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 March 31, 2001 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 30045
Lawrenceville, Georgia (Zip Code)
(Address of principal executive offices)
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
May 5, 2001 was 21,169,103.
The Exhibit Index is located at page 11.
Page 1
VISTA EYECARE, INC.
FORM 10-Q INDEX
Page of
Form 10-Q
---------
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets -
March 31, 2001 and December 30, 2000 3
Condensed Consolidated Statements of Operations -
Three Months Ended March 31, 2001 and April 1, 2000 5
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2001 and April 1, 2000 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK 19
PART II - OTHER INFORMATION
- ---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
Page 2
PART I
FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
VISTA EYECARE, INC.
(DEBTORS-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2001 and December 30, 2000
(In thousands except share information)
March 31, December 30,
2001 2000
------------ ----------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 11,969 $ 8,066
Accounts receivable
(net of allowance: 2001-$5,446; 2000-$5,744) 11,155 10,119
Inventories 30,354 31,478
Other current assets 2,043 1,590
------- ------
Total current assets 55,521 51,253
------- ------
PROPERTY AND EQUIPMENT:
Equipment 47,561 47,187
Furniture and fixtures 18,918 23,272
Leasehold improvements 23,527 18,664
Construction in progress 590 540
------- ------
90,596 89,663
Less accumulated depreciation (62,492) (60,092)
------- -------
Net property and equipment 28,104 29,571
------- -------
OTHER ASSETS AND DEFERRED COSTS (net of
accumulated amortization: 2001-$2,287; 2000-$2,142) 7,625 7,766
DEFERRED INCOME TAX ASSETS 385 385
GOODWILL AND OTHER INTANGIBLE ASSETS (net of
accumulated amortization: 2001-$2,859; 2000-$2,691) 1,728 1,913
------- -------
$ 93,363 $ 90,888
======= =======
Page 3
LIABILITIES AND SHAREHOLDERS' DEFICIT
LIABILITIES NOT SUBJECT TO COMPROMISE:
CURRENT LIABILITIES:
Accounts payable $ 469 $ 783
Accrued expenses and other current liabilities 21,997 19,693
Revolving credit facility and term loan 12,897 12,911
------- -------
Total current liabilities 35,363 33,387
------- ------
LIABILITIES SUBJECT TO COMPROMISE 172,713 170,824
COMMITMENTS AND CONTINGENCIES -- --
SHAREHOLDERS' DEFICIT:
Preferred stock, $1 par value; 5,000,000 shares
authorized, none issued
Common stock, $.01 par value; 100,000,000 shares
authorized, 21,169,103 shares issued and
outstanding as of March 31, 2001 and December 30,
2000, respectively 211 211
Additional paid-in capital 47,387 47,387
Retained deficit (158,238) (156,848)
Accumulated other comprehensive income (4,073) (4,073)
-------- -------
Total shareholders' deficit (114,713) (113,323)
------- -------
$ 93,363 $ 90,888
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 4
VISTA EYECARE, INC.
(DEBTORS-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share information)
(Unaudited)
Three Months Ended
------------------------
March 31, April 1,
2001 2000
---- ----
NET SALES $74,735 $83,180
COST OF GOODS SOLD 34,525 36,745
------- -------
GROSS PROFIT 40,210 46,435
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSE 39,071 45,759
IMPAIRMENT LOSS ON LONG-LIVED ASSETS -- 2,684
RESTRUCTURING EXPENSE -- 1,601
------- -------
OPERATING INCOME/(LOSS) 1,139 (3,609)
INTEREST EXPENSE, NET 739 5,330
------- -------
INCOME/(LOSS) BEFORE REORGANIZATION ITEMS AND TAXES 400 (8,939)
REORGANIZATION ITEMS 1,789 --
------- -------
LOSS BEFORE TAXES AND CUMULATIVE EFFECT (1,389) (8,939)
INCOME TAX EXPENSE -- --
------- -------
NET LOSS BEFORE CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE (1,389) (8,939)
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE -- (3,378)
------- --------
NET LOSS $(1,389) $(12,317)
======= ========
BASIC LOSS PER SHARE:
LOSS BEFORE CUMULATIVE EFFECT $ (0.07) $ (0.42)
LOSS FROM CUMULATIVE EFFECT -- (0.16)
------- -------
NET LOSS PER BASIC SHARE $ (0.07) $ (0.58)
======= =======
DILUTED LOSS PER SHARE
LOSS BEFORE CUMULATIVE EFFECT $ (0.07) $ (0.42)
LOSS FROM CUMULATIVE EFFECT -- (0.16)
------- -------
NET LOSS PER DILUTED SHARE $ (0.07) $ (0.58)
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 5
VISTA EYECARE, INC.
(DEBTORS-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three Months Ended
-----------------------
March 31, April 1,
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,389) $(12,317)
------- --------
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 2,867 4,816
Impairment of long-lived assets -- 2,684
Restructuring expense -- 1,601
Reorganization items 1,789 --
Cumulative effect of a change in accounting principle -- 3,378
Changes in operating assets and liabilities:
Receivables (1,036) (533)
Inventories 1,124 (1,646)
Other current assets (453) 422
Other assets 152 628
Accounts payable (314) 5,399
Accrued expenses and other current liabilities 2,304 2,673
Liabilities subject to compromise 133 --
------- -------
Total adjustments 6,566 19,422
------- -------
Net cash provided by operating activities 5,177 7,105
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,259) (2,445)
------- -------
Net cash used in investing activities (1,259) (2,445)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on revolving credit facility (76,423) (88,093)
Advances on revolving credit facility 76,408 84,769
Repayments on notes payable and capital leases -- (619)
Deferred financing costs -- (108)
------- -------
Net cash used in financing activities (15) (4,051)
------- -------
NET INCREASE IN CASH 3,903 609
CASH, beginning of period 8,066 2,886
------- -------
CASH, end of period $11,969 $ 3,495
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
Page 6
VISTA EYECARE, INC.
(DEBTORS-IN-POSSESSION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001
(Unaudited)
(1) BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared by Vista Eyecare, Inc. ("Vista" or the "Company") pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. Although management
believes that the disclosures are adequate to make the information presented not
misleading, it is suggested that these interim condensed consolidated financial
statements be read in conjunction with the Company's most recent audited
consolidated financial statements and notes thereto. In the opinion of
management, all adjustments necessary for a fair presentation of the financial
position, results of operations, and cash flows for the interim periods
presented have been made. Operating results for the interim periods presented
are not necessarily indicative of the results that may be expected for the year
ending December 29, 2001. Certain amounts in the April 1, 2000 condensed
consolidated financial statements have been reclassified to conform to the March
31, 2001 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 March 2001, the Debtors filed a plan of reorganization for the Chapter
11 Cases. We expect the Company will emerge from Chapter 11 in the second
quarter of 2001. There can be no assurance that the reorganization plan will be
confirmed by the Bankruptcy Court, or that such plan will be consummated. If
confirmed and consummated, the proposed plan of reorganization will result in
the settlement of unsecured claims at less than 100% of face value. The existing
Common Stock will be cancelled, resulting in existing shareholders receiving no
value for their interests.
The proposed plan of reorganization includes the conversion of the
Company's pre-petition unsecured claims into new secured notes and common stock.
The secured notes will have a face value of $120 million and will pay interest
of 12% twice a year at the end of March and September. The notes have an eight
year duration with principal repayments based on excess cash balances available
at each interest payment date.
Page 7
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. As discussed above, management has submitted a plan of reorganization
to the Bankruptcy Court. The ability of the Company to continue as a going
concern and the appropriateness of using the going concern basis is dependent
upon, among other things, (i) the Company's ability to comply with the
debtor-in-possession financing agreements ("DIP" Facility), (ii) the Company's
ability to obtain financing upon expiration of the DIP Facility, (iii)
confirmation of a plan of reorganization under the Bankruptcy Code, (iv) the
Company's ability to achieve profitable operations after such confirmation, and
(v) the Company's ability to generate sufficient cash from operations to meet
its obligations.
The Company believes that the DIP Facility will provide it with adequate
liquidity to conduct its operations while it awaits confirmation of its
reorganization plan. The Company is currently working to establish a secured,
revolving credit facility which will replace the DIP Facility (the "Exit
Facility"). As of May 15, 2001, the Company was finalizing the terms of the Exit
Facility. It is anticipated that the proposed Exit Facility will have a term of
3 years, bear interest at the prime rate plus 0.25% per annum or at LIBOR plus
2.50% and, subject to customary terms and conditions, is expected to provide
availability of $9.5 million, inclusive of letter of credit requirements. The
Exit Facility should provide the Company with adequate liquidity upon emergence
from bankruptcy. However, no assurances can be given that the Exit Facility will
be finalized or that it will be completed with the terms discussed above.
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 the Chapter 11 Cases.
(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 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 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.
Page 8
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)
March 31, 2001 December 30, 2000
-------------- -----------------
Accounts payable $ 26,786 $ 25,856
Accrued expenses 3,002 2,717
Provision for rejected contracts 3,839 3,142
Senior notes, net of discount
including $7,480 accrued interest 131,266 131,266
Other long-term debt and capital
lease obligations 7,820 7,843
-------- --------
$172,713 $170,824
======== ========
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.
(4) REORGANIZATION ITEMS, RESTRUCTURING EXPENSES AND IMPAIRMENT OF LONG-LIVED
ASSETS.
General
In the first quarter of 2000 and 2001, we 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.
Page 9
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 after the first quarter 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 first quarter of 2000. These charges were
incurred before the Company began the Chapter 11 Cases:(amounts in thousands)
First Quarter 2000
------------------
Impairment of fixed assets $2,684
Restructuring expense
Provision for rejected leases $1,362
Other store closing costs 239
------
$1,601
======
Impairment and restructuring charges incurred after the first quarter of
2000 are considered reorganization items and are presented below operating
income.
Summary of Reorganization Items
Results for the first quarter of 2001 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)
First Quarter 2001
------------------
Impairment of fixed assets $ 33
Provision for rejected leases 697
Other store closing costs 37
Professional fees 1,008
Interest income on accumulated cash (89)
Other reorganization costs 103
---------
$ 1,789
=========
Page 10
The following represents activity in the restructuring and reorganization
provisions during the first quarter of 2001: (amounts in thousands)
Accrued at Charged Accrued at
December 30, 2000 to expense Paid March 31, 2001
----------------- ---------- ---- --------------
Restructuring and
reorganization items $ 4,727 $1,697 $ 701 $5,723
(5) INCOME TAXES
Vista recorded a pre-tax operating loss of $1.4 million in the Current
Three Months. The resulting income tax benefit was approximately $0.5 million.
We have established a valuation allowance equal to the amount of the tax
benefit.
(6) CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements". SAB 101 summarizes the SEC's view
in applying generally accepted accounting principles to selected revenue
recognition issues. Prior to the adoption of SAB 101, the Company recognized
revenues and the related costs from retail sales when at least 50% of the
payment was received. In response to SAB 101, the Company is required to
recognize revenue upon delivery of the product. The amount of cash received at
the time the customer's order is placed is recorded as a deposit liability and
is presented within accrued liabilities. The effect of this change in accounting
principle was applied cumulatively as of the beginning of 2000 and totaled $3.4
million.
(7) EARNINGS PER COMMON SHARE
Basic earnings per common share were computed by dividing net income by the
weighted average number of common shares outstanding during the quarter. Diluted
earnings per common share were computed as basic earnings per common share,
adjusted for outstanding stock options that are dilutive. The computation for
basic and diluted earnings per share may be summarized as follows (amounts in
thousands except per share information):
Three Months Ended
--------------------------
March 31, April 1,
2001 2000
---- ----
Net Loss Before Cumulative Effect $ (1,389) $ (8,939)
Cumulative Effect -- (3,378)
-------- -------
Net Loss $ (1,389) $(12,317)
======== ========
Weighted Shares Outstanding 21,169 21,179
Basic and Diluted Loss per Share Before
Cumulative Effect $ (0.07) $ (0.42)
Cumulative Loss per Basic and Diluted Share -- $ (0.16)
-------- --------
Net Loss per Basic and Diluted Share $ (0.07) $ (0.58)
======== ========
No outstanding options were included in the above calculation as their
impact would be anti-dilutive.
Page 11
(8) SUPPLEMENTAL DISCLOSURE INFORMATION
Inventory balances, by classification, may be summarized as follows:
March 31, December 30,
2001 2000
------ ------
Raw Material $22,234 $22,175
Finished Goods 7,070 8,153
Supplies 1,050 1,150
------ ------
$30,354 $31,478
====== ======
Since filing for protection under Chapter 11 of the Bankruptcy Code, we
have stopped accruing interest on unsecured debt. Contractual interest for the
quarter ending March 31, 2001 was $5.1 million. The components of interest
expense, net, may be summarized as follows:
Three Months Ended
------------------
March 31, April 1,
2001 2000
----- -----
Interest expense on debt
and capital leases $ 559 $5,010
Purchase discounts on invoice
payments (30) (1)
Finance fees and amortization of
hedge and swap agreements 190 325
Interest income -- (1)
Other 20 (3)
------ ------
$ 739 $5,330
====== ======
Results for the three months ended March 31, 2001 exclude interest income
of $89,000. This amount was treated as a reorganization item. (See Note 4 to
Condensed Consolidated Financial Statements.)
(9) SUBSEQUENT EVENTS
On April 20, 2001, the Company completed the sale of its freestanding
retail operations to Vista Acquisition LLC (the "Buyer"). We received
consideration of approximately $7.5 million, consisting of $6.0 million in cash
and $1.5 million in notes receivable. The assets sold consist primarily of
furniture, fixtures and inventory at approximately 200 freestanding locations
and inventory and equipment at the Fullerton, California laboratory/distribution
center.
Page 12
In a related transaction, Vista agreed to sell to the Buyer its interest in
a subsidiary for $1.0 million note receivable. This subsidiary owns a portion of
the equipment in approximately half of the freestanding locations sold. This
transaction is expected to close in the summer of 2001. For purposes of the
unaudited pro forma financial information, these transactions have been
combined.
Pro forma unaudited financial results of operations are presented below, as
if the freestanding operations were disposed of at the beginning of the periods
presented. The pro forma results presented include certain adjustments and
estimates by management. The pro forma information does not necessarily reflect
actual results that would have occurred nor is it necessarily indicative of
future results of operations of the Company without the freestanding operations.
March 31, 2001 April 1, 2000
-------------- -------------
Net sales $ 61,021 $ 65,518
Gross profit $ 33,409 $ 36,605
Operating income $ 4,475 $ 4,112
EBITDA prior to significant provisions $ 7,277 $ 7,196
EBITDA is calculated as operating income before interest, taxes,
depreciation and amortization. EBITDA prior to significant provisions is
calculated as EBITDA prior to Restructuring Expense, Reorganization Items,
Extraordinary Items and the Cumulative Effect of a Change in Accounting
Principle.
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 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 March 2001, the Debtors filed a plan of reorganization for the Chapter
11 Cases. We expect the Company will emerge from Chapter 11 in the second
quarter of 2001. There can be no assurance that the reorganization plan will be
confirmed by the Bankruptcy Court, or that such plan will be consummated. If
confirmed and consummated, the proposed plan of reorganization will result in
the settlement of unsecured claims at less than 100% of face value. The existing
Common Stock will be cancelled, resulting in existing shareholders receiving no
value for their interests.
The proposed plan of reorganization includes the conversion of the
Company's pre-petition unsecured claims into new secured notes and common stock.
The secured notes will have a face value of $120 million and will pay interest
of 12% twice a year at the end of March and September. The notes have an eight
year duration with principal repayments based on excess cash balances available
at each interest payment date.
Page 13
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 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. At March 31, 2001, the Company operated 706 vision centers, versus
935 vision centers at April 1, 2000.
THREE MONTHS ENDED MARCH 31, 2001 (THE "CURRENT THREE MONTHS") COMPARED TO
THREE MONTHS ENDED APRIL 1, 2000 (THE "PRIOR THREE MONTHS")
CONSOLIDATED RESULTS
NET SALES. The Company recorded net sales of $74.7 million in the Current
Three Months, a decrease of 10% over sales of $83.2 million in the Prior Three
Months. Sales decreased due to the following:
o The Company closed 91 freestanding stores in April 2000. These stores
had sales of $2.8 million in the first quarter of 2000.
o The Company closed all of its Sam's Club operations in the third
quarter of 2000. These locations had sales of $5.4 million in the first
quarter of 2000.
Net sales from international operations increased to $1.3 million in the
Current Three Months from $1.2 million in the comparable period a year ago.
Page 14
GROSS PROFIT. In the Current Three Months, gross profit decreased to $40.2
million from $46.4 million in the Prior Three Months. This decrease in gross
profit dollars was primarily driven by a reduction in sales caused by the
closure of approximately 91 freestanding locations and the Sam's Club locations.
Gross margin as a percent of sales decreased to 53.8% from 55.8% in the Prior
Three Months. Gross margin percentage was also negatively impacted by the store
closures described above, as the Fullerton lab experienced a decrease in volume
resulting in a loss of efficiency in the lab operation. In addition, rent
expense which is a component of Gross Profit, increased as a percent of sales
for the Wal-Mart division. This was due to approximately 42 vision centers
entering the "3-year option period" of the Wal-Mart lease. The option period
effectively increases each location's minimum rent requirement. We expect this
trend of increased rent to continue as additional Wal-Mart locations enter the
"option period" of their lease.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE ("SG&A expense"). SG&A expense
(which includes both store operating expenses and home office overhead)
decreased to $39.1 million in the Current Three Months from $45.8 million for
the Prior Three Months. The dollar decrease was primarily the result of fewer
payroll, depreciation and other expenses due to the above-mentioned store
closures. SG&A expense also decreased as a percent of sales from 55.0% in the
Prior Three Months to 52.3% in the Current Three Months.
The percentage decrease in SG&A was due to the following:
o A 2.1% decrease in retail and field supervision payroll costs. This is
primarily the result of the store closures in 2000. The closed stores had
higher payroll costs as a percent of sales.
o A 1.9% decrease in depreciation and amortization costs due to the third
quarter 2000 goodwill impairment of $100.8 million, and fixed asset
impairment of $12.0 million.
These decreases were partially offset by:
o an increase in third-party processing costs as a result of increased
managed care sales and receipts,
o an increase in group health benefit costs due to increased claims
experience, and
o an increase in workers' compensation costs, due to rising claims
experience.
IMPAIRMENT LOSS, RESTRUCTURING EXPENSE AND REORGANIZATION ITEMS. In the
first quarter of 2000, the Company recorded a noncash pre-tax charge of
approximately $2.7 million primarily related to the impairment of leasehold
improvements and furniture and fixtures in 91 closed stores.
Also, in the first quarter of 2000, the Company recorded a $1.6 million
reserve for anticipated closing costs of stores. This charge was comprised of
$1.4 million in lease termination costs and $239,000 in severance and other
closing costs.
Page 15
Generally accepted accounting principles require that these charges,
incurred prior to the Company's filing for Chapter 11 protection, be presented
as components of operating income. Charges of this nature incurred subsequent to
the Company's Chapter 11 filing are presented below operating income as
"Reorganization Items." Results for the first quarter of 2001 include charges
which were incurred after the Company's Chapter 11 filing. The table below
summarizes these charges: (amounts in thousands)
First Quarter 2001
------------------
Impairment of fixed assets $ 33
Provision for rejected leases 697
Other store closing costs 37
Professional fees 1,008
Interest income on accumulated cash (89)
Other reorganization costs 103
---------
$ 1,789
=========
OPERATING INCOME. Operating income for the Current Three Months prior to
restructuring reserves and the impairment loss on long-lived assets, increased
to $1.1 million from $0.7 million in the Prior Three Months. Operating income as
a percentage of sales prior to the restructuring reserve and the impairment loss
was 1.5% in the Current Three Months, compared to 0.8% in the Prior Three
Months. This increase was primarily due to the closure of the 91 freestanding
locations and the Sam's Club locations.
INTEREST EXPENSE. Interest Expense decreased to $0.7 million compared to
$5.3 million in the Prior Three Months. As a result of the Chapter 11 filing,
the Company stopped accruing interest on unsecured debt until we emerge from
Chapter 11 or it becomes probable that we will pay these amounts as part of a
plan of reorganization. Contractual interest for the first quarter of 2001 was
$5.1 million.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE. In December 1999,
the SEC issued Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements". SAB 101 summarizes the SEC's view in applying generally
accepted accounting principles to selected revenue recognition issues. Prior to
the adoption of SAB 101, the Company recognized revenues and the related costs
from retail sales when at least 50% of the payment was received. In response to
SAB 101, the Company is required to recognize revenue upon delivery of the
product. The amount of cash received at the time the customer's order is placed
is recorded as a deposit liability and is presented within accrued liabilities.
The effect of this change in accounting principle was applied cumulatively as of
the beginning of 2000 and totaled $3.4 million.
BENEFIT FOR INCOME TAXES. Vista recorded a pre-tax operating loss of $1.4
million in the Current Three Months. The resulting income tax benefit was
approximately $0.5 million. We have established a valuation allowance equal to
the amount of the tax benefit.
NET INCOME. The Company posted a net loss of $1.4 million, or ($0.07) per
share, versus a net loss of $12.3 million, or ($0.58) per share, in the Prior
Three Months.
Page 16
LIQUIDITY AND CAPITAL RESOURCES
Our capital needs have been for operating expenses, capital expenditures
and interest expense. Our sources of capital have been cash flow from operations
and borrowings under our credit facilities.
