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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 1, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-20001
VISTA EYECARE, INC.
(Exact name of Registrant as specified in its charter)
Georgia
(State or other jurisdiction of
incorporation or organization)
58-1910859
(I.R.S. Employer Identification No.)
296 Grayson Highway
Lawrenceville, Georgia
(Address of principal executive offices)
30045
(Zip Code)
Registrant's telephone number, including area code: (770) 822-3600
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has 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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The number of shares of Common Stock of the registrant outstanding as of
February 1, 2000, was 21,179,103. The aggregate market value of shares of Common
Stock held by non-affiliates of the registrant as of February 1, 2000, was
approximately $21.2 million based on a closing price of $1.313 on the NASDAQ
Stock Market on such date. For purposes of this computation, all executive
officers and directors of the registrant are deemed to be affiliates. Such
determination should not be deemed to be an admission that such directors and
officers are, in fact, affiliates of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents have been incorporated by reference
into the parts indicated: the Company's definitive Proxy Statement for the 2000
Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission not later than 120 days after the end of the fiscal year covered by
this report--Part III.
Page 2
PART I
ITEM 1. BUSINESS
OVERVIEW
Vista Eyecare, Inc. (the Company, which may be referred to as we, us, our,
or Vista) is a retail optical company, with 926 vision centers throughout the
United States and Mexico. We operate 604 of our vision centers in host
departments, such as Wal-Mart and Sam's Club, and 322 of our vision centers in
malls and strip centers. Our locations sell a wide range of optical products,
including eyeglasses, contact lenses, and sunglasses. At approximately 650 of
our locations, we offer the services of optometrists. These optometrists are
typically independent of us and operate their own practices within our retail
locations. To support our retail operations, we also operate three manufacturing
and distribution centers.
CHAPTER 11 CASES
On April 5, 2000, the Company and ten of its subsidiaries (collectively,
the "Debtors") filed voluntary petitions with the United State Bankruptcy Court
for the Northern District of Georgia for reorganization under Chapter 11 (the
"Chapter 11 Cases"). The Chapter 11 Cases have been consolidated for the purpose
of joint administration under Case No. 00-65214. The Debtors are currently
operating their businesses as debtors-in-possession pursuant to the Bankruptcy
Code. All affiliated entities of the Company are included in the Chapter 11
Cases, except only (a) three subsidiaries which are licensed managed care
organizations and (b) foreign subsidiaries of the Company.
We cannot predict the outcome of the Chapter 11 Cases or their effect on
the Company's business. See Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations," Note 3 of Notes to Consolidated
Financial Statements, and the Report of Independent Public Accountants included
herein. If the liabilities subject to compromise in the Chapter 11 Cases exceed
the fair value of our assets, unsecured claims in the Chapter 11 cases may be
satisfied at less than 100% of their face value and the common stock of the
Company may have no value. The NASDAQ Stock Market has notified us that our
common stock may no longer be eligible for trading on the NASDAQ SmallCap
Market. See Item 5 - "Market for Registrant's Common Stock and Related
Stockholder Matters."
DEPENDENCE ON WAL-MART
We operate 385 units in domestic Wal-Mart stores, of which 379 operate
pursuant to a master license agreement (see Item 1 - "Leased Department
Agreements"). These units generated approximately 61.2% of our revenue in 1999.
We therefore depend on Wal-Mart and on our agreement with them for much of our
operations.
ACQUISITIONS
To reduce our dependence on Wal-Mart, we acquired Midwest Vision, Inc. in
1997 and Frame-n-Lens Optical, Inc. and New West Eyeworks, Inc. in 1998 (See
Note 6 to consolidated financial statements). At the time of the respective
acquisitions, these three companies collectively operated more than 500 vision
centers and generated approximately $140 million in annualized revenues.
Page 3
BRANDED FREE-STANDING STORE STRATEGY
Part of our business strategy is to build a national branded value oriented
retail optical chain using our free-standing vision centers as a platform.
During the first half of 1999, all of the free-standing vision centers were
renamed "Vista Optical".
DATE OF INFORMATION
Unless otherwise expressly stated, all information in this "Business"
section of this Form 10-K is as of January 1, 2000.
VISION CENTER OPERATIONS
Our vision centers typically occupy between 1,000 and 1,500 square feet,
including areas for merchandise display, customer service, and contact lens
fitting. Each vision center maintains inventory of approximately 1,000 eyeglass
frames and 550 pairs of contact lenses, along with sunglasses and other optical
accessories. Our three optical laboratories deliver prescription eyewear to all
our vision centers. The vision centers located in Wal-Mart typically have a
finishing laboratory, which allows for the vision center to provide one hour
service for most single vision prescription lenses. These vision centers carry
inventory of approximately 725 pairs of spectacle lenses.
MARKETING
We are a value provider of optical goods and stress that theme in our
marketing. We offer everyday low prices at our vision centers. Vista also has a
"satisfaction guaranteed" customer policy. We are constantly vigilant about ways
to lower our own costs so we may pass savings on to our customers.
MANAGED VISION CARE
We expect that retail optical sales through managed vision care programs
will increase over the next several years as a percentage of overall retail
optical sales. Under managed vision care programs, participants fulfill their
eyecare and eyewear needs at specific locations designated by the program
sponsor. We believe our network of 926 vision centers combined with the
convenience of their locations and our ability to offer low prices should enable
us to make competitive bids for managed care contracts.
TRADEMARKS
We use the "Vista Optical" name to identify our free-standing vision
centers, as well as those vision centers operating in Fred Meyer and Meijer
Thrifty Acres locations. Our vision centers in Wal-Mart are identified as the
"Vision Center Located in Wal-Mart." Our vision centers in Sam's Club are
identified as "Optical Center Inside Sam's Club". Vista has also licensed the
right to use the "Guy Laroche" trademark for certain optical goods. Our
agreement with Guy Laroche expires on December 31, 2001, but can be renewed at
our option.
Page 4
EMPLOYEES
We employ 3,431 associates on a full-time basis and 1,269 associates on a
part-time basis. We have 4,079 associates engaged in retail sales, 430 in
laboratory and distribution operations, and 191 in management and
administration. Apart from our retail employees in Mexico, none of our employees
are governed by any collective bargaining agreements. We believe that our
employment relations are generally good.
OPTOMETRISTS
Optometrists are important to the success of our vision centers. We strive
to have an optometrist on at least a part time basis at many of our locations.
These optometrists are typically independent from Vista and lease a portion of
our locations for an eye examination facility. We typically charge rent to these
optometrists, in exchange for the premises and the equipment which we provide.
Our agreement with Wal-Mart requires us to have an optometrist on duty at least
48 hours each week. Our relationships with optometrists are subject to extensive
regulation. (See Item 1 - "Business - Government Regulation".)
MANUFACTURING AND DISTRIBUTION
Vista operates three manufacturing and distribution facilities which supply
substantially all requirements of our vision centers. The facilities are located
in Lawrenceville, Georgia (this facility also includes the central
administrative offices of Vista); Fullerton, California (this facility also
includes administrative offices); and St. Cloud, Minnesota. Each vision center
located in Wal-Mart stores (with the exception of seven vision centers acquired
in 1998) has its own finishing laboratory, which manufactures lenses for
approximately half of all customers purchasing spectacle lenses.
Our distribution centers provide lens blanks, frames, contact lenses, and
sunglasses to our vision centers. We use an overnight delivery service to ship
completed orders and replenishment items to the vision centers. The distribution
centers and the manufacturing facilities are interfaced with Vista's management
information system.
MANAGEMENT INFORMATION SYSTEM
In 1999, Vista completed the development of a new point of sale system. We
began installing the system in our vision centers in the fall of 1999 and expect
to complete the installation in all of our units by the second half of 2000. The
system is working substantially as planned. The system was designed to upgrade
data processing, broaden capabilities at the retail level, and improve the
processing of managed care transactions. The system was also designed to be Year
2000 compliant. See Item 7 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations- Impact of the Year 2000 Issue."
LEASED DEPARTMENT AGREEMENTS
We have agreements in place which govern our operations in host
environments, such as Wal-Mart. Typically, each agreement is for a base term,
followed by an option to renew. The agreements provide for payments of minimum
and percentage rent, and also contain customary provisions for leased department
operations. The table below sets forth key data about each of these agreements:
Page 5
No. of Units as No. of Options
Vision Centers of January 1, Length of Length of Exercisable in
Located In 2000 Base Term Option Term Fiscal 2000
(in years) (in years)
- ----------------------------------------------------------------------------------------
Wal-Mart 379 9 3 51
- ----------------------------------------------------------------------------------------
Sam's Club 111 5 5 0
- ----------------------------------------------------------------------------------------
Fred Meyer 54 5 5 1
- ----------------------------------------------------------------------------------------
Wal-Mart Mexico 27 5 2 4
- ----------------------------------------------------------------------------------------
Meijers Thrifty Acres 9 5 0 0
- ----------------------------------------------------------------------------------------
Military Bases 18 2 or 5 0 0
- ----------------------------------------------------------------------------------------
The Company also operates six additional Wal-Mart stores which operate
under individual leases.
Other Terms
- -----------
Our agreement with Wal-Mart gives us the right to open at least 400 vision
centers, including those already open. Our agreement with Wal-Mart also provides
that, if Wal-Mart converts its own store to a "supercenter" (a store which
contains a grocery department in addition to the traditional Wal-Mart store
offering) and relocates our vision center as part of the conversion, the term of
our lease begins again. We believe that Wal-Mart may in the future convert many
of its stores and thereby cause many of our leases to start again. We have
received no assurances from Wal-Mart as to how many of their locations will
ultimately be converted.
Our agreement with Wal-Mart Mexico provides that each party will not deal
with other parties to operate leased department vision centers in Mexico. This
agreement also permits each party to terminate the lease for each vision center
which fails to meet minimum sales requirements specified in the agreement.
Page 6
Options to Renew
- ----------------
Wal-Mart Vision Centers
We exercised our option to renew 21 the leases for Wal-Mart vision centers
in 1999. The base term for 51 vision centers expires in 2000, and we will need
to determine which leases to extend. We expect to renew the leases for the vast
majority of these vision centers. These decisions will be based on various
factors, including sales levels, anticipated future profitability, increased
rental fees in the option period, and market share.
Other Vision Centers
We have exercised all options to renew locations in Sam's Clubs. By the end
of 2003, the term for all Sam's Club units will have expired. Our agreement with
Fred Meyer obligates us to exercise our renewal option as to all or none of
these locations with the exception of five stores, which are covered by a
separate agreement. This option must be exercised in 2003. Under our agreement
with Wal-Mart Mexico, we have two options for two year renewals, and one option
for an additional one year renewal, for each vision center.
No Assurances of Expansion
- ----------------------------
We have no assurances or guarantees that we will be able to expand our
operations in any of our host environments. However, we periodically discuss
such opportunities with existing and new potential host companies. We believe
that our most likely avenue of additional expansion will be the addition of new
free standing locations.
GOVERNMENT REGULATION
Our business is heavily regulated by federal, state, and local law. We must
comply with federal laws such as the Social Security Act (which applies to our
participation in Medicare programs), the Health Insurance Portability Act of
1996 (which governs our participation in managed care programs), and the Food
and Drug Administration Act (which regulates medical devices such as contact
lenses). In addition, all states have passed laws which govern or affect our
arrangements with the optometrists who practice in our vision centers. Some
states, such as California, Texas, North Carolina, and Kansas, have particularly
extensive and burdensome requirements which affect the way we do business. Many
of these states also have adopted laws which mirror the federal laws described
above. Local ordinances (such as zoning requirements) can also impose
significant burdens and costs of compliance. Frequently, our competitors sit on
state and local boards. Our risks and costs of compliance are often increased as
a result.
Page 7
We believe that we substantially comply with material regulations which
apply to our business.
COMPETITION
The retail eyecare industry is extremely competitive. We compete with
national companies such as Lenscrafters and Cole; we also compete with numerous
regional and local firms. In addition, optometrists, ophthalmologists, and
opticians provide many of the same goods and services we provide. The level and
intensity of competition can vary dramatically depending on the particular
market. We believe that we have numerous competitive advantages, such as our
everyday low pricing, product selection, and quality and consistency of service.
We also compete for managed care business. Our competition for this
business is principally the larger national and regional optical firms.
Competition for this business is driven by size of provider network, quality and
consistency of service, and by pricing of vision care services. We have one of
the largest networks in the country and believe that the size of the network
gives us a competitive advantage.
Several of our competitors have significantly greater financial resources
than we do. As a result, they may be able to engage in extensive and prolonged
price promotions which may adversely affect our business. They may also be able
spend more than we do for advertising.
MEXICO OPERATIONS
We operate 27 vision centers in Mexico under a master license agreement
with Wal-Mart. Our operations in Mexico face unique risks, such as currency
devaluations, inflation, difficulties in cross-cultural marketing, and similar
factors.
ITEM 2. PROPERTIES
Our 926 vision centers in operation as of January 1, 2000 are located as
follows:
Page 8
Location Total Location Total
-------- ----- -------- -----
Alabama 12 Nevada 11
Alaska 18 New Hampshire 4
Arkansas 4 New Jersey 13
Arizona 40 New Mexico 12
California 242 New York 29
Colorado 27 North Carolina 47
Connecticut 10 North Dakota 10
Florida 39 Ohio 4
Georgia 40 Oregon 40
Hawaii 4 Pennsylvania 22
Idaho 11 Puerto Rico 1
Illinois 9 South Carolina 14
Indiana 4 South Dakota 1
Iowa 14 Tennessee 8
Kansas 13 Texas 37
Kentucky 3 Utah 1
Louisiana 3 Virginia 26
Maine 1 Washington 47
Maryland 4 West Virginia 7
Massachusetts 5 Wisconsin 3
Michigan 11 Wyoming 3
Minnesota 34
Missouri 6
Montana 5 Mexico 27
Our headquarters in Lawrenceville, Georgia is located in a 66,000 square
foot building which includes a distribution center and lens laboratory. The
building is subleased from Wal-Mart through 2001. We have an option to renew
this lease for approximately seven years.
The Company has regional facilities located in St. Cloud, Minnesota and
Fullerton, California. The 20,000 square foot St. Cloud facility is subject to a
lease that expires in October 2007. The 45,000 square foot Fullerton facility is
subject to a lease that expires in August 2006. The Company also has an option
to extend the Fullerton lease for five years. Both facilities contain optical
laboratories.
ITEM 3. LEGAL PROCEEDINGS
On April 5, 2000, the Company and ten of its subsidiaries filed voluntary
petitions with the United States Bankruptcy Court for the Northern District of
Georgia for reorganization under Chapter 11 of the Bankruptcy Code. The Debtors
are currently operating their businesses as debtors-in-possession. The Chapter
11 Cases have been consolidated for the purpose of joint administration under
case number 00-65214. All affiliated entities of the Company are included in the
Chapter 11 cases, except only (a) three subsidiaries which are licensed managed
care organizations and (b) foreign subsidiaries of the Company.
Page 9
We cannot predict the outcome of the Chapter 11 Cases or their effect on
the Company's business. See Item 1 - "Business - Chapter 11 Cases," Item 7-
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," Note 3 of Notes to Consolidated Financial Statements, and the
Report of Independent Public Accountants included herein. If the liabilities
subject to compromise in the Chapter 11 Cases exceed the fair value of the
assets, unsecured claims may be satisfied at less than 100% of their face value
and the common stock of the Company may have no value.
On October 6, 1999, former store managers of Frame-n-Lens filed a class
action in the Orange County Superior Court in California (Kremer and Riddle v.
Vista Eyecare, Inc.), alleging that the Company failed to pay overtime wages to
present and former store managers. The Company is vigorously defending the
lawsuit. The Company has also asserted a right of indemnification pursuant to
the share purchase agreement for the acquisition of Frame-n-Lens (See Note 6 to
consolidated financial statements).
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the last
quarter of fiscal 1999.
Page 10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's common stock was traded on the NASDAQ National Market System
under the symbol "NVAL" from May 1992 until January 4, 1999, when the symbol was
changed to "VSTA". As of October 12, 1999, our common stock began trading on the
NASDAQ SmallCap Market.
The following table sets forth for the periods indicated the high and low
prices of the Company's Common Stock in the over-the-counter market on the
NASDAQ Stock Market.
Quarter Ended High Low
------------------ ------ ------
Fiscal 1998 April 4, 1998 $7.375 $4.875
July 4, 1998 $8.750 $5.000
October 3, 1998 $6.750 $4.125
January 2, 1999 $6.250 $2.188
Fiscal 1999 April 3, 1999 $6.250 $4.500
July 3, 1999 $6.250 $3.625
October 2, 1999 $3.938 $2.250
January 1, 2000 $2.750 $0.625
On April 5, 2000, trading of our common stock was halted after we issued a
press release announcing the filing of the Chapter 11 Cases. NASDAQ has
requested that we provide them with certain information before they will permit
our common stock to trade. We are considering whether to provide this
information. If we do not provide the information, it is likely that NASDAQ will
delist our common stock. We anticipate that our common stock would then trade on
the OTC Bulletin Board.
As of January 1, 2000, there were approximately 500 holders of record of
the Company's Common Stock.
The Company's board of directors presently intends to use the Company's
cash resources only for its operations and expenses related to its Chapter 11
proceedings. Future dividend policy will depend upon the earnings and financial
condition of the Company, the Company's need for funds and other factors.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company with respect to the
consolidated financial statements for the years ended January 1, 2000, January
2, 1999, January 3, 1998, December 28, 1996, and December 30, 1995, is derived
from the Company's consolidated financial statements. The selected financial
data set forth below should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this Report.
