Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 27, 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 October 31, 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 September 27, 2003 (Unaudited) 2
Condensed Consolidated Statements of Operations for the
Thirteen Weeks and Thirty-Nine Weeks Ended September 28, 2002
(Unaudited) and September 27, 2003 (Unaudited) 3
Condensed Consolidated Statements of Cash Flows for the
Thirty-Nine Weeks Ended September 28, 2002 (Unaudited)
and September 27, 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 13-20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Item 4. Controls and Procedures 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 22
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EYE CARE CENTERS OF AMERICA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
DECEMBER 28, SEPTEMBER 27,
2002 2003
-------------- ---------------
ASSETS. . . . . . . . . . . . . . . . . (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents. . . . . . $ 3,450 $ 7,512
Accounts and notes receivable, net . 12,084 12,463
Inventory. . . . . . . . . . . . . . 24,060 25,312
Prepaid expenses and other . . . . . 3,573 2,783
-------------- ---------------
Total current assets. . . . . . . . . . 43,167 48,070
PROPERTY & EQUIPMENT, net . . . . . . . 57,439 52,597
INTANGIBLE ASSETS . . . . . . . . . . . 107,588 107,423
OTHER ASSETS. . . . . . . . . . . . . . 8,862 9,251
DEFERRED INCOME TAXES . . . . . . . . . - 1,235
-------------- ---------------
Total assets. . . . . . . . . . . . . . $ 217,056 $ 218,576
============== ===============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . $ 20,256 $ 20,126
Current maturities of long-term debt 15,524 17,781
Deferred revenue . . . . . . . . . . 6,334 6,217
Accrued payroll expense. . . . . . . 7,776 5,840
Accrued interest . . . . . . . . . . 2,318 6,162
Other accrued expenses . . . . . . . 8,523 9,000
-------------- ---------------
Total current liabilities . . . . . . . 60,731 65,126
LONG TERM DEBT, less current maturities 239,109 223,924
DEFERRED RENT . . . . . . . . . . . . . 4,571 4,671
DEFERRED GAIN . . . . . . . . . . . . . 1,766 1,590
-------------- ---------------
Total liabilities . . . . . . . . . . . 306,177 295,311
-------------- ---------------
SHAREHOLDERS' DEFICIT:
Common stock . . . . . . . . . . . . 74 74
Preferred stock. . . . . . . . . . . 54,703 60,213
Additional paid-in capital . . . . . 36,040 30,463
Accumulated deficit. . . . . . . . . (179,938) (167,485)
-------------- ---------------
Total shareholders' deficit . . . . . . . (89,121) (76,735)
-------------- ---------------
$ 217,056 $ 218,576
============== ===============
See Notes to Condensed Financial Statements
2
EYE CARE CENTERS OF AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
THIRTEEN WEEKS THIRTY-NINE WEEKS
ENDED ENDED
---------------- -------------------
SEPT. 28, SEPT. 27, SEPT. 28, SEPT. 27,
2002 2003 2002 2003
---------------- ------------------- ------------ ----------
(Unaudited) . (Unaudited) (Unaudited) (Unaudited)
REVENUES:
Optical sales. . . . . . . . . . . . . . . . . $ 93,000 $ 95,510 $ 284,455 $ 285,682
Management fees. . . . . . . . . . . . . . . . 885 786 2,671 2,616
---------------- ------------------- ------------ ----------
Net revenues. . . . . . . . . . . . . . . . . . . 93,885 96,296 287,126 288,298
OPERATING COSTS AND EXPENSES:
Cost of goods sold . . . . . . . . . . . . . . 28,669 29,895 88,335 88,199
Selling, general and administrative expenses.. 55,590 57,179 164,142 166,705
Amortization of intangibles. . . . . . . . . . 127 55 1,809 165
---------------- ------------------- ------------ ----------
Total operating costs and expenses. . . . . . . . 84,386 87,129 254,286 255,069
---------------- ------------------- ------------ ----------
INCOME FROM OPERATIONS. . . . . . . . . . . . . . 9,499 9,167 32,840 33,229
INTEREST EXPENSE, NET . . . . . . . . . . . . . . 5,283 5,261 15,917 15,501
INCOME TAX EXPENSE. . . . . . . . . . . . . . . . 384 2,717 879 5,274
---------------- ------------------- ------------ ----------
NET INCOME. . . . . . . . . . . . . . . . . . . . $ 3,832 $ 1,189 $ 16,044 $ 12,454
