Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 26, 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 August 10, 2004
----- -----------------------------
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 27, 2003
and June 26, 2004 (Unaudited) . . . . . . . . . . . 2
Condensed Consolidated Statements of Operations for the
Thirteen Weeks and Twenty-Six Weeks Ended June 28,
2003 (Unaudited) and June 26, 2004 (Unaudited). . . 3
Condensed Consolidated Statements of Cash Flows for the
Twenty-Six Weeks Ended June 28, 2003 (Unaudited)
and June 26, 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. . . . 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
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EYE CARE CENTERS OF AMERICA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
DECEMBER 27, JUNE 26,
2003 2004
-------------- ----------
ASSETS. . . . . . . . . . . . . . . . . (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents. . . . . . $ 3,809 $ 5,551
Accounts and notes receivable, net . 11,117 12,319
Inventory. . . . . . . . . . . . . . 25,120 28,117
Deferred income taxes, net . . . . . 570 570
Prepaid expenses and other . . . . . 3,696 2,605
-------------- ----------
Total current assets. . . . . . . . . . 44,312 49,162
PROPERTY & EQUIPMENT, net . . . . . . . 51,715 49,739
INTANGIBLE ASSETS . . . . . . . . . . . 107,423 107,423
OTHER ASSETS. . . . . . . . . . . . . . 8,631 7,217
DEFERRED INCOME TAXES, net. . . . . . . 13,445 13,488
-------------- ----------
Total assets. . . . . . . . . . . . . . $ 225,526 $ 227,029
============== ==========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . $ 21,360 $ 24,222
Current maturities of long-term debt 18,980 20,281
Deferred revenue . . . . . . . . . . 5,743 5,634
Accrued payroll expense. . . . . . . 5,429 5,218
Accrued interest . . . . . . . . . . 3,213 2,741
Other accrued expenses . . . . . . . 8,334 11,409
-------------- ----------
Total current liabilities . . . . . . . 63,059 69,505
LONG TERM DEBT, less current maturities 219,845 204,574
DEFERRED RENT . . . . . . . . . . . . . 4,719 4,626
DEFERRED GAIN . . . . . . . . . . . . . 1,532 1,415
-------------- ----------
Total liabilities . . . . . . . . . . . 289,155 280,120
-------------- ----------
SHAREHOLDERS' DEFICIT:
Common stock . . . . . . . . . . . . 74 74
Preferred stock. . . . . . . . . . . 62,169 66,276
Additional paid-in capital . . . . . 28,259 23,387
Accumulated deficit. . . . . . . . . (154,131) (142,828)
-------------- ----------
Total shareholders' deficit . . . . . . . (63,629) (53,091)
-------------- ----------
$ 225,526 $ 227,029
============== ==========
See Notes to Condensed Consolidated Financial Statements.
2
EYE CARE CENTERS OF AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
THIRTEEN WEEKS TWENTY-SIX WEEKS
ENDED ENDED
------------------------------ -----------------------------
JUNE 28, JUNE 26, JUNE 28, JUNE 26,
2003 2004 2003 2004
---------------- ------------------ ------------ ---------
. . . . . . . . . . . . . . . . . . (Unaudited) (Unaudited) (Unaudited) (Unaudited)
REVENUES:
Optical sales . . . . . . . . . . . . . . . . $ 88,857 $ 93,297 $ 190,172 $ 204,438
Management fees . . . . . . . . . . . . . . . 804 798 1,830 1,760
---------------- ------------------ ------------ ---------
Net revenues . . . . . . . . . . . . . . . . . . 89,661 94,095 192,002 206,198
OPERATING COSTS AND EXPENSES:
Cost of goods sold. . . . . . . . . . . . . . 28,045 30,351 58,304 63,419
Selling, general and administrative expenses. 53,614 56,667 109,526 116,243
Amortization of intangibles . . . . . . . . . 55 - 110 -
---------------- ------------------ ------------ ---------
Total operating costs and expenses . . . . . . . 81,714 87,018 167,940 179,662
---------------- ------------------ ------------ ---------
INCOME FROM OPERATIONS . . . . . . . . . . . . . 7,947 7,077 24,062 26,536
INTEREST EXPENSE, NET. . . . . . . . . . . . . . 4,919 4,837 10,240 9,702
INCOME TAX EXPENSE . . . . . . . . . . . . . . . 2,123 508 2,557 5,531
---------------- ------------------ ------------ ---------
NET INCOME . . . . . . . . . . . . . . . . . . . $ 905 $ 1,732 $ 11,265 $ 11,303
================ ================== ============ =========
See Notes to Condensed Consolidated Financial Statements.
