Back to GetFilings.com

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 is an accelerated filer (as defined by Exchange Act Rule 12b-2).

                                            YES   ¨           NO   þ 

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 4, 2003 was 5,266,672, including shares that are part of the disputed claims reserve in the registrant's Chapter 11 Case.

- 1 -

 FORM 10-Q INDEX

- 2 -

PART I
FINANCIAL INFORMATION

NATIONAL VISION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 28, 2003 and December 28, 2002
(In thousands except share information)

 3 -

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

- 4 -

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

- 5 -

- 6 -

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

- 7 -

NATIONAL VISION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 28, 2003
(Unaudited)

(1)  BASIS OF FINANCIAL STATEMENT PRESENTATION

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 January 3, 2004.

(2)  DISCONTINUED OPERATIONS

During the second quarter of 2003, the Company closed ten vision centers.  Five closings were the result of Wal*Mart lease expirations.  The remaining five closures were under-performing Fred Meyer vision centers closed prior to their scheduled lease expiration. Through June 28, 2003, the Company has closed a total of 18 Wal*Mart vision centers, 5 vision centers in Fred Meyer and 2 vision centers on military bases.  Condensed information for these closed stores is presented below.  The net loss on disposal of these operations includes severance, closing costs and gains recorded from the sale of certain assets.   Historical operating results for these closed vision centers have been reclassified as discontinued operations and presented separately for all periods presented in the Condensed Consolidated Statements of Operations.

(3)  CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE

The Company adopted Emerging Issues Task Force Issue No. 02-16, "Accounting by a Customer for Certain Consideration Received from a Vendor" ("EITF  02-16") at the beginning of the first quarter of 2003.  This issue addresses the method by which retailers account for vendor allowances.  Prior to fiscal 2003, the Company received vendor allowances through co-op advertising agreements, which were classified in the income statement as a reduction in advertising expense.  As a result of the adoption of EITF 02-16, certain vendor allowances, which formerly were treated as a reduction in advertising costs, are presented as a reduction of inventory cost and subsequently as a component of cost of goods sold.   On the first day of fiscal 2003, the Company recorded additional expense of $564,000 as the cumulative effect for this change in accounting principle.  This amount reflects the portion of vendor allowances that would have reduced inventory costs had this new accounting pronouncement been in effect in 2002.

(4)  EXTENDED WARRANTY PRODUCT

During the second quarter of 2003, the Company began selling an extended warranty plan that provides for free replacement of frames and lenses if broken, bent or damaged within 12 months of the date of purchase.  Revenue from the sale of these contracts is deferred and amortized over the life of the contract on a straight-line basis.  The cost to service the warranty claims is expensed as incurred.  As of June 28, 2003, the Company has recognized approximately $70,000 of revenue and deferred approximately $800,000 of revenue related to this product.

 8

(5)  SENIOR SUBORDINATED NOTES AND REVOLVING LINE OF CREDIT

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 (as defined in the indenture) 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.

Based on results for the six-month period ended June 28, 2003, the Company expects to make an excess cash repayment of approximately  $5.3 million, which includes $953,000 of additional principal based on prior periods' calculation.  This amount is presented as a current liability at June 28, 2003.

On March 28, 2003 the Company made a semi-annual interest payment in the amount of $6.4 million.  On February 28, 2003, the Company made a principal redemption in the amount of $2.9 million, plus accrued interest of approximately $150,000.

The Company had no outstanding borrowings on its Revolving Credit Facility at June 28, 2003.  The Company's availability under the Revolving Credit Facility at June 28, 2003, after being reduced for letter of credit requirements, was approximately $2.8 million.

(6)  EARNINGS PER COMMON SHARE

The computation for basic and diluted earnings per share is summarized as follows (amounts in thousands except per share information): 

- 9 -

At June 28, 2003 and June 29, 2002, the Company had approximately 577,000 and 534,000 stock options and unvested restricted shares outstanding, respectively, which have been excluded from the computation of diluted earnings per share since they are anti-dilutive.

