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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.

FORM 10-Q

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 

YES   þ           NO   ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES   ¨           NO   þ 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. 

YES   þ           NO   ¨

The number of shares of Common Stock of the registrant outstanding as of November 10, 2003 was 5,248,297, including shares that are part of the disputed claims reserve in the registrant's Chapter 11 Case.

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 FORM 10-Q
 INDEX

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PART I
FINANCIAL INFORMATION

NATIONAL VISION, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 27, 2003 and December 28, 2002
(In thousands except share information)
(unaudited)

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

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

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

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

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NATIONAL VISION, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 27, 2003
(Unaudited)

(1)  BASIS OF FINANCIAL STATEMENT PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared by National Vision, Inc.  (“National Vision” or  the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations.  Although management believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these interim condensed consolidated financial statements be read in conjunction with the Company’s most recent audited consolidated financial statements and  notes thereto.  In the opinion of management, all adjustments necessary for a fair presentation of the financial position, results of operations, and cash flows for the interim periods presented have  been  made. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the year ending January 3, 2004.

As a result of the adoption of Financial Accounting Standards Board Statement No. 145, the Company has reclassified the prior period gain on the repurchase of debt from extraordinary income to income from continuing operations as a component of the “Other expense, net” line item included in the Condensed Consolidated Statement of Operations.

(2)  DISCONTINUED OPERATIONS

During the third quarter of 2003, the Company closed 15 vision centers.  Eight closings were the result of Wal*Mart lease expirations.  The remaining seven closures were under-performing Fred Meyer vision centers closed prior to their scheduled lease expiration. In fiscal 2003, through September 27, the Company has closed a total of 26 Wal*Mart vision centers, 12 vision centers in Fred Meyer and 2 vision centers on military bases.  Condensed information for these closed stores is presented below.  The net loss on disposal of these operations includes severance, closing costs and gains recorded from the sale of certain assets.   Historical operating results for these closed vision centers have been reclassified as discontinued operations and presented separately for all periods presented in the Condensed Consolidated Statements of Operations.

(3) RESTRUCTURING EXPENSE

During August 2003, as a result of the declining store base, the Company initiated and completed a restructuring of the retail field and home office retail support center.  The process resulted in a reduction in headcount approximating 30 employees of both the retail field management organization and the home office retail support center organization.  The total expense of the restructuring process was $484,000 which substantially consists of severance benefits.  Involuntary termination benefits accrued were $464,000, of which $148,000 was paid in the third quarter.  The remaining $336,000 of accrued costs are expected to be completely paid by the first quarter of 2004. 

(4)  CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE

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

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(5)  EXTENDED WARRANTY PLANS

The Company currently sells extended warranty plans that provide for replacement of frames and lenses if broken, bent or damaged, at a reduced cost, or free of charge during the extended warranty period, generally the first twelve months after the sale.  Revenues from the sale of these contracts are deferred and amortized over the life of the contract on a straight-line basis.  The costs to service the warranty claims are expensed as incurred.  In fiscal 2003, as of September 27, the Company has recognized approximately $540,000 of revenue and deferred approximately $2.0 million of revenue related to extended warranty plans.

(6)  SENIOR SUBORDINATED NOTES AND REVOLVING LINE OF CREDIT

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

The Company has made the following payments on the Senior Subordinated Notes in 2003:

• Based on results for the six-month period ended June 28, 2003, the Company made an excess cash repayment in August 2003 of approximately  $5.3 million, plus accrued interest of approximately $265,000.  The principal repayment included $953,000 of additional principal based on prior periods' calculation.  

• On September 26, 2003, the Company made a semi-annual interest payment of $6.1 million.

• On March 28, 2003, the Company made a semi-annual interest payment in the amount of $6.4 million. 

• On February 28, 2003, the Company made a principal redemption in the amount of $2.9 million, plus accrued interest of approximately $150,000.

The Company had no outstanding borrowings on its Revolving Credit Facility at September 27, 2003.  The Company's availability under the Revolving Credit Facility at September 27, 2003, after being reduced for letter of credit requirements, was approximately $2.4 million.

(7)  EARNINGS PER COMMON SHARE

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

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* In the three months ended September 27, 2003 and September 28, 2002, approximately 286,247 and 520,672 of restricted shares and employee stock options are anti-dilutive as to earnings per share and are therefore not reflected  in the computation of the diluted earnings per share for these periods.

