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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 November 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
September 28, 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
SEPTEMBER 28, 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.  Certain amounts in the financial statements have been reclassified to conform to the current period presentation.

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 indenture governing the Company's Senior Subordinated Notes provides for semi-annual payments of interest (on March 30 and September 30 of each year, to holders of record on March 15 and September 15, respectively).  The indenture also provides for semi-annual redemptions of notes (on February 28 and August 31 of each year, to holders of record on February 13 and August 15, respectively) in the amount of the "Excess Cash Flow" (if any) generated by the Company in the fiscal six-month period ending on the last day of December and June (for the February and the August redemptions, respectively).  Excess Cash Flow is defined as EBITDA plus or minus working capital changes less the sum of capital expenditures, cash interest payments and cash tax payments, and is limited to the extent that the Company must maintain a minimum cash balance of $3 million as of the measurement date.

On September 27, 2002 the Company made a semi-annual interest payment in the amount of $6.7 million from existing cash balances.  On August 28, 2002, the Company made a partial redemption in the amount of $4.2 million, plus accrued interest of $200,000.

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The redemption payment was based on results for the six-month period ended June 29, 2002.  The calculation of the redemption payment, which is based on earnings before interest, taxes, depreciation, and amortization, is set forth in the following table (in millions): 

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During the third quarter of 2002, the Company's Board of Directors authorized the Company to spend up to $3 million in cash to repurchase the Company's Senior Subordinated Notes, within a rolling twelve-month period.  The initial twelve-month rolling period started in August 2002.  As of September 28, 2002, the Company had repurchased Notes with a face value of $1.7 million for $1.2 million in cash (which included $90,000 of accrued interest), resulting in an extraordinary gain of $547,000.

The Company emerged from Chapter 11 on May 31, 2001 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 and Fresh-Start Adjustments.”  Results for the first five months of 2001 include charges that were incurred as part of the Company’s Chapter 11 case.  The table below summarizes these charges (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 ( in thousands except share and per share information):

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

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NATIONAL VISION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 28, 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 President and 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 September 28, 2002, 145,000 remaining unissued shares under the Plan.  Unamortized deferred compensation expense with respect to the restricted stock amounted to approximately $134,000 at September 28, 2002 and is being amortized over the three-year vesting period.  Compensation expense related to the issuance of restricted stock aggregated $12,000 and $24,000 in the three and nine months ended September 28, 2002, respectively.

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 shares available for grant under the Directors’ Plan totaled 95,000 at September 28, 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 five months ending June 2, 2001 was $8.1 million.  The components of interest expense, net, may be summarized as follows (amounts in thousands):

Interest expense excludes interest income of $127,000 for the five months ended June 2, 2001.  This amount was treated as a reorganization item.

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Comprehensive income / (loss), which consists of net income and foreign currency translation adjustments, was a loss of approximately $1.5 million and approximately $768,000 for the three months ended September 29, 2001 and September 28, 2002, respectively.  Comprehensive income was approximately $113.3 million for the five months ended June 2, 2001.  Comprehensive loss for the four months ended September 29, 2001 was $2.2 million and for the nine months ended September 28, 2002 was $3.9 million.

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 has 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 arising from the extinguishment of debt. Upon adoption of SFAS No. 145, 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 plans to adopt SFAS No. 145 in fiscal 2003, which will result in future period gains on extinguishment of debt being presented as other income versus as extraordinary items.

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.  

In October, the Company repurchased Notes with a face value of $2.0 million for $1.3 million in cash, resulting in an extraordinary gain of approximately $629,000.  In November 2002, the Board of Directors revised its prior resolution and authorized the Company to continue to repurchase Notes in private transactions (without any annual limit), subject only to any limitations on repurchases contained in the Company's credit facility.  The Company is actively discussing amendments to its credit facility with its lender and expects that it will shortly complete an agreement that will permit the Company to continue to repurchase the Notes, but subject to limitations required by the lender.