3
EYE CARE CENTERS OF AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
TWENTY-SIX WEEKS
ENDED
------------------------------
JUNE 28, JUNE 26,
2003 2004
---------- ----------
. . . . . . . . . . . . . . . . . . . . . . . . . . . . (Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,265 $ 11,303
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization . . . . . . . . . . . . . 8,739 7,960
Amortization of debt issue costs. . . . . . . . . . . . 996 1,004
Deferred liabilities and other. . . . . . . . . . . . . (1,265) (397)
Increase in operating assets and liabilities . . . . . . . . (6,237) 3,034
------------------ ----------
Net cash provided by operating activities. . . . . . . . . . . . . . 13,498 22,850
------------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment, net. . . . . . . . . (6,034) (5,949)
------------------ ----------
Net cash used in investing activities. . . . . . . . . . . . . . . . (6,034) (5,949)
------------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt and capital leases. . . . . . . . . . . . . (5,143) (13,995)
Distribution to affiliated OD. . . . . . . . . . . . . . . . - (720)
Payments to affect IPO . . . . . . . . . . . . . . . . . . . - (498)
------------------ ----------
Net cash used in financing activities. . . . . . . . . . . . . . . . (5,143) (15,213)
------------------ ----------
NET INCREASE IN CASH . . . . . . . . . . . . . . . . . . . . . . . . 2,321 1,742
CASH AND CASH EQUIVALENTS, beginning of period . . . . . . . . . . . 3,450 3,809
------------------ ----------
CASH AND CASH EQUIVALENTS, end of period . . . . . . . . . . . . . . $ 5,771 $ 5,551
================== ==========
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 and twenty-six week periods ended June 26, 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").
We 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 and twenty-six weeks ended June 28, 2003 and June 26, 2004 are as follows
(dollars in thousands):
THIRTEEN
WEEKS ENDED
------------------------
JUNE 28, JUNE 26,
2003 2004
------------- ---------
. . . . . . . . . . . . (UNAUDITED) (UNAUDITED)
Net income. . . . . . . . . . . . . . . . . . $ 905 $ 1,732
Fair value based method compensation expense. 38 56
------------- ---------
Pro forma net income. . . . . . . . . . . . . $ 867 $ 1,676
============= =========
TWENTY-SIX
WEEKS ENDED
------------------------
JUNE 28, JUNE 26,
2003 2004
------------- ---------
. . . . . . . . . . . . (UNAUDITED) (UNAUDITED)
Net income. . . . . . . . . . . . . . . . . . $ 11,265 $ 11,303
Fair value based method compensation expense. 75 96
------------- ---------
Pro forma net income. . . . . . . . . . . . . $ 11,190 $ 11,207
============= =========
5
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
and $4.7 million at June 26, 2004 and June 28, 2003, respectively.
- - 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 $0.6 million and $0.7 million at June 26, 2004 and June
28, 2003, respectively.
- - Intangible assets represent approximately 47% 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.
- - 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. Valuation allowances for deferred
tax assets are used to reduce deferred tax assets when it is deemed probable
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
lack of taxable income. Although realization is not assured due to our lack of
historical taxable income and the unpredictability of future taxable income, we
believe that it is probable that all of our deferred tax asset will be realized.
- - We began maintaining our own self-insurance group health plan in June of
fiscal 2003. 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 $2.1 million, which is included in other accrued
expenses, as of June 26, 2004 is adequate to cover future benefit payments for
claims that occurred prior to June 26, 2004.
6
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 twenty-six week periods ended June 28,
2003 and June 26, 2004, we paid THL Advisors aggregate fees and expenses of
approximately $250,000, 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 an 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 June 26, 2004, the accrued interest amount of Mr.
Andrews' promissory note was $568,605.
4. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (DOLLARS IN THOUSANDS)
TWENTY-SIX
WEEKS ENDED
------------------------
JUNE 28, JUNE 26,
2003 2004
------------- ---------
. . . . . . . . . . . . (UNAUDITED) (UNAUDITED)
Cash paid for interest. . . . . . . . $ 7,637 $ 9,290
Dividends accrued on preferred stock. $ 2,201 $ 4,107
Cash paid for taxes . . . . . . . . . $ 1,422 $ 757
5. REGISTRATION STATEMENT
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. In connection with the preparation of the Registration Statement we
incurred and capitalized $0.5 million of offering costs in other assets. A copy
of the Registration Statement is publicly available at http://www.sec.gov.
6. CONDENSED CONSOLIDATING INFORMATION (UNAUDITED) (DOLLARS IN THOUSANDS)
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
7
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
=========== ============== ======== ============== ==========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE TWENTY-SIX WEEKS ENDED JUNE 28, 2003
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
---------- -------------- ------- -------------- --------
Revenues:
Optical sales . . . . . . . . . . . . . . . . $ 62,185 $ 89,510 $38,477 $ - $190,172
Management fees . . . . . . . . . . . . . . . 330 12,569 - (11,069) 1,830
Equity earnings in subsidiaries . . . . . . . 17,292 - - (17,292) -
---------- -------------- ------- -------------- --------
Total net revenues . . . . . . . . . . . . . . . 79,807 102,079 38,477 (28,361) 192,002
Operating costs and expenses:
Cost of goods sold. . . . . . . . . . . . . . 20,482 30,155 7,667 - 58,304
Selling, general and administrative expenses. 38,230 53,717 28,648 (11,069) 109,526
Amortization of intangibles. . . . . . . - 110 - - 110
---------- -------------- ------- -------------- --------
Total operating costs and expenses . . . . . . . 58,712 83,982 36,315 (11,069) 167,940
---------- -------------- ------- -------------- --------
Income from operations . . . . . . . . . . . . . 21,095 18,097 2,162 (17,292) 24,062
Interest expense, net. . . . . . . . . . . . . . 8,119 2,117 4 - 10,240
Income tax expense/(benefit) . . . . . . . . . . 1,711 (70) 916 - 2,557
---------- -------------- ------- -------------- --------
Net income . . . . . . . . . . . . . . . . . . . $ 11,265 $ 16,050 $ 1,242 $ (17,292) $ 11,265
========== ============== ======= ============== ========
9
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THIRTEEN WEEKS ENDED JUNE 28, 2003
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
---------- ------------- ------- -------------- --------
Revenues:
Optical sales. . . . . . . . . . . . . . . . $ 12,948 $ 58,133 $17,776 $ - $ 88,857
Management fees. . . . . . . . . . . . . . . 113 5,641 - (4,950) 804
Equity earnings in subsidiaries. . . . . . . 5,459 - - (5,459) -
---------- ------------- ------- -------------- --------
Total net revenues. . . . . . . . . . . . . . . 18,520 63,774 17,776 (10,409) 89,661
Operating costs and expenses:
Cost of goods sold . . . . . . . . . . . . . 4,839 19,735 3,471 - 28,045
Selling, general and administrative expenses 8,535 36,437 13,592 (4,950) 53,614
Noncompete and other intangibles . . . . . . - 55 - - 55
---------- ------------- ------- -------------- --------
Total operating costs and expenses. . . . . . . 13,374 56,227 17,063 (4,950) 81,714
---------- ------------- ------- -------------- --------
Income from operations. . . . . . . . . . . . . 5,146 7,547 713 (5,459) 7,947
Interest expense, net . . . . . . . . . . . . . 2,964 1,953 2 - 4,919
Income tax expense. . . . . . . . . . . . . . . 1,277 509 337 - 2,123
---------- ------------- ------- -------------- --------
Net income. . . . . . . . . . . . . . . . . . . $ 905 $ 5,085 $ 374 $ (5,459) $ 905
========== ============= ======= ============== ========
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE TWENTY-SIX WEEKS ENDED JUNE 28, 2003
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