- 10 -

NATIONAL VISION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 28, 2003
(Unaudited)

(7)  STOCK COMPENSATION/EQUITY TRANSACTIONS

The Company applies the disclosure provisions of SFAS No. 123, "Accounting for Stock-Based Compensation".  Stock option awards continue to be accounted for in accordance with APB Opinion No. 25.  In October 2001, the Company granted stock options to eligible employees under the Company's employee stock option plan.  Because the number of shares to be issued and the per share strike price are certain, this stock option plan qualifies for fixed accounting treatment.  As the strike price equaled market value, the Company did not record compensation expense at the date of grant for these stock options.

Had compensation cost for this plan been determined based on the fair value at the grant date for awards in the first half of 2003 and 2002 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):

- 11 -

In April of 2003, the Company issued 14,272 shares of its common stock to certain members of management in accordance with the Company's Long-Term incentive performance plan.  These shares are reflected in the Company's total shares outstanding at June 28, 2003.

(8)  SUPPLEMENTAL DISCLOSURE INFORMATION

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): 

The components of interest expense, net, are summarized as follows (amounts in thousands):

- 12 -

(9)  COMPREHENSIVE INCOME / (LOSS)

Comprehensive income / (loss), which consists of net income and foreign currency translation adjustments, was a loss of approximately $2.7 million and approximately $1.7 million for the three months ended June 28, 2003 and June 29, 2002, respectively.  Comprehensive loss for the six months ended June 28, 2003 was $ 4.8 million and for the six months ended June 29, 2002 was $3.1 million.

(10)  RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the FASB issued FASB Interpretation No. 46 "Consolidation of Variable Interest Entities, an Interpretation of APB No. 50," ("FIN 46").  FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties.  FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003.  For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003.  The adoption of FIN 46 did not have an impact on the Company's consolidated financial position, results of operations or cash flows.

In November 2002, the FASB issued Interpretation ("FIN") No. 45, "Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others."  FIN 45 requires footnote disclosures of the guarantees or indemnification agreements a company issues.  With certain exceptions, these agreements will also require a company to prospectively recognize an initial liability for the fair value, or market value, of the obligations it assumes under that guarantee.  The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002.  The adoption of FIN No. 45 on December 29, 2002 did not have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.

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.  As vision centers are identified for closure, any costs associated with the closure or disposal will be recorded at fair value when the liability is incurred.  The Company adopted this statement on December 29, 2002.  As a result, the Company has reflected closing costs associated with store closings at their fair values when incurred.

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.  The Company adopted SFAS No. 145 on December 29, 2002, which will result in future gains or losses on extinguishment of debt being presented as a component of income from continuing operations instead of as an extraordinary item.

(11)  SUBSEQUENT EVENTS

Since June 28, 2003, the Company has closed seven Wal*Mart vision centers and seven vision centers within Fred Meyer.

In July 2003, the Company amended its agreement with Fred Meyer.  Our new agreement provides an extension of the original lease term from December 31, 2003 to December 31, 2006 and eliminates the five-year option to extend the agreement.  The amendment also revises the rent structure, beginning in 2004, to better align rent obligations with individual store performance.  The amendment also permits the closure of 12 under-performing locations.  Five of these vision centers closed in the second quarter of 2003, and the remainder have been closed in the third quarter. 

- 13 -

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 June 28, 2003, the Company operated 495 vision centers, versus 518 vision centers at December 28, 2002 and June 29, 2002.

THREE MONTHS ENDED JUNE 28, 2003 (THE “CURRENT THREE MONTHS”) COMPARED TO THREE MONTHS ENDED JUNE 29, 2002 (THE “PRIOR THREE MONTHS”)

CONSOLIDATED RESULTS

Overview of Results.  Historically, the Company has held a contact lens event in mid-June, generating between $2.0 and $4.0 million in sales.  In prior years, sales from the event were part of second quarter results.  In 2003, this event was held during the final week of the month versus earlier in the month in 2002.  As a result, we received many orders in late June for contact lenses that were delivered to customers in early July.  The amount of such orders was approximately $3.9 million.  The Company recognizes sales revenue upon delivery of the product.  As a result, the $3.9 million in sales and $1.0 million in gross margin has been deferred and will be recognized in the third quarter of 2003. 

