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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 3, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
Commission File Number 0-20001
NATIONAL VISION ASSOCIATES, LTD.
(Exact name of Registrant as specified in its charter)
Georgia
(State or other jurisdiction of
incorporation or organization)
58-1910859
(I.R.S. Employer Identification No.)
296 Grayson Highway
Lawrenceville, Georgia
(Address of principal executive offices)
30045
(Zip Code)
Registrant's telephone number, including area code: (770) 822-3600
Securities registered pursuant to Section 12(b) of the Act:
None
Page 1 of 56
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The number of shares of Common Stock of the registrant outstanding as
of February 3, 1998, was 20,819,955. The aggregate market value of shares
of Common Stock held by non-affiliates of the registrant as of February 3,
1998, was approximately $103.6 million based on a closing price of $5.50
on the NASDAQ Stock Market on such date. For purposes of this computation,
all executive officers and directors of the registrant are deemed to be
affiliates. Such determination should not be deemed to be an admission
that such directors and officers are, in fact, affiliates of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents have been incorporated by reference
into the parts indicated: the Company's definitive Proxy Statement for the
1998 Annual Meeting of Shareholders to be filed with the Securities and
Exchange Commission not later than 120 days after the end of the fiscal year
covered by this report--Part III.
The Exhibit Index is located at pages 24 - 26.
Page 2 of 56
PART I
ITEM 1. BUSINESS
National Vision Associates, Ltd. (the "Company") is engaged in the
retail sale of optical goods and services. As of February 3, 1998, the
Company operates a total of 447 vision centers, 418 of which are in the
United States. Pursuant to an agreement (the "Wal-Mart Agreement") with
Wal-Mart Stores, Inc. ("Wal-Mart"), the Company operates, as of February 3,
1998, 361 retail vision centers in stores owned and operated by Wal-Mart.
As of the same date, the Company also operates 26 vision centers in Mexico
pursuant to a license agreement (the "Mexico Agreement") with Wal-Mart de
Mexico, S.A. de C.V. ("Wal-Mart Mexico").
To reduce its dependence on Wal-Mart, and to create additional growth
opportunities, the Company decided in 1997 to develop its own free-standing
locations, initially through the acquisition of regional optical chains.
As a result, in October 1997 the Company acquired Midwest Vision, Inc., a
chain of 51 locations located primarily in Minnesota. (See Note 4 to
consolidated financial statements.)
MARKETING STRATEGY
The Company generally employs a marketing philosophy of offering
quality and value with "customer satisfaction guaranteed." Management
constantly strives to identify new means of accomplishing its overall
goal of being a low-cost provider of quality retail optical products.
VISION CENTER OPERATIONS
Each of the Company's existing Wal-Mart vision centers occupies
approximately 1,000 square feet in the front of the host store, with
separate areas for merchandise display, customer service, contact lens
fitting and a laboratory. Services of independent optometrists are
available from clinics which are approximately 500 square feet and located
in, adjacent to, or nearby the vision center, depending on regulatory
requirements. Each vision center has a laboratory containing a patternless
edging and fitting unit and other equipment that, coupled with the on-site
inventory of frames, spectacle lenses, and contact lenses, allow the
Company to give prompt, one-hour service to many customers who request
quick delivery. In each vision center, the Company maintains an
on-premises inventory of approximately 1,200 eyeglass frames, 725
pairs of spectacle lenses, and 550 pairs of contact lenses, together
with assorted sunglasses, eyeglass cases, eyeglass accessories, and
contact lens accessories. Midwest Vision locations are comparable except
that they carry less inventory and do not contain a laboratory.
OPTOMETRISTS
A key element of the Company's business strategy is the availability
of independent optometrists at clinics in, adjacent to, or nearby the
Company's vision centers. Additionally, the Wal-Mart Agreement requires
that such services be available for a minimum of 48 hours per week to the
extent permitted by applicable law. These optometrists, whose activities
and relationships with entities such as the Company are subject to state
and local regulation, are not employed by, and receive no compensation from,
the Company. See "Government Regulation." Such independent optometrists
sublicense the eye examination facilities and equipment from the Company.
Page 3 of 56
In January 1997, the Company completed various transactions related to
its relationship with each of Eyecare Leasing, Inc., which had previously
recruited optometrists for the Company pursuant to a consulting agreement,
and Stewart-Phillips, Inc., which had recruited optometrists practicing
adjacent to the Company's vision centers in California. The transactions
involved the termination of such consulting agreement and transfer of
the responsibilities of Stewart-Phillips, Inc. to a subsidiary of the
Company. (See Note 3 to consolidated financial statements.)
MANAGEMENT INFORMATION AND FINANCIAL SYSTEMS
In 1996, the Company completed the installation of a new point of sale
system and a new perpetual inventory system in all domestic store locations.
The system facilitates the processing of customer sales information and
replenishment of store inventory by passing such information, including
customer specific orders, to the Company's home office and Company in-house
lens laboratory for further processing.
The Company is in the process of developing an enhanced point of sale
software system which is scheduled to be in the retail stores by the
fourth quarter of 1999. The primary purpose of the system is to upgrade
data processing, broaden in-store capabilities, and improve the processing
of managed care sales transactions. In addition to the above improvements,
the system will be designed to be Year 2000 compliant.
YEAR 2000 COMPLIANCE
The majority of the Company's internal information systems are currently
Year 2000 compliant or in the process of being replaced with fully-compliant
new systems. The Company has identified approximately 220 point of sale
systems that require hardware upgrades to be Year 2000 compliant. The total
cost of software changes, hardware changes, and implementation is estimated
to be approximately $650,000. Costs related to hardware and new software
purchases will be capitalized as incurred and amortized over three years.
These new system modifications are expected to be completed in the second half
of 1999.
Some of the Company's vendors, financial institutions, and managed care
organizations utilize equipment to capture and transmit transactions. The
Company is in the process of coordinating its Year 2000 compliance efforts
with those of such organizations. The estimated future cost of this
transition is minimal. No assurance can be given that such organizations
will make their systems Year 2000 compliant.
The Company will utilize both internal and external resources to
reprogram, or replace, and test software for Year 2000 compliance. The costs
of the Year 2000 project and the date on which the Company plans to complete
Year 2000 modifications are based on management's best estimates, which
were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates
will be realized and actual results could differ materially from those plans.
RELATIONSHIP WITH HOST COMPANIES
Master Agreements
-----------------
The Company's relationship with each of Wal-Mart and Wal-Mart Mexico
is governed by a master license agreement which grants a separate license
Page 4 of 56
to the Company for each vision center. Each agreement provides for the
payment of minimum and percentage license fees and contains other customary
terms and conditions. Certain terms are described below:
Term of Company
Each License Options Other
------------ ------- -----
Wal-Mart one for
Agreement 9 yrs. three yrs. 1
Mexico
Agreement 5 yrs. two for two 2
yrs.; one
for one yr.
(1) The Wal-Mart Agreement, as amended, provides that Wal-Mart is to offer
the Company the opportunity to open, no later than April 30, 2000, at
least 400 vision centers (including those currently open). In January
1995, the Company made a lump sum payment in exchange for such commitment.
Such payment is being amortized over the initial term of vision centers
opened after January 1, 1995. In 1997, the Wal-Mart Agreement was amended
to provide that, with one exception, all new vision centers opened after
1997 will be located in California and North Carolina.
(2) The Company has a right of first refusal in Mexico for any store in which
Wal-Mart Mexico proposes to open a vision center. The Mexico Agreement
contains a mutual non-competition agreement preventing each party from
dealing with other parties (excluding affiliates of the Company and
Wal-Mart Mexico) in Mexico for the operation of vision centers in a host
environment. The Mexico Agreement also contains provisions which
entitle each party to terminate the license for each vision center if
such vision center fails to meet certain minimum sales requirements.
The Company opened six vision centers in 1990 under the Wal-Mart
Agreement and 54 such vision centers in 1991, with additional vision
centers being opened in subsequent years. Accordingly, beginning in 1999,
the Company will determine whether to exercise the three-year options to
extend the licenses for vision centers reaching the ninth year of operation.
The Company will make such decisions based upon various factors, including,
without limitation, the sales levels of each vision center, its estimated
future profitability, increased minimum license fees charged by Wal-Mart
during the option period, and other relevant factors. Each option must be
exercised at least six months prior to the expiration of the license for
each vision center. Although the Company expects that it will extend the
licenses of a substantial majority of these vision centers, no assurance can
be given as to the number of vision centers the licenses of which will be
extended.
Page 5 of 56
No Assurances of Expansion in Host Stores
-----------------------------------------
Future additional expansion in stores of any of the Company's hosts
beyond those currently under contract is out of the control of the Company
and there can be no assurance that any host will offer the Company any
additional vision centers or that any such offer will be on terms that are
the same as or similar to the terms contained in the current agreements.
Management periodically discusses expansion opportunities and other matters
with each host, but there can be no assurance that these discussions will
result in additional vision centers being offered to the Company.
Wal-Mart operates its own optical division. As of January 3, 1998,
such division operated approximately 680 vision centers. No assurance can
be given that, after the Company has opened 400 locations pursuant to the
Wal-Mart Agreement, Wal-Mart will not allocate all vision centers to its
own optical division.
The Company regularly explores opportunities to expand outside of its
existing host environments and continues to consider various options, such
as acquiring optical companies, opening free-standing vision centers, and
expanding in another host environment. Management currently believes that
the Company's most likely avenue of additional expansion will be through
the acquisition and development of free-standing locations.
Manufacturing and Distribution
------------------------------
The Company currently utilizes three in-house lens laboratories and
one independent laboratory to manufacture prescription eyeglasses for its
vision centers. One such laboratory was owned by Midwest Vision and was
acquired by the Company as part of that acquisition. Substantially all
prescription spectacle requirements of the Company's domestic vision centers
opened in the future will be supplied from Company-owned laboratories. The
Company has a state-of-the-art coating facility in its Lawrenceville
headquarters, capable of coating lenses with anti-reflective and mirror
surfaces. Each vision center in Wal-Mart stores has its own finishing
laboratory which manufactures lenses for approximately half of all
customers purchasing spectacle lenses.
The Company's centralized distribution center in its Lawrenceville,
Georgia headquarters facility provides lens blanks, frames, sunglasses
and contact lenses to all vision centers. The Company's central
distribution center and all laboratories are interfaced with the Company's
management information system. The Company's central distribution center
ships completed customer orders and inventory replenishment requirements,
including frames, and spectacle and contact lenses, to the Company's vision
centers throughout the United States by overnight delivery services. The
Company maintains a secondary distribution center at the Midwest Vision
regional headquarters, which primarily ships completed customer orders to
the Midwest Vision stores.
Page 6 of 56
Government Regulation
---------------------
The Company is subject to a variety of federal, state, and local
laws, regulations, and ordinances, including state and local laws and
regulations regarding advertising, qualifications and practices of
the opticians employed by the Company, relations between independent
optometrists and optical firms such as the Company, and various trade
practices such as country of origin product labeling. In addition,
certain of the Company's products, specifically contact lenses and
contact lens solutions, must comply with quality control standards
set by the United States Food and Drug Administration. Through its
participation in Medicare and in managed care programs, the Company
is also subject to a variety of other laws, such as the Federal Anti-
Kickback Statute and the Health Insurance Portability Act of 1996.
Although government regulation has increased the cost to the
Company of commencing operations and decreased its flexibility in managing
its business, government regulation has not, to date, had a material
adverse effect on the Company's overall operations or financial
performance, or on its overall relationships with independent optometrists.
It is nevertheless possible that new regulations or new interpretations of
current regulations could materially increase the Company's cost of doing
business or have a material adverse impact on the Company's sales by
restricting or eliminating the services of opticians or optometrists in,
adjacent to, or nearby the Company's vision centers. This risk is enhanced
since the Company's competitors often serve as, or exert influence on,
local regulators of the eyecare industry. Additional risk is created
because of the Company's increasing involvement in managed care plans and
general increased oversight by federal and state governments of managed
care relationships and operations.
The Company believes it is in substantial compliance with all material
governmental regulations applicable to its operations.
Competition
-----------
The retail eyecare industry in the United States is highly
competitive. In addition to optical chains such as Cole Vision and
LensCrafters, there are numerous retail optical stores, individual retail
outlets and individual opticians, optometrists, and ophthalmologists
providing the public all or some of the goods and services the Company
sells or makes available through its vision centers. Optical retailers
generally serve individual, local or regional markets, and, as a result,
competition is fragmented and varies substantially among locations and
geographic areas. Several of the Company's competitors have financial
resources substantially greater than those of the Company.
Page 7 of 56
The Company believes that its primary competitive advantages are its
locations in a prominent position in its host stores, its quality products
and value at low prices, and its customer-driven service philosophy.
Additionally, the Company competes on the basis of the quality and
consistency of service, convenience, speed of delivery, and selection.
In addition to competition for individual patients, there is
increasing competition in the eyecare industry for managed care contracts
with insurance companies, employers, and other groups. The Company
believes that the competitive advantages described above will help the
Company compete for managed care contracts. The density and size of a
vision care network are also a significant competitive aspect, however.
Several other optical chains, as well as other organizations of vision
care providers, have more service locations and cover more geographical
areas than does the Company.