----------- -------------- -------- -------------- ---------
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 11,265 $ 16,050 $ 1,242 $ (17,292) $ 11,265
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . 3,485 5,254 - - 8,739
Amortization of debt issue costs. . . . . . . . . . . . 663 333 - - 996
Deferred liabilities and other. . . . . . . . . . . . . (4,874) 3,912 (303) - (1,265)
Equity earnings in subsidiaries . . . . . . . . . . . . (17,689) 397 - 17,292 -
Increase/(decrease) in operating assets and liabilities 13,465 (18,448) (1,254) - (6,237)
----------- -------------- -------- -------------- ---------
Net cash provided by (used in) operating activities. . . . 6,315 7,498 (315) - 13,498
----------- -------------- -------- -------------- ---------
Cash flows from investing activities:
Acquisition of property and equipment . . . . . . . . . (3,046) (2,988) - - (6,034)
----------- -------------- -------- -------------- ---------
Net cash used in investing activities. . . . . . . . . . . (3,046) (2,988) - - (6,034)
----------- -------------- -------- -------------- ---------
Cash flows from financing activities:
Payments on debt and capital leases . . . . . . . . . . (5,081) (62) - - (5,143)
Net cash used in financing activities. . . . . . . . . . . (5,081) (62) - - (5,143)
----------- -------------- -------- -------------- ---------
Net Increase/(decrease) in cash and cash equivalents . . . (1,812) 4,448 (315) - 2,321
Cash and cash equivalents at beginning of period . . . . . 554 2,532 364 - 3,450
----------- -------------- -------- -------------- ---------
Cash and cash equivalents at end of period . . . . . . . . $ (1,258) $ 6,980 $ 49 $ - $ 5,771
=========== ============== ======== ============== =========
10
CONDENSED CONSOLIDATING BALANCE SHEET
JUNE 26, 2004
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
----------- -------------- -------- -------------- ----------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . $ 24 $ 5,251 $ 276 $ - $ 5,551
Accounts and notes receivable . . . . . . . 143,446 52,717 4,163 (188,007) 12,319
Inventory . . . . . . . . . . . . . . . . . - 26,025 2,092 - 28,117
Deferred income taxes . . . . . . . . . . . 570 - - - 570
Prepaid expenses and other. . . . . . . . . - 2,557 48 - 2,605
----------- -------------- -------- -------------- ----------
Total current assets . . . . . . . . . . . . . 144,040 86,550 6,579 (188,007) 49,162
Property and equipment . . . . . . . . . . . . - 49,673 66 - 49,739
Intangibles. . . . . . . . . . . . . . . . . . 166 107,195 87 (25) 107,423
Other assets . . . . . . . . . . . . . . . . . 6,493 724 - - 7,217
Deferred income taxes. . . . . . . . . . . . . 13,033 455 - - 13,488
Investment in subsidiaries . . . . . . . . . . 14,060 (14,060) -
----------- -------------- -------- -------------- ----------
Total assets . . . . . . . . . . . . . . . . . $ 177,792 $ 244,597 $ 6,732 $ (202,092) $ 227,029
=========== ============== ======== ============== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT)
Current liabilities:
Accounts payable. . . . . . . . . . . . . . $ 148 $ 204,072 $ 8,009 $ (188,007) $ 24,222
Current portion of long-term debt . . . . . 20,000 281 - - 20,281
Deferred revenue. . . . . . . . . . . . . . - 5,179 455 - 5,634
Accrued payroll expense . . . . . . . . . . - 4,926 292 - 5,218
Accrued interest. . . . . . . . . . . . . . 2,743 (2) - - 2,741
Other accrued expenses. . . . . . . . . . . (26) 10,637 798 - 11,409
----------- -------------- -------- -------------- ----------
Total current liabilities. . . . . . . . . . . 22,865 225,093 9,554 (188,007) 69,505
Long-term debt, less current maturities. . . . 202,597 1,977 - - 204,574
Deferred rent. . . . . . . . . . . . . . . . . - 4,465 161 - 4,626
Deferred gain. . . . . . . . . . . . . . . . . 1,213 202 - - 1,415
----------- -------------- -------- -------------- ----------
Total liabilities. . . . . . . . . . . . . . . 226,675 231,737 9,715 (188,007) 280,120
