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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 27, 2004.
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 33 - 70572
EYE CARE CENTERS OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-2337775
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification number)
11103 WEST AVENUE
SAN ANTONIO, TEXAS 78213
(Address of principal executive offices, including zip code)
(210) 340-3531
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant has (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act):
Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Class Outstanding at May 11, 2004
----- -----------------------------
Common Stock, $.01 par value 7,397,689 shares
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EYE CARE CENTERS OF AMERICA, INC.
INDEX
PAGE
NUMBER
-------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at December 27, 2003
and March 27, 2004 (Unaudited) 2
Condensed Consolidated Statements of Income for the
Thirteen Weeks Ended March 29, 2003 (Unaudited)
and March 27, 2004 (Unaudited) 3
Condensed Consolidated Statements of Cash Flows for the
Thirteen Weeks Ended March 29, 2003 (Unaudited)
and March 27, 2004 (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 20
Item 4. Controls and Procedures 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 22
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EYE CARE CENTERS OF AMERICA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
DECEMBER 27, MARCH 27,
2003 2004
-------------- -----------
ASSETS. . . . . . . . . . . . . . . . . (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents. . . . . . $ 3,809 $ 13,331
Accounts and notes receivable, net . 11,117 12,991
Inventory. . . . . . . . . . . . . . 25,120 27,728
Deferred income taxes, net . . . . . 570 570
Prepaid expenses and other . . . . . 3,696 3,201
-------------- -----------
Total current assets. . . . . . . . . . 44,312 57,821
PROPERTY & EQUIPMENT, net . . . . . . . 51,715 51,365
INTANGIBLE ASSETS . . . . . . . . . . . 107,423 107,423
OTHER ASSETS. . . . . . . . . . . . . . 8,631 8,070
DEFERRED INCOME TAXES, net. . . . . . . 13,445 13,033
-------------- -----------
Total assets. . . . . . . . . . . . . . $ 225,526 $ 237,712
============== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . $ 21,360 $ 24,971
Current maturities of long-term debt 18,980 20,257
Deferred revenue . . . . . . . . . . 5,743 5,916
Accrued payroll expense. . . . . . . 5,429 6,587
Accrued interest . . . . . . . . . . 3,213 5,775
Other accrued expenses . . . . . . . 8,334 13,414
-------------- -----------
Total current liabilities . . . . . . . 63,059 76,920
LONG TERM DEBT, less current maturities 219,845 208,779
DEFERRED RENT . . . . . . . . . . . . . 4,719 4,690
DEFERRED GAIN . . . . . . . . . . . . . 1,532 1,473
-------------- -----------
Total liabilities . . . . . . . . . . . 289,155 291,862
-------------- -----------
SHAREHOLDERS' DEFICIT:
Common stock . . . . . . . . . . . . 74 74
Preferred stock. . . . . . . . . . . 62,169 64,190
Additional paid-in capital . . . . . 28,259 26,146
Accumulated deficit. . . . . . . . . (154,131) (144,560)
-------------- -----------
Total shareholders' deficit . . . . . . . (63,629) (54,150)
-------------- -----------
$ 225,526 $ 237,712
============== ===========
See Notes to Condensed Consolidated Financial Statements
2
EYE CARE CENTERS OF AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands)
THIRTEEN WEEKS
ENDED
---------------------------
MARCH 29, MARCH 27,
2003 2004
------------- ----------
. . . . . . . . . . . . . . . . . . . . (Unaudited) (Unaudited)
NET REVENUES:
Optical sales . . . . . . . . . . . . . . . . . . $ 101,315 $ 111,141
Management fee. . . . . . . . . . . . . . . . . . 1,026 962
---------------- ----------
Total net revenues . . . . . . . . . . . . . . . . . 102,341 112,103
OPERATING COSTS AND EXPENSES:
Cost of goods sold. . . . . . . . . . . . . . . . 30,259 33,068
Selling, general and administrative expenses. . . 55,912 59,576
Amortization of noncompete and other intangibles. 55 -
---------------- ----------
Total operating costs and expenses . . . . . . . . . 86,226 92,644
---------------- ----------
INCOME FROM OPERATIONS . . . . . . . . . . . . . . . 16,115 19,459
INTEREST EXPENSE, NET. . . . . . . . . . . . . . . . 5,321 4,865
INCOME TAX EXPENSE . . . . . . . . . . . . . . . . . 434 5,023
---------------- ----------
NET INCOME . . . . . . . . . . . . . . . . . . . . . $ 10,360 $ 9,571
================ ==========
See Notes to Condensed Consolidated Financial Statements
3
EYE CARE CENTERS OF AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
THIRTEEN WEEKS
ENDED
----------------------------
MARCH 29, MARCH 27,
2003 2004
----------- -----------
. . . . . . . . . . . . . . . . . . . . . . . . . . . . (Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,360 $ 9,571
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.. . . . . . . . . . . . . 4,422 3,994
Amortization of debt issue costs. . . . . . . . . . . . 498 441
Deferred liabilities and other. . . . . . . . . . . . . (834) 490
Increase in operating assets and liabilities . . . . . . . . 2,939 8,534
---------------- -----------
Net cash provided by operating activities. . . . . . . . . . . . . . 17,385 23,030
---------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment, net. . . . . . . . . (3,255) (3,637)
---------------- -----------
Net cash used in investing activities. . . . . . . . . . . . . . . . (3,255) (3,637)
---------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt and capital leases. . . . . . . . . . . . . (5,226) (9,801)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . (28) (70)
---------------- -----------
Net cash used in financing activities. . . . . . . . . . . . . . . . (5,254) (9,871)
---------------- -----------
NET INCREASE IN CASH . . . . . . . . . . . . . . . . . . . . . . . . 8,876 9,522
CASH AND CASH EQUIVALENTS, beginning of period . . . . . . . . . . . 3,450 3,809
---------------- -----------
CASH AND CASH EQUIVALENTS, end of period . . . . . . . . . . . . . . $ 12,326 $ 13,331
================ ===========
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 all of our
accounts, our wholly owned subsidiaries' accounts and certain private
optometrists' accounts for whom we perform 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.