================ =================== ============ ==========
See Notes to Condensed Financial Statements
3
EYE CARE CENTERS OF AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
THIRTY-NINE
WEEKS ENDED
---------------
September 28, September 27,
2002 2003
----------- -----------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 16,044 $ 12,454
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization. . . . . . . . . . . . . 16,075 12,978
Loan cost amortization . . . . . . . . . . . . . . . . 1,209 1,506
Deferred liabilities and other . . . . . . . . . . . . 704 (1,428)
Loss on disposition of property and equipment. . . . . 62 15
Increase (decrease) in operating assets and liabilities . . (1,167) 510
-------------------- --------------------
Net cash provided by operating activities.. . . . . . . . . . . . . 32,927 26,035
-------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment. . . . . . . . . (8,417) (8,032)
Note receivable issued . . . . . . . . . . . . . . . . - (1,000)
Other. . . . . . . . . . . . . . . . . . . . . . . . . - 24
-------------------- --------------------
Net cash used in investing activities . . . . . . . . . . . . . . . (8,417) (9,008)
-------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt and capital leases. . . . . . . . . . (25,976) (12,965)
Redemption of common stock.. . . . . . . . . . . . . . (100) -
Distribution to affiliated OD. . . . . . . . . . . . . (570) -
-------------------- --------------------
Net cash used in financing activities . . . . . . . . . . . . . . . (26,646) (12,965)
-------------------- --------------------
NET INCREASE (DECREASE) IN CASH . . . . . . . . . . . . . . . . . . (2,136) 4,062
CASH AND CASH EQUIVALENTS, beginning of period. . . . . . . . . . . 3,372 3,450
-------------------- --------------------
CASH AND CASH EQUIVALENTS, end of period. . . . . . . . . . . . . . $ 1,236 $ 7,512
==================== ====================
See Notes to Condensed 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 thirty-nine week periods ended
September 27, 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
products 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. 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 by an additional $250,000 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 thirty-nine week periods ended September 28, 2002 and September 27,
2003 the Company incurred an expense of $375,000 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)
THIRTY-NINE
WEEKS ENDED
---------------
SEPTEMBER 28, SEPTEMBER 27,
2002 2003
--------------- --------------
(UNAUDITED) (UNAUDITED)
Cash paid for interest. . . . . . . . $ 10,368 $ 9,374
Dividends accrued on preferred stock. $ 4,847 $ 5,510
Cash paid for taxes . . . . . . . . . $ 486 $ 3,549
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 (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 thirty-nine weeks ended September 28, 2002 and September 27, 2003 are as
follows:
THIRTY-NINE
WEEKS ENDED
---------------
SEPTEMBER 28, SEPTEMBER 27,
2002 2003
--------------- --------------
(UNAUDITED) (UNAUDITED)
Net income. . . . . . . . . . . $ 16,044 $ 12,454
Pro forma compensation expense. 93 111
--------------- --------------
Pro forma net income. . . . . . $ 15,951 $ 12,343
=============== ==============
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
----------- -------------- -------- -------------- ----------
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
=========== ============== ======== ============== ==========
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 2002
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
---------- ------------- ------- -------------- --------
Revenues:
Optical sales. . . . . . . . . . . . . . . . $ 139,951 $ 89,959 $54,545 $ - $284,455
Management fees. . . . . . . . . . . . . . . 484 19,135 - (16,948) 2,671
Investment earnings in subsidiaries. . . . . 22,461 - - (22,461) -
---------- ------------- ------- -------------- --------
Net revenues. . . . . . . . . . . . . . . . . . 162,896 109,094 54,545 (39,409) 287,126
Operating costs and expenses:
Cost of goods sold . . . . . . . . . . . . . 46,353 31,073 10,909 - 88,335