Shareholders' equity/(deficit)
Common stock. . . . . . . . . . . . . . . . 74 - - - 74
Preferred stock . . . . . . . . . . . . . . 66,276 - - - 66,276
Additional paid-in capital. . . . . . . . . 27,595 (1,039) (3,144) (25) 23,387
Accumulated equity/(deficit) . . . . . . . . (142,828) 13,899 161 (14,060) (142,828)
----------- -------------- -------- -------------- ----------
Total shareholders' equity/(deficit) . . . . . . (48,883) 12,860 (2,983) (14,085) (53,091)
----------- -------------- -------- -------------- ----------
$ 177,792 $ 244,597 $ 6,732 $ (202,092) $ 227,029
=========== ============== ======== ============== ==========
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE TWENTY-SIX WEEKS ENDED JUNE 26, 2004
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
----------- ------------- --------- -------------- --------
Revenues:
Optical sales. . . . . . . . . . . . . . . . $ (960) $ 163,661 $ 41,737 $ - $204,438
Management fees. . . . . . . . . . . . . . . 125 13,637 - (12,002) 1,760
Equity earnings in subsidiaries. . . . . . . 21,013 - (21,013) -
----------- ------------- --------- -------------- ---------
Total net revenues. . . . . . . . . . . . . . . 20,178 177,298 41,737 (33,015) 206,198
Operating costs and expenses:
Cost of goods sold . . . . . . . . . . . . . 1,932 53,133 8,354 - 63,419
Selling, general and administrative expenses (1,837) 98,195 31,887 (12,002) 116,243
----------- ------------- --------- -------------- --------
Total operating costs and expenses. . . . . . . 95 151,328 40,241 (12,002) 179,662
----------- ------------- --------- -------------- --------
Income from operations. . . . . . . . . . . . . 20,083 25,970 1,496 (21,013) 26,536
Interest expense, net . . . . . . . . . . . . . 8,385 1,313 4 - 9,702
Income tax expense. . . . . . . . . . . . . . . 395 5,119 17 - 5,531
----------- ------------- --------- -------------- --------
Net income. . . . . . . . . . . . . . . . . . . $ 11,303 $ 19,538 $ 1,475 $ (21,013) $ 11,303
=========== ============= ========= ============== ========
11
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THIRTEEN WEEKS ENDED JUNE 26, 2004
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
----------- ------------- -------- -------------- --------
Revenues:
Optical sales . . . . . . . . . . . . . . . . $ (746) $ 75,355 $18,688 $ - $ 93,297
Management fees . . . . . . . . . . . . . . . 50 5,996 - (5,248) 798
Equity earnings in subsidiaries . . . . . . . 6,716 - - (6,716) -
----------- ------------- -------- -------------- --------
Total net revenues . . . . . . . . . . . . . . . 6,020 81,351 18,688 (11,964) 94,095
Operating costs and expenses:
Cost of goods sold. . . . . . . . . . . . . . 915 25,453 3,983 - 30,351
Selling, general and administrative expenses. (767) 48,309 14,373 (5,248) 56,667
----------- ------------- -------- -------------- --------
Total operating costs and expenses . . . . . . . 148 73,762 18,356 (5,248) 87,018
----------- ------------- -------- -------------- --------
Income from operations . . . . . . . . . . . . . 5,872 7,589 332 (6,716) 7,077
Interest expense, net. . . . . . . . . . . . . . 4,142 693 2 - 4,837
Income tax expense/(benefit) . . . . . . . . . . (2) 1,257 (747) - 508
----------- ------------- -------- -------------- --------
Net income . . . . . . . . . . . . . . . . . . . $ 1,732 $ 5,639 $ 1,077 $ (6,716) $ 1,732
=========== ============= ======== ============== ========
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE TWENTY-SIX WEEKS ENDED JUNE 26, 2004
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
----------- -------------- ------- ------------- ---------
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 11,303 $ 19,538 $1,475 $ - $ 32,316
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . - 7,960 - - 7,960
Amortization of debt issue costs. . . . . . . . . . . . 25 979 - - 1,004
Deferred liabilities and other. . . . . . . . . . . . . (100) (372) 21 - (451)