Mexican Operations
------------------
RISKS. The Company's Mexican operations face risks substantially
similar to those faced by the Company in connection with its domestic
operations, including dependence on the host store and expansion
requirements. There can be no assurance that such operations will be
able to attain profitability. In addition, such operations expose the
Company to all of the risks arising from investing and operating in
foreign countries generally, including a different regulatory, political,
and governmental environment, currency fluctuations, currency devaluations,
inflation, price controls, restrictions on profit repatriation, lower per
capita income and spending levels, import duties and other impediments to
the delivery of inventory and equipment to vision center locations,
value-added taxes, and difficulties of cross-cultural marketing.
ECONOMIC AND POLITICAL ENVIRONMENT. Regulations in Mexico do not
currently include currency controls, restrictions on profit repatriation,
limitations on foreign ownership, or restrictions on sourcing of products
that would adversely affect the Company's operations. The cumulative
translation adjustment in shareholders' equity for operations in foreign
countries at January 3, 1998 was $4.1 million.
Page 8 of 56
As a result of inflation in prior years, the Company has in the past
adjusted its retail pricing. Further pricing adjustments are contingent
upon competitive pricing levels in the marketplace. Management is monitoring
the continuing impact of these inflationary trends.
The Securities and Exchange Commission has qualified Mexico as a highly
inflationary economy under the provisions of SFAS No. 52, "Foreign Currency
Translation". Consequently, in 1997, the financial statements of the
Mexico operation were remeasured with the U.S. dollar as the functional
currency. During 1997, an immaterial loss resulted from changes in foreign
currency rates between the peso and the U.S. dollar, as calculated in the
remeasurement process, and was recorded in the Company's statement of
operations.
Trade Names and Trademarks
--------------------------
The Wal-Mart Agreement provides that, in connection with its Wal-Mart
vision centers, the Company must use the tradename "Vision Center located
in Wal-Mart" and indicate that the vision centers are operated by the
Company. Vision centers in stores owned by Wal-Mart Mexico do business
under the name "Centro de Vision." The Company also has licensed the
right to use the "Gitano" and "Guy Laroche" trademarks in its domestic
vision centers pursuant to license agreements providing for royalty
payments and containing other customary terms and conditions. The
Gitano agreement expired on June 30, 1997. Discussions concerning
extension of the Gitano agreement are in progress. The Guy Laroche
agreement expires December 31, 2001.
Employees
---------
As of January 3, 1998, the Company employed 2,040 associates on a
full-time basis and 819 associates on a part-time basis, of whom 2,468
were engaged in retail sales, 188 in laboratory and distribution operations,
and 203 in management and administration. Apart from its Mexican employees,
none of the associates employed by the Company are covered by any collective
bargaining agreements. All associates (with the exception of home office
personnel) employed in the Company's Mexican operations are covered by
collective bargaining agreements. The Company considers its employment
relations to be good, and to date the Company has not experienced any
significant difficulties in staffing its vision centers.
Page 9 of 56
Foreign and Domestic Operations
-------------------------------
See Note 14 to the consolidated financial statements contained
elsewhere in this report for additional information regarding the
Company's foreign and domestic operations.
ITEM 2. PROPERTIES
The Company's 413 domestic vision centers in operation as of
January 3, 1998 are located in the following states:
Alabama 7 New Hampshire 4
Alaska 5 New Jersey 12
Arizona 14 New Mexico 10
California 78 New York 26
Colorado 8 North Carolina 37
Connecticut 9 North Dakota 10
Florida 4 Oregon 9
Georgia 36 Pennsylvania 18
Hawaii 4 South Carolina 11
Iowa 7 South Dakota 1
Kansas 10 Tennessee 1
Kentucky 1 Texas 6
Louisiana 1 Virginia 20
Maryland 3 Washington 3
Massachusetts 4 West Virginia 7
Minnesota 33 Wisconsin 4
Montana 2 Wyoming 1
Nevada 7
The Company's foreign vision centers in operation as of January 3,
1998 are located in the following countries:
Czech Republic and Slovakia 3
Mexico 26
The Company's home office is located in approximately 66,000 square feet
of space in Lawrenceville, Georgia, and is subleased from Wal-Mart through
the year 2001 (with an option to renew for approximately seven additional
years). The Company's central distribution center, an anti-reflective and
mirror coating facility, and a lens laboratory are located in the Company's
Lawrenceville headquarters.
The Company has regional headquarters located in St. Cloud, Minnesota,
which is subject to a lease with a term expiring on October 1, 2007. This
facility also contains a full-service optical laboratory.
The Company's Los Angeles laboratory is also held under lease, which
was cancelled effective February 1998. The Company has entered into a lease
(which expires in December 2002) for a successor facility in the Los Angeles
area.
Page 10 of 56
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently a party to any legal proceedings the result
of which management believes could have a material adverse effect upon its
business or financial condition. The Company is currently the defendant
in a lawsuit (Commercial Court of Paris, Case No. RG 95 108253) in France
arising out of the Company's sale of its French operations. The suit was
initiated on December 6, 1995 by Grand Optical Photoservice, S.A. ("GPS")
to block the Company's sale of its French operations to a third party. GPS
claims that, in selling its French operations to a third party, the Company
breached a letter of intent it had previously signed with GPS. By a decision
dated December 14, 1995, the trial court rejected the plaintiff's claims
and fined the plaintiff for filing a frivolous claim. The plaintiff has
filed an appeal. The Company believes that the plaintiff's claims are
without merit.
The Company received, with respect to the 1992 tax year, a deficiency
notice (dated September 11, 1996) from the Internal Revenue Service ("IRS")
asserting, among other claims, that the Company was not entitled to a certain
deduction in the amount of $4,353,367 (relating to the exercise of certain
stock options - see Note 5 to consolidated financial statements). The Company
vigorously disputes these allegations. Through its counsel, the Company
filed a petition in October 1996 in the U.S. Tax Court (Docket No. 23670-96),
contesting the deficiency notice. Subject to the execution of definitive
settlement documents, the Company and the IRS have agreed to settle the
litigation. The settlement would provide that the Company receive
substantially all of the deduction it seeks. (See Notes 5, 9, and 16 to
consolidated financial statements.)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the last
quarter of fiscal 1997.
Page 11 of 56
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the NASDAQ National Market System
under the symbol "NVAL".
The following table sets forth for the periods indicated the high and low
closing prices of the Company's Common Stock in the over-the-counter market on
the NASDAQ National Market System.
Quarter Ended High Low
------------- ---- ---
1996 March 30 $3.625 $2.50
June 29 $5.125 $3.00
September 28 $5.125 $4.00
December 28 $4.563 $3.25
1997 March 29 $5.500 $3.875
June 28 $5.250 $4.250
September 27 $5.250 $4.063
1998 January 3 $6.125 $5.125
As of January 3, 1998, there were approximately 630 holders of record
of the Company's Common Stock.
It is the present intention of the Company's board of directors not
to pay dividends but rather to use the Company's cash resources for the
expansion of its operations, acquisitions and repayment of the Company's
revolving credit facility. Future dividend policy will depend upon the
earnings and financial condition of the Company, the Company's need for
funds, and other factors.
Page 12 of 56
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company with respect to
the consolidated financial statements for the years ended December 31,
1993, 1994, December 30, 1995, December 28, 1996 and January 3, 1998 is
derived from the Company's consolidated financial statements. The selected
financial data set forth below should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere
herein. For information on dispositions of certain business operations,
see Note 14 to consolidated financial statements.
1993 1994 (1) 1995 (2) 1996 (2) 1997 (2)(6)
---- -------- -------- ---- ----
(000's except per share information and statistical data)
STATEMENTS OF OPERATIONS DATA:
Net Sales $88,340 $119,395 $145,573 $160,376 $186,354
Cost of Goods Sold 41,445 53,898 67,966 76,692 86,363
------- -------- -------- -------- --------
Gross Profit 46,895 65,497 77,607 83,684 99,991
Gross Profit Percentage 53% 55% 53% 52% 54%
Selling, General, and Administrative
Expenses 48,602 63,911 74,390 76,920 89,156
Provision for Dispositions (3) 7,727 -- 958 -- --
Other Nonrecurring Charges (3) 2,750 -- 1,053 -- --
Stock Compensation Expense (3) 834 -- -- -- --
------- -------- -------- -------- --------
Operating Income (Loss) (13,018) 1,586 1,206 6,764 10,835
Other Income (Expense), Net 154 (1,195) (2,626) (2,084) (1,554)
------- -------- -------- -------- --------
Income (Loss) Before Income Taxes (12,864) 391 (1,420) 4,680 9,281
Income Tax Benefit (Expense) 900 (40) (100) (1,200) (3,708)
------- -------- -------- -------- --------
Net Income (Loss) $(11,964) $ 351 $ (1,520) $ 3,480 $ 5,573
======== ======== ======== ======== ========
Basic Earnings (Loss) Per Common Share (4) $ (.59) $ .02 $ (.07) $ .17 $ .27
======== ======== ======== ======== ========
Diluted Earnings (Loss) Per Common Share (4) $ (.59) $ .02 $ (.07) $ .17 $ .27
======== ======== ======== ======== ========
Earnings (Loss) before Interest, Taxes, $ (7,506) $ 9,153 $ 11,584 $ 16,922 $ 21,870
Depreciation and Amortization
As a Percentage of Sales (8.5%) 7.7% 8.0% 10.6% 11.7%
STATISTICAL DATA (UNAUDITED):
Domestic Vision Centers Open at
End of Period 186 261 319 320 443
Mexico and Eastern Europe Vision
Centers Open at End of Period 19 30 26 21 29
Average Weekly Consolidated Sales
Per Vision Center (5) $10,200 $ 9,500 $8,700 $9,300 $9,400
Average Weekly Sales Per Domestic
Vision Center (5) $11,000 $10,100 $9,100 $9,600 $9,800
Average Weekly Sales Per Vision Center
in Mexico (5) $ 6,800 $ 4,100 $2,900 $2,700 $2,700
Page 13 of 56
1993 1994(1) 1995(2) 1996 (2) 1997 (2)(6)
---- ------- ------- ---- ----
BALANCE SHEET DATA:
Working Capital $ 6,954 $ 8,723 $14,556 $13,502 $12,171
Total Assets 66,172 77,612 81,237 74,564 83,250
Long-Term Debt and Capital Lease
Obligations 15,135 30,479 38,000 26,500 23,725
Shareholders' Equity 31,577 29,613 26,326 29,906 36,368
Long-Term Debt and Lease Obligations
as a Percentage of Shareholders'
Equity 48% 103% 144% 89% 65%
(1) Financial information for 1994 includes results of international
operations for the 11 months ended November 30, 1994.
(2) Financial information for 1995 and subsequent years include results
of international operations for the 12 months ended November 30.
See Note 2 to consolidated financial statements.
(3) In 1995, the Company decided to dispose of its non-core business
operations, resulting in a $2 million provision. See Note 14 to
consolidated financial statements. In 1993, the Company recorded
provisions for nonrecurring charges related to the disposition of
the Canada business, termination of a proposed acquisition of a
frame manufacturer, write off of capitalized costs for a point of
sale system, and compensation expense associated with certain stock
options granted to employees of the Company.
(4) In 1997, the Company adopted SFAS No. 128, "Earnings per Share".
Basic earnings per common share were computed by dividing net
income by the weighted average number of common shares outstanding
during the year. Diluted earnings per common share were computed
as basic earnings per common share, adjusted for outstanding stock
options that are dilutive. Outstanding options with an exercise
price below the average price of the Company's common stock have
been included in the computation of diluted earnings per common
share, using the treasury stock method, as of the date of the grant.
Stock options have been excluded from the calculation of weighted
average shares outstanding during 1993 and 1995, as the effect would
be antidilutive. All earnings per share calculations for 1993
through 1996 have been restated to conform with SFAS No. 128.
(5) Calculated from sales from each month during the period divided by
the number of store weeks of sales during the period, excluding
stores not open a full month.
(6) Effective January 1, 1995, the Company changed its year end to a
52/53 week retail calendar (see Note 2 to consolidated financial
statements). Fiscal 1997 consisted of 53 weeks ended January 3,
1998. Sales for the 53rd week approximated $3.0 million in
fiscal 1997.
Page 14 of 56
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
- ---------------------
The Company's results of operations in any period are significantly
affected by the number of vision centers opened and operating during such
period. Given the Company's rapid expansion to 443 vision centers at
January 3, 1998, and dispositions of significant operating units (both
domestic and foreign), period-to-period comparisons may not be meaningful
and the results of operations for historical periods may not be indicative
of future results.
Effective January 1, 1995, the Company changed its year end to a more
standard 52/53 week retail calendar with the fiscal year ending on the
Saturday closest to December 31. Fiscal 1997 consisted of 53 weeks. Sales
for the 53rd week approximated $3.0 million in fiscal 1997. International
operations are reported using a fiscal year ended November 30. (See Note 2
to consolidated financial statements.)
Year Ended January 3, 1998 ("fiscal 1997") Compared to
Year Ended December 28, 1996 ("fiscal 1996")
- ------------------------------------------------------
Consolidated Results
- --------------------
NET SALES. Net sales during fiscal 1997 increased to $186.4 million
from $160.4 million for the prior year. Such increase was due to a 6.8%
increase in comparable store sales for domestic vision centers as well as
an increase in the number of domestic vision centers. Consolidated average
weekly net sales per vision center increased 1.1% from $9,300 during fiscal
1996 to $9,400 during fiscal 1997. Such improvement was due primarily to
the increase in comparable store sales on the domestic business, offset in
part by the acquisition in the fourth quarter of 1997 of Midwest Vision,
Inc., a 51 unit retail optical company with annual sales in 1997 of
approximately $14.4 million. Average weekly net sales for vision centers
open less than one year were lower than the average for vision centers
open less than one year in fiscal 1996.
