SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
Amendment No. 1 to
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-20001
VISTA EYECARE, INC.
(Exact name of Registrant as specified in its charter)
Georgia
(State or other jurisdiction of
incorporation or organization)
58-1910859
(I.R.S. Employer Identification No.)
296 Grayson Highway
Lawrenceville, Georgia
(Address of principal executive offices)
30045
(Zip Code)
Registrant's telephone number, including area code: (770) 822-3600
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The number of shares of Common Stock of the registrant outstanding as of
March 15, 2001, was 21,169,103. The aggregate market value of shares of Common
Stock held by non-affiliates of the registrant as of March 15, 2001, was
approximately $2.1 million based on a closing price of $0.14 on the OTC Bulletin
Board on such date. For purposes of this computation, all executive officers and
directors of the registrant are deemed to be affiliates. Such determination
should not be deemed to be an admission that such directors and officers are, in
fact, affiliates of the registrant.
Page 2
PART I
ITEM 1. BUSINESS
OVERVIEW
Vista is a retail optical company, with 725 vision centers throughout the
United States and Mexico. We operate 499 of our vision centers in host
departments, such as Wal-Mart and Fred Meyer locations, and 226 of our free-
standing vision centers in malls and strip centers. Our locations sell a wide
range of optical products, including eyeglasses, contact lenses, and sunglasses.
At approximately 690 of our locations, we offer the services of optometrists.
These optometrists are typically independent of us and operate their own
practices within our retail locations. To support our retail operations, we also
operate three manufacturing and distribution centers.
CHAPTER 11 CASES
On April 5, 2000, the Company and ten of its subsidiaries (collectively,
the "Debtors") filed voluntary petitions with the United State Bankruptcy Court
for the Northern District of Georgia for reorganization under Chapter 11 (the
"Chapter 11 Cases"). The Chapter 11 Cases have been consolidated for the purpose
of joint administration under Case No. 00-65214. The Debtors are currently
operating their businesses as debtors-in-possession pursuant to the Bankruptcy
Code. All affiliated entities of the Company are included in the Chapter 11
Cases, except only (a) three subsidiaries which are licensed managed care
organizations and (b) foreign subsidiaries of the Company.
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. (See Item 7, "Proceedings Under Chapter 11", and Note
3 of Notes to Consolidated Financial Statements and Report of Independent Public
Accountants included herein.)
DEPENDENCE ON WAL-MART
We operate 397 units in domestic Wal-Mart stores, of which 395 operate
pursuant to a master license agreement (See Item 1, "Leased Department
Agreements"). These units generated approximately 68% of our revenue in 2000. We
therefore depend on Wal-Mart and on our agreement with them for much of our
operations.
ACQUISITIONS AND DISPOSITIONS
To reduce our dependence on Wal-Mart, we acquired Midwest Vision, Inc. in
1997 and Frame-n-Lens Optical, Inc. and New West Eyeworks, Inc. in 1998 (the
"Acquired Businesses"). At the time of the respective acquisitions, these three
companies collectively generated approximately $140 million in annualized
revenues and operated more than 500 vision centers, including approximately 330
freestanding locations.
Page 3
Throughout 1999 and 2000, we were unable to profitably operate the free-
standing vision centers. Sales shortfalls in these vision centers resulted in
pressure on earnings and liquidity, which ultimately forced the Company to seek
protection under Chapter 11 in April 2000.
In February 2001, we entered into a purchase agreement to sell
substantially all of the freestanding vision centers and our Fullerton,
California laboratory-distribution center. We expect the transaction to close in
April 2001.
DATE OF INFORMATION
Unless otherwise expressly stated, all information in this "Business"
section of this Form 10-K is as of December 30, 2000.
VISION CENTER OPERATIONS
Our vision centers typically occupy between 1,000 and 1,500 square feet,
including areas for merchandise display, customer service, and contact lens
fitting. Each vision center maintains inventory of approximately 1,000 eyeglass
frames and 550 pairs of contact lenses, along with sunglasses and other optical
accessories. Our three optical laboratories deliver prescription eyewear to all
our vision centers. The vision centers located in Wal-Mart typically have a
finishing laboratory, which allows for the vision center to provide one hour
service for most single vision prescription lenses. These vision centers carry
inventory of approximately 725 pairs of spectacle lenses.
MARKETING
We are a value provider of optical goods and stress that theme in our
marketing. We offer everyday low prices at our vision centers. Vista also has a
"satisfaction guaranteed" customer policy. We are constantly vigilant about ways
to lower our own costs so we may pass savings on to our customers.
MANAGED VISION CARE
We expect that retail optical sales through managed vision care programs
will increase over the next several years as a percentage of overall retail
optical sales. Under managed vision care programs, participants fulfill their
eyecare and eyewear needs at specific locations designated by the program
sponsor. We believe our network of vision centers combined with the convenience
of their locations and our ability to offer low prices should enable us to make
competitive bids for managed care contracts.
TRADEMARKS
We use the "Vista Optical" name to identify our freestanding vision
centers, as well as those vision centers operating in Fred Meyer locations. Our
vision centers in Wal-Mart are identified as the "Vision Center located in
Wal-Mart." Vista has also licensed the right to use the "Guy Laroche" trademark
for certain optical goods. Our agreement with Guy Laroche expires on December
31, 2001, but can be renewed at our option.
We have provisionally determined, effective upon our anticipated emergence
from Chapter 11, to change our name to "National Vision, Inc.". As part of our
agreement to sell the freestanding vision centers, we have agreed to phase out,
over 18 months, our use of the "Vista" name.
Page 4
EMPLOYEES
We employ 2,860 associates on a full-time basis and 1,200 associates on a
part-time basis. We have 3,450 associates engaged in retail sales, 360 in
laboratory and distribution operations, and 250 in management and
administration. Apart from our retail employees in Mexico, none of our employees
are governed by any collective bargaining agreements. We believe that our
employment relations are generally good.
OPTOMETRISTS
Optometrists are important to the success of our vision centers. We strive
to have an optometrist on at least a part time basis at most of our locations.
These optometrists are typically independent from Vista and lease a portion of
our locations for an eye examination facility. We typically charge rent to these
optometrists, in exchange for the premises and the equipment which we provide.
Our agreement with Wal-Mart requires us to have an optometrist on duty at least
48 hours each week. Our relationships with optometrists are subject to extensive
regulation. (See Item 1, "Government Regulation".)
MANUFACTURING AND DISTRIBUTION
Vista operates three manufacturing and distribution facilities which supply
substantially all requirements of our vision centers. The facilities are located
in Lawrenceville, Georgia (this facility also includes the central
administrative offices of Vista); Fullerton, California (this facility also
includes administrative offices); and St. Cloud, Minnesota. Each vision center
located in Wal-Mart stores (with the exception of two vision centers acquired in
1998) has its own finishing laboratory, which manufactures lenses for
approximately half of all customers purchasing spectacle lenses.
Our distribution centers provide lens blanks, frames, contact lenses, and
sunglasses to our vision centers. We use an overnight delivery service to ship
completed orders and replenishment items to the vision centers. The distribution
centers and the manufacturing facilities are interfaced with Vista's management
information system.
MANAGEMENT INFORMATION SYSTEM
In 1999, Vista completed the development of a new point of sale system. We
began installing the system in our vision centers in the fall of 1999 and expect
to complete the installation in all of our units by the second half of 2001. The
system is working substantially as planned. The system was designed to upgrade
data processing, broaden capabilities at the retail level, and improve the
processing of managed care transactions.
LEASED DEPARTMENT AGREEMENTS
We have agreements in place which govern our operations in host
environments, such as Wal-Mart. Typically, each agreement is for a base term,
followed by an option to renew. The agreements provide for payments of minimum
and percentage rent, and also contain customary provisions for leased department
operations. The table below sets forth key data about each of these agreements:
Page 5
No. of Units as Length of Length of No. of Options
Vision Centers of December 30, Base Term Option Term Exercisable in
Located In 2000 (in years) (in years) Fiscal 2001
- ------------------------------------------------------------------------------------
Wal-Mart(1) 395 9 3 50
- -----------------------------------------------------------------------------------
Fred Meyer 56 5 5 __
- -----------------------------------------------------------------------------------
Wal-Mart Mexico 27 5 2 __
- -----------------------------------------------------------------------------------
Military Bases 19 2 or 5 __ __
- -----------------------------------------------------------------------------------
(1) The Company also operates two additional Wal-Mart stores which operate
under individual leases.
Other Terms
- -----------
Our agreement with Wal-Mart gives us the right to open at least 400 vision
centers, including those already open. Our agreement with Wal-Mart also provides
that, if Wal-Mart converts its own store to a "supercenter" (a store which
contains a grocery department in addition to the traditional Wal-Mart store
offering) and relocates our vision center as part of the conversion, the term of
our lease begins again. We believe that Wal-Mart may in the future convert many
of its stores and thereby cause many of our leases to start again. We have
received no assurances from Wal-Mart as to how many of their locations will
ultimately be converted.
Our agreement with Wal-Mart Mexico provides that each party will not deal
with other parties to operate leased department vision centers in Mexico. This
agreement also permits each party to terminate the lease for each vision center
which fails to meet minimum sales requirements specified in the agreement.
Options to Renew
- ----------------
Wal-Mart Vision Centers
We exercised our option to renew the leases for 44 Wal-Mart vision centers
in 2000. The base term for 50 vision centers expires in 2001, and we will need
to determine which leases to extend. We expect to renew the leases for the vast
majority of these vision centers. These decisions will be based on various
factors, including sales levels, anticipated future profitability, increased
rental fees in the option period, and market share.
Page 6
Other Vision Centers
Our agreement with Fred Meyer obligates us to exercise our renewal option
as to all or none of these locations with the exception of five stores, which
are covered by a separate agreement. This option must be exercised in 2003.
Under our agreement with Wal-Mart Mexico, we have two options for two year
renewals, and one option for an additional one year renewal, for each vision
center.
Lease Expiration
- ----------------
The following table sets forth the number of leases for domestic Wal-Mart
and Fred Meyer vision centers that expire each year, assuming the Company
Exercises all available options to extend the terms of the leases. This table
does not include any future Wal-Mart superstore conversions which are unknown at
this time.
LEASES EXPIRING IN
------------------
2008 AND
HOST COMPANY 2000 2003 2004 2005 2006 2007 THEREAFTER
- ---------------- ------ ------ ------ ------ ------ ------ ----------
Wal-Mart 5 41 48 46 56 62 140
- ---------------- ---- ----- ----- ----- ----- ----- -----
Fred Meyer - -- -- -- -- -- 55
- ---------------- ---- ----- ----- ----- ----- ----- -----
Totals 5 41 48 46 56 62 195
- ---------------- ---- ----- ----- ----- ----- ----- -----
No Assurances of Expansion
- ----------------------------
We have no assurances or guarantees that we will be able to expand our
operations in any of our host environments. However, we periodically discuss
such opportunities with existing and new potential host companies.
GOVERNMENT REGULATION
Our business is heavily regulated by federal, state, and local law. We must
comply with federal laws such as the Social Security Act (which applies to our
participation in Medicare programs), the Health Insurance Portability Act of
1996 (which governs our participation in managed care programs), and the Food
and Drug Administration Act (which regulates medical devices such as contact
lenses). In addition, all states have passed laws which govern or affect our
arrangements with the optometrists who practice in our vision centers. Some
states, such as California, Texas, North Carolina, and Kansas, have particularly
extensive and burdensome requirements which affect the way we do business. Many
of these states also have adopted laws which mirror the federal laws described
above. Local ordinances (such as zoning requirements) can also impose
significant burdens and costs of compliance. Frequently, our competitors sit on
state and local boards. Our risks and costs of compliance are often increased as
a result.
We believe that we substantially comply with material regulations which
apply to our business.
COMPETITION
The retail eyecare industry is extremely competitive. We compete with
national companies such as Lenscrafters and Cole; we also compete with numerous
regional and local firms. In addition, optometrists, ophthalmologists, and
opticians provide many of the same goods and services we provide. The level and
intensity of competition can vary dramatically depending on the particular
market. We believe that we have numerous competitive advantages, such as our
everyday low pricing, product selection, and quality and consistency of service.
We also compete for managed care business. Our competition for this
business is principally the larger national and regional optical firms.
Competition for this business is driven by size of provider network, quality and
consistency of service, and by pricing of vision care services. We have one of
the largest networks in the country and believe that the size of the network
gives us a competitive advantage.
Several of our competitors have significantly greater financial resources
than we do. As a result, they may be able to engage in extensive and prolonged
price promotions which may adversely affect our business. They may also be able
spend more than we do for advertising.
Page 7
MEXICO OPERATIONS
We operate 27 vision centers in Mexico under a master license agreement
with Wal-Mart. Our operations in Mexico face unique risks, such as currency
devaluations, inflation, difficulties in cross-cultural marketing, and similar
factors.
ITEM 2. PROPERTIES
Our 725 vision centers in operation as of December 30, 2000 are located as
follows:
Location Total Location Total
-------- ----- -------- -----
Alabama 9 Nevada 7
Alaska 16 New Hampshire 4
Arizona 38 New Jersey 13
California 196 New Mexico 10
Colorado 24 New York 26
Connecticut 10 North Carolina 56
Florida 5 North Dakota 10
Georgia 37 Oregon 38
Hawaii 4 Pennsylvania 18
Idaho 11 South Carolina 11
Iowa 8 South Dakota 1
Kansas 10 Tennessee 2
Kentucky 1 Texas 7
Louisiana 2 Virginia 23
Maine 1 Washington 43
Maryland 3 West Virginia 7
Massachusetts 5 Wisconsin 3
Minnesota 32 Wyoming 3
Montana 4
Mexico 27
Our headquarters in Lawrenceville, Georgia is located in a 66,000 square
foot building which includes a distribution center and lens laboratory. The
building is subleased from Wal-Mart through 2001. We have an option to renew
this lease for approximately seven years.
The Company has regional facilities located in St. Cloud, Minnesota and
Fullerton, California. The 20,000 square foot St. Cloud facility is subject to a
lease that expires in October 2007. The 45,000 square foot Fullerton facility is
subject to a lease that expires in August 2006. The Company also has an option
to extend the Fullerton lease for five years. Both facilities contain optical
laboratories.
ITEM 3. LEGAL PROCEEDINGS
On April 5, 2000, the Company and ten of its subsidiaries filed voluntary
petitions with the United States Bankruptcy Court for the Northern District of
Georgia for reorganization under Chapter 11 of the Bankruptcy Code. The Debtors
are currently operating their businesses as debtors-in-possession. The Chapter
11 Cases have been consolidated for the purpose of joint administration under
case number 00-65214. All affiliated entities of the Company are included in the
Chapter 11 cases, except only (a) three subsidiaries which are licensed managed
care organizations and (b) foreign subsidiaries of the Company. Page 8
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. (See Item 7, "Proceedings Under Chapter 11", and Note
3 of Notes to Consolidated Financial Statements and Report of Independent Public
Accountants included herein.)
On October 6, 1999, former store managers of Frame-n-Lens filed a class
action in the Orange County Superior Court in California (Kremer and Riddle v.
Vista Eyecare, Inc.), alleging that the Company failed to pay overtime wages to
present and former store managers. The Company is vigorously defending the
lawsuit. The Company has also asserted a right of indemnification pursuant to
the share purchase agreement for the acquisition of Frame-n-Lens.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the last
quarter of fiscal 2000.
Page 9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock was traded on the NASDAQ National Market System
under the symbol "NVAL" from May 1992 until January 4, 1999, when the symbol was
changed to "VSTA". From October 12, 1999 through April 4, 2000, our Common Stock
was traded on the NASDAQ SmallCap Market. On April 5, 2000, trading of our
Common Stock was halted after we issued a press release announcing the filing of
the Chapter 11 Cases. As of May 17, 2000, our common stock began trading on the
OTC Bulletin Board.
The following table sets forth for the periods indicated the high and low
prices of the Company's Common Stock in the various market systems as noted
above.
Quarter Ended High Low
------------------ ------ ------
Fiscal 1999 April 3, 1999 $6.250 $4.500
July 3, 1999 $6.250 $3.625
October 2, 1999 $3.938 $2.250
January 1, 2000 $2.750 $0.625
Fiscal 2000 April 1, 2000 $2.500 $0.844
July 1, 2000 $0.875 $0.203
September 30, 2000 $0.359 $0.125
December 30, 2000 $0.219 $0.031
As of December 30, 2000, there were approximately 500 holders of record of
the Company's Common Stock.
In March 2001, the Company filed its plan of reorganization with the
Bankruptcy Court. The plan provides for the conversion of the Company's
Liabilities Subject to Compromise into new secured notes and common stock. Under
the proposed plan, the existing Common Stock outstanding would be cancelled and
would result in existing shareholders receiving no value for their interests.
The Company believes that the value of the Common Stock is highly speculative
since it is probable that it will be cancelled, and therefore, will be worthless
if the expected plan of reorganization is consummated.