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 27, 2003 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. We
believe that all adjustments considered necessary for a fair presentation have
been included and are of a normal, recurring nature. Operating results for the
thirteen week period March 27, 2004 are not necessarily indicative of the
results that may be expected for the fiscal year ended January 1, 2005 ("fiscal
2004"). For further information, refer to the consolidated financial statements
and footnotes thereto included in our annual report on Form 10-K for the year
ended December 27, 2003 ("fiscal 2003").
2. CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those that require us 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 us 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. We have 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,
optometrist management fees, credit card companies, merchandise, rent and
license fee receivables. Our allowance for doubtful accounts requires
significant estimation and primarily consists of amounts owed to us by third
party insurance payors. This estimate is based on the historical ratio of
collections to billings. Our allowance for doubtful accounts was $3.2 million
at March 27, 2004.
- - 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. Our inventory reserves require significant estimation and are
based on product with low turnover or deemed by us to be unsaleable. Our
inventory reserve was $1.0 million at March 27, 2004.
5
- - Intangible assets represent approximately 45% of our assets and consist of
the amounts by which the purchase price exceeds the market value of acquired net
assets ("goodwill"), management agreements and noncompete agreements. Goodwill
must be tested for impairment at least annually using a "two-step" approach that
involves the identification of reporting units and the estimation of fair
values. This fair value estimation requires significant judgment by us.
- - Valuation allowances for deferred tax assets reduce deferred tax assets
when it is deemed more likely than not that some portion or all of the deferred
tax assets will expire before realization of the benefit or that future
deductibility is not probable due to taxable losses. Although realization is
not assured due to historical taxable income and the probability of future
taxable income, we believe it is more likely than not that all of the deferred
tax asset will be realized.
- - We maintain our own self-insurance group health plan. The plan provides
medical benefits for participating employees. We have an employers' stop loss
insurance policy to cover individual claims in excess of $150,000 per employee.
The amount charged to health insurance expense is based on estimates obtained
from an actuarial firm. We believe the accrued liability of approximately $1.4
million, which is included in other accrued expenses, as of March 27, 2004 is
adequate to cover future benefit payments for claims that occurred prior to
March 27, 2004.
3. RELATED PARTY TRANSACTIONS
In connection with the recapitalization of the company in 1998, we entered
into a management agreement with THL Equity Advisors IV, LLC, or THL Advisors,
dated as of April 24, 1998. Pursuant to the management agreement, in addition
to one time fees that were payable to THL Advisors at the time of the
recapitalization, THL Advisors is entitled to receive (i) management and other
consulting services fees of $500,000 per year, payable quarterly in advance,
(ii) one percent (1.0%) of the gross purchase price for acquisitions for its
participation in the negotiation and consummation of any such acquisition, (iii)
reimbursement of out-of-pocket expenses and (iv) indemnification for certain
liabilities incurred in connection with the provision of services under the
management agreement. For each of the thirteen week periods ended March 29,
2003 and March 27, 2004, we paid THL Advisors aggregate fees and expenses of
approximately $125,000, related to the management agreement. The management
agreement continues unless and until terminated by mutual consent of the parties
in writing, for so long as THL Advisors provides management and other consulting
services to us.
During fiscal 1998, Bernard W. Andrews, one of our directors and who was
our Chief Executive Officer at the time, purchased $1.0 million of our common
stock, which was paid for by the delivery by Mr. Andrews of a promissory note
payable to us with and original purchase amount of $1.0 million. Mr. Andrews'
promissory note is accruing interest at a fixed annual rate of 9.0% and is
secured by 96,061 shares of our common stock held by Bernard W. Andrews
Revocable Trust U/A. As of December 27, 2004, the accrued interest amount of
Mr. Andrews' promissory note was $456,500.
4. INCOME TAXES
We record income taxes under SFAS No. 109 using the liability method.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
6
5. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (DOLLARS IN THOUSANDS)
THIRTEEN THIRTEEN
WEEKS ENDED WEEKS ENDED
MARCH 29, MARCH 27,
2003 2004
------------- ------------
. . . . . . . . . . . . (UNAUDITED) (UNAUDITED)
Cash paid for interest. . . . . . . . $ 706 $ 1,868
Dividends accrued on preferred stock. $ 1,779 $ 2,021
Cash paid for taxes . . . . . . . . . $ 419 $ 60
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. We adopted the statement on December 29, 2002.
While the adoption of SFAS 145 resulted in the reclassification of extraordinary
gain to ordinary gain, the adoption of SFAS 145 did not have a significant
impact on our results of operations or financial position.