Page 11
1999 1998 1997 1996 1995
-------- ------------ -------- -------- --------
STATEMENTS OF OPERATIONS DATA:
(In thousands except per share information)
Net sales $ 329,055 $ 245,331 $ 186,354 $ 160,376 $ 145,573
Cost of goods sold 147,768 112,929 86,363 76,692 67,966
-------- -------- -------- ------- -------
Gross profit 181,287 132,402 99,991 83,684 77,607
Gross profit percentage 55% 54% 54% 52% 53%
Selling, general, and administrative expense 174,462 121,413 89,156 76,920 74,390
Impairment loss on long lived assets 1,952 -- -- -- --
Provision for doubtful accounts 2,700 -- -- -- --
Provision for dispositions -- -- -- -- 958
Other nonrecurring charges -- -- -- -- 1,053
-------- -------- -------- ------- -------
Operating income 2,173 10,989 10,835 6,764 1,206
Interest expense, net 19,329 5,538 1,554 2,084 2,626
-------- -------- -------- ------- -------
Income/(loss) before income taxes and extraordinary item (17,156) 5,451 9,281 4,680 (1,420)
Income tax expense -- 2,037 3,708 1,200 100
-------- -------- -------- ------- -------
Income (loss) before extraordinary item (17,156) 3,414 5,573 3,480 (1,520)
Extraordinary item, net of tax (406) -- -- -- --
-------- -------- -------- ------- -------
Net income/(loss) $ (17,562) $ 3,414 $ 5,573 $ 3,480 $ (1,520)
======== ======== ======== ======= =======
Basic earnings/(loss) per common share:
Earnings/(loss) before extraordinary item $ (0.81) $ 0.16 $ 0.27 $ 0.17 $ (0.07)
Extraordinary loss (0.02) -- -- -- --
-------- -------- -------- ------- -------
Basic earnings/(loss) per common share $ (0.83) $ 0.16 $ 0.27 $ 0.17 $ (0.07)
======== ======== ======== ======= =======
Diluted earnings/(loss) per common share:
Earnings/(loss) before extraordinary item $ (0.81) $ 0.16 $ 0.27 $ 0.17 $ (0.07)
Extraordinary loss (0.02) -- -- -- --
-------- -------- -------- ------ -------
Diluted earnings/(loss) per common share $ (0.83) $ 0.16 $ 0.27 $ 0.17 $ (0.07)
======== ======== ======== ======= =======
Page 12
1999 1998 1997 1996 1995
-------- ------------ -------- -------- --------
STATISTICAL DATA (UNAUDITED):
(In thousands except vision center data) Domestic vision centers open at end of
period:
Leased department vision centers 577 562 364 320 319
Free-standing vision centers 322 331 50 -- --
Average weekly consolidated sales
per leased department vision center $ 8,200 $ 9,000 $ 9,400 $ 9,300 $ 8,700
Average weekly consolidated sales
per free-standing vision center $ 4,700 $ 4,900 $ -- $ -- $ --
Capital expenditures $ 12,704 $ 9,183 $ 8,049 $ 2,713 $ 13,175
Depreciation and amortization 18,602 14,177 11,035 10,058 10,378
EBITDA 20,775 25,166 21,870 16,822 11,584
EBITDA margin percentage 6.3% 10.3% 11.7% 10.5% 8.0%
EBITDA prior to significant provisions 25,427 25,166 21,870 16,822 13,595
EBITDA margin percentage
prior to significant provisions 7.7% 10.3% 11.7% 10.5% 9.3%
Total annual sales growth 34.1% 31.6% 16.2% 10.2% 21.9%
BALANCE SHEET DATA:
(In thousands except vision center data)
Working capital $ (11,714) $ 4,208 $ 12,171 $ 13,502 $ 14,556
Total assets 220,219 229,097 83,250 74,564 81,237
Current and long-term debt
obligations 151,902 139,608 24,973 26,500 38,480
Shareholders' equity 26,557 43,927 35,598 29,906 26,326
Total debt and lease obligations as a
percentage of total capital 85% 76% 41% 47% 59%
Financial information for 1995 and subsequent years include results of
international operations for the 12 months ended November 30. (see Note 2
to consolidated financial statements.)
Effective January 1, 1995, the Company changed its year end to a 52/53 week
retail calendar (see Note 2 to consolidated financial statements). Fiscal
1997 consisted of 53 weeks ended January 3, 1998. Sales for the 53rd week
approximated $3.0 million in fiscal 1997.
In 1999, the Company recorded a $2.7 million provision for the write-off of
certain receivables and an impairment loss of $1.9 million in connection
with 36 under-performing vision centers. In 1995, the Company decided to
dispose of its non-core business operations, resulting in a $2 million
provision.
Calculated from sales from each month during the period divided by the
number of store weeks of sales during the period, excluding stores not open
a full month.
EBITDA is calculated as earnings before interest, taxes, depreciation and
amortization. EBITDA prior to significant provisions is calculated as
EBITDA prior to provisions described per Note 3 above.
Current and long-term debt obligations include the Revolving Credit
Facility and term loan, Senior Notes, Redeemable Common Stock, and other
long-term debt and capital lease obligations.
Total Capital is calculated as total current and long-term debt and capital
lease obligations combined with total shareholders' equity.
Page 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Proceedings Under Chapter 11 of the Bankruptcy Code
On April 5, 2000, the Company and ten of its subsidiaries filed voluntary
petitions with the Bankruptcy Court for reorganization under Chapter 11. The
Chapter 11 Cases have been consolidated for the purpose of joint administration
under Case No. 00-65214. The Debtors are currently operating their businesses as
debtors-in-possession pursuant to the Bankruptcy Code. All affiliated entities
of the Company are included in the Chapter 11 Cases, except only (a) three
subsidiaries which are licensed managed care organizations and (b) foreign
subsidiaries of the Company.
The Debtors expect to file a reorganization plan or plans that provide for
emergence from bankruptcy in 2000 or 2001. There can, however, be no assurance
that a reorganization plan or plans will be proposed by the Debtors or confirmed
by the Bankruptcy Court, or that any such plan(s) will be consummated. A plan of
reorganization could result in holders of the common stock receiving no value
for their interests. Because of such possibilities, the value of the common
stock is highly speculative.
At a hearing held on April 5, 2000, the Bankruptcy Court entered orders
granting authority to the Debtors, among other things, to maintain our cash
management system, to pay pre-petition and post-petition employee wages,
salaries, benefits and other employee obligations, and to honor customer service
programs, including warranties, returns, and gift certificates. The Bankruptcy
Court also ordered that the Company could enter into a debtor-in-possession
credit facility in substantially the form as presented to the Court. See Note 3
of Notes to Consolidated Financial Statements and the Report of Independent
Public Accountants included herein.
We cannot predict the outcome of the Chapter 11 Cases or their effect on
the Company's business. See Item 1 - "Business - Chapter 11 Cases," Note 3 of
Notes to Consolidated Financial Statements and the Report of Independent Public
Accountants included herein. If the liabilities subject to compromise in the
Chapter 11 Cases exceed the fair value of the assets, unsecured claims may be
satisfied at less than 100% of their face value and the common stock of the
Company may have no value.
Consolidated Financial Statements
The Company's Consolidated Financial Statements have been prepared on a
going concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities and commitments in the normal course of
business. The filing of the bankruptcy petition, the related circumstances and
the losses from operations raise substantial doubt with respect to the Company's
ability to continue as a going concern. The appropriateness of using the going
concern basis is dependent upon, among other things, confirmation of a plan or
plans of reorganization, future profitable operations and the ability to
generate cash from operations and financing sources sufficient to meet
obligations. As a result of the filing of the Chapter 11 Cases and related
Page 14
circumstances, realization of assets and liquidation of liabilities is subject
to significant uncertainty. While under the protection of Chapter 11, the
Debtors may sell or otherwise dispose of assets, and liquidate or settle
liabilities, for amounts other than those reflected in the Consolidated
Financial Statements. Further, a plan or plans of reorganization could
materially change the amounts reported in the accompanying Consolidated
Financial Statements. The Consolidated Financial Statements do not include any
adjustments relating to recoverability of the value of recorded asset amounts or
the amounts and classification of liabilities that might be necessary as a
consequence of a plan of reorganization.
Results of Operations
As of January 1, 2000, we operated 926 vision centers, versus 919 vision
centers at January 2, 1999. Our results for the three-year period discussed
below were significantly affected by our acquisitions of Frame-n-Lens Optical,
Inc. and New West Eyeworks, Inc. (the "Acquired Businesses") in 1998. These
entities had combined revenues of $125 million for all of 1998 and operated
approximately 455 vision centers at the time of the acquisitions. (See Note 6 to
consolidated financial statements.) These acquisitions, and the substantial debt
incurred by the Company to fund them, have had a substantial negative impact on
our operating results and cash flow.
YEAR ENDED JANUARY 1, 2000 COMPARED TO YEAR ENDED JANUARY 2, 1999
NET SALES. The Company recorded net sales of $329.1 million in fiscal 1999,
an improvement of 34% over sales of $245.3 million in fiscal 1998. We increased
sales for two reasons. First, in 1999 our net sales included the net sales of
our Acquired Busineses for the entire fiscal year, whereas our net sales for
1998 included the sales of the acquired businesses for only a portion of the
year. Second, our sales in our core leased departments increased by 4.1% over
1998 results.
NET SALES IN ACQUIRED BUSINESSES. We believe that the performance of the
Acquired Businesses represents the most important operational challenge facing
the Company. In 1999, the integration of these businesses fell below
expectations which negatively affected our results. The most important reason
for the disappointing performance was the significant shortfall in sales.
The following factors contributed to our poor operating results.
- The consolidation of three different retail concepts into one existing
concept proved more difficult than we anticipated.
- We underestimated the power of the existing trade names of the acquired
businesses and lost market share when we changed the store names to "Vista
Optical".
- We incurred significant service disruptions when we closed three of our
manufacturing locations and consolidated their operations into our existing
facilities.
Page 15
- We had substantial turnover at the field and management levels, which
further disrupted our operations.
In 1999, we made a number of changes to improve these businesses. In
particular, we:
- improved the inventory carried by these vision centers.
- recruited optometrists to many locations.
- instituted intensive training programs for retail personnel.
- created a new advertising campaign, which began running in early 2000.
We believe that the acquired businesses will need additional time to
benefit from these changes. If sales at the acquired businesses do not improve,
the Company's liquidity and profitability will continue to be adversely
affected. (See - "Liquidity and Capital Resources".)
GROSS PROFIT. In 1999, we increased gross profit to $181.3 million, a 37%
increase over $132.4 million in 1998. The increase in net sales resulted in an
increase in gross profit dollars. Our gross profit percentage increased from 54%
in 1998 to 55.1% in 1999. Several factors contributed to this increase:
- We have increased our purchasing power since completing the acquisitions.
- The consolidation of our manufacturing operations from six facilities to
three facilities has reduced our average lens cost.
- We received significant promotional payments from key vendors.
Other factors had a negative impact on gross profit percentage:
- Retail prices for contact lenses continued to decline because of intense
price competition.
- During the consolidation of our manufacturing operations, our service
declined, causing an increase in remake and warranty work on customer
orders.
- Shortfalls in sales at the acquired vision centers caused rent as a percent
of sales to increase.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE. This category of expense
includes both retail operating expense and corporate office administrative
costs. SG&A expense increased from $121.4 million in 1998 to $177.2 million in
1999. The increase was primarily due to the increase in the number of vision
centers. As a percent of net sales, SG&A expense increased from 49.5% in 1998 to
53.8% in 1999. This increase was due to:
Page 16
- A decline in sales at the acquired businesses, which thereby caused store
payroll to increase as a percent of sales.
- An increase in goodwill amortization from $800,000 in 1998 to $3.5 million
in 1999 (this increase reflects the goodwill associated with the businesses
acquired by the Company in 1998 and therefore amortized over all of 1999
versus a portion of 1998).
- SG&A includes a non-cash expense provision of $2.7 million for the
write-off of managed care receivables. During 1999, the Company continued
its efforts with its third party processor to timely collect managed care
receivable accounts. In the fourth quarter, management concluded these
efforts were not achieving anticipated results and, consequently,
determined an additional provision for doubtful accounts was warranted. We
do not expect to incur any additional charges of this magnitude for
write-offs of managed care receivables, although additional write-offs are
possible.
We believe that all our vision centers are adequately staffed and that, if
sales increase, payroll should decline as a percent of sales. In addition,
before giving effect to goodwill amortization, home office expense as a percent
of sales decreased by 0.5% over levels recorded in 1998.
Results for 1999 include a non-cash charge of $1.9 million, which
represents an impairment loss on fixed assets associated with 36 underperforming
vision centers acquired by the Company. We expect to be closing a significant
number of these vision centers shortly.
We do expect additional charges associated with the closure of 36
underperforming vision centers. Such charges would primarily be for the
settlement of lease obligations.
We are currently evaluating additional underperforming stores for possible
closure in 2000 and have identified at least an additional 50 stores which we
expect to close during the second quarter. The final plan to close these vision
centers will include additional charges for the impairment of assets, consisting
primarily of leasehold improvements and furniture and fixtures, and for the
settlement of the related lease obligations. The number of vision centers and
the aggregate costs to close are currently undetermined.
OPERATING INCOME. Operating income decreased to $2.2 million from $11
million in 1998. Operating margin decreased from 4.5% to 0.7% of net sales in
1999. The decrease was attributable to:
- The shortfall in operating results of the acquired businesses. - The
increase in SG&A expense discussed above. - The non-cash charges discussed
above.
Despite poor results in the acquired businesses, we increased operating
income in our core leased business more than 10% over levels recorded in 1998.
Page 17
INTEREST EXPENSE. Interest expense increased to $19.3 million from $5.5
million in 1998. The Company issued its $125 million senior notes in 1998 (See
Note 6 to consolidated financial statements) and incurred the associated expense
over the entirety of 1999 versus a portion of 1998. In November 1999, the
Company refinanced its secured credit facility at a higher interest rate than
that provided for in its previous credit facility. (See "Item 7-Liquidity and
Cash Resources".)
PROVISION FOR INCOME TAXES. Vista recorded a pre-tax operating loss before
extraordinary item of $17.2 million in 1999. The resulting income tax benefit
was approximately $5.2 million. We have established a valuation allowance equal
to the amount of the tax benefit.
EXTRAORDINARY LOSS. Results also include an extraordinary loss of $406,000
associated with the write-off of the capitalized costs of the Company's 1998
secured credit facility.
NET INCOME. The Company recorded a net loss of $17.6 million, or a loss
of $(0.83) per basic and diluted share.
YEAR ENDED JANUARY 2, 1999 COMPARED TO YEAR ENDED JANUARY 3, 1998
Consolidated Results
NET SALES. Net sales during fiscal 1998 increased to $245.3 million from
$186.4 million in fiscal 1997. The increase was primarily due to the
acquisitions of Frame-n-Lens and New West in 1998 and a full year of operations
from Midwest Vision which was acquired in October 1997. Comparable store sales
in leased departments increased by 3% over levels recorded in fiscal 1997.
Consolidated average weekly net sales per leased vision center decreased from
$9,400 during fiscal 1997 to $9,000 in fiscal 1998, primarily as the result of
acquired vision centers with lower net sales levels. Vision centers acquired in
the Frame-n-Lens acquisition recorded significant negative comparable store
sales and had a negative impact on results following the date of the
acquisition. This trend had a negative impact on earnings and liquidity in 1998.
For the core leased departments, average spectacle unit sales per week
increased and the average spectacle transaction value decreased over that
recorded in fiscal 1997, resulting in a net increase in spectacle sales for
stores open for more than one year. Contact lens unit sales increased over the
prior year, but such increase was more than offset by a decline in the average
transaction value on disposable contacts resulting from competitive pressure on
pricing. Sales under managed care plans increased over levels recorded in 1997.
Page 18
GROSS PROFIT. Gross profit increased to $132.4 million in fiscal 1998 from
$100 million in fiscal 1997. The increase was due to the increase in net sales
described above. Gross profit percentage essentially remained even against
levels recorded in fiscal 1997. Promotional monies from vendors and increased
manufacturing efficiencies had a positive impact on gross profit. However, this
was partially offset by the lower gross profit recorded at the vision centers
acquired by the Company in 1998.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE. SG&A expense (which includes
both operating expenses and home office overhead) increased to $121.4 million in
1998 from $89.2 million in 1997. As a percentage of sales, SG&A expense
increased from 47.8% in 1997 to 49.5% in 1998. Administrative costs increased
because of the acquisitions of Frame-n-Lens and New West. SG&A expense in 1998
included $800,000 of goodwill amortization relating to the recent acquisitions.
Store expense as a percentage of sales was negatively affected by the vision
centers recently acquired, which had higher store expenses as a percentage of
sales than did the Company's other vision centers. SG&A expense as a percentage
of net sales was positively affected by reduced incentive payment levels as a
result of the Company's lower earnings in 1998 versus 1997. Additionally,
reserves associated with managed care receivables were increased.
OPERATING INCOME. Operating income for fiscal 1998 increased to $11.0
million from $10.8 million in fiscal 1997. As a percentage of net sales,
operating income declined to 4.5% from 5.8% in fiscal 1997. The decline was
primarily due to the increase in SG&A expense discussed above and lower than
expected operating margins from Frame-n-Lens. Before giving effect to the
businesses acquired in 1998, operating income in 1998 improved 21 percent to
$13.1 million from $10.8 million recorded in 1997. The Company's Mexican
business operated at a break-even level in 1998, essentially flat against 1997
results. Mexican operating results do not include allocated corporate overhead,
interest, and taxes.
OTHER EXPENSE. Other expense increased from $1.6 million in 1997 to $5.5
million in 1998, primarily as a result of the interest expense arising out of
the issuance of the Company's senior notes in October 1998 (see Note 6 to
consolidated financial statements).
PROVISION FOR INCOME TAXES. The effective income tax rate on consolidated
pretax income was 37% in 1998 versus 40% in 1997, primarily as the result of the
1998 operating losses from Frame-n-Lens and New West. In 1998, the Company made
cash payments for federal and state income taxes approximating 30% of
consolidated pretax earnings primarily due to the utilization of alternative
minimum tax credits.
NET INCOME. Net income was $3.4 million, or $0.16 per share, as compared to
net income of $5.6 million, or $0.27 per share, in 1997.
Page 19
Inflation
Although the Company cannot determine the precise effects of inflation, it
does not believe inflation has had a material effect on its domestic sales or
results of operations. The Company cannot determine whether inflation will have
a material long-term effect on its sales or results of operations. Continued
inflation in Mexico may cause consumers to reduce discretionary purchases such
as eyeglasses.
As a result of inflation in prior years, the Company has in the past
adjusted its retail pricing. Further pricing adjustments are contingent upon
competitive pricing levels in the marketplace. Management is monitoring the
continuing impact of these inflationary trends.
LIQUIDITY AND CAPITAL RESOURCES
Our capital needs have been for operating expenses, capital expenditures,
and acquisitions and interest expense. Our sources of capital have been cash
flow from operations and borrowings under our credit facilities.
In October 1998, we issued our $125 million notes due 2005 to help fund our
acquisitions of Frame-n-Lens Optical, Inc. and New West Eyeworks, Inc. These
notes bear interest of 12.75% and were issued pursuant to an indenture which
contains a variety of customary provisions and restrictions (See note 6 to
consolidated financial statements). Interest payments are due on April 15 and
October 15 of each year. The indenture also gives us a 30 day grace period in
which to make interest payments. We must pay penalty interest if we go into the
grace period.
At the time we issued our notes, we also entered into a $25 million secured
credit facility. The agreement contained customary provisions and restrictions
(See Note 6 to consolidated financial statements).
In October 1999, we announced that, because of slow sales in the acquired
businesses, we would use the 30 day grace period contained in the indenture. We
also announced that we had breached various provisions of our credit facility.