Selling, general and administrative expenses 86,243 52,165 42,682 (16,948) 164,142
Noncompete and other intangibles . . . . . - 1,809 - - 1,809
---------- ------------- ------- -------------- --------
Total operating costs and expenses. . . . . . . 132,596 85,047 53,591 (16,948) 254,286
---------- ------------- ------- -------------- --------
Income from operations. . . . . . . . . . . . . 30,300 24,047 954 (22,461) 32,840
Interest expense, net . . . . . . . . . . . . . 14,173 1,738 6 - 15,917
Income tax expense. . . . . . . . . . . . . . . 83 446 350 - 879
---------- ------------- ------- -------------- --------
Net income. . . . . . . . . . . . . . . . . . . $ 16,044 $ 21,863 $ 598 $ (22,461) $ 16,044
========== ============= ======= ============== ========
9
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THIRTEEN WEEKS ENDED SEPTEMBER 28, 2002
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
---------- ------------- -------- -------------- --------
Revenues:
Optical sales . . . . . . . . . . . . . . . . 45,972 $ 28,821 $18,207 $ - $ 93,000
Management fees . . . . . . . . . . . . . . . 143 6,310 - (5,568) 885
Investment earnings in subsidiaries . . . . . 7,297 - - (7,297) -
---------- ------------- -------- -------------- --------
Net revenues . . . . . . . . . . . . . . . . . . 53,412 35,131 18,207 (12,865) 93,885
Operating costs and expenses:
Cost of goods sold. . . . . . . . . . . . . . 15,280 9,774 3,615 - 28,669
Selling, general and administrative expenses. 29,455 17,238 14,465 (5,568) 55,590
Noncompete and other intangibles. . . . . . - 127 - - 127
---------- ------------- -------- -------------- --------
Total operating costs and expenses . . . . . . . 44,735 27,139 18,080 (5,568) 84,386
---------- ------------- -------- -------------- --------
Income from operations . . . . . . . . . . . . . 8,677 7,992 127 (7,297) 9,499
Interest expense, net. . . . . . . . . . . . . . 4,825 456 2 - 5,283
Income tax expense . . . . . . . . . . . . . . . 20 14 350 - 384
---------- ------------- -------- -------------- --------
Net income (loss). . . . . . . . . . . . . . . . $ 3,832 $ 7,522 $ (225) $ (7,297) $ 3,832
========== ============= ======== ============== ========
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 2002
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
----------- -------------- ------ -------------- ---------
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 16,044 $ 21,863 $ 598 $ (22,461) $ 16,044
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . 8,648 7,427 - - 16,075
Loan cost amortization. . . . . . . . . . . . . . . . . 1,128 81 - - 1,209
Deferred liabilities and other. . . . . . . . . . . . . 256 330 118 - 704
Loss on disposition of property and equipment. . . . . 30 32 - - 62
Increase/(decrease) in operating assets and liabilities 15,262 (16,215) (214) - (1,167)
----------- -------------- ------ -------------- ---------
Net cash provided by operating activities. . . . . . . . . 41,368 13,518 502 (22,461) 32,927
----------- -------------- ------ -------------- ---------
Cash flows from investing activities:
Acquisition of property and equipment . . . . . . . . . (6,282) (2,135) - - (8,417)
Investment in subsidiaries. . . . . . . . . . . . . . . (9,390) (13,071) - 22,461 -
----------- -------------- ------ -------------- ---------
Net cash used in investing activities. . . . . . . . . . . (15,672) (15,206) - 22,461 (8,417)
----------- -------------- ------ -------------- ---------
Cash flows from financing activities:
Payments on debt and capital leases . . . . . . . . . . (25,644) (332) - - (25,976)
Buyback of common stock . . . . . . . . . . . . . . . . (100) - - - (100)
Distribution to affiliated OD . . . . . . . . . . . . . - - (570) - (570)
----------- -------------- ------ -------------- ---------
Net cash used in financing activities. . . . . . . . . . . (25,744) (332) (570) - (26,646)
----------- -------------- ------ -------------- ---------
Net decrease in cash and cash equivalents. . . . . . . . . (48) (2,020) (68) - (2,136)
Cash and cash equivalents at beginning of period . . . . . 755 2,209 408 - 3,372
