<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED OCTOBER 2, 1999.
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 333 - 56551
EYE CARE CENTERS OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-2337775
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification number)
11103 WEST AVENUE
SAN ANTONIO, TEXAS 78213
(Address of principal executive offices, including zip code)
(210) 340-3531
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
Indicate by check mark whether the registrant has (1) 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 the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
<TABLE>
<CAPTION>
Class Outstanding at November 5, 1999
----- -------------------------------
<S> <C>
Common Stock, $.01 par value 7,414,945 shares
</TABLE>
================================================================================
<PAGE> 2
EYE CARE CENTERS OF AMERICA, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at January 2, 1999
and October 2, 1999 (Unaudited)........................................................2
Condensed Consolidated Statements of Operations for the
Thirteen Weeks and Thirty-Nine Weeks Ended October 3, 1998
(Unaudited) and October 2, 1999 (Unaudited)............................................3
Condensed Consolidated Statements of Cash Flows for the
Thirty-Nine Weeks Ended October 3, 1998 (Unaudited)
and October 2, 1999 (Unaudited)........................................................4
Notes to Condensed Consolidated Financial Statements.........................................5-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................................................12-20
Item 3. Quantitative and Qualitative Disclosures About Market Risk.....................................20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................20
Item 6. Exhibits and Reports on Form 8-K............................................................21-22
</TABLE>
1
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EYE CARE CENTERS OF AMERICA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
JANUARY 2, OCTOBER 2,
1999 1999
--------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................. $ 5,127 $ 1,718
Accounts and notes receivable, net ......... 6,453 10,728
Inventory .................................. 26,977 29,599
Prepaid expenses and other ................. 2,286 5,032
Deferred income taxes ...................... 391 391
--------- ---------
Total current assets ............................. 41,234 47,468
PROPERTY & EQUIPMENT, net ........................ 68,118 73,391
INTANGIBLE ASSETS, net ........................... 102,459 133,912
OTHER ASSETS ..................................... 11,096 10,846
--------- ---------
Total assets ..................................... $ 222,907 $ 265,617
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable ........................... $ 20,921 $ 19,952
Deferred revenue ........................... 5,331 6,245
Current maturities of long-term debt ....... 3,578 8,793
Accrued payroll expense .................... 2,788 3,961
Accrued interest ........................... 3,347 6,767
Other accrued expenses ..................... 8,186 14,744
--------- ---------
Total current liabilities ........................ 44,151 60,462
LONG-TERM DEBT, less current maturities .......... 242,945 268,581
DEFERRED INCOME TAXES ............................ 391 391
DEFERRED RENT .................................... 3,246 3,284
DEFERRED GAIN .................................... 2,175 2,785
--------- ---------
Total liabilities ................................ 292,908 335,503
--------- ---------
SHAREHOLDERS' DEFICIT:
Common stock ............................... 75 74
Preferred stock ............................ 32,793 36,095
Additional paid-in capital ................. 60,958 56,940
Accumulated deficit ........................ (163,827) (162,995)
--------- ---------
Total shareholders' deficit ...................... (70,001) (69,886)
--------- ---------
$ 222,907 $ 265,617
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
<PAGE> 4
EYE CARE CENTERS OF AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
<TABLE>
<CAPTION>
THIRTEEN WEEKS THIRTY-NINE WEEKS
ENDED ENDED
---------------------------------------------------------------
OCTOBER 3, OCTOBER 2, OCTOBER 3, OCTOBER 2,
1998 1999 1998 1999
--------- --------- --------- ---------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET REVENUES:
Optical sales ........................................ $ 58,707 $ 74,587 $ 177,782 $ 217,911
Management fee ....................................... 851 832 2,035 2,355
--------- --------- --------- ---------
Total net revenues ......................................... 59,558 75,419 179,817 220,266
OPERATING COSTS AND EXPENSES:
Cost of goods sold ................................... 20,495 25,920 60,983 73,643
Selling, general and administrative expenses ........ 34,007 43,534 99,349 123,109
Recapitalization and other expenses .................. 192 -- 25,455 --
Amortization of intangibles .......................... 858 1,295 2,518 3,676
--------- --------- --------- ---------
Total operating costs and expenses ......................... 55,552 70,749 188,305 200,428
--------- --------- --------- ---------
INCOME/(LOSS) FROM OPERATIONS .............................. 4,006 4,670 (8,488) 19,838
INTEREST EXPENSE, NET ...................................... 5,239 5,658 13,501 17,541
IN-SUBSTANCE DEFEASED BONDS INTEREST EXPENSE, NET .......... 958 -- 2,418 --
INCOME TAX EXPENSE ......................................... 5 582 18 974
--------- --------- --------- ---------
NET INCOME/(LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE AND EXTRAORDINARY ITEM ................ (2,196) (1,570) (24,425) 1,323
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ........ -- -- -- 491
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF LONG-TERM
DEBT ....................................................... 4,200 -- 8,355 --
--------- --------- --------- ---------
NET INCOME/(LOSS) .......................................... $ (6,396) $ (1,570) $ (32,780) $ 832
========= ========= ========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
<PAGE> 5
EYE CARE CENTERS OF AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
THIRTY-NINE THIRTY-NINE
WEEKS ENDED WEEKS ENDED
OCTOBER 3, OCTOBER 2,
1998 1999
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) ................................................... $ (32,780) $ 832
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization .................................... 11,613 15,082
Other amortization ............................................... 947 1,065
Cumulative effect of change in accounting principle .............. -- 491
Deferred liabilities and other ................................... 489 783
Expenses to affect capital lease retirement ...................... -- (431)
Loss on disposition of property and equipment .................... 81 752
Extraordinary loss on early extinguishment of long-term debt ..... 8,355 --
Increase/(decrease) in operating assets and liabilities ............. 7,809 (2,265)
--------- ---------
Net cash provided by (used for) operating activities ...................... (3,486) 16,309
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment ............................... (12,571) (16,482)
Proceeds from sale of property and equipment ........................ 766 20
Purchase of retail outlet ........................................... -- (368)
Net outflow for Bizer Acquisition ................................... (33,077) --
Net outflow for Vision Twenty-One Retail Acquisition ................ -- (38,851)
Payments received on notes receivable ............................... 114 145
--------- ---------
Net cash used for investing activities .................................... (44,768) (55,536)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt and capital leases ................................. (42,780) (2,656)
Payments related to deferred compensation ........................... (10) --
Proceeds from issuance of long-term debt ............................ 234,611 39,118
Proceeds from the issuance of common stock .......................... 71,689 64
Proceeds from the issuance of preferred stock ....................... 27,750 --
Payments to retire redeemable preferred stock ....................... (12,385) --
Purchase of investment securities-restricted ........................ (76,618) --
Expenses to affect recapitalization ................................. (24,045) --
Redemption of common stock .......................................... (128,365) (440)
Equity distribution ................................................. -- (268)
Other financing activities .......................................... (374) --
--------- ---------
Net cash provided by (used for) financing activities ...................... 49,473 35,818
--------- ---------
NET INCREASE/(DECREASE) IN CASH ........................................... 1,219 (3,409)
CASH AND CASH EQUIVALENTS, beginning of period ............................ 7,172 5,127
--------- ---------
CASH AND CASH EQUIVALENTS, end of period .................................. $ 8,391 $ 1,718
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE> 6
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Eye Care
Centers of America, Inc., its wholly owned subsidiaries (collectively, unless
the context otherwise requires, the "Company") and certain optometrists to whom
the Company provides management services. All significant intercompany balances
and transactions have been eliminated.
The accompanying unaudited Condensed Consolidated Financial Statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included and are of a
normal, recurring nature. Operating results for the thirteen week and
thirty-nine week periods ended October 2, 1999 are not necessarily indicative of
the results that may be expected for the fiscal year ended January 1, 2000. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Eye Care Centers of America, Inc.'s Annual
Report on Form 10-K for the year ended January 2, 1999.
2. RELATED PARTY TRANSACTIONS
The Company and Thomas H. Lee Company ("THL Co.") entered into a
management agreement (the "Management Agreement"), as of the closing date of the
Company's Recapitalization (defined herein), pursuant to which THL Co. received
a financial advisory fee of $6.0 million in connection with structuring,
negotiating and arranging the Recapitalization of the Company and related debt
financing. In addition, pursuant to the Management Agreement, THL Co. will
initially receive $500,000 per year plus expenses for management and other
consulting services provided to the Company. After a term of ten years from the
closing date, the Management Agreement is automatically renewable on an annual
basis unless either party serves notice of termination at least ninety days
prior to the renewal date. For the thirteen week and thirty-nine week periods
ended October 2, 1999, the Company incurred $125,000 and $375,000, respectively,
related to the agreement.
3. INCOME TAXES
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax basis of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The Company currently has a net deferred
tax asset related to its temporary differences. Based upon the weight of
available evidence allowed under the criteria set forth under FAS Statement No.
109, including the lack of carryback potential, uncertainties exist as to the
future realization of the deferred tax asset. These uncertainties include lack
of carryback potential as the Company has incurred taxable losses in past years.
The Company has established a full valuation allowance for its deferred tax
assets.
5
<PAGE> 7
4. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THIRTY-NINE THIRTY-NINE
WEEKS ENDED WEEKS ENDED
OCTOBER 3, OCTOBER 2,
1998 1999
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash paid for interest................................................ $ 8,509 $ 12,889
Dividends accrued on redeemable preferred stock....................... $ 268 $ --
Rollover of preferred stock by management............................. $ 2,250 $ --
Rollover of common stock by management................................ $ 5,625 $ --
Dividends accrued on preferred stock.................................. $ 1,768 $ 3,302
Retirement of capital lease obligation................................ $ -- $ 5,652
</TABLE>
5. INTEREST RATE SWAPS
The Company does not hold or issue financial instruments for trading
purposes nor is it a party to leveraged derivatives. The Company uses interest
rate swaps that are "vanilla" and involve little complexity as hedge instruments
to manage interest rate risk.
The counter parties to the Company's derivatives consist of major
international financial institutions. Because of the number of these
institutions and their high credit ratings, management believes these
derivatives do not present significant credit risk to the Company.
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Notional Amounts Maturity Fixed Pay Floating Receive
October 2, 1999 Date Rate Rate
- ---------------- -------- --------- ----------------
<S> <C> <C> <C>
$ 33.3 million 2000 5.9% 5.0%
$ 33.3 million 2001 5.9% 5.0%
</TABLE>
Interest rate swap agreements effectively convert floating rates on
long-term debt to fixed rates. The Company's intent is to reduce overall
interest expense while maintaining an acceptable level of risk to interest rate
fluctuations. The swap agreements specifically hedge a portion of both $50.0
million aggregate principle amount of the Company's Floating Interest Rate
Subordinated Term Securities due 2008 and $50.0 million of the Company's Credit
Facility, which consists of (i) the $55.0 million term loan facility; (ii) the
$35.0 million revolving credit facility; and (iii) the $100.0 million
acquisition facility. As market interest rates fluctuate, the unrealized gain or
loss on the swap portfolio moves in relationship to the fair value of the
underlying debt. The Company had an unrealized loss on the interest rate swap
portfolio of $0.2 million as of October 2, 1999. The change in the market value
of these interest rate swaps is not recorded in the financial position or
operations of the Company. Interest to be paid or received is accrued as an
adjustment to interest expense. Upon early termination of interest rate swaps,
the fair value of the swaps at termination will be recorded through operations
over the remaining contractual life of the swap. If the hedged item is repaid
early, the Company will evaluate if the swap agreement is to be redesignated or
exited.
6
<PAGE> 8
6. NEW ACCOUNTING PRONOUNCEMENTS
Derivatives. In June 1998, the Financial Accounting Standards Board
issued SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, which is required to be adopted in years beginning after June 15,
1999. In June 1999, SFAS No. 137 was issued, which delays the required adoption
of SFAS No. 133 by one year. The statement permits early adoption as of the
beginning of any fiscal quarter after its issuance. The statement will require
the Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of derivatives will either be offset against the change in fair
value of the hedged assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. The Company has not yet determined what the
effect of SFAS No. 133 will be on the earnings and financial position of the
Company.
7. CONDENSED CONSOLIDATING INFORMATION
The $100,000,000 in principal amount of 9 1/8% Senior Subordinated Notes
due 2008 and $50,000,000 in principal amount of Floating Interest Rate
Subordinated Term Securities due 2008 were issued by the Company and are
guaranteed by all of the Company's subsidiaries (the "Guarantor Subsidiaries")
but are not guaranteed by certain private optometrists ("ODs") to whom the
Company provides management services. The guarantor subsidiaries are
wholly-owned by the Company and the guarantees are full, unconditional and joint
and several. The following condensed consolidating financial information
presents the financial position, results of operations and cash flows of (i) the
Company, as parent, as if it accounted for its subsidiaries on the equity
method, (ii) the Guarantor Subsidiaries, and (iii) ODs. Separate financial
statements of the Guarantor Subsidiaries are not presented herein as management
does not believe that such statements would be material to investors. Previous
fiscal years are not presented herein as the non-guarantor OD was consolidated
starting in the fourth quarter of fiscal 1998 and prior to this date all
subsidiaries were guarantors.