We then entered into a replacement credit facility with Foothill Capital
Corporation (the "Foothill Credit Facility"), and we used proceeds from the new
facility to make the October 15 interest payment under the notes and to pay off
the balance under the prior credit facility. As of January 1, 2000, we had
borrowed $19.3 million under this credit facility.
The Foothill Credit Facility was in the amount of $25 million and included
a $12.5 million revolver and $12.5 million term loan. Our obligations under the
Foothill Credit Facility were secured by substantially all assets of the
Company. The facility contained customary provisions and restrictions, including
restrictions on the amount we can borrow under the revolver portion (See Note 6
to consolidated financial statements).
Page 20
As of January 1, 2000, we had breached a cash flow and a net worth covenant
in the Foothill Credit Facility. On April 5, 2000, the Debtors filed the Chapter
11 Cases. We expect that the filing of these cases will affect the Company's
liquidity and capital resources in fiscal 2000.
On April 5, 2000, the Bankruptcy Court entered an interim order permitting
the Company to enter into debtor-in possession financing with Foothill Capital
Corporation (the "DIP Facility"). The DIP Facility remains subject to final
Bankruptcy Court approval. A hearing for this purpose has been set for May 3,
2000. See Item 1 - "Business - Chapter 11 Cases." If and when approved by the
Bankruptcy Court in a final order, the DIP Facility will refinance all amounts
previously outstanding under the Foothill Credit Facility and provide additional
working capital. As of April 5, 2000, we had borrowed a total of $15.4 million
(inclusive of the $12.5 million term loan portion) under the Foothill Credit
Facility.
Under the DIP Facility, the Company may borrow up to $25 million (inclusive
of amounts outstanding under the Foothill Credit Facility), subject to certain
limitations, to fund ongoing working capital needs while it prepares a
reorganization plan. The DIP Facility includes a maximum of $12.5 million in
revolving loans. The DIP Facility also contains a $12.5 million term loan
bearing interest at 15% per annum. The DIP Facility requires that the Company
have a rolling twelve month EBITDA of no less than $15 million during its term,
which expires on May 31, 2001. Events occuring in the Chapter 11 Cases could
result in earlier termination. The DIP Facility includes a $4 million
sub-facility for letters of credit. Interest rates on the revolver portion of
the DIP Facility are based on either the Wells Fargo Bank, N.A. Base Rate plus
2% or the Adjusted Eurodollar Rate plus 3.25%. The DIP Facility is secured by
substantially all of the assets of the Company and its subsidiaries, subject
only to valid, enforceable, subsisting and non-voidable liens of record as of
the date of commencement of the Chapter 11 Cases and other liens permitted under
the DIP Facility.
The DIP Facility contains customary covenants including, among others,
covenants restricting the incurrence of indebtedness, the creation or existence
of liens, the guarantee of other indebtedness, the declaration or payment of
dividends, the repurchase or redemption of debt and equity securities of the
Company, change in business activities, affiliate transactions, change in key
management and certain corporate transactions, such as sales and purchases of
assets, mergers, or consolidations. The DIP Facility also limits capital
expenditures, investments, prepayments of other indebtedness, and requires the
delivery of financial and other information to Foothill. The DIP Facility also
contains certain customary default provisions and also specifies certain
possible occurrences in the Chapter 11 Cases which could result in events of
default.
Availability under the DIP Facility is limited to certain percentages of
accounts receivable and inventory, subject to other limitations based on rolling
twelve-month historical EBIDTA and rolling 60-day cash collections.
The Company believes the DIP Facility (if approved by the Bankruptcy Court
in a final order) should provide it with adequate liquidity to conduct its
operations while it prepares a reorganization plan. However, the Company's
liquidity, capital resources, results of operations and ability to continue as a
going concern are subject to known and unknown risks and uncertainties. See Item
7 - "Management's Discussion and Analysis and Results of Operations - Risk
Factors."
Page 21
Accordingly, we are working to improve the Company's current and long-term
liquidity. We are preparing a plan of reorganization, which will likely include
the conversion of debt into equity. We do not know if the reorganization plan
will be approved, and if approved, we do not know if it will succeed.
Even if the reorganization plan is successful in improving our liquidity,
we will have to take steps to improve the Company's operating results in the
Acquired Businesses. Our initial plans include improving sales and profitability
in the Acquired Businesses in conjunction with closing additional
underperforming stores with sizeable losses.
Although management believes that its actions will have a positive impact
on the Company's operations, there can be no assurance that the Company will be
able to operate profitably.
If the Company is successful in restructuring its debt obligations and its
equity, the Company may trigger limitations on certain tax net operating loss
carryforwards. (See Note 11 to consolidated financial statements).
We plan, as of January 1, 2000, to open approximately 18 Wal-Mart vision
centers during fiscal 2000. We may open up to 12 additional vision centers
dependent upon liquidity, construction schedules and other constraints. For each
of our new vision centers, we typically spend between $100,000 and $160,000 for
fixed assets and approximately $25,000 for inventory. In general, free-standing
locations are more costly than leased locations. We also spend approximately
$20,000 for pre-opening costs. Before 1998, we capitalized these pre-opening
costs. Beginning in 1998, we expensed them as required by new accounting rules
(See Note 2 to consolidated financial statements).
IMPACT OF THE YEAR 2000 ISSUE
The transition to the year 2000 has had no impact on the Company's
operations. All of the Company's hardware and software functioned without
incident during and after the transition. The Company's point of sale system is
year 2000 compliant.
Similarly, none of the Company's business relationships have been
materially affected by transition to the year 2000. Inventory continues to be
shipped and billed properly. We have no basis to believe that our business has
been or will be adversely affected by year 2000 issues.
Costs to Address Year 2000 Issues
To prepare the Company for year 2000, we spent approximately $1.1 million
for changes to software and hardware and for various services.
Page 22
Risks of Third-Party Year 2000 Issues
We believe that our business partners have made their systems Y2K
compliant. We obviously cannot predict whether they will incur any Y2K problems.
Our business could be adversely affected if such problems occur.
DERIVATIVE FINANCIAL INSTRUMENTS
Market Risk
Market risk is the potential change in an instrument's value caused by, for
example, fluctuations in interest and currency exchange rates. The Company's
primary market risk exposures are interest rate risk and the risk of unfavorable
movements in exchange rates between the U.S. dollar and the Mexican peso.
Monitoring and managing these risks is a continual process carried out by senior
management, which reviews and approves the Company's risk management policies.
We manage market risk on the basis of an ongoing assessment of trends in
interest rates, foreign exchange rates, and economic developments, giving
consideration to possible effects on both total return and reported earnings.
The Company's financial advisors, both internal and external, provide ongoing
advice regarding trends that affect management's assessment.
Interest Rate Risk
The Company borrows long-term debt under our credit facility at variable
interest rates. (See Note 8 to consolidated financial statements.) We therefore
incur the risk of increased interest costs if interest rates rise.
In anticipation of the issuance of our senior notes, in 1998 we entered
into three anticipatory hedging transactions with a notional amount of $100
million. The interest rates on these instruments were tied to U.S. Treasury
securities and ranged from 5.43% to 5.62%. We settled these transactions for
approximately $4.6 million in September 1998 with $0.6 million cash and
additional borrowings of $4.0 million. The settlement costs are treated as
deferred financing costs amortized over the life of the notes.
Foreign Exchange Rate Risk
Historically, Mexico qualified as a highly inflationary economy under the
provisions of SFAS No. 52 -- Foreign Currency Translation. Consequently, in
1997, the financial statements of the Mexico operation were remeasured with the
U.S. dollar as the functional currency. Since 1997, we have recorded immaterial
losses because of changes in foreign currency rates between the peso and the
U.S. dollar.
Page 23
RISK FACTORS
This Form 10-K contains a number of statements about the future. It also
contains statements which involve assumptions about the future. All these
statements are forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements represent
our expectations or belief concerning future events, including the following:
any statements regarding future sales levels, any statements regarding the
continuation of historical trends, and any statements regarding the Company's
liquidity. Without limiting the foregoing, the words "believes," "anticipates,"
"plans," "expects," and similar expressions are intended to identify
forward-looking statements.
We do not know whether the forward-looking statements made in this Form
10-K will prove to be correct. We have tried to identify factors which may cause
these statements to be incorrect. These factors could also have a negative
impact on our results. The following is our list of these factors:
- We have filed for protection under Chapter 11 of the Bankruptcy Code. The
fact of this filing, along with the process through the Bankruptcy Court,
could affect our business in a variety of unforeseen ways. There could be
impairment of our ability to: operate our business during the pendency of
the proceedings; continue normal operating relationships with our host
licensors, such as Wal-Mart; obtain shipments and negotiate terms with
vendors; fund, develop, and execute an operating plan; attract and retain
key executives and associates; maintain our gross margins through vendor
participation programs and otherwise to maintain favorable courses of
dealing with vendors.
- We expect that, under the plan of reorganization we will propose to the
Bankruptcy Court, the equity of the current shareholders in the Company
will be significantly diluted.
- It is unlikely the our common stock will continue to be listed on the
NASDAQ SmallCap Market. We anticipate that our shares will trade on the OTC
Bulletin Board. The liquidity of our common stock could be adversely
affected as a result.
- There are various risks associated with the Chapter 11 Cases. Our plan of
reorganization may not be approved or, even if it is approved, may not
succeed. In addition, the Bankruptcy Court must enter a final order
approving our DIP Facility.
Page 24
- We depend heavily on our host store relationships, particularly with
Wal-Mart. Any change in these relationships could have a significant
negative impact on our business. The filing of the Chapter 11 Cases could
affect those relationships.
- The businesses we acquired in 1998 continue to generate low sales. If we
cannot improve these sales, we may not generate sufficient cash to continue
in business. We might then be forced to convert the Chapter 11 Cases into
proceedings under Chapter 7 of the Bankruptcy Code. In addition, even if we
are able to pay our bills, we may not be able to expand our business if
these low sales levels persist.
- Our new debtor-in-possession credit facility includes a revolver loan. Our
ability to borrow under the revolver portion is limited to certain
percentages of our inventory and accounts receivable. These limitations
could restrict our ability to borrow under this revolver portion.
- Managed care plans are increasingly important in the optical industry. We
will need to attract new managed care business if we intend to remain
competitive. We will also need to retain our existing managed care
arrangements. Loss of these arrangements, or our failure to attract new
managed care business, would impair our competitive position. The filing of
the Chapter 11 Cases could impair our ability to retain existing contracts
and to enter into new ones.
- We depend on reliable and timely reimbursement of claims we submit to third
party payors. There are risks we may not be paid on a timely basis, or that
we will be paid at all. Some plans have complex forms to complete.
Sometimes our staff may incorrectly complete forms, delaying our
reimbursement. These delays can hurt our cash flow and also force us to
write-off more of these accounts receivable.
- Each year, we expect to have increasing numbers of vision centers under our
Wal-Mart agreement come up for renewal. Our rental obligations to Wal-Mart
will increase in the option period. We will need to continue to improve
sales at these vision centers. If we do not, our rent as a percent of sales
will increase significantly during the option period. Alternatively, we may
choose not to exercise the options.
- A number of our leases for our free-standing vision centers have annual
rent increases or provide for increased rent in option periods. We may need
to consider closing locations or not renewing others unless we can increase
their sales levels.
- Operating factors affecting customer satisfaction and quality controls of
the Company in optical manufacturing.
- Risks associated with the Company's Year 2000 compliance program,
including, without limitation, the risks that third parties with whom the
Company deals will not have systems which are Year 2000 compliant.
Page 25
- Risks that the Company's new point of sale system will not function as
planned. In addition, we could lose sales because employees are unfamiliar
with the new system or because they have difficulty using it.
- Pricing and other competitive factors, including, without limitation,
increased price competition with respect to contact lenses.
- Technological advances in the eyecare industry, such as new surgical
procedures or medical devices, which could reduce the demand for the
Company's products. The number of individuals electing Lasik and similar
surgical procedures has dramatically increased each year. If these trends
continue, demand for our goods and services could decrease significantly.
- The mix of goods sold.
- Availability of optical and optometric professionals. An element of the
Company's business strategy and a requirement of the Wal- Mart Agreement is
the availability of vision care professionals at clinics in or nearby the
Company's vision centers.
- State and federal regulation of managed care and of the practice of
optometry and opticianry.
- General risks arising from investing and operating in Mexico, including a
different regulatory, political, and governmental environment, currency
fluctuations, high inflation, price controls, restrictions on profit
repatriation, lower per capita income and spending levels, import duties,
value added taxes, and difficulties in cross-cultural marketing.
- The Company's ability to select in-stock merchandise attractive to
customers.
- Weather affecting retail operations.
- Variations in the level of economic activity affecting employment and
income levels of consumers.
- Seasonality of the Company's business.
Recent Accounting Pronouncements
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements." SAB 101 summarizes the SEC's view
in applying generally accepted accounting principles to selected revenue
recognition issues. We are required to apply the guidance in SAB 101 to our
financial statements no later than the second quarter of 2000. We currently are
reviewing the requirements of SAB 101 and assessing its impact on our
consolidated financial statements. We anticipate reporting the impact in the
second quarter of 2000 as a cumulative effect adjustment to our consolidated
financial statements resulting from a change in accounting principles.
Page 26
Effective in 1997, the Company adopted Statement of Financial Accounting
Standards No. 128 ("SFAS 128") "Earnings per Share" and No. 129 ("SFAS 129")
"Disclosure of Information and Capital Structure." SFAS 128 simplifies the
calculation of basic earnings per common share and diluted earnings per common
share. Additionally, disclosure is required presenting a reconciliation of the
computations for basic and diluted earnings per common share. The change in
calculations did not change the Company's reported earnings per common share
amounts presented in previous filings. SFAS 129 requires disclosure of the
pertinent rights and privileges of all securities other than ordinary common
stock. The Company has disclosed such information in previous years' annual
reports filed on Form 10-K.
In July 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income." The statement addresses the reporting and display of changes in equity
that result from transactions and other economic events, excluding transactions
with owners. The adoption of SFAS No. 130 did not have a material impact on the
Company's financial statements, as comprehensive income was equal to net income
in 1999, 1998 and 1997.
Effective in 1997, the Company adopted Statement of Financial Accounting
Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and
Related Information." The statement addresses reporting of segment information
(See Note 16 to consolidated financial statements).
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 will be effective
in fiscal 2000. The Company is evaluating the effects of the adoption of this
recent pronouncement.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company are included as a
separate section of this Report commencing on page F-1.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Page 27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information Concerning Directors
Name and Age as of March 1, 2000 Position, Business Experience and Directorships
James W. Krause............55 Joined the Company in April 1994 as President and Chief Executive Officer and a
director. He was named Chairman of the Company in June 1995.
David I. Fuente............54 A director since April 1992, Mr. Fuente has been Chairman of the Board and Chief
Executive Officer of Office Depot, Inc. since 1987. He also serves on the Board of
Directors for Ryder Systems, Inc. Mr. Fuente has decided to leave the Board effective
the date of the meeting.
Ronald J. Green............52 A director since December 1990, Mr. Green has been a partner in the accounting firm of
Stephen M. Berman & Associates, Atlanta, Georgia, since 1980.
James E. Kanaley...........58 A director since October 1998, Mr. Kanaley was employed at Bausch & Lomb Inc. from
1978 until his retirement in 1997. From 1990 until 1993, he served as Senior Vice
President and Group President Contact Lens Care, and from 1993 until his retirement he
served as Senior Vice President and President, North American Healthcare.
Campbell B. Lanier, III....49 A director since October 1990, Mr. Campbell B. Lanier, III is Chairman of the Board
and Chief Executive Officer of ITC Holding Company, a telecommunications services
company located in West Point, Georgia. He is also Chairman, Chief Executive Officer
and director of Powertel, Inc. He also serves as a director of EarthLink, Inc.
J. Smith Lanier, II........72 A director since October 1990, Mr. J. Smith Lanier, II is Chairman of J. Smith Lanier
& Co., an insurance sales company. He is also a director of Interface, Inc. Mr. Lanier
is the uncle of Campbell B. Lanier, III.
Peter T. Socha.............40 Mr. Socha joined the Company in October, 1999 as Senior Vice President, Strategic
Planning. Prior to joining the Company he worked as a consultant, and served as
Executive Vice President of COHR, Inc., from May 1998 to October 1998; and as Chief
Credit Officer with Sirrom Capital Corporation, from 1994 to 1997. Mr. Socha became a
director and was appointed Senior Vice President, Strategic Planning and Managed Care
in February 2000.
Page 28
Information Concerning Executive Officers
Name, Age and Position
as of March 1, 2000 Business Experience
------------------- -------------------
James W. Krause 55 See "Information Concerning Directors"
Chairman
and Chief Executive Officer
Michael J. Boden 52 Mr. Boden joined the Company in June 1995 as Vice President, Sales and Marketing and was
Executive Vice President, named a Senior Vice President in February 1998. He was named Senior Vice President,
Retail Operations Leased Retail Operations in February, 1999. From 1992 until joining the Company, he
served as Vice President-- Store Operations of This End Up Furniture Company. He was
appointed to his current position in February 2000.
Richard D. Anderson 41 Mr. Anderson joined the Company in January 1999 and was named Senior Vice President,
Senior Vice President, Real Estate in February 1999. From 1987 until joining the Company, he was employed by
Real Estate W.H. Smith, PLC where he served as Vice President, Real Estate and Vice President,
Development and Construction.
Eduardo A. Egusquiza 47 Mr. Egusquiza joined the Company in March 1998 as Senior Vice President, Information
Senior Vice President, Technology. From 1982 until joining the Company, he was employed by Musicland Stores
Information Technology Corporation, Inc. where he served as Vice President of Information Systems and Services.
Mitchell Goodman 46 Mr. Goodman joined the Company as General Counsel and Secretary in September 1992 and
Senior Vice President, was named a Vice President in November 1993 and Senior Vice President in May 1998.
General Counsel and Secretary
Charles M. Johnson 50 Mr. Johnson joined the Company in October 1997 as Senior Vice President, Manufacturing
Senior Vice President, and Distribution. From 1988 until joining the Company, he was employed by the
Manufacturing and Distribution Sherwin-Williams Company, where he served as Vice President and Director of Research and
Development.
Angus C. Morrison 43 Mr. Morrison joined the Company in February of 1995 as Vice President, Corporate
Senior Vice President, Controller. He was appointed Senior Vice President, Chief Financial Officer and
Chief Financial Officer Treasurer in March 1998. From 1993 until joining the Company, he was Controller and
Senior Financial Officer of the Soap Division of The Dial Corp. He was Controller
and Senior Financial Officer of the Food Division of the same company from 1989
through 1992.