Under the proposed plan of Reorganization, it is the Company's intent to
use cash resources only for its operations, expenses related to its Chapter 11
proceedings and, ultimately, for payment of interest expense and repayment of
principal on the Company's new secured notes. Future dividend policy will depend
upon the earnings and financial condition of the Company, the Company's need for
funds and other factors.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company with respect to the
consolidated financial statements for the years ended December 30, 2000, January
1, 2000, January 2, 1999, January 3, 1998, and December 28, 1996, is derived
from the Company's Consolidated Financial Statements. The selected financial
data set forth below should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included elsewhere in this Report.
Amounts presented are in thousands, except per share data.
Page 10
Vista Eyecare, Inc.
DEBTORS-IN-POSSESSION
Consolidated Statements of Operations
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
(1)(4) (1)(3) (1) (1)(2) (1)
Net sales $ 307,694 $ 329,055 $ 245,331 $ 186,354 $ 160,376
Cost of goods sold 143,458 147,768 112,929 86,363 76,692
--------- --------- --------- --------- ---------
Gross profit 164,236 181,287 132,402 99,991 83,684
Gross profit percentage 53.4% 55.1% 54.0% 53.7% 52.2%
Selling, general, & administrative expense 166,364 177,162 121,413 89,156 76,920
Impairment of long-lived assets 2,684 1,952 -- -- --
Restructuring expense 1,601 -- -- -- --
--------- --------- --------- --------- ---------
Operating income/(loss) (6,413) 2,173 10,989 10,835 6,764
Interest expense 7,723 19,329 5,538 1,554 2,084
--------- --------- --------- --------- ---------
Earnings/(loss) before reorganization items and taxes (14,136) (17,156) 5,451 9,281 4,680
Reorganization items (See Note 5) 121,539 -- -- -- --
--------- --------- --------- --------- ---------
Earnings/(loss) before taxes, extraordinary item and cumulative
effect of a change in accounting principle (135,675) (17,156) 5,451 9,281 4,680
Income tax expense (See Note 14) -- -- 2,037 3,708 1,200
--------- --------- --------- --------- ---------
Earnings/(loss) before extraordinary loss and cumulative
effect of a change in accounting principle (135,675) (17,156) 3,414 5,573 3,480
Extraordinary loss, net (See Note 11) (827) (406) -- -- --
Cumulative effect, net (See Note 2) (3,378) -- -- -- --
--------- --------- --------- --------- ---------
Net earnings/(loss) $(139,880) $ (17,562) $ 3,414 $ 5,573 $ 3,480
========= ========= ========= ========= =========
Basic earnings/(loss) per share:
Earnings/(loss) before extraordinary item
and cumulative effect (6.41) (0.81) 0.16 0.27 0.17
Loss from extraordinary item (0.04) (0.02) -- -- --
Loss from cumulative effect (0.16) -- -- -- --
--------- --------- --------- --------- ---------
Net earnings/(loss) per basic share $ (6.61) $ (0.83) $ 0.16 $ 0.27 $ 0.17
========= ========= ========= ========= =========
Diluted earnings/(loss) per share:
Earnings/(loss) before extraordinary item and
cumulative effect (6.41) (0.81) 0.16 0.27 0.17
Loss from extraordinary item (0.04) (0.02) -- -- --
Loss from cumulative effect (0.16) -- -- -- --
--------- --------- --------- --------- ---------
Net earnings/(loss) per diluted share $ (6.61) $ (0.83) $ 0.16 $ 0.27 $ 0.17
========= ========= ========= ========= =========
STATISTICAL DATA (UNAUDITED):
(In thousands except vision center data)
Domestic vision centers open at end of period:
Leased department vision centers 472 577 562 364 320
Freestanding vision centers 226 322 331 50 --
Average weekly consolidated sales
per leased department vision center (5) $ 8,700 $ 8,200 $ 9,000 $ 9,400 $ 9,300
Average weekly consolidated sales
per freestanding vision center (5) $ 4,500 $ 4,700 $ 4,900 $ -- $ --
Capital expenditures $ 5,379 $ 12,704 $ 9,183 $ 8,049 $ 2,713
Depreciation and amortization 17,526 18,602 14,177 11,035 10,058
EBITDA (6) 11,113 20,775 25,166 21,870 16,822
EBITDA margin percentage 3.6% 6.3% 10.3% 11.7% 10.5%
EBITDA prior to significant provisions (6) 17,009 25,427 25,166 21,870 16,822
EBITDA margin percentage
prior to significant provisions 5.5% 7.7% 10.3% 11.7% 10.5%
BALANCE SHEET DATA:
Working capital $ 17,866 $ (11,714) $ 4,208 $ 12,171 $ 13,502
Total assets 90,888 220,219 229,097 83,250 74,564
Current and long-term debt
obligations (7) 183,735 151,902 139,608 24,973 26,500
Shareholders' (deficit) equity (113,323) 26,557 43,927 35,598 29,906
Page 11
PRO FORMA RESULTS:
As part of the proposed Plan of Reorganization filed with the Bankruptcy
Court in March 2001, the Company will dispose of all freestanding operations,
including the Fullerton, California laboratory/distribution facility. In
February 2001, the Company signed a purchase agreement to sell the assets of its
freestanding locations and the Fullerton, California laboratory for $8.5
million. The sale is expected to close in April 2001.
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.
(See Item 7, "Management's Discussion and Analysis".)
2000
-------------
Net sales $ 246,915
Gross profit $ 133,481
Operating income $ 13,493
EBITDA prior to significant provisions (6) $ 25,833
(1) Financial information for all years presented includes results of
international operations for the 12 months ended November 30. (See Note 2
to Consolidated Financial Statements.)
(2) Effective January 1, 1995, the Company changed its year end to a 52/53 week
retail calendar. (See Note 2 to Consolidated Financial Statements.) Fiscal
1997 consisted of 53 weeks ended January 3, 1998. Sales for the 53rd week
approximated $3.0 million in fiscal 1997.
(3) In 1999, the Company recorded a $2.7 million provision for the write-off of
certain receivables and an impairment of $1.9 million in connection with 36
underperforming vision centers.
(4) In 2000, the Company recorded an impairment provision for inventory and
receivables at the freestanding locations totaling $1.1 million and
$518,000, respectively. These items were included in Cost of goods sold and
SG&A expense, as appropriate.
(5) Calculated from sales from each month during the period divided by the
number of store weeks of sales during the period, excluding stores not open
a full month.
(6) EBITDA is calculated as operating income before interest, taxes,
depreciation and amortization. EBITDA is presented because it is a widely
accepted financial indicator of a company's ability to service or incur
indebtedness. However, EBITDA does not represent cash flow from operations
as defined by generally accepted accounting principles ("GAAP"), is not
necessarily indicative of cash available to fund all cash flow needs,
should not be considered an alternative to net income or to cash flow from
operations (as determined in accordance with GAAP) and should not be
considered an indication of the Company's operating performance or as a
measure of liquidity. EBITDA is not necessarily comparable to similarly
titled measures for other companies. EBITDA prior to significant provisions
is calculated as EBITDA prior to Restructuring Expense, Reorganization
Items, Extraordinary Items, Cumulative Effect and provisions described in
Footnote 3 and 4 above. The following is a reconciliation of net income to
EDITDA and EBITDA prior to significant provision:
2000 1999 1998 1997 1996
----------------------------------------------------
Operating Income (6,413) 2,173 10,989 10,835 6,764
Add back depreciation and amortization 17,526 18,602 14,177 11,035 10,058
----------------------------------------------------
EBITDA 11,113 20,775 25,166 21,870 16,822
----------------------------------------------------
Add back significant provisions:
Impairment of long-lived assets 2,684 1,952
Restructuring expense 1,601
Provision for receivables 1,093 2,700
Provision for inventory 518
----------------------------------------------------
EBITDA PRIOR TO SIGNIFICANT PROVISIONS 17,009 25,427 25,166 21,870 16,822
====================================================
(7) Current and long-term debt obligations include the Revolving Credit
Facility and term loan, Senior Notes, Redeemable Common Stock and other
long-term debt and capital lease obligations. In 2000, this includes $171
million of Liabilities Subject to Compromise which may be settled at less
than face value.
Page 12
ITEM 7. 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 filed voluntary
petitions with the Bankruptcy Court for reorganization under Chapter 11. The
Debtors are currently operating their businesses as debtors-in-possession
pursuant to the Bankruptcy Code. All affiliated entities of the Company are
included in the Chapter 11 Cases, except only (a) three subsidiaries which are
licensed managed care organizations and (b) foreign subsidiaries of the Company.
At a hearing held on April 5, 2000, the Bankruptcy Court entered orders
granting authority to the Debtors, among other things, to maintain our cash
management system, to pay pre-petition and post-petition employee wages,
salaries, benefits and other employee obligations, and to honor customer service
programs, including warranties, returns and gift certificates. The Bankruptcy
Court also ordered that the Company could enter into a debtor-in-possession
credit facility. (See Note 3 of Notes to Consolidated Financial Statements and
the Report of Independent Public Accountants included herein.)
In March 2001, the Debtors filed a plan of reorganization for the Chapter
11 Cases. We expect the Company will emerge from bankruptcy 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 and the
common stock of the Company will have no value. (See Item 7, "Liquidity and
Capital Resources" and Note 3 of Notes to Consolidated Financial Statements and
Report of Independent Public Accountants included herein.)
Page 13
Consolidated Financial Statements
The Company's 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 for 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.
As a result of the filing of the Chapter 11 Cases and related
circumstances, realization of assets and liquidation of liabilities is subject
to substantial doubt. 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 Consolidated Financial Statements.
Further, the confirmation of a plan or plans of reorganization could materially
change the amounts reported in the accompanying Consolidated Financial
Statements. The 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 or 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 December 30, 2000, the Company operated 725 vision centers
versus 926 vision centers as of January 1, 2000. In the third quarter of 2000,
the Company terminated its 72 leases governing all the Company's units located
in Sam's Club locations. (See Note 5 to Consolidated Financial Statements). In
addition, the Company terminated its ten leases in Meijer Thrifty Acre locations
in October 2000. (See Note 5 to Consolidated Financial Statements.) The Company
also rejected, or otherwise terminated the leases for, approximately 97
freestanding vision centers.
As part of our proposed plan of reorganization, we will dispose of all
free-standing operations, including the Fullerton, California
laboratory-distribution facility. In February 2001, the Company signed a
purchase agreement to sell the assets of its freestanding locations and the
Fullerton, California laboratory for $8.5 million. The sale, which is subject to
customary terms and conditions, is expected to close in April 2001. (See Note 6
of Consolidated Financial Statements.)
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.
2000 1999 1998
--------- ----------- ----------
Net Sales $ 246,915 $ 247,875 $ 209,220
Gross Profit $ 133,481 $ 134,057 $ 112,509
Operating Income $ 13,493 $ 12,230 $ 11,424
EBITDA before significant provisions $ 25,833 $ 26,021 $ 23,751
Page 14
EBITDA prior to significant provisions is calculated as EBITDA prior to
Restructuring Expense, Reorganization Items, Extraordinary Items, Cumulative
Effect and the 1999 provision for receivables.
YEAR ENDED DECEMBER 30, 2000 COMPARED TO YEAR ENDED JANUARY 1, 2000
NET SALES. The Company recorded net sales of $307.7 million in fiscal 2000,
a decrease of 6.5% over sales of $329.1 million in fiscal 1999. Sales decreased
due to the following reasons:
o The Company closed 91 freestanding stores in April 2000. Theses stores had
sales of $3.1 million in 2000 versus $13.0 million in 1999, a reduction of
$9.9 million.
o The remaining freestanding stores generated negative comparable store sales
of 15.5% resulting in a decrease of $10.6 million in sales.
o During 2000, the Company closed 117 Sam's Club locations, 72 of which were
terminated prior to the end of their lease term. These closings resulted in
a sales decrease of $12.2 million in 2000.
These decreases were partially offset by:
o Favorable comparable store sales at the Wal-Mart and Military divisions of
2.0% and 6.5%, respectively. This resulted in a $4.7 million sales
increase.
o New store openings at the Wal-Mart and Military divisions resulted in sales
increases of $6.9 million over the prior year.
In addition, the Company's adoption of SAB 101 deferred the recognition of
approximately $300,000 of net sales in fiscal 2000. (See Note 2 of Consolidated
Financial Statements.)
GROSS PROFIT. In 2000, gross profit decreased to $164.2 million versus
$181.3 million in 1999. This decrease was due to the following:
o 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
freestanding locations and the negative comparable store sales registered
by the remaining freestanding vision centers acquired by the Company ($11.8
million).
o A charge of approximately $1.1 million to adjust inventory at the Company's
freestanding stores to net realizable value (See "Reorganization Items,
Restructuring Expenses and Impairment of Long-lived Assets").
o 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 55.1% a year ago to
53.4% in the current period. In addition to the reasons described above, the
decrease can also be attributed to the following:
o 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 freestanding vision
centers as well as lower volume resulting from closed stores.
o A sales shift from eyeglasses to contact lenses caused by contact lens
promotions in the freestanding vision centers. Eyeglasses have a higher
margin than do contact lenses. Additionally, contact lens margins decreased
due to competitive price pressure.
Page 15
o A decline in average sales per store recorded by the freestanding
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. This category of expense
includes both retail operating expense and corporate office administrative
costs. SG&A expense decreased from $177.2 million in 1999 to $166.4 million in
2000. The decrease was due primarily to the following:
o Payroll savings of $6.7 million from the closure of the Sam's Club
locations and approximately 97 freestanding locations.
o Home office savings of $2.2 million related to the elimination of
amortization of goodwill from the Frame-n-Lens, New West and Midwest
acquisitions, which was impaired in the third quarter of 2000, and a
reduction in payroll, recruiting and relocation expenses.
OPERATING INCOME/(LOSS). Operating results for 2000, prior to
reorganization and restructuring items and impairment of long-lived assets,
decreased to an operating loss of $2.1 million versus operating income of $4.1
million in 1999.
INTEREST EXPENSE. Interest expense decreased from $19.3 million in 1999 to
$7.7 million in 2000. 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 expense for 2000 was $20.7
million. In addition, interest expense excludes $144,000 of interest income
which has been reflected as a reorganization item.
BENEFIT FOR INCOME TAXES. We recorded a pre-tax operating loss of $135.7
million versus a loss of $17.2 million in the prior period. The resulting income
tax benefit was approximately $1.7 million. We have established a valuation
allowance equal to the amount of the tax benefit.
EXTRAORDINARY LOSS. Results also include an extraordinary loss of $827,000
in 2000 associated with the write-off of the capitalized costs of the Company's
previous Foothill Credit Facility.
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 cumulative effect of this change in accounting principle was a $3.4
million reduction in net earnings of 2000.
NET INCOME. The Company recorded a net loss of $139.9 million, or a loss of
$6.61 per basic and diluted share.
Page 16
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.
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)
December 30, 2000
-----------------
Accounts payable $ 25,856
Accrued expenses 2,717
Provision for rejected contracts 3,142
Senior notes, net of discount including $7,480 accrued interest 131,266
Other long-term debt and capital lease obligations 7,843
--------
$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.
Page 17
REORGANIZATION ITEMS, RESTRUCTURING EXPENSES AND IMPAIRMENT OF LONG-LIVED
ASSETS.
General
In the last quarter of 1999 and in fiscal 2000, 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.
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 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
====== ======
Impairment and restructuring charges incurred after the first quarter of
2000 are considered reorganization items and are presented below operating
income.
Page 18
Summary of Reorganization Items
Results for fiscal 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)
2000
--------
Impairment of goodwill $ 100,805
Impairment of fixed assets 12,000
Provision for rejected leases 1,920
Other store closing costs 670
Professional fees 3,421
Retention bonus 2,173
Interest income on accumulated cash (144)
Other reorganization costs 694
---------
$ 121,539
=========
Impairment of Long-Lived Assets
Due to continuing negative cash flows, coupled with the possible sale or
disposition of certain Company assets, we 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
the third quarter of 2000. In addition, we recorded a noncash charge of $10.6
million to reflect the impairment of fixed assets associated with these acquired
entities.
The Company terminated ten leases governing all of the Company's units
located in Meijer Thrifty Acre locations. The Company recorded a noncash pre-tax
charge of $987,000 in 2000 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. The Company recorded a noncash pre-tax charge of $367,000
related to the impairment of leasehold improvements and furniture and fixtures
in the Sam's Club locations. (See Note 5 to Consolidated Financial Statements.)
Page 19
A summary of the impairment charges recorded in 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
Sam's Club 367
--------
Total fixed asset impairment $ 12,000
========
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.
YEAR ENDED JANUARY 1, 2000 COMPARED TO YEAR ENDED JANUARY 2, 1999
NET SALES. The Company recorded net sales of $329.1 million in fiscal 1999,
an improvement of 34% over sales of $245.3 million in fiscal 1998. We increased
sales for two reasons. First, in 1999 our net sales included the net sales of
our Acquired Businesses for the entire fiscal year, whereas our net sales for
1998 included the sales of the acquired businesses for only a portion of the
year. Second, our sales in our core leased departments increased by 4.1% over
1998 results.
NET SALES IN ACQUIRED BUSINESSES. In 1999, the integration of these
businesses fell below expectations which negatively affected our results. The
most important reason for the disappointing performance was the significant
shortfall in sales. The following factors contributed to our poor operating
results in the Acquired Businesses:
o The consolidation of three different retail concepts into one existing
concept proved more difficult than we anticipated.
o We underestimated the power of the existing trade names of the acquired
businesses and lost market share when we changed the store names to "Vista
Optical".
o We incurred significant service disruptions when we closed three of our
manufacturing locations and consolidated their operations into our existing
facilities.
o We had substantial turnover at the field and management levels, which
further disrupted our operations.
Page 20
In 1999, we made a number of changes to improve these businesses. In
particular, we:
o improved the inventory carried by these vision centers.
o recruited optometrists to many locations.
o instituted intensive training programs for retail personnel.
o created a new advertising campaign, which began running in early 2000.
GROSS PROFIT. In 1999, we increased gross profit to $181.3 million, a 37%
increase over $132.4 million in 1998. The increase in net sales resulted in an
increase in gross profit dollars. Our gross profit percentage increased from 54%
in 1998 to 55.1% in 1999. Several factors contributed to this increase:
o We increased our purchasing power since completing the acquisitions.
o The consolidation of our manufacturing operations from six facilities to
three facilities reduced our average lens cost.
o We received significant promotional payments from key vendors.
Other factors had a negative impact on gross profit percentage:
o Retail prices for contact lenses continued to decline because of intense
price competition.
o During the consolidation of our manufacturing operations, our service
declined, causing an increase in remake and warranty work on customer
orders.
o Shortfalls in sales at the acquired vision centers caused rent as a percent
of sales to increase.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE. This category of expense
includes both retail operating expense and corporate office administrative
costs. SG&A expense increased from $121.4 million in 1998 to $177.2 million in
1999. The increase was primarily due to the increase in the number of vision
centers. As a percent of net sales, SG&A expense increased from 49.5% in 1998 to
53.8% in 1999. This increase was due to:
- A decline in sales at the acquired businesses, which thereby caused
store payroll to increase as a percent of sales.
- An increase in goodwill amortization from $800,000 in 1998 to $3.5
million in 1999 (this increase reflects the goodwill associated with
the businesses acquired by the Company in 1998 and therefore amortized
over all of 1999 versus a portion of 1998).
Page 21
- SG&A includes a non-cash expense provision of $2.7 million for the
write-off of managed care receivables. During 1999, the Company
continued its efforts with its third party processor to timely collect
managed care receivable accounts. In the fourth quarter, management
concluded these efforts were not achieving anticipated results and,
consequently, determined an additional provision for doubtful accounts
was warranted.
In addition, before giving effect to goodwill amortization, home office
expense as a percent of sales decreased by 0.5% over levels recorded in 1998.
Results for 1999 include a non-cash charge of $1.9 million, which
represents an impairment loss on fixed assets associated with 36 underperforming
vision centers acquired by the Company. We closed these vision centers in 2000.
OPERATING INCOME. Operating income decreased to $2.2 million from $11
million in 1998. Operating margin decreased from 4.5% to 0.7% of net sales in
1999. The decrease was attributable to:
o The shortfall in operating results of the acquired businesses.
o The increase in SG&A expense discussed above.
o The non-cash charges discussed above.
Despite poor results in the acquired businesses, we increased operating
income in our core leased business more than 10% over levels recorded in 1998.
INTEREST EXPENSE. Interest expense increased to $19.3 million from $5.5
million in 1998. The Company issued its $125 million senior notes in 1998 (See
Note 10 to Consolidated Financial Statements) and incurred the associated
expense over the entirety of 1999 versus a portion of 1998. In November 1999,
the Company refinanced its secured credit facility at a higher interest rate
than that provided for in its previous credit facility. (See Item 7, "Liquidity
and Cash Resources".)
PROVISION FOR INCOME TAXES. Vista recorded a pre-tax operating loss before
extraordinary item of $17.2 million in 1999. The resulting income tax benefit
was approximately $5.2 million. We have established a valuation allowance equal
to the amount of the tax benefit.
EXTRAORDINARY LOSS. Results also include an extraordinary loss of $406,000
associated with the write-off of the capitalized costs of the Company's 1998
secured credit facility.
NET INCOME. The Company recorded a net loss of $17.6 million, or a loss
of $0.83 per basic and diluted share.
Inflation
Although the Company cannot determine the precise effects of inflation, it
does not believe inflation has had a material effect on its domestic sales or
results of operations. The Company cannot determine whether inflation will have
a material long-term effect on its sales or results of operations.
As a result of inflation in prior years, the Company has in the past
adjusted its retail pricing. Further pricing adjustments are contingent upon
competitive pricing levels in the marketplace. Management is monitoring the
continuing impact of these inflationary trends.
Page 22
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.
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 payments due in 2000. Amounts due under the indenture are unsecured
claims in the Chapter 11 Cases, and are classified as Liabilities Subject to
Compromise. (See Note 4 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 million term loan and $12.5
million revolving credit facility. As of December 30, 2000, the Company had
borrowed a total of $12.9 million (inclusive of the $12.5 million term loan
portion) under the DIP Facility.
The DIP Facility expires on May 31, 2001. The DIP Facility further provides
that:
o The Company must maintain a rolling twelve month EBITDA of no less than $15
million, calculated prior to restructuring charges, reorganization items,
extraordinary losses, cumulative effect losses and store impairment
reserves.
o The $12.5 million term loan portion of the DIP Facility bears interest at
15% per annum.
o 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.
The Company believes that the DIP Facility should provide it with adequate
liquidity to conduct its operations while it awaits confirmation of its
reorganization plan. The Company is currently working with Foothill to establish
a revolving credit facility which will be available upon exiting from bankruptcy
(the "Exit Facility"). The Exit Facility will replace the current DIP Facility
and should provide the Company with adequate liquidity to conduct its operations
upon emergence from bankruptcy. However, the Company's liquidity, capital
resources, results of operations and ability to continue as a going concern are
subject to known and unknown risks and uncertainties. (See "MANAGEMENT'S
DISCUSSION AND ANALYSIS AND RESULTS OF OPERATIONS - RISK FACTORS.")
Page 23
The plan of reorganization filed with the Bankruptcy Court in March 2001
assumes the conversion of pre-petition unsecured claims 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. 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 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.
We plan, as of December 30, 2000, to open approximately 5 Wal-Mart vision
centers during fiscal 2001. We may open up to 10 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 $160,000 for
fixed assets and approximately $25,000 for inventory. We also spend
approximately $20,000 for pre-opening costs. Before 1998, we capitalized these
pre-opening costs. Beginning in 1998, we expensed them as required by new
accounting rules (See Note 2 to Consolidated Financial Statements).
Risk Factors
This Form 10-K contains a number of statements about the future. It also
contains statements which involve assumptions about the future. All these
statements are forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements represent
our expectations or belief concerning future events, including the following:
any statements regarding future sales levels, the continuation of historical
trends, and the Company's liquidity and the Chapter 11 Cases, including the
Company's plan of reorganization. Without limiting the foregoing, the words
"believes", "anticipates", "plans", "expects", and similar expressions are
intended to identify forward-looking statements.
We do not know whether the forward-looking statements made in this Form
10-K will prove to be correct. We have tried to identify factors which may cause
these statements to be incorrect, but we may not have identified all of them.
These factors could also have a negative impact on our results. The following is
our list of these factors:
o We have filed for protection under Chapter 11 of the Bankruptcy Code. The
fact of this filing, along with the process through the Bankruptcy Court,
could affect our business in a variety of unforeseen ways. There could be
impairment of our ability to: operate our business during the pendency of
the proceedings; continue normal operating relationships with our host
licensors, such as Wal-Mart; obtain shipments and negotiate terms with
vendors; fund, develop, and execute an operating plan; attract and retain
key executives and associates; maintain our gross margins through vendor
participation programs and otherwise to maintain favorable courses of
dealing with vendors.
Page 24
o Under the plan of reorganization we have proposed to the Bankruptcy Court,
the equity of the current shareholders in the Company will have no value.
o The Purchase and Sale Agreement for the remaining freestanding stores and
the Fullerton lab/DC may not close thus creating additional unsecured
claims.
o There are various risks associated with the Chapter 11 Cases. Our plan of
reorganization may not be approved or, even if it is approved, may not
succeed.
o We may not obtain exit financing to replace our DIP Facility.
o We depend heavily on our host store relationships, particularly with
Wal-Mart. Any change in these relationships could have a significant
negative impact on our business. The filing of the Chapter 11 Cases could
affect those relationships.
o Managed care plans are increasingly important in the optical industry. We
will need to attract new managed care business if we intend to remain
competitive. We will also need to retain our existing managed care
arrangements. Loss of these arrangements, or our failure to attract new
managed care business, would impair our competitive position. The filing of
the Chapter 11 Cases could impair our ability to retain existing contracts
and to enter into new ones.
o We depend on reliable and timely reimbursement of claims we submit to third
party payors. There are risks we may not be paid on a timely basis, or that
we will be paid at all. Some plans have complex forms to complete.
Sometimes our staff may incorrectly complete forms, delaying our
reimbursement. These delays can hurt our cash flow and also force us to
write-off more of these accounts receivable.
o Each year, we expect to have increasing numbers of vision centers under our
Wal-Mart agreement come up for renewal. Our rental obligations to Wal-Mart
will increase in the three year option period. We will need to continue to
improve sales at these vision centers. If we do not, our rent as a percent
of sales will increase significantly during the option period.
Alternatively, we may choose not to exercise the options.
o Operating factors affecting customer satisfaction and quality controls of
the Company in optical manufacturing.
Page 25
Liabilities Subject to Compromise may increase as a result of:
o negotiations
o actions of the Bankruptcy Court
o further development with respect to disputed claims
o future rejection of additional executory contracts or unexpired leases
o the determination as to the value of any collateral securing claims
o proofs of claim
o 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.
This may further reduce the settlement of unsecured claims.
- Pricing and other competitive factors, including, without limitation,
increased price competition with respect to contact lenses.
- Technological advances in the eyecare industry, such as new surgical
procedures or medical devices, which could reduce the demand for the
Company's products. The number of individuals electing Lasik and
similar surgical procedures has dramatically increased each year. If
these trends continue, demand for our goods and services could
decrease significantly.
- The mix of goods sold.
- Availability of optical and optometric professionals. An element of
the Company's business strategy and a requirement of the Wal-Mart
Agreement is the availability of vision care professionals at clinics
in or nearby the Company's vision centers.
- State and federal regulation of managed care and of the practice of
optometry and opticianry.
- General risks arising from investing and operating in Mexico,
including a different regulatory, political, and governmental
environment, currency fluctuations, high inflation, price controls,
restrictions on profit repatriation, lower per capita income and
spending levels, import duties, value added taxes, and difficulties in
cross-cultural marketing.
- The Company's ability to select in-stock merchandise attractive to
customers.
- Weather affecting retail operations.
- Variations in the level of economic activity affecting employment and
income levels of consumers.
- Seasonality of the Company's business.
Recent Accounting Pronouncements
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. We applied the guidance in SAB 101 to our financial
statements in 2000. The impact has been reflected as a cumulative effect
adjustment to our consolidated financial statements resulting from a change in
accounting principles.
Page 26
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 is effective in
fiscal 2000. The Company had no derivatives in 2000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 long-term debt under our credit facility at variable
interest rates. (See Note 10 to Consolidated Financial Statements.) 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 foreign currency rates between the peso and the
U.S. dollar.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company are included as a
separate section of this Report commencing on page F-1.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Page 27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information Concerning Directors
Name and Age as of March 30, 2001 Position, Business Experience and Directorships
--------------------------------- -----------------------------------------------
James W. Krause............56 Joined the Company in April 1994 as President and Chief Executive Officer and a
director. He was named Chairman of the Company in June 1995.
Ronald J. Green............53 A director since December 1990, Mr. Green has been a partner in the accounting firm of
Stephen M. Berman & Associates, Atlanta, Georgia, since 1980.
James E. Kanaley...........59 A director since October 1998, Mr. Kanaley was employed at Bausch & Lomb Inc. from
1978 until his retirement in 1997. From 1990 until 1993, he served as Senior Vice
President and Group President Contact Lens Care, and from 1993 until his retirement he
served as Senior Vice President and President, North American Healthcare.
Peter T. Socha.............41 Mr. Socha joined the Company in October 1999 as Senior Vice President, Strategic
Planning. Prior to joining the Company he worked as a consultant, and served as
Executive Vice President of COHR, Inc., from May 1998 to October 1998; and as Chief
Credit Officer with Sirrom Capital Corporation, from 1994 to 1997. Mr. Socha became a
director and was appointed Senior Vice President, Strategic Planning and Managed Care
in February 2000.
Page 28
Information Concerning Executive Officers
Name, Age and Position
as of March 30, 2001 Business Experience
------------------- -------------------
James W. Krause 56 See "Information Concerning Directors"
Chairman
and Chief Executive Officer
Michael J. Boden 53 Mr. Boden joined the Company in June 1995 as Vice President, Sales and Marketing and was
Executive Vice President, named a Senior Vice President in February 1998. He was named Senior Vice President,
Retail Operations Leased retail Operations in February 1999. From 1992 until joining the Company, he
served as Vice President-- Store Operations of This End Up Furniture Company. He was
appointed to his current position in February 2000.
Richard D. Anderson 42 Mr. Anderson joined the Company in January 1999 and was named Senior Vice President,
Senior Vice President, Real Estate in February 1999. From 1987 until joining the Company, he was employed by
Real Estate W.H. Smith, PLC where he served as Vice President, Real Estate and Vice President,
Development and Construction.
Eduardo A. Egusquiza 48 Mr. Egusquiza joined the Company in March 1998 as Senior Vice President, Information
Senior Vice President, Technology. From 1982 until joining the Company, he was employed by Musicland Stores
Information Technology Corporation, Inc. where he served as Vice President of Information Systems and Services.
Mitchell Goodman 47 Mr. Goodman joined the Company as General Counsel and Secretary in September 1992 and
Senior Vice President, was named a Vice President in November 1993 and Senior Vice President in May 1998.
General Counsel and Secretary
Charles M. Johnson 51 Mr. Johnson joined the Company in October 1997 as Senior Vice President, Manufacturing
Senior Vice President, and Distribution. From 1988 until joining the Company, he was employed by the
Manufacturing and Distribution Sherwin-Williams Company, where he served as Vice President and Director of Research and
Development.
Angus C. Morrison 44 Mr. Morrison joined the Company in February of 1995 as Vice President, Corporate
Senior Vice President, Controller. He was appointed Senior Vice President, Chief Financial Officer and
Chief Financial Officer Treasurer in March 1998. From 1993 until joining the Company, he was Controller and
Senior Financial Officer of the Soap Division of The Dial Corp. He was Controller and
Senior Financial Officer of the Food Division of the same company from 1989 through 1992.
Timothy W. Ranney 48 Mr. Ranney joined the Company in September 1998 and was named Vice President, Corporate
Vice President, Controller in October 1998. From 1991 until joining the Company, he was employed by CVS
Corporate Controller Corporation where he served as Store Controller and then as Director of Financial
Systems.
Peter T. Socha 41 See "Information Concerning Directors"
Senior Vice President,
Strategic Planning and
Managed Care
Robert W. Stein 45 Mr. Stein joined the Company as Director of Human Resources in May 1992. In January
Senior Vice President, 1993, he was appointed Vice President, Human Resources, and was appointed Senior Vice
Human Resources and President in February 1999. He was appointed to his current position in February 2000.
Professional Services
Page 29
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our directors, executive
officers and holders of more than ten percent (10%) of Common Stock to file with
the Securities and Exchange Commission initial reports of ownership and reports
of changes in ownership of Common Stock and other equity securities of the
Company. We believe that, during 2000, our officers, directors and holders of
more than ten percent (10%) of Common Stock complied with all Section 16(a)
filing requirements except that the Company did not timely file a Form 5
(relating to our transactions for Timothy Ranney). In making these statements,
we have relied upon the written representations of our directors and officers
and upon copies of reports furnished to the Company.
ITEM 11. EXECUTIVE COMPENSATION
The following table discloses compensation received from the Company by the
Company's Chief Executive Officer, and the Company's four most highly
compensated officers other than the Chief Executive Officer (all such
individuals, collectively, the "named executive officers").