For the nine months ended  September 27, 2003 and September 28, 2002, the Company had approximately 467,319 and 531,750 stock options and unvested restricted shares outstanding, respectively, which have been excluded from the computation of diluted earnings per share since they are anti-dilutive.

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(8)  STOCK COMPENSATION/EQUITY TRANSACTIONS

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

Had compensation cost for this plan been determined based on the fair value at the grant date for awards in the first half of 2003 and 2002 consistent with the provisions of SFAS No. 123, the Company’s net earnings and earnings per share would have been reduced to the pro forma amounts indicated below (amounts in thousands except per share information):

In April 2003, the Company issued 14,272 shares of its common stock to certain members of management in accordance with the Company's Long-Term incentive performance plan.  These shares are reflected in the Company's total shares outstanding at September 27, 2003.

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On July 11, 2003, the Company awarded 149,625 shares of restricted stock to certain officers and employees in accordance with the Company's Management Incentive Plan.  These shares vest over a 36 month period in which one third of the shares will become fully vested at the end of each year from the grant date.  All of these shares are reflected in the Company's total shares outstanding at September 27, 2003.

(9)  SUPPLEMENTAL DISCLOSURE INFORMATION

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

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

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

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(10)  FRED MEYER AGREEMENT

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

(11)  COMPREHENSIVE INCOME / (LOSS)

Comprehensive income / (loss), which consists of net income and foreign currency translation adjustments, was income of approximately $260,000 and a loss of approximately $0.8 million for the three months ended September 27, 2003 and September 28, 2002, respectively.  Comprehensive loss for the nine months ended September 27, 2003 was $4.5 million and for the nine months ended September 28, 2002 was $3.9 million.

(12)  RECENT ACCOUNTING PRONOUNCEMENTS

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

In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity", which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity.  It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances).  Many of those instruments were previously classified as equity.  This statement was effective immediately for all financial instruments created or modified after May 31, 2003 and by the first interim period commencing after June 15, 2003 for existing financial instruments.  The adoption of SFAS No. 150 does not currently affect the Company's financial position or results of operations.

(13)  SUBSEQUENT EVENTS

Since September 27, 2003, the Company has closed seven Wal*Mart vision centers.

On November 7, 2003 the Company resolved the final outstanding claim in its Chapter 11 proceeding.  Pursuant to its plan of reorganization, the Company had deposited common stock and senior secured notes in a disputed claim reserve.  As of November 10, 2003, approximately 325,000 shares of common stock and $12.2 million in notes remained in the reserve.  The plan of reorganization provides that, upon resolution of all outstanding Chapter 11 claims, these securities will be distributed on a pro rata basis to the holders of claims in the Chapter 11 case.  The Company is in the process of calculating the distribution amounts and expects that the final distribution will take place later in the fourth quarter.

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RESULTS OF OPERATIONS

The Company’s results of operations in any period are significantly affected by the number and mix of vision centers operating during such period.  At September 27, 2003, the Company operated 481 vision centers, versus 518 vision centers at December 28, 2002 and 518 at September 28, 2002.

THREE MONTHS ENDED SEPTEMBER 27, 2003 (THE “CURRENT THREE MONTHS”) COMPARED TO THREE MONTHS ENDED SEPTEMBER 28, 2002 (THE “PRIOR THREE MONTHS”)

CONSOLIDATED RESULTS

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Overview of Results.  Historically, the Company has held a contact lens event in mid-June, generating between $2.0 and $4.0 million in sales.  In prior years, sales from the event were part of second quarter results.  In 2003, this event was held during the final week of June versus earlier in the month in 2002.  As a result, we received many orders in late June for contact lenses that were delivered to customers in early July.  The amount of such orders was approximately $3.9 million.  The Company recognizes sales revenue upon delivery of the product.  As a result, the $3.9 million in sales and $1.0 million in gross margin was deferred and recognized in the third quarter of 2003.  The $3.9 million in sales that were deferred into the third quarter positively impacted the third quarter domestic comparable store sales increase by approximately 7%.

Net Sales.  The Company recorded net sales of $65.1 million in the Current Three Months, a 12.5% increase from sales of $57.9 million in the Prior Three Months.  The increase was driven primarily by an increase in domestic retail comp store sales results of 11.0%.  In addition, the sales increase was due in part to premium revenue from a managed care insurance product that the Company began selling in the Wal*Mart California vision centers during the second quarter of 2002.  Revenue from this product contributed approximately $1.0 million of the sales increase for the Current Three Months.