Continued success of "life style" selling programs, improved
merchandising and product presentation, as well as continued focus on
customer service, contributed to the sales improvement. In stores open
for more than one year, average spectacle unit sales per week and the
average spectacle transaction value increased over that attained in fiscal
1996. In addition, sales under managed care programs increased from the
prior year.
Net sales from international operations increased from $3.8 million
in the 12-month period ending November 30, 1996 to $4.0 million in the
comparable period ending November 30, 1997. The increase is attributable
primarily to new store openings.
GROSS PROFIT. For fiscal 1997, gross profit increased to $100.0
million from $83.7 million in the prior year. This increase was due
to the increase in net sales described above. Gross profit percentage
increased from 52.2% in 1996 to 53.7% in 1997. Gross profit percentage
was positively affected primarily by increased receipts of occupancy fees
from independent optometrists as a result of the ELI and SPI transactions
which closed in January 1997 (see Note 3 to consolidated financial
statements). Additionally, the Company's focus on lifestyle selling
contributed to the improvement in gross profit percentage.
Page 15 of 56
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES ("SG&A expense").
SG&A expense (which includes both store operating expenses and home
office overhead) increased to $89.2 million in fiscal 1997 from
$77.0 million in 1996. As a percentage of net sales, SG&A expense was
47.8% in 1997, compared to 48.0% for 1996. The decrease was due primarily
to improved efficiencies at store level partially offset by increases in
administrative expenses related to responsibilities assumed in connection
with the ELI and SPI transactions which closed in January 1997 and transition
costs resulting from the acquisition of Midwest Vision, Inc. (See Notes 3
and 4 to consolidated financial statements.)
OPERATING INCOME. Operating income for fiscal 1997 increased to
$10.8 million from $6.8 million in 1996 representing an increase in
operating margin from 4.2% in 1996 to 5.8% in 1997. In addition, the
Company's international operations (29 vision centers at November 30,
1997) generated an operating loss of $28,000 in fiscal 1997, as opposed
to an operating loss of $612,000 in the comparable period a year ago.
International operating results do not include allocated corporate
overhead, interest, and taxes.
OTHER EXPENSE. The decrease in other expense to $1.6 million,
compared to $2.1 million in 1996, is due, for the most part, to
reduced interest expense, resulting from the reduction of outstanding
borrowings under the Company's credit facility. (See Note 11 to
consolidated financial statements.)
PROVISION FOR INCOME TAXES. The effective income tax rate on
consolidated pre-tax income is 40%, which represents a tax provision
of 39% on domestic earnings. Due to the Company's tax net operating
loss carryforward position, current year earnings will not be subject
to regular Federal Income Tax. However, the Company will be subject
to Federal Alternative Minimum Tax and state income tax, which will
result in the Company making cash payments approximating 24% of
consolidated pre-tax earnings. In 1998, the Company anticipates
making cash payments for Federal and State income taxes approximating
27% of consolidated pre-tax earnings.
NET INCOME. Net income was $5.6 million, or $0.27 per share, as
compared to net income of $3.5 million, or $0.17 per share, in 1996.
The increase in net income of $2.1 million over fiscal 1996 represents a
60% increase in net income on a sales increase of 16%.
Year Ended December 28, 1996 Compared to Year Ended December 30, 1995
- ---------------------------------------------------------------------
Consolidated Results
- --------------------
NET SALES. 1996 net sales increased to $160.4 million from $145.6
million for 1995, due to the net effect of the following: (a) an increase
in the number of domestic vision centers; (b) a 4% increase in comparable
sales for domestic vision centers (those open for at least one year); and
(c) a reduction in revenues resulting from the disposition and closure
of businesses in the fourth quarter 1995 and the first quarter 1996.
Consolidated average weekly net sales per vision center increased from
approximately $8,700 in 1995 to $9,300 in 1996 due primarily to the
disposition of underperforming vision centers in certain domestic operations
and Mexican operations. The improvement in average weekly net sales for
comparable domestic stores was partially offset by a reduction in average
weekly net sales for vision centers opened in 1996.
Page 16 of 56
In the first quarter of 1996, the Company implemented a new merchandising
program for spectacles. Initially, the new program served to increase the
average number of sales transactions per vision center (market share)
over the prior year, but at a lower dollar value per transaction. The
Company experienced an increase in average number of transactions per
vision center for the remainder of the year. In the latter part of 1996,
the average transaction value increased. For the year, the improvement
in sales resulting from market share increases more than offset the effect
on sales resulting from the decline in the average transaction value.
Consistent with the trend experienced in 1994 and 1995, average
weekly sales volumes for new domestic vision centers opened in 1996 were
lower than vision centers opened in the previous year. The effect of
lower new store results in 1996, which had a negative impact on consolidated
average weekly sales, was offset by an increase in average weekly sales
for stores opened in 1995 and 1994.
GROSS PROFIT. Gross profit in 1996 increased to $83.7 million from
$77.6 million in 1995, primarily because of increased net sales. Gross
profit as a percentage of sales declined from 53.3% in 1995 to 52.2% in
1996. The Company maintained margins from product sales at store level,
but margins were negatively affected by a reduction in promotional
monies from vendors (because of fewer store openings) and increased
freight costs related to the reset of store inventory planograms.
SELLING, GENERAL, AND ADMINISTRATIVE ("SG&A") EXPENSES. SG&A expenses
(which include both vision center operating expenses and home office
overhead) increased to $77.0 million in 1996 from $74.4 million in 1995,
reflecting the addition of new vision centers in 1996. Average weekly
store expense per vision center remained constant. As a percentage of
sales, SG&A expenses decreased from 51.1% in 1995 to 48.0% in 1996. The
decrease was attributable to comparable store sales increases achieved
during 1996 and to continued improved efficiencies in the operation of
administrative offices.
OTHER EXPENSE. Other expense decreased from $2.6 million in 1995
to $2.1 million in 1996 due to a decrease in average borrowings by the
Company under its credit facility, in addition to a reduction in the
effective interest rate paid by the Company in 1996 versus 1995.
PROVISION FOR INCOME TAXES. The effective income tax rate in 1996
was 26%. In light of the disposition of the unprofitable Venture domestic
operations in the first quarter of 1996 (see Note 14 to consolidated
financial statements), the Company reassessed the realizability of
domestic net operating loss carryforwards and accordingly reduced the
valuation allowance in 1996.
NET INCOME. In 1996, the Company achieved net income of $3.5 million,
or $0.17 per share, as compared to a net loss of $1.5 million, or $0.07
per share in 1995. Results of operations for 1995 included charges
approximating $2 million. (See Note 14 to consolidated financial
statements.)
Page 17 of 56
International Results in Fiscal 1996
- ------------------------------------
At November 30, 1996, the Company operated 21 vision centers
internationally versus 36 vision centers at November 30, 1995. International
locations included 18 in Mexico and two and one in the Czech Republic
and Slovakia, respectively. Financial results for international operations
during 1996 are based on the 12 months ended November 30. (See Note 2 to
consolidated financial statements.)
NET INTERNATIONAL SALES. Net international sales for the 12 months
ended November 30, 1996 were $3.8 million, a decrease from $8.9 million
during the 12 months ended November 30, 1995. Such decrease was principally
due to closure of vision centers in France and in Mexico.
GROSS PROFIT. Gross profit decreased to $1.6 million from $4.4 million
in 1995, primarily the result of the decreased sales. Gross profit as a
percentage of sales declined from 49% in 1995 to 43% in 1996, due primarily
to the effect of selling the French operation, which realized a higher gross
profit percentage than the average for the international business.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES EXCLUDING INTERCOMPANY
ALLOCATIONS. SG&A expense decreased from $5.8 million for the 12 months
ended 1995 to $2.0 million for the 12 months ended November 30, 1996, as
a result of the dispositions mentioned above. SG&A expense as a percentage
of sales decreased to 53% for the 12 months ended November 30,
1996 from 65% of sales for the 12 months ended November 30, 1995. Reductions
in selected expenses at store level coupled with favorable leveraging of
administrative expense reduced SG&A expense as a percentage of sales.
OPERATING LOSS. The operating loss for international operations does not
include allocated corporate overhead, interest or taxes. International
operations generated a net operating loss of $612,000 in the 12 months ended
November 30, 1996, as opposed to net operating loss of $1.3 million in the
12 months ended November 30, 1995. Mexican operations generated an operating
loss of $294,000 in the 12 months ended November 30, 1996.
Inflation
- ---------
Although the Company cannot determine the precise effects of inflation,
it does not believe inflation has had a material effect on its domestic
sales or results of operations. The Company cannot determine whether
inflation will have a material long-term effect on its sales or results of
operations. Continued inflation in Mexico may cause consumers to reduce
discretionary purchases such as eyeglasses.
As a result of inflation in prior years, the Company has in the past
adjusted its retail pricing. Further pricing adjustments are contingent
upon competitive pricing levels in the marketplace. Management is monitoring
the continuing impact of these inflationary trends.
Page 18 of 56
Liquidity and Capital Resources
- -------------------------------
In July 1997, the Company entered into a two-year $45 million revolving
credit facility syndicated by a major regional bank. The Company's credit
facility contains, among other covenants, a material adverse change clause
and certain minimum net worth and other requirements. As of January 3, 1998,
the Company had borrowed $19.5 million under its credit facility versus
outstanding borrowings of $26.5 million as of December 28, 1996.
During 1997, store openings and other capital requirements as well as
the acquisition of Midwest Vision, Inc. were funded through internal cash
flow. The acquisition of Midwest Vision, Inc. included a cash payment of
$1.9 million, issuance of a debt instrument in the principal amount of
$620,000 payable over five years, and issuance of 110,795 shares of common
stock. Additionally, the Company made cash payments of $239,000 related to
investment advisory fees and other costs directly related to the acquisition.
Subsequent to the close date, the Company paid off long-term debt of $1.4
million assumed in the transaction.
The Company issued unsecured promissory notes relative to various
transactions completed with ELI and SPI and to the Midwest Vision acquisition.
(See Notes 3 and 4 to consolidated financial statements.) The notes are
fixed rate instruments, with rates ranging from 6.4% to 8.5%. The promissory
notes with ELI and SPI require quarterly payments through January 2009
whereas the Midwest Vision note requires monthly payments through October
2002. The fair market value of the promissory notes are approximately
$80,000 less than book value at January 3, 1998.
The Company has entered into rate swap agreements which effectively
convert underlying variable rate debt based on LIBOR to fixed rate debt.
The agreements extend through February 20, 2000. The notional principal
amount on one agreement is $20 million, with an effective fixed rate of
6.93%, which will expire on February 20, 1998. At that date, two separate
agreements will commence with an aggregate notional principal amount of
$10 million and an effective fixed rate which averages 7.52%. At January 3,
1998, the fair market value of the fixed rate hedges approximates book
value. Under existing accounting standards, this activity is accounted
for as a hedging activity. The swaps are settled every 90 days.
The Company maintains an unsecured line of credit agreement with a
financial institution which, at the discretion of the lender, allows the
Company to borrow up to $5 million. The agreement is available to fund
financing needs on a short-term basis at a variable interest rate, determined
by the lender. As of year-end, there were no borrowings outstanding under
the agreement.
As of January 3, 1998, the Company plans to open (exclusive of any
vision centers obtained through acquisitions) approximately 35 domestic
and approximately 6 Mexican vision centers during 1998. Consistent with
prior years, the number of ultimate openings is dependant on the
construction schedules of the host store. In fiscal 1998, the Company
has a goal to attain an approximate 20% increase in store growth through
new store openings in existing businesses and through acquisitions. The
Company's ability to attain such goal will depend upon the risk factors
described below. Average costs for opening domestic vision centers have
approximated $140,000 for fixed assets and $35,000 for inventory. The Company
incurs approximately $20,000 for preopening expenses for each opening of a
domestic vision center. Prior to 1998, such costs were capitalized and
amortized over 12 months. Effective in 1998, such costs will be expensed as
incurred in accordance with proposed AICPA Statement of Position, "Reporting
Page 19 of 56
on the Costs of Start-Up Activities". Capital for leasehold improvements and
other fixed assets in Mexican vision centers should approximate $75,000
per vision center.
At January 3, 1998, the Company had borrowed $19.5 million under its
credit facility. The Company anticipates that internally generated funds, as
well as funds available under the Company's revolving credit facility, will
be sufficient to fund ongoing operating costs associated with its current
vision centers, vision centers currently scheduled to be opened during
1998, and any vision centers which may be acquired by the Company during 1998.
Year 2000 Compliance
- --------------------
The majority of the Company's internal information systems are currently
Year 2000 compliant or in the process of being replaced with fully-compliant
new systems. The Company has identified approximately 220 point of sale
systems that require hardware upgrades to be year 2000 compliant. The total
cost of software changes, hardware changes, and implementation is estimated
to be approximately $650,000. Costs related to hardware and new software
purchases will be capitalized as incurred and amortized over three years.
These new system modifications are expected to be completed in the second half
of 1999.
The Company is in the process of developing an enhanced point of sale
software system which is scheduled to be in the retail stores by the fourth
quarter of 1999. The primary purpose of the system is to upgrade data
processing, broaden in-store capabilities, and improve the accuracy of
processing managed care sales transactions. In addition to the above
improvements, the system will be designed to be Year 2000 compliant.