In December 2002, SFAS 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure" was issued by the FASB. This statement 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 statement 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. We adopted the statement on
December 29, 2002 and continue to account for stock-based employee compensation
under the intrinsic value method. As all options are granted at fair market
value, there is no compensation expense recorded for option grants. For purposes
of pro forma disclosures, the estimated fair value of the options is amortized
to expense over the options' vesting periods. The pro forma calculations include
only the effects of 2002 and 2003 grants as all grants previous to 2002 were
exercised or cancelled. As such, the impacts are not necessarily indicative of
the effects on reported net income of future years. Our pro forma net income for
the thirteen weeks ended March 29, 2003 and March 27, 2004 are as follows:
THIRTEEN
WEEKS ENDED
-------------------------
MARCH 29, MARCH 27,
2003 2004
------------- ----------
. . . . . . . . . . . . . . . . (UNAUDITED) (UNAUDITED)
Net income. . . . . . . . . . . . . . . . . . $ 10,360 $ 9,571
Fair value based method compensation expense. 37 40
------------- ----------
Pro forma net income. . . . . . . . . . . . . $ 10,323 $ 9,531
============= ==========
7
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51 ("FIN 46"). As a
result, a variable interest entity is to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or is entitled to receive a majority of the entity's
residual returns or both. The interpretation also requires disclosures about
variable interest entities that the company is not required to consolidate but
in which it has a significant variable interest. On December 24, 2003, the FASB
issued a revision to FIN 46, Revised Interpretation 46 ("FIN 46R"). FIN 46R
codifies both the proposed modifications and other decisions previously issued
through certain FASB Staff Positions and supercedes FIN 46 to include (1)
deferring the effective date of the Interpretation's provisions for certain
variable interests, (2) providing additional scope exceptions for certain other
variable interests, (3) clarifying the impact of troubled debt restructurings on
the requirement to reconsider (a) whether an entity is a variable interest
entity or (b) which party is the primary beneficiary of a variable interest
entity, and (4) revising Appendix B of FIN 46 to provide additional guidance on
what constitutes a variable interest. We adopted FIN 46R on December 27, 2003
and the adoption did not have a significant impact on our results of operations
or financial position.
7. SUBSEQUENT EVENT
On May 7, 2004, we filed a Registration Statement on Form S-1 with the
Securities and Exchange Commission (the "SEC") for an initial public offering of
Income Units, where each Income Unit will represent a share of our newly issued
class A common stock and a newly issued senior subordinated note. The
transactions contemplated by this Registration Statement are subject to SEC
approval and we can provide no assurance that these transactions will be
completed. A copy of the Registration Statement is publicly available at
http://www.sec.gov.
8. CONDENSED CONSOLIDATING INFORMATION (UNAUDITED)
The $100.0 million in principal amount of 9 1/8% Senior Subordinated Notes
due 2008 and $30.0 million in principal amount of Floating Interest Rate
Subordinated Term Securities due 2008 (collectively, the "Notes") were issued by
us and are guaranteed by all of our subsidiaries but are not guaranteed by ODs.
The subsidiaries are wholly owned by us and the guarantees are full,
unconditional and joint and several. The following condensed consolidating
financial information presents (i) our financial position, results of operations
and cash flows, as parent, as if we accounted for our subsidiaries using the
equity method, (ii) the subsidiaries, and (iii) ODs. There were no transactions
between the subsidiaries during any of the periods presented. Separate financial
statements of the subsidiaries are not presented herein as we do not believe
that such statements would be material to investors.
8
CONSOLIDATING BALANCE SHEET
DECEMBER 27, 2003
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
----------- -------------- -------- -------------- ----------
ASSETS
Current assets:
Cash and cash equivalents. . . . . . $ 67 $ 3,501 $ 241 $ - $ 3,809
Accounts and notes receivable. . . . 166,924 48,875 2,847 (207,529) 11,117
Inventory. . . . . . . . . . . . . . - 22,941 2,179 - 25,120
Deferred income taxes, net . . . . . 570 - - - 570
Prepaid expenses and other . . . . . - 3,648 48 - 3,696
----------- -------------- -------- -------------- ----------
Total current assets. . . . . . . . . . 167,561 78,965 5,315 (207,529) 44,312
Property and equipment. . . . . . . . . - 51,715 - - 51,715
Intangibles . . . . . . . . . . . . . . 166 107,195 87 (25) 107,423
Other assets. . . . . . . . . . . . . . 6,414 2,217 - - 8,631
Deferred income taxes, net. . . . . . . 13,445 - - - 13,445
Investment in subsidiaries. . . . . . . (6,952) - - 6,952 -
----------- -------------- -------- -------------- ----------
Total Assets. . . . . . . . . . . . . . $ 180,634 $ 240,092 $ 5,402 $ (200,602) $ 225,526
=========== ============== ======== ============== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable . . . . . . . . . . $ 341 $ 221,829 $ 6,719 $ (207,529) $ 21,360
Current portion of long-term debt. . 18,750 230 - - 18,980
Deferred revenue . . . . . . . . . . 512 4,785 446 - 5,743
Accrued payroll expense. . . . . . . - 5,027 402 - 5,429
Accrued interest . . . . . . . . . . 3,213 - - - 3,213
Other accrued expenses . . . . . . . 246 6,889 1,199 - 8,334
----------- -------------- -------- -------------- ----------
