- ---------
Net income. . . . . . . . . . . $ 12,212 $ 11,265
Pro forma compensation expense. 60 75
------------- ---------
Pro forma net income. . . . . . $ 12,152 $ 11,190
============= =========
7
7. CONDENSED CONSOLIDATING INFORMATION (UNAUDITED)
The Company has issued $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")
which are guaranteed by all of the subsidiaries of the Company (the "Guarantor
Subsidiaries") but are not guaranteed by the 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) the
Company, as parent, as if it accounted for its subsidiaries on the equity
method, (ii) the Guarantor Subsidiaries, and (iii) ODs. 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 SHEETS
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
----------- -------------- -------- -------------- ----------
Deferred income taxes. . . . . . . . - - - - -
----------- -------------- -------- -------------- ----------
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
Deferred income taxes . . . . . . . . . - - - - -
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
=========== ============== ======== ============== ==========
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE TWENTY-SIX WEEKS ENDED JUNE 29, 2002
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
---------- ------------- ------- -------------- --------
Revenues:
Optical sales. . . . . . . . . . . . . . . . $ 93,979 $ 61,138 $36,338 $ - $191,455
Management fees. . . . . . . . . . . . . . . 341 12,825 - (11,380) 1,786
Investment earnings in subsidiaries. . . . . 15,164 - - (15,164) -
---------- ------------- ------- -------------- --------
Net revenues. . . . . . . . . . . . . . . . . . 109,484 73,963 36,338 (26,544) 193,241
Operating costs and expenses:
Cost of goods sold . . . . . . . . . . . . . 31,073 21,299 7,294 - 59,666
Selling, general and administrative expenses 56,788 34,927 28,217 (11,380) 108,552
Amortization of intangibles:
Noncompete and other intangibles . . . . . - 1,682 - - 1,682
---------- ------------- ------- -------------- --------
Total operating costs and expenses. . . . . . . 87,861 57,908 35,511 (11,380) 169,900
---------- ------------- ------- -------------- --------
Income from operations. . . . . . . . . . . . . 21,623 16,055 827 (15,164) 23,341
Interest expense, net . . . . . . . . . . . . . 9,349 1,282 4 - 10,635
Income tax expense. . . . . . . . . . . . . . . 62 432 - - 494
---------- ------------- ------- -------------- --------
Net income. . . . . . . . . . . . . . . . . . . $ 12,212 $ 14,341 $ 823 $ (15,164) $ 12,212
========== ============= ======= ============== ========
9
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THIRTEEN WEEKS ENDED JUNE 29, 2002
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
----------- ------------- -------- -------------- --------
Revenues:
Optical sales . . . . . . . . . . . . . . . . $ 43,600 $ 29,029 $16,138 $ - $ 88,767
Management fees . . . . . . . . . . . . . . . 156 5,767 - (5,126) 797
Investment earnings in subsidiaries . . . . . 5,774 - - (5,774) -
----------- ------------- -------- -------------- --------
Net revenues . . . . . . . . . . . . . . . . . . 49,530 34,796 16,138 (10,900) 89,564
Operating costs and expenses:
Cost of goods sold. . . . . . . . . . . . . . 14,503 9,849 3,246 - 27,598
Selling, general and administrative expenses. 27,995 16,963 13,279 (5,126) 53,111
Amortization of intangibles:
Noncompete and other intangibles. . . . . . - 841 - - 841
----------- ------------- -------- -------------- --------
Total operating costs and expenses . . . . . . . 42,498 27,653 16,525 (5,126) 81,550
----------- ------------- -------- -------------- --------
Income from operations . . . . . . . . . . . . . 7,032 7,143 (387) (5,774) 8,014
