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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

Registrant’s telephone number, including area code:  (770) 822-3600

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   þ           NO   ¨

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.   
                                                         YES   þ           NO   ¨

The number of shares of Common Stock of the registrant outstanding as of August 2, 2002 was 5,084,400, including shares that are part of the disputed claims reserve in the registrant's Chapter 11 Case.

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FORM 10-Q INDEX

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PART I
FINANCIAL INFORMATION

NATIONAL VISION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 29, 2002 and December 29, 2001
(In thousands except share information)

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The accompanying notes are an integral part of these condensed consolidated financial statements.

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NATIONAL VISION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share information)
(Unaudited)

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NATIONAL VISION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share information)
(Unaudited)

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NATIONAL VISION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

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NATIONAL VISION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 29, 2002
(Unaudited)

The accompanying unaudited condensed consolidated financial statements have been prepared by National Vision, Inc.  (f.k.a. Vista Eyecare, Inc., “National Vision” or  the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations.  Although management believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these interim condensed consolidated financial statements be read in conjunction with the Company’s most recent audited consolidated financial statements and  notes thereto.  In the opinion of management, all adjustments necessary for a fair presentation of the financial position, results of operations, and cash flows for the interim periods presented have  been  made. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the year ending December 28, 2002.  

Due to the Company's emergence from bankruptcy and implementation of fresh start accounting principles, the Condensed Consolidated Financial Statements for the reorganized company as of June 2, 2001 and for the periods subsequent to June 2, 2001 will not be comparable to those of the Company for the periods prior to June 2, 2001.  Although the Company's plan of reorganization became effective on May 31, 2001, for financial reporting purposes the effective date of the plan of reorganization is considered to be June 2, 2001.  The results of operations for the period from May 31, 2001 through June 2, 2001 were not material.

A black line has been drawn between the accompanying Condensed Consolidated Statements of Operations and Cash Flows to distinguish for accounting purposes between the reorganized company ("Successor") and the predecessor company prior to emergence from bankruptcy ("Predecessor").

It is suggested that the unaudited interim condensed consolidated financial statements contained herein be used in conjunction with the financial statements and the accompanying notes to the financial statements included in the Company's Annual Report on Form 10-K for the year ended December 29, 2001.

The Company made a principal redemption payment on the Senior Subordinated Notes of $1.6 million on February 28, 2002.  The Company’s second interest payment on the Senior Notes of $7.1 million, due on March 31, 2002, was made on March 29, 2002 from existing cash balances. 

Cash and cash equivalents at June 29, 2002 were $12.9 million.  The second principal redemption payment is due on August 31, 2002 to bondholders of record on August 15, 2002.  The amount of the Excess Cash Repayment is based on the results for the six-month period ended June 29, 2002.  The following table shows the Excess Cash Repayment for the measurement period ending in June 2002 (in millions):

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The Company emerged from Chapter 11 on May 31, 2002 and implemented “fresh start” accounting as of June 2, 2001.  Generally accepted accounting principles require that these charges, incurred subsequent to the Company’s Chapter 11 filing, be presented below operating income as “Reorganization Items.”  Results for the second quarter of 2001 include charges that were incurred after the Company’s Chapter 11 filing.  The table below summarizes these charges (amounts in thousands):

Basic earnings per common share were computed by dividing net income by the weighted average number of common shares outstanding during the quarter.  Diluted earnings per common share were computed as basic earnings per common share, adjusted for outstanding  stock options and other equity grants that are dilutive.  The computation for basic and diluted earnings per share may be summarized as follows (amounts in thousands except per share information):

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No outstanding options were included in the above calculation as their impact would be anti-dilutive.

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NATIONAL VISION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 29, 2002
(Unaudited)

Under the Company's Restated Stock Option and Incentive Award Plan (the "Plan"), the Compensation Committee may issue stock options and other equity awards, covering up to a total of 720,000 shares of common stock.  In April 2002, the Compensation Committee granted 84,400 shares of restricted stock under the Plan to the Company’s Chief Operating Officer.  The shares vest one-third each year over the subsequent three years of continued employment.  After giving effect to outstanding awards, there were, at June 29, 2002, 145,000 remaining unissued shares under the Company’s Restated Stock Option and Incentive Award Plan.  Unamortized deferred compensation expense with respect to the restricted stock amounted to approximately $146,000 at June 29, 2002 and is being amortized over the three-year vesting period.  Compensation expense related to the issuance of restricted stock aggregated $12,000 in the three and six months ended June 29, 2002.

In May 2002, the Company’s Board of Directors granted options to purchase 10,000 shares of Company stock under the Restated Non-Employee Director Stock Option Plan (the “Directors’ Plan”) to each non-employee director at an exercise price equal to the market value on the date of grant.  Under the option grant, 50% of the shares vest on the second anniversary of the grant date, 25% on the third anniversary and 25% on the fourth anniversary.  All option grants are exercisable for a ten-year period.  Under the Directors' Plan, 180,000 shares of common stock are available for awards.  The remaining unissued shares under the Directors’ Plan totaled 95,000 at June 29, 2002
  

Inventory balances, by classification, may be summarized as follows (amounts in thousands):

Significant components of accrued expenses and other current liabilities may be summarized as follows (amounts in thousands): 

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Prior to emergence from bankruptcy, we stopped accruing interest on unsecured debt.  Contractual interest for the two and five months ending June 2, 2001 was $3.0 million and $8.1 million, respectively.  The components of interest expense, net, may be summarized as follows (amounts in thousands):

Interest expense excludes interest income of $38,000 and $127,000 for the two and five months ended June 2, 2001, respectively.  These amounts were treated as reorganization items.

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Comprehensive income / (loss), which consists of net income and foreign currency translation adjustments, was a loss of approximately $677,000 and income of $114.7 million for the one month and two months ended June 30, 2001 and June 2, 2001, respectively, and a loss of approximately $1.7 million for the three months ended June 29, 2002.  Comprehensive income was approximately $113.3 million and a loss of $3.1 million for the five and six months ended June 2, 2001 and June 29, 2002, respectively.

As of December 31, 2001, the Company has adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” which specifies that goodwill and other intangible assets with indefinite useful lives will no longer be amortized, but instead will be subject to periodic impairment testing.  The Company’s intangible assets have finite lives and will continue to be amortized over their useful lives.  As a result, the Company’s adoption of SFAS No. 142 has not had a material impact on the Company’s financial statements.

As of December 31, 2001, the Company has adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets and for Long-lived Assets to be Disposed Of.”  The adoption of SFAS No. 144 had no effect on the Company.

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements 4, 44 and 64, Amendment to FASB Statement 13, and Technical Corrections.”  One of the major changes of this statement is to change the accounting for the classification of gains and losses from the extinguishment of debt. Upon adoption, the Company will follow APB 30, "Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" in determining whether such extinguishment of debt may be classified as extraordinary. The provisions of this statement related to the rescission of FASB Statement 4 shall be applied in fiscal years beginning after May 15, 2002 with early application encouraged. The Company is currently evaluating the impact of this Statement.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.”  This Statement requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management's commitment to an exit plan, which is generally before an actual liability has been incurred. Adoption of this Statement is required with the beginning of fiscal year 2003. We have not yet completed our evaluation of the impact of adopting this Statement.

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RESULTS OF OPERATIONS

The Company’s results of operations in any period are significantly affected by the number and mix of vision centers opened and operating during such period.  At June 29, 2002, the Company operated 518 vision centers, versus 503 vision centers at June 30, 2001.

The Company emerged from Chapter 11 on May 31, 2001 and implemented “fresh start” accounting as of June 2, 2001.  Results of operations for the 3-day period from May 31, 2001 through June 2, 2001 were not material.  The consolidated financial statements after that date are those of a new reporting entity and are not comparable to the pre-emergence periods.  However, for purposes of this discussion, the Successor results for the one month ended June 30, 2001 have been combined with the Predecessor results of two and five months ended June 2, 2001 and then compared to the Successor results for the three and six months ended June 29, 2002.

These periods are summarized in the following tables:

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THREE MONTHS ENDED JUNE 29, 2002 (THE “CURRENT THREE MONTHS”) COMPARED TO THREE MONTHS ENDED JUNE 30, 2001 (THE “PRIOR THREE MONTHS”)

CONSOLIDATED RESULTS

Net Sales.  The Company recorded net sales of $61.2 million in the Current Three Months, a decrease of 5% from sales of $64.4 million in the Prior Three Months.  Sales decreased primarily due to the disposal of the Company’s freestanding stores in April 2001.  These stores had sales of $4.4 million in the second quarter of 2001.  This decrease was partially offset by domestic comparable store sale increase of 1.0% and new store openings.

Gross Profit.  In the Current Three Months, gross profit decreased to $34.3 million from $35.9 million in the Prior Three Months.  This decrease in gross profit dollars was primarily driven by a reduction in sales caused by the 2001 disposal of freestanding locations.  However, the disposal of unprofitable stores had a favorable impact on gross margin percentages that increased to 55.9% in the Current Three Months versus 55.7% in the Prior Three Months.  This margin improvement was partially offset by an increase in rent expense (which is a component of Gross Profit) for the Wal-Mart division.  This was due to approximately 50 vision centers entering the “3-year option period” of the Wal-Mart lease.  The option period effectively increases each location’s minimum rent requirement.  We expect this trend of increased rent to continue as additional Wal-Mart locations enter the “option period” of their lease.