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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 operating during such period.  At September 28, 2002, the Company operated 518 vision centers, versus 505 vision centers at September 29, 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.  For purposes of the discussion of Nine-Months Results, the Predecessor results for the five months ended June 2, 2001 have been combined with the Successor results for the four months ended September 29, 2001 and compared to the Successor results for the nine months ended September 28, 2002.  These periods are summarized in the following tables:

NATIONAL VISION, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands)

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THREE MONTHS ENDED SEPTEMBER 28, 2002 (THE “CURRENT THREE MONTHS”) COMPARED TO THREE MONTHS ENDED SEPTEMBER 29, 2001 (THE “PRIOR THREE MONTHS”)

CONSOLIDATED RESULTS

Net Sales.  The Company recorded net sales of $61.7 million in the Current Three Months, a 3% increase from sales of $59.7 million in the Prior Three Months.  The sales increase was partially due to premium revenue from a managed care insurance product that the Company began selling in the Wal-Mart California vision centers during the second quarter of 2002.  Revenue from this product contributed approximately $0.7 million of the sales increase for the Current Three Months.  The remaining increase came from a domestic comparable store sales increase of 2.0% and new store openings.

Historically, the Company's in-store presentation of frame and lens options was based on a package price concept.  The package price included a pair of frames, a base lens and certain lens options.  In July, the Company changed its presentation strategy by "unbundling" the package price so that pricing for frames and lenses are separately presented in the store.  The new presentation is intended to be more clear, concise and customer-friendly and is similar to product and price presentation at a majority of our competitors' stores.  After an initial orientation phase, the Company has experienced increases in the average spectacle transaction value and in spectacle unit count.  Although we expect these positive trends to continue, we can provide no assurance regarding future average spectacle transaction value or spectacle unit count.

Gross Profit.  In the Current Three Months, gross profit dollars increased by 2% over gross profit dollars in the Prior Three Months.  The retail and insurance components of sales and gross profit for the Current and Prior Three Months are detailed below:  (in thousands)

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Retail gross profit decreased slightly as a percent of sales in the Current Three Months.  The Company experienced a shift in sales mix toward eyeglasses, coupled with an increase in eyeglass margins in the Current Three Months.  This margin improvement was offset by an increase in rent expense (which is a component of Gross Profit) for the Wal-Mart division.  This was due to approximately 47 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.

Insurance gross profit represents premium revenue less claims expense for a managed care insurance product that the Company began selling in the Wal-Mart California vision centers in the second quarter of 2002.  We do not expect a significant change in insurance gross profit as a percent of premium revenue in future periods.  The addition of the lower-margin managed care insurance product increases total revenues and gross profit dollars, but decreases total gross profit as a percent of total net sales.

Selling, General, And Administrative Expense (“SG&A expense”).  SG&A expense (which includes both store operating expenses and home office overhead) increased to $32.1 million in the Current Three Months from $31.4 million for the Prior Three Months.   The increase in SG&A dollars was primarily attributable to retail-level payroll costs, which increased approximately $1.1 million or 0.8% of sales over the Prior Three Months.  This percentage increase was due to 1) an increase in health and medical benefit costs and 2) an increase in rates in certain markets, where growing competition resulted in upward pressure on rates for optical personnel.   In addition, SG&A expense was reduced because of decreases in advertising expenditures (as a result of the testing and implementation of our new product presentation).  

Operating Income.  Operating income for the Current Three Months remained consistent with the Prior Three Months at $2.2 million.   Operating income as a percentage of sales was 3.6% in the Current Three Months, down slightly from 3.7% in the Prior Three Months.

Interest Expense.  Interest expense was $3.5 million compared to $3.7 million in the Prior Three Months.  The decrease was primarily the result of a weighted-average outstanding debt balance of $116 million in the Current Three Months versus $120 million in the Prior Three Months.  Our Senior Subordinated debt has a fixed interest rate of 12%, which has not changed since issuance in May 2001.

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.  During the Current Three Months, the Company repurchased Notes with a face value of approximately $1.7 million for $1.2 million in cash, which included accrued interest of approximately $90,000.  These transactions resulted in a non-cash gain of $547,000.  Due to the Company's current pre-tax loss and the decision not to reflect a tax benefit in the current periods, the net tax effect on the extraordinary gain is zero.

Net Income.  The Company posted a net loss of $0.8 million versus a net loss of $1.5 million in the Prior Three Months.  