- 14 -

Significant items that negatively affected the financial results for the second quarter of 2003 are summarized as follows:  (in millions)

Net Sales.  Even with the significant timing difference of the contact lens event, the Company recorded net sales of $60.9 million in the Current Three Months, a 3.4% increase from sales of $58.8 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 $1.0 million of the sales increase for the Current Three Months.  The remaining increase came from a domestic comparable store sales increase of 1.0%.

Historically, the Company's in-store presentation of frame and lens options was based on a package price, which included a pair of frames, a base lens and certain lens options.  In July of 2002, the Company "unbundled" the package price so that prices for frames and lenses are separately presented in the store.  The new presentation is 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 an increase in the average spectacle transaction value.

During the second quarter of 2003, the Company began selling an extended warranty plan that provides for free replacement of frames and lenses if broken, bent or damaged with 12 months.  The Company recognizes this revenue over 12 months.  Although this was not a significant factor in the sales improvement in the Current Three Months, the amount of warranty revenues recognized in future periods is expected to increase as sales of the product accumulate.  As of June 28, 2003, the Company has deferred revenue related to this product of approximately $800,000, and had recognized revenue of approximately $70,000.

Also in 2003, the Company began selling and manufacturing eyeglasses for certain outside vision centers.  Total revenue from this line of business was approximately $300,000 for the Current Three Months.

- 15 -

Gross Profit.  In the Current Three Months, gross profit dollars increased slightly 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)

Retail gross profit decreased by 0.5% as a percent of sales in the Current Three Months.  The Company experienced a shift in sales mix toward contact lens and sunglasses, coupled with a slight decrease in eyeglass margins in the Current Three Months.  This margin decline was furthered by an increase in rent expense (which is a component of Gross Profit) for the Wal*Mart division.  This was primarily 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 insurance product increased total revenues over the Prior Three Months by $1.0 million and increased gross profit dollars by $45,000, but decreased total gross profit as a percent of total net sales by 0.8%.

- 16 -

Selling, General, And Administrative Expense (“SG&A expense”).  SG&A expense (which includes both store operating expenses and home office overhead) increased to $ 32.3 million in the Current Three Months from $ 31.1 million for the Prior Three Months.   The increase in SG&A dollars was primarily attributable to:

1. retail-level payroll costs, which increased approximately $ 1.3 million or 2.1% of sales over the Prior Three Months.  This percentage increase was due to:

2. workers compensation expense, which increased approximately $300,000 or 0.5% of sales over the Prior Three Months.  This increase was due to adverse claims development from previous years, and

3. increased professional fees of approximately $300,000 associated with the re-audit of the 2001 financial statements and completion of the 2002 financial statements.

Operating Income.  Operating income for the Current Three Months declined by approximately $1.0 million from the Prior Three Months.   Operating income as a percentage of sales was 1.0% in the Current Three Months, down from 2.6% in the Prior Three Months.

Interest Expense.  Interest expense was $ 3.2 million compared to $ 3.6 million in the Prior Three Months.  The decrease was primarily the result of a weighted-average outstanding debt balance of $ 106.9 million in the Current Three Months versus $118.4 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.

Loss from Discontinued Operations.  During the second quarter of 2003, the Company closed 10 vision centers.  Five closings were the result of  Wal*Mart lease expirations.  The remaining 5 closures were under-performing  vision centers in Fred Meyer that were closed prior to their scheduled lease expiration.  In fiscal 2003, the Company has closed a total of 18 Wal*Mart vision centers, 5 vision centers in Fred Meyer and 2 vision centers on military bases through June 28, 2003.  Condensed information for these closed stores is presented below.  The net loss on disposal of these operations includes severance, closing costs and gains recorded from the sale of certain assets.   Historical operating results for these closed vision centers have been reclassified as discontinued operations and presented separately for all periods presesnted in the Condensed Consolidated Statements of Operations.

Net Income.  The Company incurred a net loss of $ 2.7 million in the Current Three Months versus a net loss of $ 1.6 million in the Prior Three Months.  

- 17 -

Use of non-GAAP Financial Measures:  We frequently refer to EBITDA in this document.  EBITDA (as defined in the terms of our Senior Subordinated Debt agreement) is calculated as net earnings before interest, taxes, depreciation and amortization, extraordinary items, the cumulative effect of a change in accounting principle and reorganization items.  We refer to EBITDA because:

• it is the basis for the calculation of the excess cash flow principal repayment under our senior notes; and

• it is a widely accepted financial indicator of a company’s ability to service or incur indebtedness.

