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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Mark One
X Annual report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934 for the fiscal year ended January 2, 1999.
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 as specified in its charter)
TEXAS 74-2337775
(State or other jurisdiction (IRS employer identification no.)
of incorporation or organization)
11103 West Avenue
San Antonio, Texas 78213-1392
(Address of principal executive offices, including ZIP Code)
(210) 340-3531
(Company's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether the Company (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes No X
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. N/A
---
Aggregate market value of common stock held by non-affiliates of the
registrant is $358,770. As the registrant's common stock is not traded
publicly, the per share price used in this calculation is based on the per share
price of the registrant's last transaction which was the Recapitalization
effective April 24, 1998 ($10.41 per share after stock split).
Applicable only to Corporate Registrants: Indicate the number of shares
outstanding of each of the issuer's classes of common stock as of the latest
practicable date: 7,412,619 shares of common stock as of March 23, 1999.
Documents incorporated by reference: None
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FORM 10-K INDEX
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<CAPTION>
PART I
<S> <C> <C>
ITEM 1. BUSINESS....................................................................................... 1
ITEM 2. PROPERTIES.....................................................................................17
ITEM 3. LEGAL PROCEEDINGS..............................................................................17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS...........................18
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA...........................................................18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........19
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....................................29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................................29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...........29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................................30
ITEM 11. EXECUTIVE COMPENSATION.........................................................................32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................36
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K................................38
</TABLE>
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PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
Certain statements contained herein constitute "forward-looking statements"
as that term is defined under the Private Securities Litigation Reform Act of
1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company, or industry results, to be materially different
from those contemplated or projected, forecasted, estimated or budgeted in or
expressed or implied by such forward-looking statements. Such factors include,
among others, the risk and other factors set forth under "Risk Factors" as well
as the following: general economic and business conditions; industry trends; the
loss of major customers or suppliers; cost and availability of raw materials;
changes in business strategy or development plans; availability and quality of
management; and availability, terms and deployment of capital. SPECIAL ATTENTION
SHOULD BE PAID TO SUCH FORWARD-LOOKING STATEMENTS INCLUDING, BUT NOT LIMITED TO,
STATEMENTS RELATING TO (I) THE COMPANY'S ABILITY TO EXECUTE ITS BUSINESS
STRATEGY (INCLUDING, WITHOUT LIMITATION, WITH RESPECT TO NEW STORE OPENINGS AND
INCREASING THE COMPANY'S PARTICIPATION IN MANAGED VISION CARE PROGRAMS), (II)
THE COMPANY'S ABILITY TO OBTAIN SUFFICIENT RESOURCES TO FINANCE ITS WORKING
CAPITAL AND CAPITAL EXPENDITURE NEEDS AND PROVIDE FOR ITS OBLIGATIONS, (III) THE
CONTINUING SHIFT IN THE OPTICAL RETAIL INDUSTRY OF MARKET SHARE FROM INDEPENDENT
PRACTITIONERS AND SMALL REGIONAL CHAINS TO LARGER OPTICAL RETAIL CHAINS, (IV)
INDUSTRY SALES GROWTH AND CONSOLIDATION AND (V) THE ABILITY OF THE COMPANY TO
MAKE AND INTEGRATE ACQUISITIONS.
GENERAL
Eye Care Centers of America, Inc. ("the Company") is the fourth largest
retail optical chain in the United States as measured by net revenues, operating
or managing 270 stores, 243 of which are optical superstores. The Company
operates predominately under the trade name "EyeMasters," and in certain
geographical regions under the trade names "Visionworks," "Hour Eyes," "Dr.
Bizer's VisionWorld," "Dr. Bizer's ValuVision," "Doctor's ValuVision" and
"Binyon's." The Company utilizes a strategy of clustering its stores within its
targeted markets in order to build local market leadership and strong consumer
brand awareness, as well as to achieve economies of scale in advertising,
management and field overhead. Management believes that the Company has the
number one or two superstore market share position in fourteen of its top
fifteen markets, including Washington, D.C., Houston, Dallas, Tampa/St.
Petersburg, Phoenix, Miami/Ft. Lauderdale, Portland and San Antonio. Based on a
1997 survey conducted on behalf of the Company in seven of its top markets, the
Company has average total brand awareness of 90% and a reputation for quality
service and value. The Company has achieved positive same store sales growth in
each of the past six years and generated net revenues and EBITDA for the fiscal
year ended January 2, 1999, of $237.9 million and $37.2 million, respectively.
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The Company's stores, which average approximately 4,500 square feet, carry
a broad selection of branded frames at competitive prices, including designer
eyewear such as Armani, Laura Ashley, Calvin Klein and Polo/Ralph Lauren, as
well as its own proprietary brands. In addition, the Company's superstores offer
customers "one-hour service" on most prescriptions, utilizing on-site processing
laboratories to grind, coat and edge lenses. Moreover, independent optometrists
("ODs") located inside or adjacent to all of the Company's stores offer
customers convenient eye exams and provide a consistent source of retail
business. In the Company's experience, over 80% of such ODs' regular eye exam
patients purchase eyewear from the Company.
Since joining the Company as President and Chief Executive Officer in early
1996, Bernard W. Andrews has built a management team with extensive operating,
merchandising and marketing experience in the optical and retail industries.
This management team has focused on improving operating efficiencies and growing
the business through both strategic acquisitions and new store openings. Under
current management, the Company's net revenues has increased from $140.2 million
in fiscal 1995 to $237.9 million in fiscal 1998, while the Company's store base
increased from 152 to 270 over the same period, primarily as a result of three
acquisitions. The Company's senior management team owns or has the right to
acquire approximately 15% of the Company's common stock on a fully diluted
basis, through direct ownership and incentive option plans.
BUSINESS STRATEGY
The Company plans to capitalize on the favorable industry trends discussed
in "Industry" by building local market leadership through the implementation of
the following key elements of its business strategy.
MAXIMIZE STORE PROFITABILITY. Management plans to continue to improve
the Company's operating margins through superior day-to-day store
execution, customer service and inventory asset management. The Company has
implemented various programs focused on (i) increased sales of higher
margin, value-added and proprietary products, (ii) continued store expense
reductions, (iii) extensive productivity-enhancing employee training and
(iv) an upgraded point-of-sale information system. Management believes its
store clustering strategy will enable the Company to continue to leverage
local advertising and field management costs to improve its operating
margins. In addition, management believes that the Company can achieve
further improvement in its operating margins by realizing certain synergies
from its recent acquisitions, particularly from the pending introduction of
its upgraded point-of-sale information system to the acquired stores.