7
<PAGE> 9
CONSOLIDATING BALANCE SHEET
OCTOBER 2, 1999
<TABLE>
<CAPTION>
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
--------- ------------ --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ (1,793) $ 3,511 $ -- $ -- $ 1,718
Accounts and notes receivable 133,166 25,599 697 (148,734) 10,728
Inventory 15,450 14,149 -- -- 29,599
Prepaid expenses and other 3,028 2,004 -- -- 5,032
Deferred income taxes 391 -- -- -- 391
--------- --------- --------- --------- ---------
Total current assets 150,242 45,263 697 (148,734) 47,468
Property and equipment 43,316 30,075 -- -- 73,391
Intangibles 20,761 113,055 96 -- 133,912
Other assets 10,410 436 -- -- 10,846
Investment in subsidiaries 6,850 -- -- (6,850) --
--------- --------- --------- --------- ---------
$ 231,579 $ 188,829 $ 793 $(155,584) $ 265,617
========= ========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 32,912 $ 134,847 $ 268 $(148,075) $ 19,952
Deferred revenue 4,385 1,860 -- -- 6,245
Current maturities of long-term debt 8,000 793 -- -- 8,793
Accrued payroll expense 2,161 1,800 -- -- 3,961
Accrued interest 6,546 221 -- -- 6,767
Other accrued expenses 9,757 4,987 280 (280) 14,744
--------- --------- --------- --------- ---------
Total current liabilities 63,761 144,508 548 (148,355) 60,462
Long-term debt, less current maturities 233,698 34,783 100 -- 268,581
Deferred income taxes 391 -- -- -- 391
Deferred rent 2,384 900 -- -- 3,284
Deferred gain 2,055 730 -- -- 2,785
--------- --------- --------- --------- ---------
Total liabilities 302,289 180,921 648 (148,355) 335,503
--------- --------- --------- --------- ---------
Shareholders' equity/(deficit):
Common stock 74 -- -- -- 74
Preferred stock 36,095 -- -- -- 36,095
Additional paid-in capital 56,116 1,092 (268) -- 56,940
Accumulated deficit (162,995) 6,816 413 (7,229) (162,995)
--------- --------- --------- --------- ---------
Total shareholders' equity/(deficit) (70,710) 7,908 145 (7,229) (69,886)
--------- --------- --------- --------- ---------
$ 231,579 $ 188,829 $ 793 $(155,584) $ 265,617
========= ========= ========= ========= =========
</TABLE>
CONSOLIDATING INCOME STATEMENT
FOR THE THIRTY-NINE WEEKS ENDED OCTOBER 2, 1999
<TABLE>
<CAPTION>
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
--------- ------------ --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Optical sales $ 122,621 $ 67,273 $ 28,017 $ -- $ 217,911
Management fees -- 7,546 -- (5,191) 2,355
Investment earnings in subsidiaries 963 -- -- (963) --
--------- --------- --------- --------- ---------
Net revenues 123,584 74,819 28,017 (6,154) 220,266
Operating costs and expenses:
Cost of goods sold 41,656 24,622 7,365 73,643
Selling, general and administrative expenses 63,677 44,610 20,013 (5,191) 123,109
Amortization of intangibles 786 2,887 3 3,676
--------- --------- --------- --------- ---------
Total operating costs and expenses 106,119 72,119 27,381 (5,191) 200,428
--------- --------- --------- --------- ---------
Income (loss) from operations 17,465 2,700 636 (963) 19,838
Interest expense, net 15,574 1,961 6 -- 17,541
Income tax expense 694 -- 280 -- 974
--------- --------- --------- --------- ---------
Net income (loss) before extraordinary item 1,197 739 350 (963) 1,323
Cumulative effect of change in accounting
principle 365 126 -- -- 491
--------- --------- --------- --------- ---------
Net income (loss) $ 832 $ 613 $ 350 $ (963) $ 832
========= ========= ========= ========= =========
</TABLE>
8
<PAGE> 10
CONSOLIDATING INCOME STATEMENT
FOR THE THIRTEEN WEEKS ENDED OCTOBER 2, 1999
<TABLE>
<CAPTION>
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
-------- ------------ -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Optical sales $ 40,833 $ 24,428 $ 9,326 $ -- $ 74,587
Management fees -- 2,515 -- (1,683) 832
Investment earnings in subsidiaries (4,643) -- -- 4,643
-------- -------- -------- -------- --------
Net revenues 36,190 26,943 9,326 2,960 75,419
Operating costs and expenses:
Cost of goods sold 14,937 8,063 2,920 -- 25,920
Selling, general and administrative expenses 13,711 25,056 6,450 (1,683) 43,534
Amortization of intangibles 264 1,030 1 -- 1,295
-------- -------- -------- -------- --------
Total operating costs and expenses 28,912 34,149 9,371 (1,683) 70,749
-------- -------- -------- -------- --------
Income (loss) from operations 7,278 (7,206) (45) 4,643 4,670
Interest expense, net 5,038 618 2 -- 5,658
Income tax expense 569 -- 13 -- 582
-------- -------- -------- -------- --------
Net income (loss) before extraordinary item 1,671 (7,824) (60) 4,643 (1,570)
Cumulative effect of change in accounting
principle -- -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) $ 1,671 $ (7,824) $ (60) $ 4,643 $ (1,570)
======== ======== ======== ======== ========
</TABLE>
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THIRTY-NINE WEEKS ENDED OCTOBER 2, 1999
<TABLE>
<CAPTION>
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
-------- ------------ -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 832 $ 613 $ 350 $ (963) $ 832
Adjustments to reconcile net income (loss)
to net
Cash provided by operating activities:
Depreciation and amortization 8,660 6,419 3 -- 15,082
Other amortization 1,055 10 -- 1,065
Cumulative effect of change in -- --
accounting principle 365 126 491
Deferred liabilities and other 1,000 (217) -- -- 783
Expenses to affect capital lease
retirement -- (431) -- -- (431)
(Gain) loss on disposition of property
and equipment 505 247 -- -- 752
Increase/(decrease) in operating assets
and liabilities (37,853) 35,673 (85) -- (2,265)
-------- -------- -------- -------- --------
Net cash provided by (used in) operating
activities (25,436) 42,440 268 (963) 16,309
-------- -------- -------- -------- --------
Cash flows from investing activities:
Acquisition of property and equipment (13,217) (3,265) -- -- (16,482)
Proceeds from sale of property and
equipment 18 2 -- -- 20
Purchase of retail outlet (368) -- -- -- (368)
Purchase of Vision Twenty-One Retail
Acquisition (1,691) (37,160) -- -- (38,851)
Payment received on notes receivable 3 142 -- -- 145
Investment in subsidiaries (963) -- -- 963 --
-------- -------- -------- -------- --------
Net cash provided by (used in) investing
activities (16,218) (40,281) -- 963 (55,536)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Payments on debt and capital leases (2,000) (656) -- -- (2,656)
Proceeds from issuance of long-term debt 39,118 -- -- -- 39,118
Proceeds from issuance of common stock 64 -- -- -- 64
Repurchase of common stock (440) -- -- -- (440)
Equity distribution -- -- (268) -- (268)
-------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities 36,742 (656) (268) -- 35,818
-------- -------- -------- -------- --------
Net decrease in cash and cash equivalents (4,912) 1,503 -- -- (3,409)
Cash and cash equivalents at beginning of
period 3,119 2,008 -- -- 5,127
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period $ (1,793) $ 3,511 $ -- $ -- $ 1,718
======== ======== ======== ======== ========
</TABLE>
9
<PAGE> 11
8. OTHER ACCRUED EXPENSES
Other accrued expenses consists of the following:
<TABLE>
<CAPTION>
January 2, October 2,
1999 1999
--------- ---------
<S> <C> <C>
Property taxes $ 1,159 $ 1,512
Professional fees 478 276
Payroll and sales/use taxes 622 955
Store expenses 952 1,117
Insurance 230 2,111
Construction 1,083 934
Advertising 1,598 991
Acquisition liability -- 4,540
Other 2,064 2,308
------- -------
Other accrued expenses $ 8,186 $14,744
======= =======
</TABLE>
9. ACQUISITION
On August 31, 1999, the Company acquired from Vision Twenty-One, Inc.
("Vision Twenty-One") and its subsidiary, The Complete Optical Laboratory, Ltd.,
Corp. (the "Subsidiary"), substantially all of the assets used to operate 76
retail eyewear outlets pursuant to that certain Asset Purchase Agreement, dated
July 7, 1999, by and among the Company, Vision Twenty-One and the Subsidiary
(the "VTO Retail Acquisition"). As a result of this acquisition, the Company
(through its subsidiaries) (i) owns and operates 39 stores under the name
"Vision World" in Minnesota, North Dakota, Iowa, South Dakota, and Wisconsin and
18 stores under the name "Stein Optical" in Wisconsin, and (ii) manages 19
stores under the name "Eye Drx" in New Jersey pursuant to a business management
agreement with a private optometrist (collectively, the "Acquired Businesses").
The results of operations from these Acquired Businesses have been included in
the Company's operating results from the date of acquisition.
The estimated aggregate cash consideration paid at the closing by the
Company to Vision Twenty-One and the Subsidiary in the VTO Retail Acquisition
was $36.5 million (the purchase price being subject to an adjustment based upon
a final audit of these retail operations as of August 31, 1999, which the
Company believes will impact the final purchase price). The Company utilized its
existing $100.0 million acquisition facility to finance the transaction.
The VTO Retail Acquisition was accounted for using the purchase method
of accounting. Accordingly, a portion of the purchase price has been
preliminarily allocated to the identifiable net assets acquired based on their
estimated fair values with the balance of the purchase price included in
goodwill. The cost in excess of identifiable net assets acquired is being
amortized over 25 years on a straight-line basis.
Simultaneously with the closing, the Company entered into a strategic
alliance with Vision Twenty-One involving their respective managed care
programs, optometry and ophthalmology practices and the co-marketing of Vision
Twenty-One's refractive surgery program. On October 25, 1999, Vision Twenty-One
announced it has developed an initial plan to substantially exit the business of
managing practices of optometry and ophthalmology and the discontinuation of
select managed care contracts that are not consistent with the business plan. In
light of the foregoing, the status of the strategic alliance with
10
<PAGE> 12
Vision Twenty-One is being evaluated. Additionally, Vision Twenty-One
currently manages 21 optometric practices in Florida, 9 in Arizona and 6 in
Texas which are located within or adjacent to the Company's stores.
11
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Eye Care Centers of America, Inc. is the fourth largest retail optical
chain in the United States as measured by net revenues, operating 354 stores,
275 of which are optical superstores. The Company operates predominately under
the trade name "EyeMasters," and in certain geographical regions under the trade
names "Binyon's," "Visionworks", "Hour Eyes", "Dr. Bizer's VisionWorld", "Dr.
Bizer's ValuVision", "Doctor's ValuVision", "Vision World", "Stein Optical" and
"Eye Drx". The Company operates in the $15.8 billion optical retail market.
Management believes that key drivers of growth for retail optical chains include
(i) the aging of the United States population, (ii) the increased role of
managed vision care, (iii) the consolidation of the industry and (iv) new
product innovations.
The industry is highly fragmented and is undergoing significant
consolidation. Since 1996, the Company has acquired and integrated four
acquisitions. The following describes the two most recent acquisitions in 1998
and 1999. In September 1998, the Company acquired certain assets of Dr. Bizer's
VisionWorld, PLLC and related entities (the "Bizer Entities"), a nineteen store
optical retailer located primarily in Kentucky and Tennessee, and simultaneously
entered into long-term management agreements with a private optometrist to
manage such nineteen stores (collectively, the "Bizer Acquisition"). The results
of operations from the date of acquisition from these nineteen stores are
included in the Company's consolidated results of operations. In August 1999,
the Company consummated the VTO Retail Acquisition acquiring substantially all
of the assets used to operate 76 retail eyewear outlets from Vision Twenty-One,
Inc. in Minnesota, North Dakota, Iowa, South Dakota, Wisconsin and New Jersey
and simultaneously entering into a long-term business management agreement with
a private optometrist to manage the nineteen New Jersey locations.
On March 6, 1998, ECCA Merger Corp. ("Merger Corp."), a Delaware
corporation formed by Thomas H. Lee Company ("THL Co."), and the Company entered
into a recapitalization agreement (the "Recapitalization Agreement") providing
for, among other things, the merger of such corporation with and into the
Company (the "Merger" and, together with the financing of the recapitalization
and related transactions described below, the "Recapitalization"). Upon
consummation of the Recapitalization on April 24, 1998, Thomas H. Lee Equity
Fund IV, L.P. ("THL Fund IV") and other affiliates of THL Co. (collectively with
THL Fund IV and THL Co., "THL") owned approximately 89.7% of the issued and
outstanding shares of common stock of the Company ("Common Stock"), existing
shareholders (including management) of the Company retained approximately 7.3%
of the issued and outstanding Common Stock and management purchased additional
shares representing approximately 3.0% of the issued and outstanding Common
Stock. The total transaction value of the Recapitalization was approximately
$323.8 million, including related fees and expenses, and the implied total
equity value of the Company following the Recapitalization was approximately
$107.3 million.
Certain of the funds needed to consummate the Recapitalization were
obtained through the sale, pursuant to Rule 144A promulgated under the
Securities Act of 1933, as amended (the "Securities Act"), of $100,000,000 in
principal amount of 9 1/8% Senior Subordinated Notes due 2008 (the "Fixed Rate
Notes") and $50,000,000 in principal amount of Floating Interest Rate
Subordinated Term Securities due 2008 (the "Floating Rate Notes" and, together
with the Fixed Rate Notes, the "Initial Notes"). The Initial Notes were issued
by the Company and guaranteed by the Company's subsidiaries (the "Subsidiary
Guarantors"). Under that certain Indenture, dated April 24, 1998 (the
"Indenture"), by and among the Company, the Subsidiary Guarantors, and the
United States Trust Company of New York as Trustee
12
<PAGE> 14
governing the Initial Notes, the Company and the Subsidiary Guarantors are
jointly and severally liable for payment of the Initial Notes. The Company filed
a registration statement with the Securities and Exchange Commission with
respect to an offer to exchange the Initial Notes for notes which have terms
substantially identical in all material respects to the Initial Notes, except
such notes are freely transferable by the holders thereof and are issued without
any covenant regarding registration (the "Exchange Notes"). The registration
statement was declared effective on January 28, 1999. The exchange period ended
March 4, 1999. The Exchange Notes are the only notes of the Company which are
currently outstanding. In addition to the net proceeds from the sale of the
Initial Notes, the Recapitalization was financed with (a) approximately $55.0
million of borrowings under the Credit Facility (defined herein) and (b)
approximately $99.4 million from the sale of capital stock to THL, Bernard W.