During the third quarter of 2003, the Company recognized revenue from its extended warranty plans of approximately $450,000. The amount of warranty revenues recognized in future periods is expected to increase as sales of these products accumulate.  As of September 27, 2003, the Company has deferred revenue related to these products of approximately $2.0 million.

Also in 2003, the Company began selling and manufacturing eyeglasses for certain outside vision centers.  Total revenue from this line of business was approximately $289,000 for the Current Three Months.

The Company is an out-of-network provider for a large national managed care payor.  Effective October 1, 2003, this payor changed its policy regarding out-of-network providers.   These changes limited the Company's ability to verify benefit coverage and to accept assignment of the payor's benefits on behalf of the customer.  The Company is currently generating sales of approximately $4 million on an annualized basis as a result of being an out-of-network provider for this payor.  The net impact of this change has been a substantial reduction in sales as an out-of-network provider for the payor.  The Company is working aggressively to mitigate the decreases in lost sales.  The Company has attempted to discuss these matters but does not believe that the organization will change these procedures.  The Company is evaluating other alternatives but can provide no assurance that they will be successful or that the Company will again be able to participate as an out-of-network provider with this payor.  Additionally, as in the past, National Vision will continue to work toward adding other party plans and payors as part of our ongoing managed care growth strategy. 

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

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Retail gross profit as a percentage of sales decreased from 56.4% in 2002 to 54.4% in the Current Three Months.  The decline is substantially due to the effect of the timing of the 2003 contact lens event held the last week of June, which resulted in $3.9 million of contact lens sales and $1.0 million of contact lens gross margin being deferred in the second quarter of 2003 and subsequently recognized in the third quarter of 2003.  This deferral into the third quarter reduced the gross profit percentage by 1.9%.

Consistent with prior quarters during 2003, the Company experienced a shift in sales mix toward contact lenses, which generates a lower gross profit as a percentage of sales than other product categories.  During the third quarter, we realized positive sales growth in all our product categories, however, growth in the contact lens product category exceeded the rate of growth in other product categories.

Insurance gross profit represents premium revenue less claims expense for a managed care insurance product that the Company began selling in the Wal-Mart California vision centers in the second quarter of 2002.  We do not expect a significant change in insurance gross profit as a percent of premium revenue in future periods.  The addition of the lower-margin insurance product increased total revenues over the Prior Three Months by $1.0 million and increased gross profit dollars by $48,000, but decreased total average gross profit as a percent of total net sales by 0.6 percentage points.

Selling, General, And Administrative Expense (“SG&A expense”).  SG&A expense, which includes both store operating expenses and home office overhead at the retail support center, increased from $30.4 million in the Prior Three Months to $30.5 million in the Current Three Months, an increase of $104,000.  Relevant factors affecting  the Company's SG&A expenses and the change versus prior year may be summarized as follows:

• Retail level payroll costs increased by $650,000, a majority of which related to higher benefit costs, and higher store incentive costs, which is driven by sales and profit growth in our retail stores.
   
• Advertising costs were up slightly versus prior year.
   
• Home office costs were down approximately $570,000 due to lower compensation expenses, due in part to the Company's restructuring process at the retail support center, and lower professional fees.

SG&A expense, as a percentage of sales, is down due to a sales increase of 12.1% versus an increase in SG&A dollars of 0.5%.

Restructuring Expense.  During August 2003, as a result of the declining store base, the Company initiated and completed a restructuring of the retail field and home office retail support center.  The process resulted in a reduction in headcount approximating 30 employees of both the retail field management organization and the home office retail support center organization.  The total cost of the restructuring process was $484,000, which included separation and outplacement costs. Involuntary termination benefits accrued were $464,000, of which $148,000 was paid in the third quarter.  The remaining $336,000 of accrued costs are expected to be completely paid by the first quarter of 2004.  The Company expects to realize savings on an annualized basis of approximately $1.5 million. 

Operating Income.  Operating income from continuing operations for the Current Three Months increased by approximately $1.7 million from the Prior Three Months.   Operating income as a percentage of sales was 5.6% in the Current Three Months, up from 3.3% in the Prior Three Months.