----------- -------------- ------ -------------- ---------
Cash and cash equivalents at end of period . . . . . . . . $ 707 $ 189 $ 340 $ - $ 1,236
=========== ============== ====== ============== =========
10
CONDENSED CONSOLIDATING BALANCE SHEETS
SEPTEMBER 27, 2003
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
----------- -------------- -------- -------------- ----------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . $ 59 $ 7,201 $ 252 $ - $ 7,512
Accounts and notes receivable, net. . 150,667 51,764 3,388 (193,356) 12,463
Inventory . . . . . . . . . . . . . . - 23,284 2,028 - 25,312
Prepaid expenses and other. . . . . . - 2,735 48 - 2,783
----------- -------------- -------- -------------- ----------
Total current assets . . . . . . . . . . 150,726 84,984 5,716 (193,356) 48,070
Property and equipment, net. . . . . . . (13) 52,610 - - 52,597
Intangibles, net . . . . . . . . . . . . 16,706 90,655 87 (25) 107,423
Other assets . . . . . . . . . . . . . . 7,722 1,529 - - 9,251
Deferred income taxes. . . . . . . . . . 1,235 - - - 1,235
Investment in subsidiaries . . . . . . . 1,022 - - (1,022) -
----------- -------------- -------- -------------- ----------
Total assets . . . . . . . . . . . . . . $ 177,398 $ 229,778 $ 5,803 $ (194,403) $ 218,576
=========== ============== ======== ============== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable. . . . . . . . . . . $ 524 $ 205,603 $ 7,355 $ (193,356) $ 20,126
Current maturities of long-term debt. 17,615 166 - - 17,781
Deferred revenue. . . . . . . . . . . 1,415 5,051 (249) - 6,217
Accrued payroll expense . . . . . . . - 5,500 340 - 5,840
Accrued interest. . . . . . . . . . . 6,163 - (1) - 6,162
Other accrued expenses. . . . . . . . 946 7,226 828 - 9,000
----------- -------------- -------- -------------- ----------
Total current liabilities. . . . . . . . 26,663 223,546 8,273 (193,356) 65,126
Long-term debt, less current maturities. 221,952 1,877 95 - 223,924
Deferred rent. . . . . . . . . . . . . . - 4,531 140 - 4,671
Deferred gain. . . . . . . . . . . . . . 1,319 271 - - 1,590
----------- -------------- -------- -------------- ----------
Total liabilities. . . . . . . . . . . . 249,934 230,225 8,508 (193,356) 295,311
----------- -------------- -------- -------------- ----------
Shareholders' deficit:
Common stock. . . . . . . . . . . . . 74 - - - 74
Preferred stock . . . . . . . . . . . 60,213 - - - 60,213
Additional paid-in capital. . . . . . 34,662 (2,200) (1,974) (25) 30,463
Accumulated deficit . . . . . . . . . (167,485) 1,753 (731) (1,022) (167,485)
----------- -------------- -------- -------------- ----------
Total shareholders deficit . . (72,536) (447) (2,705) (1,047) (76,735)
----------- -------------- -------- -------------- ----------
$ 177,398 $ 229,778 $ 5,803 $ (194,403) $ 218,576
=========== ============== ======== ============== ==========
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER 27, 2003
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
---------- ------------- ------- -------------- --------
Revenues:
Optical sales. . . . . . . . . . . . . . . . $ 63,429 $ 164,994 $57,259 $ - $285,682
Management fees. . . . . . . . . . . . . . . 405 18,635 - (16,424) 2,616
Investment earnings in subsidiaries. . . . . 20,216 - - (20,216) -
---------- ------------- ------- -------------- --------
Net revenues. . . . . . . . . . . . . . . . . . 84,050 183,629 57,259 (36,640) 288,298
Operating costs and expenses:
Cost of goods sold . . . . . . . . . . . . . 21,330 55,406 11,463 - 88,199
Selling, general and administrative expenses 37,975 102,321 42,833 (16,424) 166,705
Amortization of intangibles. . . . . . . . . - 165 - - 165
---------- ------------- ------- -------------- --------
Total operating costs and expenses. . . . . . . 59,305 157,892 54,296 (16,424) 255,069
---------- ------------- ------- -------------- --------
Income from operations. . . . . . . . . . . . . 24,745 25,737 2,963 (20,216) 33,229
Interest expense, net . . . . . . . . . . . . . 9,549 5,946 6 - 15,501
Income tax expense. . . . . . . . . . . . . . . 2,742 1,241 1,291 - 5,274
---------- ------- ------- -------- -----
Net income. . . . . . . . . . . . . . . . . . . $ 12,454 $ 18,550 $ 1,666 $ (20,216) $ 12,454