EXPAND STORE BASE. In order to continue to build leadership in its
targeted markets, the Company plans to take advantage of significant
"fill-in" opportunities in its existing markets, as well as enter
attractive new markets where it can achieve a number one or two market
share position. Consequently, the Company currently plans to open twenty to
thirty new stores per year over the next three years, with approximately
two-thirds of these new stores currently expected to be opened in existing
markets. Management believes that the Company has in place the systems and
infrastructure to execute its expanded new store opening plan. The
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Company uses a sophisticated site selection model utilizing proprietary
software which incorporates industry and internally generated data (such as
competitive market factors, demographics and customer specific information)
to evaluate the attractiveness of new store openings. The Company has
reduced the new store site development costs of opening a new store from
approximately $450,000 in 1993 to $400,000 in 1998, by utilizing a smaller
store format averaging approximately 3,500 square feet and by equipping
each new store with standardized fixtures and equipment. In addition,
pre-opening costs average $18,000 and initial inventory requirements for
new stores average $85,000, of which approximately 40% is typically
financed by vendors.
PURSUE ACQUISITION OPPORTUNITIES. The Company has successfully
consummated and integrated three acquisitions over the last three years:
(i) in September 1996, the Company acquired Visionworks Holdings, Inc., and
its subsidiaries (collectively, "Visionworks"), a sixty store optical
retailer located along the Atlantic Coast from Florida to Washington, D.C.,
(the "Visionworks Acquisition"), (ii) in September 1997, the Company
acquired The Samit Group, Inc. and its subsidiaries (collectively, "TSGI"),
with ten Hour Eyes stores in Maryland and Washington, D.C., and certain of
the assets of Hour Eyes Doctors of Optometry, P.C., a Virginia professional
corporation formerly known as Dr. Samit's Hour Eyes Optometrist, P.C. (the
"PC"), and simultaneously entered into a long-term management agreement
with the PC to manage the PC's twelve stores in Virginia (collectively, the
"Hour Eyes Acquisition") and (iii) in September 1998, the Company acquired
certain of the 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 a long-term
management agreement with a private optometrist to manage such nineteen
stores (collectively, the "VisionWorld Acquisition"). Management believes
that it has the experience, internal resources and information systems to
continue to identify and integrate acquisitions successfully. Acquisition
candidates typically would be independent practitioners and smaller chains,
which face increasing difficulties competing with larger, more efficient
chains, particularly in a managed care environment. In addition,
acquisition candidates generally would have significant market share in a
given geographic region and offer the Company opportunities to increase
revenues, generate cost savings and extend managed care coverage.
CAPITALIZE ON MANAGED VISION CARE. Management has made a strategic
decision to pursue managed care contracts aggressively in order to help
grow the Company's retail business and over the past four years has devoted
significant management resources to the development of its managed care
business. As part of its effort, the Company has: (i) implemented direct
marketing programs and information systems necessary to compete for managed
care contracts with large employers, groups of employers and other third
party payors, (ii) developed significant relationships with certain HMOs
and insurance companies (e.g., Kaiser Permanente and Humana), which have
strengthened the Company's ability to secure managed care contracts and
(iii) obtained a single service HMO license in Texas to target additional
managed care contracts with large employers and groups of employers. While
the average ticket price on products purchased under managed care
reimbursement plans is typically lower, managed care transactions generally
earn comparable operating profit margins as they require less promotional
spending and advertising support. The Company believes that the increased
volume resulting from managed care contracts more than offsets
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the lower average ticket price. As of January 2, 1999, the Company
participated in managed vision care programs covering approximately 2.8
million lives, with retail sales from managed care lives totaling
approximately 24% of fiscal 1998 optical sales. Management believes that
the increasing role of managed vision care will continue to benefit the
Company and other large retail optical chains with strong local market
shares, broad geographic coverage and sophisticated information management
and billing systems.
ACQUISITION HISTORY
The Company was incorporated in Texas in 1984, acquired by Sears, Roebuck
and Co. in 1987, acquired by Desai Capital Management Incorporated in 1993 and
the Thomas H. Lee Company recapitalized the Company in April 1998. From its
organization through 1988, the Company expanded its business through the
acquisition of: (i) a thirteen store Phoenix-based chain named 20/20 Eye Care in
1986, (ii) a twelve store Texas and Louisiana-based chain named EyeMasters in
1986, (iii) five stores in Phoenix from EyeCo. in 1988 and (iv) a twenty store
Portland-based chain named Binyon's in 1988.
Since the current management team implemented a strategy focused on
improving operating efficiencies and increasing the store base in early 1996,
the Company has successfully acquired and integrated three acquisitions. In
September 1996, the Company acquired Visionworks Holdings Inc., a sixty store
optical retailer located along the Atlantic Coast from Florida to Washington, D.
C., with forty-nine superstores and eleven optical stores located near Eckerd
Corporation stores. In September 1997, the Company acquired TSGI, with ten Hours
Eyes stores in Maryland and Washington, D.C., and certain of the assets of the
PC, with twelve Hour Eyes stores in Virginia, and simultaneously entered into a
long-term management agreement with the PC to manage the PC's twelve stores in
Virginia. In September 1998, the Company acquired certain of the assets of the
Bizer entities, a nineteen store optical retailer located primarily in Kentucky
and Tennessee operated under the tradenames Dr. Bizer's VisionWorld, Dr. Bizer's
ValuVision and Doctor's ValuVision, and simultaneously entered into a long-term
management agreement with a private optometrist to manage such nineteen stores.
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The following table sets forth a summary of the Company's stores, as of
March 23, 1999, ranked by number of stores by trade name:
<TABLE>
<CAPTION>
NUMBER OF GEOGRAPHIC AVERAGE STORE
TRADE NAME STORES FOCUS FORMAT BUSINESS MIX
---------- ------ ----- ------ ------------
<S> <C> <C> <C> <C>
EyeMasters....................................... 155 Southwest, Superstores Glasses
Midwest, Sq. Ft. 4,200 Managed Care
Southeast Lab
OD Subleases
Visionworks...................................... 57 Mid Atlantic, Superstores Glasses
Southeast Sq. Ft. 6,700 Contacts
Lab Managed Care
OD Subleases
Hour Eyes........................................ 25 Mid Atlantic Conventional Glasses
Sq. Ft. 2,200 Contacts
Lab Managed Care
Dr. Bizer's VisionWorld, Dr. Bizer's
ValuVision and Doctor's ValuVision............... 19 Southeast Superstores Glasses
Sq. Ft. 5,800 Contacts
Lab Managed Care
Binyon's......................................... 14 Pacific Superstores Glasses
---
Northwest Sq. Ft. 4,200 Managed Care
Lab
OD Subleases
Total.................................. 270
===
</TABLE>
STORE OPERATIONS
OVERVIEW. The Company believes that the location of its stores is an
essential element of its strategy to compete effectively in the optical retail
market. The Company emphasizes locations within regional shopping malls, power
centers, strip shopping centers and free-standing locations. The Company
generally targets retail space that is close to high volume retail anchor stores
frequented by middle to high-income clientele. In order to generate economies of
scale in advertising, management and field overhead expenses, the Company
attempts to cluster its stores within a direct marketing area.