Interest expense, net. . . . . . . . . . . . . . 4,890 673 2 - 5,565
Income tax expense . . . . . . . . . . . . . . . (24) 307 - - 283
----------- ------------- -------- -------------- --------
Net income (loss). . . . . . . . . . . . . . . . $ 2,166 $ 6,163 $ (389) $ (5,774) $ 2,166
=========== ============= ======== ============== ========
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE TWENTY-SIX WEEKS ENDED JUNE 29, 2002
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
----------- -------------- ------ -------------- ---------
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . $ 12,212 $ 14,342 $ 823 $ (15,165) $ 12,212
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . 5,737 5,397 - - 11,134
Loan cost amortization . . . . . . . . . . . . . . . . . 775 61 - - 836
Deferred liabilities and other . . . . . . . . . . . . . 124 74 114 - 312
Loss on disposition of property and equipment . . . . . 31 32 - - 63
Increase/(decrease) in operating assets and liabilities. 14,348 (12,721) (626) - 1,001
----------- -------------- ------ -------------- ---------
Net cash provided by operating activities . . . . . . . . . 33,227 7,185 311 (15,165) 25,558
----------- -------------- ------ -------------- ---------
Cash flows from investing activities:
Acquisition of property and equipment. . . . . . . . . . (4,919) (1,272) - - (6,191)
Investment in Subsidiaries . . . . . . . . . . . . . . . (9,390) (5,775) - 15,165 -
----------- -------------- ------ -------------- ---------
Net cash used in investing activities . . . . . . . . . . . (14,309) (7,047) - 15,165 (6,191)
----------- -------------- ------ -------------- ---------
Cash flows from financing activities:
Payments on debt and capital leases. . . . . . . . . . . (20,081) (306) - - (20,387)
Distribution to affiliated OD. . . . . . . . . . . . . . - - (410) - (410)
----------- -------------- ------ -------------- ---------
Net cash provided by (used in) financing activities . . . . (20,081) (306) (410) - (20,797)
----------- -------------- ------ -------------- ---------
Net decrease in cash and cash equivalents . . . . . . . . . (1,163) (168) (99) - (1,430)
Cash and cash equivalents at beginning of period. . . . . . 755 2,209 408 - 3,372
----------- -------------- ------ -------------- ---------
Cash and cash equivalents at end of period. . . . . . . . . $ (408) $ 2,041 $ 309 $ - $ 1,942
=========== ============== ====== ============== =========
10
CONDENSED CONSOLIDATING BALANCE SHEETS
JUNE 28, 2003
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
----------- -------------- -------- -------------- ----------
ASSETS
Current assets:
Cash and cash equivalents. . . . . . $ (1,258) $ 6,980 $ 49 $ - $ 5,771
Accounts and notes receivable, net . 160,885 49,220 3,428 (201,251) 12,282
Inventory. . . . . . . . . . . . . . - 25,195 2,008 - 27,203
Prepaid expenses and other . . . . . (3) 2,885 48 - 2,930
----------- -------------- -------- -------------- ----------
Total current assets. . . . . . . . . . 159,624 84,280 5,533 (201,251) 48,186
Property and equipment, net . . . . . . (13) 54,821 - - 54,808
Intangibles, net. . . . . . . . . . . . 16,706 90,710 87 (25) 107,478
Other assets. . . . . . . . . . . . . . 7,723 2,011 - - 9,734
Deferred income taxes. . . . . . . . 1,155 - - - 1,155
Investment in subsidiaries. . . . . . . (1,902) - - 1,902 -
----------- -------------- -------- -------------- ----------
Total assets. . . . . . . . . . . . . . $ 183,293 $ 231,822 $ 5,620 $ (199,374) $ 221,361
=========== ============== ======== ============== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable . . . . . . . . . . $ 2,335 $ 211,030 $ 7,254 $ (201,251) $ 19,368
Current maturities of long-term debt 16,336 120 - - 16,456