========== ============= ======= ============== ========
11
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THIRTEEN WEEKS ENDED SEPTEMBER 27, 2003
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
----------- ------------- ------- -------------- --------
Revenues:
Optical sales. . . . . . . . . . . . . . . . $ 1,244 $ 75,484 $18,782 $ - $ 95,510
Management fees. . . . . . . . . . . . . . . 75 6,066 - (5,355) 786
Investment earnings in subsidiaries. . . . . 2,924 - - (2,924) -
----------- ------------- ------- -------------- --------
Net revenues. . . . . . . . . . . . . . . . . . 4,243 81,550 18,782 (8,279) 96,296
Operating costs and expenses:
Cost of goods sold . . . . . . . . . . . . . 848 25,251 3,796 - 29,895
Selling, general and administrative expenses (255) 48,604 14,185 (5,355) 57,179
Amortization of intangibles. . . . . . . . . - 55 - - 55
----------- ------------- ------- -------------- --------
Total operating costs and expenses. . . . . . . 593 73,910 17,981 (5,355) 87,129
----------- ------------- ------- -------------- --------
Income from operations. . . . . . . . . . . . . 3,650 7,640 801 (2,924) 9,167
Interest expense, net . . . . . . . . . . . . . 1,430 3,829 2 - 5,261
Income tax expense. . . . . . . . . . . . . . . 1,031 1,311 375 - 2,717
----------- ------------- ------- -------------- --------
Net income. . . . . . . . . . . . . . . . . . . $ 1,189 $ 2,500 $ 424 $ (2,924) $ 1,189
=========== ============= ======= ============== ========
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER 27, 2003
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
----------- -------------- -------- -------------- ---------
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 12,454 $ 18,550 $ 1,666 $ (20,216) $ 12,454
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . 3,485 9,493 - - 12,978
Loan cost amortization. . . . . . . . . . . . . . . . . 675 831 - - 1,506
Deferred liabilities and other. . . . . . . . . . . . . (6,147) 5,022 (303) - (1,428)
Loss on disposition of property and equipment. . . . . - 15 - - 15
Increase/(decrease) in operating assets and liabilities 25,568 (23,588) (1,470) - 510
----------- -------------- -------- -------------- ---------
Net cash provided by operating activities. . . . . . . . . 36,035 10,323 (107) (20,216) 26,035
----------- -------------- -------- -------------- ---------
Cash flows from investing activities:
Acquisition of property and equipment . . . . . . . . . (3,046) (4,986) - - (8,032)
Note receivable issued. . . . . . . . . . . . . . . . . - (1,000) - - (1,000)
Other . . . . . . . . . . . . . . . . . . . . . . . . . - 24 - - 24
Investment in subsidiaries. . . . . . . . . . . . . . . (20,613) 397 - 20,216 -
----------- -------------- -------- -------------- ---------
Net cash used in investing activities. . . . . . . . . . . (23,659) (5,565) - 20,216 (9,008)
----------- -------------- -------- -------------- ---------
Cash flows from financing activities:
Payments on debt and capital leases . . . . . . . . . . (12,871) (89) (5) - (12,965)
----------- -------------- -------- -------------- ---------
Net cash used in financing activities. . . . . . . . . . . (12,871) (89) (5) - (12,965)
----------- -------------- -------- -------------- ---------
Net increase (decrease) in cash and cash equivalents . . . (495) 4,669 (112) - 4,062
Cash and cash equivalents at beginning of period . . . . . 554 2,532 364 - 3,450
----------- -------------- -------- -------------- ---------
Cash and cash equivalents at end of period . . . . . . . . $ 59 $ 7,201 $ 252 $ - $ 7,512
=========== ============== ======== ============== =========
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 370 stores, 301 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 new store openings. During the
first three 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 three quarters of fiscal 2003, the Company
experienced a 0.4% increase in optical sales compared to the first three
quarters of fiscal 2002, which was largely the result of a 0.5% increase in
transaction volume compared to the first three quarters of fiscal 2002.