Summary Compensation Table
Long Term Compensation
Annual Compensation ------------------------------------------------
Name and -------------------------------------------------- Restricted Securities
Principal Fiscal Other Annual Stock Underlying All Other
Position Year Salary($) Bonus($) Compensation($) Awards($)(1) Options/SARs(#) Compensation($)
-------- ------- --------- -------- --------------- ------------ --------------- ---------------
James W. Krause 2000 375,000 112,000 -- --(2) 40,000 20,000(3)
Chairman of 1999 375,000 -- -- -- 340,000 20,000
the Board 1998 368,000 101,500 -- 79,688 250,000 20,000
and Chief
Executive Officer
Michael J. Boden 2000 222,000 64,000 -- --(4) 12,000 --
Executive Vice 1999 200,000 -- -- -- 12,000 --
President, 1998 193,000 38,000 -- 26,563 15,000 --
Retail Operations
Eduardo A. Egusquiza 2000 188,000 58,000 -- --(7) 12,000 --
Senior Vice 1999 170,000 -- 153,000(6) -- 12,000 --
President, 1998(5) 139,000 36,000 -- 26,563 50,000 --
Information
Technology
Charles M. Johnson 2000 218,000 67,000 -- --(7) 12,000 --
Senior Vice 1999 204,000 -- -- -- 12,000 --
President, 1998 197,000 39,000 37,000(8) 26,563 15,000 --
Manufacturing and
Distribution
Peter T. Socha 2000 208,000 62,000 -- -- 40,000 --
Senior Vice 1999(9) 36,000 -- -- -- 100,000 --
President, Strategic
Planning
Page 30
(1) Restricted Stock Awards vest and restrictions lapse after five-year
performance period to the extent and depending upon achievement by the
Company of return on asset goals relative to a comparison group of
companies. For awards made in 1998, restricted shares, to the extent not
vested after five years, vest after ten years of employment. Vesting is
accelerated automatically upon a change of control (as defined). Dividends
(if any are declared) will not be paid on restricted stock.
(2) As of December 30, 2000, Mr. Krause had restricted stock holdings
representing 30,000 shares of Common Stock with a value of $936.
(3) The Company has executed a "split dollar" insurance agreement with Mr.
Krause. The annual premium (payable by the Company) is $20,000. The term
life portion of this premium is $2,500; the non-term life portion is
$17,500.
(4) As of December 30, 2000, Mr. Boden had restricted stock holdings
representing 10,000 shares of Common Stock with a value of $312.
(5) Mr. Egusquiza joined the Company in March 1998.
(6) $82,000 represents reimbursement of relocation expenses; $71,000 represents
tax reimbursement payments on the foregoing.
(7) As of December 30, 2000, this executive had restricted stock holdings
representing 5,000 shares of Common Stock with a value of $156.
(8) $34,000 represents reimbursement of relocation expenses; $3,000 represents
tax reimbursement payments.
(9) Mr. Socha joined the Company in October 1999.
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information on option grants to the named
executive officers by the Company in 2000. The table also shows the hypothetical
gains or "option spreads" that would exist for the respective options. These
gains are based on assumed rates of annual compound stock price appreciation of
5% and 10% from the date the options were granted over the full option term.
Potential Realizable
Value at Assumed
No. of % of Total Annual Rates of Stock
Securities Options/SARs Price Appreciation
Underlying Granted to for Option Terms($)(2)
Option/SARs Employees in Exercise or Expiration -----------------------
Granted Fiscal Year(1) Base Price($) Date 5% 10%
------------ -------------- ------------------------- ----------- -----------
James W. Krause 40,000(3) 9.3 2.00 2/24/10 130,312 207,499
Michael J. Boden 12,000(3) 2.8 2.00 2/24/10 39,093 62,250
Eduardo A. Egusquiza 12,000(3) 2.8 2.00 2/24/10 39,093 62,250
Charles M. Johnson 12,000(3) 2.8 2.00 2/24/10 39,093 62,250
Peter T. Socha 40,000(3) 9.3 2.00 2/24/10 130,312 207,499
(1) The Company granted options covering 431,200 shares to employees in 2000.
(2) These amounts represent assumed rates of appreciation only. Actual gains,
if any, on stock option exercises and holdings of Common Stock are
dependent on the future performance of Common Stock and overall stock
market conditions. There can be no assurance that the amounts reflected in
this table will be achieved. Under the plan of reorganization filed by the
Company, all existing Common Stock and other equity interests will be
cancelled.
(3) Grants under the Company's Restated Stock Option and Incentive Award Plan.
Options vest 50% on second anniversary of grant date and 25% on each of the
third and fourth anniversary of grant date, subject to continued
employment. Expiration date is 10th anniversary of grant date.
Page 31
FISCAL YEAR END OPTION VALUES
The following table provides information, as of December 30, 2000,
regarding the number and value of options held by the named executive officers.
No. of Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options
Fiscal Year End At Fiscal Year End($)
------------------------------- ----------------------------
Exercisable Unexercisable(1) Exercisable Unexercisable
James W. Krause 362,500 367,500 0 0
Michael J. Boden 33,750 35,250 0 0
Eduardo A. Egusquiza 25,000 49,000 0 0
Charles M. Johnson 56,250 42,750 0 0
Peter T. Socha 100,000 40,000 0 0
- --------------------
(1) Shares represented were not exercisable as of December 30, 2000, and future
exercisability is subject to the executive's remaining employed by the
Company for up to four years from grant date of options. No options were
exercised by the named executive officers in fiscal 2000.
Change in Control Arrangements
The Company has agreements with the named executive officers which provide
severance benefits in the event of termination of employment under certain
circumstances following a change in control of the Company (as defined). The
circumstances are:
- termination by the Company, other than because of death or disability
commencing prior to a threatened change in control (as defined);
- for cause (as defined); or
- by an officer as the result of a voluntary termination (as defined).
Page 32
Following any such termination, in addition to compensation and benefits
already earned, the officer will be entitled to receive a lump sum severance
payment equal to up to three times the officer's annual rate of base salary.
Cause for termination by the Company is the:
- commission of any act that constitutes, on the part of the officer,
(a) fraud, dishonesty, gross negligence, or willful misconduct and
(b) that directly results in material injury to the Company, or
- officer's material breach of the agreement, or
- officer's conviction of a felony or crime involving moral turpitude.
Circumstances which would entitle the officer to terminate as a result of
voluntary termination following a change in control include, among other things:
- the assignment to the officer of any duties inconsistent with the
officer's title and status in effect prior to the change in control or
threatened change in control;
- a reduction by the Company of the officer's base salary;
- the Company's requiring the officer to be based anywhere other than
the Company's principal executive offices;
- the failure by the Company, without the officer's consent, to pay to
the officer any portion of the officer's then current compensation;
- the failure by the Company to continue in effect any material
compensation plan in which the officer participates immediately prior
to the change in control or threatened change in control; or
- the failure by the Company to continue to provide the officer with
benefits substantially similar to those enjoyed by the officer under
any of the Company's life insurance, medical, or other plans.
The term of each agreement is for a rolling three years unless the Company
gives notice that it does not wish to extend such term, in which case the term
of the agreement would expire three years from the date of the notice.
Under the plan of reorganization filed by the Company, all these agreements
will be rejected by the Company, or amended to the satisfaction of the Company
and the Official Committee of Unsecured Creditors.
Page 33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
COMMON STOCK OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The Company is not aware of any person who, on March 1, 2001, was the
beneficial owner of five percent (5%) or more of outstanding shares of Common
Stock, except as set forth below.
Amount and Nature of Percent
Beneficial Ownership of Class
-------------------- --------
Campbell B. Lanier, III 4,363,062(a)(b) 20.7
Rayna Casey 1,808,152(c) 8.5
- ----------
(a) Includes shares owned by the following individuals and entities, who may be
deemed a "group" within the meaning of the beneficial ownership provisions
of the federal securities laws: Mr. Lanier (838,832 shares); Mr. Lanier's
wife (750 shares); Campbell B. Lanier, IV (25,550 shares); ITC Service
Company (3,356,648 shares); William H. Scott, III (82,782 shares); Martha
J. Scott (28,000 shares, inclusive of 10,000 shares owned by the Scott
Trust, of which Ms. Scott is the sole trustee); William H. Scott, III
Irrevocable Trust F/B/O Martha Scott (the "Scott Trust") (10,000 shares);
Bryan W. Adams (8,000 shares).
(b) Includes 24,375 shares which Mr. Lanier has the right to acquire under the
Company's Non-Employee Director Stock Option Plan.
(c) Includes 159,948 shares owned by a trust of which Ms. Casey is the trustee
and her daughter the beneficiary. Ms. Casey's address is 712 West Paces
Ferry Road, Atlanta, Georgia.
The following table sets forth information, as of March 1, 2001, concerning
beneficial ownership by all directors, by each of the executive officers named
in the Summary Compensation Table above, and by all directors and executive
officers as a group.
Page 34
Percent of
Beneficially Number of
Name and Address Owned Shares
of Beneficial Owner(1) Common Stock Outstanding
---------------------- ------------ -----------
Campbell B. Lanier, III................. 4,363,062(2)(3) 20.7
James W. Krause......................... 797,193(4) 3.7
J. Smith Lanier, II..................... 304,110(3)(5) 1.4
Ronald J. Green......................... 113,375(3)(6) *
Peter T. Socha.......................... 100,000(7) *
James E. Kanaley........................ 5,625 *
Michael J. Boden........................ 60,327(8) *
Charles M. Johnson...................... 75,600(9) *
Eduardo A. Egusquiza.................... 48,500(10) *
All directors and executive officers as a
group (sixteen persons)................. 6,137,982 27.6
- --------------------
* Represents less than one percent of the outstanding Common Stock.
(1) Unless otherwise indicated below, the address of the persons named is 296
Grayson Highway, Lawrenceville, GA 30045.
(2) See footnote (a) in table above.
(3) Includes 24,375 shares which this individual has the right to acquire under
the Company's Non-Employee Director Stock Option Plan. Messrs. Campbell B.
Lanier, III and J. Smith Lanier, II resigned from the Board of Directors in
March 2001.
(4) Includes 532,500 shares which Mr. Krause has the right to acquire under the
Company's Restated Stock Option and Incentive Award Plan (the "Plan"). Also
includes 30,000 shares of restricted stock awarded under the Plan.
(5) Includes 1,800 shares owned by Mr. Lanier's wife, as to which he disclaims
beneficial ownership.
(6) Includes 9,000 shares owned by Mr. Green's children, as to which he
disclaims beneficial ownership.
(7) Represents 100,000 shares which Mr. Socha has the right to acquire under
the Plan.
(8) Includes 47,250 shares which Mr. Boden has the right to acquire under the
Plan. Also includes 10,000 shares of restricted stock awarded under the
Plan.
(9) Includes 62,250 shares which Mr. Johnson has the right to acquire under the
Plan and 5,000 shares of restricted stock awarded under the Plan.
(10) Includes 43,500 shares which Mr. Egusquiza has the right to acquire under
the Plan and 5,000 shares of restricted stock awarded under the Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company paid insurance premiums of approximately $443,000 in 2000 for
insurance policies purchased through an agency in which J. Smith Lanier, II, a
director of the Company, has a substantial ownership interest. The Audit
Committee (which has ratified the purchase of insurance by the Company from this
insurance agency) and management of the Company believe that these premiums are
comparable to those which could have been obtained from unaffiliated companies.
Page 35
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) and (2) The Consolidated Financial Statements and Schedule of the
Company and its subsidiaries are filed as a separate section of this Report
commencing on page F-1.
(3) We have filed or incorporated by reference the following exhibits:
Exhibit
Number Description
- ------- -----------
3.1 -- Amended and Restated Articles of Incorporation of the Company, dated
April 8, 1992, along with Articles of Amendment to the Amended and
Restated Articles of Incorporation of the Company dated January 17,
1997, and Articles of Amendment to the Amended and Restated Articles
of Incorporation of the Company dated December 31, 1998, incorporated
by reference to the Company's Form 8-K filed with the Commission on
January 6, 1999.
3.2 -- Amended and Restated By-Laws of the Company, 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.
4.1 -- Form of Common Stock Certificate, incorporated by reference to the
Company's Registration Statement on Form 8-A filed with the Commission
on January 17, 1997.
4.2 -- Rights Agreement dated as of January 17, 1997 between the Company
and Wachovia Bank of North Carolina, N.A., incorporated by reference
to the Company's Registration Statement on Form 8-A filed with the
Commission on January 17, 1997.
4.3 -- Indenture dated as of October 8, 1998, among the Company, the Guaran-
tors and State Street Bank & Company, as Trustee (including form of
Exchange Note), incorporated by reference to the Company's
Registration Statement on Form S-4, registration number 333-71825,
filed with the Commission on February 5, 1998, and amendments thereto.
4.4 -- Purchase Agreement dated as of October 8, 1998, among the Company, the
Guarantors and the Initial Purchasers, incorporated by reference to
the Company's Registration Statement on Form S-4, registration number
333-71825, filed with the Commission on February 5, 1998, and
amendments thereto.
4.5 -- Registration Rights Agreement dated as of October 8, 1998, among the
Company, the Guarantors and the Initial Purchasers, incorporated by
reference to the Company's Registration Statement on Form S-4,
registration number 333- 71825, filed with the Commission on February
5, 1998, and amendments thereto.
Page 36
10.1 -- Sublease Agreement, dated December 16, 1991, by and between Wal-Mart
Stores, Inc. and the Company, 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.
10.2 -- Form indemnification agreement for directors and executive officers
of the Company, incorporated by reference to the Company's Form 10-K
for the fiscal year ended December 31, 1992.
10.3 -- Vision Center Master License Agreement, dated as of June 16, 1994, by
and between Wal-Mart Stores, Inc. and the Company, incorporated by
reference to the Company's Form 10-Q for the quarterly period ended
September 30, 1994. [Portions of Exhibit 10.3 have been omitted
pursuant to an order for confidential treatment granted by the
Commission. The omitted portions have been filed separately with the
Commission.]
10.4++ -- Split Dollar Life Insurance Agreement, dated as of November 3, 1994,
among the Company, A. Kimbrough Davis, as Trustee, and James W.
Krause, incorporated by reference to the Company's Form 10-K for the
fiscal year ended December 31, 1994.
10.5++ -- Level IV Management Incentive Plan, incorporated by reference to the
Company's Form 10-K for the fiscal year ended December 31, 1994.
10.6 -- Agreement dated as of November 23, 1995 by and between Mexican Vision
Associates Operadora, S. de R.L. de C.V. and Wal-Mart de Mexico, S.A.
de C.V. in original Spanish and an uncertified English translation,
incorporated by reference to the Company's Form 10-K for the fiscal
year ended December 30, 1995. [Portions of Exhibit 10.6 have been
omitted pursuant to a request for confidential treatment filed with
the Commission. The omitted portions have been filed separately with
the Commission.]
10.7++ -- Executive Relocation Policy, incorporated by reference to the
Company's Form 10-Q for the quarterly period ended March 30, 1996.
10.8++ -- Restated Stock Option and Incentive A ward Plan, incorporated by
reference to the Company's Form 10-Q for the quarterly period ended
June 29, 1996.
10.9++ -- First Amendment to Restated Stock Option and Incentive Award Plan,
incorporated by reference to the Company's Form 10-Q for the quarterly
period ended March 29, 1997.
10.10++-- Form Change in Control Agreement for executive officers of the
Company, incorporated by reference to the Company's Form 10-K for the
fiscal year ended December 28, 1996.
Page 37
10.11++-- Form Restricted Stock Award, incorporated by reference to the
Company's Form 10-Q for the quarterly period ended March 29, 1997.
10.12++-- Restated Non-Employee Director Stock Option Plan, incorporated by
reference to the Company's Form 10-Q filed on June 28, 1997.
10.13++-- Executive Deferred Compensation Plan, incorporated by reference to the
Company's Form 10-K for the fiscal year ended January 3, 1998.
10.14 -- Credit Agreement dated October 8, 1998 by and among the Company,
Bank of America, FSB, First Union National Bank and the financial
institutions listed hereto, incorporated by reference to the Company's
Registration Statement on Form S-4, registration number 333-71825,
filed with the Commission on February 5, 1999, and amendments thereto.
10.15 -- Amended and Restated Credit Agreement dated as of November 12, 1999 by
and between the Company and Foothill Capital Corporation, incorporated
by reference to the Company's Form 10-K for the fiscal year ended
January 1, 2000.
10.16 -- Agreement dated as of September 9, 1999, by and among the Company, ITC
Service Company, and Campbell B. Lanier, III, incorporated by
reference to the Company's Form 10-K for the fiscal year ended January
1, 2000.
10.17 -- Senior Secured, Super-Priority Debtor in Possession Loan and Security
Agreement dated as of April 6, 2000 by and between the Company and
Foothill Capital Corporation, incorporated by reference to the
Company's Form 10-Q for the quarterly period ended July 1, 2000.
21 -- Subsidiaries of the Registrant, incorporated by reference to the
Company's Form 10-K for the fiscal year ended January 1, 2000.
23** -- Consent by Arthur Andersen LLP.
** Filed with this Form 10-K/A.
++ Management contract or compensatory plan or arrangement in which a director
or named executive officer participates.