Total current liabilities . . . . . . . 23,062 238,760 8,766 (207,529) 63,059
Long-term debt, less current maturities 217,789 2,056 - - 219,845
Deferred rent . . . . . . . . . . . . . - 4,570 149 - 4,719
Deferred gain . . . . . . . . . . . . . 1,213 319 - - 1,532
----------- -------------- -------- -------------- ----------
Total liabilities . . . . . . . . . . . 242,064 245,705 8,915 (207,529) 289,155
----------- -------------- -------- -------------- ----------
Shareholders' deficit:
Common stock . . . . . . . . . . . . 74 - - - 74
Preferred stock. . . . . . . . . . . 62,169 - - - 62,169
Additional paid-in capital . . . . . 30,458 25 (2,199) (25) 28,259
Accumulated deficit. . . . . . . . . (154,131) (5,638) (1,314) 6,952 (154,131)
----------- -------------- -------- -------------- ----------
Total shareholders' deficit . . . . . . . (61,430) (5,613) (3,513) 6,927 (63,629)
----------- -------------- -------- -------------- ----------
$ 180,634 $ 240,092 $ 5,402 $ (200,602) $ 225,526
=========== ============== ======== ============== ==========
9
CONDENSED CONSOLIDATING INCOME STATEMENT
FOR THE THIRTEEN WEEKS ENDED MARCH 29, 2003
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
---------- -------------- ------- -------------- --------
Revenues:
Optical sales. . . . . . . . . . . . . . . . . . $ 49,237 $ 31,377 $20,701 $ - $101,315
Management fees. . . . . . . . . . . . . . . . . 217 6,928 - (6,119) 1,026
Equity earnings in subsidiaries. . . . . . . . . 11,833 - - (11,833) -
---------- -------------- ------- -------------- --------
Total net revenues. . . . . . . . . . . . . . . . . 61,287 38,305 20,701 (17,952) 102,341
Operating costs and expenses:
Cost of goods sold . . . . . . . . . . . . . . . 15,643 10,420 4,196 - 30,259
Selling, general and administrative expenses . . 29,695 17,280 15,056 (6,119) 55,912
Amortization of noncompete and other intangibles - 55 - - 55
---------- -------------- ------- -------------- --------
Total operating costs and expenses. . . . . . . . . 45,338 27,755 19,252 (6,119) 86,226
---------- -------------- ------- -------------- --------
Income from operations. . . . . . . . . . . . . . . 15,949 10,550 1,449 (11,833) 16,115
Interest expense, net . . . . . . . . . . . . . . . 5,155 164 2 - 5,321
Income tax expense. . . . . . . . . . . . . . . . . 434 (579) 579 - 434
---------- -------------- ------- -------------- --------
Net income. . . . . . . . . . . . . . . . . . . . . $ 10,360 $ 10,965 $ 868 $ (11,833) $ 10,360
========== ============== ======= ============== ========
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THIRTEEN WEEKS ENDED MARCH 29, 2003
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
----------- -------------- ------ -------------- ---------
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 10,360 $ 10,965 $ 868 $ (11,833) $ 10,360
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . 2,649 1,773 - - 4,422
Amortization of debt issue costs. . . . . . . . . . . . 498 - - - 498
Deferred liabilities and other. . . . . . . . . . . . . (633) 82 (283) - (834)
Equity earnings in subsidiaries . . . . . . . . . . . . (11,833) - - 11,833 -
Increase/(decrease) in operating assets and liabilities 14,427 (10,887) (601) - 2,939
----------- -------------- ------ -------------- ---------
Net cash provided by (used in) operating activities. . . . 15,468 1,933 (16) - 17,385
----------- -------------- ------ -------------- ---------
Cash flows from investing activities:
Acquisition of property and equipment . . . . . . . . . (2,864) (391) - - (3,255)
----------- -------------- ------ -------------- ---------
Net cash used in investing activities. . . . . . . . . . . (2,864) (391) - - (3,255)
----------- -------------- ------ -------------- ---------
Cash flows from financing activities:
Payments on debt and capital leases . . . . . . . . . . (5,202) (24) - - (5,226)
Payments for financing fees . . . . . . . . . . . . . . (28) - - - (28)
----------- -------------- ------ -------------- ---------
Net cash used in financing activities. . . . . . . . . . . (5,230) (24) - - (5,254)
----------- -------------- ------ -------------- ---------
Net Increase/(decrease) in cash and cash equivalents . . . 7,374 1,518 (16) - 8,876
Cash and cash equivalents at beginning of period . . . . . 554 2,532 364 - 3,450
----------- -------------- ------ -------------- ---------
Cash and cash equivalents at end of period . . . . . . . . $ 7,928 $ 4,050 $ 348 $ - $ 12,326
=========== ============== ====== ============== =========
10
CONDENSED CONSOLIDATING BALANCE SHEET
MARCH 27, 2004
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
----------- -------------- -------- -------------- ----------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . $ 125 $ 12,807 $ 399 $ - $ 13,331
Accounts and notes receivable . . . . . . . 155,739 50,697 4,396 (197,841) 12,991
Inventory . . . . . . . . . . . . . . . . . - 25,463 2,265 - 27,728
Deferred income taxes . . . . . . . . . . . 570 - - - 570
Prepaid expenses and other. . . . . . . . . - 3,154 47 - 3,201
----------- -------------- -------- -------------- ----------
Total current assets . . . . . . . . . . . . . 156,434 92,121 7,107 (197,841) 57,821
Property and equipment . . . . . . . . . . . . - 51,299 66 - 51,365
Intangibles. . . . . . . . . . . . . . . . . . 166 107,195 87 (25) 107,423
Other assets . . . . . . . . . . . . . . . . . 6,415 1,655 - - 8,070
Deferred income taxes. . . . . . . . . . . . . 13,033 - - - 13,033
Investment in subsidiaries . . . . . . . . . . 7,345 (7,345) - - -
----------- -------------- -------- -------------- --------
Total assets . . . . . . . . . . . . . . . . . $ 183,393 $ 252,270 $ 7,260 $ (205,211) $ 237,712
=========== ============== ======== ============== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT)