Timothy W. Ranney 47 Mr. Ranney joined the Company in September 1998 and was named Vice President, Corporate
Vice President, Controller in October 1998. From 1991 until joining the Company, he was employed by CVS
Corporate Controller Corporation where he served as Store Controller and then as Director of Financial
Systems.
Peter T. Socha 40 See "Information Concerning Directors"
Senior Vice President,
Strategic Planning and
Managed Care
Robert W. Stein 44 Mr. Stein joined the Company as Director of Human Resources in May 1992. In January
Senior Vice President, 1993, he was appointed Vice President, Human Resources, and was appointed Senior Vice
Human Resources and President in February 1999. He was appointed to his current position in February 2000.
Professional Services
Michael C. Thomas 34 Mr. Thomas joined the Company as Assistant Vice President, Western Region in October,
Senior Vice President, 1993. He was promoted to Senior Vice President, Vista Retail Operations in July of 1999.
Vista Retail Operations
Page 29
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our directors, executive
officers and holders of more than ten percent (10%) of Common Stock to file with
the Securities and Exchange Commission initial reports of ownership and reports
of changes in ownership of Common Stock and other equity securities of the
Company. We believe that, during 1999, our officers, directors and holders of
more than ten percent (10%) of Common Stock complied with all Section 16(a)
filing requirements, except for ITC Service Company, which filed one late report
arising out of one purchase of shares of Common Stock. In making these
statements, we have relied upon the written representations of our directors and
officers and upon copies of reports furnished to the Company.
ITEM 11. EXECUTIVE COMPENSATION
The following table discloses compensation received from the Company by the
Company's Chief Executive Officer, and the Company's four most highly
compensated officers other than the Chief Executive Officer (all such
individuals, collectively, the "named executive officers").
Summary Compensation Table
Long Term Compensation
Annual Compensation ------------------------------------------------
Name and ----------------------------------------- Restricted Securities
Principal Fiscal Other Annual Stock Underlying All Other
Position Year Salary($) Bonus($) Compensation($) Awards($)(1) Options/SARs(#) Compensation($)
-------- ------- --------- -------- --------------- ------------ --------------- ---------------
James W. Krause 1999 375,000 -- -- --(2) 340,000 20,000
Chairman of 1998 368,000 101,500 -- 79,688 250,000 20,000(3)
the Board 1997 338,000 247,000 -- 72,000 50,000 20,000(3)
and Chief
Executive Officer
Michael J. Boden 1999 200,000 -- -- --(4) 12,000 --
Executive Vice 1998 193,000 38,000 -- 26,563 15,000 --
President, 1997 185,000 135,000 -- 24,000 15,000 --
Retail Operations
Eduardo A. Egusquiza 1999 170,000 -- 153,000(5) --(6) 12,000 --
Senior Vice 1998(7) 139,000 36,000 26,563 50,000 --
President,
Information
Technology
Charles M. Johnson 1999 204,000 -- -- --(6) 12,000 --
Senior Vice 1998 197,000 39,000 37,000(8) 26,563 15,000 --
President, 1997(9) 41,000 70,000 -- -- 75,000 --
Manufacturing and
Distribution
Angus C. Morrison 1999 170,000 -- -- --(10) 12,000 --
Senior Vice 1998 160,000 31,000 -- 28,155 25,000 --
President, Chief 1997 107,000 49,000 -- 14,438 10,000 --
Financial Officer
and Treasurer
Page 30
(1) Restricted Stock Awards vest and restrictions lapse after five-year
performance period to the extent and depending upon achievement by the
Company of return on asset goals relative to a comparison group of
companies. For awards made in 1998, restricted shares, to the extent not
vested after five years, vest after ten years of employment. Vesting is
accelerated automatically upon a change of control (as defined). Dividends
(if any are declared) will be paid on restricted stock.
(2) As of January 1, 2000, Mr. Krause had restricted stock holdings
representing 30,000 shares of Common Stock with a value of $30,930.
(3) The Company has executed a "split dollar" insurance agreement with Mr.
Krause. The annual premium (payable by the Company) is $20,000. The term
life portion of this premium is $2,500; the non-term life portion is
$17,500.
(4) As of January 1, 2000, Mr. Boden had restricted stock holdings representing
10,000 shares of Common Stock with a value of $10,310.
(5) $82,000 represents reimbursement of relocation expenses; $71,000 represents
tax reimbursement payments on the foregoing.
(6) As of January 1, 2000, this executive had restricted stock holdings
representing 5,000 shares of Common Stock with a value of $5,155.
(7) Mr. Egusquiza joined the Company in March 1998.
(8) $34,000 represents reimbursement of relocation expenses; $3,000 represents
tax reimbursement payments.
(9) Mr. Johnson joined the Company in October 1997.
(10) As of January 1, 2000, Mr. Morrison had restricted stock holdings
representing 8,000 shares of Common Stock with a value of $8,248.
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information on option grants to the named
executive officers by the Company in 1999. The table also shows the hypothetical
gains or "option spreads" that would exist for the respective options. These
gains are based on assumed rates of annual compound stock price appreciation of
5% and 10% from the date the options were granted over the full option term.
Potential Realizable
Value at Assumed
No. of % of Total Annual Rates of Stock
Securities Options/SARs Price Appreciation
Underlying Granted to for Option Terms($)(2)
Option/SARs Employees in Exercise or Expiration -----------------------
Granted Fiscal Year(1) Base Price($) Date 5% 10%
------------ -------------- ------------------------- ----------- -----------
James W. Krause 300,000(3) 34.0 5.50 4/03/04 456,000 1,008,000
40,000(4) 4.5 5.281 4/22/09 132,760 336,680
Michael J. Boden 12,000(4) 1.4 5.281 4/22/09 39,828 101,004
Eduardo A. Egusquiza 12,000(4) 1.4 5.281 4/22/09 39,828 101,004
Charles M. Johnson 12,000(4) 1.4 5.281 4/22/09 39,828 101,004
Angus C. Morrison 12,000(4) 1.4 5.281 4/22/09 39,828 101,004
Page 31
- --------------------
(1) The Company granted options covering 883,060 shares to employees in 1999.
(2) These amounts represent assumed rates of appreciation only. Actual gains,
if any, on stock option exercises and holdings of Common Stock are
dependent on the future performance of Common Stock and overall stock
market conditions. There can be no assurance that the amounts reflected in
this table will be achieved.
(3) Grant under the Company's Restated Stock Option and Incentive Award Plan.
Option vests 50% first anniversary of grant date and 25% on each of second
and third anniversaries of grant date, subject to continued employment.
(4) Grants under the Company's Restated Stock Option and Incentive Award Plan.
Options vest 50% on second anniversary of grant date and 25% on each of the
third and fourth anniversary of grant date, subject to continued
employment. Expiration date is 10th anniversary of grant date.
FISCAL YEAR END OPTION VALUES
The following table provides information, as of January 1, 2000, regarding
the number and value of options held by the named executive officers.
No. of Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options
Fiscal Year End At Fiscal Year End($)
------------------------------- -------------------------------
Exercisable Unexercisable(1) Exercisable Unexercisable
James W. Krause 112,500 627,500 0 0
Michael J. Boden 68,750 38,250 0 0
Eduardo A. Egusquiza 0 62,000 0 0
Charles M. Johnson 37,500 64,500 0 0
Angus C. Morrison 47,500 44,500 0 0
- --------------------
(1) Shares represented were not exercisable as of January 1, 2000, and future
exercisability is subject to the executive's remaining employed by the
Company for up to four years from grant date of options.
Change in Control Arrangements
The Company has agreements with the named executive officers which provide
severance benefits in the event of termination of employment under certain
circumstances following a change in control of the Company (as defined). The
circumstances are:
- termination by the Company, other than because of death or disability
commencing prior to a threatened change in control (as defined);
- for cause (as defined); or
- by an officer as the result of a voluntary termination (as defined).
Page 32
Following any such termination, in addition to compensation and benefits
already earned, the officer will be entitled to receive a lump sum severance
payment equal to up to three times the officer's annual rate of base salary.
Cause for termination by the Company is the:
- commission of any act that constitutes, on the part of the officer,
(a) fraud, dishonesty, gross negligence, or willful misconduct and
(b) that directly results in material injury to the Company, or
- officer's material breach of the agreement, or
- officer's conviction of a felony or crime involving moral turpitude.
Circumstances which would entitle the officer to terminate as a result of
voluntary termination following a change in control include, among other things:
- the assignment to the officer of any duties inconsistent with the officer's
title and status in effect prior to the change in control or threatened
change in control;
- a reduction by the Company of the officer's base salary;
- the Company's requiring the officer to be based anywhere other than the
Company's principal executive offices;
- the failure by the Company, without the officer's consent, to pay to the
officer any portion of the officer's then current compensation;
- the failure by the Company to continue in effect any material compensation
plan in which the officer participates immediately prior to the change in
control or threatened change in control; or
- the failure by the Company to continue to provide the officer with benefits
substantially similar to those enjoyed by the officer under any of the
Company's life insurance, medical, or other plans.
The term of each agreement is for a rolling three years unless the Company
gives notice that it does not wish to extend such term, in which case the term
of the agreement would expire three years from the date of the notice.
Page 33
REPORT OF THE COMPENSATION COMMITTEE
A. General
The Compensation Committee (the Committee) determines the compensation of
the executive officers of the Company and also administers and makes awards of
equity compensation under Vista's equity programs. None of the members of the
Committee is an officer or employee of the Company.
Compensation Philosophy
The compensation philosophy of the Company is based on the premise that the
Company's achievements result from the coordinated efforts of its employees. The
Company strives to achieve those objectives through teamwork that is focused on
meeting the expectations of customers and shareholders.
Goals of the Compensation Program
The goals of the compensation program are to:
- Link compensation with business objectives and performance
- Enable the Company to attract, retain, and reward executive officers who
contribute to the long-term success of the Company.
Components
The program consists of three components:
- Salaries. Salaries are based on compensation studies of comparable
positions in the Company's market area and on the Committee's assessment of
the individual's performance. Generally, the Company's objective is to set
executive salaries at or near the midpoint of the survey range of salaries
for similar positions at other companies. Salaries are reviewed on an
annual basis.
- Annual Incentive Compensation. The Company has adopted a plan under which
the Committee will award annual incentive compensation only if the Company
has met certain financial goals (based on defined improvement in earnings
per share) and if the executive meets defined individual performance goals.
Both conditions must be met; as a result, if the Company does not meet its
financial goals, the Committee will not approve awards of annual incentive
compensation, even if the executive has met the individual goals.
- Equity Compensation. Each year, the Committee grants stock options to
administrative and field level employees. In 1999, the Committee approved
guidelines for annual grants of stock options to the executive officers of
the Company. These guidelines contemplate annual grants of 40,000 shares to
the chief executive officer and 12,000 to the executive officers of the
Company. The Committee approved these guidelines on the basis of a report
submitted by independent compensation consultants.
Page 34
B. 1999 Compensation Decisions
The Company's financial performance in 1999 had a significant impact on the
Committee's actions this year.
- Salaries. Because of the significant operational and financial issues
facing the Company in 1999, the Committee did not implement any proposed
salary increases. [Because of raises awarded during 1998 (and therefore
applicable to only a portion of 1998), the summary compensation table on
page 30 sets forth different salaries for 1998 and 1999.]
- Annual Incentive Compensation. The Company did not meet its financial goals
for 1999. As a result, the Committee did not approve any awards of
incentive compensation.
- Equity Compensation. In May 1999, the Committee approved annual grants of
stock options to executive officers in the amounts contemplated by the
guidelines described above. In October, the Committee approved a grant of
an option covering 100,000 shares to Mr. Socha in consideration of Mr.
Socha's prior experience as well as the position and duties he would
assume. In addition, in 1999 the Committee approved grants of options to
three executive officers (including Mr. Krause) to replace stock options
which had expired. The earlier grants had been for five-year terms. Because
the Company has changed its policies to provide for options with ten-year
terms, the Committee awarded the replacement options with five-year terms
(at the same exercise price as in the original stock options).
C. Internal Revenue Code
Section 162(m) of the Internal Revenue Code limits to $1 million the
deductibility of compensation paid to the Company's five most highly compensated
officers, unless the Company meets certain requirements. One requirement is that
the Committee consist entirely of outside directors. The Committee meets this
requirement. Because the stock option plan of the Company was approved by our
shareholders, grants of stock options under the Company's stock option plan meet
the requirement that such awards be approved by the shareholders. With respect
to salary compensation under Section 162(m), the Committee has not adopted any
policies because total salary compensation of each executive officer is well
below $1 million.
COMPENSATION COMMITTEE
David I. Fuente (Chairman)
Ronald J. Green
James E. Kanaley
Page 35
PERFORMANCE GRAPH
NOTE: The stock price performance shown on the graph below is not
necessarily indicative of future price performance.
[PERFORMANCE GRAPH WHICH APPEARS HERE IS REPRESENTED BY THE TABLE BELOW.]
CUMULATIVE TOTAL RETURN
Based upon an initial investment of $100 on December 31, 1994
with dividends reinvested
31-Dec-94 30-Dec-95 28-Dec-96 3-Jan-98 2-Jan-99 1-Jan-00
--------- --------- --------- -------- -------- --------
Vista Eyecare, Inc. $100 $80 $110 $160 $143 $28
Nasdaq Composite Index $100 $141 $174 $213 $300 $542
Nasdaq Retail Group $100 $110 $131 $154 $188 $182
SOURCE: GEORGESON SHAREHOLDER COMMUNICATIONS INC.
Page 36
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
COMMON STOCK OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The Company is not aware of any person who, on March 1, 2000, was the
beneficial owner of five percent (5%) or more of outstanding shares of Common
Stock, except as set forth below.
Amount and Nature of Percent
Beneficial Ownership of Class
-------------------- --------
Campbell B. Lanier, III 4,361,187(a)(b) 20.6
Rayna Casey 1,808,152(c) 8.5
- ----------
(a) Includes shares owned by the following individuals and entities, who may be
deemed a "group" within the meaning of the beneficial ownership provisions
of the federal securities laws: Mr. Lanier (836,957 shares); Mr. Lanier's
wife (750 shares); Campbell B. Lanier, IV (25,550 shares); ITC Service
Company (3,356,648 shares); William H. Scott, III (82,782 shares); Martha
J. Scott (28,000 shares, inclusive of 10,000 shares owned by the Scott
Trust, of which Ms. Scott is the sole trustee); William H. Scott, III
Irrevocable Trust F/B/O Martha Scott (the "Scott Trust") (10,000 shares);
Bryan W. Adams (8,000 shares).
(b) Includes 22,500 shares which Mr. Lanier has the right to acquire under the
Company's Non-Employee Director Stock Option Plan.
(c) Includes 159,948 shares owned by a trust of which Ms. Casey is the trustee
and her daughter the beneficiary. Ms. Casey's address is 712 West Paces
Ferry Road, Atlanta, Georgia.
The following table sets forth information, as of March 1, 2000, concerning
beneficial ownership by all directors and nominees, by each of the executive
officers named in the Summary Compensation Table below, and by all directors and
executive officers as a group. Percent of Number of Shares Outstanding Name and
Address of Beneficial Owner(1) Beneficially Owned Common Stock
Campbell B. Lanier, III................. 4,361,187(2)(3) 20.6
James W. Krause......................... 494,444(4) 2.3
J. Smith Lanier, II..................... 302,235(3)(5) 1.4
Ronald J. Green......................... 111,500(3)(6) *
Peter T. Socha.......................... 100,000(7) *
David I. Fuente......................... 50,500(3) *
James E. Kanaley........................ 0 *
Michael J. Boden........................ 96,827(8) *
Angus C. Morrison....................... 59,500(9) *
Charles M. Johnson...................... 58,350(10) *
Eduardo A. Egusquiza.................... 30,000(11) *
All directors and executive officers as a
group (sixteen persons)................. 5,832,753 26.6
Page 37
- --------------------
* Represents less than one percent of the outstanding Common Stock.
(1) Unless otherwise indicated below, the address of the persons named is 296
Grayson Highway, Lawrenceville, GA 30045.
(2) See footnote (a) in table above.
(3) Includes 22,500 shares which this individual has the right to acquire under
the Company's Non-Employee Director Stock Option Plan.
(4) Includes 262,500 shares which Mr. Krause has the right to acquire under the
Company's Restated Stock Option and Incentive Award Plan (the "Plan"). Also
includes 30,000 shares of restricted stock awarded under the Plan.
(5) Includes 1,800 shares owned by Mr. Lanier's wife, as to which he disclaims
beneficial ownership.
(6) Includes 9,000 shares owned by Mr. Green's children, as to which he
disclaims beneficial ownership.
(7) Represents 100,000 shares which Mr. Socha has the right to acquire under
the Plan.
(8) Includes 83,750 shares which Mr. Boden has the right to acquire under the
Plan. Also includes 10,000 shares of restricted stock awarded under the
Plan.
(9) Includes 11,200 shares held as custodian for Mr. Morrison's children,
22,500 shares which Mr. Morrison has the right to acquire under the Plan,
and 8,000 shares of restricted stock awarded under the Plan.
(10) Includes 45,000 shares which Mr. Johnson has the right to acquire under the
Plan and 5,000 shares of restricted stock awarded under the Plan.
(11) Includes 25,000 shares which Mr. Egusquiza has the right to acquire under
the Plan and 5,000 shares of restricted stock awarded under the Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company paid insurance premiums of approximately $1.5 million in 1999
for insurance policies purchased through an agency in which J. Smith Lanier, II,
a director of the Company, has a substantial ownership interest. The Audit
Committee (which has ratified the purchase of insurance by the Company from this
insurance agency) and management of the Company believe that these premiums are
comparable to those which could have been obtained from unaffiliated companies.
Page 38
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) and (2) The Consolidated Financial Statements and Schedule of the
Company and its subsidiaries are filed as a separate section of this Report
commencing on page F-1.
(3) We have filed or incorporated by reference the following exhibits:
Exhibit
Number Description
- ------- -----------
3.1 -- Amended and Restated Articles of Incorporation of the Company, dated
April 8, 1992, along with Articles of Amendment to the Amended and
Restated Articles of Incorporation of the Company dated January 17,
1997, and Articles of Amendment to the Amended and Restated Articles
of Incorporation of the Company dated December 31, 1998, incorporated
by reference to the Company's Form 8-K filed with the Commission on
January 6, 1999.
3.2 -- Amended and Restated By-Laws of the Company, incorporated by reference
to the Company's Registration Statement on Form S-1, registration
number 33-46645, filed with the Commission on March 25, 1992, and
amendments thereto.
4.1 -- Form of Common Stock Certificate, incorporated by reference to the
Company's Registration Statement on Form 8-A filed with the Commission
on January 17, 1997.