Some of the Company's vendors, financial institutions, and managed care
organizations utilize equipment to capture and transmit transactions. The
Company is in the process of coordinating its Year 2000 compliance efforts
with those of such organizations. The estimated future cost of this
transition is minimal. No assurance can be given that such organizations
will make their systems Year 2000 compliant.
The Company will utilize both internal and external resources to
reprogram, or replace, and test software for Year 2000 compliance. The costs
of the Year 2000 project and the date on which the Company plans to complete
Year 2000 modifications are based on management's best estimates, which
were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates
will be realized and actual results could differ materially from those plans.
Derivative Financial Instruments
- --------------------------------
MARKET RISK. Market risk is the potential change in an instrument's
value caused by, for example, fluctuations in interest and currency exchange
rates. The Company's primary market risk exposures are interest rate risk
and the risk of unfavorable movements in exchange rates between the U.S.
dollar and the Mexican peso. Monitoring and managing these risks is a
continual process carried out by senior management, which reviews and
approves the Company's risk management policies. Market risk is managed
based on 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.
Page 20 of 56
INTEREST RATE RISK. The Company holds long-term debt on a revolving
credit facility with variable interest rates indexed to LIBOR which exposes
it to the risk of increased interest costs if interest rates rise. To
reduce the risk related to unfavorable interest rate movements, the Company
enters into interest rate swap contracts to pay a fixed rate and receive a
variable rate that is indexed to LIBOR. The ratio of the swap notional
amount to the principal amount of variable rate debt issued changes
periodically based on management's ongoing assessment of the future trend
in interest rate movements. The Company's financial advisors, both internal
and external, provide ongoing advice regarding trends that affect management's
assessment. The notional amount of fixed interest rate swaps in place at
January 3, 1998 represents approximately 100 percent of the Company's
variable rate debt and will change to approximately 50% on February 20, 1998.
FOREIGN EXCHANGE RATE RISK. The Securities and Exchange Commission
has qualified Mexico as a highly inflationary economy under the provisions
of SFAS No. 52 - Foreign Currency Translation. Consequently, in 1997, the
financial statements of the Mexico operation were remeasured with the U.S.
dollar as the functional currency. During 1997, an immaterial loss resulted
from changes in foreign currency rates between the peso and the U.S. dollar,
as calculated in the remeasurement process, and was recorded in the Company's
statement of operations. Continued increases in the conversion rate for the
peso will generate further losses in future years. The Company has pursued
the purchase of a foreign currency hedge to mitigate the possible financial
loss resulting from unfavorable movements in the peso; however, due to the
unstable market conditions relative to the peso, it is management's conclusion
that the cost to acquire a hedge exceeds the financial loss that may occur
given current predictions by the Company's external financial advisors as
to the peso conversion rate at fiscal year end 1998. The conversion rate
was 8.2 at fiscal year end 1997. If the conversion rate moves to 10 at year
end 1998, the loss to the Company would approximate $60,000. The Company
will continue to explore options to reduce this financial risk.
Option to Extend License Agreement
- ----------------------------------
The Company's agreement with Wal-Mart provides for a nine-year base term and
a three-year option for each vision center, with the base term beginning on
the date of opening. The Company opened six vision centers in 1990 under its
agreement with Wal-Mart and 54 such vision centers in 1991, with additional
vision centers being opened in subsequent years. Accordingly, beginning in
1999, the Company will determine whether to exercise options to extend the
licenses for such vision centers. The Company will make such decisions based
upon various factors, including, without limitation, the sales levels of each
vision center, its estimated future profitability, increased minimum license
fees charged by Wal-Mart during the option period, and other relevant factors.
Each option must be exercised at least six months prior to the expiration of
the license for each vision center. Although the Company expects that it will
extend the licenses of a substantial majority of these vision centers, no
assurance can be given as to the number of vision centers the licenses of
which will be extended.
Page 21 of 56
Risk Factors
- ------------
Any expectations, beliefs, and other non-historical statements contained
in this 10-K are forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements made in
this Form 10-K concern the following matters: planned development of software
systems; planned opening of vision centers; expected exercise of options under
the Wal-Mart Agreement; potential future acquisitions; funding of expansion
through internal cash flow; and anticipated reduction of borrowings under the
Company's credit facility. With respect to such forward-looking statements
and others which may be made by, or on behalf of, the Company, the following
factors could materially affect the Company's actual results:
- - The Company's relationship with its host stores, including the Company's
dependence on Wal-Mart for its current and continued operations.
- - Operating factors affecting customer satisfaction and quality controls of
the Company in optical manufacturing.
- - The Company's ability to identify potential acquisition targets and to
consummate acquisitions on acceptable terms and conditions.
- - Risks associated with the acquisition and integration of any acquired
operations.
- - The Company's ability to obtain and retain managed care contracts and
business. Management expects that managed care arrangements will become
increasingly important in the optical industry.
- - The Company's ongoing ability to generate continued sales and
contribution improvement at its vision centers operated under the Wal-Mart
Agreement, so as to justify the exercise of options to extend the licenses
of vision centers.
- - Pricing and other competitive factors.
- - The mix of goods sold.
- - Availability of optical and optometric professionals. An element of the
Company's business strategy and a requirement of the Wal-Mart Agreement is
the availability of vision care professionals at clinics in or nearby the
Company's vision centers.
- - State and federal regulation of managed care and of the practice of
optometry and opticianry.
- - The Company's ability to timely develop a new point of sale system.
- - General risks arising from investing and operating in Mexico, including
a different regulatory, political, and governmental environment, currency
fluctuations, high inflation, price controls, restrictions on profit
repatriation, lower per capita income and spending levels, import duties,
value added taxes, and difficulties in cross-cultural marketing.
- - The Company's ability to select in-stock merchandise attractive to
customers.
- - Weather affecting retail operations.
Page 22 of 56
- - Variations in the level of economic activity affecting employment and
income levels of consumers.
- - Seasonality of the Company's business.
Recent Accounting Pronouncements
- --------------------------------
Effective in 1997, the Company adopted Statement of Financial Accounting
Standards No. 128 ("SFAS 128") "Earnings per Share" and No. 129 ("SFAS 129")
"Disclosure of Information and Capital Structure." SFAS 128 simplifies the
calculation of basic earnings per common share and diluted earnings per
common share. Additionally, disclosure is required presenting a
reconciliation of the computations for basic and diluted earnings per common
share. The change in calculations did not change the Company's reported
earnings per common share amounts presented in previously filed 10-K's or
quarterly reports filed in 10-Q's. SFAS 129 requires disclosure of the
pertinent rights and privileges of all securities other than ordinary
common stock. The Company has disclosed such information in previous years'
annual reports filed on Form 10-K.
Effective in 1997, the Company adopted Statement of Financial Accounting
Standard No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise
and Related Information". The statement addresses reporting of segment
information. (See Note 15 of Notes to Consolidated Financial Statements.)
In July 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income". The statement addresses the reporting and display of changes in
equity that result from transactions and other economic events, excluding
transactions with owners. Management does not believe the adoption of
SFAS No. 130 will not have a material impact on the Company's financial
statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company are included as a
separate section of this Report commencing on page 28.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no disagreements with accountants on accounting and
financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The section entitled "Election of Directors" contained in the definitive
proxy statement to holders of the Company's Common Stock in connection with
the solicitation of proxies to be used in voting at the 1998 Annual Meeting
of Shareholders is hereby incorporated by reference for the purpose of
providing information about the identification of directors.
ITEM 11. EXECUTIVE COMPENSATION
The section entitled "Compensation of Executive Officers" contained in
the definitive proxy statement to holders of the Company's Common Stock in
connection with the solicitation of proxies to be used in voting at the
1998 Annual Meeting of Shareholders is hereby incorporated by reference
for the purpose of providing information about executive compensation.
Page 23 of 56
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Common Stock Ownership of Certain Beneficial
Owners and Management" contained in the definitive proxy statement to
holders of the Company's Common Stock in connection with the solicitation
of proxies to be used in voting at the 1998 Annual Meeting of Shareholders
is hereby incorporated by reference for the purpose of providing information
about security ownership of certain beneficial owners and management.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Compensation Committee Interlocks and Insider
Participation" contained in the definitive proxy statement to holders of
the Company's Common Stock in connection with the solicitation of proxies
to be used in voting at the 1998 Annual Meeting of Shareholders is hereby
incorporated by reference for the purpose of providing information about
transactions with management and others and certain business relationships.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) and (2) The Consolidated Financial Statements and Schedule of
the Company and its subsidiaries are filed herewith as a separate section
of this Report commencing on page 28.
(3) The following exhibits are filed herewith or incorporated by
reference:
Exhibit
Number
3.2a -- Amended and Restated By-Laws of the Company.
4.1b -- Form of Common Stock Certificate.
4.2c -- Amended and Restated Articles of Incorporation of the
Company.
4.5b -- Rights Agreement dated as of January 17, 1997 between
the Company and Wachovia Bank of North Carolina, N.A.
10.7a -- Sublease Agreement, dated December 16, 1991, by and
between Wal-Mart Stores, Inc. and the Company.
10.17d -- Form indemnification agreement for directors and
certain executive officers of the Company.
10.24e++ -- Employment Agreement of Sandra M. Buffa, dated as of
June 15, 1993.
10.34f -- Vision Center Master License Agreement, dated as of
June 16, 1994, by and between Wal-Mart Stores, Inc. and
the Company. [Portions of Exhibit 10.34 have been
omitted pursuant to an order for confidential treatment
granted by the Commission. The omitted portions have
been filed separately with the Commission.]
Page 24 of 56
Exhibit
Number
10.37g++ -- Split Dollar Life Insurance Agreement, dated as of
November 3, 1994, among the Company, A. Kimbrough Davis,
as Trustee, and James W. Krause.
10.39g++ -- Level IV Management Incentive Plan.
10.46h -- Agreement dated as of November 23, 1995 by and between
Mexican Vision Associates Operadora, S. de R.L. de C.V.
and Wal-Mart de Mexico, S.A. de C.V. in original Spanish
and an uncertified English translation. [Portions of
Exhibit 10.46 have been omitted pursuant to a request
for confidential treatment filed with the Commission.
The omitted portions have been filed separately with
the Commission.]
10.47i++ -- Executive Relocation Policy.
10.48j++ -- Restated Stock Option and Incentive Award Plan.
10.48.1k++ -- First Amendment to Restated Stock Option and Incentive
Award Plan.
10.49l++ -- Form Change in Control Agreement for certain executive
officers of the Company.
10.50l -- Agreement for Assignment of License Interests and Related
Matters dated as of November 1, 1996 by and among the
Company and other parties.
10.51k++ -- Form Restricted Stock Award.
10.52m++ -- Restated Non-Employee Director Stock Option Plan.
10.53n -- $45,000,000 Credit Agreement dated as of July 15, 1997
among the Company, Wachovia Bank, N.A., and certain
other banks.
10.54** -- Stock Purchase Agreement dated as of September 15, 1997
by and between the Company and Myrel Neumann, O.D.
10.55++** -- Executive Deferred Compensation Plan.
11** -- Statement Re: Computation of Net Income (Loss) Per Share.
21** -- Subsidiaries of the Registrant.
23** -- Consent by Arthur Andersen LLP.
27** -- Financial Data Schedule.
Page 25 of 56
Exhibit
Number
a Incorporated by reference to the Company's Registration Statement
on Form S-1, registration number 33-46645, filed with the Commission
on March 25, 1992, and amendments thereto.
b Incorporated by reference to the Company's Registration Statement
on Form 8-A filed with the Commission on January 17, 1997.
c Incorporated by reference to the Company's Form 8-K filed with the
Commission on January 17, 1997.
d Incorporated by reference to the Company's Form 10-K for the fiscal
year ended December 31, 1992.
e Incorporated by reference to the Company's Form 10-Q for the
quarterly period ended September 30, 1993.
f Incorporated by reference to the Company's Form 10-Q for the
quarterly period ended September 30, 1994.
g Incorporated by reference to the Company's Form 10-K for the
fiscal year ended December 31, 1994.
h Incorporated by reference to the Company's Form 10-K for the
fiscal year ended December 30, 1995.
i Incorporated by reference to the Company's Form 10-Q for the
quarterly period ended March 30, 1996.
j Incorporated by reference to the Company's Form 10-Q for the
quarterly period ended June 29, 1996.
k Incorporated by reference to the Company's Form 10-Q for the
quarterly period ended March 29, 1997.
l Incorporated by reference to the Company's Form 10-K for the
year ended December 28, 1996.
m Incorporated by reference to the Company's Form 10-Q filed on
June 28, 1997.
n Incorporated by reference to the Company's Form 10-Q for the
quarterly period ended September 27, 1997.
** Filed with this Form 10-K.
++ Management contract or compensatory plan or arrangement in which
a director or named executive officer participates.
(b) No reports on Form 8-K have been filed during October,
November, or December, 1997.
Page 26 of 56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
NATIONAL VISION ASSOCIATES, LTD.
By: /s/James W. Krause
James W. Krause
Chairman of the Board,
President and Chief Executive
Officer and Director
Date: February 17, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant on February 17, 1998, in the capacities indicated.