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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 and EBITDA prior to significant provisions exclude gains on extinguishment of debt.   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:  (in thousands)

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NINE MONTHS ENDED SEPTEMBER 28, 2002 (THE “CURRENT NINE MONTHS”) COMPARED TO NINE MONTHS MONTHS ENDED SEPTEMBER 29, 2001 (THE “PRIOR NINE MONTHS”)

CONSOLIDATED RESULTS

Net Sales.  The Company recorded net sales of $185.6 million in the Current Nine Months, a decrease of $13.4 million, or 7% from the Prior Nine 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 Nine Months.  This decrease was partially offset by a domestic comparable store sales increase of 1.5%, premium revenue of $1.4 million and new store openings.

Gross Profit.  In the Current Nine Months, gross profit decreased to $103.5 million from $109.8 million in the Prior Nine 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 retail gross margin percentages that increased to 56.1% from 55.2% in the Prior Nine 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 47 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.

The retail and insurance components of sales and gross profit for the Current and Prior Nine Months are detailed below:  (in thousands)

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Selling, General, And Administrative Expense (“SG&A expense”).   SG&A expense (which includes both store operating expenses and home office overhead) decreased to $97.1 million  in the Current Nine Months from $106.4 million for the Prior Nine Months.  The dollar decrease was primarily the result of (1) fewer payroll, depreciation and other expenses due to the above-mentioned store disposition and (2) $3.9 million fewer managed care receivable write-offs in the Current Nine Months.  These decreases were partially offset by 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.

SG&A expense, however, continued to be negatively affected because of the uncertain legal and regulatory environment in California.  We incurred additional professional fees and administrative costs of approximately $1.1 million in connection with our HMO in California.  Although we believe that professional fees, which comprise the majority of this incremental increase, will decline, the increased administrative expense (associated with higher payroll for our HMO) is expected to continue.  The increased administrative expense will have a negative impact on SG&A expense as a percent of revenue and on earnings unless offset by potentially higher revenues from our HMO.

Operating Income.  Operating income for the Current Nine Months increased to $6.4 million from $3.4 million in the Prior  Nine Months primarily due to the disposal of the freestanding operations in April 2001.  Operating income as a percentage of sales was 3.5% in the Current Nine Months, compared to 1.7% in the Prior Nine Months.

Interest Expense.  Interest expense increased to $10.7 million in the Current Nine Months, compared to $5.9 million in the Prior Nine 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 and Fresh-Start Adjustment.”  Results for the Prior Nine Months include charges which were incurred during the Company’s Chapter 11 proceedings.  The table below summarizes these charges (in thousands):

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

Extraordinary Item.   During the Current Nine Months, the Company repurchased notes with a face value of approximately $1.7 million for $1.2 million in cash, which included accrued interest of approximately $90,000.  These transactions resulted in an extraordinary, non-cash gain of $547,000.  The extraordinary item in the Prior Nine Months represents the gain on extinguishment of debt as recorded in fresh-start accounting.  Due to the Company's pre-tax loss in the Current and Prior Period and the decision not to reflect a tax benefit, the net tax effect on these extraordinary items is zero.  

Net Income.  The Company posted a net loss of $3.7 million versus net income of $111.1 million in the Prior Nine 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 and EBITDA prior to significant provisions exclude gains on extinguishment of debt.   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 (in thousands):

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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.  In addition, these results include the revenues and expenses related to the sale of a new managed care insurance product as previously discussed.  Costs related to the bankruptcy, reorganization and restructuring costs, as well as large non-cash provisions, are also excluded (amounts in thousands):

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The following is a reconciliation of reported results for the Nine Months ended September 29, 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 nine months ended September 28, 2002, nor the three months ended September 29, 2001, as these periods did not include the freestanding operation or any restructuring expenses (amounts in thousands):

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Nine Months Ended September 28, 2002 (“Current Nine Months”) Compared to the Pro Forma
Nine Months Ended September 29, 2001 (“Pro Forma Prior Nine Months”)

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SUMMARY OF MASTER LEASE AGREEMENTS

The following table sets forth the number of leases for domestic Wal-Mart and Fred Meyer vision centers that expire each calendar year, assuming the Company exercises all available options to extend the terms of the leases.  This table does not include any future Wal-Mart superstore conversions that are unknown at this time.