Deferred revenue . . . . . . . . . . 2,608 3,885 (249) - 6,244
Accrued payroll expense. . . . . . . - 5,080 316 - 5,396
Accrued interest . . . . . . . . . . 3,729 - - - 3,729
Other accrued expenses . . . . . . . 776 6,748 1,188 - 8,712
----------- -------------- -------- -------------- ----------
Total current liabilities . . . . . . . 25,784 226,863 8,509 (201,251) 59,905
Long-term debt, less current maturities 231,009 1,950 - - 233,059
Deferred rent . . . . . . . . . . . . . - 4,510 100 - 4,650
Deferred gain . . . . . . . . . . . . . 1,319 330 140 - 1,649
----------- -------------- -------- -------------- ----------
Total liabilities . . . . . . . . . . . 258,112 233,653 8,749 (201,251) 299,263
----------- -------------- -------- -------------- ----------
Shareholders' deficit:
Common stock . . . . . . . . . . . . 74 - - - 74
Preferred stock. . . . . . . . . . . 58,317 - - - 58,317
Additional paid-in capital . . . . . 35,464 (1,084) (1,974) (25) 32,381
Accumulated deficit. . . . . . . . . (168,674) (747) (1,155) 1,902 (168,674)
----------- -------------- -------- -------------- ----------
Total shareholders' deficit . . . . . . (74,819) (1,831) (3,129) 1,877 (77,902)
----------- -------------- -------- -------------- ----------
$ 183,293 $ 231,822 $ 5,620 $ (199,374) $ 221,361
=========== ============== ======== ============== ==========
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE TWENTY-SIX WEEKS ENDED JUNE 28, 2003
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
---------- -------------- ------- -------------- --------
Revenues:
Optical sales. . . . . . . . . . . . . . . . $ 62,185 $ 89,510 $38,477 $ - $190,172
Management fees. . . . . . . . . . . . . . . 330 12,569 - (11,069) 1,830
Investment earnings in subsidiaries. . . . . 17,292 - - (17,292) -
---------- -------------- ------- -------------- --------
Net revenues. . . . . . . . . . . . . . . . . . 79,807 102,079 38,477 (28,361) 192,002
Operating costs and expenses:
Cost of goods sold . . . . . . . . . . . . . 20,482 30,155 7,667 - 58,304
Selling, general and administrative expenses 38,230 53,717 28,648 (11,069) 109,526
Noncompete and other intangibles. . . . . . - 110 - - 110
---------- -------------- ------- -------------- --------
Total operating costs and expenses. . . . . . . 58,712 83,982 36,315 (11,069) 167,940
---------- -------------- ------- -------------- --------
Income from operations. . . . . . . . . . . . . 21,095 18,097 2,162 (17,292) 24,062
Interest expense, net . . . . . . . . . . . . . 8,119 2,117 4 - 10,240
Income tax expense. . . . . . . . . . . . . . . 1,711 (70) 916 - 2,557
---------- -------------- ------- -------------- --------
Net income. . . . . . . . . . . . . . . . . . . $ 11,265 $ 16,050 $ 1,242 $ (17,292) $ 11,265
========== ============== ======= ============== ========
11
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THIRTEEN WEEKS ENDED JUNE 28, 2003
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
---------- ------------- ------- -------------- --------
Revenues:
Optical sales. . . . . . . . . . . . . . . . $ 12,948 $ 58,133 $17,776 $ - $ 88,857
Management fees. . . . . . . . . . . . . . . 113 5,641 - (4,950) 804
Investment earnings in subsidiaries. . . . . 5,459 - - (5,459) -
---------- ------------- ------- -------------- --------
Net revenues. . . . . . . . . . . . . . . . . . 18,520 63,774 17,776 (10,409) 89,661
Operating costs and expenses:
Cost of goods sold . . . . . . . . . . . . . 4,839 19,735 3,471 - 28,045
Selling, general and administrative expenses 8,535 36,437 13,592 (4,950) 53,614
Amortization of intangibles:
Noncompete and other intangibles . . . . . - 55 - - 55
---------- ------------- ------- -------------- --------