Signature Title
/s/
_____________________________
James W. Krause Chairman of the Board, President
and Chief Executive Officer and Director
/s/
_____________________________
Sandra M. Buffa Senior Vice President, Finance and
Treasurer, and Director (Principal
Financial Officer)
/s/
_____________________________
Angus C. Morrison Vice President, Corporate Controller
(Principal Accounting Officer)
/s/
_____________________________
David I. Fuente Director
/s/
_____________________________
Ronald J. Green Director
/s/
_____________________________
Campbell B. Lanier, III Director
/s/
_____________________________
J. Smith Lanier, II Director
Page 27 of 56
NATIONAL VISION ASSOCIATES, LTD. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
AS OF DECEMBER 30, 1995, DECEMBER 28, 1996, AND JANUARY 3, 1998
TOGETHER WITH
AUDITORS' REPORT
Page 28 of 56
NATIONAL VISION ASSOCIATES, LTD. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
The following consolidated financial statements and schedule of the
registrant and its subsidiaries are submitted herewith in response to
Item 8 and Item 14(a)1 and to Item 14(a)2, respectively.
Page
____
Report of Independent Public Accountants 30
Consolidated Balance Sheets as of December 28, 1996 and
January 3, 1998 31
Consolidated Statements of Operations for the
Years Ended December 30, 1995, December 28, 1996 and
January 3, 1998 32
Consolidated Statements of Shareholders' Equity for
the Years Ended December 30, 1995, December 28, 1996 and
January 3, 1998 33
Consolidated Statements of Cash Flows for the Years Ended
December 30, 1995, December 28, 1996 and January 3, 1998 34
Notes to Consolidated Financial Statements and Schedule 35
Schedule II, Valuation and Qualifying Accounts 56
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions, are inapplicable, or have been
disclosed in the notes to consolidated financial statements and,
therefore, have been omitted.
Page 29 of 56
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of National Vision
Associates, Ltd. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of
NATIONAL VISION ASSOCIATES, LTD. (a Georgia corporation) AND SUBSIDIARIES
as of December 28, 1996 and January 3, 1998 and the related consolidated
statements of operations, shareholders' equity, and cash flows for the
three years in the period ended January 3, 1998. These financial statements
and the schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of National
Vision Associates, Ltd. and subsidiaries as of December 28, 1996 and
January 3, 1998 and the results of their operations and their cash
flows for the three years in the period ended January 3, 1998 in
conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedule listed in the
index to consolidated financial statements is presented for purposes of
complying with the Securities and Exchange Commission's rules and is
not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in relation
to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 17, 1998
Page 30 of 56
NATIONAL VISION ASSOCIATES, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 28, 1996 and January 3, 1998
(000's except share information)
1996 1997
____ ____
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,110 $ 2,559
Accounts receivable (net of allowance: 1996 - $353; 1997 - $762) 4,164 6,066
Inventories 23,970 23,271
Store preopening costs (net of accumulated amortization: 1996 - $605; 1997 - $712) 240 295
Other current assets 944 464
------- -------
Total current assets 30,428 32,655
------- -------
PROPERTY AND EQUIPMENT:
Equipment 38,573 44,070
Furniture and fixtures 17,136 20,366
Leasehold improvements 13,178 15,005
Construction in progress 1,669 893
------- -------
70,556 80,334
Less accumulated depreciation (27,206) (36,692)
------- -------
Net property and equipment 43,350 43,642
------- -------
OTHER ASSETS AND DEFERRED COSTS (net of accumulated amortization:
1996 - $729; 1997 - $846) 786 1,015
ASSIGNMENT AGREEMENT AND INTANGIBLE ASSETS (net of accumulated
amortization: 1997 - $733) 5,938
------- -------
$74,564 $83,250
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 8,283 $ 7,252
Accrued expenses and other current liabilities 8,643 12,754
Current portion long-term debt 478
------- -------
Total current liabilities 16,926 20,484
------- -------
REVOLVING CREDIT FACILITY - LONG TERM 26,500 19,500
LONG-TERM NOTES PAYABLE, LESS CURRENT PORTION 4,225
DEFERRED INCOME TAX LIABILITIES 1,232 2,673
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDERS' EQUITY:
Preferred stock, $1 par value; 5,000,000 shares authorized, none issued -- --
Common stock, $.01 par value; 100,000,000 shares authorized,
20,644,752 and 20,819,955 shares issued and outstanding as
of December 28, 1996 and January 3, 1998, respectively 206 208
Additional paid-in capital 42,166 43,053
Retained deficit (8,393) (2,820)
Cumulative foreign currency translation (4,073) (4,073)
------- -------
Total shareholders' equity 29,906 36,368
------- -------
$74,564 $83,250
======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
Page 31 of 56
NATIONAL VISION ASSOCIATES, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 30, 1995, December 28, 1996 and January 3, 1998
(000's except per share information)
1995 1996 1997
---- ---- ----
NET SALES $145,573 $160,376 $186,354
COST OF GOODS SOLD 67,966 76,692 86,363
-------- -------- --------
GROSS PROFIT 77,607 83,684 99,991
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES 74,390 76,920 89,156
PROVISION FOR DISPOSITION OF
ASSETS 958
OTHER NONRECURRING CHARGES 1,053
-------- -------- --------
OPERATING INCOME 1,206 6,764 10,835
-------- -------- --------
OTHER EXPENSE, NET 2,626 2,084 1,554
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES (1,420) 4,680 9,281
PROVISION FOR INCOME TAXES 100 1,200 3,708
-------- -------- --------
NET INCOME (LOSS) $ (1,520) $ 3,480 $ 5,573
======== ======== ========
BASIC EARNINGS (LOSS) PER COMMON SHARE $ (.07) $ .17 $ .27
======== ======== ========
DILUTED EARNINGS (LOSS) PER COMMON SHARE $ (.07) $ .17 $ .27
======== ======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
Page 32 of 56
NATIONAL VISION ASSOCIATES, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 30, 1995, December 28, 1996, and January 3, 1998
(000's except share information)
Additional Retained Cumulative
Common Stock Paid-In Earnings Translation
Shares Amount Capital (Deficit) Adjustments Total
------ ------ ---------- --------- ----------- -----
BALANCE, December 31, 1994 20,510,402 $205 $42,133 $(10,353) $(2,372) $29,613
Exercise of stock options 76,103 1 14 15
Foreign Currency Translation (1,782) (1,782)
Net Loss (1,520) (1,520)
---------- ---- ------- -------- ------- -------
BALANCE, December 30, 1995 20,586,505 206 42,147 (11,873) (4,154) 26,326
Exercise of stock options 58,247 19 19
Foreign Currency Translation 81 81
Net Income 3,480 3,480
---------- ---- ------- -------- ------- -------
BALANCE, December 28, 1996 20,644,752 206 42,166 (8,393) (4,073) 29,906
Issuance of common stock 110,795 1 835 836
Restricted Stock 54,000 1 35 36
Exercise of stock options 10,408 17 17
Net Income 5,573 5,573
---------- ---- ------- -------- ------- -------
BALANCE, January 3, 1998 20,819,955 $208 $43,053 $ (2,820) $(4,073) $36,368
========== ==== ======= ======== ======= =======
The accompanying notes are an integral part of these consolidated
financial statements.
Page 33 of 56
NATIONAL VISION ASSOCIATES, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 30, 1995, December 28, 1996 and January 3, 1998
(000's)
1995 1996 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,520) $ 3,480 $ 5,573
-------- ------- -------
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Provision for disposition of assets 958
Provision for other nonrecurring charges 1,053
Depreciation and amortization 10,378 10,058 11,035
Provision for Deferred Income Tax Expense 1,002 1,441
Other 29 91 268
Changes in operating assets and liabilities,
net of effects of acquisitions:
Receivables (701) 2,224 (875)
Inventories (2,467) (2,594) 2,031
Store preopening costs (1,288) (657) (643)
Other current assets (34) 67 612
Accounts payable, accrued expenses, and other
current liabilities (88) 725 1,245
-------- ------- -------
Total adjustments 7,840 10,916 15,114
-------- ------- -------
Net cash provided by operating activities 6,320 14,396 20,687
-------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (13,175) (2,713) (8,049)
Acquisition, net of cash acquired (1,772)
Payment for non-competition agreement (484)
Purchase of Assignment Agreement (500)
-------- ------- -------
Net cash used in investing activities (13,175) (2,713) (10,805)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances on revolving credit facility 12,000 1,500 5,500
Repayments on revolving credit facility (4,000) (13,000) (12,500)
Repayments of notes payable and capital leases (471) (480) (1,450)
Proceeds from issuance of common stock 15 19 17
-------- -------- -------
Net cash provided by (used in) financing activities 7,544 (11,961) (8,433)
-------- -------- -------
Effect of foreign currency exchange rate changes (1,782) 81
-------- -------- -------
NET INCREASE (DECREASE) IN CASH (1,093) (197) 1,449
CASH, beginning of year 2,400 1,307 1,110
-------- -------- -------
CASH, end of year $ 1,307 $ 1,110 $ 2,559
======== ======== =======
The accompanying notes are an integral part of these consolidated
financial statements.
Page 34 of 56
NATIONAL VISION ASSOCIATES, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
December 30, 1995, December 28, 1996 and January 3, 1998
1. ORGANIZATION AND OPERATIONS
National Vision Associates, Ltd. (the "Company") is engaged in the
retail sale of optical goods and services, primarily in the United States
and Mexico. The Company is largely dependent on Wal-Mart Stores, Inc.
("Wal-Mart") for continued operation of current vision centers (see Note 3).
In October 1997, the Company acquired all the capital stock of Midwest
Vision, Inc., a retail optical company with 51 locations in Minnesota and
three adjoining states (see Note 4).
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. Effective
January 1, 1995, the Company changed its year end to a 52/53 week retail
calendar with the fiscal year ending on the Saturday closest to December 31.
Pursuant to such calendar, financial information for each of 1995 and 1996
is presented for the 52-week period ended December 30 and December 28,
respectively. Fiscal 1997 consisted of 53 weeks ended January 3, 1998.
Due to various statutory and other considerations, international operations
were not changed to this 52/53 week calendar. To allow for more timely
consolidation and reporting, international operations are reported using a
fiscal year ending November 30. Certain amounts in the December 28, 1996
and December 30, 1995 consolidated financial statements have been
reclassified to conform to the January 3, 1998 presentation.
Revenue Recognition
The Company recognizes revenues and the related costs from retail
sales when at least 50% of the payment has been received.
Cash and Cash Equivalents
The Company considers cash on hand, short-term cash investments, and
checks that have not been processed by financial institutions to be cash
and cash equivalents. The aggregate amount of outstanding checks not
processed at January 3, 1998 was $381,000 (at December 28, 1996 - $440,000).
The Company's policy is to maintain uninvested cash at minimal levels. Cash
includes cash equivalents which represent highly liquid investments with a
maturity of one month or less. The carrying amount approximates fair value.
The Company restricts investment of temporary cash investments to financial
institutions with high credit standing.
Page 35 of 56
Inventories
Inventories are valued at the lower of weighted average cost or
market. Market represents the net realizable value.
Store Preopening Costs
Prior to 1998, preopening costs which were directly associated with
the opening of new vision centers have been capitalized and amortized using
the straight-line method over 12 months beginning with the commencement of
each vision center's operations. The average cost capitalized per vision
center approximated $20,000. Effective in 1998, preopening costs will be
expensed as incurred in accordance with proposed AICPA Statement of Position,
"Reporting on the Costs of Start-Up Activities".
Property and Equipment
Property and equipment are stated at cost. For financial reporting
purposes, depreciation is computed using the straight-line method over
the assets' estimated useful lives or terms of the related leases,
whichever is shorter. Accelerated depreciation methods are used for
income tax reporting purposes. For financial reporting purposes, the
useful lives used for computation of depreciation range from five to ten
years for equipment, from three to nine years for furniture and fixtures,
from three to six years for hardware and software related to information
systems processing, and nine years for leasehold improvements. At the
time property and equipment are retired, the cost and related accumulated
depreciation are removed from the accounts and any gain or loss is credited
or charged to income. Annually, the Company evaluates the net book value
of property and equipment for impairment. The evaluation is performed
for retail locations and compares its best estimate of future cash flows
with the net book value of the property and equipment. Maintenance and
repairs are charged to expense as incurred. Replacements and improvements
are capitalized.
Balance Sheet Financial Instruments: Fair Values
The carrying amount reported in the consolidated balance sheets for
cash, accounts receivable, accounts payable and short-term debt approximates
fair value because of the immediate or short-term maturity of these financial
instruments. The carrying amount reported for "Revolving Credit Facility-
Long-Term" approximates fair value because the underlying instrument is a
variable rate note that reprices frequently. The fair value of the
Company's fixed interest rate swap agreements and fixed rate debt is based
on estimates using standard pricing models that take into consideration
current interest rate market conditions supplied by independent financial
institutions.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade accounts
receivable. The risk is limited due to the large number of individuals
and entities comprising the Company's customer base.
Assignment Agreement and Intangible Assets
Assignment agreement and intangible assets represent the excess of the
cost of net assets acquired in certain contract transactions and business
combinations over their fair value. Such amounts are amortized over periods
ranging from 11 years to 15 years. The Company evaluates intangible assets
for impairment annually. In completing this evaluation, the Company compares
its best estimate of future cash flows with the carrying value of the
underlying asset.
Page 36 of 56
Income Taxes
Deferred income taxes are recorded using current enacted tax laws
and rates. Deferred income taxes are provided for depreciation, store
preopening costs, organization costs, inventory basis differences, and
accrued expenses where there is a temporary difference in recording such
items for financial reporting and income tax reporting purposes.