On April 5, 2000, the Company filed for protection under Chapter 11. The
Bankruptcy Court permitted the Company to enter into a Debtor-in-Possession
("DIP") Credit Facility. As of March 31, 2001, the Company had borrowed a total
of $12.9 million (inclusive of the $12.5 million term loan portion) under the
DIP Facility. The term of the DIP Facility expires on May 31, 2001.
The Company believes that the DIP Facility will provide it with adequate
liquidity to conduct its operations while it awaits confirmation of its
reorganization plan. The Company is currently working to establish a secured,
revolving credit facility which will replace the DIP Facility (the "Exit
Facility"). As of May 15, 2001, the Company was finalizing the terms of the Exit
Facility. It is anticipated that the proposed Exit Facility will have a term of
3 years, bear interest at the prime rate plus 0.25% per annum or at LIBOR plus
2.50% and, subject to customary terms and conditions, is expected to provide
availability of $9.5 million, inclusive of letter of credit requirements. The
Exit Facility should provide the Company with adequate liquidity upon emergence
from bankruptcy. However, no assurances can be given that the Exit Facility will
be finalized or that it will be completed with the terms discussed above.
In March 2001, the Company filed a plan or reorganization with the
bankruptcy court. Management expects the plan to be approved in the second
quarter of 2001. In the Company's plan or reorganization, Liabilities Subject to
Compromise are estimated to be $175 million and are expected to be converted, at
approximately 80% of face value, into a combination of new secured notes and
common stock. The secured notes will have a face value of $120 million and will
pay interest of 12% twice a year at the end of March and September. The notes
have an eight year duration with principal repayments based on excess cash
balances available at each interest payment date. It also provides for the
cancellation of the Company's current Common Stock.
If the plan of reorganization is approved by the Bankruptcy Court, the
Company will adopt "fresh start" accounting principles as contained in the
AICPA's Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code." "Fresh Start" accounting principles
require that we determine the reorganization value of the reorganized Company.
The Company's reorganization value is based on financial projections developed
by the Company, the credit committee and their respective financial advisors.
Such projections were submitted to the court and to creditors for review via the
Company's disclosure statement accompanying the proposed Reorganization Plans.
The reorganization value will be allocated, based on estimated fair values to
specific identifiable assets of the Company. To the extent that the
reorganization value of the Company exceeds the value of the specific
identifiable assets, the Company will record an intangible asset.
We do not know whether the reorganization 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 trigger
limitations on certain tax net operating loss carry-forwards.
Under the proposed plan of reorganization, it is the Company's intent to
use cash reserves for its ongoing operations and for payment of interest expense
and repayment of principal on the Company's outstanding debt. Subsequent to the
first quarter of 2001, the Company has repaid approximately $7.0 million of
principal on the DIP Facility.
Page 17
In April 2001, the Company finalized the sale of its freestanding
operations for consideration of $7.5 million, consisting of $6.0 million in cash
and $1.5 million in notes receivable. The Company anticipates that cashflow from
operations will improve with the disposition of the freestanding operations.
We plan, as of April 1, 2001, to open one Wal-Mart vision center during the
remainder of 2001. We may open up to six additional vision centers dependent
upon liquidity, construction schedules and other constraints. For each of our
new vision centers, we typically spend between $100,000 and $140,000 for fixed
assets and approximately $25,000 for inventory.
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
2000 could materially affect the Company's actual results.
Page 18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
Market risk is the potential change in an instrument's value cause 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 managment policies. We
manage market risk on the basis of an ongoing assessment of trends in interest
rates, foreign exchange rates, and economic developments, giving consideration
to possible effects on both total return and reported earnings. The Company's
financial advisors, both internal and external, provide ongoing advice regarding
trends that affect management's assessment.
Interest Rate Risk
The Company borrows long-term debt under our credit facility at variable
interest rates. We therefore incur the risk of increased interest costs if
interest rates rise.
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 remeasured with the
U.S. dollar as the functional currency. Since 1997, we have recorded immaterial
losses because of changes in foregin currency rates between the peso and the
U.S. dollar.
Page 19
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***
*Incorporated by reference to the Company's Form 8-K filed with the
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.
(b) Reports on Form 8-K.
The following reports on Form 8-K have been filed during the last
quarter of the period covered by this report:
Date of Report Item Reported Financial Statements Filed
----------------- ------------- --------------------------
February 23, 2001 5 None
March 15, 2001 5 None
March 16, 2001 5 None
Page 20
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 Officer
By: /S/ Timothy W. Ranney
------------------------
Chief Accounting Officer
May 15, 2001
Page 21