Andrews and other members of management (the "Equity Contribution") consisting
of (i) approximately $71.6 million from the sale of Common Stock and (ii)
approximately $27.8 million from the sale of shares of a newly created series of
preferred stock of the Company ("New Preferred Stock"). The Company used the
proceeds from such bank borrowings, the sale of the Exchange Notes, and the
Equity Contribution principally to finance the conversion into cash of the
shares of Common Stock which were not retained by existing stockholders, to
refinance certain existing indebtedness of the Company, to redeem certain
outstanding preferred stock of the Company and to pay related fees and expenses
of the Recapitalization. In connection with the Recapitalization, the Company
in-substance defeased its previously issued 12% Senior Notes due 2003 (the
"Senior Notes") by depositing with the trustee for the Senior Notes (i) an
irrevocable notice of redemption of the Senior Notes on October 1, 1998 and (ii)
United States government securities in an amount necessary to yield on October
1, 1998, $78.4 million, which constituted the principal amount, premium and
interest payable on the Senior Notes on the October 1, 1998 redemption date. The
Senior Notes were defeased as scheduled on October 1, 1998.
13
<PAGE> 15
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain statement of
income data as a percentage of net revenues:
<TABLE>
<CAPTION>
THIRTEEN THIRTY-NINE
WEEKS ENDED WEEKS ENDED
-------------------------- ------------------------
OCTOBER 3, OCTOBER 2, OCTOBER 3, OCTOBER 2,
1998 1999 1998 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
NET REVENUES:
Optical sales 98.6% 98.9% 98.9% 98.9%
Management fee 1.4 1.1 1.1 1.1
----- ----- ----- -----
Total net revenues 100.0 100.0 100.0 100.0
OPERATING COSTS AND EXPENSES:
Cost of goods sold 34.9* 34.8* 34.3* 33.8*
Selling, general and administrative expenses 57.9* 58.4* 55.9* 56.5*
Recapitalization and other expenses 0.3 -- 14.2 --
Amortization of intangibles 1.4 1.7 1.4 1.7
----- ----- ----- -----
Total operating costs and expenses 93.3 93.8 104.7 91.0
----- ----- ----- -----
INCOME/(LOSS) FROM OPERATIONS 6.7 6.2 (4.7) 9.0
INTEREST EXPENSE, NET 8.8 7.5 7.6 8.0
IN-SUBSTANCE DEFEASED BONDS INTEREST EXPENSE, NET 21.6 -- 1.3 --
INCOME TAX EXPENSE 0.0 0.8 0.0 0.4
----- ----- ----- -----
NET INCOME/(LOSS) BEFORE CHANGE IN ACCOUNTING PRINCIPLE
AND EXTRAORDINARY LOSS (3.7) (2.1) (13.6) 0.6
CHANGE IN ACCOUNTING PRINCIPLE -- -- -- 0.2
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF LONG-TERM
DEBT 7.0 -- 4.6 --
----- ----- ----- -----
NET INCOME/(LOSS) (10.7)% (2.1)% (18.2)% 0.4%
===== ===== ===== =====
</TABLE>
* Percentages based on optical sales only
14
<PAGE> 16
THE THIRTEEN WEEKS ENDED OCTOBER 2, 1999 COMPARED TO THE THIRTEEN WEEKS ENDED
OCTOBER 3, 1998.
Net Revenues. The increase in net revenues to $75.4 million for the thirteen
weeks ended October 2, 1999 from $59.6 million for the thirteen weeks ended
October 3, 1998 was largely the result of the Bizer Acquisition and VTO
Acquisition and an increase in comparable store sales of 0.1%. The Bizer and VTO
Retail Acquisitions resulted in an increase in net revenues of $9.3 million and
$4.4 million, respectively, during the third thirteen weeks of fiscal 1999.
Gross Profit. Gross profit increased to $48.7 million for the thirteen weeks
ended October 2, 1999 from $38.2 million for the thirteen weeks ended October 3,
1998. Gross profit as a percentage of optical sales increased to 65.2% for the
thirteen weeks ended October 2, 1999 as compared to 65.1% for the thirteen weeks
ended October 3, 1998. This percentage increase was primarily due to increased
productivity within the store labs.
Selling General & Administrative Expenses (SG&A). SG&A increased to $43.5
million for the thirteen weeks ended October 2, 1999 from $34.0 million for the
thirteen weeks ended October 3, 1998. SG&A as a percentage of optical sales
increased to 58.4% for the thirteen weeks ended October 2,1999 from 57.9% for
the thirteen weeks ended October 3, 1998. This percentage increase was primarily
due to the inclusion of doctor payroll expenses for the stores acquired through
the Bizer Acquisition, which were not included in the third quarter of 1998
results. This percentage increase was offset by increased leveraging of
advertising expenditures.
Amortization Expense. Amortization expense (excluding the amortization of store
pre-opening costs) increased to $1.3 million for the thirteen weeks ended
October 2, 1999 from $0.9 million for the thirteen weeks ended October 3, 1998.
This increase was due to amortization of the goodwill related to the Bizer
Acquisition, which was consummated on September 30, 1998.
Net Interest Expense. Net interest expense decreased to $5.7 million for the
thirteen weeks ended October 2, 1999 from $6.2 million for the thirteen weeks
ended October 3, 1998. This decrease was due to the repayment of interest
related to the defeasance of the $70.0 million Senior Notes and was offset by
the increased borrowings related to the Bizer and VTO Retail Acquisitions.
Net Income. Net loss decreased to $1.6 million for the thirteen weeks ended
October 2, 1999 from a net loss of $6.4 million for the thirteen weeks ended
October 3, 1998.
THE THIRTY-NINE WEEKS ENDED OCTOBER 2, 1999 COMPARED TO THE THIRTY-NINE WEEKS
ENDED OCTOBER 3, 1998.
Net Revenues. The increase in net revenues to $220.3 million for the thirty-nine
weeks ended October 2, 1999 from $179.8 million for the thirty-nine weeks ended
October 3, 1998 was largely the result of the Bizer Acquisition, the VTO Retail
Acquisition and an increase in comparable store sales of 1.1%. The Bizer
Acquisition and the VTO Retail Acquisition resulted in an increase in net
revenues of $28.0 million and $4.4 million, respectively, during the thirty-nine
weeks of fiscal 1999.
Gross Profit. Gross profit increased to $144.3 million for the thirty-nine weeks
ended October 2, 1999 from $116.8 million for the thirty-nine weeks ended
October 3, 1998. Gross profit as a percentage of optical sales increased to
66.2% for the thirty-nine weeks ended October 2, 1999 as compared to 65.7%
15
<PAGE> 17
for the thirty-nine weeks ended October 3, 1998. This percentage increase was
primarily due to increased productivity within the store labs.
Selling General & Administrative Expenses (SG&A). SG&A increased to $123.1
million for the thirty-nine weeks ended October 2, 1999 from $99.3 million for
the thirty-nine weeks ended October 3, 1998. SG&A as a percentage of optical
sales increased to 56.5% for the thirty-nine weeks ended October 2, 1999 from
55.9% for the thirty-nine weeks ended October 3, 1998. This percentage increase
was primarily due to the inclusion of doctor payroll expenses for the stores
acquired through the Bizer Acquisition, which were not included in the third
quarter of 1998 results. This percentage increase was offset by increased
leveraging of advertising expenditures and other general selling expenses.
Amortization Expense. Amortization expense (excluding the amortization of store
pre-opening costs) increased to $3.7 million for the thirty-nine weeks ended
October 2, 1999 from $2.5 million for the thirty-nine weeks ended October 3,
1998. This increase was due to amortization of the goodwill related to the Bizer
Acquisition, which was consummated on September 30, 1998, and amortization of
the debt issuance costs related to the Recapitalization.
Net Interest Expense. Net interest expense increased to $17.5 million for the
thirty-nine weeks ended October 2, 1999 from $15.9 million for the thirty-nine
weeks ended October 3, 1998. This increase was due to the increased borrowings
related to the Recapitalization, the Bizer Acquisition and the VTO Retail
Acquisition.
Net Income. Net income increased to $0.8 million for the thirty-nine weeks ended
October 2, 1999 from a net loss of $32.8 million for the thirty-nine weeks ended
October 3, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities have provided net cash of $16.3
million for the thirty-nine weeks ended October 2, 1999 as compared to a use of
$3.5 million for the thirty-nine weeks ended October 3, 1998. As of October 2,
1999, the Company had $1.7 million of cash available to meet the Company's
obligations.
Capital expenditures are related to the construction of new stores,
repositioning of existing stores in some markets, new computer systems for the
stores and maintenance of existing facilities. Capital expenditures for the
thirty-nine weeks ended October 2, 1999 were $16.5 million. Capital expenditures
for 1999 are anticipated to be approximately $22.0 million. Of the 1999 capital
expenditures, approximately $11.0 million are expected to be related to new
stores, approximately $5.0 million are expected to be for maintenance of
existing facilities and the remaining approximately $6.0 million represents the
funds necessary to complete the Company's point-of-sale and equipment upgrade
programs, which management believes are non-recurring in nature.
In connection with the Recapitalization, the Company entered into a
credit agreement (the "Credit Facility") which consists of (i) the $55.0 million
term loan facility (the "Term Loan Facility"); (ii) the $35.0 million revolving
credit facility (the "Revolving Credit Facility"); and (iii) the $100.0 million
acquisition facility (the "Acquisition Facility"), of which $50.0 million was
committed at April 24, 1998. At October 2, 1999, the Company had $53.0 million
in term loans outstanding under the Term Loan Facility and $69.2 million
outstanding under the Acquisition Facility, which funded the Bizer and VTO
Acquisitions. At October 2, 1999, the Company had $35.0 million under the
Revolving Credit Facility and $30.8 million under the Acquisition Facility
uncommitted. Borrowings made under the Credit Facility bear interest at a rate
equal to, at the Company's option, LIBOR plus 2.25% or the Base Rate (as defined
in the Credit Facility) plus 1.25%. The Term Loan Facility matures five years
from the closing date of the Credit Facility and will amortize quarterly in
aggregate annual principal amounts of approximately $0.0 million, $4.0 million,
$12.0
16
<PAGE> 18
million, $18.0 million, and $21.0 million, respectively, for years one through
five after the closing of the Credit Facility.
In connection with the Recapitalization, the Company completed a debt
offering of the Initial Notes, which were subsequently exchanged for the
Exchange Notes. Interest on the Exchange Notes will be payable semiannually on
each May 1 and November 1, commencing on November 1, 1998. Interest on the Fixed
Rate Notes accrues at the rate of 9 1/8% per annum. The Floating Rate Notes bear
interest at a rate per annum, reset semiannually, and equal to LIBOR (as
defined) plus 3.98%. The Exchange Notes will not be entitled to the benefit of
any mandatory sinking fund. On April 24, 1998, the Company entered into an
interest rate swap agreement which converts a portion of the Floating Rate Notes
to a fixed rate.
During 1996, the Company issued 110,000 shares of Series A Cumulative
Mandatorily Redeemable Exchangeable Pay-in-Kind Preferred Stock ("Preferred
Stock"). In conjunction with the Recapitalization, the Company repurchased the
Preferred Stock, canceled it and issued 300,000 shares of a new series of
preferred stock (the "New Preferred Stock"), par value $ .01 per share.
Dividends on shares of New Preferred Stock are cumulative from the date of issue
(whether or not declared) and will be payable when and as may be declared from
time to time by the Board of Directors of the Company. Such dividends accrue on
a daily basis from the original date of issue at an annual rate per share equal
to 13% of the original purchase price per share, with such amount to be
compounded quarterly. The New Preferred Stock will be redeemable at the option
of the Company, in whole or in part, at $100 per share plus (i) the per share
dividend rate and (ii) all accumulated and unpaid dividends, if any, to the date
of redemption, upon occurrence of an offering of equity securities, a change of
control or certain sales of assets.
Based upon current operations, anticipated cost savings and future
growth, the Company believes that its cash flow from operations, together with
available borrowings under the Revolving Credit Facility, will be adequate to
meet its anticipated requirements for working capital, capital expenditures and
scheduled principal and interest payments. However, the Company believes that
its ability to repay the Exchange Notes and amounts outstanding under the
Revolving Credit Facility and the Acquisition Facility at maturity may require
additional financing. The ability of the Company to meet its debt service
obligations and reduce its debt will be dependent on the future performance of
the Company, which in turn, will be subject to general economic conditions and
to financial, business, and other factors, including factors beyond the
Company's control. A portion of the Company's debt bears interest at floating
rates; therefore, its financial condition is and will continue to be affected by
changes in prevailing interest rates.
SYSTEMS CONVERSION; YEAR 2000 ISSUE
The Company is aware of the potential for industry wide business
disruption which could occur due to problems related to the "Year 2000" issue.
It is the belief of the Company's management that it has a prudent plan in place
to address these issues within the Company and with its suppliers. The
components of the Company's plan include: an assessment of internal systems for
modification and/or replacement; communication with external vendors to
determine their state of readiness to maintain an uninterrupted supply of goods
and services to the Company; an evaluation of the Company's production equipment
as to its ability to function properly after the turn of the century; an
evaluation of facility-related issues; the retention of technical and advisory
expertise to ensure that the Company is taking prudent action steps; and the
development of a contingency plan.
17
<PAGE> 19
State of Readiness
The Company has developed a comprehensive plan to reduce the
probability of operational difficulties due to Year 2000 related failures. The
Company believes that it is on track towards a timely completion at the
beginning of December of 1999. Overall the Company estimates that it has
substantially completed the Year 2000 issue identification process, and
estimates that approximately 90% of the Year 2000 issues identified have been
remediated.
Internal Systems (Information Technology)
To date, the Company has fully completed its assessment of all
information technology systems that could be significantly affected by the Year
2000 issue. The completed assessment indicated that certain systems are already
Year 2000 compliant while others are still in the process of being remediated.
