SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

NATIONAL VISION, INC.

(Exact name of registrant as specified in its charter)

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

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

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

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

The number of shares of Common Stock of the registrant outstanding as of August 10, 2005 was 5,460,668.

FORM 10-Q INDEX

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PART I

FINANCIAL INFORMATION

ITEM 1.     FINANCIAL STATEMENTS

NATIONAL VISION, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

July 2, 2005 and January 1, 2005

(in thousands except share and par value information)

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

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NATIONAL VISION, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

July 2, 2005 and January 1, 2005

(in thousands except share and par value information)

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

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NATIONAL VISION, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands except per share information)

(Unaudited)

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

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NATIONAL VISION, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

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

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NATIONAL VISION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JULY 2, 2005

(Unaudited)

(1) SUBSEQUENT EVENT

On July 26, 2005, we announced that we had signed a definitive merger agreement with Vision Acquisition Corp., an affiliate of Berkshire Partners LLC, a private equity investor, pursuant to which Vision Acquisition Corp. has initiated a tender offer to acquire all outstanding shares of National Vision, Inc. common stock at a price of $7.25 per share in cash.  The merger agreement also contemplates that our senior subordinated notes due in March 2009 will be redeemed at par.  Concurrent with this announcement, we also announced that we had signed an agreement to acquire all of the outstanding common stock of Consolidated Vision Group, Inc. for approximately $88 million, including debt repayment. Consolidated Vision Group operates 111 retail optical stores under the brand name “America’s Best Contacts & Eyeglasses.”  We also announced that we intend to enter into a new credit facility arranged by Freeport Financial, to fund the acquisition and the repayment of our notes.

Consummation of the tender offer is subject to our simultaneous acquisition of Consolidated Vision Group, the tender of at least 67% of our fully diluted shares and other customary conditions including the funding of our new credit facility.

Costs incurred of $230,000 in connection with our pending acquisition of Consolidated Vision Group, Inc. are included in  “Other Assets and Deferred Costs” in the Condensed Consolidated Balance Sheets at July 2, 2005.  If the acquisition is not consummated, these costs will be charged to expense in a future period.

(2) BASIS OF FINANCIAL STATEMENT PRESENTATION

We prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission.  Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted.  Although we believe that the disclosures contained herein are adequate to make the information presented not misleading, we recommend that these interim condensed consolidated financial statements be read in conjunction with our most recent audited consolidated financial statements and the notes thereto.  In our opinion, all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented have been made.  Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.

(3) SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies that we follow are set forth in Note 2 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended January 1, 2005.  The following is a summary of the most significant accounting policies influencing the three and six month periods ended July 2, 2005.

Principles of Consolidation

The consolidated financial statements include our accounts as well as our subsidiaries’ accounts.  All significant inter-company balances and transactions have been eliminated in consolidation.

Discontinued Operations

Historical operating results for our closed vision centers that were not relocated to freestanding locations within the vicinity of the closed locations are classified as discontinued operations for all periods.  These operating results are presented as discontinued operations because the vision center locations are geographically dispersed, and in the case of our domestic Wal-Mart locations, we believe the host will open a vision center in the space we vacate and, except in those cases where we open a nearby freestanding vision center, significant cash flows from the closed locations are not expected to migrate to our other vision center operations.

During the second quarter of 2005, we closed four vision centers inside Wal-Mart stores located in the United States as a result of lease expirations.  Also during the quarter we closed our two home medical equipment stores that were opened in 2004 as a test.  During the first six months of 2005, we closed a total of 14 vision centers inside domestic Wal-Mart stores, four vision centers in Wal-Mart de Mexico stores and our two home medical equipment stores.  Six of the 14 vision centers closed inside domestic Wal-Mart stores were relocated to freestanding locations within the vicinity of the closed locations.  Relocated stores are not considered to be discontinued operations.  During 2004 we closed 55 vision centers in Wal-Mart stores in the United States, two vision centers in Wal-Mart de Mexico and three vision centers on military bases. Two of the 55 closed vision centers in domestic Wal-Mart stores were relocated to freestanding locations in the vicinity of the closed locations and are not considered discontinued operations. The six locations inside Wal-Mart de Mexico stores were closed

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due to poor operating results and prospects.  Loss on disposal includes severance and closing costs offset by gains recorded from the sale of certain assets. Condensed information for these discontinued operations is presented below (in thousands):

Revenue Recognition

We recognize revenue from sales of optical products and services upon delivery of the products or services to the customer. Our retail customers generally make full payment for prescription eyewear products at the time they place an order, and we defer revenue recognition associated with such transactions by estimating the amount of product that has not been delivered to customers at the end of each accounting period.

We provide a short-term right of return for sales of optical products and therefore an estimate of future returns is recorded as a reduction of revenue in the period of sale based on historical return experience.

We sell separately priced extended warranty contracts which provide for repair and replacement of eyeglasses during the first year after purchase.  Revenues from the sale of extended warranty contracts are recognized on a straight-line basis over the life of the contract.

A wholly owned subsidiary operates as a specialized health care service plan (an “HMO”).  Fees from managed vision care services include premiums from the HMO’s managed care insurance product and patient co-payments for exam fees in excess of the benefit provided under the HMO plan.  Revenue from the HMO premium is recognized over the twelve-month life of the policy as services are rendered.  Patient co-payments are recognized as revenue at the time the exam services are provided.

A reconciliation of the changes in deferred revenue from the sale of warranty contracts and HMO premiums is as follows (in thousands):

Cost of Goods Sold

We recognize the cost of product sold concurrent with the recognition of revenue.  Occupancy costs for our retail locations are included in cost of goods sold.

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Intangible Value Of Contractual Rights

Our most significant asset is the Intangible Value of Contractual Rights which represents the value, when we emerged from bankruptcy in May 2001, of our lease agreement with Wal-Mart and the business relationship therein created.  The value ascribed was based upon estimated discounted cash flows and comprehended scheduled expirations of our leases in Wal-Mart as well as estimates of automatic lease extensions that occur upon conversion of Wal-Mart host stores to supercenter locations.  Based on those projections, our best estimate of the useful life of this asset was 15 years.  Due to the uncertainty involved in predicting the pattern of economic benefits realized from the Wal-Mart relationship we amortize this asset using the straight-line method.

Since May 31, 2001, actual lease expirations and supercenter conversions have not differed significantly from the assumptions in the financial projections used to establish the initial value of the Intangible Value of Contractual Rights at that date.  Nonetheless, the precise length of the asset’s life is still not known principally because we cannot precisely predict supercenter conversions.  Therefore, our best estimate of the remaining useful life of this asset is equal to the remaining amortization period of 10 years and 11 months.  We continually review our scheduled Wal-Mart lease expirations, projected supercenter conversions and related cash flows.  It is possible that at some time in the future, events and circumstances may indicate that a modification of the remaining useful life of and/or the method of amortizing this asset will be warranted.

Amortization expense on the Intangible Value of Contractual Rights was $1.9 million and $3.8 million in each of the three-month and six-month periods ended July 2, 2005 and July 3, 2004, respectively.  Future amortization expense is currently scheduled to be $7.5 million per year for each of the five succeeding years.

Impairment of Long-Lived Assets

We assess impairment of long-lived assets whenever events or changes in circumstances indicate that their carrying value may not be recoverable.  Factors which could trigger an impairment review include (1) actual or anticipated operating losses at vision center locations; (2) a significant underperformance of vision center operations relative to expected historical or projected future operating results; (3) termination of individual leases prior to the expiration of their contractual term; (4) significantly fewer supercenter conversions than anticipated in 2001; (5) significant changes in the manner or use of our assets or the strategy for our overall retail optical business; (6) significant negative industry or economic trends; or (7) a permanent adverse change in cash flows generated by an operation.  If one or more of the above indicators of impairment exists, we determine if the carrying value of the respective long-lived assets may not be recoverable based on a projected undiscounted cash flow model.  If the projected cash flows are not in excess of the book value of the related asset, we measure the impairment based on a projected discounted cash flow model.

We continually monitor our business for events or changes in circumstances that would indicate that the carrying value of our long-lived assets may not be recoverable.  In addition, each year when the following year’s budgets are prepared, we review the historical and projected operating results of each of our retail locations in order to assess whether such operating results are indicative of potential impairment.

Our tests for impairment of the Wal-Mart master license agreement involve developing new projections of the cash flows to be generated under the agreement and comparing this amount to the remaining carrying value of the Intangible Value of Contractual Rights.  We performed such a test in the third quarter of 2003 when the Company decided to close thirteen Wal-Mart vision centers prior to the expiration of their leases due to poor operating performance.  The test indicated that the sum of the undiscounted cash flows expected from our remaining Wal-Mart leases significantly exceeded the carrying value of the intangible asset.  Accordingly, no impairment loss was recorded.  Since the third quarter of 2003, we have not noted any other events or changes in circumstances pertaining to the Wal-Mart master license agreement that would warrant an impairment review.

Income Taxes

Deferred income taxes are provided for the future tax benefits to be derived from the utilization of tax loss carry-forwards and the tax effect of items of income and expense that are recognized in different periods for financial and tax reporting purposes, such as depreciation and amortization, inventory basis differences and certain accrued expenses.  Deferred income taxes are computed using enacted tax rates in effect for the year in which the differences are expected to reverse.

A valuation allowance is recorded against any net deferred tax asset if it is “more likely than not” that we will not ultimately realize the benefit of the net deferred tax asset.  Due to uncertainties that existed during the first and second quarters of 2004, we provided a full valuation allowance for the net deferred tax asset.  At January 1, 2005, we reassessed our situation and based on our strong operating performance in 2004 and improved prospects for future profitability we were no longer able to

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conclude that it was “more likely than not” that we would not eventually realize the tax benefits of our net operating loss carry-forwards.  Accordingly, we reversed the valuation allowance effective as of January 1, 2005.