4.2 -- Rights Agreement dated as of January 17, 1997 between the Company
and Wachovia Bank of North Carolina, N.A., incorporated by reference
to the Company's Registration Statement on Form 8-A filed with the
Commission on January 17, 1997.
4.3 -- Indenture dated as of October 8, 1998, among the Company, the Guaran-
tors and State Street Bank & Company, as Trustee (including form of
Exchange Note), incorporated by reference to the Company's
Registration Statement on Form S-4, registration number 333-71825,
filed with the Commission on February 5, 1998, and amendments thereto.
4.4 -- Purchase Agreement dated as of October 8, 1998, among the Company, the
Guarantors and the Initial Purchasers, incorporated by reference to
the Company's Registration Statement on Form S-4, registration number
333-71825, filed with the Commission on February 5, 1998, and
amendments thereto.
4.5 -- Registration Rights Agreement dated as of October 8, 1998, among the
Company, the Guarantors and the Initial Purchasers, incorporated by
reference to the Company's Registration Statement on Form S-4,
registration number 333- 71825, filed with the Commission on February
5, 1998, and amendments thereto.
Page 39
10.1 -- Sublease Agreement, dated December 16, 1991, by and between Wal-Mart
Stores, Inc. and the Company, incorporated by reference to the
Company's Registration Statement on Form S-1, registration number
33-46645, filed with the Commission on March 25, 1992, and amendments
thereto.
10.2 -- Form indemnification agreement for directors and executive officers
of the Company, incorporated by reference to the Company's Form 10-K
for the fiscal year ended December 31, 1992.
10.3 -- Vision Center Master License Agreement, dated as of June 16, 1994, by
and between Wal-Mart Stores, Inc. and the Company, incorporated by
reference to the Company's Form 10-Q for the quarterly period ended
September 30, 1994. [Portions of Exhibit 10.3 have been omitted
pursuant to an order for confidential treatment granted by the
Commission. The omitted portions have been filed separately with the
Commission.]
10.4++ -- Split Dollar Life Insurance Agreement, dated as of November 3,
1994, among the Company, A. Kimbrough Davis, as Trustee, and James W.
Krause, incorporated by reference to the Company's Form 10-K for the
fiscal year ended December 31, 1994.
10.5++ -- Level IV Management Incentive Plan, incorporated by reference to
the Company's Form 10-K for the fiscal year ended December 31, 1994.
10.6 -- Agreement dated as of November 23, 1995 by and between Mexican Vision
Associates Operadora, S. de R.L. de C.V. and Wal-Mart de Mexico, S.A.
de C.V. in original Spanish and an uncertified English translation,
incorporated by reference to the Company's Form 10-K for the fiscal
year ended December 30, 1995. [Portions of Exhibit 10.6 have been
omitted pursuant to a request for confidential treatment filed with
the Commission. The omitted portions have been filed separately with
the Commission.]
10.7++ -- Executive Relocation Policy, incorporated by reference to the
Company's Form 10-Q for the quarterly period ended March 30, 1996.
10.8++ -- Restated Stock Option and Incentive Award Plan, incorporated by
reference to the Company's Form 10-Q for the quarterly period ended
June 29, 1996.
10.9++ -- First Amendment to Restated Stock Option and Incentive Award Plan,
incorporated by reference to the Company's Form 10-Q for the quarterly
period ended March 29, 1997.
10.10++-- Form Change in Control Agreement for executive officers of the
Company, incorporated by reference to the Company's Form 10-K for the
fiscal year ended December 28, 1996.
Page 40
10.11++-- Form Restricted Stock Award, incorporated by reference to the
Company's Form 10-Q for the quarterly period ended March 29, 1997.
10.12++-- Restated Non-Employee Director Stock Option Plan, incorporated by
reference to the Company's Form 10-Q filed on June 28, 1997.
10.13++-- Executive Deferred Compensation Plan, incorporated by reference to the
Company's Form 10-K for the fiscal year ended January 3, 1998.
10.14 -- Credit Agreement dated October 8, 1998 by and among the Company,
Bank of America, FSB, First Union National Bank and the financial
institutions listed hereto, incorporated by reference to the Company's
Registration Statement on Form S-4, registration number 333-71825,
filed with the Commission on February 5, 1999, and amendments thereto.
10.15**-- Amended and Restated Credit Agreement dated as of November 12, 1999 by
and between the Company and Foothill Capital Corporation.
10.16**-- Agreement dated as of September 9, 1999, by and among the Company, ITC
Service Company, and Campbell B. Lanier, III.
21** -- Subsidiaries of the Registrant.
23** -- Consent by Arthur Andersen LLP.
27** -- Financial Data Schedule.
** Filed with this Form 10-K.
++ Management contract or compensatory plan or arrangement in which a director
or named executive officer participates.
(b) The following reports on Form 8-K have been filed during the last
quarter of the period covered by this report:.
Date of Report Item Reported Financial Statements Filed
-------------- ------------- --------------------------
October 19, 1999 Item 5 None
Page 41
VISTA EYECARE, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
AS OF JANUARY 1, 2000, JANUARY 2, 1999 AND JANUARY 3, 1998
TOGETHER WITH
AUDITORS' REPORT
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
The following consolidated financial statements and schedule of the
registrant and its subsidiaries are submitted herewith in response to Item 8 and
Item 14(a)1 and to Item 14(a)2, respectively.
Page
----
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of January 1, 2000 and
January 2, 1999 F-3
Consolidated Statements of Operations for the
Years Ended January 1, 2000, January 2, 1999 and
January 3, 1998 F-5
Consolidated Statements of Shareholders' Equity for the
Years Ended January 1, 2000, January 2, 1999 and
January 3, 1998 F-6
Consolidated Statements of Cash Flows for the
Years Ended January 1, 2000, January 2, 1999 and
January 3, 1998 F-7
Notes to Consolidated Financial Statements and Schedule F-8
Schedule II, Valuation and Qualifying Accounts F-36
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions, are inapplicable, or have been disclosed in the notes to
consolidated financial statements and, therefore, have been omitted.
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Vista Eyecare, Inc.
and Subsidiaries:
We have audited the accompanying consolidated balance sheets of VISTA
EYECARE, INC. (a Georgia corporation) AND SUBSIDIARIES as of January 1, 2000 and
January 2, 1999 and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended January 1, 2000. These financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Vista Eyecare, Inc. and
subsidiaries as of January 1, 2000 and January 2, 1999 and the results of their
operations and their cash flows for each of the three years in the period ended
January 1, 2000 in conformity with accounting principles generally accepted in
the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company incurred a net loss in 1999 and has a net
working capital deficiency of approximately $11.7 million at January 1, 2000. In
addition, the Company filed voluntary petitions with the United States
Bankruptcy Court for reorganization under Chapter 11. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are described in Note 3. The
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
consolidated financial statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 17, 2000
(except for the matter
discussed in Note 3,
as to which the date
is April 5, 2000)
F-2
VISTA EYECARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 1, 2000 and January 2, 1999
(In thousands except share information)
1999 1998
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,886 $ 7,072
Accounts receivable (net of allowance: 1999 - $4,403; 1998 - $1,516) 10,416 10,135
Inventories 34,373 31,670
Other current assets 2,761 2,899
---------- ----------
Total current assets 50,436 51,776
---------- ----------
PROPERTY AND EQUIPMENT:
Equipment 57,750 54,396
Furniture and fixtures 26,600 23,124
Leasehold improvements 28,458 26,806
Construction in progress 3,427 2,022
---------- ----------
116,235 106,348
Less accumulated depreciation (62,329) (48,305)
---------- ----------
Net property and equipment 53,906 58,043
OTHER ASSETS AND DEFERRED COSTS
(net of accumulated amortization: 1999 - $1,500; 1998 - $1,292) 9,315 9,953
DEFERRED INCOME TAX ASSET 385 385
GOODWILL AND OTHER INTANGIBLE ASSETS
(net of accumulated amortization: 1999 - $6,994; 1998 - $2,544) 106,177 108,940
---------- ----------
$ 220,219 $ 229,097
========== ==========
F-3
1999 1998
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 17,192 $ 18,925
Accrued expenses and other current liabilities 24,568 26,637
Current portion other long-term debt and capital lease obligations 1,098 2,006
Revolving credit facility and term loan 19,292 --
--------- ---------
Total current liabilities 62,150 47,568
--------- ---------
SENIOR NOTES (net of discount: 1999 - $1,253; 1998 - $1,391) 123,747 123,609
REVOLVING CREDIT FACILITY -- 6,000
OTHER LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 6,865 7,223
COMMITMENTS AND CONTINGENCIES (Note 11)
REDEEMABLE COMMON STOCK 900 770
SHAREHOLDERS' EQUITY:
Preferred stock, $1 par value; 5,000,000 shares authorized, none issued -- --
Common stock, $0.01 par value, 100,000,000 shares authorized, 21,179,103
and 21,166,612 shares issued and outstanding as of January 1, 2000 and
January 2, 1999, respectively 211 211
Additional paid-in capital 47,387 47,195
Retained (deficit)earnings (16,968) 594
Accumulated other comprehensive income (4,073) (4,073)
--------- ---------
Total shareholders' equity 26,557 43,927
--------- ---------
$ 220,219 $ 229,097
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
VISTA EYECARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended January 1, 2000, January 2, 1999, and January 3, 1998
(In thousands except per share information)
For the years ended
---------------------------------------
January 1, January 2, January 3,
2000 1999 1998
---------- ---------- ----------
NET SALES $ 329,055 $ 245,331 $ 186,354
COST OF GOODS SOLD 147,768 112,929 86,363
---------- ---------- ----------
GROSS PROFIT 181,287 132,402 99,991
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE 177,162 121,413 89,156
IMPAIRMENT LOSS ON LONG-LIVED ASSETS 1,952 -- --
---------- ----------- ----------
OPERATING INCOME 2,173 10,989 10,835
INTEREST EXPENSE, NET 19,329 5,538 1,554
---------- ---------- ----------
INCOME/(LOSS) BEFORE INCOME TAXES (17,156) 5,451 9,281
INCOME TAX EXPENSE -- 2,037 3,708
---------- ---------- ----------
NET INCOME/(LOSS) BEFORE EXTRAORDINARY ITEM $ (17,156) $ 3,414 $ 5,573
EXTRAORDINARY LOSS, NET OF TAXES (406) -- --
---------- ---------- ----------
NET INCOME/(LOSS) $ (17,562) $ 3,414 $ 5,573
========== ========== ==========
BASIC EARNINGS/(LOSS) PER SHARE:
EARNINGS/(LOSS) BEFORE EXTRAORDINARY ITEM $ (0.81) $ 0.16 $ 0.27
EXTRAORDINARY LOSS (0.02) -- --
---------- ---------- ----------
NET EARNINGS/(LOSS)PER BASIC SHARE $ (0.83) $ 0.16 $ 0.27
========== ========== ==========
DILUTED EARNINGS/(LOSS) PER SHARE:
EARNINGS/(LOSS) BEFORE EXTRAORDINARY ITEM $ (0.81) $ 0.16 $ 0.27
EXTRAORDINARY LOSS (0.02) -- --
---------- ---------- ----------
NET EARNINGS/(LOSS)PER DILUTED SHARE $ (0.83) $ 0.16 $ 0.27
========== ========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
VISTA EYECARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended January 1, 2000, January 2, 1999, and January 3, 1998
(In thousands except share information)
Accumulated
Common Stock Additional Retained Other
---------------------- Paid-In Earnings Comprehensive
Shares Amount Capital (Deficit) Income Total
------ ------ ---------- --------- ----------- --------
BALANCE, December 28, 1996 20,644,752 $ 206 $ 42,166 $ (8,393) $ (4,073) $ 29,906
Issuance of common stock 110,795 66 66
Awards of restricted stock 54,000 1 35 36
Exercise of stock options 10,408 17 17
Net income 5,573 5,573
---------- ------ -------- --------- --------- --------
BALANCE, January 3, 1998 20,819,955 207 42,284 (2,820) (4,073) 35,598
Awards of restricted stock 52,000 1 121 122
Exercise of stock options 294,657 3 1,482 1,485
Tax settlement (see Note 11) 3,308 3,308
Net income 3,414 3,414
---------- ------ -------- --------- --------- --------
BALANCE, January 2, 1999 21,166,612 211 47,195 594 (4,073) 43,927
Restricted stock 136 136
Exercise of stock options 12,491 56 56
Net loss (17,562) (17,562)
---------- ------ -------- --------- --------- --------
BALANCE, January 1, 2000 21,179,103 $ 211 $ 47,387 $ (16,968) $ (4,073) $ 26,557
========== ====== ======== ========= ========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
VISTA EYECARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended January 1, 2000, January 2, 1999, and January 3, 1998
(In thousands)
1999 1998 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $(17,562) $ 3,414 $ 5,573
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization 18,602 14,177 11,035
Provision for deferred income tax expense -- 1,173 1,441
Impairment of long-lived assets 1,952 -- --
Extraordinary loss 406 -- --
Other (459) 936 319
Changes in operating assets and liabilities, net of
effects of acquisitions:
Receivables (281) (1,504) (875)
Inventories (2,703) 1,304 2,031
Store preopening costs -- -- (643)
Other current assets 138 (1,630) 612
Accounts payable (1,733) (410) (1,872)
Accrued expenses (2,069) (7,691) 3,117
-------- -------- --------
Total adjustments 13,853 6,355 15,165
-------- -------- --------
Net cash (used in) provided by operating activities (3,709) 9,769 20,738
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (12,704) (9,183) (8,049)
Acquisitions, net of cash acquired -- (97,357) (1,772)
Proceeds from sale of property and equipment 955 -- --
Payment for non-competition agreement -- -- (484)
Purchase of assignment agreement -- -- (500)
-------- -------- --------
Net cash used in investing activities (11,749) (106,540) (10,805)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of senior notes, net of discount -- 123,580 --
Advances on revolving credit facility 79,238 52,500 5,500
Repayments on revolving credit facility (65,946) (66,000) (12,500)
Principal payment on notes payable and capital leases (1,265) (436) (1,450)
Proceeds from exercise of stock options 56 1,485 17
Deferred financing costs (811) (9,845) (51)
-------- -------- --------
Net cash provided by (used in) financing activities 11,272 101,284 (8,484)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH (4,186) 4,513 1,449
CASH, beginning of year 7,072 2,559 1,110
-------- -------- --------
CASH, end of year $ 2,886 $ 7,072 $ 2,559
======== ======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
F-7
VISTA EYECARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
1. ORGANIZATION AND OPERATIONS
Vista Eyecare, Inc., formerly National Vision Associates, Ltd., (the
"Company") is engaged in the retail sale of optical goods and services. The
Company is largely dependent on Wal-Mart Stores, Inc. ("Wal-Mart") for continued
operation of vision centers which generate a significant portion of the
Company's revenues (See Note 5). In October 1997, the Company acquired the
capital stock of Midwest Vision, Inc., a retail optical company with 51
locations in Minnesota and three adjoining states. In July 1998, the Company
acquired the capital stock of Frame-n-Lens Optical, Inc., which operated
approximately 280 vision centers, mainly in the western United States. In
October 1998, the Company acquired the capital stock of New West Eyeworks, Inc.
which operated approximately 175 vision centers in 13 states (See Note 6).
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation. The Company operates on a 52/53 week
retail calendar with the fiscal year ending on the Saturday closest to December
31. Pursuant to such calendar, financial information for each of 1998 and 1996
is presented for the 52-week period ended January 2 and December 28,
respectively. Fiscal 1997 consisted of 53 weeks ended January 3, 1998. Due to
various statutory and other considerations, international operations were not
changed to this 52/53 week calendar. To allow for more timely consolidation and
reporting, international operations are reported using a fiscal year ending
November 30.
Certain amounts in the January 2, 1999 and January 3, 1998 consolidated
financial statements have been reclassified to conform to the January 1, 2000
presentation.
Revenue Recognition
The Company recognizes revenues and the related costs from retail sales
when at least 50% of the payment has been received.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements." SAB 101 summarizes the SEC's view
in applying generally accepted accounting principles to selected revenue
recognition issues. The Company is required to apply the guidance in SAB 101 to
the financial statements no later than the second quarter of 2000. The Company
is currently reviewing the requirements of SAB 101 and assessing its impact on
the consolidated financial statements. The Company anticipates reporting the
impact in the second quarter of 2000 as a cumulative effect adjustment to the
consolidated financial statements resulting from a change in accounting
principles.
F-8
Cash and Cash Equivalents
The Company considers cash on hand, short-term cash investments, and checks
that have not been processed by financial institutions to be cash and cash
equivalents. The aggregate amount of outstanding checks not processed at January
1, 2000 was $556,000 (at January 2, 1999 - $816,000). The Company's policy is to
maintain uninvested cash at minimal levels. Cash includes cash equivalents which
represent highly liquid investments with a maturity of one month or less. The
carrying amount approximates fair value. The Company restricts investment of
temporary cash investments to financial institutions with high credit standings.
Inventories
Inventories are valued at the lower of weighted average cost or market.
Market represents the net realizable value.
Store Preopening Costs
Prior to 1998, preopening costs which were directly associated with the
opening of new vision centers have been capitalized and amortized using the
straight-line method over 12 months beginning with the commencement of each
vision center's operations. The average cost capitalized per vision center
approximated $20,000. Effective in 1998, preopening costs are expensed as
incurred in accordance with AICPA Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities."
Property and Equipment
Property and equipment are stated at cost. For financial reporting
purposes, depreciation is computed using the straight-line method over the
assets' estimated useful lives or terms of the related leases, whichever is
shorter. Accelerated depreciation methods are used for income tax reporting
purposes. For financial reporting purposes, the useful lives used for
computation of depreciation range from five to ten years for equipment, from
three to nine years for furniture and fixtures, from three to six years for
hardware and software related to information systems processing, and from five
to nine years which approximate the remaining lease term for leasehold
improvements. At the time property and equipment are retired, the cost and
related accumulated depreciation are removed from the accounts and any gain or
loss is credited or charged to income. Periodically, the Company evaluates the
net book value of property and equipment for impairment. This evaluation is
performed for retail locations and compares management's best estimate of future
cash flows with the net book value of the property and equipment. See Note 4 for
a discussion of impaired property and equipment in 1999. Maintenance and repairs
are charged to expense as incurred. Replacements and improvements are
capitalized.
F-9
Balance Sheet Financial Instruments: Fair Values
The carrying amount reported in the consolidated balance sheets for cash,
accounts receivable, accounts payable and short-term debt approximates fair
value because of the immediate or short-term maturity of these financial
instruments. The carrying amount reported for "Revolving Credit Facility-
Long-Term" approximates fair value because the underlying instrument is a
variable rate note that reprices frequently. The fair value of the Company's
previous fixed interest rate swap agreements and fixed rate debt was based on
estimates using standard pricing models that take into consideration current
interest rate market conditions supplied by independent financial institutions.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade accounts receivable.