The following table sets forth as of January 2, 1999 the Company's top
fifteen markets and management's estimate of the Company's superstore market
share ranking each of these markets as measured by sales.
<TABLE>
<CAPTION>
NUMBER OF MARKET
DESIGNATED MARKET AREA SUPERSTORES SHARE RANK
--------------------------------- ------------ -----------
<S> <C> <C>
Washington, D.C............................................ 25 1
Dallas..................................................... 18 1
Houston.................................................... 17 1
Tampa/St. Petersburg....................................... 12 1
Phoenix.................................................... 12 1
Portland................................................... 12 1
Miami/Ft. Lauderdale....................................... 10 2
Cleveland/Akron............................................ 9 2
Kansas City................................................ 8 2
San Antonio................................................ 8 1
Charlotte.................................................. 5 2
Oklahoma City.............................................. 5 1
Austin..................................................... 5 2
Waco....................................................... 4 1
Orlando.................................................... 4 3
---
Total of Top Fifteen Markets..................... 154
===
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LOCATIONS. The Company operates 270 stores, 243 of which are superstores,
located primarily in the Southwest, Midwest, Southeast, along the Gulf Coast and
Atlantic Coast and in the Pacific Northwest regions of the United States. Of the
Company's stores, 139 are located in enclosed regional malls, 77 are in strip
shopping centers, 49 are freestanding locations and five are located near Eckerd
Corporation stores.
The following table sets forth by location, ranked by number of stores, the
Company's store base as of March 23, 1999.
<TABLE>
<CAPTION>
LOCATION EYEMASTERS VISIONWORKS HOUR EYES VISIONWORLD BINYON'S TOTAL
---------------- ---------- ----------- --------- ----------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Texas.......................... 70 -- -- -- -- 70
Florida........................ 3 38 -- -- -- 41
Tennessee...................... 7 -- -- 10 -- 17
Virginia....................... -- 3 13 -- -- 16
North Carolina................. -- 13 -- -- -- 13
Oregon......................... -- -- -- -- 13 13
Arizona........................ 12 -- -- -- -- 12
Louisiana...................... 12 -- -- -- -- 12
Ohio........................... 9 -- -- -- -- 9
Maryland....................... -- -- 9 -- -- 9
Kentucky....................... -- -- -- 7 -- 7
Missouri....................... 6 -- -- 1 -- 7
Oklahoma....................... 7 -- -- -- -- 7
Kansas......................... 5 -- -- -- -- 5
Alabama........................ 4 -- -- -- -- 4
New Mexico..................... 3 -- -- -- -- 3
Nevada......................... 3 -- -- -- -- 3
Mississippi.................... 3 -- -- -- -- 3
Idaho.......................... 3 -- -- -- -- 3
Nebraska....................... 3 -- -- -- -- 3
South Carolina................. -- 3 -- -- -- 3
Washington, D.C................ -- -- 3 -- -- 3
Utah........................... 2 -- -- -- -- 2
Washington..................... 1 -- -- -- 1 2
Georgia........................ 1 -- -- -- -- 1
Indiana........................ -- -- -- 1 -- 1
Iowa........................... 1 -- -- -- -- 1
--- -- -- -- -- ---
Total................ 155 57 25 19 14 270
=== == == == == ===
</TABLE>
STORE LAYOUT AND DESIGN. The average size of the Company's stores is
approximately 4,500 square feet. In the last two years, the Company has
developed and implemented a smaller and more efficient new store prototype,
which averages approximately 3,500 square feet in size. This new store prototype
typically has approximately 450 square feet dedicated to the in-house lens
processing area and 1,750 square feet devoted to product display and fitting
areas. The optometrist's office is generally 1,300 square feet and is, depending
on state regulation, either in or adjacent to the store. Each store follows a
uniform merchandise layout plan, which is designed to emphasize fashion, invite
customer browsing and enhance the customer's shopping experience. Frames are
displayed in self-serve cases along the walls and on tabletops located
throughout the store and are organized by gender suitability and frame style.
The Company believes its self-serve displays are more effective than the less
customer friendly locked glass cases or "under the shelf" trays used by some of
its competitors. Above the display racks are photographs of men and women which
are designed to help customers coordinate frame shape and color with their
facial features. In-store displays and signs are rotated periodically to
emphasize key vendors and new styles.
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IN-HOUSE LENS PROCESSING. Most stores have an on-site lens-processing
laboratory of approximately 450 square feet in which most prescriptions can be
prepared in one hour or less. Lens processing involves grinding, coating and
edging lenses. Unusual or difficult prescriptions are sent to the Company's main
laboratory in San Antonio, Texas, which has a typical turnaround of two to four
days.
ON-SITE OPTOMETRIST. All stores have an OD, located in or adjacent to the
store, who performs eye examinations, and in some cases dispenses contact
lenses. The ODs are generally available during the same hours as the Company's
store hours. The ODs offer customers convenient eye exams and provide a
consistent source of retail business. In the Company's experience, over 80% of
such ODs' regular eye exam patients purchase eyewear from the Company. In
addition, the Company believes proficient ODs help to generate repeat customers
and reinforce the quality and professionalism of each store. Due to state
regulations, ODs are generally independent business persons who lease space
inside or adjacent to each store from the Company or the landlord. Most ODs pay
the Company monthly rent consisting of a percentage of gross receipts, base
rental or a combination of both.
STORE MANAGEMENT. Each store has an operating plan, which maps out
appropriate staffing levels to maximize store profitability. In addition, each
store is run by a general manager who is responsible for its day-to-day
operations. In higher volume locations, a retail manager supervises the
merchandising area and the eyewear specialists. A lab manager trains the lab
technicians and supervises eyewear manufacturing. Sales personnel are trained to
assist customers effectively in making purchase decisions. A portion of store
managers' and territory directors' compensation is based on sales, profitability
and customer service scores at their particular stores. The stores are open
during normal retail hours, typically 10 a.m. to 9 p.m., six days a week, and
typically 12:00 p.m. to 6:00 p.m. on Sundays.
MERCHANDISING
The Company's merchandising strategy is to offer its customers a wide
selection of high quality and fashionable frames at various price points, with
particular emphasis on offering a broad selection of competitively priced
designer and branded frames. The Company's product offering is supported by
strong customer service and advertising. The key elements of the Company's
merchandising strategy are described below.