(b) No reports on Form 8-K have been filed during the last quarter of the
period covered by this report.
Page 38
VISTA EYECARE, INC. AND SUBSIDIARIES
DEBTORS-IN-POSSESSION
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
AS OF DECEMBER 30, 2000, JANUARY 1, 2000 AND JANUARY 2, 1999
TOGETHER WITH AUDITORS' REPORT
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
The following consolidated financial statements and schedule of the
registrant and its subsidiaries are submitted herewith in response to Item 8 and
Item 14(a)1 and to Item 14(a)2, respectively.
Page
----
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of December 30, 2000 and
January 1, 2000 F-3
Consolidated Statements of Operations for the
Years Ended December 30, 2000, January 1, 2000 and
January 2, 1999 F-5
Consolidated Statements of Shareholders' (Deficit)/Equity
for the Years Ended December 30, 2000, January 1, 2000
and January 2, 1999 F-6
Consolidated Statements of Cash Flows for the
Years Ended December 30, 2000, January 1, 2000 and
January 2, 1999 F-7
Notes to Consolidated Financial Statements F-8
Schedule II, Valuation and Qualifying Accounts F-37
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions, are inapplicable, or have been
disclosed in the notes to consolidated financial statements and, therefore, have
been omitted.
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Vista Eyecare, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of VISTA
EYECARE, INC. (a Georgia corporation) AND SUBSIDIARIES as of December 30, 2000
and January 1, 2000 and the related consolidated statements of operations,
shareholders' (deficit)/equity, and cash flows for each of the three years in
the period ended December 30, 2000. These financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Vista Eyecare, Inc. and
subsidiaries as of December 30, 2000 and January 1, 2000 and the results of
their operations and their cash flows for each of the three years in the period
ended December 30, 2000 in conformity with accounting principles generally
accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company filed voluntary petitions with the United
States Bankruptcy Court for reorganization under Chapter 11. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are described in Note 3. The
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
As explained in Note 2 to the financial statements, effective January 2,
2000 the Company changed its method of accounting for revenues and related costs
of retail sales upon adoption of Securities and Exchange Commission Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements."
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
consolidated financial statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 30, 2001
F-2
VISTA EYECARE, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
December 30, 2000 and January 1, 2000
(In thousands except share information)
2000 1999
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8,066 $ 2,886
Accounts receivable (net of allowance: 2000 - $5,744; 1999 - $4,403) 10,119 10,416
Inventories 31,478 34,373
Other current assets 1,590 2,761
---------- ----------
Total current assets 51,253 50,436
---------- ----------
PROPERTY AND EQUIPMENT:
Equipment 47,187 57,750
Furniture and fixtures 23,272 26,600
Leasehold improvements 18,664 28,458
Construction in progress 540 3,427
---------- ----------
89,663 116,235
Less accumulated depreciation (60,092) (62,329)
---------- ----------
Net property and equipment 29,571 53,906
OTHER ASSETS AND DEFERRED COSTS
(net of accumulated amortization: 2000 - $2,142; 1999 - $1,500) 7,766 9,315
DEFERRED INCOME TAX ASSET 385 385
GOODWILL AND OTHER INTANGIBLE ASSETS
(net of accumulated amortization: 2000 - $2,691; 1999 - $6,994) 1,913 106,177
---------- ----------
$ 90,888 $ 220,219
========== ==========
F-3
2000 1999
---------- ----------
LIABILITIES AND SHAREHOLDERS' (DEFICIT)/EQUITY
LIABILITIES NOT SUBJECT TO COMPROMISE:
CURRENT LIABILITIES:
Accounts payable $ 783 $ 17,288
Accrued expenses and other current liabilities 19,693 24,472
Current portion of other long-term debt and capital lease obligations -- 1,098
Revolving credit facility and term loan 12,911 19,292
--------- ---------
Total current liabilities 33,387 62,150
--------- ---------
SENIOR NOTES (net of discount: 1999 - $1,253) -- 123,747
OTHER LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS -- 6,865
LIABILITIES SUBJECT TO COMPROMISE (See Note 4) 170,824 --
COMMITMENTS AND CONTINGENCIES (See Note 13) -- --
REDEEMABLE COMMON STOCK -- 900
SHAREHOLDERS' (DEFICIT)/EQUITY:
Preferred deficit stock, $1 par value; 5,000,000 shares authorized, none issued -- --
Common stock, $0.01 par value, 100,000,000 shares authorized, 21,169,103
and 21,179,103 shares issued and outstanding as of December 30, 2000 and
January 1, 2000, respectively 211 211
Additional paid-in capital 47,387 47,387
Retained deficit (156,848) (16,968)
Accumulated other comprehensive income (4,073) (4,073)
--------- ---------
Total shareholders' (deficit)/equity (113,323) 26,557
--------- ---------
$ 90,888 $ 220,219
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
VISTA EYECARE, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 30, 2000, January 1, 2000 and January 2, 1999
(In thousands except per share information)
2000 1999 1998
---------- ---------- ----------
NET SALES $ 307,694 $ 329,055 $ 245,331
COST OF GOODS SOLD 143,458 147,768 112,959
---------- ---------- ---------
GROSS PROFIT 164,236 181,287 132,402
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE 166,364 177,162 121,413
IMPAIRMENT OF LONG-LIVED ASSETS 2,684 1,952 -
RESTRUCTURING EXPENSE 1,601 - -
--------- ---------- ---------
OPERATING INCOME/(LOSS) (6,413) 2,173 10,989
INTEREST EXPENSE (Contractual interest of $20,728 in 2000) 7,723 19,329 5,538
---------- ---------- ---------
INCOME/(LOSS) BEFORE REORGANIZATION ITEMS AND TAXES (14,136) (17,156) 5,451
REORGANIZATION ITEMS (SEE NOTE 5) 121,539 - -
---------- ---------- ---------
EARNINGS/(LOSS) BEFORE TAXES, EXTRAORDINARY ITEM AND CUMULATIVE EFFECT (135,675) (17,156) 5,451
INCOME TAX EXPENSE - - 2,037
---------- ---------- ---------
NET EARNINGS/(LOSS) BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT (135,675) (17,156) 3,414
EXTRAORDINARY LOSS, NET (SEE NOTE 11) (827) (406) -
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET (SEE NOTE 2) (3,378) - -
--------- ---------- ---------
NET INCOME/(LOSS) $(139,880) $ (17,562) $ 3,414
========= ========== ==========
BASIC EARNINGS/(LOSS) PER SHARE:
EARNINGS/(LOSS) BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT (6.41) (0.81) 0.16
LOSS FROM EXTRAORDINARY ITEM (0.04) (0.02) -
LOSS FROM CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (0.16) - -
--------- --------- ---------
NET EARNINGS/(LOSS)PER BASIC SHARE $ (6.61) $ (0.83) $ 0.16
========= ========= =========
DILUTED EARNINGS/(LOSS) PER SHARE:
EARNINGS/(LOSS) BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT (6.41) (0.81) 0.16
LOSS FROM EXTRAORDINARY ITEM (0.04) (0.02) -
LOSS FROM CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (0.16) - -
---------- ---------- ---------
NET EARNINGS/(LOSS)PER DILUTED SHARE $ (6.61) $ (0.83) $ 0.16
========== ========== ==========
Pro forma amounts as if the new revenue recognition policy was applied retroactively (See Note 2):
1999 1998
---------- ---------
NET EARNINGS/(LOSS) BEFORE EXTRAORDINARY ITEM $ (17,239) $ 3,352
NET EARNINGS/(LOSS) $ (17,645) $ 3,352
NET EARNINGS/(LOSS) PER SHARE-BASIC AND DILUTED:
NET EARNINGS/(LOSS) BEFORE EXTRAORDINARY ITEM $ (0.82) $ 0.16
NET EARNINGS/(LOSS) $ (0.84) $ 0.16
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
VISTA EYECARE, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT)/EQUITY
For the years ended December 30, 2000, January 1, 2000 and January 2, 1999
(In thousands except share information)
Accumulated
Common Stock Additional Retained Other
---------------------- Paid-In Earnings Comprehensive
Shares Amount Capital (Deficit) Income Total
------ ------ ---------- ---------- ----------- ----------
BALANCE, January 3, 1998 20,819,955 207 42,284 (2,820) (4,073) 35,598
Awards of restricted stock 52,000 1 121 122
Exercise of stock options 294,657 3 1,482 1,485
Tax settlement (See Note 14) 3,308 3,308
Net income 3,414 3,414
---------- ----- -------- --------- --------- --------
BALANCE, January 2, 1999 21,166,612 211 47,195 594 (4,073) 43,927
Restricted stock 136 136
Exercise of stock options 12,491 56 56
Net loss (17,562) (17,562)
---------- ----- -------- --------- --------- --------
BALANCE, January 1, 2000 21,179,103 211 47,387 (16,968) (4,073) 26,557
Cancellation of Shares (10,000)
Net Loss (139,880) (139,880)
---------- ----- -------- --------- ---------- ---------
BALANCE, December 30, 2000 21,169,103 $ 211 $ 47,387 $(156,848) $ (4,073) $(113,323)
========== ===== ======== ========= ========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
VISTA EYECARE, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 30, 2000, January 1, 2000, and
January 2, 1999 (In thousands)
2000 1999 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) $(139,880) $(17,562) $ 3,414
Adjustments to reconcile net income/(loss) to -------- ------- -------
net cash provided by (used in) operating activities:
Depreciation and amortization 17,526 18,602 14,177
Provision for deferred income tax expense -- -- 1,173
Impairment of long-lived assets 2,684 1,952 --
Restructuring expense 1,601 -- --
Reorganization items 121,539 -- --
Extraordinary loss 827 406 --
Cumulative effect of a change in accounting principle 3,378 -- --
Other 1,181 (459) 936
Changes in operating assets and liabilities, net of
effects of acquisitions:
Receivables (1,480) (281) (1,504)
Inventories 5,026 (2,703) 1,304
Other current assets 1,171 138 (1,630)
Accounts payable 9,351 (1,733) (410)
Accrued expenses (4,335) (2,069) (7,691)
--------- --------- ---------
Total adjustments $ 158,469 $ 13,853 $ 6,355
--------- --------- ---------
Net cash (used in) provided by operating activities 18,589 (3,709) 9,769
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (5,379) (12,704) (9,183)
Acquisitions, net of cash acquired -- -- (97,357)
Proceeds from sale of property and equipment -- 955 --
--------- --------- ---------
Net cash used in investing activities (5,379) (11,749) (106,540)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of senior notes, net of discount -- -- 123,580
Advances on revolving credit facility 305,751 79,238 52,500
Repayments on revolving credit facility (312,132) (65,946) (66,000)
Principal payment on notes payable and capital leases (934) (1,265) (436)
Proceeds from exercise of stock options -- 56 1,485
Deferred financing costs (715) (811) (9,845)
--------- --------- ---------
Net cash provided by (used in) financing activities (8,030) 11,272 101,284
--------- --------- ---------
NET INCREASE/(DECREASE) IN CASH 5,180 (4,186) 4,513
CASH, beginning of year 2,886 7,072 2,559
--------- --------- ---------
CASH, end of year $ 8,066 $ 2,886 $ 7,072
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
VISTA EYECARE, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS
Vista Eyecare, Inc. (the "Company") is engaged in the retail sale of
optical goods and services. The Company is largely dependent on Wal-Mart Stores,
Inc. ("Wal-Mart") for continued operation of vision centers which generate a
significant portion of the Company's revenues (See Note 7). In October 1997, the
Company acquired the capital stock of Midwest Vision, Inc., a retail optical
company with 51 locations in Minnesota and three adjoining states. In July 1998,
the Company acquired the capital stock of Frame-n-Lens Optical, Inc., which
operated approximately 280 vision centers, mainly in the western United States.
In October 1998, the Company acquired the capital stock of New West Eyeworks,
Inc. which operated approximately 175 vision centers in 13 states (See Note 8).
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation. The Company operates on a 52/53 week
retail calendar with the fiscal year ending on the Saturday closest to December
31. Pursuant to such calendar, financial information for 1998 is presented for
the 52-week period ended January 2. Due to various statutory and other
considerations, international operations do not operate on this 52/53 week
calendar. To allow for more timely consolidation and reporting, international
operations are reported using a fiscal year ending November 30.
Certain amounts in the financial statements have been reclassified to
conform to the current year presentation.
Revenue Recognition
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.
Cash and Cash Equivalents
The Company considers cash on hand and short-term cash investments to be
cash and cash equivalents. The Company's policy is to maintain uninvested cash
at minimal levels. Cash includes cash equivalents which represent highly liquid
investments with a maturity of one month or less. The Company restricts
investment of temporary cash investments to financial institutions with high
credit standings.
F-8
Inventories
Inventories are valued at the lower of weighted average cost or market.
Market represents the net realizable value.
Property and Equipment
Property and equipment are stated at cost. For financial reporting
purposes, depreciation is computed using the straight-line method over the
assets' estimated useful lives or terms of the related leases, whichever is
shorter. Accelerated depreciation methods are used for income tax reporting
purposes. For financial reporting purposes, the useful lives used for
computation of depreciation range from five to ten years for equipment, from
three to nine years for furniture and fixtures, from three to six years for
hardware and software related to information systems processing, and from five
to nine years which approximate the remaining lease term for leasehold
improvements. At the time property and equipment are retired, the cost and
related accumulated depreciation are removed from the accounts and any gain or
loss is credited or charged to income. Periodically, the Company evaluates the
net book value of property and equipment for impairment. This evaluation is
performed for retail locations and compares management's best estimate of future
cash flows with the net book value of the property and equipment. (See Note 4
for a discussion of impaired property and equipment.) Maintenance and repairs
are charged to expense as incurred. Replacements and improvements are
capitalized.
Balance Sheet Financial Instruments: Fair Values
The carrying amounts reported in the consolidated balance sheets for cash,
accounts receivable, accounts payable and short-term debt approximates fair
value because of the immediate or short-term maturity of these financial
instruments. The carrying amount reported for "Revolving Credit Facility and
Term Loan" approximates fair value because the underlying instrument is a
variable rate note that reprices frequently.
Liabilities Subject to Compromise refers to liabilities incurred prior to
the commencement of the Chapter 11 Cases (See Note 4). The settlement of these
liabilities will be determined in a court-approved plan of reorganization. In
March 2001, the Company filed a plan of reorganization which will result in the
settlement of these liabilities at less than 100% of face value. No adjustment
to these liabilities has been made in the December 30, 2000 financial statements
as the proposed plan of reorganization has yet to be approved.
The Company is party to letters of credit totaling $4.5 million and $2.2
million at December 30, 2000 and January 1, 2000, respectively. In the Company's
past experience, virtually no claims have been made against these financial
instruments. Management does not expect any material losses to result from these
off-balance-sheet instruments because performance is not expected to be
required. Therefore, management is of the opinion that the fair value of these
instruments is zero.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade accounts receivable.
The risk is limited due to the large number of individuals and entities
comprising the Company's customer base.
F-9
Goodwill and other Intangible Assets
Goodwill and other intangible assets represent the excess of the cost of
net assets acquired in certain contract transactions and business acquisitions
over their fair value. Such amounts are amortized over periods ranging from 11
years to 30 years. The Company periodically evaluates the carrying value of
goodwill and other intangible assets based on the expected future undiscounted
operating cash flows of the related business unit. (See Note 5 for a discussion
of goodwill impairments in 2000.)
Income Taxes
Deferred income taxes are recorded using current enacted tax laws and
rates. Deferred income taxes are provided for depreciation, inventory basis
differences, and accrued expenses where there is a temporary difference in
recording such items for financial reporting and income tax reporting purposes.
Other Deferred Costs
Other deferred costs include capitalized financing costs which are being
amortized on a straight line basis over periods from one to seven years to
correspond with the terms of the underlying debt. In addition, certain
capitalized assets resulting from contractual obligations are included and are
being amortized on a straight line basis over periods of up to five years.
Certain deferred financing costs which relate to pre-petition debt are no longer
being amortized. When the related pre-petition debt is approved as an allowed
claim by the Bankruptcy Court, these deferred costs will adjust the carrying
value of the related debt. Any gain or loss will be recognized as a
reorganization item at that time.
Advertising and Promotion Expense
Production costs of future media advertising and related promotion
campaigns are deferred until the advertising events occur. All other advertising
and promotion costs are expensed over the course of the year in which they are
incurred.
Interest Expense, Net
Interest expense includes interest on debt and capital lease obligations,
purchase discounts on invoice payments, the amortization of finance fees, and
the amortization of the discount on the senior notes. The Company has stopped
accruing interest on unsecured debt until the Company emerges from Chapter 11,
or it becomes probable that the Company will pay these amounts as part of a
reorganization plan.
Foreign Currency Translation
The financial statements of foreign subsidiaries are translated into U.S.
dollars in accordance with Statement of Financial Accounting Standards No. 52
("SFAS 52"). Translation adjustments, which result from the process of
translating foreign financial statements into U.S. dollars, were not material
for the years ended December 30, 2000 or January 1, 2000.
Derivative Instruments and Hedging Activities
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities". The Company's adoption of SFAS 133 in 2000
had no impact on the Company's financial statements as the Company did not hold
derivative instruments, nor participate in hedging activities during the
reporting period.
F-10
Other Comprehensive Income
In July 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income". The statement addresses the reporting and display of changes in equity
that result from transactions and other economic events, excluding transactions
with owners. The adoption of SFAS No. 130 did not have a material impact on the
Company's financial statements, as comprehensive income was equal to net income
in 2000, 1999 and 1998.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. BANKRUPTCY PROCEEDINGS 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 State Bankruptcy Court
for the Northern District of Georgia for reorganization under Chapter 11 (the
"Chapter 11 Cases"). The Chapter 11 Cases have been consolidated for the purpose
of joint administration under Case No. 00-65214. The Debtors are currently
operating their businesses as debtors-in-possession pursuant to the Bankruptcy
Code. All affiliated entities of the Company are included in the Chapter 11
Cases, except only (a) three subsidiaries which are licensed managed care
organizations and (b) foreign subsidiaries of the Company.
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.
As a result of the Chapter 11 filings, absent approval of the Bankruptcy
Court, the Company is prohibited from paying, and creditors are prohibited from
attempting to collect, claims or debts arising prior to April 5,2000 (See Note
10). We may assume or reject certain contracts which were signed before the date
the Debtors filed the Bankruptcy petition. Rejected contracts will generate
unsecured claims in the Chapter 11 Cases. To assume contracts, we will have to
cure any outstanding defaults. We believe that, as part of our reorganization
plan, the Company will be able to assume the contracts it desires to continue.
F-11
Because of our operating losses and the changes we recorded in 2000, (See
Note 5), we do not meet certain requirements contained in some of our contracts.
We anticipate that, as part of our reorganization plan, we will meet these
requirements upon emergence from Chapter 11.
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.
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. The
consolidated financial statements do not include any adjustments relating to
recoverability and classification of recorded asset amounts or the amount and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
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, except as discussed in Note 5.
4. 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.
F-12
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)
December 30, 2000
-----------------
Accounts payable $ 25,856
Accrued expenses 2,717
Provision for rejected contracts 3,142
Senior notes, net of discount including $7,480
accrued interest 131,266
Other long-term debt and capital lease obligations 7,843
--------
$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.
5. REORGANIZATION ITEMS, RESTRUCTURING EXPENSES AND IMPAIRMENT OF LONG-LIVED
ASSETS.
General
In the last quarter of 1999 and in fiscal 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.
F-13
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 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
====== ======
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 fiscal 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)
2000
-------------
Impairment of goodwill $ 100,805
Impairment of fixed assets 12,000
Provision for rejected leases 1,920
Other store closing costs 670
Professional fees 3,421
Retention bonuses 2,173
Interest income on accumulated cash (144)
Other reorganization costs 694
---------
$ 121,539
=========
The following represents activity in the restructuring and reorganization
provisions during 2000: (amounts in thousands)
Accrued at
Charged to expense Paid December 30, 2000
------------------ ---- -----------------
Restructuring and
reorganization items $8,505 $3,778 $4,727
F-14
Impairment of Long-Lived Assets
Due to continuing negative cash flows, coupled with the possible sale or
disposition of certain Company assets, we 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 terminated ten leases governing all of the Company's units
located in Meijer Thrifty Acre locations. The Company recorded a noncash pre-tax
charge of $987,000 in 2000 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. The Company recorded a noncash pre-tax charge of $367,000
related to the impairment of leasehold improvements and furniture and fixtures
in the Sam's Club locations.
A summary of the impairment charges recorded since filing the Chapter 11
Cases 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
Sam's Club 367
--------
Total fixed asset impairment $ 12,000
========
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 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.
F-15
6. SUBSEQUENT EVENTS
In March 2001, the Company filed a plan of reorganization with the
Bankruptcy Court. Major provisions of the plan are as follows:
o Unsecured creditors will receive 12% secured notes with a face value of
$120 million and equity in the Reorganized Company. This proposed
settlement is less than 100% of the face value of this debt.
o The existing Common Stock will be cancelled and current shareholders will
not receive a distribution for their interests.
o The freestanding operations will be disposed of either by sale or
abandonment, prior to emergence from Bankruptcy.
In February 2001, the Company signed a purchase agreement to sell the
assets of its freestanding locations and the Fullerton, California laboratory
for $8.5 million. The sale is expected to close in April 2001.
Freestanding operations include the remaining 226 freestanding locations
acquired from Midwest Vision, Inc. ("Midwest"), Frame-n-Lens Optical, Inc.
("Frame-n-Lens"), and New West Eyeworks, Inc. ("New West") and the Fullerton,
California laboratory and administrative facility. The assets to be disposed of
consist primarily of inventory, fixed assets and a California HMO license. The
principal liability of this division is rent obligations that will either be
assumed by the purchaser or rejected through the Company's Chapter 11
proceedings.
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.
2000 1999 1998
-------- -------- --------
Net sales $246,915 $247,875 $209,220
Gross profit $133,481 $134,057 $112,509
Operating income $ 13,493 $ 12,230 $ 11,424
EBITDA prior to significant provisions $ 25,833 $ 26,021 $ 23,751
EDITDA 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, Cumulative Effect and the 1999 provisions for receivables
of $1.3 million.
7. WAL-MART MASTER LICENSE AGREEMENT AND OTHER AGREEMENTS
Wal-Mart Agreement
------------------
In 1994, the Company and Wal-Mart replaced their original agreement with a
new master license agreement (the "Wal-Mart Agreement"), which increased minimum
and percentage license fees payable by the Company and also granted the Company
the opportunity to operate up to 400 vision centers in existing and future
Wal-Mart stores (395 vision centers were in operation under the Wal-Mart
Agreement at fiscal year end 2000). In January 1995, the Company made a lump sum
payment in exchange for such opportunity. The payment is being amortized over
the initial term of the vision centers opened subsequent to January 1, 1995.
Each vision center covered by the Wal-Mart Agreement has a separate license.
Pursuant to the Wal-Mart Agreement, the term of each such license is nine years
with a renewable option for one additional three-year term. Percentage license
fees remain the same over the nine-year base term and three- year option term,
whereas minimum license fees increase during the three-year option term.
F-16
Consulting and Management Agreement
-----------------------------------
Among other things, the Wal-Mart Agreement requires an independent,
licensed optometrist to practice adjacent to or near each of the Company's
vision centers for at least 48 hours per week. In 1990, the Company entered into
a long-term consulting and management service agreement, as amended, with two
companies (Eyecare Leasing, Inc. ("ELI") and Stewart-Phillips, Inc. ("SPI"))
jointly owned by two shareholders to recruit such optometrists for certain of
its vision centers. Subject to applicable state regulations, this agreement,
among other things, required the Company to provide space and certain equipment
to the optometrists for which the optometrists pay the Company an occupancy fee.
In exchange for their services, ELI and SPI received certain fees under the
agreement. The net payments offset occupancy expense incurred by the Company.
Occupancy expense is a component of cost of goods sold.
In January 1997, the Company completed various transactions related to its
relationship with each of ELI and SPI. The transactions involved the termination
of such consulting agreement and transfer of the responsibilities of ELI and SPI
to a subsidiary of the Company. As a result of these transactions, the Company
acquired the right to the payments which otherwise would have been made to ELI
and SPI under the consulting agreement. The aggregate cost of the transactions
was $4.6 million, which was capitalized as an intangible asset and is being
amortized over the remaining life of the original term of vision center leases.
The Company made a lump sum payment of $500,000 at closing and entered into
promissory obligations for the balance, payable over a 12-year period at 6.4%
interest.
Mexico Agreement
----------------
In 1994, the Company opened 8 vision centers in stores owned and operated
by Wal-Mart de Mexico, S.A. de C.V. ("Wal-Mart de Mexico"). In 1995, the Company
completed the negotiation of a master license agreement governing these vision
centers. Pursuant to this agreement, each vision center has an individual base
term of five years from the date of opening, followed by two options (each for
two years), and one option for one year. Each party has the right to terminate a
location which fails to meet specified sales levels. The agreement provides for
annual fees based on a minimum and percentage of sales. The agreement also gives
the Company a right of first refusal to open vision centers in all stores in
Mexico owned by Wal-Mart de Mexico. As of December 30, 2000, the Company
operated 27 vision centers in Wal-Mart de Mexico stores.
Fred Meyer
----------
The Company operates 56 leased vision centers in stores owned by Fred Meyer
pursuant to a master license agreement. The agreement provides for minimum and
percentage rent and other customary terms and conditions. The term of the
agreement is for five years (expiring December 31, 2003), with a five-year
option.
F-17
8. ACQUISITIONS
On July 28, 1998, the Company acquired all the outstanding capital stock of
Frame-n-Lens Optical, Inc. ("Frame-n-Lens") in a transaction accounted for as a
purchase business combination. Prior to the acquisition, Frame-n-Lens operated
approximately 280 retail optical centers in 23 states. The aggregate purchase
price was $50 million of which $23 million was paid in cash and additional
borrowings from the Company's credit facilities, $24 million was assumed in debt
and liabilities, and $3 million was established as a deferred purchase
obligation to be paid in quarterly installments over six years.
The Company has deposited installment payments of the deferred purchase
obligation into a separate company bank account. As of December 30, 2000, the
Company had deposited a total of $914,000 which is included in the Company's
cash balance. The Company has the right to withhold payment of the deferred
purchase obligation based upon the identification of any undisclosed
liabilities. The Company is currently defending a class-action lawsuit which was
filed against Frame-n-Lens and which was not disclosed to the Company at the
time of acquisition. Although management cannot predict the outcome of this
litigation, we believe that the amount accrued for the deferred purchase
obligation will be sufficient to cover any costs incurred related to this
lawsuit.
The excess of cost over fair value of assets acquired was $41 million, and
was being amortized over 30 years using the straight-line method. In the third
quarter of 2000, the Company determined that the goodwill associated with the
Frame-n-Lens acquisition was impaired, resulting in a charge of $38.3 million in
2000. Frame-n-Lens' financial position and results of operations are included
with those of the Company for the periods subsequent to the date of the
acquisition. In November 2000, the Company decided to dispose of the remaining
locations acquired from Frame-n-Lens. (See Note 6.)
On October 23, 1998, the Company acquired all the outstanding capital stock
of New West Eyeworks, Inc. ("New West") in a transaction accounted for as a
purchase business combination. Prior to the acquisition, New West operated
approximately 175 retail optical centers in 13 states. The aggregate purchase
price was $79 million, including the assumption of certain indebtedness and
acquisition-related expenses which were paid with a portion of the proceeds of
the Company's 12 3/4% Senior Notes due 2005 (the "Notes") (See Note 10 to
Consolidated Financial Statements). In September 1999, the Company sold the
Tempe manufacturing facility acquired from New West Eyeworks for approximately
$1 million.
The excess of cost over fair value of the assets acquired was $64 million
and was being amortized over 30 years using the straight-line method. In the
third quarter of 2000, the Company determined that the goodwill associated with
the New West acquisition was impaired, resulting in a charge of $60.6 million in
2000. New West's financial position and results of operations are included with
those of the Company in the period subsequent to the date of the acquisition. In
November 2000, the Company decided to dispose of the freestanding locations
acquired from New West. (See Note 6.)
F-18
The following summary prepared on an unaudited basis presents the results
of operations of the Company combined with Frame-n-Lens and New West as if the
acquisitions had occurred at the beginning of 1998, after the impact of certain
adjustments. These adjustments include 1) the cost savings related to the
consolidation of duplicative manufacturing and administrative support
facilities, 2) the amortization of goodwill, 3) increased interest expense on
the acquisition debt, 4) elimination of interest on debt repaid with proceeds
from the Notes, and 5) the related income tax effects: (amounts in thousands,
except per share amounts)
January 2,
1999
(unaudited)
-----------
Net sales $ 325,670
Operating income $ 15,831
Net loss $ (2,811)
Loss per share $ (0.13)
- --------------------------------------------------------------------------------
The pro forma results are not necessarily indicative of what actually would
have occurred if the acquisitions had occurred as of the beginning of the period
presented.
In October 1997, the Company acquired all the outstanding common stock of
Midwest Vision, Inc. ("Midwest") in a transaction accounted for as a purchase
business combination. Midwest's financial position and results of operations are
included with those of the Company in the period subsequent to the date of
acquisition. Prior to the acquisition, Midwest operated 51 retail optical
centers in Minnesota, Wisconsin, Iowa and North Dakota. The aggregate purchase
price was approximately $5 million, including assumed long-term debt of
approximately $1 million. The excess of cost over fair value of the assets
acquired was $2 million and was being amortized on a straight-line basis over 15
years. In the third quarter of 2000, the Company determined that the goodwill
associated with the Midwest acquisition was impaired, resulting in a charge of
$1.9 million in 2000.
The purchase price was paid in cash of $2 million, a note payable of $0.6
million and 110,975 shares of the Company's common stock. In addition, the
Company issued a put option to the seller, entitling the seller to put 100,000
of such shares to the Company at $9.00 per share in January 2000. Subsequent to
January 1, 2000, the seller exercised the put option. The Company has not paid
this obligation. Any claims asserted by the seller will be addressed during the
Company's Chapter 11 proceedings. The additional obligation has been reflected
in Liabilities Subject to Compromise in the Consolidated Balance Sheets.
9. INVENTORY
The Company classifies inventory as finished goods if such inventory is
readily available for sale to customers without assembly or value added
processing. Finished goods include contact lenses, over the counter sunglasses
and accessories. The Company classifies inventory as raw materials if such
inventory requires assembly or value added processing. This would include
grinding a lens blank, "cutting" the lens in accordance with a prescription from
an optometrist, and fitting the lens in a frame. Frames and uncut lens are
considered raw materials. A majority of the Company's sales represent custom
orders; consequently, the majority of the Company's inventory is classified as
raw materials.
F-19
Inventory balances, by classification, may be summarized as follows:
(amounts in thousands)
2000 1999
--------- ---------
Raw materials $ 22,175 $ 24,408
Finished goods 8,153 8,804
Supplies 1,150 1,161
--------- ---------
$ 31,478 $ 34,373
========= =========
10. LONG-TERM DEBT
All of the Company's unsecured debt is considered part of Liabilities
Subject to Compromise in the Consolidated Balance Sheets (See Note 4) and may be
settled at less than face value. All interest accruals and payments on unsecured
debt were suspended upon filing the Chapter 11 Cases. No principal or interest
payments will be made on unsecured debt until approved by the Bankruptcy Court.
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 December 30, 2000, the Company had borrowed a total of $12.9
million (inclusive of the $12.5 million term loan portion) under the DIP
Facility.
The DIP Facility expires on May 31, 2001. The DIP Facility further provides
that:
o 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.
o The $12.5 million term loan portion of the DIP Facility bears interest at
15% per annum.
o 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%.
o Availability under the DIP Facility is limited to certain percentages of
accounts receivable and inventory, subject to other limitations based on
rolling 60-day cash collections.
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.
F-20
The Company believes that the DIP Facility should provide it with adequate
liquidity to conduct its operations while it awaits confirmation of its
reorganization plan. The Company is currently working with Foothill to establish
a revolving credit facility which will be available upon exiting from bankruptcy
(the "Exit Facility"). The Exit Facility will replace the current DIP Facility
and should provide the Company with adequate liquidity to conduct its operations
upon emergence from bankruptcy. However, the Company's liquidity, capital
resources, results of operations and ability to continue as a going concern are
subject to known and unknown risks and uncertainties.
Foothill Credit Facility
------------------------
On November 12, 1999, the Company replaced its prior secured credit
facility with a new $25.0 million secured credit facility with Foothill Capital
Corporation (the "Foothill Credit Facility"). The Foothill Credit Facility
consists of a $12.5 million term loan and a $12.5 million revolver.
The proceeds of the Foothill Credit Facility were available for making the
October 15, 1999 payment under the Senior Notes, refinancing existing debt,
working capital, and general corporate purposes. All obligations of the Company
under the Foothill Credit Facility were unconditionally and irrevocably
guaranteed jointly and severally by certain of the Company's subsidiaries.
The revolver under the Foothill Credit Facility carried interest rates
equal to, at the option of the Company, either (i) Foothill's Reference Rate
plus 2.00% or (ii) the LIBOR rate plus 3.25%. The term loan portion bore
interest at the rate of 15% per annum.
The Company filed for protection under Chapter 11 of the Bankruptcy Code on
April 5, 2000 and negotiated with Foothill to establish the DIP Facility. The
DIP Facility, which was approved by the Bankruptcy Court in May 2000, replaced
the Foothill Credit Facility.
The Company paid approximately $715,000 and $811,000 in various fees
related to its various credit facilities in 2000 and 1999, respectively.