The risk is limited due to the large number of individuals and entities
comprising the Company's customer base.
Goodwill and other Intangible Assets
Goodwill and other intangible assets represent the excess of the cost of
net assets acquired in certain contract transactions and business acquisitions
over their fair value. Such amounts are amortized over periods ranging from 11
years to 30 years. The Company periodically evaluates the carrying value of
goodwill and other intangible assets based on the expected future undiscounted
operating cash flows of the related business unit.
Income Taxes
Deferred income taxes are recorded using current enacted tax laws and
rates. Deferred income taxes are provided for depreciation, inventory basis
differences, and accrued expenses where there is a temporary difference in
recording such items for financial reporting and income tax reporting purposes.
Other Deferred Costs
Other deferred costs include capitalized financing costs which are being
amortized on a straight line basis over periods from three to seven years to
correspond with the terms of the underlying debt. In addition, certain
capitalized assets resulting from contractual obligations are included and are
being amortized on a straight line basis over periods of up to five years.
Advertising and Promotion Expense
Production costs of future media advertising and related promotion
campaigns are deferred until the advertising events occur. All other advertising
and promotion costs are expensed over the course of the year in which they are
incurred.
Interest Expense, Net
Interest expense includes interest on debt and capital lease obligations,
purchase discounts on invoice payments, the amortization of finance fees, as
well as hedge and swap agreements, and the amortization of the discount on the
senior notes.
F-10
Foreign Currency Translation
The financial statements of foreign subsidiaries are translated into U.S.
dollars in accordance with Statement of Financial Accounting Standards No. 52
("SFAS No. 52"). Translation adjustments, which result from the process of
translating foreign financial statements into U.S. dollars, are accumulated as a
separate component of other comprehensive income.
Other Comprehensive Income
In July 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income." The statement addresses the reporting and display of changes in equity
that result from transactions and other economic events, excluding transactions
with owners. The adoption of SFAS No. 130 did not have a material impact on the
Company's financial statements, as comprehensive income was equal to net income
in 1999, 1998 and 1997.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. SUBSEQUENT EVENTS AND GOING CONCERN MATTERS
Proceedings Under Chapter 11 of the Bankruptcy Code
On April 5, 2000, the Company and ten of its subsidiaries (collectively,
the "Debtors") filed voluntary petitions with the United States Bankruptcy Court
for the Northern District of Georiga for reorganization under Chapter 11 (the
"Chapter 11 Cases"). The Chapter 11 Cases have been consolidated for the purpose
of joint administration under Case No. 00-65214. The Debtors are currently
operating their businesses as debtors-in-possession pursuant to the Bankruptcy
Code. All affiliated entities of the Company are included in the Chapter 11
Cases, except only (a) three subsidiaries which are licensed managed care
organizations and (b) foreign subsidiaries of the Company.
The Debtors expect to file a reorganization plan or plans that provide for
emergence from bankruptcy in 2000 or 2001. Management anticipates that its
reorganization plan will include closing additional under-performing stores and
restructuring the Company's debt and equity. There can be no assurance that a
reorganization plan or plans will be proposed by the Debtors or confirmed by the
Bankruptcy Court, or that any such plan(s) will be consummated. A plan of
reorganization could result in holders of the Common Stock receiving no value
for their interests. Because of such possibilities, the value of the Common
Stock is highly speculative.
F-11
Debtor-in Possession Financing
On April 5, 2000, the Bankruptcy Court entered an interim order permitting
the Company to enter into debtor-in possession financing with Foothill Capital
Corporation (the "DIP Facility"). The DIP Facility remains subject to final
Bankruptcy Court approval. A hearing for this purpose has been set for May 3,
2000. See Item 1 - "Business - Chapter 11 Cases." If and when approved by the
Bankruptcy Court in a final order, the DIP Facility will refinance all amounts
previously outstanding under the Foothill Credit Facility and provide additional
working capital. As of April 5, 2000, the Company had borrowed a total of $15.4
million (inclusive of the $12.5 million term loan portion) under the Foothill
Credit Facility.
Under the facility, the Company may borrow up to $25 million (inclusive of
amounts outstanding under the Foothill Credit Facility), subject to certain
limitations, to fund ongoing working capital needs while it prepares a
reorganization plan. The DIP Facility includes a maximum of $12.5 million in
revolving loans. The DIP Facility also contains a $12.5 million term loan
bearing interest at 15% per annum. The DIP Facility requires that the Company
have a rolling twelve month EBITDA of no less than $15 million during its term,
which expires on May 31, 2001. Events occuring in the Chapter 11 Cases could
result in earlier termination. The DIP Facility includes a $4 million
sub-facility for letters of credit. Interest rates on the revolver portion of
the DIP Facility are based on either the Wells Fargo Bank, N.A. Base Rate plus
2% or the Adjusted Eurodollar Rate plus 3.25%. The DIP Facility is secured by
substantially all of the assets of the Company and its subsidiaries, subject
only to valid, enforceable, subsisting and non-voidable liens of record as of
the date of commencement of the Chapter 11 Cases and other liens permitted under
the DIP Facility.
The DIP Facility contains customary covenants including, among others,
covenants restricting the incurrence of indebtedness, the creation or existence
of liens, the guarantee of other indebtedness, the declaration or payment of
dividends, the repurchase or redemption of debt and equity securities of the
Company, change in business activities, affiliate transactions, change in key
management and certain corporate transactions, such as sales and purchases of
assets, mergers, or consolidations. The DIP Facility also limits capital
expenditures, investments, prepayments of other indebtedness, and requires the
delivery of financial and other information to Foothill. The DIP Facility also
contains certain customary default provisions and also specifies certain
possible occurrences in the Chapter 11 Cases which could result in events of
default.
Availability under the DIP Facility is limited to certain percentages of
accounts receivable and inventory, subject to other limitations based on rolling
twelve-month historical EBIDTA and rolling 60-day cash collections.
F-12
The Company believes the DIP Facility (if approved by the Bankruptcy Court
in a final order) should provide it with adequate liquidity to conduct its
operations while it prepares a reorganization plan. However, the Company's
liquidity, capital resources, results of operations and ability to continue as a
going concern are subject to known and unknown risks and uncertainties. See Item
7 - "Management's Discussion and Analysis and Results of Operations - Risk
Factors."
Going Concern Matters
The accompanying consolidated financial statements have been prepared on a
going concern basis of accounting and do not reflect any adjustments that might
result if the Company is unable to continue as a going concern. The Company's
recent losses and negative cash flows from operations, and the Chapter 11 Cases,
raise substantial doubt about the Company's ability to continue as a going
concern. As discussed above, management intends to submit a plan for
reorganization to the Bankruptcy Court. The ability of the Company to continue
as a going concern and appropriateness of using the going concern basis is
dependent upon, among other things, (i) the Company's ability to obtain and
comply with debtor-in-possession financing agreements, (ii) confirmation of a
plan of reorganization under the Bankruptcy Code, (iii) the Company's ability to
achieve profitable operations after such confirmation, and (iv) the Company's
ability to generate sufficient cash from operations to meet its obligations.
Management believes that, subject to the approval of the Bankruptcy Court,
the DIP Facility, along with cash provided by operations, will provide
sufficient liquidity to allow the Company to continue as a going concern;
however, there can be no assurance that the sources of liquidity will be
available or sufficient to meet the Company's needs. The consolidated financial
statements do not include any adjustments relating to recoverability and
classification of recorded asset amounts or the amount and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern.
A plan of reorganization could materially change the amounts currently
recorded in the consolidated financial statements. The consolidated financial
statements do not give effect to any adjustment to the carrying value of assets
or amounts and classifications of liabilities that might be necessary as a
result of the Chapter 11 Cases.
4. SIGNIFICANT PROVISIONS
Provision for Managed Care Receivables
--------------------------------------
During 1999, the Company continued its efforts with its third party
processor to timely collect managed care receivable accounts. In the fourth
quarter, management concluded these efforts were not achieving anticipated
results and, consequently, determined an additional provision for doubtful
accounts was warranted.
F-13
Impairment loss of long-lived assets
------------------------------------
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of" ("SFAS 121"), the Company periodically reviews the recorded
value of its long-lived assets to determine if the future cash flows derived
from these properties will be sufficient to recover the remaining recorded asset
values. As a result of this review in the fourth quarter of 1999, the Company
recorded a noncash pre-tax charge of $1.9 million. The write-down primarily
represents leasehold improvements and furniture and fixtures for 36
under-performing stores. The 36 stores are concentrated in Florida and
California. Factors leading to the impairment of these assets included a
combination of historical losses, anticipated future losses and inadequate cash
flows.
Extraordinary Item
------------------
The Company recorded an extraordinary loss of $406,000 as a result of
refinancing the Company's revolving credit facility. (See Note 8). This
necessitated the write-off of capitalized costs associated with the previous
credit facility. Due to the Company's decision to fully reserve for the 1999 tax
benefit, the net tax effect on the extraordinary item is zero.
5. WAL-MART MASTER LICENSE AGREEMENT AND OTHER AGREEMENTS
Wal-Mart Agreement
------------------
In 1994, the Company and Wal-Mart replaced their original agreement with a
new master license agreement (the "Wal-Mart Agreement"), which increased minimum
and percentage license fees payable by the Company and also granted the Company
the opportunity to operate up to 400 vision centers in existing and future
Wal-Mart stores (379 vision centers were in operation under the Wal-Mart
Agreement at fiscal year end 1999). In January 1995, the Company made a lump sum
payment in exchange for such opportunity. The payment is being amortized over
the initial term of the vision centers opened subsequent to January 1, 1995. In
1997, the Wal-Mart Agreement was amended to provide that Wal-Mart must, by April
1, 2000, grant the Company the opportunity to operate 400 vision centers under
the Wal-Mart Agreement, and that, with one exception, all new vision centers
opened after 1997 will be located in California and North Carolina. Each vision
center covered by the Wal-Mart Agreement has a separate license. Pursuant to the
Wal-Mart Agreement, the term of each such license is nine years with a renewable
option for one additional three-year term. Percentage license fees remain the
same over the nine-year base term and three- year option term, whereas minimum
license fees increase during the three-year option term.
F-14
Consulting and Management Agreement
-----------------------------------
Among other things, the Wal-Mart Agreement requires an independent,
licensed optometrist to practice adjacent to or near each of the Company's
vision centers for at least 48 hours per week. In 1990, the Company entered into
a long-term consulting and management service agreement, as amended, with two
companies (Eyecare Leasing, Inc. ("ELI") and Stewart-Phillips, Inc. ("SPI"))
jointly owned by two shareholders to recruit such optometrists for certain of
its vision centers. Subject to applicable state regulations, this agreement,
among other things, required the Company to provide space and certain equipment
to the optometrists for which the optometrists pay the Company an occupancy fee.
In exchange for their services, ELI and SPI received certain fees under the
agreement. The net payments offset occupancy expense incurred by the Company.
Occupancy expense is a component of cost of goods sold.
In January 1997, the Company completed various transactions related to its
relationship with each of ELI and SPI. The transactions involved the termination
of such consulting agreement and transfer of the responsibilities of ELI and SPI
to a subsidiary of the Company. As a result of these transactions, the Company
acquired the right to the payments which otherwise would have been made to ELI
and SPI under the consulting agreement. The aggregate cost of the transactions
was $4.6 million, which was capitalized as an intangible asset and is being
amortized over the remaining life of the original term of vision center leases.
The Company made a lump sum payment of $500,000 at closing and entered into
promissory obligations for the balance, payable over a 12-year period at 6.4%
interest.
Mexico Agreement
----------------
In 1994, the Company opened 8 vision centers in stores owned and operated
by Wal-Mart de Mexico, S.A. de C.V. ("Wal-Mart de Mexico"). In 1995, the Company
completed the negotiation of a master license agreement governing these vision
centers. Pursuant to this agreement, each vision center has an individual base
term of five years from the date of opening, followed by two options (each for
two years), and one option for one year. Each party has the right to terminate a
location which fails to meet specified sales levels. The agreement provides for
annual fees based on a minimum and percentage of sales. The agreement also gives
the Company a right of first refusal to open vision centers in all stores in
Mexico owned by Wal-Mart de Mexico. As of January 1, 2000, the Company operated
27 vision centers in Wal- Mart de Mexico stores.
Sam's Club
----------
The Company also operates 111 vision centers in Sam's Club stores in 21
states. Each such vision center is subject to a separate lease, which provides
for payment of percentage and minimum rent and other customary terms and
conditions. The leases for these vision centers began expiring in 1998 and the
term for the remaining leases will expire at various times through 2003. The
Company has no option or right to extend the term of these leases.
F-15
Fred Meyer
----------
The Company operates 54 leased vision centers in stores owned by Fred Meyer
pursuant to a master license agreement. The agreement provides for minimum and
percentage rent and other customary terms and conditions. The term of the
agreement is for five years (expiring December 31, 2003), with a five-year
option.
6. ACQUISITIONS
On July 28, 1998, the Company acquired all the outstanding capital stock of
Frame-n-Lens Optical, Inc. ("Frame-n-Lens") in a transaction accounted for as a
purchase business combination. Prior to the acquisition, Frame-n-Lens operated
approximately 280 retail optical centers in 23 states. The aggregate purchase
price was $50 million of which $23 million was paid in cash and additional
borrowings from the Company's credit facilities, $24 million was assumed in debt
and liabilities, and $3 million was established as a deferred purchase
obligation to be paid in quarterly installments over six years.
The Company has deposited installment payments of the deferred purchase
obligation into a separate Company bank account. As of January 1, 2000, the
Company had deposited a total of $833,000 which is included in the Company's
cash balance. The Company has the right to withhold payment of the deferred
purchase obligation based upon the identification of any undisclosed
liabilities. The Company is currently defending a class-action lawsuit which was
filed against Frame-n-Lens and which was not disclosed to the Company at the
time of acquisition. Although management cannot predict the outcome of this
litigation, we believe that the amount accrued for the deferred purchase
obligation will be sufficient to cover any costs incurred related to this
lawsuit.
The excess of cost over fair value of assets acquired was $41 million, and
is being amortized over 30 years using the straight-line method. At the date of
acquisition the assets of Frame-n-Lens included approximately $9 million of
goodwill. Frame-n-Lens' financial position and results of operations are
included with those of the Company for the periods subsequent to the date of the
acquisition.
On October 23, 1998, the Company acquired all the outstanding capital stock
of New West Eyeworks, Inc. ("New West") in a transaction accounted for as a
purchase business combination. Prior to the acquisition, New West operated
approximately 175 retail optical centers in 13 states. The aggregate purchase
price was $79 million, including the assumption of certain indebtedness and
acquisition-related expenses which were paid with a portion of the proceeds of
the Company's 12 3/4% Senior Notes due 2005 (the "Notes") (See Note 8 to
consolidated financial statements). In September 1999, the Company sold the
Tempe manufacturing facility acquired from New West Eyeworks for approximately
$1 million.
F-16
The excess of cost over fair value of the assets acquired was $64 million
and is being amortized over 30 years using the straight-line method. New West's
financial position and results of operations are included with those of the
Company in the period subsequent to the date of the acquisition.
The following summary prepared on an unaudited basis presents the results
of operations of the Company combined with Frame-n-Lens and New West as if the
acquisitions had occurred at the beginning of the periods presented, after the
impact of certain adjustments. These adjustments include 1) the cost savings
related to the consolidation of duplicative manufacturing and administrative
support facilities, 2) the amortization of goodwill, 3) increased interest
expense on the acquisition debt, 4) elimination of interest on debt repaid with
proceeds from the Notes and 5) the related income tax effects for the following
year ended (amounts in thousands, except per share amounts):
January 2, January 3,
1999 1998
(unaudited) (unaudited)
------------- -----------
Net sales $ 325,670 $ 313,937
Operating income $ 15,831 $ 18,518
Net (loss) $ (2,811) $ (475)
(Loss) per share $ (0.13) $ (0.02)
- -----------------------------------------------------------------------
The pro forma results are not necessarily indicative of what actually would
have occurred if the acquisitions had occurred as of the beginning of the
periods presented.
In October 1997, the Company acquired all the outstanding common stock of
Midwest Vision, Inc. ("Midwest") in a transaction accounted for as a purchase
business combination. Prior to the acquisition, Midwest operated 51 retail
optical centers in Minnesota, Wisconsin, Iowa and North Dakota. The aggregate
purchase price was approximately $5 million, including assumed long-term debt of
approximately $1 million. The excess of cost over fair value of the assets
acquired was $2 million and is being amortized on a straight-line basis over 15
years. The purchase price was paid in cash of $2 million, a note payable of $0.6
million and 110,975 shares of the Company's common stock. In addition, the
Company issued a put option to the seller, entitling the seller to put 100,000
of such shares to the Company at $9.00 per share in January 2000. Subsequent to
January 1, 2000, the seller exercised the put option. The Company has not paid
this obligation. Any claims asserted by the seller will be addressed during the
Company's Chapter 11 proceedings. (See Note 3 to Consolidated Financial
Statements.) The additional obligation has been reflected as redeemable common
stock.
F-17
7. INVENTORY
The Company classifies inventory as finished goods if such inventory is
readily available for sale to customers without assembly or value added
processing. Finished goods include contact lenses, over the counter sunglasses
and accessories. The Company classifies inventory as raw material if such
inventory requires assembly or value added processing. This would include
grinding a lens blank, "cutting" the lens in accordance with a prescription from
an optometrist, and fitting the lens in a frame. Frames and uncut lens are
considered raw material. A majority of the Company's sales represent custom
orders; consequently, the majority of the Company's inventory is classified as
raw material.
Inventory balances, by classification, may be summarized as follows
(amounts in thousands):
1999 1998
--------- ---------
Raw material $ 24,408 $ 22,814
Finished goods 8,804 7,634
Supplies 1,161 1,222
--------- ---------
$ 34,373 $ 31,670
========= =========
8. LONG-TERM DEBT
Senior Notes
------------
On October 8, 1998, the Company issued its $125 million 12 3/4% Senior
Notes due 2005 (the "Notes") pursuant to Rule 144A of the Securities Act. The
Notes, which were sold at a discount for an aggregate price of $123.6 million,
require semiannual interest payments commencing on April 15, 1999. The Notes
were issued pursuant to an indenture containing customary provisions including:
limitations on incurrence of additional indebtedness; limitations on restricted
payments; limitations on asset sales; payment restrictions affecting
subsidiaries; limitations on liens; limitations on transactions with affiliates;
and other customary terms. In the event of a Change of Control (as defined), the
Company will be required to offer to repurchase the Notes at a purchase price
equal to 101% of the principal amount thereof, plus accrued and unpaid interest.