EBITDA does not represent cash flow from operations as defined by generally accepted accounting principles, 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 our operating performance or as a measure of liquidity.  EBITDA is not necessarily comparable to similarly titled measures for other companies.

The following is a reconciliation of net earnings to EBITDA:

EBITDA.  EBITDA is calculated as net earnings before interest, taxes, depreciation and amortization, extraordinary items, cumulative effect of a change in accounting principle and reorganization items.  (See "Use of non-GAAP financial measures.")  EBITDA declined from $6.8 million in the Prior Three Months to $4.5 million in the Current Three Months, primarily as the result of three factors:

1. decline of $0.6 million EBITDA from discontinued operations,

2. lower gross profit of $1.0 million due to deferring revenues related to the contact lens event from the second quarter to the third quarter of 2003 (see "Overview of Results");

3. increases in store operating expenses, primarily from payroll and workers' compensation expense, and

4. increases in professional fees of approximately $300,000 due to the re-audit of the 2001 financial statements and completion of the 2002 financial statements.

- 18 -

SIX MONTHS ENDED JUNE 28, 2003 (THE “CURRENT SIX MONTHS”) COMPARED TO SIX MONTHS ENDED JUNE 29, 2002 (THE “PRIOR SIX MONTHS”)

CONSOLIDATED RESULTS

Net Sales.  The Company recorded net sales of $122.6 million in the Current Six Months, an increase of $5.0 million, or 4.3% from the Prior Six Months.  A portion of the remaining increase came from a domestic comparable store sales increase of 2.0%.  The sales increase was also 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 $2.3 million of the sales increase for the Current Six Months.  Sales increases in the Current Six Months were somewhat reduced due to the timing of a contact lens event, typically held in mid-June.  In 2003, this event took place during the final weekend of June, resulting in customer orders of $3.9 million being deferred until delivery of the product in July.  (See "Overview of Results.") 

During the second quarter of 2003, the Company began selling an extended warranty plan that provides for free replacement of frames and lenses if broken, bent or damaged with 12 months.  The Company recognizes this revenue over 12 months.  Although this was not a significant factor in the sales improvement in the Current Six Months, the amount of warranty revenues recognized in future periods is expected to increase as sales of the product accumulate.  As of June 28, 2003, the Company has deferred revenue related to this product of approximately $800,000, and had recognized approximately $70,000.

Also in 2003, the Company began selling and manufacturing eyeglasses for certain outside vision centers.  Total revenue from this line of business was approximately $300,000 for the Current Six Months.

- 19 -

Gross Profit.  In the Current Six Months, gross profit increased to $66.9 million from $65.8 million in the Prior Six Months.  The retail and insurance components of sales and gross profit for the Current and Prior Six Months are detailed below:  (in thousands)

Retail gross profit decreased by 0.4% as a percent of sales in the Current Six Months, but increased by approximately $1.0 million dollars.  The gross profit percentage decrease is primarily attributable 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.

These margin decreases were partially offset by an improvement in eyeglass margins in the Current Six Months.

Insurance gross profit represents premium revenue less claims expense for a managed care product that the Company began selling in the Wal*Mart California vision centers in the second quarter of 2002.  The addition of this lower-margin insurance product increased total revenues by $2.3 million and gross profit dollars by $79,000, but decreased total gross profit as a percent of total net sales by 1.0%.

- 20 -

Selling, General, And Administrative Expense (“SG&A expense”).   SG&A expense (which includes both store operating expenses and home office overhead) increased to $64.4 million  in the Current Six Months from $62.6 million for the Prior Six Months.  The increase in SG&A expense was primarily attributable to the following factors:

1. retail-level payroll costs, which increased approximately $2.3 million  or 1.9% of sales over the Prior Six Months.  This increase was due to multiple factors, including:

2. workers compensation expense, which increased approximately $500,000 or 0.4% of sales over the Prior Six Months.  This increase was due to adverse development of claims from previous years;

3. increased professional fees associated with the re-audit of the 2001financial statements and the completion of the 2002 financial statements; and

4. costs for the Company's national sales meeting, which approximated $300,000.