BREADTH AND DEPTH OF SELECTION. The Company offers its customers high
quality frames, lenses, accessories and sunglasses, including designer and
private label frames. Frame assortments are tailored to match the demographic
composition of each store's market area. On average, each store contains between
1,500 and 2,000 frame stock keeping units in 350 to 400 different styles of
frames. This represents two to three times the assortment provided by
conventional chains or independent retailers. Approximately 25% of the frames
carry designer names such as Polo, Armani, Gucci, Liz Claiborne, Laura Ashley
and Calvin Klein. In fiscal 1998, over 50% of the Company's frames were supplied
by other well-known frame manufacturers and about 14% of the Company's frames
were manufactured specifically for the Company under private labels. The Company
believes that a broader selection of high-quality, lower-priced private label
frames allow it to offer more value to customers while improving the
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Company's gross margin. In addition, the Company also offers customers a wide
variety of value-added eyewear features and services on which it realizes a
higher gross margin. These include thinner and lighter lenses, progressive
lenses and customer lens features, such as tinting, anti-reflecting coatings,
scratch-resistant coatings, ultra-violet protection and edge polishing.
PROMOTIONAL STRATEGY. The Company's frames and lenses are generally
comparably priced or priced lower than its direct superstore competitors, with
prices varying based on geographic region. The Company employs a comprehensive
promotional strategy on a wide selection of frames and/or lenses, offering
discounts and "two for one" promotions. These promotions are highly effective at
attracting customers to shop the Company's stores. While the promotional
strategy is fairly common for optical retail chains, independents tend to offer
fewer promotions in order to guard their margins and mass merchandisers tend to
generally adhere to an "Every Day Low Pricing" strategy.
EFFECTIVE PRODUCT DISPLAY. The Company employs an "easy-to-shop" store
layout. Merchandise in each store is organized by gender suitability, frame
style and brand. Sales personnel are trained to assist customers in selecting
frames, which complement an individual's attributes such as facial features,
face shape and skin tone. See "- Store Layout and Design." In-store displays
focus customer attention on premium priced products, such as designer frames and
thinner and lighter lenses.
MARKETING
The Company actively supports its stores by aggressive local advertising in
individual geographical markets. Advertising expenditures totaled $23.8 million,
or 10.0% of net revenues, in fiscal 1998. The Company utilizes a variety of
advertising media and promotions in order to establish the Company's image as a
high quality, cost competitive eyewear provider with a broad product offering.
The Company's brand positioning is supported by a marketing campaign which
features the tagline "See Better, Look Better." Through this campaign, the
Company has recognized an increase in top of mind brand awareness with
consumers. In addition, the Company's strategy of clustering stores in each
targeted market area allows it to maximize the benefit of its advertising
expenditures. As managed care becomes a larger part of the Company's business in
certain local markets, advertising expenditures as a percentage of sales are
likely to decrease in those markets, since managed care programs tend to reduce
the need for marketing expenditures to attract customers to shop the Company's
stores.
STORE EXPANSION
The Company's business strategy is to continue to grow through the opening
of additional locations through selected store acquisitions. The Company has an
aggressive but disciplined new store expansion strategy. The Company currently
plans to open between twenty to thirty new stores per year over the next three
years, with approximately two-thirds of these new stores currently expected to
be opened in existing markets. The new stores are expected to have an on-site OD
and a lens-processing laboratory. To determine which new markets to enter, the
Company uses a sophisticated site selection model utilizing proprietary software
which incorporates industry and internally generated data (such as competitive
market factors,
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demographics and customer specific information) to evaluate the attractiveness
of new store openings. The Company has reduced the new store site development
costs of opening a new store from approximately $450,000 in fiscal 1993 to
$400,00 in fiscal 1998, by utilizing a smaller store format averaging
approximately 3,500 square feet and by equipping each new store with
standardized fixtures and equipment. In addition, pre-opening costs average
$18,000 and initial inventory requirements for new stores average $85,000, of
which approximately 40% is typically financed by vendors.
EMPLOYEE TRAINING
The Company believes that its dedication to employee training has improved
customer service, increased morale among its employees and contributed to the
Company's increased productivity levels. Each new employee with no prior
experience in the optical industry receives approximately eighty hours of
initial training. New employees with previous optical experience receive
approximately forty hours of initial training. Store managers participate in
approximately fifty hours of annual training. The American Board of Opticianry
("ABO") has certified the Company to offer up to seventy hours of ABO continuing
education credits to maintain opticianary-licensing requirements. Employee
training emphasizes customer service, thorough product and service knowledge,
optical knowledge, lab skills, selling techniques and the utilization of store
performance data to better manage day-to-day store operations. Store level
employees may also be cross-trained in sales and lab-related skills to promote
increased staffing flexibility. Ongoing training is conducted periodically to
familiarize management and employees with new products and services, to improve
the level of understanding of store operations and productivity and to maintain
the Company's overall high quality standards.
COMPETITION
The retail optical industry is fragmented and highly competitive. The
Company competes with (i) independent practitioners (including opticians,
optometrists and ophthalmologists) (ii) optical retail chains (including
superstores) and (iii) mass merchandisers and warehouse clubs. From time and
time, competitors have launched aggressive promotional programs, which have
temporarily impacted the Company's ability to achieve comparable stores sales
growth and maintain gross margin. Some of the Company's competitors are larger,
have longer operating histories, greater financial resources and greater market
recognition than the Company.
VENDORS
The Company purchases a majority of its lenses from three principal vendors
and purchases frames from over twenty different vendors. In fiscal 1998, three
vendors collectively supplied approximately 37% of the frames purchased by the
Company. Two vendors supplied over 61% of the Company's lens materials during
the same period. While such vendors supplied a significant share of the lenses
used by the Company, lenses are a generic product and can be purchased from a
number of other vendors on comparable terms. The Company therefore does not
believe that it is dependent on such vendors or any other single vendor for
frames or lenses. The Company believes that its relationships with its existing
vendors are satisfactory. The Company believes that significant disruption in
the delivery of merchandise from one or more of
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its current principal vendors would not have a material adverse effect on the
Company's operations because multiple vendors exist for all of the Company's
products.
MANAGED VISION CARE
In recent years, managed vision care has grown in importance in the eyewear
market as health insurers have sought to gain a competitive advantage by
offering a full range of health insurance options, including coverage of primary
eye care. Managed vision care, including the benefits of routine annual eye
examinations and eyewear discounts, is being utilized by a growing number of
managed care participants. Since regular eye examinations may assist in the
identification and prevention of more serious conditions, managed care programs
encourage members to have their eyes examined more regularly, which in turn
typically results in more frequent eyewear replacement.
While the average ticket price on products purchased under managed care
reimbursement plans is typically lower, managed care transactions generally earn
comparable operating profit margins as they require less promotional spending
and advertising support. The company believes that the increased volume
resulting from managed care contracts more than offsets the lower average ticket
price.
While managed vision care encompasses many of the conventional attributes of
managed care, there are significant differences. For example, there is no
medical risk involved, as these programs cover only a customer's eye examination
and no medical condition of such customer. Moreover, less than 1% of the
Company's total revenues are derived from traditional capitated managed care
programs. In capitated programs, the Company is compensated by a third party on
a per member per month flat fee basis. The Company allocates such payment
between the provider of services: the OD for eye examinations performed and the
Company for eyewear purchased. The Company receives less than $500,000 of eye
examination related revenue. The Company does not employ the ODs who perform
such eye examinations, and therefore believes it is not engaged in the corporate
practice of medicine. Since the number of visits to an OD is limited to annual
or bi-annual appointments, exam utilization is more predictable, so costs to
insurers are easier to quantify, generally resulting in lower capitation risk.
Even though managed vision care programs typically limit coverage to a certain
dollar amount or discount for an eyewear purchase, the member's eyewear benefit
generally allows the member to "trade up." Management believes that the growing
consumer perception of eyewear as a fashion accessory as well as the consumer's
historical practice of paying for eyewear purchases out-of-pocket contributes to
the frequency of "trading-up." The Company has historically found that managed
care participants who take advantage of the eye exam benefit under the managed
care program in turn have typically had their prescriptions filled at adjacent
optical stores.
Management has made a strategic decision to pursue managed care contracts
aggressively in order to help grow the Company's retail business and over the
past four years has devoted significant management resources to the development
of this business. As part of its effort, the Company has: (i) implemented direct
marketing programs and information systems necessary to compete for managed care
contracts with large employers, groups of employers and other third party
payers, (ii) developed significant relationships with certain HMOs and insurance
10
<PAGE> 13
companies (e.g., Kaiser Permanente and Humana), which have strengthened the
Company's ability to secure managed care contracts, and (iii) obtained a single
service HMO license in Texas to target additional managed care contracts with
large employers and groups of employers.
As of January 2, 1999, the Company participated in managed vision care
programs covering approximately 2.8 million lives, with retail sales from
managed care lives totaling approximately 24% of fiscal 1998 optical sales.
Management believes that the increasing role of managed vision care will
continue to benefit the Company and other large retail optical chains. Managed
care is likely to accelerate industry consolidation as payers look to contract
with large retail optical chains who deliver superior customer service, have
strong local brand awareness, offer competitive prices, provide multiple
convenient locations and hours of operation, and possess sophisticated
information management and billing systems. Large optical retail chains are
likely to be the greatest beneficiaries of this trend as independents cannot
satisfy the scale requirements of managed care programs and mass merchandisers'
"Every Day Low Price" strategy is generally incompatible with the price
structure required by the managed vision care model.
GOVERNMENT REGULATION
The Company or its landlord leases a portion of each of the Company's stores
or adjacent space to an independent optometrist. The availability of such
professional services in or adjacent to the Company's stores is critical to the
Company's marketing strategy. The delivery of health care, including the
relationships among health care providers such as optometrists and suppliers
(e.g., providers of eyewear), is subject to extensive federal and state
regulation. The laws of many states prohibit business corporations such as the
Company from practicing medicine or exercising control over the medical
judgments or decisions of physicians and from engaging in certain financial
arrangements, such as splitting fees with physicians. In certain situations, to
address and comply with certain regulatory restrictions the Company and
independent optometrist have entered into long-term management contracts whereby
the Company (through its subsidiaries) manage the optical dispensary and certain
limited aspects of professional practice of the independent optometrist instead
of owning the store and employing the optometrists directly.
Other than local and state business licenses, the Company is not currently
required to maintain any licenses or certificates to operate its business in any
state. However, as a result of the capitation element of some of its managed
care contracts, the Company is required in the states of North Carolina, Texas
and California to obtain insurance licenses and to comply with certain routine
insurance laws and regulations as an insurer in order to offer managed care
discount programs to various employee groups within such states. The cost of
such compliance is minimal. These insurance laws require that the Company make
certain mandatory filings with the state relating to: (i) pertinent financial
information and (ii) quality of care standards. Violation of any of these laws
or regulations could possibly result in the Company incurring monetary fines
and/or other penalties. The Company is currently in material compliance with
each of these laws and regulations.
The fraud and abuse provisions of the Social Security Act and anti-kickback
laws and regulations adopted in many states prohibit the solicitation, payment,
receipt, or offering of any
11
<PAGE> 14
direct or indirect remuneration in return for, or as an inducement to, certain
referrals of patients, items or services. Provisions of the Social Security Act
also impose significant penalties for false or improper billings to Medicare and
Medicaid, and many states have adopted similar laws applicable to any payor of
health care services. In addition, the Stark Self-Referral Law imposes
restrictions on physicians' referrals for designated health services
reimbursable by Medicare or Medicaid to entities with which the physicians have
financial relationships, including the rental of space if certain requirements
have not been satisfied. Many states have adopted similar self-referral laws
which are not limited to Medicare or Medicaid reimbursed services. Violations of
any of these laws may result in substantial civil or criminal penalties,
including double and treble civil monetary penalties, and, in the case of
violations of federal laws, exclusion from participation in the Medicare and
Medicaid programs. Such exclusions and penalties, if applied to the Company,
could have a material adverse effect on the Company. The Company is currently in
material compliance with all of the foregoing laws and no determination of any
violation in any state has been made with respect to the foregoing laws.
TRADEMARK AND TRADE NAMES
The Company's superstores operate under the trade names "EyeMasters,"
"Binyon's," "Visionworks," "Hour Eyes," "Dr. Bizer's VisionWorld," "Dr. Bizer's
ValuVision" and "Doctor's ValuVision." In addition, "SlimLite" is the Company's
trademark for its line of lightweight plastic lenses and "SunMasters" is the
trade name for the sunglass kiosk within the "EyeMasters" superstore. Other
trademarks and trade names used by the Company are "Master Eye Associates,"
"Master Eye Exam," "EyeMasters" and the "eyeball" mark used in conjunction with
the trade name "EyeMasters."
EMPLOYEES
As of January 2, 1999, the Company employed approximately 3,500 employees.
The Company's employees are not covered by any collective bargaining agreements,
and the Company considers its relations with its employees to be good.
THE RECAPITALIZATION
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
12
<PAGE> 15
approximately $323.8 million, including related fees and expenses, and the
implied total equity value of the Company following the Recapitalization is
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 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 governing the Initial Notes, the Company and the subsidiary guarantors
are jointly and severally liable for payment of the Initial Notes. 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 New Credit
Facility (see "Introduction" in Management's Discussion and Analysis of
Financial Condition and Results of Operation) 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"). See "Description of New Preferred
Stock." The Company used the proceeds from such bank borrowings, the sale of the
Initial 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.
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.
SEASONALITY AND QUARTERLY RESULTS
The company's sales fluctuate seasonally. Historically, the Company's
highest sales and earnings occur in the first and third quarters. In addition,
quarterly results are affected by the opening of new stores; therefore, the
Company's growth, the Visionworks Acquisition, the Hour Eyes Acquisition and the
VisionWorld Acquisition may affect seasonal fluctuations. Hence, quarterly
results are not necessarily indicative of results for the entire year.