Other Deferred Costs
Deferred costs represent capitalized assets resulting from contractual
obligations and are being amortized on a straight line basis over a period
of time not to exceed five years.
Advertising and Promotion Expense
Production costs of future media advertising and related promotion
campaigns are deferred until the advertising events occur. All other
advertising and promotion costs are expensed when incurred.
Other Income and Expense
Other income and expense represents net financing costs associated
with the Company's financing activities, including interest costs on
borrowings under the revolving credit facility and other notes payable,
loan commitment fees and amortization of interest rate hedge and swap
agreements, purchase discounts on invoice payments, interest income on
cash investments and for fiscal 1997, realized exchange gains or losses
resulting from foreign currency transactions.
Foreign Currency Translation
The financial statements of foreign subsidiaries are translated
into U.S. dollars in accordance with Statement of Financial Accounting
Standards No. 52 ("SFAS No. 52"). Translation adjustments, which result
from the process of translating foreign financial statements into U.S.
dollars, are accumulated as a separate component of shareholders' equity.
The Securities and Exchange Commission has classified Mexico as a highly
inflationary economy under the provisions of SFAS No. 52 for reporting periods
starting in 1997. Effective in 1997, the financial statements of the Company's
Mexico operations are remeasured with the U.S. dollar as the functional
currency. Any gain or loss is recorded in the Company's statement of
operations as other income and expense.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Page 37 of 56
Derivatives Used in Risk Management Activities
As part of its risk management activities, the Company uses interest
rate swaps to modify the variable interest rate characteristics of long-term
debt on the revolving credit facility. The Company holds no other
derivatives or similar instruments. The derivative contracts are designated
as hedges when acquired. They are expected to be effective economic hedges
and have high correlation with the debt being hedged.
Interest rate swaps are accounted for using the accrual method, with
an adjustment to interest expense in the income statement. The Company
accounts for the swap by recording the offset of the swap into the Company's
accounts. The swaps are settled every 90 days. Realized gains and losses
from the early settlement or disposition of swap contracts are deferred on
the balance sheet and amortized to interest expense over the original term
of the swap agreement.
3. WAL-MART MASTER LICENSE AGREEMENT AND OTHER AGREEMENTS
Wal-Mart Agreement
In 1994, the Company and Wal-Mart replaced their original agreement with
a new master license agreement (the "Wal-Mart Agreement"), which increased
minimum and percentage license fees payable by the Company and also granted
the Company the opportunity to operate up to 400 vision centers in existing
and future Wal-Mart stores (357 vision centers were in operation at fiscal
year end 1997). In January 1995, the Company made a lump sum payment in
exchange for such opportunity. The payment is being amortized over the
initial term of the vision centers opened subsequent to January 1, 1995. In
1997, the Wal-Mart Agreement was amended to provide that Wal-Mart must, by
April 1, 2000, grant the Company the opportunity to operate 400 vision centers
under the Wal-Mart Agreement, and that, with one exception, all new vision
centers opened after 1997 will be located in California and North Carolina.
Each vision center covered by the Wal-Mart Agreement has a separate license.
Pursuant to the Wal-Mart Agreement, the term of each such license is nine
years with a renewable option for one additional three-year term. Percentage
license fees remain the same over the nine-year base term and three-year
option term, whereas minimum license fees increase during the three-year
option term.
Consulting and Management Agreement
Among other things, the Wal-Mart Agreement requires an independent,
licensed optometrist to practice adjacent to or near each of the Company's
vision centers for at least 48 hours per week. In 1990, the Company entered
into a long-term consulting and management service agreement, as amended,
with two companies (Eyecare Leasing, Inc. ("ELI") and Stewart-Phillips, Inc.
("SPI")) jointly owned by two shareholders to recruit such optometrists for
certain of its vision centers. Subject to applicable state regulations,
this agreement, among other things, required the Company to provide space
and certain equipment to the optometrists for which the optometrists pay
the Company an occupancy fee. In exchange for their services, ELI and SPI
received certain fees under the agreement. Net of the fees paid to ELI and
SPI, the Company received $2.5 million and $2.9 million pursuant to this
agreement during 1995 and 1996, respectively. The net payments offset
occupancy expense incurred by the Company. Occupancy expense is a
component of cost of goods sold.
Page 38 of 56
In January 1997, the Company completed various transactions related to
its relationship with each of ELI and SPI. The transactions involved the
termination of such consulting agreement and transfer of the responsibilities
of ELI and SPI to a subsidiary of the Company. As a result of these
transactions, the Company acquired the right to the payments which otherwise
would have been made to ELI and SPI under the consulting agreement. In 1997,
the Company received occupancy fees of $4.0 million, which included $1.4
million which would have been paid to ELI and SPI if the consulting agreement
had been in effect during 1997. The aggregate cost of the transactions was
$4.6 million, which was capitalized as an intangible asset and is being
amortized over the remaining life of the original term of vision center
leases. The Company made a lump sum payment of $500,000 at closing and
entered into promissory obligations for the balance, payable over a 12-year
period at 6.4% interest.
Mexico Agreement
In 1994, the Company opened 8 vision centers in stores owned and
operated by Wal-Mart de Mexico, S.A. de C.V. ("Wal-Mart de Mexico"). In
1995, the Company completed the negotiation of a master license agreement
governing these vision centers. Pursuant to this agreement, each vision
center has an individual base term of five years from the date of opening,
followed by two options (each for two years), and one option for one year.
Each party has the right to terminate a location which fails to meet specified
sales levels. The agreement provides for annual fees based on a minimum
and percentage of sales. The agreement also gives the Company a right
of first refusal to open vision centers in all stores in Mexico owned
by Wal-Mart de Mexico. As of January 3, 1998, the Company operated
26 vision centers in Wal-Mart de Mexico stores.
4. ACQUISITION
In October 1997, the Company acquired the common stock of Midwest
Vision, Inc., a retail optical company which operated 51 vision centers in
Minnesota, Wisconsin, Iowa, and North Dakota. Unaudited annual sales for
Midwest Vision approximated $14.4 million for the calendar year 1997. The
purchase price was approximately $3.6 million, plus $1.4 million of assumed
long-term debt.
The acquisition was accounted for by the purchase method of accounting
and, accordingly, the purchase price was allocated to the assets acquired and
the liabilities assumed based on the estimated fair values at the date of
acquisition. The excess of purchase price over the estimated fair values of
the net assets acquired was recorded as an intangible asset (goodwill), which
is being amortized on a straight-line basis over 15 years for financial
reporting. Subsequent to the close date, the Company paid off the outstanding
long-term debt of Midwest Vision.
The estimated fair values of assets and liabilities acquired are
summarized as follows:
Cash $ 327
Inventory 1,332
Accounts receivable and other assets 1,398
Property and equipment 1,729
Excess of cost over net assets acquired 2,068
Accounts payable and accrued expenses (1,867)
Debt (1,433)
------
Net Purchase Price $3,554
======
Page 39 of 56
The purchase price was paid in cash of $1.9 million, a debt instrument
(in the principal amount of $620,000 payable over five years), and 110,795
shares of the Company's common stock. Additionally, the Company made cash
payments of $239,000 related to investment advisory fees and other costs
directly associated with the acquisition. In connection with 100,000 shares
of the common stock, the Company also issued a put option to the seller,
entitling the seller to put such shares to the Company at $7.00 per share in
January 1999 or, if such shares are not then put back to the Company, at $9.00
per share in January 2000. If the seller exercises the put option, the Company
will settle the transaction by issuing additional shares to the seller such
that the aggregate fair market value of the shares equals the aggregate
guarantee value. The guarantee has been recorded at a fair market value. In
conjunction with the transaction, the Company entered into an employment
agreement with the seller which requires the performance of certain duties
and contains certain noncompete provisions.
The operating results of Midwest Vision are included in the Company's
consolidated results of operations from the date of acquisition.
5. INVENTORY
The Company classifies inventory as finished goods if such inventory is readily
available for sale to customers without any assembly or value added processing
to satisfy a customer's order. Finished goods include contact lens, over the
counter sunglasses and accessories. The Company classifies inventory as raw
material if such inventory requires assembly or value added processing to
satisfy a customer's order. This would include grinding a lens blank,
"cutting" the lens in accordance with a prescription from an optometrist, and
fitting the lens in a frame. Frames and uncut lens are considered raw
material. A majority of the Company's sales represent custom orders;
consequently, the majority of the Company's inventory is classified as raw
material.
Inventory balances, by classification, may be summarized as follows:
1996 1997
---- ----
Raw Material $15,199 $15,646
Finished Goods 8,279 7,003
Supplies 492 622
------- -------
$23,970 $23,271
======= =======
6. LONG-TERM DEBT
Long-term debt obligations at December 28, 1996 and January 3, 1998
consisted of the following (in 000's):
1996 1997
---- ----
Borrowings under revolving credit facility $26,500 $19,500
Other promissory notes 4,703
------- -------
26,500 24,203
Less current portion 478
------- -------
$26,500 $23,725
======= =======
Page 40 of 56
In July 1997, the Company entered into a syndicated $45 million
two-year unsecured revolving credit facility. The aggregate outstanding
balance is due for repayment in July 1999. The Company's credit facility
contains, among other covenants, a material adverse change clause and
certain minimum net worth and other requirements. Commitment fees
payable on the average daily balance of the unused portion of the credit
facility were .25% per annum in 1997. The Company paid approximately
$150,704 and $125,611 in various fees related to the revolving credit
facility in 1996 and 1997, respectively. Interest on the outstanding
advances is based on certain financial covenants and applicable interest
rates for Eurodollar or base loan borrowings, as defined in the agreement.
As of January 3, 1998, the Company had borrowed $19.5 million under
its credit facility at a weighted average interest rate of 6.9%. The
aggregate fair value of the Company's long-term debt obligation under
the credit facility is estimated to approximate its carrying value.
The Company has entered into rate swap agreements which effectively
convert underlying variable rate debt based on Eurodollar rates to fixed rate
debt. The agreements extend through February 20, 2000. The notional principal
amount on one agreement is $20 million, with an effective fixed rate of 6.93%,
which will expire on February 20, 1998. At that date, two separate agreements
will commence with an aggregate notional principal amount of $10 million and
an effective fixed rate which averages 7.52%. The fair market value of the
fixed rate hedges approximates book value. Under existing accounting
standards, this activity is accounted for as a hedging activity. The swaps
are settled every 90 days.
The Company entered into unsecured promissory notes relative to various
transactions completed with ELI and SPI (see Note 3) and the Midwest Vision
acquisition (see Note 4). The notes are fixed rate instruments, with rates
ranging from 6.4% to 8.5%. The promissory notes with ELI and SPI require
quarterly payments through January 2009 whereas the Midwest Vision note
requires monthly payments through October 2002. Based on current market
rates at January 3, 1998, the fair market value of the promissory notes is
approximately $80,000 less than book value. At January 3, 1998, future
minimum principal payments on the promissory notes were as follows (amounts
in 000's):
1998 $ 478
1999 487
2000 498
2001 509
2002 495
Thereafter 2,236
------
$4,703
The Company maintains an unsecured line of credit agreement with a
financial institution which, at the discretion of the lender, allows the
Company to borrow up to $5 million. The agreement is available to fund
financing needs on a short-term basis at a variable interest rate, determined
by the lender. As of year-end, there were no borrowings outstanding under
the agreement.
7. RELATED-PARTY TRANSACTIONS
In 1991, a receivable from the Company was assigned to a lease finance
company which is owned by a shareholder/director of the Company. The Company
made lease payments (including principal and interest) of $417,000 and $341,000
to this lease finance company in 1995 and 1996, respectively. Such lease was
paid in full as of September, 1996.
Page 41 of 56
During 1995, 1996, and 1997, the Company purchased its business and
casualty insurance policies through an insurance agency in which a
shareholder/director has a substantial ownership interest. Total
premiums paid for policies acquired through the insurance company during
1995, 1996, and 1997 were approximately $910,000, $844,000, and $904,732,
respectively. The Audit Committee of the Company's Board
of Directors has approved such purchases.
In 1996, Edward G. Weiner, the Company's then Vice Chairman, was employed
at an annual salary of $165,000 pursuant to an employment agreement with the
Company with a term ending March 1, 2000. In connection with Mr. Weiner's
resignation from the Board of Directors in February 1997, the employment
agreement was terminated, and the Company (in exchange for a non-competition
agreement through March, 2000) paid Mr. Weiner an amount equal to a discounted
present value of the payments which would have been made under the employment
agreement. The payment amount was capitalized as other deferred costs and
will be amortized over the term of the non-compete agreement.
8. COMMITMENTS AND CONTINGENCIES
Noncancelable Operating Lease and License Agreements
As of January 3, 1998, the Company is a lessee under noncancelable
operating lease agreements for certain equipment which expire at various
dates through 1998. Additionally, the Company is required to pay minimum
and percentage license fees pursuant to certain commercial leases and
pursuant to its agreements with its host department store companies.
Effective December 20, 1991, the Company entered into a lease agreement
with Wal-Mart for approximately 66,000 square feet of corporate office space.
The term of the lease is ten years with a renewal option of seven years.
The Company paid Wal-Mart approximately $215,000 annually in rental fees in
1995, 1996, and 1997.
Effective July 1995, the Company entered into an operating lease for
a computer equipment upgrade that provides processing for the newly
installed management information and financial systems. The term of the
lease is three years. Lease expense is approximately $8,000 monthly.