Selling, General, And Administrative Expense(“SG&A expense”).  SG&A expense (which includes both store operating expenses and home office overhead) decreased to $32.2 million in the Current Three Months from $35.8 million for the Prior Three Months.  The dollar decrease was partially the result of $3.9 million fewer managed care receivable write-offs in the Current Three Months.  A further decrease in SG&A dollars is attributable to l) reductions of approximately $1.0 million in retail, field supervision, and home office payroll costs resulting from the 2001 disposal of freestanding locations, 2) decreases in advertising spending as we changed our product presentation, and 3) increases in professional fees and administrative costs arising out of the difficult legal and regulatory environment in California.  These dollar decreases were partially offset by increases in depreciation and amortization expense of approximately $1.5 million resulting from the increase in fair value of certain assets established as part of fresh start accounting in May 2001.  SG&A expense also decreased as a percent of sales from 55.6% in the Prior Three Months to 52.6% in the Current Three Months.

The percentage decrease in SG&A expense was primarily attributable to the above-mentioned factors with the exception of retail-level payroll costs, which increased 0.8% of sales over the Prior Three Months.  This percentage increase was due to an increase in rates in certain markets, where growing competition resulted in upward pressure on rates for optical personnel.

Operating Income.  Operating income for the Current Three Months increased to $2.0 million from $53,000 in the Prior Three Months primarily due to the disposal of the freestanding operations in April 2001.   Operating income as a percentage of sales was 3.3% in the Current Three Months, compared to break even levels in the Prior Three Months.

Interest Expense.  Interest Expense increased to $3.6 million compared to $1.5 million in the Prior Three Months.  As a result of the Chapter 11 filing, the Company did not accrue interest on unsecured debt until it emerged from Chapter 11 on May 31, 2001.  Contractual interest for the two months ended June 2, 2001 was $3.0 million.

Reorganization Items.  Generally accepted accounting principles require that these charges, incurred subsequent to the Company’s Chapter 11 filing, be presented below operating income as “Reorganization Items.”  Results for the second quarter of 2001 include charges that were incurred after the Company’s Chapter 11 filing.  The table below summarizes these charges (amounts in thousands):

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Benefit For Income Taxes.  The Company recorded a pre-tax  operating loss in the Current Three Months.  No income tax benefit has been recorded due to the uncertainty of realizability.

Extraordinary Item.   The extraordinary item in the Prior Three Months represents the gain on extinguishment of debt as recorded in fresh start accounting.

Net Income.  The Company posted a net loss of $1.5 million versus net income of $114.0 million in the Prior Three Months.  The current period variance is primarily the result of the fresh-start adjustments and the gain on extinguishment of debt recognized in May 2001 as the Company emerged from Chapter 11.

EBITDA Prior to Significant Provisions.   EBITDA is calculated as operating income before interest, taxes, depreciation and amortization.  EBITDA prior to significant provisions is calculated as EBITDA prior to significant non-cash charges.  EBITDA is presented because it is a widely accepted financial indicator of a company’s ability to service or incur indebtedness.  In addition, it is the basis for the calculation of the Company’s Excess Cash Repayment under the Senior Subordinated Notes.  However, EBITDA does not represent cash flow from operations as defined by generally accepted accounting principles (GAAP), is not necessarily indicative of cash available to fund all cash flow needs, should not be considered an alternative to net income or to cash flow from operations (as determined in accordance with GAAP) and should not be considered an indication of the Company’s operating performance or as a measure of liquidity.  EBITDA is not necessarily comparable to similarly titled measures for other companies.  Due to the reorganization, EBITDA prior to June 2, 2001 may not be meaningful.   The following is a reconciliation of operating income to EBITDA prior to significant provisions:

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SIX MONTHS ENDED JUNE 29, 2002 (THE “CURRENT SIX MONTHS”) COMPARED TO SIX MONTHS ENDED JUNE 30, 2001 (THE “PRIOR SIX MONTHS”)

CONSOLIDATED RESULTS

Net Sales.  The Company recorded net sales of $123.1 million in the Current Six Months, a decrease of 12% from sales of $139.2 million in the Prior Six Months.  Sales decreased primarily due to the disposal of the Company’s freestanding stores in April 2001.  These stores had sales of $18.2 million in the Prior Six Months.  This decrease was partially offset by a domestic comparable store sales increase of 1.5% and new store openings.

Gross Profit.In the Current Six Months, gross profit decreased to $69.1 million from $76.1 million in the Prior Six Months.  This decrease in gross profit dollars was primarily driven by a reduction in sales caused by the disposal of the freestanding locations.   The disposal of unprofitable stores, however, had a favorable impact on gross margin percentages that increased to 56.2% from 54.7% in the Prior Six Months.  This margin improvement was partially offset by an increase in rent expense (which is a component of Gross Profit) for the Wal-Mart division.  This was due to approximately 50 vision centers entering the “3-year option period” of the Wal-Mart lease.  The option period effectively increases each location’s minimum rent requirement.  We expect this trend of increased rent to continue as additional Wal-Mart locations enter the “option period” of their lease.