(a)           The number of leases expiring in 2002 includes one location that was closed at the end of the original lease term.

The Company previously disclosed that it and Wal-Mart have discussed possible amendments to their master license agreement.  The parties have considered various proposals to restructure the master license agreement.  At this time, the parties have not agreed to amend the master license agreement, which remains in effect.  As a result, the Wal-Mart leases will begin expiring as noted in the previous table.  The number of lease expirations is subject to favorable change given future notification of supercenter conversions.

Of the six Wal-Mart leases scheduled to expire in 2002, one location was closed in the first quarter of 2002 at the end of the original nine-year lease term.  The remaining five leases are scheduled to expire on December 31, 2002, which will fall into the Company's fiscal year 2003.  These five leases represent annualized sales of approximately $3.3 million and annualized store-level cash flow of approximately $0.9 million.  In 2003, 34 leases are scheduled to expire over the course of the year, 13 in the first half and 21 in the second half.  These stores represent annualized sales of approximately $18.0 million and annualized store-level cash flow of approximately $2.3 million.  Store-level cash flow excludes corporate overhead and other costs not specifically attributable to individual stores.  The Company anticipates that the results of stores which cease operations in 2003 will be shown as discontinued operations beginning in 2003.

OPERATING STRATEGIES

The Company's current strategic process includes (1) maximizing sales and cash flow from our Wal-Mart stores, (2) selectively expanding store operations in other host environments, and (3) testing, developing and creating additional growth opportunities within a host environment.  These growth opportunities represent new areas in which the Company does not currently have an operating business.  In order to create new business opportunities, the Company's strategic focus is to leverage existing strengths acquired in operating our host retail optical stores.  The Company is considering the creation of a retail business with both a product and service component, consultation from a professional services expert and a store model within a host environment.  As part of our efforts, we are working with Wal-Mart to investigate potential growth vehicles.  We are considering options outside of the optical industry, including health, wellness and beauty-related services.  We can provide no assurances, however, (a) that Wal-Mart or any other host operator will permit us to test new concepts in their stores, (b) that any such test will be successful, or (c) that the Company will be able to develop a profitable line of business arising out of any such test.

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In the fourth quarter, we initiated a review of the Company's retail and support organizations, store and home office processes and the technology that supports both.  As part of our review process, we have engaged an outside consulting firm with strong retail experience to assist us.  Our initial focus will be on our Wal-Mart vision centers in three areas:  1)  optimizing store employee and doctor scheduling, 2) simplifying and improving the processing of managed care transactions at the store and in the retail support center, and 3) simplifying and improving the customer order and delivery process.  We expect to begin implementing changes in processes, systems and possibly in staffing levels  in the first half of 2003.

The outside consulting firm will also assist us in complying with new requirements under the Health Insurance Portability and Accountability Act ("HIPAA").  The Department of Health and Human Services has enacted regulations under HIPAA, which will require that we implement new policies, procedures, and systems in connection with our retail and home office operations.  We will incur expenses and make capital expenditures in the fourth quarter of 2002 and in 2003 in order to comply with these regulations.

Liquidity And Capital Resources

Our capital needs have been for operating expenses, capital expenditures, the repayment of principal on the Senior Subordinated Notes and interest expense.  Our sources of capital have been cash flow from operations.

It is the Company’s intent to use excess cash for its ongoing operations, repurchase of Notes, and repayment of principal on the Company’s outstanding debt.  As of November 5, 2002, the Company’s remaining unused availability under its credit facility with Fleet, after being reduced for letter of credit requirements, has increased slightly to approximately $1.9 million from $1.7 million at December 29, 2001.  At September 28, 2002, the Company had no borrowings under its credit facility, and had letters of credit of $4.4 million outstanding.  The Company believes that cash generated from operations and funds available under the credit facility will be sufficient to satisfy its cash requirements through 2002 and 2003.

The Company made a principal redemption payment on the Senior Subordinated Notes of $1.6 million on February 28, 2002.  The Company also made a principal redemption payment of $4.2 million, plus accrued interest of $200,000 from existing cash balances on August 28, 2002 to bond holders of record on August 15, 2002.  In addition, the Company made an interest payment of approximately $6.7 million from existing cash balances on September 27, 2002.  Cash and cash equivalents totaled $6.1 million on September 28, 2002 after making this interest payment.