Total operating costs and expenses. . . . . . . 13,374 56,227 17,063 (4,950) 81,714
---------- ------------- ------- -------------- --------
Income from operations. . . . . . . . . . . . . 5,146 7,547 713 (5,459) 7,947
Interest expense, net . . . . . . . . . . . . . 2,964 1,953 2 - 4,919
Income tax expense. . . . . . . . . . . . . . . 1,277 509 337 - 2,123
---------- ------------- ------- -------------- --------
Net income. . . . . . . . . . . . . . . . . . . $ 905 $ 5,085 $ 374 $ (5,459) $ 905
========== ============= ======= ============== ========
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE TWENTY-SIX WEEKS ENDED JUNE 28, 2003
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
----------- -------------- -------- -------------- ---------
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . $ 11,265 $ 16,050 $ 1,242 $ (17,292) $ 11,265
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . 3,485 5,254 - - 8,739
Loan cost amortization . . . . . . . . . . . . . . . . . 663 333 - - 996
Deferred liabilities and other . . . . . . . . . . . . . (4,874) 3,894 (303) - (1,283)
Loss on disposition of property and equipment . . . . . - 18 - - 18
Increase/(decrease) in operating assets and liabilities. 13,465 (17,447) (1,254) - (5,236)
----------- -------------- -------- -------------- ---------
Net cash provided by operating activities . . . . . . . . . 24,004 8,102 (315) (17,292) 14,499
----------- -------------- -------- -------------- ---------
Cash flows from investing activities:
Acquisition of property and equipment. . . . . . . . . . (3,046) (3,031) - - (6,077)
Notes Receivable . . . . . . . . . . . . . . . . . . . . - (1,026) - - (1,026)
Proceeds from sale of property and equipment . . . . . . - 43 - - 43
Payments received on notes receivable. . . . . . . . . . - 25 - - 25
Investment in Subsidiaries . . . . . . . . . . . . . . . (17,689) 397 - 17,292 -
----------- -------------- -------- -------------- ---------
Net cash used in investing activities . . . . . . . . . . . (20,735) (3,592) - 17,292 (7,035)
----------- -------------- -------- -------------- ---------
Cash flows from financing activities:
Payments on debt and capital leases. . . . . . . . . . . (5,081) (62) - - (5,143)
----------- -------------- -------- -------------- ---------
Net cash provided by (used in) financing activities . . . . (5,081) (62) - - (5,143)
----------- -------------- -------- -------------- ---------
Net decrease in cash and cash equivalents . . . . . . . . . (1,812) 4,448 (315) - 2,321
Cash and cash equivalents at beginning of period. . . . . . 554 2,532 364 - 3,450
----------- -------------- -------- -------------- ---------
Cash and cash equivalents at end of period. . . . . . . . . $ (1,258) $ 6,980 $ 49 $ - $ 5,771
=========== ============== ======== ============== =========
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 368 stores, 299 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 the 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 two quarters 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 this 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. For the first two
quarters of fiscal 2003, the Company experienced a 0.6% decrease in net revenues
compared to the first two quarters of fiscal 2002, which was largely the result
of a 0.8% decrease in transaction volume compared to the first two quarters of
fiscal 2002. Management believes the decrease in transaction volume was largely
the result of weak consumer demand and general economic weakness. With the weak
retail environment, high unemployment rates and the trend toward deeply
discounted promotional offers in the optical market, sales generation will
remain challenging for the remainder of fiscal 2003.
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
twenty-six weeks ended June 28, 2003, approximately 30.3% of the Company's total
revenues were derived from managed vision care programs, compared to 35.3% for
the twenty-six weeks ended June 29, 2002; however, the Company expects that the
percent of penetration will normalize in the 30% range as the transition to
funded managed vision care programs continues and the value retail offer
replaces activity under discount managed vision care plans. 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 TWENTY-SIX
WEEKS ENDED WEEKS ENDED
------------------------ -------------------------
JUNE 29, JUNE 28, JUNE 29, JUNE 28,
2002 2003 2002 2003
------------------------- -------------------------
STATEMENT OF INCOME DATA:
NET REVENUES:
Optical sales 99.2 % 99.1 % 99.1 % 99.0 %
Management fee 0.8 0.9 0.9 1.0
------------ --------- ------------ ---------
Total net revenues 100.0 100.0 100.0 100.0
OPERATING COSTS AND EXPENSES:
Cost of goods sold 31.1 * 31.6 * 31.2 * 30.7 *
Selling, general and administrative expenses 59.8 * 60.3 * 56.7 * 57.6 *
Amortization of intangibles:
Noncompete and other intangibles 0.9 0.1 0.9 0.1
------------ --------- ------------ ---------
Total operating costs and expenses 91.1 91.1 87.9 87.5
------------ --------- ------------ ---------
INCOME FROM OPERATIONS 8.9 8.9 12.1 12.5
INTEREST EXPENSE, NET 6.2 5.5 5.5 5.3
INCOME TAX EXPENSE 0.3 2.4 0.3 1.3
------------ --------- ------------ ---------
NET INCOME 2.4 % 1.0 % 6.3 % 5.9 %
============ ========= ============ =========
* Percentages based on optical sales only
THE THIRTEEN WEEKS ENDED JUNE 28, 2003 COMPARED TO THE THIRTEEN WEEKS ENDED JUNE
29, 2002.
Net Revenues. Net revenues increased to $89.7 million for the thirteen weeks
ended June 28, 2003 from $89.6 million for the thirteen weeks ended June 29,
2002. Comparable store sales decreased by 0.5% compared to the second quarter
of fiscal 2002. Comparable transaction volume decreased by 0.2% compared to the
second quarter of fiscal 2002 and average ticket prices declined by 0.1%
compared to the second quarter of fiscal 2002. The Company opened seven stores
and closed one store in the second quarter of 2003. This relatively flat
performance in average ticket and comparable transactions is a result of a soft
retail environment driven by weak consumer demand, high unemployment rates and
comparisons to a strong fiscal 2002 second quarter comparable sales result of
9.1%.
Gross Profit. Gross profit from optical sales decreased to $60.8 million for
the thirteen weeks ended June 28, 2003 from $61.2 million for the thirteen weeks
ended June 29, 2002. Gross profit as a percentage of optical sales decreased to
68.4% for the thirteen weeks ended June 28, 2003 as compared to 68.9% for the
14
thirteen weeks ended June 29, 2002. This percentage decrease was largely due to
the decrease in average ticket prices and the increase in contact lens product
mix which have lower profit margins than traditional lenses and frames.
Selling General & Administrative Expenses (SG&A). SG&A increased to $53.6
million for the thirteen weeks ended June 28, 2003 from $53.1 million for the
thirteen weeks ended June 29, 2002. SG&A as a percentage of optical sales
increased to 60.3% for the thirteen weeks ended June 28, 2003 from 59.8% for the
thirteen weeks ended June 29, 2002. This percentage increase was primarily due
to the addition of noncomparable doctor practices in four of the Company's
markets, which has resulted in increased doctor payroll expenditures. In
addition, the Company closed one store and opened seven new stores in the second
quarter of fiscal 2003, which has resulted in increased occupancy expenditures.
Amortization Expense. Amortization expense decreased to $0.1 million for the
thirteen weeks ended June 28, 2003 from $0.8 million for the thirteen weeks
ended June 29, 2002. This decrease was largely due to a greater amount of
intangible balances having been fully amortized prior to the second quarter of
fiscal 2003 as compared with the second quarter of fiscal 2002.
Net Interest Expense. Net interest expense decreased to $4.9 million for the
thirteen weeks ended June 28, 2003 from $5.6 million for the thirteen weeks
ended June 29, 2002. This decrease was due to the decrease in outstanding debt
and the decrease in applicable interest rates.
Income Tax Expense. Net income tax expense increased to $2.1 million for the
thirteen weeks ended June 28, 2003 from $0.3 million for the thirteen weeks
ended June 29, 2002. This increase was due to the depletion of the Company's
net operating loss carryforward during the first quarter of fiscal 2003.
Net Income. Net income for the thirteen weeks ended June 28, 2003 was $0.9
million. Net income for the thirteen weeks ended June 29, 2002 was $2.2
million.