INDUSTRY
OVERVIEW. Optical retail sales in the United States totaled $15.4 billion in
1997, according to industry sources. Since 1987, the optical retail market has
grown each year at an average annual rate of approximately 5%. Management
believes that the industry will continue to grow at a similar rate over the next
several years due to a number of favorable trends discussed below.
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<PAGE> 16
The following chart sets forth expenditures (based upon products sold) in the
optical retail market over the past seven years according to a leading industry
publication.
U.S. OPTICAL RETAIL SALES BY SECTOR 1991 -- 1997
(DOLLARS IN BILLIONS)
<TABLE>
<CAPTION>
1997
1991 1992 1993 1994 1995 1996 1997 SHARE
------- ------- ------- ------- ------- ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Lenses/treatments $ 5.2 $ 5.6 $ 6.0 $ 6.5 $ 6.8 $ 7.2 $ 7.6 49.5%
Frames 3.9 4.0 4.1 4.1 4.4 4.6 5.0 32.2
Sunglasses(a) 0.5 0.5 0.5 0.5 0.7 0.8 0.9 5.8
Contact lenses 1.8 1.8 1.7 1.8 1.9 1.9 1.9 12.5
------- ------- ------- ------- ------- ------- -------- -----
$ 11.5 $ 11.9 $ 12.3 $ 12.9 $ 13.8 $ 14.6 $ 15.4 100.0%
======= ======= ======= ======= ======= ======= ======== =====
</TABLE>
- ----------
(a) Does not include sales through specialty optical retailers or general retail
channels.
Distribution. Eye care services in the United States are delivered by local
providers consisting of approximately 65,000 opticians, 31,000 optometrists and
16,500 ophthalmologists. The optical retail industry in the United States is
highly fragmented and consists of (i) independent practitioners (including
opticians, optometrists and ophthalmologists), (ii) optical retail chains and
(iii) warehouse clubs and mass merchandisers. In 1997, optical retail chains
accounted for approximately 32.5% of the total market, while independent
practitioners comprised approximately 61.5% and other distribution channels
represented approximately 6.0%. Optical retail chains have begun consolidating
the optical retail market at the expense of independent practitioners.
Independent practitioners' market share dropped from 63.0% to 61.5% between 1996
and 1997, while optical retail chains' market share increased over the same
period from 31.3% to 32.5%.
Independent Practitioners. In 1997, independent practitioners represented
$9.5 billion of eyewear retail sales, or 61.5% of the industry's total optical
retail sales volume of $15.4 billion. Independent practitioners typically cannot
provide quick turnaround of eyeglasses because they do not have laboratories on
site and generally charge higher prices than other competitors. Moreover, their
eyewear product assortment is usually narrow, although a growing portion
includes some designer or branded products. Prior to 1974, independent
practitioners benefited from regulatory and other factors which inhibited
commercial retailing of prescription eyewear. In 1974, the Federal Trade
Commission began requiring doctors to provide their patients with copies of
their prescriptions, enabling sophisticated retailers to implement retail
marketing concepts which gave way to a more competitive marketplace. Independent
practitioners' market share has declined from approximately 100% in 1974 to
61.5% in 1997, dropping 1.5% from 1996. Management believes that independent
practitioners will continue to lose market share over the next several years.
Optical Retail Chains. Optical retail chains represented 32.5% of the total
optical retail market in 1997. Over the past three years, the top one hundred
optical retail chains (in terms of net revenues) have grown at a rate faster
than the overall market. Optical retail chains include both superstores and
conventional optical stores. Optical retail chains offer quality service
provided by on-site optometrists and also carry a wide product line, emphasizing
the fashion element of eyewear,
14
<PAGE> 17
although lower-priced lenses and frames are also available. In addition, the
retail optical chains, particularly the superstores, are generally able to offer
better value and service through a reduced cost structure, sophisticated
merchandising and display, economies of scale and greater volume. Furthermore,
they can generate greater market awareness than can fragmented independent
practitioners as optical retail chains usually invest more in advertising and
promotions. Management believes that large optical chains are best positioned to
benefit from industry consolidation trends including the growth in managed
vision care.
Warehouse Clubs and Mass Merchandisers. Warehouse clubs and mass
merchandisers usually provide eyewear in a host environment which is typically a
larger general merchandise store. This segment typically provides some of the
service elements of retail optical chains, but competes primarily on price. As a
result, its eyewear selection tends to focus on lower-priced optical products.
Moreover, this segment's "Every Day Low Price" strategy is generally
incompatible with the pricing structure required by the managed vision care
model. Warehouse clubs and mass merchandisers' market share declined from 4.2%
in 1996 to 4.0% in 1997.
Other. Other participants in the optical retail market include HMOs and
school-controlled dispensaries. In 1997, other participants represented
approximately 2.0% of the total optical retail market.
TRENDS. Management believes that growth and consolidation in the optical
retail market is being driven by the following trends:
Favorable Demographics. Approximately 60% of the U.S. population, or 160
million individuals, and nearly 95% of people over the age of forty-five,
require some form of corrective eyewear. In addition to their higher utilization
of corrective eyewear, the over forty-five segment spends more per pair of
glasses purchased due to their need for premium priced products like bifocals
and progressive lenses and their generally higher levels of discretionary
income. In 1996, the over forty-five segment represented 58% of retail optical
spending despite representing just 33% of the U.S. population. As the "baby
boom" generation ages and life expectancies increase, management believes that
this demographic trend is likely to increase the number of eyewear customers and
the average price per purchase.
Increasing Role of Managed Vision Care. Management believes that optical
retail sales through managed vision care programs, which were approximately $4.1
billion (or approximately 30% of the market) in 1995, will continue to increase
over the next several years. Managed vision care, including the benefits of
routine annual eye examinations and eyewear discounts, is being utilized by a
growing number of managed care participants. Since regular eye examinations may
assist in the identification and prevention of more serious conditions, managed
care programs encourage members to have their eyes examined more regularly,
which in turn typically results in more frequent eyewear replacement. Management
believes that large optical retail chains are likely to be the greatest
beneficiaries of this trend as payers look to
15
<PAGE> 18
contract with chains who deliver superior customer service, have strong local
brand awareness, offer competitive prices, provide multiple convenient locations
and flexible hours of operation, and possess sophisticated information
management and billing systems.