Some of this increase in SG&A expense was offset by decreases in advertising expenditures and lower receivable write-offs related to managed care sales for the Current Six Months.

Operating Income.  Operating income for the Current Six Months decreased to $2.5 million from $3.2 million in the Prior  Six Months.  Operating income as a percentage of sales was 2.1% in the Current Six Months, compared to 2.8% in the Prior Six Months.

Interest Expense.  Interest expense decreased to $6.5 million in the Current Six Months, compared to $7.1 million in the Prior Six Months.  The decrease was primarily the result of a weighted-average outstanding debt balance of $107.8 million in the Current Six Months versus $118.9 million in the Prior Six Months.  Our Senior Subordinated Debt has a fixed interest rate of 12%, which has not changed since issuance in May 2001.

- 21 -

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.

Loss from Discontinued Operations.  During the first half of 2003, 20 of the Company’s vision center leases expired, resulting in the closure of 18 Wal*Mart vision centers and two vision centers on military bases.  In addition, the Company has closed 5 under-performing vision centers in Fred Meyer locations prior to their scheduled lease expiration.  Condensed information for these closed stores is presented below.  The net loss on disposal of these operations included severance and closing costs and gains recorded from the sale of certain assets.   Operating results for these closed vision centers have been presented separately as discontinued operations for all periods presented in the Condensed Consolidated Statements of Operations. 

Cumulative Effect of a Change in Accounting Principle.  The Company adopted Emerging Issues Task Force Issue No. 02-16, "Accounting by a Customer for Certain Consideration Received from a Vendor" ("EITF  02-16") at the beginning of the first quarter of 2003.  This issue addresses the method by which retailers account for vendor allowances.  Historically, the Company received vendor allowances through co-op advertising agreements, which were classified in the income statement as a reduction in advertising expense.  As a result of the adoption of EITF 02-16, certain vendor allowances, which formerly were treated as a reduction in advertising costs, are presented as a reduction of inventory cost and subsequently as a component of cost of goods sold.   On the first day of fiscal 2003, the Company recorded additional expense of $564,000 as the cumulative effect for this change in accounting principle.  This amount reflects the portion of vendor allowances that would have reduced inventory costs had this new accounting pronouncement been in effect in 2002.

Net Income.  The Company posted a net loss of $4.8 million versus a net loss of $3.0 million in the Prior Six Months. 

EBITDA.  EBITDA is calculated as net earnings before interest, taxes, depreciation and amortization, extraordinary items, the cumulative effect of a change in accounting principle and reorganization items.  (See "Use of non-GAAP financial measures.")  EBITDA declined from $13.9 million in the Prior Six Months to $10.4 million in the Current Six Months primarily as a result of the following factors:

1. decline of $1.1 million from discontinued operations,
2. increases in store operating expenses, primarily from payroll and and workers' compensation expense,
3. increases in professional fees due to the re-audit of the 2001 financial statements, and
4. costs for the Company's national sales meeting.

The following is a reconciliation of net earnings to EBITDA:

- 22 -

SUMMARY OF MASTER LEASE AGREEMENTS

We have agreements governing our operations in host environments, such as Wal*Mart.  Typically, each agreement is for a base term, followed by an option to renew for a specified length of time.  The agreements provide for payments of minimum and percentage rent, and also contain customary provisions for leased department operations.

Wal*Mart Vision Centers

Our agreement with Wal*Mart gives us the right to open 400 vision centers, the last of which opened in 2001.  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.  During 2002, 14 locations were relocated, effectively renewing these leases.  We expect approximately 19 leases to relocate to supercenters in 2003.  Eleven stores have relocated  in the first six months of 2003, effectively renewing their leases.  As of June 28, 2003, we have 152 vision centers located in Wal*Mart supercenters.  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.

On a continuous basis, the Company monitors total lease months remaining under the Wal*Mart Master License Agreement.  Our measurement of lease months assumes that we exercise all available renewal options, and that supercenter conversions currently scheduled will trigger new vision center leases.  The remaining lease months may be affected by the conversion of the host store to a supercenter.  additionally, the remaining lease months may be affected by the Company's decision on exercising lease renewal options and, in general, by the passage of time.  Total remaining lease months at June 2003 were approximately 25,300 compared to approximately 25,100 in July 2002.