Effective the first quarter 1996, the Company entered into operating
leases for 34 vehicles. The terms of the leases are cancelable by the
Company at any time, but the Company expects to retain the leases for the
three-year term. Lease expense is approximately $13,800 monthly.
Under the lease for its Los Angeles laboratory, the Company paid
$102,000, $101,000, and $87,000 in rental fees in 1995, 1996, and 1997,
respectively. In December 1997, the Company entered into a new five-year
lease for a successor facility in the Los Angeles area. Lease expense is
approximately $5,528 monthly.
In connection with its acquisition of Midwest Vision, Inc. (see Note
4), the Company entered into a ten-year lease for administrative headquarters
and an optical laboratory located in St. Cloud, Minnesota. The facility is
leased from the former owner of Midwest Vision. Lease expense on the
headquarters and laboratory is approximately $6,667 monthly which, in the
opinion of management, represents a fair market lease rate. Additionally,
the Company assumed operating lease agreements in connection with 51
freestanding locations obtained from the acquisition. Lease expense on
such leases is approximately $64,000 monthly.
Page 42 of 56
Aggregate future minimum payments under the license and lease
arrangements are as follows (amounts in 000's):
1998 19,529
1999 19,296
2000 17,553
2001 14,592
2002 11,110
Thereafter 18,237
-------
$100,317
=======
Total expenses recognized under these license and lease arrangements
were approximately $17.0 million, $19.9 million, and $22.8 million for the
years ended December 30, 1995, December 28, 1996, and January 3, 1998,
respectively.
Gitano and Guy Laroche Trademark Licenses
The Company has separate license agreements with Gitano, Inc. and
Guy Laroche of North America, Inc., giving the Company the right to use
the trademarks "Gitano" and "Guy Laroche", respectively, in its vision
centers in North America. Each agreement requires the Company to pay
minimum and percentage royalties on retail and wholesale sales.
Pursuant to its terms, the Gitano agreement expired on June 30, 1997.
The agreement has, however, continued to be performed by the parties.
The Guy Laroche agreement, as amended, expires on December 31, 2001.
Under the Gitano agreement, the Company paid $113,000, $111,000, and
$121,000 in fees during 1995, 1996, and 1997, respectively. Under
the Guy Laroche agreement, the Company paid $150,000, $238,000, and
$176,000 in fees during 1995, 1996, and 1997, respectively.
Change in Control and Other Arrangements
There are agreements between the Company and seven of its executive
officers which provide severance benefits in the event of termination of
employment under certain circumstances following a change in control of
the Company (as defined). The circumstances are termination by the Company
other than because of death or disability commencing prior to a threatened
change in control (as defined), or for cause (as defined), or by the officer
as the result of a voluntary termination (as defined). Following any such
termination, in addition to compensation and benefits already earned, the
officer will be entitled to receive a lump sum severance payment equal to
up to three times the officer's annual rate of base salary. The term of
each agreement is for a rolling three-years unless the Company gives notice
that it does not wish to extend such term, in which case the term of the
agreement would expire three years from the date of the notice.
One executive officer is employed pursuant to an employment agreement
which provides for an annual salary and certain other benefits. Such
agreement further provides that the Company may at any time terminate
the executive's employment upon six months notice or upon no notice if
such termination is for cause, as defined.
Page 43 of 56
9. INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounts Standards (SFAS) No. 109 "Accounting for Income Taxes," which
requires the use of the liability method of accounting for deferred income
taxes. The components of the net deferred tax assets/(liabilities) are as
follows (amounts in 000's):
As of December 28, As of January 3,
1996 1998
Total deferred tax (liabilities) $(9,484) $(9,005)
Total deferred tax assets 10,658 8,738
Valuation allowance (2,406) (2,406)
------- -------
Net deferred tax (liabilities) $(1,232) $(2,673)
======= =======
The sources of the difference between the financial accounting and tax
basis of the Company's liabilities and assets which give rise to the deferred
tax liabilities and deferred tax assets and the tax effects of each are as
follows (amounts in 000's):
As of December 28, As of January 3,
1996 1998
---- ----
Deferred tax liabilities:
Depreciation $ 6,062 $ 5,506
Reserve for foreign losses 3,137 3,137
Store preopening costs 91 99
Other 194 263
------- -------
$ 9,484 $ 9,005
======= =======
Deferred tax assets:
Accrued expenses and reserves $ 1,471 $ 1,393
Inventory basis differences 326 145
Net operating loss carryforwards 8,650 4,677
Alternative minimum tax 135 2,117
Other 76 406
------- -------
$10,658 $ 8,738
======= =======
Page 44 of 56
The consolidated provision for income taxes consists of the following
(amounts in 000's):
Year Ended
-------------------------------------------------------------
December 30, December 28, January 3,
1995 1996 1998
---- ---- ----
Current:
Federal $ 50 $ 135 $1,937
State 50 63 330
---- ------ ------
100 198 2,267
---- ------ ------
Deferred:
Federal 897 1,296
State 105 145
---- ------ ------
0 1,002 1,441
---- ------ ------
Total provision for income taxes $100 $1,200 $3,708
==== ====== ======
The tax expense (benefit) differs from the amounts resulting from
multiplying income before income taxes by the statutory federal income tax
rate for the following reasons (amounts in 000's):
Year Ended December 30, December 28, January 3,
1995 1996 1998
---- ---- ----
Federal income tax (benefit) at statutory rate $(483) $1,591 $3,156
State income taxes, net of federal income
tax benefit 50 69 314
Foreign losses not deductible for U.S.
federal tax purposes 686 63 65
Valuation allowance for U.S. state and
federal taxes (181) (556)
Other 28 33 173
---- ------ ------
$100 $1,200 $3,708
==== ====== ======
At January 3, 1998, the Company recorded a valuation allowance of
$2.4 million due to the uncertainty regarding the realizability of its
net operating loss carryforwards. A portion of the net operating loss
carryforward deferred tax asset (approximately $3.2 million) relates
to tax benefits (subject to the outcome of the audit discussed below)
from the exercise of stock options granted by the former Chairman of the
Company to two shareholders who own companies which recruited optometrists
for the Company. (See Note 12.) This benefit will be recorded as an addition
to paid-in-capital (and a reduction in the valuation allowance) when realized.
At January 3, 1998, the Company had U.S. regular tax net operating
loss carryforwards of $12 million (of which $8.3 million relates to the tax
benefits from the exercise of stock options discussed above) which can
reduce future federal income taxes. If not utilized, these carryforwards
will expire beginning in 2007.
Page 45 of 56
As a result of an examination by the Internal Revenue Service ("IRS")
of the Company's 1992 tax return, the Company received a deficiency notice
in 1996 from the IRS, challenging the tax benefit relating to the exercise of
stock options referred to above. The Company has filed a petition in the
U.S. Tax Court, contesting the deficiency notice. The Company does not
expect that the outcome of this proceeding will have a material adverse
impact on the financial statements or conditions of the Company. Subject to
the execution of definitive documents, an agreement to settle this matter was
reached in February 1998. (See Note 15.)
In Mexico, the location of the Company's major foreign operations,
the Company pays the greater of its income tax or an asset tax. Because
the Company has operating losses in Mexico, the Company pays no income tax,
but it is subject to the asset tax. Therefore, no provision for income
taxes has been made on the Company's books for its operations in Mexico.
10. EARNINGS PER COMMON SHARE
In 1997, the Company adopted SFAS No. 128, "Earnings per Share". Basic
earnings per common share were computed by dividing net income by the
weighted average number of common shares outstanding during the year.
Diluted earnings per common share were computed as basic earnings per
common share, adjusted for outstanding stock options that are dilutive. The
computation for basic and diluted earnings per share may be summarized as
follows (amounts in 000's except per share information):
1995 1996 1997
---- ---- ----
Net Income (Loss) $(1,520) $ 3,480 $ 5,573
======= ======= =======
Weighted Shares Outstanding 20,538 20,618 20,676
Basic Earnings (Loss) per Share ($0.07) $0.17 $0.27
======= ======= =======
Weighted Shares Outstanding 20,538 20,618 20,676
Net Options Issued to Employees 88 163
------- ------- -------
Aggregate Shares Outstanding 20,538 20,706 20,839
Diluted Earnings (Loss) per Share ($0.07) $0.17 $0.27
======= ======= =======
Outstanding options with an exercise price below the average price
of the Company's common stock have been included in the computation of
dilutive earnings per common share, using the treasury stock method, as of
the date of the grant. Stock options have been excluded from the calculation
of weighted average shares outstanding during 1995, as the effect would be
antidilutive.
11. SUPPLEMENTAL DISCLOSURE INFORMATION
Supplemental disclosure information is as follows (amounts in 000's):
(i) Supplemental Cash Flow Information
1995 1996 1997
---- ---- ----
Cash paid for-
Interest $2,750 $2,565 $1,582
Income taxes 244 149 2,383
Page 46 of 56
(ii) Supplemental Noncash Investing and Financial Activities
The acquisition information relates to the ELI and SPI transactions
and the purchase of Midwest Vision, Inc. (see Notes 3 and 4).
1997
----
Business acquisitions, net of cash acquired
Fair value of assets acquired $4,459
Purchase price in excess of net assets acquired 6,671
Liabilities assumed (8,022)
Stock issued (836)
------
Net cash paid for acquisitions $2,272
(iii) Supplemental Balance Sheet Information
Significant components of accrued expenses and other current
liabilities may be summarized as follows:
1996 1997
---- ----
Accrued employee compensation and benefits $2,903 $5,425
Accrued license fees 1,851 2,349
At January 3, 1998, accrued expenses and other current liabilities
include an increase of $875,000 related to the Midwest Vision
operation.
(iv) Supplemental Income Statement Information
The components of other expense, net, may be summarized as follows:
1995 1996 1997
---- ---- ----
Interest expense on debt and capital leases $2,818 $2,338 $1,853
Purchase discounts on invoice payments (230) (430) (483)
Finance fees and amortization of
hedge and swap agreements 150 230 236
Interest income (99) (66) (38)
Other (13) 12 (14)
______ ______ ______
$2,626 $2,084 $1,554
====== ====== ======
12. EQUITY TRANSACTIONS
Employee Stock Option and Incentive Award Plan
In 1996, the Company adopted the Restated Stock Option and Incentive
Award Plan (the "Plan") pursuant to which incentive stock options
qualifying under Section 422A of the Internal Revenue Code and nonqualified
stock options may be granted to key employees. The Plan also provides for
the issuance of other equity awards, such as awards of restricted stock.
The Plan replaced and restated all the Company's prior employee stock
option plans. A total of up to 3,350,000 shares of common stock may be
granted under the Plan (a total of up to 2,350,000 shares were available
for grant under the prior plans). The Plan is administered by the
Compensation Committee of the Company's Board of Directors. The
Page 47 of 56
Compensation Committee has the authority to determine the persons
receiving options, option prices, dates of grants, and vesting periods,
although no option may have a term exceeding ten years. Options granted
prior to 1996 have a term of five years.
Directors' Stock Option Plan
In April 1997, the Company adopted the Restated Non-Employee Director
Stock Option Plan (the "Directors Plan"), pursuant to which stock options
for up to 500,000 shares of Common Stock may be granted to nonemployee
directors. The Directors Plan replaced and restated the Company's prior
non-employee director stock option plan. The Directors Plan provides for
automatic grants of options to purchase 7,500 shares of the Company's
common stock to each nonemployee director serving on the date of each
annual meeting of shareholders, beginning with the 1997 annual meeting. Of
the options granted, 50% of the shares under each option are exercisable
on the second anniversary of the grant date, 75% in three years, and
100% in four years. All option grants are at exercise prices no less
than the market value of a share of Common Stock on the date of grant
and are exercisable for a ten-year period. Options granted under the
predecessor stock option plan are exercisable for a five-year period.
Options covering 67,500 shares under the Directors Plan were exercisable
at January 3, 1998.
Restricted Stock Awards
Restricted stock grants, with an outstanding balance of 54,000 shares
at January 3, 1998, were awarded to certain officers and key employees which
require five years of continuous employment from the date of grant before
vesting and receiving the shares without restriction. The number of shares
to be received without restriction is based on the Company's performance
relative to a peer group of companies. Unamortized deferred compensation
expense with respect to the restricted stock amounted to $225,000 at January 3,
1998 and is being amortized over the five-year vesting period. Deferred
compensation expense aggregated $54,000 in 1997. A summary of restricted
stock granted during 1997 is as follows:
1997
----
Shares granted 60,000
Shares forfeited 6,000
Weighted-average fair value of
stock granted during year $4.81
All Stock Option Plans
All exercise prices represent the estimated fair value of the Common
Stock on the date of grant as determined by the Board of Directors. Of the
options granted, 50% of the shares under each option are exercisable after
two years from the grant date, 75% in three years, and 100% in four years.