Accounting for Stock Options

We apply the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.”  Stock option awards continue to be accounted for in accordance with APB Opinion No. 25.  The number of shares to be issued and the per share strike price are not subject to uncertainty and option prices approximate the fair value of the stock at date of grant; accordingly, our stock option grants qualify for fixed accounting treatment and we do not record compensation expense in connection with the granting of these stock options. (See Note 6 to the Condensed Consolidated Financial Statements.)

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement No. 123(R), Share-Based Payments, which will require compensation costs related to share-based payment transactions to be recognized in the financial statements.  As permitted by the predecessor Statement No. 123, we do not recognize compensation expense with respect to stock options we have issued because the option price was no greater than the market price at the time the option was issued.  Statement 123(R) will be effective for us in our fiscal year beginning January 1, 2006.  We have not completed an evaluation of the impact of adopting Statement 123(R).

Use of Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires that we make estimates and assumptions affecting the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

On an ongoing basis, we evaluate our estimates and judgments, and incorporate any changes in such estimates and judgments into the accounting records underlying our consolidated financial statements.  We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

(4) SENIOR SUBORDINATED NOTES AND REVOLVING LINE OF CREDIT

Interest on our Senior Subordinated Notes accrues at the rate of 12% per annum and is payable twice a year at the end of March and September.  Principal repayments are required semi-annually at the end of February and August based on excess cash flow (as defined) for the prior six-month periods ended June and December. The semi-annual principal repayments are limited to an amount that causes us to maintain a minimum pro forma consolidated cash balance of $3 million as of the measurement date.  Our consolidated cash balance at the most recent measurement date was $6,009,000, which limits our August 2005 principal repayment to $3,009,000.  The Senior Subordinated Notes mature on March 30, 2009 or earlier in the event of a change in control.

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On June 1, 2005, we made an optional partial redemption of our Senior Subordinated Notes in the amount of $5.2 million at par.  This redemption created an equal reduction in the amount of our mandatory redemption payment scheduled for August 31, 2005.  Had we not made this optional redemption, our August 31, 2005 mandatory redemptions would be approximately $8.2 million.

Our revolving credit facility with Bank of America (the “Bank of America Facility”) bears interest at the prime rate plus 0.75% per annum or at LIBOR plus 3.0%.  Any borrowings made under this facility are secured by substantially all of our assets.  The Bank of America Facility contains various restrictive covenants and requires us to maintain minimum levels of EBITDA (as defined) and a minimum fixed charge coverage ratio (as defined).  Prior to making the optional redemption described in the preceding paragraph, we entered into an amendment with Bank of America that excluded such redemption from the computation of certain financial covenants contained in the Bank of America Facility.  The Bank of America Facility also limits the amount of our capital expenditures.  We had no outstanding borrowings on the Bank of America Facility at July 2, 2005.  However, we had issued letters of credit under the facility aggregating $3.8 million.  Our availability under the Bank of America Facility at July 2, 2005, after reduction for the outstanding letters of credit, was approximately $2.7 million.

(5) 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 period.  Diluted earnings per common share are computed as basic earnings per common share adjusted for the effect of all potential common stock equivalent shares.  The computations of basic and diluted earnings per common share (“EPS”) for the periods presented are summarized as follows (amounts in thousands except per share information):

For the three and six-month period ended July 3, 2004, approximately 72,000 stock options were excluded from the computation of diluted earnings per share due to their antidilutive effect.

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(6) ACCOUNTING FOR STOCK OPTIONS

Had compensation cost for the employee and non-employee director stock options been determined based on the fair value at the grant date under the provisions of SFAS No. 123, our net earnings and earnings per share would have been reduced to the pro forma amounts indicated below (amounts in thousands):

(7) SEGMENT REPORTING

We have one reportable segment, Domestic Vision Centers, in which we aggregate the following four operating segments:  (1) retail vision centers operated in Wal-Mart stores in the United States, (2) retail vision centers operated in Fred Meyer stores in the United States, (3) retail vision centers operated on U.S. military bases in the United States and (4) retail vision centers operated in freestanding locations in the United States.  We aggregate these four operating segments because of the similarity of their economic and operating characteristics, as the domestic vision centers included in each such operating segment (i) have achieved similar long-term average gross profit margins, (ii) sell substantially identical products and services, consisting primarily of eyeglasses and contact lenses, (iii) sell products that are manufactured and/or assembled using the same production processes, (iv) have similar types and classes of customers and (v) have identical methods of distribution.  We also operate retail vision centers in Wal-Mart stores in Mexico and we operate a specialized health care service plan in California.  These other operating segments are individually not material and are included in the Other column in the tables below.

Management evaluates segment performance based on segment income or loss before income taxes.  Segment income or loss excludes interest income, interest expense and certain other non-operating gains and losses, all of which are considered Corporate items.  Corporate assets consist primarily of cash and cash equivalents and deferred income taxes.

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The accounting policies of the reportable segment and the other segments are the same as those described in the summary of significant accounting policies. Selected summarized segment financial information for the three and six-month periods ended July 2, 2005 and July 3, 2004 is as follows (in thousands):