THE TWENTY-SIX WEEKS ENDED JUNE 28, 2003 COMPARED TO THE TWENTY-SIX WEEKS ENDED
JUNE 29, 2002.
Net Revenues. The decrease in net revenues to $192.0 million for the twenty-six
weeks ended June 28, 2003 from $193.2 million for the twenty-six weeks ended
June 29, 2002 was largely the result of decreased comparable store sales of 1.9%
compared to the twenty-six weeks ended June 29, 2002. Comparable transaction
volume decreased by 0.8% compared to the twenty-six weeks ended June 29, 2002
and average ticket prices declined by 1.0% compared to the twenty-six weeks
ended June 29, 2002. The decrease in comparable store sales, transactions and
average ticket prices was largely a result of a soft retail environment driven
by weak consumer demand, severe winter weather and general economic weakness and
comparisons to a strong comparable sales result of 9.9% for the twenty-six weeks
ended June 29, 2002. With the continuing weak environment and the trend toward
deeply discounted promotional offers in the optical market, sales generation
will remain challenging for the remainder of fiscal 2003. The Company opened
seven stores and closed two stores during the twenty-six weeks ended June 28,
2003.
Gross Profit. Gross profit from optical sales increased to $131.9 million for
the twenty-six weeks ended June 28, 2003 from $131.8 million for the twenty-six
weeks ended June 29, 2002. Gross profit as a percentage of optical sales
increased to 69.3% for the twenty-six weeks ended June 28, 2003 as compared to
68.8% for the twenty-six weeks ended June 30, 2001. 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.
15
Selling General & Administrative Expenses (SG&A). SG&A increased to $109.5
million for the twenty-six weeks ended June 28, 2003 from $108.6 million for the
twenty-six weeks ended June 29, 2002. SG&A as a percentage of optical sales
increased to 57.6% for the twenty-six weeks ended June 28, 2003 from 56.7% for
the twenty-six weeks ended June 29, 2002. This percentage increase was
primarily due to the addition of noncomparable doctor practices in four of the
Company's markets, which has resulted in increased doctor payroll expenditures.
In addition, the Company closed two stores and opened seven new stores during
the twenty-six weeks ended June 28, 2003, which has resulted in increased
occupancy expenditures.
Amortization Expense. Amortization expense decreased to $0.1 million for the
twenty-six weeks ended June 28, 2003 from $1.7 million for the twenty-six weeks
ended June 29, 2002. This decrease was largely due to intangible balances that
have been fully amortized compared to the twenty-six weeks ended June 28, 2003
Net Interest Expense. Net interest expense decreased to $10.2 million for the
twenty-six weeks ended June 28, 2003 from $10.6 million for the twenty-six weeks
ended June 29, 2002. This decrease was due to the decrease in outstanding debt
and the decrease in applicable interest rates during the second quarter of
fiscal 2003.
Income Tax Expense. Net income tax expense increased to $2.6 million for the
twenty-six weeks ended June 28, 2003 from $0.5 million for the twenty-six weeks
ended June 29, 2002. This increase was due to the depletion of the Company's
net operating loss carryforward during the first quarter of fiscal 2003.
Net Income. Net income for the twenty-six weeks ended June 28, 2003 was $11.3
million. Net income for the twenty-six weeks ended June 29, 2002 was $12.2
million.
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
$14.5 million for the twenty-six weeks ended June 28, 2003 and $25.6 million for
the twenty-six weeks ended June 29, 2002. As of June 28, 2003 the Company had
$5.8 million of cash available to meet its obligations.
16
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 $5.1 million for the twenty-six weeks ended June 28, 2003 compared to
$20.8 million for the twenty-six weeks ended June 29, 2002 largely due to
payments of $9.5 million made to reduce the outstanding balance under the
Revolver (as hereinafter defined) during the twenty-six weeks ended June 22,
2002.
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 the Notes, which
typically range between $5.0 to $6.0 million per payment.
Capital expenditures were $6.1 million for the twenty-six weeks ended June
28, 2003 compared to $6.2 million for the twenty-six weeks ended June 29, 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 % 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 June 28, 2003 related to the New Facilities
was $4.2 million.