Selling, General, And Administrative Expense(“SG&A expense”).  SG&A expense (which includes both store operating expenses and home office overhead) decreased to $65.0 million in the Current Six Months from $74.9 million for the Prior Six Months.  The dollar decrease was primarily the result of (1) fewer payroll, depreciation and other expenses due to the above-mentioned store closures and (2) $3.9 million fewer managed care receivable write-offs in the Current Six Months.  These decreases were partially offset by 1) increases in the amortization of Intangible Value of Contractual Rights and depreciation of revalued fixed assets, both of which were established as part of fresh start accounting and 2) increases in professional fees and administrative costs arising out of the difficult legal and regulatory environment in California.  SG&A expense also decreased as a percent of sales from 53.8% in the Prior Six Months to 52.8% in the Current Six Months.

Decreases in SG&A expense as a percent of sales were primarily driven by the factors mentioned above, but also by a decrease in advertising spending in the second quarter of 2002. 

Operating Income.  Operating income for the Current Six Months increased to $4.2 million from $1.2 million in the Prior Six Months primarily due to the disposal of the freestanding operations in April 2001.  Operating income as a percentage of sales was 3.4% in the Current Six Months, compared to 0.9% in the Prior Six Months.

Interest Expense.  Interest expense increased to $7.1 million in the Current Six Months, compared to $2.3 million in the Prior Six Months.  As a result of the Chapter 11 filing, the Company did not accrue interest on unsecured debt until it emerged from Chapter 11 in May 2001.  Contractual interest for the five months ended June 2, 2001 was $8.1 million.

Reorganization Items.  Generally accepted accounting principles require that these charges, incurred subsequent to the Company’s Chapter 11 filing, be presented below operating income as “Reorganization Items.”  Results for the Prior Six Months include charges which were incurred after the Company’s Chapter 11 filing.  The table below summarizes these charges (amounts in thousands):

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Benefit For Income Taxes.  The Company recorded a pre-tax operating loss in the Current Six Months.  No income tax benefit has been recorded due to the uncertainty of realizability.

Extraordinary Item.   The extraordinary item in the Prior Six Months represents the gain on extinguishment of debt as recorded in fresh start accounting.

Net Income.  The Company posted a net loss of $3.0 million versus net income of $112.6 million in the Prior Six Months.  The current period variance is primarily the result of the fresh-start adjustments and the gain on extinguishment of debt recognized in May 2001 as the Company emerged from Chapter 11.

EBITDA Prior to Significant Provisions.   EBITDA is calculated as operating income before interest, taxes, depreciation and amortization.  EBITDA prior to significant provisions is calculated as EBITDA prior to significant non-cash charges.  EBITDA is presented because it is a widely accepted financial indicator of a company’s ability to service or incur indebtedness.  In addition, it is the basis for the calculation of the Company’s Excess Cash Repayment under the Senior Subordinated Notes.  However, EBITDA does not represent cash flow from operations as defined by generally accepted accounting principles (GAAP), is not necessarily indicative of cash available to fund all cash flow needs, should not be considered an alternative to net income or to cash flow from operations (as determined in accordance with GAAP) and should not be considered an indication of the Company’s operating performance or as a measure of liquidity.  EBITDA is not necessarily comparable to similarly titled measures for other companies.  Due to the reorganization, EBITDA prior to June 2, 2001 may not be meaningful.  The following is a reconciliation of operating income to EBITDA prior to significant provisions:

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Historical Pro Forma Results of Ongoing Operations

The following pro forma information presents the Company's results of operations for the retail store operations retained by the Company upon emergence from bankruptcy ("Ongoing operations," "Ongoing host operations").  Accordingly, such pro forma data is presented as if the freestanding operations were closed or disposed of as of the beginning of 2001.  Costs related to the bankruptcy, reorganization and restructuring costs, as well as large non-cash provisions, are also excluded.

The following is a reconciliation of reported results for the three and six months ended June 30, 2001 to the historical pro forma results as if the freestanding operations were closed or disposed of as of the beginning of the periods presented.  No pro forma results are presented for the three and six months ended June 29, 2002, as these periods did not include the freestanding operation nor any restructuring expenses.

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Three Months Ended June 29, 2002 (“Current Three Months”) Compared to the Pro Forma Three Months Ended June 30, 2002 (“Pro Forma Prior Three Months”)

The following is a summary of the Company’s results for the Current Three Month period compared with the Company’s historical pro forma results of ongoing operations for the Prior Three Month period.