During the third quarter of 2002, the Company's Board of Directors authorized the Company to spend up to $3 million in cash to repurchase the Company's Senior Subordinated Notes, within a rolling twelve-month period.  The initial twelve-month rolling period started in August 2002.  As of September 28, 2002, the Company had repurchased Notes with a face value of $1.7 million for $1.2 million in cash (which included $90,000 of accrued interest), resulting in a non-cash, extraordinary gain of $547,000.  In October, the Company spent an additional $1.3 million to repurchase $2.0 million in Notes.  

In November 2002, the Board of Directors revised its prior resolution and authorized the Company to continue to repurchase Notes in private transactions (without any annual limit), subject only to any limitations on repurchases contained in the Company's credit facility.  The Company is actively discussing amendments to its credit facility with its lender and expects that it will shortly complete an agreement that will permit the Company to continue to repurchase the Notes, but subject to limitations required by the lender.

Prior to 2002, we opened 400 domestic Wal-Mart vision centers, as provided for in our Master Lease Agreement.  The Company did not open any vision centers during the third quarter of 2002.  We expect to open between 5 and 7 vision centers in 2002 in host environments other than domestic Wal-Mart vision centers.  These store openings are subject to change depending upon liquidity, construction schedules and other constraints.  For each of our new vision centers, we typically spend between $100,000 and $140,000 for fixed assets and approximately $25,000 for inventory.

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Through November 5, 2002, we have converted 11 Wal-Mart vision centers to supercenters this year.  In all of 2002, we expect to convert between 12 and 14 of our existing Wal-Mart vision centers to supercenters.  Each supercenter conversion requires expenditures of approximately $60,000 to $80,000 and effectively “re-starts” that location’s lease term. 

In conjunction with our historical results from operations, emergence from Chapter 11 and the disposition of our freestanding operations, the Company incurred significant net operating losses.  These losses are expected to result in significant tax net operating loss carry-forwards.

Recently Issued Accounting Pronouncements 

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 of SFAS No. 145, 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 Transaction" 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 plans to adopt SFAS No. 145 in fiscal 2003, which will result in future period gains on extinguishment of debt being presented as other income versus as extraordinary items.

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 as of the beginning of fiscal year 2003.  

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management’s Discussion and Analysis of Financial Condition and Results of Operations discuss the consolidated financial statements of National Vision, which have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the 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.  Significant areas that require management’s judgment and the use of estimates include:  reserves for loss, obsolescence and discontinuance of inventory, reserves for uncollectible managed care receivables, accruals for group medical insurance claims and workers’ compensation claims, accruals for remake and warranty costs and  estimates for the deferral of revenue for product not delivered at the end of the reporting period.

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On an ongoing basis, management evaluates its estimates and judgments and incorporates any changes in such estimates and judgments into the accounting records underlying the Company’s consolidated financial statements.  Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions. 

Management has identified the policies below as critical to our business operations and the understanding of our results of operations.  The impact and any associated risks related to these policies on our business operations is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. 

Revenue Recognition

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 recognizes revenue upon delivery of the product.  The Company estimates the value of transactions in which final delivery to the customer has not occurred at the end of the period presented.  These estimates are based on historical trends and take into consideration current changes in the Company’s manufacturing and distribution process. 

Management must make estimates of potential returns and warranty and replacement costs for all or part of the eyewear sold to a customer.  We analyze historical remake and warranty activity, consider current economic trends and changes in customer demand and acceptance of our products when evaluating the adequacy of our estimate of these costs.  Differences may result in the amount and timing of revenue and related costs for any period if management made different judgments or utilized different estimates.

Allowance for Uncollectible Receivables under Reimbursement Plans

Managed care accounts receivable are reduced by an allowance for amounts that may become uncollectible in the future.  Substantially all of the Company’s receivables are due from health care plans or third-party administrators located throughout the United States.  Approximately 11% of the Company net sales from ongoing businesses relate to products sold to customers that ultimately will be funded in full or in part through private insurance plans, third party insurance administration programs or government reimbursement programs such as Medicare and Medicaid.  Estimates of our allowance for uncollectible receivables are based on our historical collection experience, historical and current operating, billing and collection trends and a percentage of our receivables by aging category.  Changes in our billing and collection processes, changes in funding policies by insurance plans and changes in our sales mix within insurance plans may have a material affect on the amount and timing of our estimated uncollectible accounts.