The Notes are guaranteed by a majority of the Company's subsidiaries and are
redeemable at the option of the Company, in whole or in part, at 105% of their
principal amount beginning October 15, 2003 and at 100% on or after October 15,
2004. In addition, the Company may, at its option, redeem up to 35% of the
Notes, plus accrued interest, with the net cash proceeds of one or more equity
offerings at a redemption price equal to 112.75% of the principal amount (see
Note 9 for financial information of guarantors).
A portion of the proceeds from the Notes was utilized to extinguish
outstanding indebtedness on the Company's existing credit facility (such credit
facility was terminated simultaneously with the repayment), with the remainder
to be utilized to complete the acquisition of New West and pay for miscellaneous
expenses related to the acquisitions of Frame-n-Lens and New West.
F-18
In anticipation of the Notes offering, the Company entered into three
anticipatory hedging transactions with a notional amount of $100 million. The
interest rates on these instruments were tied to U.S. Treasury securities and
ranged from 5.43% to 5.62%. The Company settled these transactions for
approximately $4.6 million. The settlement costs are being treated as deferred
financing costs amortized over the life of the Notes.
Foothill Credit Facility
------------------------
On November 12, 1999, the Company replaced its prior secured credit
facility with a new $25.0 million secured credit facility with Foothill Capital
Corporation (the "Foothill Credit Facility"). The Foothill Credit Facility
consists of a $12.5 million term loan and a $12.5 million revolver. Availability
under the revolver portion is limited to certain percentages of accounts
receivable and inventory, subject to other limitations based on a rolling
six-month historical EBITDA covenant and a rolling 60-day cash collections
covenant. The Foothill Credit Facility expires on May 31, 2002.
The proceeds of the Foothill Credit Facility were available for making the
October 15, 1999 payment under the Senior Notes, refinancing existing debt,
working capital, and general corporate purposes. All obligations of the Company
under the Foothill Credit Facility are unconditionally and irrevocably
guaranteed jointly and severally by certain of the Company's subsidiaries.
The revolver under the Foothill Credit Facility bears interest at rates per
annum equal to, at the option of the Company, either (i) Foothill's Reference
Rate plus 2.00% or (ii) the LIBOR rate plus 3.25%. The term loan portion bears
interest at the rate of 15% per annum and may be prepaid at any time, but only
if at the time of the payment the Company meets certain minimum availability
requirements. Payment of the principal of the term loan is due on May 31, 2002.
The Company paid origination fees of 0.50% and 2.00% on the revolver and
the term loan portions, respectively. The Company will pay a fee of 0.50% per
annum on the unused portion of the revolver and an annual fee of .25% on the
full amount of the revolver. In December 2000, the Company, to the extent the
term loan has not been repaid, must elect to pay a fee, or interest on the term
loan increases monthly. (The term loan is divided into Term Loan A (in the
amount of $2.5 million) and Term Loan B (in the amount of $10 million); the fee
is 1% and 2%, respectively (payable on the outstanding balance of Term Loan A
and Term Loan B), and the monthly interest increase is .125% and .375%,
respectively.) In addition, the Company will pay fees of 1.5% on any letters of
credit issued under the Foothill Credit Facility, which are calculated based on
the amount of outstanding letters of credit. There is a prepayment fee of 1%
under the revolver portion of the Foothill Credit Facility.
The Foothill Credit Facility contains customary covenants including, among
others, covenants restricting the incurrence of indebtedness, the creation or
existence of liens, the guarantee of other indebtedness, the declaration or
payment of dividends, the repurchase or redemption of debt and equity securities
of the Company, change in business activities, affiliate transactions, change in
F-19
key management and certain corporate transactions, such as sales and purchases
of assets, mergers, or consolidations. The Foothill Credit Facility also
contains certain financial covenants relating to minimum rolling six-month
EBITDA and rolling three-month net worth requirements, and limitations on
capital expenditures, investments, prepayments of other indebtedness, and
delivery of financial and other information to Foothill and other matters.
The Foothill Credit Facility contains certain customary default provisions,
including, among others, payment events of default, breach of representations or
warranties, covenant defaults, an event of default based on a change in control
of the Company, a material adverse change clause, cross-defaults to other
indebtedness of, and bankruptcy and judgment defaults against, the Company, and
uninsured losses.
As of January 1, 2000, the Company is in violation of certain financial
covenants under its Foothill Credit Facility. The Company filed for protection
under Chapter 11 of the Bankruptcy Code on April 5, 2000. (See Note 3 to
Consolidated Financial Statements).
Prior Credit Facility
---------------------
On October 8, 1998, the Company entered into a $25.0 million revolving
credit facility. The availability under the credit facility was limited to
certain percentages of accounts receivable, inventory and twelve-month trailing
EBITDA. All obligations of the Company under the credit facility were guaranteed
by a majority of the Company's subsidiaries. Borrowings under the credit
facility were secured by substantially all assets of the Company and its
subsidiaries.
The credit facility charged interest at rates per annum equal to, at the
option of the Company, either (i) the applicable Reference Rate plus the
applicable margin or (ii) the LIBOR rate plus the applicable margin. The
applicable margin was a maximum of 2.00% for the Reference Rate and 3.25% for
the LIBOR rate. The Company paid a fee of 0.50% per annum on the unused portion
of the credit facility.
1997 Facility
-------------
In July 1997, the Company entered into a syndicated $45 million two-year
unsecured revolving credit facility. Commitment fees payable on the average
daily balance of the unused portion of the credit facility were 0.25% per annum
in 1998 and 1997.
The Company paid approximately $710,110 and $811,288 in various fees
related to its various credit facilities in 1998 and 1999, respectively.
F-20
Unsecured Notes
---------------
The Company entered into unsecured promissory notes relative to various
transactions completed with the Frame-n-Lens and New West acquisitions in 1998
and the ELI and Midwest Vision acquisitions in 1997 (See Note 6). The notes are
fixed rate instruments, with rates ranging from 6.4% to 8.5%. At January 1,
2000, future minimum principal payments on total indebtedness, excluding capital
leases, were as follows (amounts in thousands):
2000 $ 20,154
2001 974
2002 545
2003 373
2004 373
Thereafter 129,459
-----------
$ 151,878
===========
Long-Term Debt Balances
- -----------------------
Long-term debt obligations at January 1, 2000 and January 2, 1999 consisted
of the following (amounts in thousands):
1999 1998
--------- ----------
12 3/4% Senior Notes Due 2005 $125,000 $ 125,000
Discount on 12 3/4 % Senior Notes (1,253) (1,391)
Borrowings under New Credit Facility 19,292 --
Borrowings under Prior Credit Facility -- 6,000
Other promissory notes 7,586 8,344
--------- ---------
$150,625 $ 137,953
Less current portion 20,154 1,518
--------- ---------
$130,471 $ 136,435
========= =========
As of January 1, 2000, the Company had borrowed $19.3 million under the New
Facility at a weighted average interest rate of 13%. The aggregate fair value of
the Company's long-term debt obligation under the Foothill Credit Facility is
estimated to approximate its carrying value.
This note contains information regarding the Company's short-term
borrowings and long-term debt as of January 1, 2000. On April 5, 2000, the
Company filed the Chapter 11 Cases. See Note 3 to Consolidated Financial
Statements. As a result of the filing of the Chapter 11 Cases, no principal or
interest payments will be made on any pre-petition debt until a plan of
reorganization defining the repayment terms has been approved by the Bankruptcy
Court.
9. FINANCIAL INFORMATION OF GUARANTORS
The Company's wholly owned domestic subsidiaries, Midwest Vision, Inc.;
NVAL Healthcare Systems, Inc.; International Vision Associates, Ltd.;
Frame-n-Lens Optical, Inc.; Vision Administrators, Inc.; Family Vision Centers,
Inc.; New West Eyeworks, Inc.; Alexis Holdings Company, Inc.; and Vista Eyecare
Network, LLC (collectively, the "Guarantors"), have guaranteed on a senior
unsecured basis, jointly and severally, the payment of the principal of,
premium, if any, and interest on the Notes. Combined summarized financial
information of the Guarantors is presented below (amounts in thousands):
F-21
For the years ending: January 1, 2000 January 2, 1999 January 3, 1998
--------------- --------------- ---------------
Net sales $ 123,090 $ 49,904 $ 3,540
Gross profit $ 63,747 $ 21,545 $ 1,816
Net (loss) $ (10,151) $ (2,861) $ (39)
January 1, 2000 January 2, 1999 January 3, 1998
---------------- --------------- ---------------
Current assets $ 14,287 $ 22,080 $ 2,239
Noncurrent assets $ 16,574 $ 15,832 $ 3,970
Current liabilities $ 25,742 $ 18,979 $ 836
Noncurrent liabilities $ 3,265 $ 3,748 $ --
10. COMMITMENTS AND CONTINGENCIES
Noncancelable Operating Lease and License Agreements
----------------------------------------------------
As of January 1, 2000, the Company is a lessee under noncancelable
operating lease agreements for certain equipment which expire at various dates
through 2003. Additionally, the Company is required to pay minimum and
percentage license fees pursuant to certain commercial leases and pursuant to
its agreements with its host store companies.
Effective December 20, 1991, the Company entered into a lease agreement
with Wal-Mart for approximately 66,000 square feet of corporate office space.
The term of the lease is ten years with a renewal option of seven years. The
Company paid Wal-Mart approximately $215,000 annually in rental fees in 1999,
1998, and 1997.
In connection with its acquisition of Midwest Vision, Inc. (See Note 6),
the Company entered into a ten-year lease for administrative headquarters and an
optical laboratory located in St. Cloud, Minnesota. The facility is leased from
the former owner of Midwest Vision. Lease expense on the headquarters and
laboratory is approximately $6,667 monthly which, in the opinion of management,
represents a fair market lease rate. Additionally, the Company assumed operating
lease agreements in connection with 51 freestanding locations obtained from the
acquisition. Lease expense on these leases is approximately $64,000 monthly.
F-22
In connection with its acquisitions of Frame-n-Lens and New West (See Note
6), the Company assumed operating lease agreements in connection with
approximately 280 and 175 vision centers, respectively, obtained from the
acquisitions. Through the Frame-n-Lens acquisition, the Company assumed a lease
for a manufacturing and distribution facility located in Fullerton, California.
This facility is subject to a lease with a term expiring on August 31, 2006.
Lease expense is $408,000 annually for this facility.
Aggregate future minimum payments under the license and lease arrangements
are as follows (amounts in thousands):
Capital Operating
Fiscal Year Leases Leases
----------- ------ ------
2000 $ 259 $ 33,102
2001 136 30,251
2002 13 24,965
2003 --- 18,102
2004 --- 11,166
Thereafter --- 17,185
------- ---------
Total minimum lease payments $ 408 $ 134,771
Less amounts representing interest 31 =========
-------
Present value of minimum capital lease
payments 377
Less current installments of obligations 236
under capital leases -------
Obligations under capital leases
excluding current installments $ 141
=======
Total rental expenses related to cancelable and non-cancelable operating
leases were approximately, $43.1 million, $30.1 million, and $22.8 million, for
the years ended January 1, 2000, January 2, 1999, and January 3, 1998,
respectively.
Guy Laroche and Gitano Trademark Licenses
-----------------------------------------
The Company has a license agreement with Guy Laroche of North America,
Inc., giving the Company the right to use the trademark "Guy Laroche" in its
vision centers in North America. The agreement requires the Company to pay
minimum and percentage royalties on retail and wholesale sales. The Guy Laroche
agreement, as amended, expires on December 31, 2001. Under the Guy Laroche
agreement, the Company paid $310,000, $389,000, and $397,000, in fees during
1999, 1998, and 1997, respectively.
F-23
In 1999, 1998, and 1997, the Company paid $53,000, $96,000, and $121,000
respectively, in fees to Gitano, Inc. and its successors in connection with a
license agreement (which expired in 1998) which gave the Company the right to
use the "Gitano" trademark in its vision centers.
Change in Control and Other Arrangements
----------------------------------------
There are agreements between the Company and twelve of its executive
officers which provide severance benefits in the event of termination of
employment under certain circumstances following a change in control of the
Company (as defined). The circumstances are termination by the Company other
than because of death or disability commencing prior to a threatened change in
control (as defined), or for cause (as defined), or by the officer as the result
of a voluntary termination (as defined). Following any such termination, in
addition to compensation and benefits already earned, the officer will be
entitled to receive a lump sum severance payment equal to up to three times the
officer's annual rate of base salary. The term of each agreement is for a
rolling three-years unless the Company gives notice that it does not wish to
extend such term, in which case the term of the agreement would expire three
years from the date of the notice.
11. INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards (SFAS No. 109) "Accounting for Income Taxes," which
requires the use of the liability method of accounting for deferred income
taxes. The components of the net deferred tax assets/(liabilities) are as
follows (amounts in thousands):
As of January 1, As of January 2,
2000 1999
---------------- ----------------
Total deferred tax liabilities $ (8,980) $ (9,001)
Total deferred tax assets 17,918 12,757
Valuation allowance (8,553) (3,371)
-------- ---------
Net deferred tax asset $ 385 $ 385
======== =========
The sources of the difference between the financial accounting and tax
basis of the Company's liabilities and assets which give rise to the deferred
tax liabilities and deferred tax assets and the tax effects of each are as
follows (amounts in thousands):
F-24
As of January 1, As of January 2,
2000 1999
---------------- ----------------
Deferred tax liabilities:
Depreciation $ 4,935 $ 4,691
Reserve for foreign losses 2.218 2,218
Other 1,827 2,092
-------- ---------
$ 8,980 $ 9,001
======== =========
Deferred tax assets:
Accrued expenses and reserves $ 3,206 $ 3,292
Inventory basis differences 171 456
Net operating loss carryforwards 10,698 5,507
Alternative minimum tax 2,062 2,483
Other 1,781 1,019
-------- ---------
$ 17,918 $ 12,757
======== =========
The consolidated provision for income taxes consists of the following
(amounts in thousands):
Year Ended
------------------------------------
January 1, January 2, January 3,
2000 1999 1998
---- ---- ----
Current:
Federal $ 0 $ 1,426 $ 1,937
State 0 191 330
-------- --------- --------
0 1,617 2,267
-------- --------- --------
Deferred:
Federal 0 338 1,296
State 0 82 145
-------- --------- --------
0 420 1,441
-------- --------- --------
Total Provision for Income $ 0 $ 2,037 $ 3,708
Taxes ======== ========= ========
F-25
The tax expense differs from the amounts resulting from multiplying income
before income taxes by the statutory federal income tax rate for the following
reasons (amounts in thousands):
Year Ended
-------------------------------------------------
January 1, January 2, January 3,
2000 1999 1998
---------- ---------- ----------
Federal income tax(benefit) provision at statutory rate $(5,971) $1,853 $3,156
State income taxes, net of federal income tax benefit (439) 180 314
Foreign losses not deductible for U.S. federal tax purposes 3 37 65
Change in valuation allowance for U.S. federal and state taxes 5,182 (548)
Nondeductible goodwill 1,425 292
Other, net (200) 223 173
-------- ------- -------
$ 0 $2,037 $3,708
======== ======= =======
At January 1, 2000, the Company had U.S. regular tax net operating loss
carryforwards of $28.5 million that can reduce future federal income taxes. If
not utilized, these carryforwards will expire beginning in 2007. The Company
also has non-expiring alternative minimum tax credit carryforwards of $2.1
million available to offset future regular taxes.
On July 28, 1998, the Company acquired all of the outstanding capital stock
of Frame-n-Lens. The Company accounted for the acquisition as a purchase, with
the excess of the purchase price over the fair value of the net assets acquired
to be allocated to goodwill. Frame-n-Lens had net operating loss carryforwards
of $1.4 million.
On October 25, 1998, the Company acquired all of the outstanding common
stock and common stock equivalents of New West. The Company accounted for the
acquisition as a purchase, with the excess of the purchase price over the fair
value of the net assets acquired to be allocated to goodwill. New West had net
operating loss carryforwards of $5.5 million and $4.9 million for regular tax
and alternative minimum tax purposes, respectively, which begin to expire in
2006. These net operating losses are subject to limitations from a prior
ownership change.
At January 3, 1998, the Company recorded a valuation allowance of $2.4
million due to the uncertainty regarding the realizability of its net operating
loss carryforwards. A portion of the net operating loss carryforward
(approximately $3.3 million) related to tax benefits (subject to the outcome of
the audit discussed below) from the exercise of stock options granted by the
former Chairman of the Company to two shareholders who own companies which
recruited optometrists for the Company.
As a result of an examination by the Internal Revenue Service ("IRS") of
the Company's 1992 tax return, the Company adjusted its net operating
carryforward loss by $314,000. the agreement between the Company and the IRS was
reached in February 1998 for which no income tax was due or receivable. The
Company reduced its valuation allowance by approximately $3.3 million and
increased additional paid-in-capital for this benefit.
F-26
At January 1, 2000, the Company recorded an additional valuation allowance
of $5.2 due to the uncertainty of the realizability of the current year net
operating losses.
The Company's net operating loss carryforward of $28.5 million at January
1, 2000 could be limited in the event of a greater than 50% change in stock
ownership of the Company. The limitation would be based on the stock value and
the Federal Exempt Tax Rate on the date of ownership change. These limitations
could create a cap on the amount of the NOLs that would be deductible each year
going forward until the amount is depleted or the time limitation on the NOLs
expires.
In Mexico, the location of the Company's foreign operations, the Company
pays the greater of its income tax or an asset tax. Because the Company has
operating losses in Mexico, the Company pays no income tax, but it is subject to
the asset tax. Therefore, no provision for income taxes has been made on the
Company's books for its operations in Mexico.
12. EARNINGS PER COMMON SHARE
In 1997, the Company adopted SFAS No. 128, "Earnings per Share". Basic
earnings per common share are computed by dividing net income by the weighted
average number of common shares outstanding during the year. Diluted earnings
per common share are computed as basic earnings per common share, adjusted for
outstanding stock options that are dilutive. The computation for basic and
diluted earnings per share may be summarized as follows (amounts in thousands
except per share information):
1999 1998 1997
---- ---- ----
Income/(loss) before extraordinary item $(17,156) $ 3,414 $ 5,573
Extraordinary loss, net of tax (406) -- --
-------- -------- --------
Net Income/(loss) $(17,562) $ 3,414 $ 5,573
======== ======== ========
Weighted shares outstanding 21,068 20,949 20,676
Basic earnings/(loss) per share:
Earnings before Extraordinary item $ (0.81) $ 0.16 $ 0.27
Extraordinary loss, net of tax (0.02) -- --
-------- -------- --------
Net Income/(loss) $ (0.83) $ 0.16 $ 0.27
======== ======== ========
Weighted shares outstanding 21,068 20,949 20,676
Net options issued to employees 110 285 163
-------- -------- --------
Aggregate shares outstanding 21,178 21,234 20,839
Diluted earnings/(loss) per share:
Earnings before Extraordinary item $ (0.81) $ 0.16 $ 0.27
Extraordinary loss, net of tax (0.02) -- --
-------- -------- --------
Net Income/(loss) $ (0.83) $ 0.16 $ 0.27
========= ======== ========
F-27
Outstanding options with an exercise price below the average price of the
Company's common stock have been included in the computation of diluted earnings
per common share, using the treasury stock method, as of the date of the grant.