Compliant systems include the Company's general ledger system, the managed
vision care system, the merchandising system and the point-of-sale system. The
system remaining to be remediated is the payroll/human resources system, which
should be compliant by the end of November 1999.
Suppliers
The Company is in the process of communicating with its external
vendors to gain an understanding of their state of readiness to maintain an
uninterrupted supply of goods and services to the Company. Although the Company
believes that its products may be purchased from a number of vendors on
comparable terms and that therefore it is not dependent on any individual or
group of vendors for frames or lenses, the Company has identified vendors that
may otherwise be viewed as important to its business. The Company is defining a
critical vendor as one whose inability to continue to provide goods and services
could have a serious adverse impact on the Company's ability to produce,
deliver, and collect payment for eyewear and/or services. To date the Company is
not aware of any supplier with a Year 2000 issue that would materially impact
the results of operations, liquidity or capital resources. However, the Company
has no means of ensuring that suppliers will be Year 2000 ready. Although the
Company believes it does not have any vendor which is individually critical, the
inability of suppliers to complete their Year 2000 resolution process in a
timely fashion could materially impact the Company.
Production Equipment
The Company has completed an inventory of production equipment
currently used at the Company. The Company has determined the Year 2000
readiness of this equipment through communication with the equipment
manufacturers and testing where appropriate. The Company is not aware of any
production equipment that is affected by the Year 2000 issue.
Facility-Related Issues
The Company is in the process of evaluating facilities-related
equipment with the potential for Year 2000 related failures. The Company will
determine the Year 2000 readiness of this equipment through communication with
the equipment manufacturers and testing where appropriate. It is the Company's
intention to repair or replace non-compliant equipment prior to operating
difficulties. The Company remains aware of the potential for imbedded logic
within microchips to cause equipment failure. The Company believes that it has a
prudent approach towards evaluating facilities equipment, however, it may be
impracticable or impossible to test certain items of equipment for Year 2000
readiness. To the extent such untested equipment is not Year 2000 ready, it may
fail to operate on or after January 1, 2000, resulting in possible interruptions
of security, heating, elevator, telephone and other services.
18
<PAGE> 20
Technical and Advisory Expertise
The Company has engaged outside consultants to assist it in project
planning, testing methodologies, and evaluating our Year 2000 remediation
activities.
Costs
The Company is evaluating the total cost of Year 2000 compliance. At
this time, the Company estimates the total cost of Year 2000 related activities
to be approximately $2,000,000, with $500,000 of that amount yet to be incurred.
This amount is incremental spending and has been budgeted within the normal
magnitude of Information Technology spending. This amount includes the
replacement of hardware and applications that are outdated and were due for
replacement regardless of Year 2000 issues.
Contingency Plan
Although the Company believes that it is taking prudent action related
to the identification and resolution of issues related to the Year 2000, its
assessment is still in progress. The Company may never be able to know with
certainty whether certain key vendors are compliant. Failure of key vendors to
make their computer systems Year 2000 compliant could result in delayed
deliveries of products to the Company. If such delays are extended they could
have a material adverse effect on the Company's business, financial condition,
and results of operations. There are also technical vagaries to logic imbedded
within microchips, which may prove impracticable or impossible to test. To the
extent such microchips are not Year 2000 compliant, this could have a material
adverse effect on the Company's business, financial condition, and results of
operations.
Risks
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers, the Company is
unable to determine at this time whether the consequences of Year 2000 failures
will have a material impact on the Company's results of operations, liquidity or
financial condition. The Company's efforts related to the Year 2000 issue are
expected to significantly reduce the Company's level of uncertainty about the
Year 2000 problem and, in particular, about the Year 2000 compliance and
readiness of its critical vendors. The Company believes that, with the
implementation of new business systems and completion of the plans set in place
related to the Year 2000 issue, the possibility of significant interruptions of
normal operations should be reduced.
INFLATION
The impact of inflation on the Company's operations has not been
significant to date. While the Company does not believe its business is highly
sensitive to inflation, there can be no assurance that a high rate of inflation
would not have an adverse impact on the Company's operations.
19
<PAGE> 21
SEASONALITY AND QUARTERLY RESULTS
The Company's sales fluctuate seasonally. Historically, the Company's
highest sales and earnings occur in the first and third fiscal quarters;
however, the opening of new stores and the Bizer Acquisition and the VTO Retail
Acquisition may affect seasonal fluctuations. Hence, quarterly results are not
necessarily indicative of results for the entire year.
FORWARD LOOKING STATEMENTS
The foregoing Form 10-Q contains various "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements represent the Company's expectations or belief concerning future
events, including the following: any statements regarding future sales and gross
profit percentages, any statements regarding the continuation of historical
trends, and any statements regarding the sufficiency of the Company's cash
balances and cash generated from operating and financing activities for the
Company's future liquidity and capital resource needs. Without limiting the
foregoing, the words "believes," "anticipates," "plans," "expects," and similar
expressions are intended to identify forward-looking statements. The Company
cautions that these statements are further qualified by important economic and
competitive factors that could cause actual results to differ materially from
those in the forward-looking statements, including, without limitation, risks of
the eye care industry, including a highly competitive industry with many
well-established competitors with greater financial and other resources than the
Company, and the impact of changes in consumer tastes, local, regional and
national economic conditions, demographic trends, traffic patterns, employee
availability and cost increases. In addition, the Company's ability to expand is
dependent upon various factors, such as the availability of attractive sites for
new stores, the ability to negotiate suitable lease terms, the ability to
generate or borrow funds to develop new stores and obtain various government
permits and licenses and the recruitment and training of skilled management and
employees. Accordingly, such forward-looking statements do not purport to be
predictions of future events or circumstances and may not be realized.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various market risks. Market risk is the
potential loss arising from adverse changes in market prices and rates. The
Company does not enter into derivative or other financial instruments for
trading or speculative purposes. There have been no material changes in the
Company's market risk during the third quarter of fiscal 1999. For further
discussion, refer to the Eye Care Centers of America, Inc.'s annual report on
Form 10-K for the year ended January 2, 1999.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to routine litigation in the ordinary course of its
business. There have been no such pending matters, individually or in the
aggregate, that are deemed to be material to the business or financial condition
of the Company that have arisen during the third quarter of fiscal 1999. For
further discussion, refer to the Eye Care Centers of America, Inc.'s annual
report on Form 10-K for the year ended January 2, 1999.
20
<PAGE> 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report.
2.1 Stock Purchase Agreement dated August 15, 1996 by and between
Eye Care Centers of America, Inc., Visionworks Holdings, Inc.
and the Sellers listed therein. (a)
2.2 Stock Purchase Agreement, dated September 30, 1997, by and
among Eye Care Centers of America, Inc., a Texas corporation,
Robert A. Samit, O. D. and Michael Davidson, O. D. (a)
2.3 Recapitalization Agreement dated as of March 6, 1998 among
ECCA Merger Corp., Eye Care Centers of America, Inc. and the
sellers Listed therein. (a)
2.4 Amendment No. 1 to the Recapitalization Agreement dated as of
April 23, 1998 among ECCA Merger Corp., Eye Care Centers of
America, Inc., and the sellers listed therein. (a)
2.5 Amendment No. 2 to the Recapitalization Agreement dated as of
April 24, 1998 among ECCA Merger Corp., Eye Care Centers of
America, Inc. and the sellers listed therein. (a)
2.6 Articles of Merger of ECCA Merger Corp. with and into Eye Care
Centers of America, Inc. dated April 24, 1998. (a)
2.7 Master Asset Purchase Agreement, dated as of August 22, 1998,
by and among Eye Care Centers of America, Inc., Mark E. Lynn,
Dr. Mark Lynn & Associates, PLLC; Dr. Bizer's Vision World,
PLLC and its affiliates. (a)
2.8 Letter Agreement, dated October 1, 1998, amending and
modifying that certain Master Asset Purchase Agreement, dated
as of August 22, 1998, by and among Eye Care Centers of
America, Inc.; Mark E. Lynn; Dr. Mark Lynn & Associates, PLLC;
Dr. Bizer's VisionWorld, PLLC and its affiliates. (a)
2.9 Asset Purchase Agreement, dated July 7, 1999 by and among Eye
Care Centers of America, Inc., Vision Twenty-One, Inc., and
The Complete Optical Laboratory, Ltd., Corp. (c) (*)
2.10 Letter Agreement, dated August 31, 1999, amending and
modifying that certain Asset Purchase Agreement, dated July 7,
1999 by and among Eye Care Centers of America, Inc., Vision
Twenty-One, Inc., and The Complete Optical Laboratory, Ltd.,
Corp. (d)
3.1 Restated Articles of Incorporation of Eye Care Centers of
America Inc. (a)
3.2 Statement of Resolution of the Board of Directors of Eye Care
Centers of America, Inc. designating a series of Preferred
Stock. (a)
21
<PAGE> 23
3.3 Amended and Restated By-laws of Eye Care Centers of America,
Inc. (a)
3.4 Certificate of Incorporation of Eye Drx Retail Management,
Inc. (a)
3.5 Certificate of Incorporation of Stein Optical, Inc. (a)
3.6 Certificate of Incorporation of Vision World, Inc. (a)
4.1 Indenture dated as of April 24, 1998 among Eye Care Centers of
America, Inc., the Guarantors named therein and United States
Trust Company of New York, as Trustee for the 9 1/8% Senior
Subordinated Notes Due 2008 and Floating Interest Rate
Subordinated Term Securities. (a)
4.2 Form of Fixed Rate Exchange Note (included in Exhibit 4.1
Hereto). (a)
4.3 Form of Floating Rate Exchange Note (included in Exhibit 4.1
Hereto). (a)
4.4 Form of Guarantee (included in Exhibit 4.1 hereto). (a)
4.5 Registration Rights Agreement dated April 24, 1998 between Eye
Care Centers of America, Inc., the subsidiaries of the Company
named as guarantors therein, BT Alex. Brown Incorporated and
Merrill Lynch, Pierce, Fenner & Smith Incorporated. (a)
27.1 Financial Data Schedule. (d)
- ----------
+ Portions of this Exhibit have been omitted pursuant to an application
for an order declaring confidential treatment filed with the
Securities and Exchange Commission.
* Portions of this Exhibit have been omitted pursuant to Rule 601 of
the Securities Act and a copy will be furnished supplementally upon
request.
(a) Incorporated by reference from the Registration Statement on Form S-4
(File No. 333 - 56551).
(b) Incorporated by reference from the Company's Annual Report on Form
10-K for the year ended January 2, 1999.
(c) Incorporated by reference from the Company's Quarter Report on Form
10-Q for the period ended July 3, 1999.
(d) Filed herewith.
(b) Report on Form 8-K
Form 8-K dated September 15, 1999, Item 5 reporting VTO Retail
Acquisition
22
<PAGE> 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EYE CARE CENTERS OF AMERICA, INC.
November 15, 1999 /s/ Alan E. Wiley
- ------------------------- -----------------------------------
Dated Alan E. Wiley
Executive Vice President and
Chief Financial Officer
23
<PAGE> 25
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<S> <C>
2.1 Stock Purchase Agreement dated August 15, 1996 by and between
Eye Care Centers of America, Inc., Visionworks Holdings, Inc.
and the Sellers listed therein. (a)
2.2 Stock Purchase Agreement, dated September 30, 1997, by and
among Eye Care Centers of America, Inc., a Texas corporation,
Robert A. Samit, O. D. and Michael Davidson, O. D. (a)
2.3 Recapitalization Agreement dated as of March 6, 1998 among
ECCA Merger Corp., Eye Care Centers of America, Inc. and the
sellers Listed therein. (a)
2.4 Amendment No. 1 to the Recapitalization Agreement dated as of
April 23, 1998 among ECCA Merger Corp., Eye Care Centers of
America, Inc., and the sellers listed therein. (a)
2.5 Amendment No. 2 to the Recapitalization Agreement dated as of
April 24, 1998 among ECCA Merger Corp., Eye Care Centers of
America, Inc. and the sellers listed therein. (a)
2.6 Articles of Merger of ECCA Merger Corp. with and into Eye Care
Centers of America, Inc. dated April 24, 1998. (a)
2.7 Master Asset Purchase Agreement, dated as of August 22, 1998,
by and among Eye Care Centers of America, Inc., Mark E. Lynn,
Dr. Mark Lynn & Associates, PLLC; Dr. Bizer's Vision World,
PLLC and its affiliates. (a)
2.8 Letter Agreement, dated October 1, 1998, amending and
modifying that certain Master Asset Purchase Agreement, dated
as of August 22, 1998, by and among Eye Care Centers of
America, Inc.; Mark E. Lynn; Dr. Mark Lynn & Associates, PLLC;
Dr. Bizer's VisionWorld, PLLC and its affiliates. (a)
2.9 Asset Purchase Agreement, dated July 7, 1999 by and among Eye
Care Centers of America, Inc., Vision Twenty-One, Inc., and
The Complete Optical Laboratory, Ltd., Corp. (c) (*)
2.10 Letter Agreement, dated August 31, 1999, amending and
modifying that certain Asset Purchase Agreement, dated July 7,
1999 by and among Eye Care Centers of America, Inc., Vision
Twenty-One, Inc., and The Complete Optical Laboratory, Ltd.,
Corp. (d)
3.1 Restated Articles of Incorporation of Eye Care Centers of
America Inc. (a)
3.2 Statement of Resolution of the Board of Directors of Eye Care
Centers of America, Inc. designating a series of Preferred
Stock. (a)
</TABLE>
<PAGE> 26
<TABLE>
<S> <C>
3.3 Amended and Restated By-laws of Eye Care Centers of America,
Inc. (a)
3.4 Certificate of Incorporation of Eye Drx Retail Management,
Inc. (a)
3.5 Certificate of Incorporation of Stein Optical, Inc. (a)
3.6 Certificate of Incorporation of Vision World, Inc. (a)
4.1 Indenture dated as of April 24, 1998 among Eye Care Centers of
America, Inc., the Guarantors named therein and United States
Trust Company of New York, as Trustee for the 9 1/8% Senior
Subordinated Notes Due 2008 and Floating Interest Rate
Subordinated Term Securities. (a)
4.2 Form of Fixed Rate Exchange Note (included in Exhibit 4.1
Hereto). (a)
4.3 Form of Floating Rate Exchange Note (included in Exhibit 4.1
Hereto). (a)
4.4 Form of Guarantee (included in Exhibit 4.1 hereto). (a)
4.5 Registration Rights Agreement dated April 24, 1998 between Eye
Care Centers of America, Inc., the subsidiaries of the Company
named as guarantors therein, BT Alex. Brown Incorporated and
Merrill Lynch, Pierce, Fenner & Smith Incorporated. (a)
27.1 Financial Data Schedule. (d)
</TABLE>
- ----------
+ Portions of this Exhibit have been omitted pursuant to an application
for an order declaring confidential treatment filed with the
Securities and Exchange Commission.
* Portions of this Exhibit have been omitted pursuant to Rule 601 of
the Securities Act and a copy will be furnished supplementally upon
request.
(a) Incorporated by reference from the Registration Statement on Form S-4
(File No. 333 - 56551).
(b) Incorporated by reference from the Company's Annual Report on Form
10-K for the year ended January 2, 1999.
(c) Incorporated by reference from the Company's Quarter Report on Form
10-Q for the period ended July 3, 1999.
(d) Filed herewith.
<PAGE> 1
EXHIBIT 2.10
VISION TWENTY-ONE, INC.
7360 BRYAN DAIRY ROAD
LARGO, FLORIDA 33777
August 31, 1999
Eye Care Centers of America, Inc.
11103 West Avenue
San Antonio, Texas 78213
Attention: Alan E. Wiley
Executive Vice President and
Chief Financial Officer
RE: EYE CARE CENTERS OF AMERICA, INC.'S ACQUISITION VISION
TWENTY-ONE, INC.'S RETAIL OPTICAL DIVISION
Ladies and Gentlemen:
This Letter Agreement shall supplement and amend certain terms and
conditions of the Asset Purchase Agreement of even date herewith by and among
Eye Care Centers of America, Inc. ("Purchaser"), Vision Twenty-One, Inc. (the
"Company") and The Complete Optical Laboratory, Ltd., Corp. (the "Subsidiary"
and, together with the Company, "Sellers"), relating to the acquisition by the
Purchaser of substantially all of the assets of the Company's retail optical
division (the "Acquisition Transaction"). Where any provision of this Letter
Agreement conflicts or is otherwise inconsistent with a provision of the
transaction documents, this Letter Agreement shall prevail. Defined terms used
but not otherwise defined herein shall have the meanings given to them in the
Asset Purchase Agreement.
1. The schedules and exhibits to the Asset Purchase Agreement are hereby
supplemented and amended by the Supplement to Exhibits and Schedules
attached hereto as EXHIBIT 1.
2. Pursuant to the Settlement Agreement between the Company, Russell and
Takako Trenholme, VWSC Corp., and the Trenholme Family Limited
Partnership, the Company has agreed to transfer to Russell and Takako
Trenholme ownership of two automobiles owned by the Company (the
"Vehicles"). The Vehicles were included in the Assets to be transferred
to Purchaser pursuant to the terms of the Asset Purchase Agreement.
Sellers shall reimburse the Purchaser in the amount of Twenty-Five
Thousand Dollars ($25,000) which shall be withheld from the Estimated
Cash Payment. Purchaser acknowledges and agrees that the Vehicles shall
be deemed to be Excluded Assets and shall not be transferred to
Purchaser.
3. Section 2.02(b) of the Asset Purchase Agreement provides that the
Purchase Price received by the Sellers pursuant to the Asset Purchase
Agreement shall be allocated between the Sellers as set forth on
Exhibit E-1, and Exhibit E-1 provides that the allocation is to be
agreed upon by the parties prior to Closing. The parties have agreed
that the portion of the Purchase Price to be allocated to the
Subsidiary shall be an amount equal to the book value of the personal
property constituting Subsidiary Assets, and that no portion of the
Purchase Price allocated to the Subsidiary shall be allocated to
goodwill.
<PAGE> 2
4. The Company has submitted the titles to 11 vehicles owned by the
Company and used in connection with the Minnesota Business to the
Minnesota Department of Motor Vehicles (the "DMV") for transfer of
title. The vehicle titles have not yet been returned to the Company by
the DMV. The Company agrees to diligently pursue the transfer of these
vehicle titles and to deliver the original titles to Purchaser promptly
after receipt from the DMV. Purchaser acknowledges that the titles to
these vehicles will not be delivered at the Closing and waives receipt
of such titles as a condition to Closing.
5. The Sellers have not obtained all of the Landlord Estoppel Certificates
required to be delivered by the Sellers to Purchaser pursuant to
Section 7.11 of the Asset Purchase Agreement. As of the date hereof,
the Landlords for the locations set forth on EXHIBIT 2 (the "Designated
Premises") have not delivered executed Landlord Estoppel Certificates
in a form acceptable to Purchaser. The Sellers and Purchaser agree to
continue to use good faith efforts to pursue the Landlord Estoppel
Certificates for the Designated Premises and Sellers agree to indemnify
Purchaser in accordance with the terms of the Indemnification Agreement
and Waiver attached hereto as EXHIBIT 3 for any damages arising out of
and collectible pursuant to the Indemnification Agreement and Waiver
for the failure to obtain such Landlord Estoppel Certificates and
Purchaser waives the receipt of the Landlord Estoppel Certificates for
the Designated Premises as a condition to Closing. The Sellers
represent and warrant that neither it nor any of their agents and
representatives have received any indication from the landlords of the
Designated Premises that such landlord will not consent to the Subject
Transactions and deliver a Landlord Estoppel Certificates in a form
reasonably acceptable to Purchaser.
6. With respect to the Master Lease Agreement dated November 19, 1992 and
November 21, 1994 respectively between the Company and Associated
Leasing, Inc., the parties agree that equipment subject to such lease
shall be purchased concurrent with the Closing with title thereto
delivered to Vision World, Inc. The pay-off amount for such leases is
$116,466.38, of which the Purchaser shall pay $97,834.38 and the
Sellers shall pay $18,834.00. The amount owed by the Sellers shall be
withheld from the cash payment made by Purchaser at the Closing and the
full pay-off amount shall be delivered directly from Purchaser to
Associated Leasing, Inc.
7. With respect to the Master Lease Agreement No. VTO-54 dated September
22, 1998 between the Company and Principal Management Corporation,
Inc., the parties agree that equipment subject to such lease which is
used in the Acquired Businesses shall be purchased concurrent with the
Closing with title thereto delivered to Vision World, Inc. The pay-off
amount for such leases is $264,112, of which the Purchaser shall pay
the entire amount. The Sellers represent and warrant that the equipment
which is being purchased from Principal is all of the equipment subject
to such lease which is used in the Acquired Businesses.
8. Daron Johnson has resigned from the employ of the Company effective
August 31, 1999 and therefore his Employment Agreement will not be
assigned to the Purchaser and will be included as an Excluded Asset.
9. Reference is made to the point of sale system software ("Software")
used in the Minnesota Business licensed by Vision World, Inc. from Eye
Care Software, Inc. ("ECSI") under the Software License Agreement,
dated August 31, 1999 (the "Software License Agreement") and the
related computer equipment originally purchased by the Company from
Vision
<PAGE> 3
World, Inc., a Minnesota corporation, on or about June 30, 1999 and
transferred to Purchaser on the date hereof (the "Computer Equipment").
If there is a breach of the representations and warranties of the
Company set forth in Section 3.28 of the Agreement relating to the
Software and the Computer Equipment, and ECSI fails to remedy or
replace the Software or the Computer Equipment as required under the
Software License Agreement, Purchaser shall pursue, to a reasonable
conclusion, its remedies against ECSI for failing to perform under the
Software License Agreement before the Purchaser may pursue Sellers for
such breach by Sellers in accordance with the rights, if any, Purchaser
may have against Seller in accordance with the Asset Purchase
Agreement.
<PAGE> 4
Please acknowledge your understanding and acceptance of the foregoing
supplements, amendments, consents and waivers through your execution below.
Very truly yours,
Vision Twenty-One, Inc.
By:
-------------------------------------------
Richard T. Welch, Chief Financial Officer
The Complete Optical Laboratory, Ltd., Corp.
By:
--------------------------------------
Title:
-------------------------------------
ACCEPTED AND AGREED:
EYE CARE CENTERS OF AMERICA, INC.
By:
-------------------------------
Alan E. Wiley
Executive Vice President and
Chief Financial Officer
<PAGE> 5
AGREEMENT REGARDING STRATEGIC ALLIANCE
This Agreement Regarding Strategic Alliance is made this 31st day of
August, 1999 by and between Vision Twenty-One, Inc. ("Vision Twenty-One") and
Eye Care Centers of America, Inc. ("ECCA").
RECITALS:
A. Vision Twenty-One provides a full line of optometric management,
laser vision correction and eye care services and other products related to the
optometric/ophthalmological market. ECCA operates a nationwide chain of full
service retail optical facilities. Vision Twenty-One has decided to refocus and
restructure its business operational model, and in connection therewith has
entered into a transaction simultaneously with the execution of this Agreement
pursuant to which it will sell to ECCA substantially all of its retail optical
chain facilities related to Vision World, Stein Optical and Eye Drx.
B. As part of Vision Twenty-One's restructuring, Vision Twenty-One
desires to enter into a strategic alliance with ECCA in order to expand the
management of optometry practices, expand the marketing and administration of
its managed vision plan and medical/surgical business and to create an
appropriate strategic alliance with ECCA to facilitate the growth of its
refractive surgery business and ECCA believes this strategic alliance will
provide significant benefits to its business and its customers.
NOW, THEREFORE, in consideration of the mutual agreements contained
herein and for other good and valuable consideration, the receipt and
sufficiency of which are acknowledged, the parties agree as follows:
1. Definitions:
(a) Affiliate. "Affiliate" as to any person or entity shall
mean any entity or person that directly or indirectly through one or more
intermediaries controls, is controlled by or is under common control with, the
specified person or entity. The term "control" for this purpose shall mean the
ability, whether by the ownership of shares or other equity interest, by
contract or otherwise, to elect a majority of the directors of a corporation, to
independently select the general partner of a partnership, or otherwise to have
the power independently to remove and then select a majority of those persons
exercising governing authority over an entity. "Control" shall be conclusively
presumed in the case of direct or indirect ownership of 50% or more of the
equity interest by such person or entity. Notwithstanding the foregoing, in no
event shall the term "Affiliate" (i) with respect to ECCA include Thomas H. Lee
Company or any of its Affiliates (other than ECCA and its subsidiaries) or any
optometrist or other entity owned by an optometrist to whom ECCA or its
subsidiaries provide management services, and (ii) with
<PAGE> 6
respect to Vision Twenty-One include any optometrist or other entity owned by an
optometrist to whom Vision Twenty-One or its subsidiaries provide management
services.
(b) Optometric Territory. "Optometric Territory" shall mean
the geographic areas described below, within which ECCA currently operates or
hereinafter operates Retail Optical Centers. The geographic areas shall include
the greater Metropolitan areas of the following cities: Tampa/St. Petersburg,
Florida; Sarasota/Port Charlotte, Florida; Naples/Ft. Meyers, Florida;
Orlando/Gainesville/Daytona Beach, Florida; Jacksonville/Tallahassee, Florida;
Ft. Lauderdale/West Palm Beach/Miami, Florida; Phoenix, Arizona; and Tucson,
Arizona.
(c) Refractive Territories. "Refractive Territories" shall
mean the geographic areas described below, within which Vision Twenty-One or any
of its Affiliates, presently operates or hereinafter operates a refractive
surgery center or is otherwise affiliated with a strategic partner as described
in Section 4. The geographic areas shall include the greater Metropolitan areas
of the following cities: Washington, D.C./Baltimore, Maryland/Northern Virginia;
Salt Lake City, Utah; Louisville, Kentucky; Tampa, Florida; Phoenix, Arizona;
Ft. Lauderdale, Florida; Tallahassee, Florida; Austin, Texas; Tucson, Arizona;
Denver, Colorado; Orlando, Florida; Jacksonville, Florida; Las Vegas, Nevada;
Charlotte, North Carolina; Dallas, Texas; San Antonio, Texas; Raleigh/Durham,
North Carolina; Portland, Oregon; Kansas City, Missouri; Houston, Texas;
Nashville, Tennessee; Cleveland, Ohio; Minneapolis/St. Paul, Minnesota;
Milwaukee, Wisconsin; and Newark, New Jersey.
(d) Retail Optical Center. "Retail Optical Center" shall mean a
retail facility owned, partially owned, or operated by ECCA or an Affiliate
which sells or dispenses glasses, eye wear, contact lenses and related vision
care products and services, provided however the term "Retail Optical Center"
shall not include any dispensary owned by an optometrist (or other entity owned
by an optometrist) to whom ECCA or its subsidiaries provides management
services.
2. Right of First Refusal to Provide Optometric Services.
(a) ECCA, on behalf of itself and each existing and future
Affiliate, hereby grants Vision Twenty-One for the Term of this Agreement, a
right of first refusal to sublease space in, adjacent to or near each Retail
Optical Center located in the Optometric Territory, for the provision of
optometric and related services, on the terms and conditions hereinafter set
forth, and subject to the terms of existing agreements with third parties. The
parties contemplate that any sublease entered into between the parties will be
at fair market value as determined in good faith negotiations between the
parties hereto as hereinafter provided.