Consolidation. Although the optical retail market in the United States is
highly fragmented, the industry is experiencing increasing consolidation. In
1997, the top ten and the top one hundred optical retail chains represented
approximately 18% and 28% of the total optical market, respectively. The
remaining approximately 72% of the market includes independent practitioners,
smaller chains, warehouse clubs and mass merchandisers. Independent
practitioners' market share dropped from 63.0% to 61.5% between 1996 and 1997,
while optical retail chains' market share increased over the same period from
31.3% to 32.5%. Management believes that several factors are likely to drive
further consolidation: (i) the importance of scale to managed care programs
which require providers with strong store brand awareness, multiple locations
and sophisticated information management and billing systems, (ii) efficiencies
of scale in merchandising, marketing, manufacturing and sourcing product, (iii)
the significant capital required to build lens processing laboratories on
premises and (iv) the desire of small regional chains and independent
practitioners to achieve liquidity by selling to larger optical retail chains.
Management believes that the large optical retail chains are better positioned
than mass merchandisers and warehouse clubs to benefit from this consolidation
trend and that such chains will continue to gain market share from the
independent practitioners over the next several years.
New Product Innovations. Since the late 1980's, several technological
innovations have led to the introduction of new optical lenses and lens
treatments, including progressive addition lenses (no-line bifocals), high-index
and aspheric lenses (thinner and lighter), polycarbonate lenses (shatter
resistant) and anti-reflective coatings. These innovative products are popular
among consumers, generally command premium prices and yield higher margins than
traditional lenses. The average retail price for all lenses and lens treatments
has increased over 4% per year from $87.94 to $95.50 between 1995 and 1997,
reflecting, in part, the rising popularity of these products. Similarly, during
the same period, the average retail price for eyeglass frames has increased over
4% per year from $57.03 to $62.20, due in large part to both technological
innovation and an evolving customer preference for higher priced, branded
frames.
Greater Frequency of Purchase. Since 1983, the frequency of eyewear
purchases has increased over 45%, from an average purchase of new eyewear every
2.2 years to every 1.5 years. Management believes that managed care has
contributed to this trend and is likely to serve as a continuing catalyst to
further increases in the frequency of eyewear purchases, as plan participants
are encouraged to have their eyes examined more frequently. In addition,
consumers are currently purchasing multiple eyewear products for distinct
occasions (work, casual, fashion, driving, sun, sport, etc.), driven, in part,
by the growing consumer perception of eyewear as a fashion accessory.
16
<PAGE> 19
ITEM 2. PROPERTIES
As of March 23, 1999, the Company operated 270 retail locations in the
United States. The Company believes its properties are adequate and suitable for
its purposes. The Company leases all its retail locations, the majority of which
are under triple net leases that require payment by the Company of its pro rata
share of real estate taxes, utilities, and common area maintenance charges.
These leases range in terms of up to 15 years. Certain leases require percentage
rent based on gross receipts in excess of a base rent. The Company subleases a
portion of substantially all of the stores or the landlord leases an adjacent
space, to an independent optometrist or a corporation controlled by an
independent optometrist. The terms of these leases or subleases range from one
to fifteen years, with rentals consisting of a percentage of gross receipts, a
base rental, or a combination of both. The general character of the Company's
stores is described in Item 1 of this report.
The Company leases combined corporate offices and a retail location in San
Antonio, Texas, pursuant to a fifteen-year lease. In addition, the Company
leases a combined distribution center and central laboratory in San Antonio,
pursuant to a seven-year lease. The Company believes central distribution
improves efficiency through better inventory management and streamlined
purchasing.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to routine litigation in the ordinary course of its
business. Except for the matters set forth below, no such pending matters,
individually or in the aggregate, are deemed to be material to the business or
financial condition of the Company.
The Government of the District of Columbia, Office of Corporate Counsel has
terminated its investigation relating to Medicaid claims submitted for
reimbursement by certain optometrists who provided services from (i) one Hour
Eyes store located in Washington, D.C. which was subsequently acquired by the
Company in connection with the Hour Eyes Acquisition and (ii) one other Hour
Eyes store located in Washington, D.C. which was not acquired by the Company but
which was under common control with the corporation which sold certain Hour Eyes
stores to the Company in 1997. This matter has been referred to the Commission
of Health Care Finance for the Department of Health Care for the District of
Columbia (the "Health Commission") for further handling and disposition. The
Company is entitled to certain rights of indemnification with respect to matters
arising out of this investigation under the stock purchase agreement relating to
the Hour Eyes Acquisition, and a limited dollar amount has been set aside in an
escrow account to secure the sellers' indemnification obligations. In light of
the on-going investigation by the Health Commission, the Company at this time is
unable to determine whether any action or claim will be brought against the
Company or, if brought, the precise nature or extent of any such action or
claim. No assurance can be given that the Health Commission or any other
governmental body will not bring an action, assert one or more claims or seek
material damages, interest, fines and/or penalties, including criminal
penalties, against the Company for matters arising out of this investigation.
The Company believes the indemnification arrangement under this agreement is
reasonably adequate to satisfy any assessed penalties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None to be reported.
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<PAGE> 20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
SHAREHOLDER MATTERS
The Common Stock, par value $.01 per share, of the Company is not traded on
any established public trading market. There are 18 holders of the Common Stock
and no dividends were paid in fiscal 1997 or 1998. See "The Recapitalization."
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected financial data and other operating
information of the Company. The selected financial data in the table are derived
from the consolidated financial statements of the Company. The following
selected financial data should be read in conjunction with the Consolidated
Financial Statements, the related notes thereto and other financial information
included elsewhere in this Annual Report on Form 10-K. All references in this
Annual Report on Form 10-K to a year or a fiscal year shall mean the fiscal year
ended December 31 of such year, except references herein to 1996 or fiscal 1996,
1997 or fiscal 1997 and 1998 or fiscal 1998 relate to the fiscal years ended
December 28, 1996, January 3, 1998 and January 2, 1999 respectively.