Other Expense.  Other expense was $ 3.2 million compared to $ 3.0 million in the Prior Three Months. Interest expense declined by approximately $0.3 million which was primarily the result of a weighted-average outstanding debt balance of $ 105.1 million in the Current Three Months versus $116.6 million in the Prior Three Months.  Our Senior Subordinated debt has a fixed interest rate of 12%, which has not changed since issuance in May 2001.  This decline was offset by the prior year gain on repurchase of bonds of $547,000 for a net increase in other expense of approximately $200,000.

Benefit For Income Taxes.  The Company recorded pre-tax  operating income in the Current Three Months.  No income tax expense has been recorded due to the Company's projected loss for the full fiscal year.

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Loss from Discontinued Operations.  During the third quarter of 2003, the Company closed 15 vision centers.  Eight closings were the result of  Wal*Mart lease expirations.  The remaining seven closures were under-performing  vision centers in Fred Meyer that were closed prior to their scheduled lease expiration.  In fiscal 2003, the Company has closed a total of 26 Wal*Mart vision centers, 12 vision centers in Fred Meyer and 2 vision centers on military bases through September 27, 2003.  Condensed information for these closed stores is presented below.  The net loss on disposal of these operations includes severance, closing costs and gains recorded from the sale of certain assets.   Historical operating results for these closed vision centers have been reclassified as discontinued operations and presented separately for all periods presented in the Condensed Consolidated Statements of Operations (amounts in thousands).

Net Income.  The Company realized net income of $356,000 in the Current Three Months versus a net loss of $753,000 in the Prior Three Months.  

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

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

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

EBITDA does not represent cash flow from operations as defined by generally accepted accounting principles, is not necessarily indicative of cash available to fund all cash flow needs, should not be considered an alternative to net income or to cash flow from operations (as determined in accordance with GAAP) and should not be considered an indication of our operating performance or as a measure of liquidity.  EBITDA is not necessarily comparable to similarly titled measures for other companies.

The following is a reconciliation of net earnings to EBITDA:

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NINE MONTHS ENDED SEPTEMBER 27, 2003 (THE “CURRENT NINE MONTHS”) COMPARED TO NINE MONTHS ENDED SEPTEMBER 28, 2002 (THE “PRIOR NINE MONTHS”)

CONSOLIDATED RESULTS

Net Sales.  The Company recorded net sales of $185.6 million in the Current Nine Months, an increase of $12.5 million, or 7.2% from the Prior Nine Months.  A majority of the increase came from a domestic comparable store sales increase of 4.5%.  The sales increase was also partially due to premium revenue from a managed care insurance product that the Company began selling in the Wal-Mart California vision centers during the second quarter of 2002.  Revenue from this product contributed approximately $3.4 million of the sales increase for the Current Nine Months.

During the nine months ended September 27, 2003, the Company recognized revenue from its extended warranty plans approximating $540,000.  The amount of warranty revenues recognized in future periods is expected to increase as sales of these products accumulate.  As of September 27, 2003, the Company has deferred revenue related to these products of approximately $2.0 million.

Also in 2003, the Company began selling and manufacturing eyeglasses for certain outside vision centers.  Total revenue from this line of business was approximately $630,000 for the Current Nine Months.

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Gross Profit.  In the Current Nine Months, gross profit increased to $100.6 million from $97.2 million in the Prior Nine Months.  The retail and insurance components of sales and gross profit for the Current and Prior Nine Months are detailed below:  (in thousands)

Retail gross profit decreased by 1.0 percentage points as a percent of sales in the Current Nine Months, but increased by approximately $3.2 million dollars versus the comparable prior year period.  The gross profit percentage decrease is primarily attributable to the following areas: 

•  46 vision centers entered the "3-year option period" of the Wal*Mart lease during 2003.  The option period effectively increases each location's minimum rent requirement.  We expect this trend of increased rent to continue as additional Wal*Mart locations enter the "option period" of their lease.  This factor reduced our gross profit as a percentage of sales by 0.4%.
   

• The Company experienced a shift in sales mix  from eyeglasses toward other product category sales.  The effect of the mix change reduced our gross profit as a percentage of sales by 0.4%.
   

• During the Current Nine Months, we formalized our eyeglass merchandising approach within our Fred Meyer stores,  which centers around a "buy one, get one free" promotion concept.  This approach is consistent with our host's merchandising approach.  Sales have improved consistently.  However, the concept has reduced our eyeglass margins as a percentage of sales.

Insurance gross profit represents premium revenue less claims expense for a managed care product that the Company began selling in the Wal*Mart California vision centers in the second quarter of 2002.  The addition of this lower-margin insurance product increased total revenues by $3.4 million and gross profit dollars by $129,000, but decreased total gross profit as a percent of total net sales by 0.8 percentage points.

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Selling, General, And Administrative Expense (“SG&A expense”).   SG&A expense, which includes both store operating expenses and home office overhead at the retail support center, increased to $93.7 million  in the Current Nine Months from $91.9 million for the Prior Nine Months, which represents an increase of $1.8 million.  The increase in SG&A expense was primarily attributable to the following factors:

1. An increase in retail-level compensation of approximately $2.0 million, which includes base payroll costs and retail-level incentive costs.  Substantially all of the increase in base payroll is due to higher rates in certain markets, where regulations for dispensing opticians and growing competition resulted in upward pressure on rates for optical personnel.  Also in 2003, the Company restructured payroll scheduling, to provide consistent coverage based on operating needs by volume levels.  This change did not have a significant impact on the average hours of coverage.

Regarding incentive costs, the Company amended its incentive programs in 2003 to better align incentive awards with retail performance based on sales growth goals as well as store profitability goals.  Higher levels of goal achievement are resulting in higher levels of incentive compensation.

2. An increase in health and medical benefit costs of approximately $400,000.

3. Workers compensation expense, which increased approximately $500,000 over the Prior Nine Months.  This increase was due to adverse development of claims from previous years, primarily in California.

4. Increased professional fees of approximately $300,000, a majority of which was incurred as a result of the re-audit of the 2001 financial statements and the completion of the 2002 financial statements.

5. During the Current Nine Months, the Company realized a reduction in depreciation and amortization expense of approximately $2.6 million versus the Prior Nine Months.  The reduction is largely due to leasehold improvements and equipment becoming fully-depreciated.

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

Restructuring Expense.  During August 2003, as a result of a declining store base, the Company initiated and completed a restructuring of the retail field and home office retail support center.  The process resulted in a reduction in headcount approximating 15% of both the retail field management organization and the home office retail support center organization.   The cost of the restructuring process was $484,000, which included separation costs and outplacement costs.  The Company expects to realize savings on an annualized basis of approximately $1.5 million.

Operating Income.  Operating income for the Current Nine Months increased to $6.4 million from $5.3 million in the Prior Nine Months.  Operating income as a percentage of sales was 3.5% in the Current Nine Months, compared to 3.1% in the Prior Nine Months.

Other Expense.  Other expense decreased to $9.7 million in the Current Nine Months, compared to $10.1 million in the Prior Nine Months.  The decrease in interest expense was primarily the result of a weighted-average outstanding debt balance of $106.9 million in the Current Nine Months versus $118.1 million in the Prior Nine Months.  Our Senior Subordinated Debt has a fixed interest rate of 12%, which has not changed since issuance in May 2001.  This $1.0 million decline in interest was partially offset by the prior year gain on repurchase of bonds of $547,000 for a total net improvement in other expense of approximately $400,000.

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

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Loss from Discontinued Operations.  During the first nine months of 2003, 28 of the Company’s vision center leases expired, resulting in the closure of 26 Wal*Mart vision centers and two vision centers on military bases.  In addition, the Company has closed 12 under-performing vision centers in Fred Meyer locations prior to their scheduled lease expiration.  Condensed information for these closed stores is presented below.  The net loss on disposal of these operations included severance and closing costs and gains recorded from the sale of certain assets.   Operating results for these closed vision centers have been presented separately as discontinued operations for all periods presented in the Condensed Consolidated Statements of Operations. 

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

Net Income.  The Company posted a net loss of $4.4 million versus a net loss of $3.7 million in the Prior Nine Months. 

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

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

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

EBITDA does not represent cash flow from operations as defined by generally accepted accounting principles, is not necessarily indicative of cash available to fund all cash flow needs, should not be considered an alternative to net income or to cash flow from operations (as determined in accordance with GAAP) and should not be considered an indication of our operating performance or as a measure of liquidity.  EBITDA is not necessarily comparable to similarly titled measures for other companies.

The following is a reconciliation of net earnings to EBITDA:

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