Equity earnings in subsidiaries . . . . . . . . . . . . (21,013) - - - (21,013)
Increase/(decrease) in operating assets and liabilities 23,708 (19,933) (741) - 3,034
----------- -------------- ------- ------------- ---------
Net cash provided by operating activities. . . . . . . . . 13,923 8,172 755 - 22,850
----------- -------------- ------- ------------- ---------
Cash flows from investing activities:
Acquisition of property and equipment . . . . . . . . . - (5,895) - - (5,895)
----------- -------------- ------- ------------- ---------
Net cash used in investing activities. . . . . . . . . . . - (5,895) - - (5,895)
----------- -------------- ------- ------------- ---------
Cash flows from financing activities:
Payments on debt and capital leases . . . . . . . . . . (13,966) (29) - - (13,995)
Distributions to affiliated OD. . . . . . . . . . . . . - - (720) - (720)
Payments to affect IPO. . . . . . . . . . . . . . . . . - (498) - - (498)
----------- -------------- ------- ------------- ---------
Net cash used in financing activities. . . . . . . . . . . (13,966) (527) (720) - (15,213)
----------- -------------- ------- ------------- ---------
Net increase in cash and cash equivalents. . . . . . . . . (43) 1,750 35 - 1,742
Cash and cash equivalents at beginning of period . . . . . 67 3,501 241 - 3,809
----------- -------------- ------- ------------- ---------
Cash and cash equivalents at end of period . . . . . . . . $ 24 $ 5,251 $ 276 $ - $ 5,551
=========== ============== ======= ============= =========
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 377 stores in 33 states, including 313
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 two quarters
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 7.5%
and comparable transaction volume increased 1.4% when compared to the first two
quarters of fiscal 2003. We believe these increases were largely the result of
increased promotional activity and overall improvement in the optical market.
Our net revenues derived from managed care plans decreased by 4.2% during
the first two quarters of fiscal 2004 as compared to the first two quarters of
fiscal 2003. We believe that optical retail sales through funded managed vision
care programs will 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. 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. 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 two quarters of fiscal 2004, approximately 29.3% of our optical revenues
were derived from managed vision care programs; however, we expect that the
percent of penetration will normalize at 30.0% as our transition to funded
programs continues 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 TWENTY-SIX
WEEKS ENDED WEEKS ENDED
------------------------ -------------------------
JUNE 28, JUNE 26, JUNE 28, JUNE 26,
2003 2004 2003 2004
------------------------- -------------------------
STATEMENT OF INCOME DATA:
NET REVENUES:
Optical sales 99.1 % 99.2 % 99.0 % 99.1 %
Management fee 0.9 0.8 1.0 0.9
------------ --------- ------------ ---------
Total net revenues 100.0 100.0 100.0 100.0
OPERATING COSTS AND EXPENSES:
Cost of goods sold 31.6 * 32.5 * 30.7 * 31.0 *
Selling, general and administrative expenses 60.3 * 60.7 * 57.6 * 56.9 *
Amortization of intangibles 0.1 0.0 0.1 0.0
------------ --------- ------------ ---------
Total operating costs and expenses 91.1 92.5 87.5 87.1
------------ --------- ------------ ---------
INCOME FROM OPERATIONS 8.9 7.5 12.5 12.9
INTEREST EXPENSE, NET 5.5 5.2 5.3 4.7
INCOME TAX EXPENSE 2.4 0.5 1.3 2.7
------------ --------- ------------ ---------
NET INCOME 1.0 % 1.8 % 5.9 % 5.5 %
============ ========= ============ =========
* Percentages based on optical sales only
The following is a discussion of certain factors affecting our results of
operations from the first two quarters of fiscal 2004 as compared to the first
two quarters of fiscal 2003 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 JUNE 26, 2004 COMPARED TO THE THIRTEEN WEEKS ENDED JUNE
28, 2003.