Current liabilities:
Accounts payable. . . . . . . . . . . . . . $ 162 $ 213,890 $ 8,760 $ (197,841) $ 24,971
Current portion of long-term debt . . . . . 20,000 257 - - 20,257
Deferred revenue. . . . . . . . . . . . . . 33 5,424 459 - 5,916
Accrued payroll expense . . . . . . . . . . - 6,246 341 - 6,587
Accrued interest. . . . . . . . . . . . . . 5,775 - - - 5,775
Other accrued expenses. . . . . . . . . . . 24 12,437 953 - 13,414
----------- -------------- -------- -------------- ----------
Total current liabilities. . . . . . . . . . . 25,994 238,254 10,513 (197,841) 76,920
Long-term debt, less current maturities. . . . 206,801 1,978 - - 208,779
Deferred rent. . . . . . . . . . . . . . . . . - 4,533 157 - 4,690
Deferred gain. . . . . . . . . . . . . . . . . 1,213 260 - - 1,473
----------- -------------- -------- -------------- ----------
Total liabilities. . . . . . . . . . . . . . . 234,008 245,025 10,670 (197,841) 291,862
Shareholders' equity/(deficit)
Common stock. . . . . . . . . . . . . . . . 74 - - - 74
Preferred stock . . . . . . . . . . . . . . 64,190 - - - 64,190
Additional paid-in capital. . . . . . . . . 29,681 (1,016) (2,494) (25) 26,146
Accumulated equity/(deficit) . . . . . . . . (144,560) 8,261 (916) (7,345) (144,560)
----------- -------------- -------- -------------- ----------
Total shareholders' equity/(deficit) . . . . . . (50,615) 7,245 (3,410) (7,370) (54,150)
----------- -------------- -------- -------------- ----------
$ 183,393 $ 252,270 $ 7,260 $ (205,211) $ 237,712
=========== ============== ======== ============== ==========
11
CONDENSED CONSOLIDATING INCOME STATEMENT
FOR THE THIRTEEN WEEKS ENDED MARCH 27, 2004
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
----------- ------------- --------- -------------- --------
Revenues:
Optical sales. . . . . . . . . . . . . . . . $ (214) $ 88,306 $ 23,049 $ - $111,141
Management fees. . . . . . . . . . . . . . . 75 7,641 - (6,754) 962
Equity earnings in subsidiaries. . . . . . . 14,297 - - (14,297) -
----------- ------------- --------- -------------- ---------
Total net revenues. . . . . . . . . . . . . . . 14,158 95,947 23,049 (21,051) 112,103
Operating costs and expenses:
Cost of goods sold . . . . . . . . . . . . . 1,017 27,680 4,371 - 33,068
Selling, general and administrative expenses (1,070) 49,886 17,514 (6,754) 59,576
----------- ------------- --------- -------------- --------
Total operating costs and expenses. . . . . . . (53) 77,566 21,885 (6,754) 92,644
----------- ------------- --------- -------------- --------
Income from operations. . . . . . . . . . . . . 14,211 18,381 1,164 (14,297) 19,459
Interest expense, net . . . . . . . . . . . . . 4,243 620 2 - 4,865
Income tax expense. . . . . . . . . . . . . . . 397 3,862 764 - 5,023
----------- ------------- --------- -------------- --------
Net income. . . . . . . . . . . . . . . . . . . $ 9,571 $ 13,899 $ 398 $ (14,297) $ 9,571
=========== ============= ========= ============== ========
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THIRTEEN WEEKS ENDED MARCH 27, 2004
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
----------- -------------- ------ -------------- ---------
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 9,571 $ 13,899 $ 398 $ (14,297) $ 9,571
Adjustments to reconcile net income to net
Cash provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . - 3,994 - - 3,994
Amortization of debt issue costs. . . . . . . . . . . . 13 428 - - 441
Deferred liabilities and other. . . . . . . . . . . . . (67) 536 21 - 490
Equity earnings in subsidiaries . . . . . . . . . . . . (14,297) 1,917 - 12,380 -
Increase/(decrease) in operating assets and liabilities 14,588 (5,863) (191) - 8,534
----------- -------------- ------ -------------- ---------
Net cash provided by operating activities. . . . . . . . . 9,808 14,911 228 (1,917) 23,030
----------- -------------- ------ -------------- ---------
Cash flows from investing activities:
Acquisition of property and equipment . . . . . . . . . - (3,637) - - (3,637)
----------- -------------- ------ -------------- ---------
Net cash used in investing activities. . . . . . . . . . . - (3,637) - - (3,637)
----------- -------------- ------ -------------- ---------
Cash flows from financing activities:
Payments on debt and capital leases . . . . . . . . . . (9,750) (51) - - (9,801)
Other . . . . . . . . . . . . . . . . . . . . . . . . . - - (70) - (70)
----------- -------------- ------ -------------- ---------
Net cash used in financing activities. . . . . . . . . . . (9,750) (51) (70) - (9,871)
----------- -------------- ------ -------------- ---------
Net increase in cash and cash equivalents. . . . . . . . . 58 11,223 158 (1,917) 9,522
Cash and cash equivalents at beginning of period . . . . . 67 3,501 241 - 3,809
----------- -------------- ------ -------------- ---------
Cash and cash equivalents at end of period . . . . . . . . $ 125 $ 14,724 $ 399 $ (1,917) $ 13,331
=========== ============== ====== ============== =========
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
We are the third largest optical retail chain as measured by net revenues
and the largest company focused solely on the optical retail sector in the
United States. We currently operate 374 stores in 33 states, including 310
directly-owned optical stores and 64 stores owned by an optometrist's
professional entity and managed by us under management agreements. We operate
in the $16.3 billion optical retail market. We believe that key drivers of our
performance include (i) maximizing our store profitability, (ii) increasing
transactions by offering both convenience and value to our customers, (iii)
capitalizing on the continued role of managed vision care, and (iv) actively
managing our store base in targeted markets.