In 1999, these options have been excluded from the calculation due to their
anti-dilutive effect.
13. SUPPLEMENTAL DISCLOSURE INFORMATION
Supplemental disclosure information is as follows (amounts in thousands):
(i) Supplemental Cash Flow Information
1999 1998 1997
---- ---- ----
Cash paid for
Interest $17,826 $2,257 $1,582
Income taxes 495 1,918 2,383
(ii) Supplemental Noncash Investing and Financial Activities
The acquisition information relates to the Frame-n-Lens and New West
acquisitions in 1998 (See Note 6 to Consolidated Financial Statements).
1998 1997
-------- --------
Business acquisitions, net of cash acquired
Fair value of assets acquired $ 30,240 $ 4,459
Purchase price in excess of net assets acquired 104,813 6,671
Liabilities assumed (37,696) (8,022)
Stock issued -- (836)
----------- --------
Net cash paid for acquisitions $ 97,357 $ 2,272
========== ========
(iii) Supplemental Balance Sheet Information
Significant components of accrued expenses and other current liabilities
may be summarized as follows:
1999 1998
--------- --------
Accrued employee compensation and benefits $ 6,343 $ 6,966
Accrued rent expense 4,047 3,677
Accrued license fees 1,996 2,184
Accrued acquisition expenses 1,678 5,215
Accrued capital expenditures 1,345 498
F-28
(iv) Supplemental Income Statement Information
The components of interest expense, net, may be summarized as follows:
1999 1998 1997
--------- -------- --------
Interest expense on debt and capital leases $ 18,306 $ 5,721 $ 1,853
Purchase discounts on invoice payments (37) (509) (483)
Finance fees and amortization of hedge and swap
agreements 1,158 407 236
Interest income (73) (86) (38)
Other (25) 5 (14)
--------- -------- --------
$ 19,329 $ 5,538 $ 1,554
========= ========= ========
14. EQUITY TRANSACTIONS
Employee Stock Option and Incentive Award Plan
----------------------------------------------
In 1996, the Company adopted the Restated Stock Option and Incentive Award
Plan (the "Plan") pursuant to which incentive stock options qualifying under
Section 422A of the Internal Revenue Code and nonqualified stock options may be
granted to key employees. The Plan also provides for the issuance of other
equity awards, such as awards of restricted stock. The Plan replaced and
restated all the Company's prior employee stock option plans. The Plan was
amended in 1999 to increase the number of shares under the Plan from 3,350,000
to 4,350,000. The Plan is administered by the Compensation Committee of the
Company's Board of Directors. The Compensation Committee has the authority to
determine the persons receiving options, option prices, dates of grants, and
vesting periods, although no option may have a term exceeding ten years. Options
granted prior to 1996 have a term of five years.
Directors' Stock Option Plan
----------------------------
In April 1997, the Company adopted the Restated Non-Employee Director Stock
Option Plan (the "Directors' Plan"), pursuant to which stock options for up to
500,000 shares of Common Stock may be granted to non-employee directors. The
Directors' Plan replaced and restated the Company's prior non-employee director
stock option plan. The Directors' Plan provides for automatic grants of options
to purchase 7,500 shares of the Company's common stock to each non-employee
director serving on the date of each annual meeting of shareholders, beginning
with the 1997 annual meeting. Of the options granted, 50% of the shares under
each option are exercisable on the second anniversary of the grant date, 75% in
three years, and 100% in four years. All option grants are at exercise prices no
less than the market value of a share of Common Stock on the date of grant and
are exercisable for a ten-year period. Options granted under the predecessor
stock option plan are exercisable for a five-year period. Options covering
90,000 shares under the Directors' Plan were exercisable at January 1, 2000.
F-29
All Stock Option Plans
----------------------
All exercise prices represent the estimated fair value of the Common Stock
on the date of grant as determined by the Board of Directors. Of the options
granted, 50% of the shares under each option are exercisable after two years
from the grant date, 75% in three years, and 100% in four years.
The Committee granted a stock option for 100,000 shares of the Company's
common stock to one executive officer which vests at the rate of one-sixth of
the number of shares covered by the option for each month of service the
executive renders to the Company.
Stock option transactions during the three years ended January 1, 2000 were
as follows:
1999 1998 1997
--------- --------- ---------
Options outstanding beginning of year 2,582,380 2,294,203 1,950,166
Options granted 928,060 1,171,750 631,864
Options exercised (12,491) (294,657) (7,840)
Options cancelled (882,528) (588,916) (279,987)
--------- --------- ---------
Options outstanding end of year 2,615,421 2,582,380 2,294,203
========= ========= =========
Options exercisable end of year 760,162 748,803 1,020,674
========= ========= =========
Weighted average option prices per share:
Granted $ 4.893 $ 5.030 $ 4.878
Exercised $ 4.500 $ 4.989 $ 2.168
Cancelled $ 5.044 $ 9.461 $ 9.640
Outstanding at year end $ 4.832 $ 4.881 $ 6.028
Options exercisable end of year $ 4.369 $ 4.973 $ 7.891
The Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation." The
Company will continue to account for stock option awards in accordance with APB
Opinion No. 25. Had compensation cost for the Plan been determined based on the
fair value at the grant date for awards in 1999, 1998, and 1997 consistent with
the provisions of SFAS No. 123, the Company's net earnings and earnings per
share would have been reduced to the pro forma amounts indicated below (amounts
in thousands except per share information):
F-30
1999 1998 1997
-------- -------- --------
As reported:
Net earnings (loss) $(17,562) $ 3,414 $ 5,573
======== ======== ========
Earnings (loss) per share $ (0.83) $ 0.16 $ 0.27
======== ======== ========
Pro forma:
Net earnings (loss) $(19,266) $ 2,655 $ 5,142
======== ======== ========
Earnings (loss) per share $ (0.91) $ 0.13 $ 0.25
======== ======== ========
Basic and diluted earnings per share are the same for each year.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model. The following weighted average
assumptions were used in the model:
1999 1998 1997
------- ------- -------
Dividend yield 0.00% 0.00% 0.00%
Expected volatility 88% 76% 74%
Risk free interest rates 5.1% 4.9% 6.1%
Expected lives (years) 4.68 4.91 4.51
The following table shows the options outstanding and the options
exercisable with pertinent data related to each:
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------------------------------------
Weighted
Average Weighted Number Weighted
Number Remaining Average Exercisable Average
Range of Outstanding Contractual Exercise As of Exercise
Exercise Prices as of 1/1/00 Life Price 1/1/00 Price
- --------------------------------------------------------------------------------------------------------------
$1.62 - $4.82 937,510 6.72 $3.765 483,562 $3.896
$4.83 - $5.32 1,111,550 7.38 $5.260 256,100 $5.181
$5.33 - $7.88 566,361 5.97 $5.758 20,500 $5.375
- ------------------------------------------------------------------------------------------------------------
$1.62 - $7.88 2,615,421 6.84 $4.832 760,162 $4.369
F-31
Restricted Stock Awards
-----------------------
Restricted stock grants, with an outstanding balance of 106,000 shares at
January 1, 2000, were awarded to certain officers and key employees which
require five years of continuous employment from the date of grant before
vesting and receiving the shares without restriction. The number of shares to be
received without restriction is based on the Company's performance relative to a
peer group of companies. For awards made in 1998, restricted shares, to the
extent not awarded after five years, vest after ten years of employment.
Unamortized deferred compensation expense with respect to the restricted stock
was $302,000, and $430,000 at January 1, 2000 and January 2, 1999, respectively,
and is being amortized over the five-year vesting period. Deferred compensation
expense aggregated $131,000 and $120,000 in 1999 and 1998, respectively. There
were no new grants or forfeitures of restricted stock in 1999. A summary of
restricted stock granted during 1998 is as follows:
1998
-------
Shares granted 67,000
Shares forfeited 15,000
Weighted-average fair value of
stock granted during year $ 5.34
Preferred Stock
---------------
The Company is authorized to issue up to 5,000,000 shares of preferred
stock, par value $1 per share, with such terms, characteristics and designations
as may be determined by the Board of Directors. No such shares are issued and
outstanding.
Shareholder Rights Plan
-----------------------
In January of 1997, the Company's Board of Directors approved a
Shareholders Rights Plan (the "Rights Plan"). The Rights Plan provides for the
distribution of one Right for each outstanding share of the Company's Common
Stock held of record as of the close of business on January 27, 1997 or that
thereafter becomes outstanding prior to the earlier of the final expiration date
of the Rights or the first date upon which the Rights become exercisable. Each
Right entitles the registered holder to purchase from the Company one one-
hundredth of a share of Series A Participating Cumulative Preferred Stock, par
value $0.01 per share, at a price of $40.00 (the "Purchase Price"), subject to
adjustment. The Rights are not exercisable until ten calendar days after a
person or group (an "Acquiring Person") buys or announces a tender offer for 15%
or more of the Company's Common Stock, or if any person or group has acquired
such an interest, the acquisition by that person or group of an additional 2% of
the Company's Common Stock. In the event the Rights become exercisable, then
each Right will entitle the holder to receive that number of shares of Common
F-32
Stock (or, under certain circumstances, an economically equivalent security or
securities of the Company) having a market value equal to the Purchase Price.
If, after any person has become an Acquiring Person (other than through a tender
offer approved by qualifying members of the Board of Directors), the Company is
involved in a merger or other business combination where the Company is not the
surviving corporation, or the Company sells 50% or more of its assets, operating
income, or cash flow, then each Right will entitle the holder to purchase, for
the Purchase Price, that number of shares of common or other capital stock of
the acquiring entity which at the time of such transaction have a market value
of twice the Purchase Price. The Rights will expire on January 26, 2007, unless
extended, unless the Rights are earlier exchanged, or unless the Rights are
earlier redeemed by the Company in whole, but not in part, at a price of $0.001
per Right. In February 1998, the Company's Board of Directors amended the Rights
Plan effective March 1, 1998 to provide that Rights under this plan can be
redeemed and certain amendments to this plan can be effected only with the
approval of the Continuing Directors, which are defined in the Rights Plan as
the current directors and any future directors that are approved or recommended
by Continuing Directors.
On April 22, 1999, the Company permitted a group, of which a director,
Campbell B.Lanier, III, is a member, to acquire beneficial ownership of up to
25% of the Company's common stock without triggering the provisions of the
Rights Plan. By an agreement dated as of September 9, 1999, the Company further
permitted the same group to acquire up to 28% of the Company's common stock
(inclusive of amounts previously purchased by the group) without triggering the
provisions of the Rights Plan. The group agreed that, if it acquired more than
25% of the outstanding common stock of the Company, the group would vote such
additional shares in the same ratio as all other shares voted by shareholders
other than the members of the group and their affiliates.
15. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
Selected quarterly data for the Company for the fiscal years ended January
1, 2000 and January 2, 1999 is as follows (amounts in thousands except per share
information).
F-33
FISCAL 1999 Quarter Ended
- --------------------------------------------------------------------------------------------------------------
April 3 July 3 October 2 January 1
----------- ---------- ------------- -------------
Net sales $ 86,634 $ 82,531 $ 83,262 $ 76,628
Cost of goods sold 37,088 36,745 37,474 36,461
-------- -------- -------- --------
Gross profit 49,546 45,786 45,788 40,167
Selling, general, and administrative expense 42,446 42,937 45,355 46,424
Impairment loss on long-lived assets -- -- -- 1,952
-------- -------- -------- --------
Operating income (loss) 7,100 2,849 433 (8,209)
Interest expense, net 4,665 4,743 4,809 5,112
-------- -------- -------- --------
Income (loss) before income taxes 2,435 (1,894) (4,376) (13,321)
Provision (benefit) for income taxes 970 (584) (1,396) 1,010
-------- -------- -------- --------
Income/(loss) before extraordinary item 1,465 (1,310) (2,980) (14,331)
Extraordinary item, net of tax -- -- -- (406)
------- -------- -------- --------
Net income/(loss) $ 1,465 $ (1,310) $(2,980) $(14,737)
======== ======== ======== ========
Basic earnings (loss) per common share:
Earnings/(loss) before extraordinary item $ 0.07 $ (0.06) $ (0.14) $ (0.68)
Extraordinary loss -- -- -- (0.02)
-------- -------- -------- --------
Net income/(loss) 0.07 (0.06) (0.14) (0.70)
======== ======== ======== ========
Diluted earnings (loss) per common share
Earnings/(loss) before extraordinary item $ 0.07 $ (0.06) $ (0.14) $ (0.68)
Extraordinary loss -- -- -- (0.02)
-------- -------- -------- --------
Net income/(loss) 0.07 (0.06) (0.14) (0.70)
======== ======== ======== ========
FISCAL 1998 Quarter Ended
- --------------------------------------------------------------------------------------------------------------
April 4 July 4 October 3 January 2
----------- ---------- ------------- -------------
Net sales $ 54,408 $ 51,037 $ 67,654 $ 72,232
Cost of goods sold 24,465 23,890 30,757 33,817
-------- -------- -------- --------
Gross profit 29,943 27,147 36,897 38,415
Selling, general, and administrative expense 25,557 23,286 32,995 39,575
-------- -------- -------- --------
Operating income (loss) 4,386 3,861 3,902 (1,160)
Interest expense, net 277 235 736 4,290
-------- -------- -------- --------
Income (loss) before income taxes 4,109 3,626 3,166 (5,450)
Provision (benefit) for income taxes 1,657 1,483 1,314 (2,417)
-------- -------- -------- --------
Net income (loss) 2,452 2,143 1,852 (3,033)
======== ======== ======== ========
Basic earnings (loss) per common share $ 0.12 $ 0.10 $ 0.09 ($ 0.14)
======== ======== ======== ========
Diluted earnings (loss) per common share $ 0.12 $ 0.10 $ 0.09 ($ 0.14)
======== ======== ======== =========
F-34
16. REPORTABLE BUSINESS SEGMENTS
The Company's operating business segments provide quality retail optical
services and products that represent high value and satisfaction to the
customer. The separate businesses within the Company use the same production
processes for eyeglass lens manufacturing, offer products and services to a
broad range of customers and utilize the Company's central administrative
offices to coordinate product purchases and distribution to retail locations. A
field organization provides management support to individual store locations.
The Mexico operation has a separate laboratory and distribution center in Mexico
and buys a majority of its products from local vendors. However, market demands,
customer requirements, laboratory manufacturing and distribution processes, as
well as product offerings, are substantially the same for the domestic and
Mexico business. Consequently, the Company considers its domestic and Mexico
businesses as one reportable segment under the definitions required by SFAS No.
131 - "Disclosures about Segments of an Enterprise and Related Information."
Information relative to sales and identifiable assets for the United States
and Mexico for the fiscal years ended January 1, 2000, January 2, 1999, and
January 3, 1998 are summarized in the following tables (amounts in thousands).
Identifiable assets include all assets associated with operations in the
indicated reportable segment excluding inter-company receivables and
investments.
United States Mexico Other Consolidated
------------- ------ ----- ------------
1999
Sales $ 325,101 $ 3,954 $ -- $ 329,055
========== ======== ====== ==========
Identifiable Assets $ 217,690 $ 2,328 $ 201 $ 220,219
========== ======== ====== ==========
1998
Sales $ 241,705 $ 3,429 $ 197 $ 245,331
========== ======== ====== ==========
Identifiable Assets $ 226,323 $ 2,147 $ 627 $ 229,097
========== ======== ====== ==========
1997
Sales $ 182,333 $ 2,988 $ 1,033 $ 186,354
========== ======== ====== ==========
Identifiable Assets $ 80,284 $ 2,279 $ 687 $ 83,250
========== ======== ====== ==========
F-35
SCHEDULE II
VISTA EYECARE, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
January 1, 2000, January 2, 1999, and January 3, 1998
(In thousands)
Additions
------------------------------------
Description Balance at Charged to Charged to Balance at
Beginning of Period Cash and Expenses Other Accounts Deductions End of Period
- -------------- ------------------- ----------------- --------------- ---------- -------------
Year ended
January 3, 1998
Allowance for
Uncollectible
Accounts Receivable $ 353 $ 928 -- $ 519 $ 762
Year ended
January 2, 1999
Allowance for
Uncollectible
Accounts Receivable $ 762 $ 900 $ 726 $ 872 $ 1,516
Year ended
January 1, 2000
Allowance for
Uncollectible
Accounts Receivable $1,516 $3,384 $ 885 $1,382 $ 4,403
F-36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
VISTA EYECARE, INC.
By: /s/James W. Krause
------------------
James W. Krause
Chairman of the Board & Chief Executive
Officer and Director
Date: April ____, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant on March __, 2000, in the capacities indicated.
Signature Title
/s/James W. Krause
- -----------------------------
James W. Krause Chairman of the Board and
Chief Executive Officer and Director
/s/Angus C. Morrison
- -----------------------------
Angus C. Morrison Senior Vice President, Chief Financial
Officer
(Principal Financial Officer)
/s/Timothy W. Ranney
- -----------------------------
Timothy W. Ranney Vice President, Corporate Controller
(Principal Accounting Officer)
/s/Peter T. Socha
- -----------------------------
Peter T. Socha Senior Vice President,
Strategic Planning and Managed Care,
Director
/s/David I. Fuente
- -----------------------------
David I. Fuente Director
/s/Ronald J. Green
- -----------------------------
Ronald J. Green Director
/s/James E. Kanaley
- -----------------------------
James E. Kanaley Director
/s/Campbell B. Lanier, III
- -----------------------------
Campbell B. Lanier, III Director
/s/J. Smith Lanier, II
- -----------------------------
J. Smith Lanier, II Director
EXHIBIT INDEX
10.15 Amended and Restated Credit Agreement dated as of November 12, 1999 by
and between the Company and Foothill Capital Corporation.
10.16 Agreement dated as of September 9, 1999, by and among the
Company, ITC Service Company, and Campbell B. Lanier, III.
21 Subsidiaries of the Registrant.
23 Arthur Andersen LLP Consent.
27 Financial Data Schedule.