Net Revenues. The increase in net revenues to $94.1 million for the thirteen
weeks ended June 26, 2004 from $89.7 million for the thirteen weeks ended June
28, 2003 was largely the result of the addition of nine new stores since the end
of the second quarter of fiscal 2003, seven of which were in the Atlanta market,
and a comparable store sales increase of 0.2% compared to the second quarter of
fiscal 2003. Transaction volume decreased by 0.5% compared to the second quarter
of fiscal 2003 and average ticket prices increased by 0.7% compared to the
second quarter of fiscal 2003. The relatively flat trend in comparable store
sales and transaction volume was mostly due to the weak consumer demand for
optical products in the second 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. Total managed
vision care sales decreased by 0.2% compared to the second quarter of fiscal
2003. The total managed vision care sales decline was primarily due to the
discontinuation of our
14
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 second quarter of fiscal 2004.
Gross Profit. Gross profit increased to $63.7 million for the thirteen weeks
ended June 26, 2004 from $61.6 million for the thirteen weeks ended June 28,
2003. This increase was primarily the result of the increase in store base and
an increase in sales of higher margin products. Gross profit as a percentage of
optical sales decreased to 67.5% for the thirteen weeks ended June 26, 2004 as
compared to 68.4% for the thirteen weeks ended June 28, 2003. This decrease was
largely due to higher expenditures in our lab manufacturing processes.
Selling General & Administrative Expenses (SG&A). SG&A increased to $56.7
million for the thirteen weeks ended June 26, 2004 from $53.6 million for the
thirteen weeks ended June 28, 2003 which is consistent with the increase in
sales. SG&A, as a percentage of optical sales, increased to 60.7% for the
thirteen weeks ended June 26, 2004 from 60.3% for the thirteen weeks ended June
28, 2003. This percentage increase was primarily due to increased advertising
promotions and retail payroll expenditures. This was offset by economies of
scale achieved in overhead expenses and the leveraging of depreciation expense.
Amortization Expense. No amortization expense occurred for the thirteen weeks
ended June 26, 2004 as compared to $0.1 million for the thirteen weeks ended
June 28, 2003. Our intangible balances have been fully amortized.
Net Interest Expense. Net interest expense decreased to $4.8 million for the
thirteen weeks ended June 26, 2004 from $4.9 million for the thirteen weeks
ended June 28, 2003. This decrease was primarily due to lower outstanding debt
balances as compared to the second quarter of fiscal 2003.
Income Tax Expense. Income tax expense decreased to $0.5 million for the
thirteen weeks ended June 26, 2004 from a $2.1 million expense for the thirteen
weeks ended June 28, 2003. This decrease was largely the result of a decrease
in deferred income tax expense and taxable income compared to the second quarter
of fiscal 2003.
Net Income. Net income increased to $1.7 million for the thirteen weeks ended
June 26, 2004 from $0.9 million for the thirteen weeks ended June 28, 2003
primarily as a result of the decrease in income tax expense.
THE TWENTY-SIX WEEKS ENDED JUNE 26, 2004 COMPARED TO THE TWENTY-SIX WEEKS ENDED
JUNE 28, 2003.
Net Revenues. The increase in net revenues to $206.2 million for the twenty-six
weeks ended June 26, 2004 from $192.0 million for the twenty-six weeks ended
June 28, 2003 was largely the result of the addition of nine new stores since
the end of the second quarter of fiscal 2003, seven of which were in the Atlanta
market, during the last two quarters of fiscal 2003 and the first two quarters
of fiscal 2004 and a comparable store sales increase of 2.7% compared to the
first twenty six weeks of fiscal 2003. Transaction volume increased by 1.4%
compared to the first two quarters of fiscal 2003 and average ticket prices
increased by 1.4% compared to the first two quarters of fiscal 2003. The
increase in comparable store 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 two quarters 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 1.0% compared to the first two quarters of fiscal
2003. Total managed vision care sales decreased by
15
4.2% compared to the first two quarters 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 six stores in
the first two quarters of fiscal 2004.
Gross Profit. Gross profit increased to $142.8 million for the twenty-six weeks
ended June 26, 2004 from $133.7 million for the twenty-six weeks ended June 28,
2003, primarily as a result of an increase in sales. Gross profit as a
percentage of optical sales decreased to 69.0% for the twenty-six weeks ended
June 26, 2004 as compared to 69.3% for the twenty-six weeks ended June 28, 2003.
This decrease was largely due to an increase in mix of branded frames which have
a higher acquisition cost than non-branded frames as well as higher expenditures
in our lab manufacturing processes.