We have focused on improving operating efficiencies and growing sales by
offering convenience and value to our customers. During the first quarter of
fiscal 2004, we continued to focus on our value retail promotion of two complete
pairs of single vision eyewear for $99. Optical sales increased 9.7% and
comparable transaction volume increased 3.1% when compared to the first quarter
of fiscal 2003. We believe these increases were largely the result of increased
promotional activity and overall improvement in the optical market.
We believe that optical retail sales through funded managed vision care
programs will continue to increase over the next several years. We have made a
strategic decision to pursue funded managed vision care relationships in order
to help our retail business grow. Our net revenues derived from funded managed
care plans grew at the rate of 2.0% during the first quarter of fiscal 2004 as
compared to the first quarter of fiscal 2003. Discount managed care programs
will play a less significant role in our sales as our value retail offer becomes
more developed throughout our stores. Discount insurance programs consist of
relationships where the customer receives a pre-agreed upon discount on eye care
products and often our value promotion prices are lower than these discount
prices.
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 by us. We
believe that the increased volume resulting from managed vision care
relationships also compensates for the lower average ticket price per
transaction. During the first quarter of fiscal 2004, approximately 30.0% of
our optical revenues were derived from managed vision care programs which is
approximately the percentage of penetration that we expect managed vision care
revenues to normalize at as our transition to funded programs develops and our
retail value offer displaces discount managed vision care plans. We believe
that the role of managed vision care will continue to benefit us and other large
optical retail 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 the percentage relationship to net revenues
of certain income statement data. The period-to-period comparison of financial
results is not necessarily indicative of future results.
THIRTEEN
WEEKS ENDED
------------------------------
MARCH 29, MARCH 27,
2003 2004
------------ ----------
STATEMENT OF INCOME DATA:
NET REVENUES:
Optical sales. . . . . . . . . . . . . . . . 99.0 % 99.1 %
Management fee . . . . . . . . . . . . . . . 1.0 . 0.9
-------- --------
Total net revenues. . . . . . . . . . . . . . . 100.0 . 100.0
OPERATING COSTS AND EXPENSES:
Cost of goods sold . . . . . . . . . . . . . 29.9 * 29.8 *
Selling, general and administrative expenses 55.2 * 53.6 *
Amortization of intangibles. . . . . . . . . 0.1 . 0.0
-------- --------
Total operating costs and expenses. . . . . . . 84.3 . 82.6
-------- --------
INCOME FROM OPERATIONS. . . . . . . . . . . . . 15.7 . 17.4
INTEREST EXPENSE, NET . . . . . . . . . . . . . 5.2 . 4.3
INCOME TAX EXPENSE. . . . . . . . . . . . . . . 0.4 . 4.5
-------- --------
NET INCOME. . . . . . . . . . . . . . . . . . . 10.1 % 8.5 %
======== ========
* Percentages based on optical sales only
The following is a discussion of certain factors affecting our results of
operations from the first quarter of fiscal 2003 as compared to the first
quarter of fiscal 2004 and our liquidity and capital resources. This discussion
should be read in conjunction with the consolidated financial statements and
notes thereto included elsewhere in this document.
THE THIRTEEN WEEKS ENDED MARCH 27, 2004 COMPARED TO THE THIRTEEN WEEKS ENDED
MARCH 29, 2003.
Net Revenues. The increase in net revenues to $112.1 million for the thirteen
weeks ended March 27, 2004 from $102.3 million for the thirteen weeks ended
March 29, 2003 was largely the result of the addition of ten new stores, nine of
which were in the Atlanta market, during the last three quarters of fiscal 2003
and a comparable store sales increase of 4.9% compared to the first quarter of
fiscal 2003. Transaction volume increased by 3.1% compared to the first quarter
of fiscal 2003 and average ticket prices increased by 2.1% compared to the first
quarter of fiscal 2003. The increase in comparable store
14
sales and transaction volume was the result of an overall improvement in the
retail optical market and an increase in promotional activity in the first
quarter of fiscal 2004. The increase in average ticket prices was largely the
result of the increase in the sales mix of branded product which has a higher
price point than non-branded frames. Funded managed vision care sales increased
by 2.0% compared to the first quarter of fiscal 2003. Total managed vision care
sales decreased by 5.2% compared to the first quarter of fiscal 2003. The total
managed vision care sales decline was primarily due to the discontinuation of
our participation in discount, affinity and medicaid plans and the shift of
managed care participants to our retail value promotion. In addition, we opened
three stores in the first quarter of fiscal 2004.
Gross Profit. Gross profit increased to $78.1 million for the thirteen weeks
ended March 27, 2004 from $71.1 million for the thirteen weeks ended March 29,
2003, primarily as a result of an increase in the sales of higher margin
products. Gross profit as a percentage of optical sales increased to 70.2% for
the thirteen weeks ended March 27, 2004 as compared to 70.1% for the thirteen
weeks ended March 29, 2003. This relatively flat trend was largely due to
increased efficiencies in our lab processes which offset the increase in mix of
branded frames which have a higher acquisition cost than non-branded frames.
Selling General & Administrative Expenses (SG&A). SG&A increased to $59.6
million for the thirteen weeks ended March 27, 2004 from $55.9 million for the
thirteen weeks ended March 29, 2003 which is consistent with the increase in
sales. SG&A, as a percentage of optical sales, decreased to 53.6% for the
thirteen weeks ended March 27, 2004 from 55.2% for the thirteen weeks ended
March 29, 2003. This percentage decrease was primarily due to increased sales
from more effective advertising promotions with advertising declining as a
percentage of sales despite a minor increase in expenditures. We also achieved
economies of scale in occupancy expense as the expense remained flat compared to
the first quarter of fiscal 2003 while sales improved.