Page 48 of 56
Stock option transactions during the three years ended January 3, 1998
were as follows:
1995 1996 1997
---- ---- ----
Options outstanding beginning of year 1,736,150 1,813,195 1,950,166
Options granted 576,044 395,305 631,864
Options exercised (75,927) (55,371) (7,840)
Options cancelled (423,072) (202,963) (279,987)
--------- --------- ---------
Options outstanding end of year 1,813,195 1,950,166 2,294,203
========= ========= =========
Options exercisable end of year 386,644 734,109 1,020,674
========= ========= =========
Weighted average option
prices per share:
Granted $4.638 $3.394 $4.878
Exercised $0.248 $0.278 $2.168
Cancelled $8.376 $7.816 $9.640
Outstanding at year end $7.569 $6.904 $6.028
Options exercisable end of year $11.376 $9.806 $7.891
The Company has adopted the disclosure provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." The Company will continue to account for stock option
awards in accordance with APB Opinion No. 25. Had compensation cost for
the Plan been determined based on the fair value at the grant date for
awards in 1995, 1996 and 1997 consistent with the provisions of SFAS No. 123,
the Company's net earnings and earnings per share would have been reduced
to the pro forma amounts indicated below (amounts in 000's except per share
information):
1995 1996 1997
As Reported: ---- ---- ----
Net Earnings (Loss) ($1,520) $3,480 $5,573
=================================
Earnings per share ($0.07) $0.17 $0.27
=================================
Pro Forma:
Net Earnings (Loss) ($1,769) $3,163 $5,142
=================================
Earnings per share ($0.09) $0.15 $0.25
=================================
Basic and diluted earnings per share are the same for each year.
Page 49 of 56
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model. The following weighted
average assumptions were used in the model:
1995 1996 1997
---- ---- ----
Dividend Yield 0.00% 0.00% 0.00%
Expected Volatility 86% 86% 74%
Risk Free Interest Rates 6.70% 5.90% 6.14%
Expected Lives (years) 4.34 4.34 4.51
The following table shows the options outstanding and the options
exercisable with pertinent data related to each:
Options Outstanding Options Exercisable
- -----------------------------------------------------------------------------------------------------------
Weighted
Average Weighted Number Weighted
Number Remaining Average Exercisable Average
Range of Outstanding Contractual Exercise As of Exercise
Exercise Prices As of 1/3/98 Life Price 1/3/98 Price
- ------------------------------------------------------------------------------------------------------------
$3.12 - $4.81 890,877 7.48 $4.059 79,856 $3.863
$4.88 - $7.00 1,022,915 3.17 $5.417 562,157 $5.490
$7.25 - $21.38 380,411 0.90 $12.282 378,661 $12.306
--------- ---- -------- --------- --------
$3.12 - $21.38 2,294,203 4.47 $6.028 1,020,674 $7.891
Principal Shareholder Transactions
On November 13, 1990, in consideration of the services rendered by
two principals in two companies recruiting optometrists for the Company
(Note 3), the then Chairman and largest shareholder of the Company entered
into option agreements which granted each of the two principals the option
(the "Option") to acquire from the then Chairman 683,775 shares of Common
Stock. The Options were exercised in 1992 and 1994.
Upon the exercise of all the Options, the Company became entitled to
a tax benefit valued at approximately $4.1 million, which is equal to the
number of option shares multiplied by the difference between the market price
of the option shares as of the date of exercise and the exercise price for
the option shares, adjusted for the impact of tax rates. The tax benefit
will be treated as a contribution to capital and will have no impact on
earnings for financial reporting purposes. The timing and the amount of
the benefit from the tax deduction will depend on future earnings of the
Company. The Company has recorded a valuation allowance against the tax
benefit. The Company has received a deficiency notice from the Internal
Revenue Service with respect to the tax benefit the Company expects to
realize from the exercise of the Options. (See Note 9.)
Page 50 of 56
Preferred Stock
The Company is authorized to issue up to 5,000,000 shares of preferred
stock, par value $1 per share, with such terms, characteristics and
designations as may be determined by the Board of Directors. No such
shares are issued and outstanding.
Shareholder Rights Plan
In January of 1997, the Company's Board of Directors approved a
Shareholders Rights Plan (the "Rights Plan"). The Rights Plan provides for
the distribution of one Right for each outstanding share of the Company's
Common Stock held of record as of the close of business on January 27, 1997
or that thereafter becomes outstanding prior to the earlier of the final
expiration date of the Rights or the first date upon which the Rights become
exercisable. Each Right entitles the registered holder to purchase from the
Company one one-hundredth of a share of Series A Participating Cumulative
Preferred Stock, par value $0.01 per share, at a price of $40.00 (the
"Purchase Price"), subject to adjustment. The Rights are not exercisable
until ten calendar days after a person or group (an "Acquiring Person") buys
or announces a tender offer for 15% or more of the Company's Common Stock,
or if any person or group has acquired such an interest, the acquisition by
that person or group of an additional 2% of the Company's Common Stock. In
the event the Rights become exercisable, then each Right will entitle the
holder to receive that number of shares of Common Stock (or, under certain
circumstances, an economically equivalent security or securities of the
Company) having a market value equal to the Purchase Price. If, after any
person has become an Acquiring Person (other than through a tender offer
approved by qualifying members of the Board of Directors), the Company
is involved in a merger or other business combination where the Company
is not the surviving corporation, or the Company sells 50% or more of
its assets, operating income, or cash flow, then each Right will entitle
the holder to purchase, for the Purchase Price, that number of shares of
common or other capital stock of the acquiring entity which at the time
of such transaction have a market value of twice the Purchase Price. The
Rights will expire on January 26, 2007, unless extended, unless the Rights
are earlier exchanged, or unless the Rights are earlier redeemed by the
Company in whole, but not in part, at a price of $0.001 per Right. The
Shareholder Rights Plan was amended in February 1998. (See Note 16.)
Page 51 of 56
13. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
Selected quarterly data for the Company for the fiscal years ended
December 28, 1996 and January 3, 1998 is as follows (amounts in 000's except
per share information). The fourth quarter of fiscal 1997 consisted of 14
weeks; all other quarters consisted of 13 weeks.
YEAR ENDED DECEMBER 28, 1996:
Quarter Ended
- --------------------------------------------------------------------------------------------------------------------------------
March 30 June 29 September 28 December 28
-------- ------- ------------ -----------
Net Sales $40,133 $40,525 $41,347 $38,371
Cost of Goods Sold 18,724 19,133 19,684 19,151
------- ------- ------- -------
Gross Profit 21,409 21,392 21,663 19,220
Selling, General, and
Administrative Expenses 19,386 19,202 19,679 18,653
------- ------- ------- -------
Operating Income 2,023 2,190 1,984 567
Other Expense, Net 659 507 453 465
------- ------- ------- -------
Income Before Income Taxes 1,364 1,683 1,531 102
Provision for Income Taxes 373 431 321 75
------- ------- ------- -------
Net Income $ 991 $ 1,252 $ 1,210 $ 27
======= ======= ======= =======
Basic Earnings per Common Share $ .05 $ .06 $ .06 $ --
======= ======= ======= =======
Diluted Earnings per Common Share $ .05 $ .06 $ .06 $ --
======= ======= ======= =======
Page 52 of 56
YEAR ENDED JANUARY 3, 1998:
Quarter Ended
- --------------------------------------------------------------------------------------------------------------------------------
March 29 June 28 September 27 January 3
-------- ------- ------------ ---------
Net Sales $44,362 $44,512 $45,862 $51,618
Cost of Goods Sold 20,143 20,654 20,926 24,640
------- ------- ------- -------
Gross Profit 24,219 23,858 24,936 26,978
Selling, General, and
Administrative Expenses 20,971 20,793 21,559 25,833
------- ------- ------- -------
Operating Income 3,248 3,065 3,377 1,145
Other Expense, Net 488 391 314 361
------- ------- ------- -------
Income Before Income Taxes 2,760 2,674 3,063 784
Provision for Income Taxes 1,107 1,054 1,204 343
------- ------- ------- -------
Net Income $ 1,653 $ 1,620 $ 1,859 $ 441
======= ======= ======= =======
Basic Earnings per Common Share $ .08 $ .08 $ .09 $ .02
======= ======= ======= =======
Diluted Earnings per Common Share $ .08 $ .08 $ .09 $ .02
======= ======= ======= =======
14. DISPOSITIONS
Sale of French Operations
On December 29, 1995, the Company sold its shares in IVACAR, S.A., its
French subsidiary, to Carrefour France, for the sum of 18,000,000 FF
($3.7 million U.S.), paid in cash at the closing. The initial sum was
received the first business day of 1996. In connection with this transaction,
the Company recorded a gain of $491,000 in 1995. Such gain was offset by
the provisions discussed below.
Sale of Venture Operations
The Venture operations were disposed of in the fourth quarter 1995
and the first quarter 1996. In anticipation of the disposition of the
Venture operations, a provision of $1.4 million was recorded in 1995 to
reduce the net assets of the Venture operations to management's estimate
of net realizable value.
Net sales and operating losses for each operation (exclusive of
disposition costs, allocated corporate overhead, interest and taxes) for
each period presented is summarized as follows (000's):
Venture France
Year Ended December 28, 1996
Net Sales $ 37 $ 402
Operating Losses $ (81) $ (240)
Year Ended December 30, 1995
Net Sales $ 2,257 $ 5,117
Operating Losses $(2,073) $ (523)
Page 53 of 56
Investment in Czech Republic and Slovakia
In 1995, the Company decided that it would pursue the disposition of its
interest in the joint venture which operated three vision centers in Eastern
Europe. A provision has been recorded to reflect management's estimate of net
realizable value of the Company's investment in such joint venture.
Aurrera Store Closures
In 1995, the Company decided to close 16 underperforming vision centers
located in Aurrera stores. The Mexican operations recorded a $346,000
provision to reduce the assets in those locations to management's estimate
of net realizable value and record separation costs for employees. The
Company closed six vision centers in February 1995 and the remainder in the
first quarter 1996.
Foreclosure Proceedings - Frame Manufacturer
In February 1995, the Company foreclosed on its security interest
covering the assets of CompuFrame, a frame manufacturer. The Company
recorded a provision of $400,000 to reduce the net carrying amount of assets
held for sale to management's estimate of their net realizable value. The
remaining assets were liquidated in 1996.
The net assets of the Venture operations and the frame manufacturer
were classified as assets held for sale in the current asset section
of the Company's balance sheet at December 30, 1995. The dispositions
were completed in 1996. For purposes of the accompanying statements of cash
flows, the change in components comprising assets held for sale is reflected
in the original balance sheet classification.
15. REPORTABLE BUSINESS SEGMENTS
The Company's operating business segments provide quality retail optical
services and products that represent high value and satisfaction to the
customer. Vision centers offer eyewear through each retail location, which
includes eyeglasses, contact lenses, and sunglasses. Optometrists are
available on-site to provide eye examinations. The separate businesses within
the Company use the same production processes for eyeglass lens manufacturing,
offer products and services to a broad range of customers and utilize the
Company's central administrative offices to coordinate product purchases and
distribution to retail locations. A field organization provides management
support to individual store locations. The Mexico operation has a separate
laboratory and distribution center in Mexico and buys a majority of its
products from local vendors. However, market demands, customer requirements,
laboratory manufacturing and distribution processes, as well as product
offerings, are substantially the same for the domestic and Mexico business.
Consequently, the Company considers its domestic and Mexico businesses as one
reportable segment under the definitions required by SFAS 131 - Disclosures
about Segments of an Enterprise and Related Information.
Page 54 of 56
Information relative to sales and identifiable assets for the United
States and Mexico for the fiscal years ended December 30, 1995, December 28,
1996, and January 3, 1998 are summarized in the following tables (amounts in
000's). Identifiable assets include all assets associated with operations
in the indicated reportable segment excluding intercompany receivables and
investments.
1997 United States Mexico Other Consolidated
---- ------------- ------ ----- ------------
Sales $182,333 $2,988 $1,033 $186,354
======== ====== ====== ========
Identifiable Assets $ 80,284 $2,279 $ 687 $ 83,250
======== ====== ====== ========
1996
----
Sales $156,599 $2,068 $1,709 $160,376
======== ====== ====== ========
Identifiable Assets $ 72,209 $1,811 $ 544 $ 74,564
======== ====== ====== ========
1995
----
Sales $136,633 $2,915 $6,025 $145,573
======== ====== ====== ========
Identifiable Assets $ 74,270 $2,611 $4,356 $ 81,237
======== ====== ====== ========
16. SUBSEQUENT EVENTS
In February 1998, the Company's Board of Directors amended the Company's
Shareholder Rights Plan (See Note 12) effective March 1, 1998 to provide
that Rights under such plan can be redeemed and certain amendments to such
plan can be effected only with the approval of the Continuing Directors,
which are defined in the Rights Plan as the current directors and any future
directors that are approved or recommended by Continuing Directors.
In February 1998, the Company and the Internal Revenue Service agreed,
subject to execution of definitive settlement documents, to settle litigation
in the U.S. Tax Court arising out of the grant and exercise of certain stock
options. (See Notes 9 and 12.) The settlement provides that the Company will
receive substantially all of the deduction it has claimed.
Page 55 of 56
SCHEDULE II
NATIONAL VISION ASSOCIATES, LTD. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
December 30, 1995, December 28, 1996, and January 3, 1998
(in 000's)
Additions
------------------------------
Balance at Charged to Charged to Balance at
Description Beginning of Period Cash and Expense Other Accounts Deductions End of Period
- ----------- ------------------- ---------------- -------------- ---------- -------------
Year ended
December 30, 1995:
Allowance for
Uncollectible
Accounts Receivable $253 $216 $130 $339
Year ended
December 28, 1996:
Allowance for
Uncollectible
Accounts Receivable $339 $177 $163 $353
Year ended
January 3, 1998:
Allowance for
Uncollectible
Accounts Receivable $353 $928 $519 $762
Page 56 of 56