Management believes the relatively flat transaction volume was largely the
result of mediocre consumer demand and a sluggish economy for the majority of
the first three quarters of fiscal 2003. With the soft optical retail
environment 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; however,
discount managed care programs have begun to play and will increasingly 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 overall sales
volume resulting from managed vision care relationships also compensates for the
lower average ticket price. During the thirty-nine weeks ended September 27,
2003, approximately 29.6% of the Company's total revenues were derived from
managed vision care programs, compared to 35.4% for the thirty-nine weeks ended
September 28, 2002. The Company expects the percent of penetration to 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 statements of income data as a percentage
of net revenues:
THIRTEEN THIRTY-NINE
WEEKS ENDED WEEKS ENDED
---------------------------- ----------------------------
SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27,
2002 2003 2002 2003
-------------- -------------- -------------- --------------
STATEMENTS OF INCOME DATA:
NET REVENUES:
Optical sales . . . . . . . . . . . . . 99.1 % 99.2 % 99.1 % 99.1 %
Management fees . . . . . . . . . . . . 0.9 0.8 0.9 0.9
-------------- -------------- -------------- --------------
Total net revenues . . . . . . . . . . . . 100.0 100.0 100.0 100.0
OPERATING COSTS
AND EXPENSES:
Cost of goods sold. . . . . . . . . . . 30.8 * 31.3 * 31.1 * 30.9 *
Selling, general and administrative
expenses. . . . . . . . . . . . . . . . 59.8 * 59.9 * 57.7 * 58.4 *
Amortization of intangibles . . . . . . 0.1 0.1 0.6 0.1
-------------- -------------- -------------- --------------
Total operating costs and expenses . . . . 89.9 90.5 88.6 88.5
-------------- -------------- -------------- --------------
INCOME FROM OPERATIONS . . . . . . . . . . 10.1 9.5 11.4 11.5
INTEREST EXPENSE, NET. . . . . . . . . . . 5.6 5.5 5.5 5.4
INCOME TAX EXPENSE . . . . . . . . . . . . 0.4 2.8 0.3 1.8
-------------- -------------- -------------- --------------
NET INCOME . . . . . . . . . . . . . . . . 4.1 % 1.2 % 5.6 % 4.3 %
============== ============== ============== ==============
* Percentages based on optical sales only
THE THIRTEEN WEEKS ENDED SEPTEMBER 27, 2003 COMPARED TO THE THIRTEEN WEEKS ENDED
SEPTEMBER 28, 2002.
Net Revenues. Net revenues increased to $96.3 million for the thirteen weeks
ended September 27, 2003 from $93.9 million for the thirteen weeks ended
September 28, 2002. Comparable store sales increased by 1.0% compared to the
third quarter of fiscal 2002. Comparable transaction volume increased by 0.5%
compared to the third quarter of fiscal 2002 and average ticket prices increased
by 0.5% compared to the third quarter of fiscal 2002. This relatively flat
performance in average ticket and comparable transactions is the result of a
soft optical retail environment driven by mediocre consumer demand and
comparisons to a strong fiscal 2002 third quarter comparable sales result of
5.7%. The Company opened two stores in the third quarter of 2003.