At June 28, 2003, the Company had $129.8 million in notes payable
outstanding evidenced by the Exchange Notes (as hereinafter defined), $51.3
million and $62.0 million in term loans outstanding under the Term Loan A and
Term Loan B, respectively, $4.0 million outstanding under the revolving credit
facility and $2.4 million in capital lease and equipment obligations. In
addition, in connection with the Company's acquisition of certain assets used at
the "Hour Eyes" locations in Virginia and the related long-
17
term business management agreement the Company guaranteed a $1.0 million loan
made to an optometrist owning the optometric practice (the "Hour Eyes Loan"). On
April 24, 2003, the Hour Eyes Loan was paid off with proceeds from a loan
directly from the Company to the optometrist owning the optometric practice. The
principal of the new loan amortizes equally over ten years and is fully secured
by the stock and assets of the professional corporation through which such
optometrist operates. Interest on the Hour Eyes Loan is payable quarterly each
year until maturity at prime plus 2% per annum.
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 June 28, 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:
18
- - incur additional indebtedness;
- - pay dividends or make other distributions in respect of its capital stock;
- - purchase equity interests or subordinated indebtedness;
- - create certain liens;
- - 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, par value $.01 per share (the "Preferred Stock").
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 June 28, 2003.
Payments due by period
-----------------------
Total Less than 1 1 to 3 3 to 5 More than 5
. . . . . . . . . . . . Year Years Years Years
- ------------------------------- --------- ------- ------------ -------- --------
Long Term Debt. . . . . . . . . $ 247,110 $ 16,304 $ 35,042 $ 66,000 $ 129,764
Capital Lease Obligations . . . 2,405 152 496 1,757 -
Operating Leases. . . . . . . . 164,835 31,656 54,721 40,089 38,369
Purchase Obligations. . . . . . - - - - -
--------- ------- ------------ -------- --------
Total future principal payments
on contractual obligations . $ 414,350 $ 48,112 $ 90,259 $107,846 $ 168,133
========= ======= ============ ======== ========
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
19
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 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.
Whenever the Company makes a statement that is not a statement of historical
fact (such as when the Company describes what it "believes," "expects,"
"anticipates," or "intends" to do, and other similar statements), the Company is
making a forward looking statement. 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 be
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
20
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 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
June 28, 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
In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an
evaluation, under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the period covered by this report. Based on that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that the design and operation of our disclosure controls and procedures were
effective as of June 28, 2003 to provide reasonable assurance that information
required to be disclosed in our reports filed or submitted under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms.
There has been no change in our internal controls over financial reporting
that occurred during the thirteen weeks ended June 28, 2003 that has materially
affected, or is reasonably likely to materially affect, our internal controls
over financial reporting.
21
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 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.
22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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 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)
10.4 Promisory note dated as of April 24, 2003 among Eye Care Centers of
America, Inc. and Daniel Poth, O.D. (d)
10.5 Professional Business Management Agreement dated May 25, 2003, by and
between EyeMasters, Inc., a Delaware corporation, and S.L. Christensen, O.D.
and Associates, P.C., an Arizona professional corporation. (e)
10.6 Professional Business Management Agreement dated May 12, 2003, by and
between EyeMasters, Inc., a Delaware corporation, and Michael J. Martin O.D.
and Associates, P.C., P.C., a Georgia professional corporation. (e)
31.1 Certification of Chief Executive Officer (e)
31.2 Certification of Chief Financial Officer (e)
__________
(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) Previously provided with, and incorporated by reference from, the Company's
Quarterly Report on Form 10-Q for the quarter ended March 29, 2003.
(e) Filed herewith
(B) The company filed no current reports on Form 8-K with the Securities and
Exchange Commission during the thirteen weeks ended June 28, 2003.
23
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: August 11, 2003
/s/ Alan E. Wiley
- ----------------------------------------------------
Alan E. Wiley
Executive Vice President and Chief Financial Officer