Senior Notes
------------
On October 8, 1998, the Company issued $125 million 12 3/4% Senior Notes
due 2005 (the "Notes") pursuant to Rule 144A of the Securities Act. The Notes,
which were sold at a discount for an aggregate price of $123.6 million, require
semiannual interest payments commencing on April 15, 1999. The Notes were issued
pursuant to an indenture containing customary provisions including: limitations
on incurrence of additional indebtedness; limitations on restricted payments;
limitations on asset sales; payment restrictions affecting subsidiaries;
limitations on liens; limitations on transactions with affiliates; and other
customary terms.
A portion of the proceeds from the Notes was utilized to extinguish
outstanding indebtedness on the Company's existing credit facility (such credit
facility was terminated simultaneously with the repayment), with the remainder
to be utilized to complete the acquisition of New West and pay for miscellaneous
expenses related to the acquisitions of Frame-n-Lens and New West.
F-21
In anticipation of the Notes offering, the Company 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%. The Company settled these transactions for
approximately $4.6 million. The settlement costs were being treated as deferred
financing costs amortized over the life of the Notes; however, the Company
stopped amortizing these deferred financing costs upon filing the Chapter 11
Cases. When the senior notes are approved as an allowed claim by the Bankruptcy
Court, these deferred financing costs, along with the Bond discount of $1.2
million, will adjust the carrying value of the notes to the allowed value. Any
gain or loss will be recognized as a reorganization item at that time.
Unsecured Notes
---------------
The Company entered into unsecured promissory notes relative to various
transactions completed with the Frame-n-Lens and New West acquisitions in 1998
and the ELI and Midwest Vision acquisitions in 1997 (See Note 8). The notes are
fixed rate instruments, with rates ranging from 6.4% to 8.5%. The future
scheduled contractual principal payments for the Company's borrowings (which are
subject to being restructured in connection with the Chapter 11 Cases) were as
follows at December 30, 2000: (amounts in thousands)
Contractual
Principal Payments
------------------
2001 $ 14,303
2002 545
2003 373
2004 373
2005 373
Thereafter 128,752
-----------
$ 144,719
===========
Long-Term Debt Balances
-----------------------
Long-term debt obligations, exclusive of capital lease obligations, at
December 30, 2000 and January 1, 2000 consisted of the following: (amounts in
thousands)
2000 1999
--------- ----------
12 3/4% Senior Notes Due 2005 $125,000 $ 125,000
Discount on 12 3/4 % Senior Notes (1,214) (1,253)
Borrowings under Foothill Credit Facility -- 19,292
Borrowings under DIP Facility 12,911 --
Other promissory notes 6,808 7,586
--------- ---------
$143,505 $ 150,625
Less: Borrowings not subject to compromise
classified as current 12,911 20,154
--------- ---------
Long-term debt subject to compromise $130,594 $ 130,471
========= =========
As of December 30, 2000, the Company had borrowed $12.9 million under the
DIP Facility at a weighted average interest rate of 15%. The aggregate fair
value of the Company's long-term debt obligation under the DIP Facility is
estimated to approximate its carrying value.
F-22
11. EXTRAORDINARY ITEM
In 2000, the Company recorded an extraordinary loss of $827,000 as a result
of refinancing the Company's Foothill Credit Facility. In 1999, the Company
recorded an extraordinary loss of $406,000 as a result of refinancing the
previous secured credit facility. Both refinancings necessitated the write-off
of capitalized costs associated with the previous facilities. Because of the
Company's decision to fully reserve for the Company's 2000 and 1999 tax benefit,
the net tax effect on these extraordinary items is zero.
12. FINANCIAL INFORMATION OF GUARANTORS
The Company's wholly owned domestic subsidiaries, Midwest Vision, Inc.;
NVAL Healthcare Systems, Inc.; International Vision Associates, Ltd.;
Frame-n-Lens Optical, Inc.; Vision Administrators, Inc.; Family Vision Centers,
Inc.; New West Eyeworks, Inc.; Alexis Holdings Company, Inc.; and Vista Eyecare
Network, LLC (collectively, the "Guarantors"), have guaranteed on a senior
unsecured basis, jointly and severally, the payment of the principal of,
premium, if any, and interest on the Notes. Combined summarized financial
information of the Guarantors is presented below: (amounts in thousands)
For the years ending: December 30, 2000 January 1, 2000 January 2, 1999
----------------- --------------- ---------------
Net sales $ 77,004 $ 123,090 $ 49,904
Gross profit $ 41,772 $ 63,747 $ 21,545
Net loss $ (133,126) $ (10,151) $ (2,861)
December 30, 2000 January 1, 2000 January 2, 1999
------------------ --------------- ---------------
Current assets $ 13,963 $ 14,287 $ 22,080
Noncurrent assets $ 2,989 $ 16,574 $ 15,832
Current liabilities $ 3,288 $ 25,742 $ 18,979
Noncurrent liabilities $ 3,554 $ 3,265 $ 3,748
13. COMMITMENTS AND CONTINGENCIES
The Company incurred liabilities prior to the commencement of the Chapter
11 Cases (Liabilities Subject to Compromise), including claims arising out of
rejections of leases 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. As part of the disposition of the freestanding
locations, the Company expects to either assign or reject all freestanding
location leases, including the Fullerton, California facility lease.
F-23
Non-cancellable Operating Lease and License Agreements
------------------------------------------------------
As of December 30, 2000, the Company is a lessee under non-cancellable
operating lease agreements for certain equipment which expire at various dates
through 2003. Additionally, the Company is required to pay minimum and
percentage license fees pursuant to certain commercial leases and pursuant to
its agreements with its host store companies.
Effective December 20, 1991, the Company entered into a lease agreement
with Wal-Mart for approximately 66,000 square feet of corporate office space.
The term of the lease is ten years with a renewal option of seven years. The
Company paid Wal-Mart approximately $215,000 annually in rental fees in 2000,
1999 and 1998.
In connection with its acquisition of Midwest Vision, Inc. (See Note 8),
the Company entered into a ten-year lease for administrative headquarters and an
optical laboratory located in St. Cloud, Minnesota. The facility is leased from
the former owner of Midwest Vision. Lease expense on the headquarters and
laboratory is approximately $6,667 monthly which, in the opinion of management,
represents a fair market lease rate. Additionally, the Company assumed operating
lease agreements in connection with 51 freestanding locations obtained from the
acquisition. Lease expense on these leases is approximately $64,000 monthly.
In connection with its acquisitions of Frame-n-Lens and New West (See Note
8), the Company assumed operating lease agreements in connection with
approximately 280 and 175 vision centers, respectively, obtained from the
acquisitions. Through the Frame-n-Lens acquisition, the Company assumed a lease
for a manufacturing and distribution facility located in Fullerton, California.
This facility is subject to a lease with a term expiring on August 31, 2006.
Lease expense is $408,000 annually for this facility.
Aggregate future minimum payments under the license and lease arrangements
that will not be assigned or rejected in the Bankruptcy proceedings are as
follows: (amounts in thousands)
Fiscal Year Leases Leases
----------- ------ ------
2001 $ 131 $ 21,026
2002 12 18,188
2003 - 10,567
2004 - 6,307
2005 - 4,778
Thereafter - 6,336
------ ---------
Total minimum lease payments 143 $ 67,202
Less amounts representing interest 7 =========
------
Present value of minimum capital lease
payments 136
Less current installments of obligations
under capital leases 124
------
Obligations under capital leases
excluding current installments $ 12
======
F-24
Total rental expenses related to cancellable and non-cancellable operating
leases were approximately $41.0 million, $43.1 million and $30.1 million for the
years ended December 30, 2000, January 1, 2000 and January 2, 1999,
respectively.
Guy Laroche and Gitano Trademark Licenses
-----------------------------------------
The Company has a license agreement with Guy Laroche of North America,
Inc., giving the Company the right to use the trademark "Guy Laroche" in its
vision centers in North America. The agreement requires the Company to pay
minimum and percentage royalties on retail and wholesale sales. The Guy Laroche
agreement, as amended, expires on December 31, 2001. Under the Guy Laroche
agreement, the Company paid $310,000, $310,000 and $389,000 in fees during 2000,
1999 and 1998, respectively.
In 2000, 1999 and 1998, the Company paid $34,000, $53,000, and $96,000,
respectively, in fees to Gitano, Inc. and its successors in connection with a
license agreement which gave the Company the right to use the "Gitano" trademark
in its vision centers.
Change in Control and Other Arrangements
----------------------------------------
There are agreements between the Company and twelve of its officers which
provide severance benefits in the event of termination of employment under
certain circumstances following a change in control of the Company (as defined).
The circumstances are termination by the Company other than because of death or
disability commencing prior to a threatened change in control (as defined), or
for cause (as defined), or by the officer as the result of a voluntary
termination (as defined). Following any such termination, in addition to
compensation and benefits already earned, the officer will be entitled to
receive a lump sum severance payment equal to up to three times the officer's
annual rate of base salary. The term of each agreement is for a rolling
three-years unless the Company gives notice that it does not wish to extend such
term, in which case the term of the agreement would expire three years from the
date of the notice.
14. INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards (SFAS No. 109) "Accounting for Income Taxes," which
requires the use of the liability method of accounting for deferred income
taxes. The components of the net deferred tax assets are as follows: (amounts in
thousands)
December 30, January 1,
2000 2000
---------------- ----------------
Total deferred tax liabilities $ (6,053) $ (8,980)
Total deferred tax assets 23,773 17,918
Valuation allowance (17,335) (8,553)
--------- ---------
Net deferred tax asset $ 385 $ 385
========== =========
F-25
The sources of the difference between the financial accounting and tax
basis of the Company's liabilities and assets which give rise to the deferred
tax liabilities and deferred tax assets and the tax effects of each are as
follows: (amounts in thousands)
December 30, January 1,
2000 2000
---------------- ----------------
Deferred tax liabilities:
Depreciation $ 2,875 $ 4,935
Reserve for foreign losses 2,218 2,218
Other 960 1,827
--------- ---------
$ 6,053 $ 8,980
========= =========
Deferred tax assets:
Accrued expenses and reserves $ 5,929 $ 3,206
Inventory basis differences 334 171
Net operating loss carryforwards 14,222 10,698
Alternative minimum tax 2,062 2,062
Other 1,226 1,781
--------- ---------
$ 23,773 $ 17,918
========= =========
The consolidated provision for income taxes consists of the following:
(amounts in thousands)
Year Ended
-------------------------------------------
December 30, January 1, January 2,
2000 2000 1999
---- ---- ----
Current:
Federal $ 0 $ 0 $ 1,426
State 0 0 191
-------- ------- --------
0 0 1,617
-------- ------- --------
Deferred:
Federal 0 0 338
State 0 0 82
-------- ------- --------
0 0 420
-------- ------- --------
Total Provision for Income $ 0 $ 0 $ 2,037
Taxes ======== ======= ========
F-26
The tax expense differs from the amounts resulting from multiplying income
before income taxes by the statutory federal income tax rate for the following
reasons: (amounts in thousands)
Year Ended
-------------------------------------------------
December 30, January 1, January 2,
2000 2000 1999
---------- ---------- ----------
Federal income tax/(benefit) provision at statutory rate $(46,148) $ (5,971) $ 1,853
State income taxes, net of federal income tax benefit (3,393) (439) 180
Foreign losses not deductible for U.S. federal tax purposes 13 3 37
Change in valuation allowance for U.S. federal and state taxes 8,782 5,182 (548)
Nondeductible goodwill 38,640 1,425 292
Other, net 2,106 (200) 223
-------- -------- -------
$ 0 $ 0 $ 2,037
======== ======== =======
At December 30, 2000, the Company had U.S. regular tax net operating loss
carryforwards of approximately $37.4 million that can reduce future federal
income taxes. If not utilized, these carryforwards will expire beginning in
2007. The Company also has non-expiring alternative minimum tax credit
carryforwards of $2.1 million available to offset future regular taxes.
On July 28, 1998, the Company acquired all of the outstanding capital stock
of Frame-n-Lens. The Company accounted for the acquisition as a purchase, with
the excess of the purchase price over the fair value of the net assets acquired
to be allocated to goodwill. Frame-n-Lens had net operating loss carryforwards
of $1.4 million.
On October 25, 1998, the Company acquired all of the outstanding common
stock and common stock equivalents of New West. The Company accounted for the
acquisition as a purchase, with the excess of the purchase price over the fair
value of the net assets acquired to be allocated to goodwill. New West had net
operating loss carryforwards of $5.5 million and $4.9 million for regular tax
and alternative minimum tax purposes, respectively, which begin to expire in
2006. These net operating losses are subject to limitations from a prior
ownership change.
As a result of an examination by the Internal Revenue Service ("IRS") of
the Company's 1992 tax return, the Company adjusted its net operating
carryforward loss by $314,000. The agreement between the Company and the IRS was
reached in February 1998 for which no income tax was due or receivable. The
Company reduced its valuation allowance by approximately $3.3 million and
increased additional paid-in-capital for this benefit.
At December 30, 2000, the Company recorded an additional valuation
allowance of $8.8 million due to the uncertainty of the realizability of the
current year net operating losses.
The Company's net operating loss carryforwards of $37.4 million at December
30, 2000, could be limited in the event of a greater than 50% change in stock
ownership of the Company. The limitation would be based on the stock value and
the Federal Exempt Tax Rate on the date of ownership change. These limitations
could create a cap on the amount of the NOLs that would be deductible each year
going forward until the amount is depleted or the time limitation on the NOLs
expires.
In Mexico, the location of the Company's foreign operations, the Company
pays the greater of its income tax or an asset tax. Because the Company has
operating losses in Mexico, the Company pays no income tax, but it is subject to
the asset tax. Therefore, no provision for income taxes has been made on the
Company's books for its operations in Mexico.
F-27
15. EARNINGS PER COMMON SHARE
Basic earnings per common share are computed by dividing net income by the
weighted average number of common shares outstanding during the year. Diluted
earnings per common share are 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)
2000 1999 1998
----------- ---------- ----------
Earnings/(loss) before extraordinary loss and Cumulative Effect
and change in accounting principle $ (135,675) $ (17,156) $ 3,414
Extraordinary loss, net (827) (406) 0
Cumulative effect, net (3,378) 0 0
----------- ---------- ----------
Net earnings/(loss) $ (139,880) $ (17,562) $ 3,414
=========== ========== ==========
Weighted shares outstanding 21,169 21,068 20,949
Basic earnings/(loss) per share:
Earnings/(loss) before extraordinary Item and cumulative effect $ (6.41) $ (0.81) $ 0.16
Loss from extraordinary item (0.04) (0.02) 0.00
Loss from cumulative effect (0.16) 0.00 0.00
----------- ---------- ----------
Net earnings/(loss) per basic share $ (6.61) $ (0.83) $ 0.16
=========== ========== ==========
Weighted shares outstanding 21,169 21,068 20,949
Impact of dilutive options held by employees 0 110 285
----------- ---------- ----------
Aggregate shares outstanding 21,169 21,178 21,234
=========== ========== ==========
Diluted earnings/(loss) per share:
Earnings/(loss) before extraordinary item and cumulative effect $ (6.41) $ (0.81) $ 0.16
Loss from extraordinary item (0.04) (0.02) 0.00
Loss from cumulative effect (0.16) 0.00 0.00
----------- ---------- ----------
Net earnings/(loss) per diluted share $ (6.61) $ (0.83) $ 0.16
=========== ========== ==========
Outstanding options with an exercise price below the average price of the
Company's common stock have been included in the computation of diluted earnings
per common share, using the treasury stock method, as of the date of the grant.
In 1999, these options have been excluded from the calculation due to their
anti-dilutive effect.
F-28
16. SUPPLEMENTAL DISCLOSURE INFORMATION
Supplemental disclosure information is as follows: (amounts in thousands)
(i) Supplemental Cash Flow Information
2000 1999 1998
---- ---- ----
Cash paid for
Interest $ 2,729 $17,826 $2,257
Income taxes - 495 1,918
(ii) Supplemental Noncash Investing and Financial Activities
The following information relates to the Frame-n-Lens and New West
acquisitions in 1998 (See Note 8).