Gross Profit. Gross profit increased to $65.6 million for the thirteen weeks
ended September 27, 2003 from $64.3 million for the thirteen weeks ended
September 28, 2002. Gross profit as a percentage of optical sales decreased to
68.7% for the thirteen weeks ended September 27, 2003 as compared to 69.2% for
the thirteen weeks ended September 28, 2002. This percentage decrease was
largely due to the increase in contact lens product mix which have lower profit
margins than traditional lenses and frames and a change in contact lens vendors.
14
Selling General & Administrative Expenses (SG&A). SG&A increased to $57.2
million for the thirteen weeks ended September 27, 2003 from $55.6 million for
the thirteen weeks ended September 28, 2002. SG&A as a percentage of optical
sales increased to 59.9% for the thirteen weeks ended September 27, 2003 from
59.8% for the thirteen weeks ended September 28, 2002. This percentage increase
was primarily due to the increase in advertising expenditures related to the
Company's entry in to a new market. The addition of noncomparable doctor
practices in eighteen of the Company's stores also resulted in increased doctor
payroll expenditures during the thirteen week period ended September 27, 2003.
In addition, the Company opened two new stores in the third quarter of fiscal
2003, which has resulted in increased occupancy expenditures.
Amortization Expense. Amortization expense was $0.1 million for the thirteen
weeks ended September 27, 2003 and September 28, 2002, respectively.
Net Interest Expense. Net interest expense was $5.3 million for the thirteen
weeks ended September 27, 2003 and September 28, 2002, respectively.
Income Tax Expense. Net income tax expense increased to $2.7 million for the
thirteen weeks ended September 27, 2003 from $0.4 million for the thirteen weeks
ended September 28, 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 September 27, 2003 was $1.2
million. Net income for the thirteen weeks ended September 28, 2002 was $3.8
million.
THE THIRTY-NINE WEEKS ENDED SEPTEMBER 27, 2003 COMPARED TO THE THIRTY-NINE WEEKS
ENDED SEPTEMBER 28, 2002.
Net Revenues. Net revenues increased to $288.3 million for the thirty-nine
weeks ended September 27, 2003 from $287.1 million for the thirty-nine weeks
ended September 28, 2002. Comparable store sales decreased by 1.0% compared to
the thirty-nine weeks ended September 28, 2002. Comparable transaction volume
decreased by 0.4% compared to the thirty-nine weeks ended September 28, 2002 and
average ticket prices decreased by 0.5% compared to the thirty-nine weeks ended
September 28, 2002. This relatively flat performance in average ticket and
comparable transactions is the result of a soft optical retail environment
driven by mediocre consumer demand and comparisons to a strong comparable sales
result of 8.5% for the thirty-nine weeks ended September 28, 2002. The Company
opened nine stores and closed two during the thirty-nine weeks ended September
27, 2003. With the continuing weak retail environment and the trend toward
deeply discounted promotional offers in the optical market, sales generation
will remain challenging for the remainder of fiscal 2003.
Gross Profit. Gross profit increased to $197.5 million for the thirty-nine
weeks ended September 27, 2003 from $196.1 million for the thirty-nine weeks
ended September 28, 2002. Gross profit as a percentage of optical sales
increased to 69.1% for the thirty-nine weeks ended September 27, 2003 as
compared to 68.9% for the thirty-nine weeks ended September 28, 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 $166.7
million for the thirty-nine weeks ended September 27, 2003 from $164.1 million
for the thirty-nine weeks ended September 28, 2002. SG&A as a percentage of
optical sales increased to 58.4% for the thirty-nine weeks ended September 27,
2003 from 57.7% for the thirty-nine weeks ended September 28, 2002. This
percentage increase was primarily due to the addition of noncomparable doctor
practices in eight of the Company's markets, which has resulted in increased
doctor payroll expenditures. In addition, the Company closed
15
two stores and opened nine new stores during the thirty-nine weeks ended
September 27, 2003, which has resulted in increased occupancy expenditures.