(b) With respect to each new Retail Optical Center to be
opened within the Optometric Territory, ECCA shall give Vision Twenty-One at
least 120 days advance written notice of its intention to open such new Retail
Optical Center, setting forth the
2
<PAGE> 7
location, the general dimensions of the premises (including the portion of the
premises within, adjacent to or near the Retail Optical Center to be subleased
to Vision Twenty-One), the proposed rental rate and the proposed commencement
date of the sublease. Within 30 days of the receipt of such notice, Vision
Twenty-One shall notify ECCA in writing whether it intends to exercise its right
to enter into the sublease and whether it agrees to the rental rate proposed by
ECCA. If Vision Twenty-One fails to notify ECCA within such 30 day period,
Vision Twenty-One shall be deemed to have elected not to exercise such right of
first refusal and ECCA may enter into a sublease with another third party, in
its sole discretion. If Vision Twenty-One so exercises this option, but does not
agree with the rental rate proposed by ECCA, ECCA and Vision Twenty-One shall
commence negotiations and utilize reasonable efforts for determination of a
mutually agreeable rental rate based upon estimated fair market value. If,
within 45 days of ECCA's original written notice of its intention to open such
new Retail Optical Center, the parties have not reached an agreement on the
rental rate, Vision Twenty-One's right of first refusal to sublease such space
shall terminate and ECCA shall be free to negotiate with any other party for the
sublease of such space. If Vision Twenty-One's right of first refusal so
terminates and ECCA negotiates sublease terms and rental rates that are
acceptable to ECCA and another party for the sublease of such space and if the
rental rate of such proposed sublease is at least ninety percent (90%) of the
most favorable rental rate previously offered by ECCA to Vision Twenty-One, ECCA
will give Vision Twenty-One notice of the rental rate of the proposed sublease
and will give Vision Twenty-One a right to enter into the sublease at the same
rental rate. Within seven (7) days of receipt of such notice, Vision Twenty-One
shall notify ECCA whether it intends to exercise its right to enter into the
sublease on such terms and at such rental rate. If Vision Twenty-One fails to
exercise this option within seven (7) days of receipt of such notice, ECCA shall
be free to enter into a sublease with any other party. Upon exercise of the
right of first refusal and agreement upon the rental rate, the parties shall be
obligated to execute the sublease upon the terms and rental rate agreed to by
the parties.
(c) With respect to all Retail Optical Centers existing as of
the date of this Agreement in the Optometric Territory with premises within,
adjacent to or near them that are presently subleased to parties other than
Vision Twenty-One, such subleases shall remain in full force and effect
notwithstanding this Agreement. Upon the expiration or termination of such
existing sublease at the existing Retail Optical Center, of which all such
existing subleases and their respective expiration dates are shown on the
attached Exhibit 1, and expressly subject to any contractual or legal obligation
to the existing tenant ECCA may have relating to the renewal or extension of any
such sublease, ECCA agrees that Vision Twenty-One shall have the right of first
refusal to sublease such premises on the terms provided in this Section 2.
Accordingly, ECCA will notify Vision Twenty-One as soon as practicable once it
becomes aware that the sublease within, adjacent to or near an existing Retail
Optical Center in the Optometric Territory is to become available and shall give
written notice to Vision Twenty-One, setting forth the location, the general
dimensions of the premises (including the portion of the premises within,
adjacent to or near the Retail Optical Center to be subleased to Vision
Twenty-One), the proposed rental rate and the proposed commencement date of the
sublease. As soon as practicable, but no
3
<PAGE> 8
later than 15 days after receipt of such notice, Vision Twenty-One shall notify
ECCA in writing whether it intends to exercise its right to sublease the
specified premises, and whether it agrees with the rental rate proposed by ECCA.
If Vision Twenty-One desires to exercise its option to sublease the specified
premises, but does not agree with the rental rate proposed by ECCA, ECCA and
Vision Twenty-One shall commence negotiations and utilize reasonable efforts for
determination of an a mutually agreeable rental rate based upon estimated fair
market value. If, within 15 days of ECCA's original written notice of its
intention to open such new Retail Optical Center, the parties have not reached
an agreement on the rental rate, Vision Twenty-One's right of first refusal to
sublease such space shall terminate and ECCA shall be free to negotiate with any
other party for the sublease of such space. If Vision Twenty-One's right of
first refusal so terminates and ECCA negotiates sublease terms and rental rates
that are acceptable to ECCA and another party for the sublease of such space and
if the rental rate of such proposed sublease is at least ninety percent (90%) of
the most favorable rental rate previously offered by ECCA to Vision Twenty-One,
ECCA will give Vision Twenty-One notice of the rental rate of the proposed
sublease and will give Vision Twenty-One a right to enter into the sublease at
the same rental rate. Within seven (7) days of receipt of such notice, Vision
Twenty-One shall notify ECCA whether it intends to exercise its right to enter
into the sublease on such terms and at such rental rate. If Vision Twenty-One
fails to exercise this option within seven (7) days of receipt of such notice,
ECCA shall be free to enter into a sublease with any other party. Upon exercise
of the right of first refusal and agreement upon the rental rate, the parties
shall be obligated to execute the sublease upon the terms and rental rate agreed
to by the parties. ECCA agrees that upon the expiration or termination of any
existing sublease, ECCA will use reasonable efforts to make the specified
premises available for Vision Twenty-One's occupancy as soon as possible
following the expiration or termination of the subject sublease, including
taking reasonably necessary steps to remove a holdover tenant.
(d) With respect to each Retail Optical Center that Vision
Twenty-One elects to sublease space within, adjacent to or near under this
Section 2 (and with respect to which the parties agree upon the rental rate),
ECCA and Vision Twenty-One will enter into a sublease substantially in the form
of either Exhibit 2 or 3 attached hereto, depending on the circumstances of the
operating format of such Retail Optical Center. Notwithstanding any provision in
this Agreement to the contrary, ECCA's and its Affiliates' obligations to enter
into a sublease with Vision Twenty-One or its Affiliate or designated managed
professional association shall be subject to any consent required by the
landlord of the subject premises, which ECCA will use reasonable efforts to
obtain, unless such efforts would require ECCA to suffer adverse economic
consequences which they would otherwise be unable to recoup from Vision
Twenty-One.
(e) With respect to each sublease that Vision Twenty-One
enters into with ECCA for the sublease of space within, adjacent to or near a
Retail Optical Center, Vision Twenty-One, represents, warrants and agrees that
unless otherwise consented to by ECCA the subleased premises shall be used and
occupied solely for the purposes of an office for providing the full-time
professional services of optometry, which shall include
4
<PAGE> 9
the performance of routine eye examinations, prescribing corrective lenses,
practicing therapeutic optometry, as may be allowed by law, prescribing and/or
supplying and fitting of contact lenses, as may be allowed by the sublease, and
performing pre- and post-operative co-management services with respect to laser
refractive surgery procedures, and for no other purposes whatsoever, it being
acknowledged by ECCA that Vision Twenty-One will be providing management
services to such practice. In no event shall optical goods (including, without
limitation, eyeglasses, contact lenses and sunglasses) be sold at such subleased
space without ECCA's prior written consent. Both parties agree to operate their
respective businesses at Vision Twenty-One subleased Retail Optical Centers in
accordance with all applicable laws, regulations and ordinances, and Vision
Twenty-One will require the same of its employed optometrists or managed
professional associations, where applicable. To the extent permitted by law,
Vision Twenty-One also agrees, represents and warrants that it will use
reasonable efforts to make certain that the optometric practice in the subleased
premises will open and have sufficient licensed and fully qualified optometrists
in personal attendance on the first day of the sublease term, and will
continuously operate such optometric practice, with the presence of sufficient
licensed and a fully qualified optometrist in personal attendance, during the
same hours as ECCA operates its Retail Optical Center, Monday through Sunday of
each week, except for closings for Christmas Day, New Year's Day, Easter Sunday
and Thanksgiving Day.
(f) With respect to each sublease that Vision Twenty-One
enters into with ECCA for the sublease of space within, adjacent to or near a
Retail Optical Center, Vision Twenty-One will, subject to all applicable laws,
duplicate the operational model currently in effect in the Tampa Bay area;
provided, however, Vision Twenty-One and ECCA may negotiate in good faith for a
modification of such model from time to time due to operating considerations of
the various markets. In particular, all Vision Twenty-One optometric offices
shall comply in all material respects with the following minimum performance
criteria to the extent permitted by law: (1) exam slots in each optometric
office shall be managed such that weekly exams are at or less than 80% of the
available weekly slots; and (2) each optometric office shall maintain the
ability to schedule all exam requests within twenty-four (24) hours. In each
Retail Optical Center, Vision Twenty-One shall manage all optometrists and
related technical staff, and shall provide and own all equipment, materials and
supplies reasonably necessary or advisable for the provision of optometric and
related services.
(g) In addition to the rights granted hereunder to sublease
premises within, adjacent to or near the Retail Optical Centers located within
the Optometric Territory, Vision Twenty-One shall have a right of first refusal
to sublease premises in any new Retail Optical Centers opened by ECCA or its
Affiliate in any metropolitan statistical area in which ECCA does not currently
operate ("New ECCA Market") if applicable laws in such geographic areas do not
allow ECCA to directly employ licensed optometrists or enter into a management
agreement with an optometrist (or the optometric professional association or
corporation owned by such optometrist) to operate a fully integrated one-door
optometric facility with an optical dispensary. In each New ECCA Market which
satisfies the requirements of this Subsection 2(g), ECAA will give Vision
Twenty-One at
5
<PAGE> 10
least one hundred twenty (120) days advanced written notice of its intention to
open new Retail Optical Centers in such New ECCA Market, setting forth the
locations, the general dimensions of the premises (including the portion of the
premises within, adjacent to or near the Retail Optical Center to be subleased
to Vision Twenty-One), the proposed rental rate(s) which shall be estimated Fair
Market Value and the proposed commencement date of the sublease. Within thirty
(30) days of its receipt of such notice, Vision Twenty-One shall notify ECCA in
writing whether it intends to exercise its right to enter into all of the
subleases in such New ECCA Market. If Vision Twenty-One does exercise its option
during such 30 day period, such notice shall also state whether it agrees with
the rental rate(s) proposed by ECCA. If Vision Twenty-One desires to exercise
its option to sublease space within, adjacent to or near all of the proposed new
Retail Optical Centers in the New ECCA Market, but does not agree with the
rental rate, the parties shall commence negotiation for determination of a
mutually agreeable rental rate based upon estimated fair market value. If Vision
Twenty-One desires to exercise its option to sublease the specified premises,
but does not agree with the rental rate(s) proposed by ECCA, the parties shall
enter into negotiations pursuant to the timeline and procedures as set forth in
Subsection 2(b) above (including the procedures relating to the subleases with
other third parties).
(h) In respect to paragraph 2, it is understood that in any
states where the optometrist must control the leased premises, Vision Twenty-One
may assign its rights and obligations to enter into a sublease hereunder to
Vision Twenty-One's designated professional association it plans on managing.
6
<PAGE> 11
3. Managed Care Alliance.
(a) Vision Twenty-One, through its affiliate Block Vision,
holds managed vision care contracts with payors which it operates and manages
vision care plans marketed to employer groups and third party payors. ECCA
Managed Vision Care, Inc., an affiliate of ECCA, operates a similar program in
Texas and Arizona. ECCA has entered into negotiations to establish a contractual
relationship with Fidelity Security Life Insurance Company ("FSL") wherein ECCA
and FSL have agreed to jointly develop a vision care insurance product and
jointly market that product. Subject to obtaining the approval of FSL as may be
required under the agreement between ECCA and FSL, and any other required
consents or approvals, Vision Twenty-One and ECCA agree to strategically align
in Texas and Arizona for the purpose of more effectively serving employer groups
and managed vision care health plans. ECCA shall utilize its reasonable efforts
to obtain the consent of FSL and any other necessary consents. However,
notwithstanding anything contained herein to the contrary, ECCA shall not bind
Vision Twenty-One to any obligations in connection with FSL. ECCA and Vision
Twenty-One, in order to more effectively service the market for vision care
services, desire to align their integrated vision care products and the parties
will negotiate in good faith to take the following steps in the Texas and
Arizona markets, within 90 days following the date of this Agreement:
(i) Create an integrated managed care vision program
targeted to third party payors and employer groups;
(ii) Jointly develop a seamless marketing plan to cover
Texas and Arizona utilizing the existing sales force of both Vision Twenty-One
and ECCA pursuant to the joint marketing plan attached as Exhibit 4; and
(iii) Develop a sales-based commission structure
acceptable to both parties designed to motivate and incentivize their joint
sales force to facilitate sales at Retail Optical Centers and Vision Twenty-One
optical dispensaries in Texas and Arizona.
(b) In implementing the affiliation and consolidation
described in this Section 3, the parties envision three levels of comprehensive
vision plans to be marketed by the parties: (1) those plans where the panel
provider is composed exclusively of Retail Optical Centers and optometrists
subleasing within or adjacent to a Retail Optical Center; (2) those plans where
the provider panel is comprised primarily of Retail Optical Centers and
optometrists subleasing space inside or adjacent to a Retail Optical Center,
with such panels being augmented on a limited basis by providers from the Block
Vision network; and (3) those plans where the provider panel is composed of both
Retail Optical Centers, optometrists subleasing space within or adjacent to a
Retail Optical Center and other Block Vision providers. With respect to all
plans where ECCA and its subleasing optometrists are the exclusive or primary
providers as identified in (1) above, ECCA will provide the administrative
services to be agreed upon by the parties, will charge a mutually agreed upon
fee for such services, and will be the contract holder with respect to the
7
<PAGE> 12
comprehensive vision plan marketed and offered by Vision Twenty-One, ECCA, or
any Affiliate of either, and entered into in the states of Arizona and Texas
during the term of this Agreement. With respect to all other vision care plans
sold pursuant to this Section 3, Vision Twenty-One will provide the
administrative services to be agreed upon by the parties, will charge a mutually
agreed upon fee for such services, and will be the contract holder with respect
to the comprehensive visions plans marketed and offered by Vision Twenty-One,
ECCA, or any Affiliate of either, and entered into in the states of Arizona and
Texas during the Term of this Agreement. The parties agree that the insurance
license of ECCA Managed Vision Care shall be used for all products sold in Texas
pursuant to item (1) above, and the insurance license of Block Vision shall be
used for all products sold in Texas pursuant to items (2) and (3) above. Vision
Twenty-One will use its commercially reasonable efforts to include ECCA and its
Retail Optical Centers on all proprietary panels for all vision care plans sold
or marketed by Vision Twenty-One or its Affiliate.
(c) It is contemplated by the parties that the managed care
alliance described in this Section 3 serve as a prototype for similar
arrangements in other markets in which ECCA and Vision Twenty-One operate,
provided the approval of FSL and all other necessary parties is obtained and
both of the parties have materially performed as agreed to. The parties will
expand the alliance to Florida during the fourth quarter of 1999, provided each
party is materially performing as agreed to in Texas and Arizona and provided
further ECCA has implemented its new point of sale systems in Florida which it
will use reasonable efforts to implement within a reasonable period of time.
With respect to any markets (other than Texas and Arizona) in which the parties
mutually agree to implement the affiliation and consolidation described in this
Section 3 for the purposes of marketing an insurance product underwritten by
FSL, ECCA will use reasonable efforts to: (i) obtain the consent of FSL to
include in the panel for such insurance products the provider network of Vision
Twenty-One as contemplated in Subsection 3(b) above; and (ii) obtain the consent
of FSL for the participation of Vision Twenty-One in the marketing and sales of
such insurance product if requested by Vision Twenty-One.
(d) In all markets in the Optometric Territory, the Refractive
Territories, and New ECCA Markets, unless otherwise specified by the associated
employer group or managed care entity, to the extent permitted by applicable
law, Vision Twenty-One, through its Affiliates, shall use reasonable efforts to
insure that the provider panels on managed vision care plans within such
markets, if credentialed, will include those optometrists or other entity owned
by an optometrist to whom ECCA or its subsidiaries subleases space within,
adjacent to or near a Retail Optical Center, or to whom ECCA or its subsidiaries
provides management services.
(e) ECCA and its Affiliates, unless otherwise specified by the
associated employer group or managed care entity, to the extent permitted by
applicable law, shall use reasonable efforts to ensure that optometrists and
ophthalmologists affiliated with Vision Twenty-One and located adjacent to or
within an Optical Retail Center are included in the provider panels of the
managed vision care plans operated by ECCA or its Affiliates.
8
<PAGE> 13
4. Laser Vision Correction Marketing Alliance.
(a) Vision Twenty-One currently operates or intends to operate
or manage surgical centers for the provision of refractive surgery within the
Refractive Territories. ECCA desires to provide its customers with convenient
accessibility to qualified refractive surgeons within the Refractive Territories
who are operating pursuant to the Refractive Surgery Programs described below in
all material respects. To the extent permitted by law, Vision Twenty-One and
ECCA agree to an exclusive marketing arrangement for the provision of laser
vision corrective services at the facilities owned, partially owned, operated or
managed by Vision Twenty-One for patients and customers of the Retail Optical
Centers (and the optometric practice located within or adjacent thereto) and the
optometric practices managed by ECCA or its Affiliates in the Refractive
Territories; provided however, ECCA shall have no obligation under this Section
4 with respect to participating in the Refractive Surgery Program or marketing
thereunder in any market unless and until Vision Twenty-One establishes a
Refractive Surgery Program in such market and at least eighty percent (80%) of
the optometrists located within, adjacent to or next to the Retail Optical
Centers in such market agree to participate in all material aspects of the
Refractive Surgery Program.
(b) Vision Twenty-One will develop a comprehensive refractive
marketing plan for each Refractive Territory which plan will include facility
access, affiliated surgeons, marketing strategies, optometric program and
optometric co-management protocol and fees (the "Refractive Surgery Programs").
To the extent permitted by law, all elements of the Refractive Surgery Programs
shall be developed by Vision Twenty-One and/or its eye care professionals and
subject to limitations of applicable law, all non-medical related material
elements (including but not limited to advertising and marketing materials)
shall be subject to the approval by ECCA, which approval shall not be
unreasonably withheld or delayed.
(c) With respect to Retail Optical Centers in a Refractive
Territory at which ECCA employs optometrists or with respect to optometric
practices in the Refractive Territories with which ECCA has entered into a
management agreement with an optometrist (or the optometric professional
association or corporation owned by such optometrist) to operate a fully
integrated one-door optometric facility with an optical dispensary, Vision
Twenty-One and ECCA will agree to use commercially reasonable efforts to
implement the Refractive Surgery Program developed for such market on an
exclusive basis; provided, however, ECCA's obligations hereunder shall be
subject to the consent and approval of the optometrists with whom ECCA has a
management agreement or employs, which consent ECCA will use commercially
reasonable efforts to obtain. Additionally, ECCA will cooperate in introducing
Vision Twenty-One to such optometrists and assist in scheduling meetings with
such optometrists. With respect to Retail Optical Centers in a Refractive
Territory at which an optometrist or Vision Twenty-One subleases space within,
adjacent to or near a Retail Optical Center, ECCA and Vision Twenty-One will
coordinate marketing efforts to implement the Refractive
9
<PAGE> 14
Surgery Program developed for such market on an exclusive basis, provided that
such optometric practice agrees to participate in all aspects of the Refractive
Surgery Program. Subject to the provisions of this Section 4, ECCA agrees that,
in any Refractive Territory in which Vision Twenty-One establishes a Refractive
Surgery Program as contemplated by this Section 4, it will not, on its own
behalf, on behalf of any of its Affiliates, or on behalf of any of optometric
practices which it or its Affiliate manages, enter into an exclusive or any
other type of relationship with any other refractive surgery center providing
for an arrangement similar to the Refractive Surgery Program developed for each
Refractive Territory, unless Vision Twenty-One materially defaults on its
obligations under this Section 4. ECCA or an Affiliate does not currently have
an existing agreement or relationship with respect to the marketing,
co-management or provision of refractive surgery with any other entity in the
Refractive Territory, except as set forth in Exhibit 6.
(d) In addition to any other amounts to which a party may be
entitled as may be set forth in the Refractive Surgery Program, ECCA shall be
reimbursed by Vision Twenty-One for reasonable costs taking into account Vision
Twenty-One's pro rata share of ECCA's marketing costs associated with the
Refractive Surgery Program implemented as contemplated in this Section 4.
(e) The parties' obligations under this Section 4 in each of
the Refractive Markets are expressly conditioned on and subject to the
development by Vision Twenty-One of a Refractive Surgery Program that is market
competitive and reasonably acceptable to the parties taking into consideration
all applicable law as it relates to:
(i) Co-management protocol and fees;
(ii) Point-of-purchase marketing materials;
(iii) Training;
(iv) In store literature;
(v) Surgery costs; and
(vi) Quality of the refractive surgeons and their
services.
(f) The parties agree that the exclusive nature of the
relationship set forth in this Section 4 shall apply to all new markets in which
ECCA establishes a Retail Optical Center and in which Vision Twenty-One offers a
Refractive Surgery Program, provided Vision Twenty-One is in material compliance
with this Agreement. However, nothing in this Agreement shall be construed to
obligate Vision Twenty-One to offer a Refractive Surgery Program in any market
or restrict Vision Twenty-One from entering into a marketing arrangement with
any other party.
(g) The parties agree that the essential elements of the
Refractive Surgery Program will contain the elements set forth on the attached
Exhibit 7.
(h) With respect to the retail optical chain facilities
related to Vision World, Stein Optical and Eye Drx, purchased from Vision
Twenty-One, ECCA shall
10
<PAGE> 15
maintain the existing Refractive Surgery Program currently in place in such
centers, provided such Refractive Surgery Program complies with this Section 4.
(i) Upon request by Vision Twenty-One (but in no event more
frequently that three times per year), ECCA shall provide to Vision Twenty-One,
in any market in which Vision Twenty-One offers a Refractive Surgery Program or
otherwise requests such information, all information and materials relating to
any provider of refractive surgery or refractive surgery services which were
provided to ECCA by such provider or by its optometrists (including, but not
limited to, marketing materials and pricing information), except as restricted
by applicable law or contractual obligations. Concurrent with such request, ECCA
shall request that its optometrists provide ECCA with such information for the
purpose of delivering to Vision Twenty-One.
5. Term. This Agreement shall commence as of the date hereof and shall
continue for an Initial Term of five years (the "Initial Term") and, unless
otherwise terminated pursuant to Section 7 of this Agreement, shall
automatically renew for additional one year terms unless either party provides
written notice of non-renewal to the other at least 180 days, and not more than
365 days, prior to the expiration of the Initial Term or any one year renewal
term, as the case may be. The Initial Term and any Renewal Term are referred to
herein as the "Term".
6. Representations and Warranties. Each party hereto represents and
warrants to the other party with respect to this Agreement as follows:
(a) Each party has the full power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby,
and this Agreement, upon execution and delivery by such party shall constitute
the valid and binding obligation of such party, enforceable in accordance with
its terms;
(b) Each party has the full right, power and authority to
effect the transactions described herein without the consent of any other party
not a party to this Agreement;
(c) The consummation of the transactions and the performance
of such party's obligations as contemplated under this Agreement will not
conflict with or result in a breach or violation of any applicable law or
regulation, term or provision of any loan, mortgage, contract or other agreement
of any nature whatsoever to which such party is bound or by which such party's
assets or business may be bound or affected, nor will it constitute an event
that will permit any party to terminate or seek damages under any agreement or
accelerate the maturity of any indebtedness or other obligation of such party;
(d) There is no litigation, controversy or other matter
pending against such party involving the types of arrangements contemplated by
this Agreement or which could otherwise have a material adverse impact on such
party; and
11
<PAGE> 16
(e) There is no insolvency proceeding of any character
including without limitation, bankruptcy receivership, reorganization whether
voluntary or involuntary, pending against such party and no party has made an
assignment for the benefit of creditors or taken any action in contemplation of
or which would constitute the basis for the institution of such insolvency
proceeding.
7. Default and Termination and/or Cure.
(a) In addition to whether other remedies either party may have
at law or in equity under the terms of this Agreement, this Agreement may be
terminated by a non-defaulting party for cause, by written notice to the other
party (and the non-defaulting party is thereby relieved of any liabilities or
obligations thereunder except for the liabilities and obligations that accrued
prior to the date of termination) upon occurrence of the following events:
(i) If the other party shall be in material default of
the terms of this Agreement, and the non-defaulting party shall have given
written notice, identified as the notice of default and describing such breach
in particular, and the defaulting party shall have failed to cure the same
within 60 days after receipt of such notice, provided, however, that where such
breach cannot reasonably be cured within a sixty day period, if the defaulting
party shall proceed promptly to cure the same and prosecute the curing with due
diligence, then the time for curing such breach shall be extended for such
period of time as may be necessary to complete such cure, but in no event shall
such cure period exceed 120 days; or
(ii) If the other party becomes insolvent or seeks
protection under any bankruptcy, receivership, or a similar proceeding, or such
proceeding is instituted against the other party and not dismissed within 90
days
(b) Notwithstanding the right to terminate set forth above,
termination shall be held in abeyance in the event the party charged with
default, in good faith disputes such default and has initiated the proceeding
set forth in Section 9.
8. Indemnification.
(a) By Vision Twenty-One. Vision Twenty-One shall indemnify,
defend and hold harmless ECCA, and its Affiliates, and each of their principals,
partners, employees, agents, representatives, officers, directors, successors
and assigns (collectively the "ECCA Indemnified Parties") from and against any
and all demands, claims, actions, or causes of action, judgments, assessments,
losses, damages, liabilities, fines, costs and expenses, including without
limitation reasonable attorneys' fees and expenses ("Damages") asserted against,
resulting to, imposed upon or incurred by an ECCA Indemnified Party in
connection with or arising from (i) a breach by Vision Twenty-One of its
representations, warranties, covenants, or obligations hereunder or (ii) any
claim by a third party against an ECCA Indemnified Party arising solely as a
result of the negligence or misconduct of
12
<PAGE> 17
Vision Twenty-One or its employees, officers or agents in connection with the
performance of their obligations under this Agreement.
(b) By ECCA. ECCA shall indemnify, defend and hold harmless
Vision Twenty-One and its Affiliates, and each of their principals, partners,
employees, agents, representatives, officers, directors, successors and assigns
(collectively the "Vision Twenty-One Indemnified Parties") from and against any
and all demands, claims, actions, or causes of action, judgments, assessments,
losses, damages, liabilities, fines, costs and expenses, including without
limitation reasonable attorneys' fees and expenses ("Damages") asserted against,
resulting to, imposed upon or incurred by a Vision Twenty-One Indemnified Party
in connection with or arising from (i) a breach by ECCA of its representations,
warranties, covenants, or obligations hereunder or (ii) any claim by a third
party against a Vision Twenty-One Indemnified Party arising solely as a result
of the negligence or misconduct of ECCA or its employees, officers or agents in
connection with the performance of their obligations under this Agreement.
(c) Conditions of Indemnification. The obligations and
liabilities of Vision Twenty-One and ECCA with respect to claims for Damages
made by third parties shall be subject to the following terms and conditions:
(i) The indemnified party shall give the indemnifying
party prompt notice of any such claim for Damages, and the indemnifying party
shall have the right to undertake the defense thereof by representatives chosen
by it;
(ii) If the indemnifying party, within a reasonable
time after notice of any such claim for Damages, fails to defend the indemnified
party against which such claim for Damages has been asserted, the indemnified
party shall (upon further notice to the indemnifying party) have the right to
undertake the defense, compromise or settlement of such claim for Damages on
behalf of and for the account and risk of the indemnifying party subject to the
right of the indemnifying party to assume the defense of such claim for Damages
at any time prior to settlement, compromise or final determination thereof;
(iii) Notwithstanding any provision herein to the
contrary, failure of the indemnified party to give notice required by this
Section shall not constitute a waiver of the indemnified party's right to
indemnification hereunder, except to the extent that such failure has prejudiced
the ability of the indemnifying party to defend such claim for Damages.