Amortization Expense. No amortization expense occurred for the thirteen weeks
ended March 27, 2004 as compared to $0.1 million for the thirteen weeks ended
March 29, 2003. Our intangible balances have been fully amortized.
Net Interest Expense. Net interest expense decreased to $4.9 million for the
thirteen weeks ended March 27, 2004 from $5.3 million for the thirteen weeks
ended March 29, 2003. This decrease was primarily due to lower outstanding debt
balances as compared to the first quarter of fiscal 2003.
Income Tax Expense. Income tax expense increased to $5.0 million for the
thirteen weeks ended March 27, 2004 from a $0.4 million expense for the thirteen
weeks ended March 29, 2003, due to the utilization of our net operating loss
deduction in the first quarter of fiscal 2004. During the first quarter of
fiscal 2003, our net operating loss fully offset taxable income and in the first
quarter of 2004 our remaining net operating loss balance was utilized.
Net Income. Net income decreased to $9.6 million for the thirteen weeks ended
March 27, 2004 from $10.4 million for the thirteen weeks ended March 29, 2003
primarily as a result of the increase in income tax expense.
LIQUIDITY AND CAPITAL RESOURCES
Our capital requirements are driven principally by our obligations to
service debt and to fund the following costs:
- - Construction of new stores
- - Repositioning of existing stores
15
- - Purchasing inventory and equipment
- - Leasehold improvements
The amount of capital available to us will affect our ability to service
our debt obligations and to continue to grow our business through expanding the
number of stores and increasing comparable store sales.
SOURCES OF CAPITAL
Our principal sources of capital are from cash on hand, cash flows from
operating activities and funding from our credit facility. Cash flows from
operating activities provided net cash of $23.0 million for the thirteen weeks
ended March 27, 2004 and $17.4 million for the thirteen weeks ended March 29,
2003. As of March 27, 2004 we had $13.3 million of cash available to meet our
obligations.
Payments on debt have been our principal financing activity. Cash flows
from financing activities used net cash of $9.9 million for the thirteen weeks
ended March 27, 2004 compared to $5.3 million for the thirteen weeks ended March
29, 2003.
Our working capital primarily consists of cash and cash equivalents,
accounts receivable, inventory, accounts payable and accrued expenses and was a
deficit of $19.1 million for the thirteen weeks ended March 27, 2004. Our level
of working capital has remained relatively consistent from March 29, 2003.
Capital expenditures were $3.6 million for the thirteen weeks ended March
27, 2004 compared to $3.3 million for the thirteen weeks ended March 29, 2003.
Capital expenditures for all of 2004 are projected to be approximately $11.0
million. Of the planned 2004 capital expenditures, approximately $3.4 million
is related to commitments to new stores and approximately $7.6 million is
expected to be for maintenance of existing facilities and systems.
LONG-TERM DEBT
CREDIT FACILITY. Our existing credit facility consists of (i) a $55.0
million term loan facility (the "Term Loan A"); (ii) a $62.0 million term loan
facility (the "Term Loan B"); and (iii) a $25.0 million revolving credit
facility (the "Revolver" and together with the Term Loan A and Term Loan B, the
"Facilities").
Borrowings under the Facilities accrue interest, at our option, at the Base
Rate or the LIBOR rate, plus the applicable margin. The Base Rate is a floating
rate equal to the higher of the overnight Federal Funds Rate plus 1/2% or the
Fleet prime rate. The margins applicable to the Base Rate and LIBOR for each of
the Facilities are set forth in the following table.
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 Facilities, we incurred
approximately $4.8 million in debt issuance costs. These amounts are classified
within other assets in the accompanying
16
balance sheets and are being amortized over the life of the Facilities. The
unamortized amount of debt issuance costs as of March 27, 2004 related to the
Facilities was $3.2 million.
At March 27, 2004, we had $129.8 million in notes payable outstanding
evidenced by the Exchange Notes, $35.0 million and $62.0 million in term loans
outstanding under the Term Loan A and Term Loan B, respectively, and $2.2
million in capital lease and equipment obligations. We had $22.8 million of our
revolving credit facility available to finance working capital requirements and
general corporate purposes as of March 27, 2004.
The Facilities are collateralized by all of our tangible and intangible
assets, including the stock of our subsidiaries. In addition, we must meet
certain financial covenants including minimum EBITDA, interest coverage,
leverage ratio and capital expenditures. As of March 27, 2004, we were in
compliance with all of our financial covenants.
NOTES. In 1998, we issued $100.0 million aggregate principal amount of our
9 1/8% Senior Subordinated Notes due 2008 (the "Fixed Rate Notes") and $50.0
million aggregate principal amount of our Floating Interest Rate Subordinated
Term Securities due 2008 (the "Floating Rate Notes" and, together with the Fixed
Rate Notes, the "Notes"). We used a portion of the initial borrowings under the
Facilities to redeem $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
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 our
subsidiaries. The Notes and related guarantees:
- - are general unsecured obligations of ours and our guarantors;
- - are subordinated in right of payment to all current and future senior
indebtedness including indebtedness under the Facilities; and
- - rank pari passu in right of payment with any of our future senior
subordinated indebtedness or of our guarantors and senior in right of
payment with any of our future subordinated obligations or our guarantors.
We may redeem the Notes, at our 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
- ------------------- -----------------
2004. . . . . . . . 103.042%
2005. . . . . . . . 101.521%
2006 and thereafter 100.000%
Beginning on May 1, 2003, the Floating Rate Notes became redeemable at 100%
of the principal amount thereof plus accrued and unpaid interest to the date of
redemption.