Amortization Expense. Amortization expense decreased to $0.2 million for the
thirty-nine weeks ended September 27, 2003 from $1.8 million for the thirty-nine
weeks ended September 28, 2002. This decrease was largely due to intangible
balances that have been fully amortized compared to the thirty-nine weeks ended
September 28, 2002.
Net Interest Expense. Net interest expense decreased to $15.5 million for the
thirty-nine weeks ended September 27, 2002 from $15.9 million for the
thirty-nine weeks ended September 28, 2002. This decrease was due to the
decrease in outstanding debt and the decrease in applicable interest rates.
Net Income. Net income for the thirty-nine weeks ended September 27, 2003 was
$12.5 million. Net income for the thirty-nine weeks ended September 28, 2002
was $16.0 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
$26.0 million for the thirty-nine weeks ended September 27, 2003 and $32.9
million for the thirty-nine weeks ended September 28, 2002. As of September 27,
2003, the Company had $7.5 million of cash available to meet its obligations.
Payments on debt have been the Company's principal financing activities.
Cash flows from financing activities used net cash of $13.0 million for the
thirty-nine weeks ended September 27, 2003 compared to $26.7 million for the
thirty-nine weeks ended September 28, 2002 largely due to payments of $15.5
million made to reduce the outstanding balance under the Revolver (as
hereinafter defined) during the thirty-nine weeks ended September 28, 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 $8.0 million for the thirty-nine weeks ended
September 27, 2003 compared to $8.4 million for the thirty-nine weeks ended
September 28, 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 related to systems and maintenance of existing
facilities.
16
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 Fleet Bank's 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 September 27, 2003 related to the New
Facilities was $3.9 million.
At September 27, 2003, the Company had $241.7 million of outstanding debt
consisting of $129.8 million of the Notes (as hereinafter defined) outstanding,
$47.5 million and $62.0 million in term loans outstanding under the Term Loan A
and Term Loan B, respectively 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-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 September 27, 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 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
17
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;
- - 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.
18
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 September 27, 2003.
Payments due by period
----------------------- More
Total Less than 1 1 to 3 3 to 5 than 5
. . . . . . . . . . . . Year Years Years Years
--------- ------- ------------ -------- --------
Long Term Debt. . . . . . . . . $239,359 $17,578 $30,005 $62,000 $129,776
Capital Lease Obligations . . . 2,346 203 418 1,725 -
Operating Leases. . . . . . . . 161,097 31,695 53,840 39,365 36,197
Purchase Obligations. . . . . . - - - - -
------- ------- ------------ -------- --------
Total future principal payments
on contractual obligations . $402,802 $49,476 $84,263 $103,090 $165,973
======= ======= ============ ======== ========
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 under the New Facilities,
the Company may attempt to renegotiate the terms of the 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 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.
19
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 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.
20
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
September 27, 2003, $139.3 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 $139.3 million
in long-term borrowings, the Company's annual interest expense would change by
approximately $2.8 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 September 27, 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 September 27, 2003 that has materially
affected, or is reasonably likely to materially affect, our internal controls
over financial reporting.
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
three quarters of fiscal 2003. For further discussion, refer to the Company's
annual report on Form 10-K for the year ended December 28, 2002.
21
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 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)
10.7 Professional Business Management Agreement dated August 3, 2003, by and
between EyeMasters, Inc., a Delaware corporation, and Jason Wonch O.D. and
Associates, A P.C., a Louisiana professional optometry corporation. (d)
31.1 Certification of Chief Executive Officer (d)
31.2 Certification of Chief Financial Officer (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 September 27, 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: November 10, 2003
/s/ Alan E. Wiley
- ----------------------------------------------------
Alan E. Wiley
Executive Vice President and Chief Financial Officer