Selling General & Administrative Expenses (SG&A). SG&A increased to $116.2
million for the twenty-six weeks ended June 26, 2004 from $109.5 million for the
twenty-six weeks ended June 28, 2003 which is consistent with the increase in
sales. SG&A, as a percentage of optical sales, decreased to 56.9% for the
twenty-six weeks ended June 26, 2004 from 57.6% for the twenty-six weeks ended
June 28, 2003. This percentage decrease was primarily due to economies of scale
achieved in overhead expenses and the leveraging of depreciation expense.
Amortization Expense. No amortization expense occurred for the twenty-six weeks
ended June 26, 2004 as compared to $0.1 million for the twenty-six weeks ended
June 28, 2003. Our intangible balances have been fully amortized.
Net Interest Expense. Net interest expense decreased to $9.7 million for the
twenty-six weeks ended June 26, 2004 from $10.2 million for the twenty-six weeks
ended June 28, 2003. This decrease was primarily due to lower outstanding debt
balances as compared to the first two quarters of fiscal 2003.
Income Tax Expense. Income tax expense increased to $5.5 million for the
twenty-six weeks ended June 26, 2004 from a $2.6 million expense for the
twenty-six weeks ended June 28, 2003. This increase was primarily 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.
Net Income. Net income remained flat at $11.3 million for the twenty-six weeks
ended June 26, 2004 and June 28, 2003, respectively.
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
- - 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.
16
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 $22.9 million for the twenty-six weeks
ended June 26, 2004 and $13.5 million for the twenty-six weeks ended June 28,
2003. As of June 26, 2004 we had $5.6 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 $15.2 million for the twenty-six
weeks ended June 26, 2004 compared to $5.1 million for the twenty-six weeks
ended June 28, 2003.
Our working capital primarily consists of cash and cash equivalents,
accounts receivable, inventory, accounts payable and accrued expenses and was a
deficit of $20.3 million for the twenty-six weeks ended June 26, 2004. Our
level of working capital has remained relatively consistent from June 28, 2003.
Capital expenditures were $5.9 million for the twenty-six weeks ended June
26, 2004 compared to $6.0 million for the twenty-six weeks ended June 28, 2003.
Capital expenditures for all of fiscal 2004 are projected to be approximately
$11.0 million. Of the planned fiscal 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 % 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 balance sheets and are being amortized
over the life of the Facilities. The unamortized amount of debt issuance costs
as of June 26, 2004 related to the Facilities was $2.9 million.
At June 26, 2004, we had $129.8 million in notes payable outstanding
evidenced by the Notes (as defined below), $29.0 million and $59.8 million in
term loans outstanding under the Term Loan A and Term Loan B, respectively, $4.0
million outstanding under the revolving credit facility and $2.3 million in
capital lease and equipment obligations. We had $18.8 million of our revolving
credit facility available to finance working capital requirements and general
corporate purposes as of June 26, 2004.
17
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 June 26, 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.
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.
18
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
June 26, 2004:
Payments due by period (dollars in thousands)
-------------------------------------------------
Total Less than 1 to 3 to More than
1 yr. 3 yrs 5 yrs 5 yrs
Long Term Debt. . . . . . . . . $ 222,597 $20,000 $28,951 $ 173,646 $ -
Capital Lease Obligations . . . 2,258 281 630 1,039 308
Operating Leases. . . . . . . . 154,009 31,937 52,942 39,353 29,777
Purchase Obligations. . . . . . - - - - -
----------------------- ------- ------- ---------- -------
Total future principal payments
on contractual obligations . $ 378,864 $52,218 $82,523 $ 214,038 $30,085
======================= ======= ======= ========== =======
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 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.
19
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 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.
20
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 two
quarters 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 June 26,
2004, $122.6 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 $122.6 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 June 26, 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 twenty-six weeks ended June 26, 2004 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
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 second 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 April24, 1998, between Eye Care
Centers of America, Inc., the subsidiaries of the Company named as
guarantors therein, BT Alex. Brown Incorporated and Merrill Lynch, Pierce,
Fenner & Smith Incorporated. (a)
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)
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: August 10, 2004
/s/ Alan E. Wiley
- ----------------------------------------------------
Alan E. Wiley
Executive Vice President and Chief Financial Officer