17
The indenture governing the Notes contains certain covenants that, among
other things, limit our and each of our 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, we issued 300,000 shares of a new series of
preferred stock (the "Preferred Stock"), par value $.01 per share. Dividends on
shares of the Preferred Stock are cumulative from the date of issue (whether or
not declared) and are payable when and as may be declared from time to time by
our Board of Directors. 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 our option, 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. We are 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 our contractual obligations as of
March 27, 2004:
Payments due by period
----------------------- More
Total Less than 1 1 to 3 3 to 5 than 5
. . . . . . . . . . . . Year Years Years Years
--------- ------- ------------ -------- --------
Long Term Debt. . . . . . . . . $226,800 $20,000 $35,000 $171,800 $ -
Capital Lease Obligations . . . 2,236 257 581 1,039 359
Operating Leases. . . . . . . . 157,816 32,189 53,821 40,335 31,471
Purchase Obligations. . . . . . - - - - -
------- ------- ------------ -------- --------
Total future principal payments
on contractual obligations . $386,852 $52,446 $89,402 $213,174 $31,830
======= ======= ============ ======== ========
We have no off-balance sheet debt or unrecorded obligations and have not
guaranteed the debt of any other party.
FUTURE CAPITAL RESOURCES. Based upon current operations, anticipated cost
savings and future growth, we believe that our cash flow from operations,
together with borrowings currently available under the Revolver, are adequate to
meet our anticipated requirements for working capital, capital expenditures and
scheduled principal and interest payments through the next twelve (12) months.
Our ability to satisfy our financial covenants under the Facilities, to meet our
debt service obligations and to reduce our debt will depend on our future
performance, which in turn, will be subject to general economic conditions and
to financial, business, and other factors, including factors beyond our control.
In the event we do not satisfy our financial covenants set forth in the
Facilities, we may attempt to renegotiate the terms of the
18
Facilities with our lenders for further amendments to, or waivers of, the
financial covenants of the Facilities. We believe that our ability to repay the
Term Loan A and Term Loan B and amounts outstanding under the Revolver at
maturity will likely require additional financing. We cannot assume that
additional financing will be available to us. A portion of our debt bears
interest at floating rates; therefore, our financial condition is and will
continue to be affected by changes in prevailing interest rates.
INFLATION
The impact of inflation on our operations has not been significant to date.
While we do not believe our business is highly sensitive to inflation, there can
be no assurance that a high rate of inflation would not have an adverse impact
on our operations.
SEASONALITY AND QUARTERLY RESULTS
Our sales fluctuate seasonally. Historically, our 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 our
financial position, business strategy, budgets and plans and objectives of
management for future operations are forward-looking statements. Although we
believe that the expectations reflected in such forward-looking statements are
reasonable, we can give no assurance that such expectations will prove to have
been correct. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance
or achievements, 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 our Annual Report
on Form 10-K for fiscal 2003 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) OUR
ABILITY TO EXECUTE OUR BUSINESS STRATEGY (INCLUDING, WITHOUT LIMITATION, WITH
RESPECT TO NEW STORE OPENINGS AND INCREASING OUR PARTICIPATION IN MANAGED VISION
CARE PROGRAMS), (II) OUR ABILITY TO OBTAIN SUFFICIENT RESOURCES TO FINANCE OUR
WORKING CAPITAL AND CAPITAL EXPENDITURE NEEDS AND PROVIDE FOR OUR 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) OUR MANAGEMENT
ARRANGEMENTS WITH PROFESSIONAL CORPORATIONS; (VIII) OUR ABILITY TO OBTAIN
ADDITIONAL
19
FINANCING TO REPAY OUR 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
We are exposed to various market risks. Market risk is the potential loss
arising from adverse changes in market prices and rates. We do not enter into
derivative or other financial instruments for trading or speculative purposes.
There have been no material changes in our market risk during the first quarter
of fiscal 2004. For further discussion, refer to our annual report on Form 10-K
for the year ended December 27, 2003.
Our primary market risk exposure is interest rate risk. As of March 27,
2004, $127.0 million of our long-term debt bore interest at variable rates.
Accordingly, our 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 our $127.0 million in long-term
borrowings, our annual interest expense would change by approximately $2.5
million.
In the event of an adverse change in interest rates, we could take actions
to mitigate our 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 March 27, 2004 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 March 27, 2004 that has materially
affected, or is reasonably likely to materially affect, our internal controls
over financial reporting.
20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are a party to routine litigation in the ordinary course of our
business. There have been no such pending matters, individually or in the
aggregate, that we have deemed to be material to our business or our financial
condition that have arisen during the first quarter of fiscal 2004. For further
discussion, refer to our annual report on Form 10-K for the year ended December
27, 2003.
21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report.
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)
31.1 Certification of Chief Executive Officer (d)
31.2 Certification of Chief Financial Officer (d)
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002 (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, our Quarterly
Report on Form 10-Q for the quarter ended September 29, 2001.
(c) Previously provided with, and incorporated by reference from, our Quarterly
Report on Form 10-Q for the quarter ended September 28, 2002.
(d) Filed herewith
(B) We filed a report on Form 8-K dated May 6, 2004 under Item 5. Other Events
that reported we filed a registration statement on Form S-1 dated May 6,
2004 in respect of our initial public offering of Income Units and Senior
Subordinated Notes.
22
SIGNATURE
EYE CARE CENTERS OF AMERICA, INC.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: May 11, 2004
/s/ Alan E. Wiley
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Alan E. Wiley
Executive Vice President and Chief Financial Officer