Valuation of long-lived and intangible assets

The Company assesses the impairment of identifiable intangibles and long-lived assets on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable.  Factors that could trigger an impairment review include (1) a significant underperformance of vision center operations relative to historical or projected future operating results; (2) significant changes in the manner of our use of Company assets or the strategy for our overall retail optical business; (3) significant negative industry or economic trends; and (4) a permanent adverse change in cash flows generated by an operation.

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If we determine that the carrying value of intangibles or long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure any impairment based on a projected cash flow model.  If the projected cash flows are not in excess of the book value of the related asset, we measure the impairment based on a projected discounted cash flow method.  Significant management judgment is required regarding the existence of impairment indicators as discussed above.  Future events could cause us to conclude that impairment indicators exist and that long-lived assets or intangible assets are impaired.  Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.

Accounting for income taxes

As part of the process of preparing our consolidated financial statements we are required to estimate our income taxes in each of the jurisdictions in which we operate.  This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as equipment depreciation, for tax and accounting purposes.  These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet.  We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance.  To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the statement of operations. 

The Company emerged from Chapter 11 Bankruptcy on May 31, 2001.  As part of the emergence Plan, the Company’s capital structure was highly leveraged with $120 million of senior notes with interest payable at 12% per annum.  Before, during and after the bankruptcy process, the Company incurred significant net operating losses (“NOL”) that result in tax loss carry-forwards.  A portion of these carry-forwards is subject to limitations under section 382 of the Internal Revenue Code.

Generally accepted accounting principles require that we record a valuation allowance against the deferred tax asset associated with this NOL if it is “more likely than not” that we will not be able to utilize it to offset future taxes.  Due to the size of the NOL carry-forward in relation to our history of unprofitable operations and the continuing uncertainties surrounding the profitability of our ongoing retail businesses taking into consideration the highly leveraged capital structure within which we operate as discussed above, we have not recognized any of this net deferred tax asset.  We currently provide for income taxes only to the extent that we expect to pay cash taxes for current income.

It is possible, however, that we could be profitable in the future at levels which cause management to conclude that it is more likely than not that we will realize all or a portion of the NOL carry-forward.  Upon reaching such a conclusion, we would immediately record the estimated net realizable value of the deferred tax asset at a rate equal to our combined federal and state effective rates.  Subsequent revisions to the estimated net realizable value of the deferred tax asset could cause our provision for income taxes to vary significantly from period to period, although our cash tax payments would remain unaffected until the benefit of the NOL is utilized.

Other Accounting Policies

The above listing is not intended to be a comprehensive list of all of our accounting policies.  In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with no need for management’s judgment.

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                RISK FACTORS.  Any expectations, beliefs and other non-historical statements contained in this Form 10-Q are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements represent the Company’s expectations or belief concerning future events, including the following:  any statements regarding future sales levels, any statements regarding the continuation of historical trends, any statements regarding the Company’s liquidity and any statements regarding tax losses.  Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” and similar expressions are intended to identify forward-looking statements.  With respect to such forward-looking statements and others that may be made by, or on behalf of, the Company, the factors described as “Risk Factors” in the Company’s Report on Form 8-K, filed on May 15, 2002, could materially affect the Company’s actual results.

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 its credit facility at variable interest rates.  We therefore incur the risk of increased interest costs if interest rates rise.  As of September 28 and November 5, 2002, the Company has no outstanding borrowing under its credit facility. 

Within the 90 days prior to the filing date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15.  Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective as of the date of such evaluation.  Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.

Since the evaluation date, there have not been any significant changes in the internal controls of the Company, or in other factors that could significantly affect these controls subsequent to the evaluation date.

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PART II
OTHER INFORMATION

                          The following reports on Form 8-K have been filed during the quarter for which this report is filed:

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SIGNATURES

Pursuant to the  requirements  of the Securities  Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

November 12, 2002

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I, James W. Krause, certify that: