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
For the quarterly period Commission File
ended September 30, 2000 Number 0-20001
VISTA EYECARE, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
GEORGIA 58-1910859
- -------------------------------- --------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
296 Grayson Highway
Lawrenceville, Georgia 30045
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
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 X No
----- -----
The number of shares of Common Stock of the registrant outstanding as of
November 10, 2000 was 21,179,103.
The Exhibit Index is located at page 26.
VISTA EYECARE, INC.
FORM 10-Q INDEX
Page of
Form 10-Q
---------
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets -
September 30, 2000 and January 1, 2000 3
Condensed Consolidated Statements of Operations -
Three Months Ended September 30, 2000 and October 2, 1999 and Nine
Months Ended September 30, 2000 and October 2, 1999 5
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2000 and October 2, 1999 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 25
PART II - OTHER INFORMATION
- ---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 26
PART I
FINANCIAL INFORMATION
ITEM I FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2000 and January 1, 2000
(In thousands except share information)
September 30, January 1,
2000 2000
-------------- ----------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ...................................................... $ 3,450 $ 2,886
Accounts receivable ............................................................ 13,289 10,416
(net of allowance: 2000-$3,977 1999-$4,403)
Inventories .................................................................... 30,635 34,373
Other current assets (See Note 7) .............................................. 4,448 2,761
--------- ---------
Total current assets ........................................................... $ 51,822 $ 50,436
--------- ---------
PROPERTY AND EQUIPMENT:
Equipment ...................................................................... 48,337 57,750
Furniture and fixtures ......................................................... 23,372 26,600
Leasehold improvements ......................................................... 18,300 28,458
Construction in progress ....................................................... 609 3,427
--------- ---------
90,618 116,235
Less accumulated depreciation .................................................. (59,046) (62,329)
--------- ---------
Net property and equipment ..................................................... 31,572 53,906
--------- ---------
OTHER ASSETS AND DEFERRED COSTS (net of accumulated
amortization: 2000-$1,997; 1999-$1,500) ........................................ 8,308 9,315
DEFERRED INCOME TAX ASSETS ..................................................... 385 385
GOODWILL AND OTHER INTANGIBLE ASSETS (net of accumulated
amortization: 2000-$2,524 ; 1999-$6,994) (See Note 4).......................... 2,080 106,177
--------- ---------
$ 94,167 $ 220,219
========= =========
3
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
LIABILITIES NOT SUBJECT TO COMPROMISE:
CURRENT LIABILITIES:
Accounts payable (See Note 7) .................................................. $ 1,493 $ 17,192
Accrued expenses and other current liabilities ................................. 16,238 24,568
Current portion of long-term debt and capital leaseobligations ................. -- 1,098
Revolving credit facility and term loan ........................................ 13,159 19,292
--------- ---------
Total current liabilities .......................................... 30,890 62,150
--------- ---------
SENIOR NOTES (net of discount: 1999-$1,253) ................................... -- 123,747
OTHER LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS ............................. -- 6,865
--------- ---------
Total liabilities not subject to compromise ........................ 30,890 192,762
LIABILITIES SUBJECT TO COMPROMISE .............................................. 168,392 --
COMMITMENTS AND CONTINGENCIES .................................................. -- --
REDEEMABLE COMMON STOCK ........................................................ -- 900
SHAREHOLDERS' (DEFICIT) EQUITY:
Preferred stock, $1 par value; 5,000,000 shares authorized, none issued ........ -- --
Common stock, $.01 par value; 100,000,000 shares authorized,
21,179,103 shares issued and outstanding as of
September 30, 2000 and January 1, 2000 ....................................... 211 211
Additional paid-in capital ..................................................... 47,387 47,387
Retained deficit ............................................................... (148,640) (16,968)
Accumulated other comprehensive income ......................................... (4,073) (4,073)
--------- ---------
Total shareholders' (deficit) equity ............................... (105,115) 26,557
--------- ---------
$ 94,167 $ 220,219
========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements
4
VISTA EYECARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share information)
(Unaudited)
Three Months Ended Nine Months Ended
------------------------ ------------------------
September 30, October 2, September 30, October 2,
2000 1999 2000 1999
---------- --------- ---------- ---------
NET SALES ................................. $ 75,161 $ 83,262 $ 238,827 $ 252,428
COST OF GOODS SOLD ........................ 36,209 37,474 109,689 111,307
--------- -------- --------- ---------
GROSS PROFIT .............................. 38,952 45,788 129,138 141,121
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE 41,648 45,355 129,831 130,738
IMPAIRMENT LOSS ON LONG-LIVED ASSETS ...... -- -- 2,684 --
RESTRUCTURING EXPENSE ..................... -- -- 1,601 --
--------- -------- --------- ---------
OPERATING INCOME/(LOSS).................... (2,696) 433 (4,978) 10,383
INTEREST EXPENSE, NET (SEE NOTE 10)........ 721 4,809 6,968 14,218
--------- -------- --------- ---------
LOSS BEFORE REORGANIZATION ITEMS AND TAXES (3,417) (4,376) (11,946) (3,835)
REORGANIZATION ITEMS ...................... 114,520 -- 118,900 --
--------- -------- --------- ---------
LOSS BEFORE TAXES AND EXTRAORDINARY ITEM .. (117,937) (4,376) (130,846) (3,835)
INCOME TAX EXPENSE/(BENEFIT) .............. -- (1,396) -- (1,010)
--------- -------- --------- ---------
NET LOSS BEFORE EXTRAORDINARY ITEM ........ (117,937) (2,980) (130,846) (2,825)
EXTRAORDINARY LOSS, NET OF TAX ............ -- -- (827) --
--------- -------- --------- ---------
NET LOSS .................................. $(117,937) $ (2,980) $(131,673) $ (2,825)
========= ======== ========= =========
BASIC LOSS PER COMMON SHARE:
LOSS BEFORE EXTRAORDINARY ITEM .......... (5.60) (0.14) (6.21) (0.13)
EXTRAORDINARY LOSS ...................... (--) -- (0.04) --
--------- -------- --------- ---------
NET LOSS PER BASIC SHARE .................. $ (5.60) $ (0.14) $ (6.25) $ (0.13)
========= ======== ========= =========
DILUTED LOSS PER COMMON SHARE:
LOSS BEFORE EXTRAORDINARY ITEM .......... (5.60) (0.14) (6.21) (0.13)
EXTRAORDINARY LOSS ...................... (--) -- (0.04) --
--------- -------- --------- ---------
NET LOSS PER DILUTED SHARE ................ $ (5.60) $ (0.14) $ (6.25) $ (0.13)
========= ======== ========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
VISTA EYECARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
--------------------------------
Sept. 30, 2000 Oct. 2,1999
-------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ...................................................................... $(131,673) $ (2,825)
--------- --------
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization ............................................. 14,887 14,254
Provision for deferred income tax expense ................................. -- (1,222)
Impairment of long-lived assets (See Note 4)............................... 2,684 --
Restructuring expense (See Note 4) ........................................ 1,601 --
Reorganization items (See Note 4) ......................................... 118,900 --
Extraordinary items (See Note 6) .......................................... 827 --
Changes in operating assets and liabilities:
Receivables ......................................................... (3,932) (3,075)
Inventories ......................................................... 3,703 (5,640)
Other current assets ................................................ (687) (1,397)
Other assets ........................................................ 489 (1,585)
Accounts payable .................................................... 9,261 5,588
Accrued expenses and other current liabilities ...................... (3,464) (1,863)
--------- --------
Total adjustments ............................................... 144,269 5,060
--------- --------
Net cash provided by operating activities ....................... 12,596 2,235
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment ............................. -- 955
Purchase of property and equipment ....................................... (4,279) (10,522)
--------- --------
Net cash used in investing activities ........................... (4,279) (9,567)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITES:
Repayments on revolving credit facility .................................. (242,154) (14,744)
Advances on revolving credit facility .................................... 236,020 19,000
Repayments on notes payable and capital leases ........................... (901) (1,167)
Deferred financing costs ................................................. (718) --
Proceeds from issuance of common stock ................................... (--) 56
--------- --------
Net cash (used in) provided by financing activities ............. (7,753) 3,145
--------- --------
NET INCREASE (DECREASE) IN CASH ............................................... 564 (4,187)
CASH, beginning of period ..................................................... 2,886 7,072
--------- --------
CASH, end of period ........................................................... $ 3,450 $ 2,885
========= ========
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
VISTA EYECARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(Unaudited)
(1) BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared by Vista Eyecare, Inc., (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 (which include only normal recurring adjustments)
necessary for a fair presentation of the financial position, results of
operations, and cash flows for the interim periods presented have been made.
Operating results for the interim periods presented are not necessarily
indicative of the results that may be expected for the year ending December 30,
2000. Certain amounts in the October 2, 1999 condensed consolidated financial
statements have been reclassified to conform to the September 30, 2000
presentation.
(2) BANKRUPTCY PROCEEDING AND GOING CONCERN MATTERS
Proceedings Under Chapter 11 of the Bankruptcy Code
On April 5, 2000, the Company and ten of its subsidiaries (collectively,
the "Debtors") filed voluntary petitions with the United States Bankruptcy Court
for the Northern District of Georgia for reorganization under Chapter 11 (the
"Chapter 11 Cases"). The Debtors are currently operating their businesses as
debtors-in-possession pursuant to the Bankruptcy Code.
In the course of the Chapter 11 Cases, we may assume or reject certain
contracts which were signed before the date the Debtors filed the bankruptcy
petitions. Contracts which are rejected will generate unsecured claims in the
Chapter 11 Cases ( See Footnote 3). To assume contracts, we will have to cure
any outstanding defaults. We believe that, as part of a plan of reorganization,
the Company will be able to assume the contracts it desires to continue in
effect.
Because of our operating losses and the charges we recorded in the
third quarter 2000, (See Footnote 4), we do not, as of the end of this fiscal
quarter, meet certain requirements contained in some of our contracts. We will
need to comply with these requirements in order to keep these contracts in
effect upon completion of the Chapter 11 Cases. We anticipate that, as part of a
plan of reorganization, we will meet these requirements upon emergence from
Chapter 11.
7
The Debtors expect to file a reorganization plan or plans that provide
for emergence from bankruptcy in 2001. There can be no assurance that a
reorganization plan or plans will be proposed by the Debtors or confirmed by the
Bankruptcy Court, or that any such plan(s) will be consummated. A plan of
reorganization could result in holders of common stock receiving no value for
their interests. Because of such possibilities, the value of the Company's
common stock is highly speculative.
Going Concern Matters
The accompanying consolidated financial statements have been prepared on a
going concern basis of accounting and do not reflect any adjustments that might
result if the Company is unable to continue as a going concern. The Company's
recent losses and negative cash flows from operations, and the Chapter 11 Cases,
raise substantial doubt about the Company's ability to continue as a going
concern. The consolidated financial statements do not include any adjustments
relating to recoverability and classification of recorded asset amounts, except
for the impairment of long-lived assets as discussed in Footnote 4, or the
amount and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern. The ability of the Company to
continue as a going concern and appropriateness of using the going concern basis
is dependent upon, among other things:
(i) the Company's ability to comply with its debtor-in-possession
financing agreement (the "DIP Facility") (See Note 5 to Condensed
Consolidated Financial Statements);
(ii) the Company's ability to generate sufficient cash flows from
operations to meet its obligations;
(iii)the confirmation of a plan of reorganization under the Bankruptcy
Code; and
(iv) the Company's ability to achieve profitable operations after such
confirmation.
Management believes that the DIP Facility, along with cash provided by
operations, will provide sufficient liquidity to allow the Company to continue
as a going concern. However, there can be no assurance that the sources of
liquidity will be available or sufficient to meet the Company's needs. Although
the Company is currently in compliance with the terms of the DIP Facility, a
continuation of negative sales and cash flow trends could cause the Company to
breach the EBITDA covenant.
A plan of reorganization could materially change the amounts currently
recorded in the consolidated financial statements. The consolidated financial
statements do not give effect to any adjustments to the carrying value of assets
or amounts and classifications of liabilities that might be necessary as a
result of a reorganization plan.
(3) ACCOUNTING DURING REORGANIZATION PROCEEDINGS
Entering the reorganization proceedings does not affect or change the
application of generally accepted accounting principles followed by the Company
in the preparation of its consolidated financial statements. During the pendency
of the Chapter 11 Cases, our consolidated financial statements will distinguish
transactions and events that are directly associated with the reorganization
from the ongoing operations of the business in accordance with the American
Institute of Certified Public Accountants' Statement of Position 90-7 -
8
"Financial Reporting by Entities in Reorganization under the Bankruptcy Code"
("SOP 90-7"). The Company's consolidated balance sheets will segregate
liabilities subject to compromise from liabilities not subject to compromise. In
addition, we will stop accruing for interest on unsecured debt until the Company
emerges from protection under Chapter 11 of the Bankruptcy Code, or it becomes
probable that we will pay these amounts as part of a plan of reorganization.
Liabilities Subject to Compromise
"Liabilities subject to compromise" refers to liabilities incurred prior to
the commencement of the Chapter 11 Cases, including those considered by the
Bankruptcy Court to be pre-petition claims, such as claims arising out of a
rejection of a lease for real property. These liabilities consist primarily of
amounts outstanding under long-term debt and also include accounts payable,
accrued interest, accrued restructuring costs, and other accrued expenses. These
amounts represent the Company's estimate of known or potential claims to be
resolved in the Chapter 11 Cases. Such claims remain subject to future
adjustments. Adjustments may result from (1) negotiations; (2) actions of the
Bankruptcy Court; (3) further development with respect to disputed claims; (4)
future rejection of additional executory contracts or unexpired leases; (5) the
determination as to the value of any collateral securing claims; (6) proofs of
claim; or (7) other events. Payment terms for these amounts, which are
considered long-term liabilities at this time, will be established in connection
with the Chapter 11 Cases.
The principal categories of claims classified as liabilities subject to
compromise in the Chapter 11 Cases are identified below: (amounts in thousands)
September 30, 2000
------------------
Accounts payable $ 25,486
Accrued expenses 527
Provision for rejected contracts 3,189
Senior notes, net of discount including $7,480 accrued interest 131,266
Other long-term debt and capital lease obligations 7,024
Redeemable common stock 900
--------
$168,392
========
The Company has received approval from the Bankruptcy Court to pay
pre-petition and post-petition employee wages, salaries, benefits and other
employee obligations, to pay vendors and other providers in the ordinary course
for goods and services received from April 5, 2000 and to honor customer service
programs, including warranties and returns. These items are recorded as accrued
expenses not subject to compromise.
9
(4) REORGANIZATION ITEMS, RESTRUCTURING EXPENSES AND IMPAIRMENT OF LONG-LIVED
ASSETS
General
In the last quarter of 1999 and the first three quarters of 2000, we have
recorded charges relating to store closings, to impairments of long-lived assets
and to expenses incurred in the Chapter 11 Cases. Generally accepted accounting
principles require different presentations depending on whether we incurred the
cost before or after the filing of the Chapter 11 Cases.
Impairment of Fixed Assets and Restructuring Expenses
We have recorded charges for impairment of fixed assets and restructuring
expenses in connection with stores closed before the filing of the Chapter 11
Cases. Emerging Issues Task Force Issue 94-03, "Liability Recognition for
Certain Employee Termination Benefits to Exit an Activity (Including Certain
Costs Incurred in a Restructuring)", requires that we present these charges as
components of operating income.
In connection with stores closed after the filing of the Chapter 11 Cases,
we have recorded charges for impairment of long-lived assets and for
restructuring expenses. SOP 90-7 requires that we present these charges as
reorganization items below operating income.
Summary of Restructuring Charges
The table below summarizes charges for impairment of fixed assets and
restructuring expenses incurred in the fourth quarter 1999 and the first quarter
2000. These charges were incurred before the Company began the Chapter 11 Cases
(amounts in thousands):
Fourth Quarter 1999 First Quarter 2000
------------------- ------------------
Impairment of fixed assets $1,952 $2,684
Restructuring expenses
Provision for rejected leases $ -- $1,362
Other store closing costs -- 239
------ ------
Restructuring expense $ -- $1,601
====== ======
Summary of Reorganization Items
Results for the third quarter include charges which were incurred after
the Company filed the Chapter 11 Cases. Expenses related to the reorganization
process and the Chapter 11 Cases are considered reorganization items. The table
below summarizes these charges (amounts in thousands):
Three Months Ending Nine Months Ending
September 30, 2000 September 30, 2000
------------------ ------------------
Impairment of goodwill $ 100,805 $ 100,805
Impairment of fixed assets 11,633 11,966
Provision for rejected leases 85 1,920
Other store closing costs 244 662
Professional fees 1,155 2,311
Retention bonus 564 1,113
Interest income on accumulated cash (43) (91)
Other reorganization costs 77 214
--------- ---------
$ 114,520 $ 118,900
========= =========
10
Impairment of Long-Lived Assets
As a result of our Chapter 11 filing, we are evaluating various strategic
alternatives, including the possible sale or disposition of certain of the
Company's assets. Due to continuing negative cash flows in the third quarter of
2000, coupled with the possible sale or disposition of certain Company assets,
we have recorded a noncash charge of $100.8 million for the impairment of
goodwill associated with the acquisition of Frame-n-Lens Optical, Inc., New West
Eyeworks Inc. and Midwest Vision Inc. ("Acquired Entities"). In addition, we
recorded a noncash charge of $10.6 million to reflect the impairment of fixed
assets associated with the Acquired Entities
The Company reached an agreement in principle with Meijer, Inc. to
terminate ten leases governing all of the Company's units located in Meijer
Thrifty Acre locations. Pursuant to this agreement, the Company will turn over
all of its Meijer locations to Meijer, Inc. by October 31, 2000, but will pay
rent totaling $85,000 through January 2001. Neither the Company nor Meijer will
receive any proceeds from the other party for the early termination. The Company
has recorded a noncash pre-tax charge of approximately $1.0 million in the third
quarter related to the impairment of leasehold improvements and furniture and
fixtures in the Meijer locations.
In the second quarter of 2000, the Company reached an agreement with
Wal-Mart Stores, Inc. to terminate its 72 leases governing all of the Company's
units located in Sam's Club locations. Pursuant to this agreement, the Company
turned over all such locations to Wal-Mart Stores by September 1, 2000. The
Company received no proceeds from Wal-Mart for the early termination, and
Wal-Mart will waive all claims for rent under the leases for the balance of the
original lease term. In the second quarter of 2000, the Company recorded a
noncash pre-tax charge of approximately $330,000 related to the impairment of
leasehold improvements and furniture and fixtures in the Sam's Club locations.
A summary of the impairment charges recorded in the third quarter 2000 follows
(amounts in thousands):
Impairment of goodwill:
Frame-n-Lens $ 38,318
New West Eyeworks 60,610
Midwest Vision 1,877
--------
Total goodwill impairment $100,805
========
Impairment of fixed assets:
Frame-n-Lens $ 4,792
New West Eyeworks 5,186
Midwest Vision 668
Meijer Thrifty Acre 987
--------
Total fixed asset impairment $ 11,633
========
We periodically evaluate the carrying value of long-lived assets based
on the expected future undiscounted operating cash flows of the related business
unit. As part of the reorganization process, we may decide to sell or otherwise
dispose of assets for amounts other than those reflected in the Condensed
Consolidated Financial Statements, which may result in further impairment of
long-lived assets.
In addition to the impairment of goodwill and fixed assets, the Company
recorded adjustments to inventory of $1.1 million and to accounts receivable of
$0.5 million to adjust the carrying value to net realizable value. These charges
were included in cost of goods sold and SG&A expense, as appropriate.
11
(5) DEBTOR-IN-POSSESSION FINANCING
On May 9, 2000, the Bankruptcy Court approved an order permitting the
Company to enter into a $25 million debtor-in-possession credit facility with
Foothill Capital Corporation (the "DIP Facility"). The DIP Facility (which
replaced the Company's prior secured credit facility with Foothill Capital
Corporation) consists of a $12.5 million term loan and $12.5 million revolving
credit facility. The Company paid professional fees, organization fees, and
waiver fees of $500,000 to convert the previous Foothill credit facility to the
DIP Facility. As of September 30, 2000, the Company had borrowed a total of
$13.2 million (inclusive of the $12.5 million term loan portion) under the DIP
Facility.
The DIP Facility contains customary terms and conditions. It expires on May
31, 2001. The DIP Facility further provides that:
- - The Company must maintain a rolling twelve month EBITDA of no less than $15
million, calculated prior to restructuring charges, reorganization items,
extraordinary losses and store impairment reserves.
- - The $12.5 million term loan portion of the DIP Facility bears interest at
15% per annum.
- - Interest rates on the revolver portion of the DIP Facility are based on
either the Wells Fargo Bank, N.A. Base Rate plus 2% or the Adjusted
Eurodollar Rate plus 3.25%.
Although the Company is currently in compliance with the terms of the DIP
Facility, a continuation of negative sales and cash flow trends could cause the
Company to breach the EBITDA covenant.
(6) EXTRAORDINARY ITEM
The Company recorded an extraordinary loss of $827,000 as a result of
refinancing the Company's previous revolving credit facility in the second
quarter of 2000 (See Note 5 to Condensed Consolidated Financial Statements).
This refinancing necessitated the write-off of capitalized costs associated with
the previous credit facility. Because of the Company's decision to fully reserve
for the Company's 2000 tax benefit, the net tax effect on the extraordinary item
is zero.
(7) ACCOUNTS PAYABLE
As a result of the bankruptcy proceedings, many of the Company's vendors
are requiring payment in advance of delivery of goods or services. As of
September 30, 2000, the Company had made approximately $1.5 million of payments
in advance which have been presented in "Other Current Assets."
(8) INCOME TAXES
The Company recorded a pretax loss of $117.9 million in the third quarter.
The resulting income tax benefit was approximately $6.5 million. The Company has
established a valuation allowance equal to the amount of the tax benefit.
(9) EARNINGS PER COMMON SHARE
Basic earnings (loss) per common share were computed by dividing net income
(loss) by the weighted average number of common shares outstanding during the
year. Diluted earnings (loss) per common share were computed as basic earnings
per common share, adjusted for outstanding stock options that are dilutive. The
following table sets forth basic and diluted earnings per share for the periods
indicated (amounts in thousands except per share information).
12
VISTA EYECARE, INC.
CONDENSED CONSOIDATED STATEMENTS OF OPERATIONS
(In thousands except per share information)
(Unaudited)
Three Months Ended Nine Months Ended
-------------------------- -------------------------
Sept. 30, Oct. 2, Sept. 30, Oct. 2,
2000 1999 2000 1999
--------- --------- --------- ---------
Loss before extraordinary item $(117,937) $ (2,980) $ (130,846) $ (2,825)
Extraordinary loss, net of tax -- -- (827) --
--------- -------- ----------- ----------
Net Loss $(117,937) $ (2,980) $ (131,673) $ (2,825)
========= ======== =========== ==========
Weighted shares outstanding 21,070 21,070 21,070 21,068
Basic loss per share:
Earnings before extraordinary item (5.60) (0.14) (6.21) (0.13)
Extraordinary loss, net of tax -- -- (0.04) --
--------- -------- ----------- ----------
Basic loss per share $ (5.60) $ (0.14) $ (6.25) $ (0.13)
========= ======== =========== ==========
Weighted shares outstanding 21,070 21,070 21,070 21,068
Impact of dilutive options held by
employees -- -- -- --
--------- -------- ----------- ----------
Aggregate shares outstanding $ 21,070 $ 21,070 $ 21,070 $ 21,068
========= ======== =========== ==========
Diluted earnings per share:
Earnings before extraordinary item (5.60) (0.14) (6.21) (0.13)
Extraordinary loss, net of tax -- -- (0.04) --
--------- -------- ----------- ----------
Diluted loss per share $ (5.60) $ (0.14) $ (6.25) $ (0.13)
========= ======== =========== ==========
There are no outstanding options with an exercise price below the average price
of the Company's common stock.
13
(10) SUPPLEMENTAL DISCLOSURE INFORMATION
The following table sets forth inventory balances by classification:
(amounts in thousands)
September 30, 2000 January 1, 2000
------------------ ---------------
Raw Material $21,458 $24,408
Finished Goods 8,023 8,804
Supplies 1,154 1,161
------- -------
$30,635 $34,373
======= =======
Since filing for protection under Chapter 11 of the Bankruptcy Code, we
have stopped accruing interest on unsecured debt. Contractual interest was $5.1
million and $15.6 million for the quarter and nine months ending September 30,
2000, respectively. The following table sets forth the components of interest
expense, net: (amounts in thousands)
Three Months Ended Nine Months Ended
------------------------- -------------------------
Sept. 30, Oct. 2, Sept. 30, Oct. 2,
2000 1999 2000 1999
------- ------- -------- --------
Interest expense on debt and capital leases $ 576 $ 4,516 $ 6,325 $ 13,433
Purchase discounts on invoice payments (34) (1) (47) (37)
Finance fees and amortization of hedge and
swap agreements 180 316 692 863
Interest income -- (17) (3) (70)
Other (1) (5) 1 29
------- ------- -------- --------
$ 721 $ 4,809 $ 6,968 $ 14,218
======== ======= ======== ========
This excludes interest income of $43,000 and $91,000 for the three and nine
months ended September 30, 2000. These amounts were treated as
reorganization items. (See Note 4 to Condensed Consolidated Financial
Statements.)
Supplemental cash flow information: (amounts in thousands)
Nine Months Ended
--------------------------
Sept. 30, Oct. 2,
2000 1999
------- -------
Cash paid for
Income taxes $ -- $ 495
Interest 2,111 9,269
Restructuring expenses and
reorganization items 4,725 --
14
(11) REVENUE RECOGNITION
The Company currently recognizes revenues and the related costs from retail
sales when it has received at least 50% of the payment. Under Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements", revenue and the
related costs from retail sales may be recognized only when the entire payment
has been received. The SEC has delayed the implementation date of this
accounting bulletin until the fourth quarter of fiscal 2000. The Company is
evaluating the impact of SAB No. 101 and will apply this accounting bulletin and
the related accounting principles to its financial statements in the fourth
quarter of 2000. We will report the impact as a cumulative effect adjustment to
our consolidated financial statements resulting from a change in accounting
principles as if the change had occurred on January 1, 2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Proceedings Under Chapter 11 of the Bankruptcy Code
On April 5, 2000, the Company and ten of its subsidiaries (collectively,
the "Debtors") filed voluntary petitions with the Bankruptcy Court for the
Northern District of Georgia for reorganization under Chapter 11 (the "Chapter
11 Cases"). The Debtors are currently operating their businesses as
debtors-in-possession pursuant to the Bankruptcy Code.
In the course of the Chapter 11 Cases, we may assume or reject certain
contracts which were signed before the date the Debtors filed the bankruptcy
petitions. Contracts which are rejected will generate unsecured claims in the
Chapter 11 Cases ( See Footnote 3). To assume contracts, we will have to cure
any outstanding defaults. We believe that, as part of a plan of reorganization,
the Company will be able to assume the contracts it desires to continue in
effect.
Because of our operating losses and the charges we recorded in the
third quarter 2000, (See Footnote 4 to Condensed Consolidated Financial
Statements), we do not, as of the end of this fiscal quarter, meet certain
requirements contained in some of our contracts. We will need to comply with
these requirements in order to keep these contracts in effect upon completion of
the Chapter 11 Cases. We anticipate that, as part of a plan of reorganization,
we will meet these requirements upon emergence from Chapter 11.
The Debtors expect to file a reorganization plan or plans that provide for
emergence from bankruptcy in 2001. There can, however, be no assurance that a
reorganization plan or plans will be proposed by the Debtors or confirmed by the
Bankruptcy Court, or that any such plan(s) will be consummated. A plan of
reorganization could result in holders of the common stock receiving no value
for their interests. Because of such possibilities, the value of the common
stock is highly speculative.
We cannot predict the outcome of the Chapter 11 Cases or their effect on
the Company's business. If the liabilities subject to compromise in the Chapter
11 Cases exceed the fair value of the assets, unsecured claims may be satisfied
at less than 100% of their face value and the common stock of the Company may
have no value.
15
Condensed Consolidated Financial Statements
The Company's Condensed Consolidated Financial Statements have been
prepared on a going concern basis, which contemplates continuity of operations,
realization of assets and liquidation of liabilities and commitments in the
normal course of business. The filing of the bankruptcy petition, the related
circumstances and the losses from operations raise substantial doubt with
respect to the Company's ability to continue as a going concern. The
appropriateness of using the going concern basis is dependent upon, among other
things, confirmation of a plan or plans of reorganization, future profitable
operations and the ability to generate cash from operations and financing
sources sufficient to meet obligations.
As a result of the filing of the Chapter 11 Cases and related
circumstances, realization of assets and liquidation of liabilities is subject
to significant uncertainty. While under the protection of Chapter 11, the
Debtors may sell or otherwise dispose of assets, and liquidate or settle
liabilities, for amounts other than those reflected in the Condensed
Consolidated Financial Statements. Further, a plan or plans of reorganization
could materially change the amounts reported in the accompanying Condensed
Consolidated Financial Statements. The Condensed Consolidated Financial
Statements do not include any adjustments relating to recoverability of the
value of recorded asset amounts, except for the impairment of long-lived assets
as discussed in Footnote 4, or the amounts and classification of liabilities
that might be necessary as a consequence of a plan of reorganization.
RESULTS OF OPERATIONS
The Company's results of operations in any period are significantly
affected by the number and mix of vision centers opened and operating during
such period. As of September 30, 2000, the Company operated 735 vision centers,
versus 933 vision centers as of October 2, 1999. In the third quarter, the
Company terminated its 72 leases governing all the Company's units located in
Sam's Clubs locations (See Note 4 to Condensed Consolidated Financial
Statements). In addition, the Company reached an agreement in principle with
Meijer, Inc., to terminate ten leases governing all of the Company's units
located in Meijer locations no later than October 31, 2000 (See Note 4 to
Condensed Consolidated Financial Statements). The Company had also previously
this year, rejected, or otherwise terminated the leases for, approximately 91
other vision centers.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED OCTOBER 2,
1999.
CONSOLIDATED RESULTS
NET SALES. Net sales during the current period decreased to $75.2 million
from $83.3 million in the period a year ago. The sales decline was attributable
to the following reasons:
- - In the third quarter of fiscal 2000, the Company closed all of its Sam's
Club locations which, in the third quarter of 1999, had generated $6
million in sales. These vision centers generated $1.2 million in net sales
in the third quarter 2000.
- - The Company operated approximately 97 fewer free-standing vision centers in
the third quarter of 2000 than in the comparable period a year ago.
Additionally, the Company's remaining free-standing vision centers recorded
comparable store sales of negative 12.5% in the third quarter.
16
Net sales for stores open more than one year for the domestic core business
were flat compared to levels recorded in the comparable period of a year ago.
GROSS PROFIT. Gross profit decreased to $39.0 million in the current period
from $45.8 million in the comparable period a year ago. This decrease was due to
the following:
- - A reduction in sales caused by the closure of all of the Company's Sam's
Club locations, as well as the operation of approximately 97 fewer
free-standing locations, and the negative comparable store sales registered
by the remaining free-standing vision centers acquired by the Company.
- - A sales shift from eyeglasses to contact lenses caused by contact lens
promotions in the free-standing vision centers. Eyeglasses have a higher
margin than do contact lenses.
- - A charge of approximately $1.1 million to adjust inventory at the Company's
free-standing stores to its net realizable value ( see "Reorganization
Items, Restructuring Expenses and Impairment of Long-lived Assets").
- - A reduction in vendor promotional monies and independent optometrist
revenue from the amounts received a year ago.
Gross profit as a percentage of sales decreased from 55.0% a year ago to
51.8 % in the current period. In addition to the reasons described above, the
decrease can also be attributed to the following:
- - A loss of efficiency in the Fullerton Lab caused by the decrease in volume
as a result of declining sales levels in the Company's free-standing vision
centers as well as lower volume resulting from closed stores.
- - A decline in average sales per store recorded by the free-standing
operations caused rent as a percentage of net sales to increase and thereby
reduced margin as a percent of net sales.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE ("SG&A expense"). SG&A
expense, which includes both store operating expenses and home office overhead,
decreased from $45.4 million in the comparable period a year ago to $41.7
million in the current period.
The principal reasons for the decrease are as follows:
- - Payroll savings of $2.9 million from the closure of the Sam's Club
locations and approximately 97 free-standing locations.
- - A $1.0 million reduction in advertising costs in the third quarter 2000
versus the same period a year ago.
- - Home Office savings of $0.8 million primarily related to a reduction in
headcount, as well as travel and other expenses.
These savings were partially offset by:
- - An increase in SG&A expense at host locations due to new store openings.
- - A charge of approximately $0.5 million to adjust accounts receivable at the
Company's free-standing stores to its net realizable value.
- - An increase in payroll for optometrists due to an increase in the number of
optometrists employed by the Company.
17
As a percentage of net sales, SG&A expense increased from 54.5% in the
comparable period a year ago to 55.4% in the current period. This increase was
due primarily to the sales shortfall from the Acquired Entities and the closure
of the Sam's Club and approximately 97 free-standing locations.
OPERATING LOSS. Operating results for the current period, prior to
reorganization items and the impairment of long-lived assets, decreased to an
operating loss of $2.7 million from operating income of $0.4 million in the
comparable period a year ago.
INTEREST EXPENSE. Interest expense decreased from $ 4.8 million to $0.7
million in the current period. Because of the filing of the Chapter 11 Cases, we
have stopped accruing for interest on unsecured debt until the Company emerges
from Chapter 11 of the Bankruptcy Code, or it becomes probable that the Company
will pay these amounts as part of a plan of reorganization. See "Accounting
During Reorganization Proceedings." Contractual interest for the third quarter
of 2000 was $5.1 million. In addition, interest expense excludes $43,000 of
interest income which has been reflected as a reorganization item.
REORGANIZATION ITEMS, RESTRUCTURING EXPENSES AND IMPAIRMENT OF LONG-LIVED
ASSETS.
General
In the last quarter of 1999 and the first three quarters of 2000, we have
recorded charges relating to store closings, to impairment of long-lived assets
and to expenses incurred in the Chapter 11 Cases. Generally accepted accounting
principles require different presentations depending on whether we incurred the
cost before or after the filing of the Chapter 11 Cases.
Impairment of Fixed Assets and Restructuring Expenses
We have recorded charges for impairment of fixed assets and restructuring
expenses in connection with stores closed before the filing of the Chapter 11
Cases. Emerging Issues Task Force Issue 94-03, "Liability Recognition for
Certain Employee Termination Benefits to Exit an Activity (Including Certain
Costs Incurred in a Restructuring)", requires that we present these charges as
components of operating income.
In connection with stores closed after the filing of the Chapter 11 Cases,
we have recorded charges for impairment of fixed assets and for restructuring
expenses. All expenses of this nature incurred in the second and third quarters
of 2000 have been presented as reorganization items, below operating income.
Summary of Restructuring Charges
The table below summarizes charges for impairment of fixed assets and
restructuring expenses incurred in the fourth quarter 1999 and the first quarter
2000. These charges were incurred before the Company began the Chapter 11 Cases
(amounts in thousands):
Fourth Quarter 1999 First Quarter 2000
------------------- ------------------
Impairment of fixed assets $1,952 $2,684
Restructuring expense
Provision for rejected leases $ -- $1,362
Other store closing costs -- 239
------ ------
$ -- $1,601
====== ======
18
Impairment and restructuring charges incurred in the second and third
quarters of 2000 are considered reorganization items and are presented below
operating income.
Summary of Reorganization Items
Results for the second and third quarters include charges which were
incurred after the Company filed the Chapter 11 Cases. Expenses related to the
reorganization process and the Chapter 11 Cases are considered reorganization
items. The table below summarizes these charges (amounts in thousands):
Second Quarter Third Quarter
2000 2000
---------------- --------------
Impairment of goodwill $ -- $ 100,805
Impairment of fixed assets 333 11,633
Provision for rejected leases 1,834 85
Other store closing costs 419 244
Professional fees 1,156 1,155
Retention bonus 549 564
Interest income on accumulated cash (48) (43)
Other reorganization costs 136 77
--------- ---------
$ 4,379 $ 114,520
========= =========
Impairment of Long-Lived Assets
As a result of our Chapter 11 filing, we are evaluating various strategic
alternatives, including the possible sale or disposition of certain of the
Company's assets. Due to continuing negative cash flows in the third quarter of
2000, coupled with the possible sale or disposition of certain Company assets,
we have recorded a noncash charge of $100.8 million for the impairment of
goodwill associated with the acquisition of Frame-n-Lens Optical, Inc., New West
Eyeworks Inc. and Midwest Vision, Inc. In addition, we recorded a noncash charge
of $10.6 million to reflect the impairment of fixed assets associated with the
Acquired Entities.
The Company reached an agreement in principle with Meijer, Inc. to
terminate ten leases governing all of the Company's units located in Meijer
Thrifty Acre locations. Pursuant to this agreement, the Company will turn over
all of its Meijer locations to Meijer, Inc. by October 31, 2000, but will pay
rent totaling $85,000 through January 2001. Neither the Company nor Meijer will
receive any proceeds from the other party for the early termination. The Company
has recorded a noncash pre-tax charge of approximately 1.0 million related to
the impairment of leasehold improvements and furniture and fixtures in the
Meijer locations.
In the second quarter of 2000, the Company reached an agreement with
Wal-Mart Stores, Inc. to terminate its 72 leases governing all of the Company's
units located in Sam's Club locations. Pursuant to this agreement, the Company
turned over all such locations to Wal-Mart Stores by September 1, 2000. The
Company received no proceeds from Wal-Mart for the early termination, and
Wal-Mart will waive all claims for rent under the leases for the balance of the
original lease term. In the second quarter of 2000, the Company recorded a
noncash pre-tax charge of approximately $330,000 related to the impairment of
leasehold improvements and furniture and fixtures in the Sam's Club locations.
(See Note 4 to Condensed Consolidated Financial Statements.)
19
A summary of the impairment charges recorded in the third quarter 2000
follows (amounts in thousands):
Impairment of goodwill:
Frame-n-Lens $ 38,318
New West Eyeworks 60,610
Midwest Vision 1,877
--------
Total goodwill impairment $100,805
========
Impairment of fixed assets:
Frame-n-Lens $ 4,792
New West Eyeworks 5,186
Midwest Vision 668
Meijer Thrifty Acre 987
--------
Total fixed asset impairment $ 11,633
========
We periodically evaluate the carrying value of long-lived assets based on
the expected future undiscounted operating cash flows of the related business
unit. As part of the reorganization process, we may decide to sell or otherwise
dispose of assets for amounts other than those reflected in the Condensed
Consolidated Financial Statements, which may result in further impairment of
long-lived assets.
In addition to the impairment of goodwill and fixed assets, the Company
recorded adjustments to inventory of $1.1 million and to accounts receivable of
$0.5 million to adjust the carrying value to net realizable value. These charges
were included in cost of goods sold and SG&A expense, as appropriate.
BENEFIT FOR INCOME TAXES. We recorded a pre-tax operating loss of $117.9
million versus a loss of $4.4 million in the prior period. The resulting income
tax benefit was approximately $6.5 million. We have established a valuation
allowance equal to the amount of the tax benefit.
NET LOSS. The Company posted a net loss of $117.9 million or $(5.60) per
share, versus a net loss of $3.0 million or $(0.14) per share in the comparable
period a year ago.
NINE MONTHS ENDED September 30, 2000 COMPARED TO NINE MONTHS ENDED OCTOBER 2,
1999.
NET SALES. Net sales during the current nine month period decreased to
$238.8 million from $252.4 million for the same period a year ago. The decrease
in net sales was the result of the following factors:
- - In the third quarter of fiscal 2000, the Company closed all of its Sam's
Club locations which, in the first nine months of 1999, had generated $18.8
million in sales. These vision centers generated $10.4 million in net sales
in the first nine months of 2000.
- - The Company rejected, or otherwise terminated the leases for, 97
free-standing vision centers in the first nine months of 2000.
Additionally, the Company's free-standing vision centers recorded
comparable store sales of negative 15.9% in the first nine months of 2000.
- - This decrease in net sales was partially offset by sales from 10 new
Wal-Mart stores which have opened since the third quarter of 1999.
GROSS PROFIT. For the current nine month period, gross profit decreased to
$129.1 million from $141.1 million in the prior nine months. This decrease was
due to the following:
20
- - A reduction in sales caused by the closure of all of the Company's Sam's
Club locations, as well as the operation of approximately 97 fewer
free-standing locations, and the negative comparable store sales registered
by the vision centers acquired by the Company.
- - A sales shift from eyeglasses to contact lenses caused by contact lens
promotions in the free-standing vision centers. Eyeglasses have a higher
margin than do contact lenses.
- - A charge of approximately $1.1 million to adjust inventory at the Company's
free-standing stores to its net realizable value.
- - A reduction in vendor promotional monies and independent optometrist
revenue from the amounts received a year ago.
Gross profit as a percentage of sales decreased from 55.9% in the prior
nine months to 54.1% in the current nine months. In addition to the
afore-mentioned reasons, this decrease can also be attributed to the following:
- - A loss of efficiency in the Fullerton Lab caused by the decrease in volume
as a result of declining sales levels in the Company's free-standing vision
centers.
- - Declining sales recorded by the free-standing operations caused rent as a
percentage of net sales to increase and thereby reduced margin as a percent
of net sales.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE ("SG&A expense"). SG&A expense
(which includes both store operating expenses and home office overhead)
decreased from $130.7 million for the nine months ending October 2, 1999 to
$129.8 million for the current nine months period.
In the current nine months, we experienced improvements in SG&A expense as noted
below:
- - Payroll savings from the closure of the Sam's Club locations and
approximately 97 free-standing locations totaling approximately $5.3
million.
- - A $1.1 million reduction in advertising spending in the third quarter of
2000 versus the third quarter of 1999.
These improvements were partially offset by:
- - Increased payroll costs of approximately $3.0 million to the Wal-Mart
locations primarily as the result of 10 new store openings since the third
quarter of 1999.
- - An increase in payroll for optometrists due to an increase in the number of
optometrists employed by the Company.
- - A charge of approximately $0.5 million to adjust accounts receivable at the
Company's free-standing stores to its net realizable value.
- - An increase in reserves for managed care processing fees and collection
costs versus the same period a year ago.
As a percentage of net sales, SG&A expense increased to 54.4% in the
current nine months, from 51.8% for the prior nine months. In addition to the
reasons described above, the percentage increase was due to low sales levels
recorded at the vision centers acquired from Frame-n-Lens and New West.
21
RESTRUCTING EXPENSE AND IMPAIRMENT OF FIXED ASSETS. The table below
summarizes charges for impairment of fixed assets and restructuring expenses
incurred in the fourth quarter 1999 and the first quarter 2000. These charges
were incurred before the Company began the Chapter 11 Cases (amounts in
thousands):
Fourth Quarter 1999 First Quarter 2000
------------------- ------------------
Impairment of fixed assets $1,952 $2,684
Restructuring expense
Provision for rejected leases $ -- $1,362
Other store closing costs -- 239
------ -------
Restructuring expense $ -- $1,601
====== ======
OPERATING LOSS. Operating results for the current nine months decreased
to a loss of $5.0 million from operating income of $10.4 million in the
comparable period a year ago.
INTEREST EXPENSE. Our interest expense decreased from $14.2 million to $7.0
million because we stopped accruing interest for unsecured debt at the time we
filed the Chapter 11 Cases. See "Accounting During Reorganization Proceedings."
Contractual interest for the nine months ended September 30, 2000 was $15.6
million. In addition, interest expense excludes $91,000 of interest income which
has been reflected as a reorganization item.
REORGANIZATION ITEMS. Results for the nine months ending September 30,
2000 include charges which were incurred after the Company filed the Chapter 11
Cases. Expenses related to the reorganization process and the Chapter 11 Cases
are considered reorganization items. The table below summarizes these charges
(amounts in thousands):
Nine Months Ending
September 30, 2000
------------------
Impairment of goodwill $ 100,805
Impairment of fixed assets 11,966
Provision for rejected leases 1,920
Other store closing costs 662
Professional fees 2,311
Retention bonus 1,113
Interest income on accumulated cash (91)
Other reorganization costs 214
---------
$ 118,900
=========
INCOME TAXES. We recorded a pre-tax operating loss of $130.8 million in the
current period versus a pre-tax loss of $3.8 million in the comparable prior
period. The resulting income tax benefit in 2000 was approximately $11.5
million. We have established a valuation allowance equal to the amount of the
tax benefit.
NET LOSS. We generated a net loss of $131.7 million, or $(6.25) per share,
as compared to a net loss of $2.8 million or ($0.13) per share, in the
comparable period a year ago.
22
ACCOUNTING DURING REORGANIZATION PROCEEDINGS
Entering the reorganization proceeding does not affect or change the
application of generally accepted accounting principles followed by the Company
in the preparation of its consolidated financial statements. During the pendency
of the Chapter 11 Cases, our consolidated financial statements will distinguish
transactions and events that are directly associated with the reorganization
from the ongoing operations of the business in accordance with the American
Institute of Certified Public Accountants' Statement of Position 90-7 -
"Financial Reporting by Entities in Reorganization under the Bankruptcy Code"
("SOP 90-7"). The Company's consolidated balance sheets will segregate
liabilities subject to compromise from liabilities not subject to compromise. In
addition, we have stopped accruing for interest on unsecured debt until the
Company emerges from protection under Chapter 11 of the Bankruptcy Code, or it
becomes probable that we will pay these amounts as part of a plan of
reorganization.
Liabilities Subject to Compromise
"Liabilities subject to compromise" refers to liabilities incurred prior to
the commencement of the Chapter 11 Cases, including those considered by the
Bankruptcy Court to be pre-petition claims, such as claims arising out of a
rejection of a lease for real property. These liabilities consist primarily of
amounts outstanding under long-term debt and also include accounts payable,
accrued interest, accrued restructuring costs, and other accrued expenses. These
amounts represent the Company's estimate of known or potential claims to be
resolved in the Chapter 11 Cases. Such claims remain subject to future
adjustments. Adjustments may result from (1) negotiations; (2) actions of the
Bankruptcy Court; (3) further development with respect to disputed claims; (4)
future rejection of additional executory contracts or unexpired leases; (5)the
determination as to the value of any collateral securing claims; (6) proofs of
claim; or (7) other events. Payment terms for these amounts, which are
considered long-term liabilities at this time, will be established in connection
with the Chapter 11 Cases.
The principal categories of claims classified as liabilities subject to
compromise in the Chapter 11 Cases are identified below: (Amounts in thousands.)
September 30, 2000
------------------
Accounts payable $ 25,486
Accrued expenses 527
Provision for rejected contracts 3,189
Senior notes, net of discount including $7,480 accrued interest 131,266
Other long-term debt and capital lease obligations 7,024
Redeemable common stock 900
--------
$168,392
========
The Company has received approval from the Bankruptcy Court to pay
pre-petition and post-petition employee wages, salaries, benefits and other
employee obligations, to pay vendors and other providers in the ordinary course
for goods and services received from April 5, 2000 and to honor customer service
programs, including warranties and returns. These items are recorded as accrued
expenses not subject to compromise.
23
LIQUIDITY AND CAPITAL RESOURCES
Our capital needs have been for operating expenses, capital expenditures,
acquisitions and interest expense. Our sources of capital have been cash flow
from operations and borrowings under our credit facilities.
In October 1998, we issued our $125 million notes due 2005 to help fund the
acquisition of Frame-n-Lens Optical, Inc. and New West Eyeworks, Inc. These
notes bear interest of 12.75% and were issued pursuant to an indenture which
contains a variety of customary provisions and restrictions. Interest payments
are due on April 15 and October 15 of each year. The Company did not make the
interest payment due on April 15, 2000. Amounts due under the indenture are
unsecured claims in the Chapter 11 Cases, and are classified as liabilities
subject to compromise. (See Note 3 to Condensed Consolidated Financial
Statements.)
On April 5, 2000, the Debtors filed the Chapter 11 Cases. On May 9, 2000,
the Bankruptcy Court approved an order permitting the Company to enter into a
$25 million debtor-in-possession credit facility with Foothill Capital
Corporation (the "DIP Facility"). The DIP Facility (which replaced the Company's
prior secured credit facility) consists of a $12.5 term loan and $12.5 revolving
credit facility. As of September 30, 2000, the Company had borrowed a total of
$13.2 million (inclusive of the $12.5 million term loan portion) under the DIP
Facility.
The DIP Facility contains customary terms and conditions. It expires on May
31, 2001. The DIP Facility further provides that:
- - The Company must maintain a rolling twelve month EBITDA of no less than $15
million, calculated prior to restructuring charges, reorganization items,
extraordinary losses and store impairment reserves.
- - The $12.5 million term loan portion of the DIP Facility bears interest at
15% per annum.
- - Interest rates on the revolver portion of the DIP Facility are based on
either the Wells Fargo Bank, N.A. Base Rate plus 2% or the Adjusted
Eurodollar Rate plus 3.25%.
The Company believes the DIP Facility should provide it with adequate
liquidity to conduct its operations while it prepares a reorganization plan.
However, the Company's liquidity, capital resources, results of operations and
ability to continue as a going concern are subject to risks and uncertainties.
Although the Company currently in compliance with the terms of the DIP Facility,
a continuation of negative sales and cash flow trends could cause the Company to
breach the EBITDA covenant.
We expect to complete a plan of reorganization in 2001. The plan will
likely provide for the conversion of debt into equity. We do not know whether
the plan will be approved or, if it is approved, whether it will succeed.
If the Company is successful in restructuring its debt obligations and its
equity, the Company may utilize and / or trigger limitations on certain tax net
operating loss carryforwards.
We do not plan to open additional Wal-Mart vision centers during the
remainder of 2000. Currently, one vision center is under construction and
scheduled to open in 2001, and we may open up to three additional vision centers
in 2001 dependent upon liquidity, construction schedules and other constraints.
For each of our new vision centers, we typically spend between $100,000 and
$160,000 for fixed assets and approximately $25,000 for inventory. In general,
free-standing locations are more costly than leased locations. We also spend
approximately $20,000 for pre-opening costs.
24
RISK FACTORS
Any expectations, beliefs, and other non-historical statements contained in
this Form 10-Q are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements represent
the Company's expectations or belief concerning future events, including the
following: any statements regarding future sales levels, any statements
regarding the continuation of historical trends, and any statements regarding
the Company's liquidity. Without limiting the foregoing, the words "believes,"
"anticipates," "plans," "expects," and similar expressions are intended to
identify forward-looking statements. With respect to such forward-looking
statements and others which may be made by, or on behalf of, the Company, the
factors described as "Risk Factors" in the Company's Report on Form 10-K for
1999 could materially affect the Company's actual results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market Risk
Market risk is the potential change in an instrument's value caused by, for
example, fluctuations in interest and currency exchange rates. The Company's
primary market risk exposures are interest rate risk and the risk of unfavorable
movements in exchange rates between the U.S. dollar and the Mexican peso.
Monitoring and managing these risks is a continual process carried out by senior
management, which reviews and approves the Company's risk management policies.
We manage market risk on the basis of an ongoing assessment of trends in
interest rates, foreign exchange rates, and economic developments, giving
consideration to possible effects on both total return and reported earnings.
The Company's financial advisors, both internal and external, provide ongoing
advice regarding trends that affect management's assessment.
Interest Rate Risk
The Company borrows money under our credit facility at variable interest
rates. We therefore incur the risk of increased interest costs if interest rates
rise.
In 1998, in anticipation of the issuance of our senior notes, we entered
into three anticipatory hedging transactions with a notional amount of $100
million. The interest rates on these instruments were tied to U.S. Treasury
securities and ranged from 5.43% to 5.62%. We settled these transactions for
approximately $4.6 million in September 1998 with $0.6 million cash and
additional borrowings of $4.0 million. The settlement costs are treated as
deferred financing costs and are amortized over the life of the notes.
Foreign Exchange Rate Risk
Historically, Mexico qualified 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 reassured with the
U.S. dollar as the functional currency. Since 1997, we have recorded immaterial
losses because of changes in foreign currency rates between the peso and the
U.S. dollar.
25
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following exhibits are filed herewith or incorporated by
reference:
Exhibit Number
--------------
Amended and Restated Articles of Incorporation 3.1*
Amended and Restated Bylaws 3.2**
Form of Common Stock Certificate 4.1***
Financial Data Schedule 27****
*Incorporated by reference to the Company's Form 8-K filed
with Commission on January 6, 1999.
**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.
***Incorporated by reference to the Company's Registration
Statement on Form 8-A filed with the Commission on January 17,
1997.
****Filed with this Form 10-Q.
(b) Reports on Form 8-K.
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
VISTA EYECARE, INC.
By: /s/ Angus C. Morrison
------------------------
Senior Vice President
Chief Financial Office
By: /s/ Timothy W. Ranney
-------------------------
Chief Accounting Officer
November 20, 2000