1998
--------
Business acquisitions, net of cash acquired
Fair value of assets acquired $ 30,240
Purchase price in excess of net assets acquired 104,813
Liabilities assumed (37,696)
---------
Net cash paid for acquisitions $ 97,357
=========
(iii) Supplemental Balance Sheet Information
Significant components of accrued expenses and other current liabilities
may be summarized as follows:
2000 1999
--------- --------
Accrued employee compensation and benefits $ 5,859 $ 6,343
Accrued rent expense 3,758 4,047
Accrued acquisition expenses 546 1,678
Accrued capital expenditures - 1,345
Customer deposit liability (See Note 2) 3,282 -
(iv) Supplemental Income Statement Information
The components of interest expense, net, may be summarized as follows:
2000 1999 1998
--------- -------- --------
Interest expense on debt and capital leases $ 6,902 $ 18,306 $ 5,721
Purchase discounts on invoice payments (86) (37) (509)
Finance fees 881 1,158 407
Interest income - (73) (86)
Other 26 (25) 5
--------- -------- --------
$ 7,723 $ 19,329 $ 5,538
========= ========= ========
F-29
17. EQUITY TRANSACTIONS
Employee Stock Option and Incentive Award Plan
----------------------------------------------
In 1996, the Company adopted the Restated Stock Option and Incentive Award
Plan (the "Plan") pursuant to which incentive stock options qualifying under
Section 422A of the Internal Revenue Code and nonqualified stock options may be
granted to key employees. The Plan also provides for the issuance of other
equity awards, such as awards of restricted stock. The Plan replaced and
restated all the Company's prior employee stock option plans. The Plan was
amended in 1999 to increase the number of shares under the Plan from 3,350,000
to 4,350,000. The Plan is administered by the Compensation Committee of the
Company's Board of Directors. The Compensation Committee has the authority to
determine the persons receiving options, option prices, dates of grants and
vesting periods, although no option may have a term exceeding ten years. Options
granted prior to 1996 have a term of five years.
Directors' Stock Option Plan
----------------------------
In April 1997, the Company adopted the Restated Non-Employee Director Stock
Option Plan (the "Directors' Plan"), pursuant to which stock options for up to
500,000 shares of Common Stock may be granted to non-employee directors. The
Directors' Plan replaced and restated the Company's prior non-employee director
stock option plan. The Directors' Plan provides for automatic grants of options
to purchase 7,500 shares of the Company's common stock to each non-employee
director serving on the date of each annual meeting of shareholders, beginning
with the 1997 annual meeting. No options were granted under this plan in 2000.
Of the options previously granted, 50% of the shares under each option are
exercisable on the second anniversary of the grant date, 75%in three years, and
100% in four years. All option grants are at exercise prices no less than the
market value of a share of Common Stock on the date of grant and are exercisable
for a ten-year period. Options granted under the predecessor stock option plan
are exercisable for a five-year period. Options covering 69,375 shares under the
Directors' Plan were exercisable at December 30, 2000.
All Stock Option Plans
----------------------
In 2000 and 1999, all exercise prices represent the estimated fair value of
the Common Stock on the date of grant as determined by the Board of Directors.
Of the options granted, 50% of the shares under each option are exercisable
after two years from the grant date, 75% in three years, and 100% in four years.
The Committee granted a stock option for 100,000 shares of the Company's
common stock to one executive officer which became fully vested in 2000.
F-30
Stock option transactions during the three years ended December 30, 2000
were as follows:
2000 1999 1998
------- --------- ---------
Options outstanding beginning of year 2,615.421 2,582,380 2,294,203
Options granted 431,200 928,060 1,171,750
Options exercised - (12,491) (294,657)
Options cancelled (306,979) (882,528) (588,916)
--------- --------- ---------
Options outstanding end of year 2,739,642 2,615,421 2,582,380
========= ========= =========
Options exercisable end of year 1,245,105 760,162 748,803
========= ========= =========
Weighted average option prices per share:
Granted $ 1.989 $ 4.893 $ 5.030
Exercised $ - $ 4.500 $ 4.989
Cancelled $ 4.611 $ 5.044 $ 9.461
Outstanding at year end $ 4.409 $ 4.832 $ 4.881
Options exercisable end of year $ 4.570 $ 4.369 $ 4.973
The Company applies the disclosure provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation". The
Company will continue to account for stock option awards in accordance with APB
Opinion No. 25. Had compensation cost for the Plan been determined based on the
fair value at the grant date for awards in 2000, 1999 and 1998 consistent with
the provisions of SFAS No. 123, the Company's net earnings and earnings per
share would have been reduced to the pro forma amounts indicated below: (amounts
in thousands except per share information)
2000 1999 1998
-------- -------- --------
As reported:
Net earnings / (loss) $(139,880) $(17,562) $ 3,414
========== ======== ========
Earnings / (loss) per share $ (6.61) $ (0.83) $ 0.16
========== ======== ========
Pro forma:
Net earnings / (loss) $(141,792) $(19,266) $ 2,655
========== ======== ========
Earnings / (loss) per share $ (6.70) $ (0.91) $ 0.13
========== ======== ========
Basic and diluted earnings per share are the same for each year.
F-31
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model. The following weighted average
assumptions were used in the model:
2000 1999 1998
------- ------- -------
Dividend yield 0.00% 0.00% 0.00%
Expected volatility 142% 88% 76%
Risk free interest rates 5.1 % 5.1% 4.9%
Expected lives (years) 5.0 4.7 4.9
The following table shows the options outstanding and the options
exercisable with pertinent data related to each:
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------------------------------------
Weighted
Average Weighted Number Weighted
Number Remaining Average Exercisable Average
Range of Outstanding Contractual Exercise As of Exercise
Exercise Prices as of 12/30/00 Life Price 12/30/00 Price
- --------------------------------------------------------------------------------------------------------------
$1.42 - $4.25 950,499 7.88 $2.640 393,975 $3.002
$4.50 - $5.32 1,222,832 7.17 $5.159 582,699 $5.075
$5.33 - $7.88 566,361 4.97 $5.758 268,431 $5.773
- ------------------------------------------------------------------------------------------------------------
$1.42 - $7.88 2,739,642 6.96 $4.409 1,245,105 $4.570
Restricted Stock Awards
-----------------------
Restricted stock grants, with an outstanding balance of 106,000 shares at
December 30, 2000, were awarded to certain officers and key employees which
require five years of continuous employment from the date of grant before
vesting and receiving the shares without restriction. The number of shares to be
received without restriction is based on the Company's performance relative to a
peer group of companies. For awards made in 1998, restricted shares, to the
extent not awarded after five years, vest after ten years of employment.
Unamortized deferred compensation expense with respect to the restricted stock
was $302,000 at December 30, 2000 and January 1, 2000, and is being amortized
over the five-year vesting period. Deferred compensation expense aggregated
$131,000 and $120,000 in 1999 and 1998, respectively. Due to the value of the
Company's stock and the uncertainties surrounding the Chapter 11 Cases, no
compensation expense was recognized in 2000. There were no new grants or
forfeitures of restricted stock in 1999 or 2000. A summary of restricted stock
granted during 1998 is as follows:
1998
-------
Shares granted 67,000
Shares forfeited 15,000
Weighted-average fair value of
stock granted during year $ 5.34
F-32
Preferred Stock
---------------
The Company is authorized to issue up to 5,000,000 shares of preferred
stock, par value $1 per share, with such terms, characteristics and designations
as may be determined by the Board of Directors. No such shares are issued and
outstanding.
Shareholder Rights Plan
-----------------------
In January of 1997, the Company's Board of Directors approved a
Shareholders Rights Plan (the "Rights Plan"). The Rights Plan provides for the
distribution of one Right for each outstanding share of the Company's Common
Stock held of record as of the close of business on January 27, 1997 or that
thereafter becomes outstanding prior to the earlier of the final expiration date
of the Rights or the first date upon which the Rights become exercisable. Each
Right entitles the registered holder to purchase from the Company one one-
hundredth of a share of Series A Participating Cumulative Preferred Stock, par
value $0.01 per share, at a price of $40.00 (the "Purchase Price"), subject to
adjustment. The Rights are not exercisable until ten calendar days after a
person or group (an "Acquiring Person") buys or announces a tender offer for 15%
or more of the Company's Common Stock, or if any person or group has acquired
such an interest, the acquisition by that person or group of an additional 2% of
the Company's Common Stock. In the event the Rights become exercisable, then
each Right will entitle the holder to receive that number of shares of Common
Stock (or, under certain circumstances, an economically equivalent security or
securities of the Company) having a market value equal to the Purchase Price.
If, after any person has become an Acquiring Person (other than through a tender
offer approved by qualifying members of the Board of Directors), the Company is
involved in a merger or other business combination where the Company is not the
surviving corporation, or the Company sells 50% or more of its assets, operating
income, or cash flow, then each Right will entitle the holder to purchase, for
the Purchase Price, that number of shares of common or other capital stock of
the acquiring entity which at the time of such transaction have a market value
of twice the Purchase Price. The Rights will expire on January 26, 2007, unless
extended, unless the Rights are earlier exchanged, or unless the Rights are
earlier redeemed by the Company in whole, but not in part, at a price of $0.001
per Right. In February 1998, the Company's Board of Directors amended the Rights
Plan effective March 1, 1998 to provide that Rights under this plan can be
redeemed and certain amendments to this plan can be effected only with the
approval of the Continuing Directors, which are defined in the Rights Plan as
the current directors and any future directors that are approved or recommended
by Continuing Directors.
On April 22, 1999, the Company permitted a group, of which a director,
Campbell B. Lanier, III, is a member, to acquire beneficial ownership of up to
25% of the Company's common stock without triggering the provisions of the
Rights Plan. By an agreement dated as of September 9, 1999, the Company further
permitted the same group to acquire up to 28% of the Company's common stock
(inclusive of amounts previously purchased by the group) without triggering the
provisions of the Rights Plan. The group agreed that, if it acquired more than
25% of the outstanding common stock of the Company, the group would vote such
additional shares in the same ratio as all other shares voted by shareholders
other than the members of the group and their affiliates.
In 2000, the Company cancelled 10,000 shares of its Common Stock.
F-33
18. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
Selected quarterly data for the Company for the fiscal years ended December
30, 2000 and January 1, 2000 is as follows: (amounts in thousands except per
share information)
FISCAL 2000 Quarter Ended
- -------------------------------------------------------------------------------------------------------------------
April 1 July 1 September 30 December 30
--------- --------- ------------ -----------
Net sales $ 83,180 $ 78,783 $ 75,578 $ 70,153
Cost of goods sold 36,745 36,287 36,338 34,088
--------- --------- --------- ---------
Gross profit 46,435 42,496 39,240 36,065
Selling, general & administrative 45,759 42,424 41,646 36,535
Impairment on long-lived assets 2,684 0 0 0
Restructuring expense 1,601 0 0 0
--------- --------- --------- ---------
Operating income/(loss) (3,609) 72 (2,406) (470)
Interest expense 5,330 917 721 755
--------- --------- --------- ---------
Earnings / (loss) before reorganization
items and taxes (8,939) (845) (3,127) (1,225)
Reorganization items 0 4,379 114,521 2,639
--------- --------- --------- ---------
(Loss) before taxes, extraordinary loss
and cumulative effect (8,939) (5,224) (117,648) (3,864)
Income tax expense 0 0 0 0
--------- --------- --------- ---------
Earnings / (loss) before extraordinary
loss and cumulative effect (8,939) (5,224) (117,648) (3,864)
Extraordinary loss, net 0 (827) 0 0
Cumulative effect, net (3,378) 0 0 0
--------- --------- --------- ---------
Net loss $ (12,317) $ (6,051) $(117,648) $ (3,864)
========= ========= ========= =========
Basic earnings/(loss) per share:
Earnings/(loss) before extraordinary
item and cumulative effect $ (0.42) $ (0.25) $ (5.56) $ (0.18)
Loss from extraordinary item 0.00 (0.04) 0.00 0.00
Loss from cumulative effect 0.00 0.00 0.00 (0.16)
--------- --------- --------- ---------
Net earnings/(loss) per basic share $ (0.42) $ (0.29) $ (5.56) $ (0.34)
========= ========= ========= =========
Diluted earnings/(loss) per share:
Earnings/(loss) before extraordinary
item and cumulative effect $ (0.42) $ (0.25) $ (5.56) $ (0.18)
Loss from extraordinary item 0.00 (0.04) 0.00 0.00
Loss from cumulative effect 0.00 0.00 0.00 (0.16)
--------- --------- --------- ---------
Net earnings/(loss) per diluted share $ (0.42) $ (0.29) $ (5.56) $ (0.34)
========= ========= ========= =========
F-34
FISCAL 1999 Quarter Ended
- -------------------------------------------------------------------------------------------------------------------
April 3 July 3 October 2 January 1
------------ ---------- ----------- -------------
Net sales $ 86,634 $ 82,531 $ 83,262 $ 76,628
Cost of goods sold 37,088 36,745 37,474 36,461
-------- -------- -------- --------
Gross profit 49,546 45,786 45,788 40,167
Selling, general, and administrative expense 42,446 42,937 45,355 46,424
Impairment loss on long-lived assets -- -- -- 1,952
-------- -------- -------- --------
Operating income/(loss) 7,100 2,849 433 (8,209)
Interest expense, net 4,665 4,743 4,809 5,112
-------- -------- -------- --------
Income/(loss) before income taxes 2,435 (1,894) (4,376) (13,321)
Provision/(benefit) for income taxes 970 (584) (1,396) 1,010
-------- -------- -------- --------
Income/(loss) before extraordinary item 1,465 (1,310) (2,980) (14,331)
Extraordinary item, net of tax -- -- -- (406)
-------- -------- -------- --------
Net income/(loss) $ 1,465 $ (1,310) $(2,980) $(14,737)
======== ======== ======== ========
Basic earnings/(loss) per common share:
Earnings/(loss) before extraordinary item $ 0.07 $ (0.06) $ (0.14) $ (0.68)
Extraordinary loss -- -- -- (0.02)
-------- -------- -------- --------
Net income/(loss) $ 0.07 $ (0.06) $ (0.14) $ (0.70)
======== ======== ======== ========
Diluted earnings/(loss) per common share:
Earnings/(loss) before extraordinary item $ 0.07 $ (0.06) $ (0.14) $ (0.68)
Extraordinary loss -- -- -- (0.02)
-------- -------- -------- --------
Net income/(loss) $ 0.07 $ (0.06) $ (0.14) $ (0.70)
======== ======== ======== ========
F-35
19. REPORTABLE BUSINESS SEGMENTS
The Company's operating business segments provide quality retail optical
services and products that represent high value and satisfaction to the
customer. The separate businesses within the Company use the same production
processes for eyeglass lens manufacturing, offer products and services to a
broad range of customers and utilize the Company's central administrative
offices to coordinate product purchases and distribution to retail locations. A
field organization provides management support to individual store locations.
The Mexico operation has a separate laboratory and distribution center in Mexico
and buys a majority of its products from local vendors. However, market demands,
customer requirements, laboratory manufacturing and distribution processes, as
well as product offerings, are substantially the same for the domestic and
Mexico business. Consequently, the Company considers its domestic and Mexico
businesses as one reportable segment under the definitions required by SFAS No.
131 - "Disclosures about Segments of an Enterprise and Related Information."
Information relative to sales and identifiable assets for the United States
and Mexico for the fiscal years ended December 30, 2000, January 1, 2000 and
January 2, 1999 are summarized in the following tables (amounts in thousands).
Identifiable assets include all assets associated with operations in the
indicated reportable segment excluding inter-company receivables and
investments.
United States Mexico Other Consolidated
------------- ------ ----- ------------
2000
Sales $ 302,902 $ 4,792 $ -- $ 307,694
========== ======== ====== ==========
Identifiable Assets $ 88,666 $ 2,222 $ -- $ 90,888
========== ======== ====== ==========
1999
Sales $ 325,101 $ 3,954 $ -- $ 329,055
========== ======== ====== ==========
Identifiable Assets $ 217,690 $ 2,328 $ 201 $ 220,219
========== ======== ====== ==========
1998
Sales $ 241,705 $ 3,429 $ 197 $ 245,331
========== ======== ====== ==========
Identifiable Assets $ 226,323 $ 2,147 $ 627 $ 229,097
========== ======== ====== ==========
F-36
SCHEDULE II
VISTA EYECARE, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
VALUATION AND QUALIFYING ACCOUNTS
December 30, 2000, January 1, 2000 and January 2, 1999
(In thousands)
Additions
-------------------------------------
Balance at Charged to Charged to Balance at
Description Beginning of Period Cash and Expenses Other Accounts Deductions End of Period
-------------------- ------------------- ----------------- --------------- ---------- -------------
Year ended
January 2, 1999
Allowance for
Uncollectible
Accounts Receivable $ 762 $ 900 $ 726 $ 872 $ 1,516
Year ended
January 1, 2000
Allowance for
Uncollectible
Accounts Receivable $ 1,516 $ 3,384 $ 885 $ 1,382 $ 4,403
Year ended
December 30, 2000
Allowance for
Uncollectible
Accounts Receivable $ 4,403 $ 2,503 $ 1,373 $ 2,535 $ 5,744
Provision for
reorganization
and restructuring
items $ -- $ 8,505 $ -- $ 3,778 $ 4,727
F-37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NATIONAL VISION, INC.
By: Angus C. Morrison
--------------------------------------
Angus C. Morrison
Senior Vice President and Chief
Financial Officer
Date: November 13, 2001
EXHIBIT INDEX
-------------
23 Arthur Andersen LLP Consent.
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K/A into the Company's previously filed Registration Statement File No. 333-06579 and File No. 333-21782.
/s/ Arthur Andersen LLP
Atlanta, Georgia
November 9, 2001