- 23 -

Liquidity And Capital Resources

Our capital needs have been for operating expenses, capital expenditures, the repayment of principal on the Senior Subordinated Notes and the payment of interest expense.  Our sources of capital have been cash flow from operations and borrowings under the Company’s credit facility.

It is the Company’s intent to use excess cash for its ongoing operations, repayment of principal and payment of interest on the Company’s outstanding debt and for the repurchase of Notes.  During the first quarter of 2003, the Company made a principal redemption payment on the Senior Subordinated Notes of approximately $2.9 million on February 28, 2003.  In addition, the Company made an interest payment of approximately $6.4 million on March 28, 2003.  Pursuant to the terms of the indenture, each principal redemption payment is based on the results for the six-month period ending in June or December, respectively.  The Company borrowed $1.0 million under its credit facility in the week preceding the interest payment date in order to provide liquidity for the Company’s daily cash flow requirements.  The Company repaid the borrowings during April 2003.

On August 29, 2003, the Company expects to make a principal redemption payment of $5.3 million from existing cash balances to bondholders of record on August 15, 2003.  This amount includes $953,000 of additional principal from previous periods' excess cash calculation.  In addition, the Company expects to make a semi-annual interest payment of $6.1 million from existing cash balances on September 30, 2003.

As of August 4, 2003, 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 $1.8 million from $1.7 million at December 28, 2002.  At August 4, 2003 and June 28, 2003, the Company had no borrowings under its credit facility, and had letters of credit of $4.1 million outstanding.  Cash and cash equivalents totaled $10.6 million on June 28, 2003.  The Company believes that cash generated from operations and funds available under the credit facility will be sufficient to satisfy its cash requirements through 2003.

During the second quarter of 2003, the Company began selling an extended warranty plan that provides for free replacement of frames and lenses if broken, bent or damaged within 12 months of the date of purchase.  The Company recognizes this revenue on a straight-line basis over 12 months.  As of June 28, 2003, the Company has deferred revenue related to this product of approximately $0.8 million. 

- 24 -

Certain holders of the Company’s senior notes previously objected to these repurchases at a discount.  The Company engaged in discussions with these holders and believes that it has the legal right to continue to repurchase the notes.  The Board of Directors is evaluating various means of continuing these repurchases.  The Company may seek to repurchase notes in private transactions or other means, including a broader offer to the holders, but can give no assurances as to whether such repurchases will take place or as to the timing, duration or amount of any such repurchases.  The Company is discussing amendments to its credit facility with its lender to permit the Company to continue to repurchase the Notes.

Prior to 2002, we opened 400 domestic Wal*Mart vision centers, as provided for in our Master Lease Agreement.  The Company opened one vision center on a military base and one vision center located in a Fred Meyer during the first half of 2003.  We expect to open between 5 and 7 vision centers in 2003 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.

Through June 28, 2003, we have converted 10 Wal*Mart vision centers to supercenters this year.  In all of 2003, we expect to convert approximately 19 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. 

Recently Issued Accounting Pronouncements 

In January 2003, the FASB issued FASB Interpretation No. 46 "Consolidation of Variable Interest Entities, an Interpretation of APB No. 50," ("FIN 46").  FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties.  FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003.  For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003.  The adoption of FIN 46 did not have an impact on the Company's consolidated financial position, results of operations or cash flows.

- 25 -

In November 2002, the FASB issued Interpretation ("FIN") No. 45, "Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others."  FIN 45 requires footnote disclosures of the guarantees or indemnification agreements a company issues.  With certain exceptions, these agreements will also require a company to prospectively recognize an initial liability for the fair value, or market value, of the obligations it assumes under that guarantee.  The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002.  The adoption of FIN No. 45 on December 29, 2002 did not have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.

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.  As vision centers are identified for closure, any costs associated with the closure or disposal will be recorded at fair value when the liability is incurred.  The Company adopted this statement on December 29, 2002.  As a result, the Company has reflected closing costs associated with store closings at their fair values when incurred.

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.  The Company adopted SFAS No. 145 on December 29, 2002, which will result in future gains or losses on extinguishment of debt being presented as a component of income from continuing operations instead of as an extraordinary item.