(iv) Any indemnification claim under this Section 8
with respect to any breach or nonperformance by any party of a representation,
warranty, covenant or agreement shall be limited to the amount of actual damages
sustained by the party seeking indemnification by reason of such breach or
nonperformance. Notwithstanding anything to the contrary elsewhere in this
Agreement, no party or its Affiliates shall in any event be liable to any other
party or its Affiliates for any consequential damages, including, but not
13
<PAGE> 18
limited to, loss of future revenue or income, cost of capital, or loss of
business reputation or opportunity. Each party further agrees that it shall not
seek, and shall be entitled to, punitive damages or statutory multiple damages
as to any matter relating to this Agreement or the transactions contemplated by
it. The indemnification provided for in this Section 8 shall be the exclusive
remedy in any action seeking damages or any other form of monetary relief
brought by any party to this Agreement against another party to this Agreement
with respect to any provision of this Agreement.
9. Binding Arbitration and Resolution of Disputes.
(a) Any and every dispute of any nature whatsoever that may
arise between the Parties, whether sounding in contract, tort (including without
limitation, negligence, gross negligence, fraud, misrepresentation, defamation,
disparagement, tortious interference, misappropriation or any other tort),
antitrust, unfair competition, infringement, breach of fiduciary duty,
discrimination or any other legal theory, including, but not limited to,
disputes relating to or involving the construction, performance or breach of
this Agreement or any other agreement between the Parties, whether entered into
prior to, on or subsequent to the date of this Agreement, or those arising under
any federal, state or local law, regulation or ordinance, shall be determined by
binding arbitration in accordance with the then-current commercial arbitration
rules of the American Arbitration Association, to the extent such rules do not
conflict with the provisions of this paragraph.
(b) The parties agree that prior to any demand for arbitration
they shall meet in good faith to resolve any disputes that may arise between
them that in any way relate to or arise out of provisions of this Agreement or
the performance by any party of their obligations hereunder. If the parties are
unable to resolve any such dispute within 60 days of the first meeting held to
resolve such dispute, either party shall have the right, or if a party refuses
to meet within 15 days of the request by the other party for a meeting to
resolve such dispute, the party requesting the meeting shall have the right, to
request an arbitration which shall be conducted in Atlanta, Georgia, or such
other location as may be agreed between the parties.
(c) If the amount in controversy in the arbitration exceeds One
Million Dollars ($1,000,000), exclusive of interest, attorney's fees and costs,
the arbitration shall be conducted by a panel of three (3) neutral arbitrators.
Otherwise, the arbitration shall be conducted by a single neutral arbitrator.
The parties shall endeavor to select the neutral arbitrator(s) by mutual
agreement. If such an agreement cannot be reached within thirty (30) calendar
days after a dispute has arisen which is to be decided by arbitration, any party
or the Parties jointly shall request the American Arbitration Association to
submit to each party an identical panel of fifteen (15) persons. Alternate
strikes shall be made to the panel, commencing with the party bringing the
claim, until the names of three (3) persons remain, and one (1) person if the
case is to be heard by a single arbitrator. The Parties may, however, by mutual
agreement, request the American Arbitration Association to submit additional
panels of possible arbitrators. The person(s) thus remaining shall be
14
<PAGE> 19
arbitrator(s) for such arbitration. If three (3) arbitrators are selected, the
arbitrators shall elect a chairperson to preside at all meetings and hearings. A
single arbitrator and the chairperson of an arbitration panel shall be a
licensed attorney. The arbitrator(s), or a majority of them shall have the power
to determine all matters incident to the conduct of the arbitration, including
without limitation all procedural and evidentiary matters and the scheduling of
any hearing. The award made by a majority of the arbitrators shall be final and
binding upon the parties thereto and the subject matter. The arbitration shall
be governed by the United States Arbitration Act, 9 U.S.C. Sections 1-16, and
judgment upon the award rendered by the arbitrator(s) may be entered by any
court having jurisdiction thereof. The arbitrator shall have no authority to
award punitive or exemplary damages or any statutory multiple damages, and shall
only have the authority to award compensatory damages, arbitration costs,
reasonable attorney's fees, declaratory relief, and permanent injunctive relief,
if applicable.
(d) Waiver of Jury Trial. Each of the parties to this Agreement
waives any right to trial by jury of any dispute of any nature whatsoever that
may arise between them, including, but not limited to, any disputes relating to
or involving, in any way, the construction, performance or breach of this
Agreement or any other agreement between the parties, or arising under the
common law or any federal, state or local law, regulation or ordinance, whenever
the same may have arisen. By execution of this Agreement, each of the parties
hereto acknowledges and agrees that it has had an opportunity to consult with
legal counsel and knowingly and voluntarily waives any right to a trial by jury
that otherwise might exist, any law, regulation or ordinance notwithstanding.
10. Confidentiality and Non-Solicitation. In connection with the
cooperative relationships contemplated by this Agreement, each party hereto will
obtain information regarding the other party's operational systems, technology,
processes, data, income figures, projections, estimates, business and sales
techniques, trade secrets, development and marketing strategy, managed care
contracts, pricing and terms and other proprietary information (the "Proprietary
Information"). Each party agrees that the other party is entitled to the full
and complete protection of its Proprietary Information. Accordingly, during the
Term of this Agreement and for a period of two years following expiration or
termination of the Agreement, each party agrees to maintain the confidentiality
of the other parties' Proprietary Information and not to disclose or use such
Proprietary Information for any purpose whatsoever other than as contemplated
under this Agreement. Each party further agrees that, without the prior written
consent and approval of the other party, during the term of this Agreement, and
for a period of one year following termination of this Agreement, for any reason
whatsoever, such party will not directly or indirectly hire or attempt to hire
for employment or otherwise retain as a consultant or otherwise, any person who
is then an employee of the other party, or has been an employee of the other
party during the proceeding one year period.
11. Legislative Regulatory or Administrative Interpretation or Change.
In the event there shall be a change in Federal or State statutes, case laws,
regulations or general instructions, or the interpretation of any of the
foregoing, the adoption of new federal or
15
<PAGE> 20
State legislation, or a change in any third-party reimbursement system, any of
which are reasonably likely to materially, and adversely effect the manner in
which either party may perform or be compensated for its obligations under this
Agreement or which shall make any portion of this Agreement unlawful, the
parties shall immediately enter into good faith negotiations regarding a new
arrangement or basis for compensation that complies with the law, regulation or
policy and that approximates as closely as possible the economic position of the
parties prior to the change or interpretation. If good faith negotiations cannot
resolve the matter, then either party shall have the right to terminate the
Agreement by giving written notice thereof to the other and this Agreement will
terminate as of the date of the giving of such notice.
12. Miscellaneous.
(a) Entire Agreement. This Agreement and the exhibits
schedules and other documents referred to herein which form a part hereof
contain the entire understanding of the parties hereto with respect to their
subject matter. This Agreement supersedes all prior agreements and
understandings, oral and written, with respect to its subject matter.
(b) Severability. If any section, subsection, sentence,
clause, phrase or portion of this Agreement is for any reason held invalid or
unconstitutional by any court of competent jurisdiction, such portion shall be
deemed a separate, distinct and independent provision of any such holding and
shall not affect the validity of the remaining portions of this Agreement.
(c) Amendment. This Agreement may not be modified or amended
except in a writing signed by authorized representative of both parties.
(d) Counterparts. This Agreement may be executed by the
parties hereto in several separate counterparts, each of which shall be an
original and all of which together shall constitute the same agreement.
(e) Notices. Any notice, request, demand, instruction or other
communication (a "Notice") to be given to any party or its counsel shall be
deemed to have been properly sent and given when delivered by hand or when sent
by certified mail, return receipt requested, or by reputable overnight courier
service. If delivered by hand, a Notice shall be deemed to have been sent, given
and received when actually received by the addressee. If sent by certified mail,
a Notice shall be deemed to have been sent when properly deposited with the
United States Postal Service with the proper address and paid therewith, and
shall be deemed to have been received an the third (3rd) business day following
the date of such deposit. If sent by courier service, a Notice shall be deemed
to have been sent when delivered to said courier service with the proper address
and delivery charges either prepaid or charged to a proper account, and shall be
deemed to have been received when actually received by the addressee. The
addressee to which Notices shall be sent are:
16
<PAGE> 21
If to ECCA: Eye Care Centers of America
11103 West Avenue
San Antonio, Texas 78213
Attn: Mr. Bernie Andrews
With a copy to: Cox & Smith Incorporated
112 E. Pecan, Suite 1800
San Antonio, Texas 78205
Attention: Daniel Harkins
If to Vision Twenty-One:
Vision Twenty-One
7360 Bryan Dairy Road
Largo, Florida 33777
Attn: Mr. Ted Gillette
With a copy to: Shumaker, Loop & Kendrick, LLP
101 E. Kennedy Boulevard, Suite 2800
Tampa, Florida 33602
Attn: Darrell C. Smith, Esquire
(f) Binding Effect. This Agreement shall be binding upon the
parties hereto and their successors and assigns. ECCA agrees that any transfer
by ECCA of all or substantially all of its assets be made expressly subject to
the terms of this Agreement and any such purchaser shall be required to assume
ECCA's obligations hereunder; provided, however, Vision Twenty-One shall be
obligated to consent to such transfer as required pursuant to section 12(g).
(g) Successors/Assignment/Transfer. Neither Party may sell,
transfer, assign or otherwise dispose of its rights, title, interest or
obligations under this Agreement or any portion thereof without the prior
written consent of the other party, which may be withheld if, and only if, (i)
the proposed assignee is a competitor of the non-assigning party, (ii) the
non-assigning party reasonably believes that the proposed assignee is not
financially or otherwise capable of fulfilling the obligations hereunder being
assumed by such person, or (iii) the non-assigning party reasonably believes
that its reputation in the industry would materially and adversely impacted
through association with the proposed assignee. In the event such consent is
properly withheld, the party seeking such consent may terminate this Agreement.
For purposes hereof, a Change of Control shall be deemed an assignment subject
to the consent requirement set forth in this Section 12(g).
For purposes of this Section 12(g), a "Change of Control"
shall mean a sale of stock, merger, consolidation, reorganization or other
similar transaction, or series of such
17
<PAGE> 22
transactions, which has the effect of changing the control of the company from
the persons or entity in control as of the date of this Agreement; provided,
however such transaction(s) will not be deemed a Change of Control if such
transaction(s) results in the shareholders of such company immediately before
such transaction(s) owning, directly or indirectly immediately following such
transaction, at least 51% of the combined voting power of the voting securities
of such company or such surviving entity outstanding immediately after such
transaction(s) in substantially the same proportion as their ownership of the
voting securities immediately before such sale of stock, merger, consolidation,
reorganization or other similar transaction(s).
(h) Waiver. Any failure to exercise or delay in exercising any
right, power, privilege or remedy herein contained, or any failure or delay at
any time to require the other party's performance of any obligation under this
Agreement, shall not affect the right to subsequently exercise that right,
power, privilege or remedy or to require performance of that obligation. A
waiver of any of the provisions of this Agreement shall not be deemed, nor shall
constitute, a waiver of any other provision, nor shall any waiver constitute a
continuing waiver. A waiver shall not be binding unless executed in writing and
delivered to the other party.
(i) Third-Party Beneficiaries. This Agreement shall not confer
any rights or remedies upon any person other the than parties hereto and their
respective successors and permitted assigns and any Indemnified Persons.
(j) Headings. All headings contained in this Agreement are
included for convenience of reference only and shall in no way affect the
construction or interpretation of any of the terms or provisions of this
Agreement.
(k) Time of the Essence. Time shall be of the essence with
respect to each obligation of either Vision Twenty-One or ECCA under this
Agreement that is required to be performed by a specific date, or within a
certain number of days.
(l) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware.
(m) Relationship of the Parties. Nothing herein contained
shall be construed to treat either party hereto as the agent, joint venturer or
partner of the other party.
(n) Public Disclosure. The parties shall cooperate and
coordinate all public or press releases (including SEC filings and disclosures)
regarding the alliance created under this Agreement. All such announcements or
disclosures (except as may be required by law) shall be made with the consent
and approval of both parties hereto. Neither party will disclose the specific
terms and conditions of this Agreement, other than to its advisers, consultants,
employees and the like unless required as a matter of law or as a result of
legal process. Each party shall notify the other prior to making any such
disclosure.
18
<PAGE> 23
(o) Compliance with Applicable Laws. The parties shall comply
with all applicable federal, state, and local laws, regulations, rules and
restrictions in the conduct of their obligations under this Agreement.
19
<PAGE> 24
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed on the day and year first written above.
Vision Twenty-One Inc.:
- ---------------------------------------
By:
Eye Care Centers of America, Inc.:
By:
------------------------------------
Alan E. Wiley, Executive Vice President
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-END> JUL-03-1999
<CASH> 1,718
<SECURITIES> 0
<RECEIVABLES> 11,614
<ALLOWANCES> 886
<INVENTORY> 29,599
<CURRENT-ASSETS> 47,468
<PP&E> 141,433
<DEPRECIATION> 68,042
<TOTAL-ASSETS> 265,617
<CURRENT-LIABILITIES> 60,462
<BONDS> 268,581
0
36,095
<COMMON> 74
<OTHER-SE> (106,055)
<TOTAL-LIABILITY-AND-EQUITY> 265,617
<SALES> 217,911
<TOTAL-REVENUES> 220,266
<CGS> 73,643
<TOTAL-COSTS> 200,428
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,541
<INCOME-PRETAX> 2,297
<INCOME-TAX> 974
<INCOME-CONTINUING> 1,323
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 491
<NET-INCOME> 832
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