<TABLE>
<CAPTION>
Years Ended
-------------- --------------- --------------- --------------- ----------------
December 31, December 30, December 28, January 3, January 2,
1994 1995 1996 1998 1999
-------------- --------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
(DOLLARS IN THOUSANDS)
Net revenues $ 130,673 $ 140,198 $ 158,224 $ 219,611 $ 237,851
Operating costs and expenses:
Cost of goods sold 45,240 47,525 51,884 77,134 80,636
Selling, general and
administrative (a) 81,434 87,402 91,897 120,319 132,390
Recapitalization and other
expenses -- -- -- -- 25,803
Amortization of intangible assets 10,542 5,551 2,938 2,870 3,705
--------- --------- --------- --------- ---------
Total costs and expenses 137,216 140,478 146,719 200,323 242,534
--------- --------- --------- --------- ---------
Operating income (loss) (6,543) (280) 11,505 19,288 (4,683)
Interest expense, net 9,072 8,839 9,899 13,738 19,159
In-substance defeased bonds interest
expense, net -- -- -- -- 2,418
--------- --------- --------- --------- ---------
Income (loss) before income taxes (15,615) (9,119) 1,606 5,550 (26,260)
Income tax expense -- -- 188 335 13
--------- --------- --------- --------- ---------
Net income (loss) before
extraordinary item (15,615) (9,119) 1,418 5,215 (26,273)
Extraordinary loss on early extinguishment
of long-term debt -- -- -- -- 8,355
--------- --------- --------- --------- ---------
Net income (loss) $ (15,615) $ (9,119) $ 1,418 $ 5,215 $ (34,628)
========= ========= ========= ========= =========
OTHER FINANCIAL DATA:
Depreciation and amortization (b) $ 20,675 $ 15,229 $ 12,449 $ 15,001 $ 16,050
Capital expenditures 5,367 6,765 4,233 9,470 20,656
Gross Margin % 65.4% 66.1% 67.2% 64.9% 66.1%
Ratio of earnings to fixed -- -- 1.11x 1.27x 0.1x
charges(c)
MISCELLANEOUS DATA:
EBITDA (d) $ 14,132 $ 14,949 $ 23,954 $ 34,289 $ 37,170
EBITDA margin % 10.8% 10.7% 15.1% 15.6% 15.6%
Comparable store sales growth (e) 1.1% 4.2% 3.5% 3.8% 1.1%
End of period stores 162 152 218 239 270
Sales per store (f) $ 878 $ 904 $ 935 $ 995 $ 1,007
</TABLE>
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<PAGE> 21
- ----------
(a) The Company recorded a $0.7 million non-cash impairment charge related to
its investment in its subsidiary in Mexico, which is included in selling,
general and administrative expenses for 1996.
(b) Depreciation and amortization shown here does not include the amortization
of store pre-opening costs, which is included in selling, general and
administrative expenses.
(c) In computing the ratio of earnings to fixed charges, "earnings" represents
income (loss) before income tax expense plus fixed charges. "Fixed charges"
consists of interest, amortization of debt issuance costs and a portion of
rent, which is representative of interest factor (approximately one-third
of rent expense). For the years ended December 31, 1994 and December 30,
1995, earnings were insufficient to cover fixed charges by $15.6 million
and $9.1 million, respectively.
(d) EBITDA represents consolidated net income (loss) before interest expense,
income taxes, depreciation and amortization (other than amortization of
store pre-opening costs) and recapitalization and other expenses. The
Company has included information concerning EBITDA because it believes that
EBITDA is used by certain investors as one measure of a company's
historical ability to fund operations and meet its financial obligations.
EBITDA should not be considered as an alternative to, or more meaningful
than, operating income (loss) or net income (loss) in accordance with
generally accepted accounting principals as an indicator of the Company's
operating performance or cash flow as a measure of liquidity. Additionally,
EBITDA presented may not be comparable to similarly titled measures
reported by other companies.
(e) Comparable store sales growth increase is calculated comparing net revenues
for the period to net revenues of the prior period for all stores open at
least twelve months prior to each such period.
(f) Sales per store is calculated on a monthly basis by dividing total net
revenues by the total number of stores open during the period. Annual sales
per store is the sum of the monthly calculations.
ITEM 7. 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 270 stores,
243 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" and "Doctor's ValuVision". The Company operates in the $5.0
billion retail optical chain sector of the $15.4 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, (iv) new product
innovations and (v) the greater frequency of eyewear purchases.
In early 1996, Bernard W. Andrews joined the Company as President and Chief
Executive Officer and has built a management team with extensive operating,
merchandising and marketing experience in the optical and retail industries.
This management team has focused on improving operating efficiencies and growing
the business through both strategic acquisitions and new store openings.
The industry is highly fragmented and is undergoing significant
consolidation. See the "Industry" discussion in "ITEM 1. BUSINESS." Under the
current management team, the Company has successfully acquired and integrated
three acquisitions. In September 1996, the Company consummated the Visionworks
Acquisition, acquiring all of the outstanding shares of the capital stock of
Visionworks Holdings, Inc. for $61.5 million. At the time of the Visionworks
Acquisition, Visionworks was a sixty store optical retailer located along the
19
<PAGE> 22
Atlantic Coast from Florida to Washington, D. C. with forty-nine superstores
and eleven optical stores located near Eckerd Corporation stores. In September
1997, the Company consummated the Hour Eyes Acquisition, acquiring all of the
outstanding capital stock of TSGI and certain assets of the PC for approximately
$22.3 million less acquisition date liabilities and simultaneously entering into
a long-term business management agreement with the PC to manage an additional
twelve Hour Eyes optical stores in Virginia. As a result of the long-term
business management agreement with Hour Eyes Doctors of Optometry, P.C., the
Company records a management fee but does not include the results of operations
from the twelve Virginia stores in the Company's consolidated results of
operations. In September 1998, the Company consummated the VisionWorld
Acquisition, acquiring certain of the assets of the Bizer entities, a nineteen
store optical retailer located primarily in Kentucky and Tennessee, for
approximately $32.2 million and simultaneously entering into a long-term
business management agreement with a private optometrist to manage the nineteen
stores. The results of operations from the date of acquisition from these
nineteen stores are included in the Company's consolidated results of
operations.
Management believes that optical retail sales through managed vision care
programs will continue to increase over the next several years. As a result,
management has made a strategic decision to pursue managed care contracts
aggressively in order to help the Company's retail business grow and over the
past three years has devoted significant management resources to the development
of its managed care business. While the average ticket price on products
purchased under managed care reimbursement plans is typically lower, managed
care transactions generally earn comparable operating profit margins as they
require less promotional spending and advertising support. The Company believes
that the increased volume resulting from managed care contracts more than
offsets the lower average ticket price. During fiscal year 1998, approximately
24% of the Company's total revenues were derived from managed care programs.
Management believes that the increasing role of managed vision care will
continue to benefit the Company and other large retail optical chains with
strong local markets shares, broad geographic coverage and sophisticated
information management and billing systems.
Historically, the Company has operated on a calendar year basis. Effective
January 1, 1994, the Company began reporting using a 52- or 53-week fiscal year
ending on the Saturday closest to December 31, with monthly results on a 4-4-5
week basis each quarter. Fiscal 1998 was a 52-week fiscal year and fiscal 1997
was a 53-week year.
On March 6, 1998, Merger Corp., THL and the Company entered into the
Recapitalization Agreement providing for, among other things, the Merger of
Merger Corp. with and into the Company. Upon consummation of the
Recapitalization on April 24, 1998, THL owned approximately 89.7% of the issued
and outstanding shares of Common Stock of the Company, 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
20
<PAGE> 23
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 is
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 the Initial Notes in the aggregate principal amount of $150.0
million. The Initial Notes were issued by the Company and guaranteed by the
subsidiary guarantors. Under the Indenture governing the Initial Notes, the
Company and the subsidiary guarantors are jointly and severally liable for
payment of the Initial Notes. 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 New Credit Facility (see "Liquidity and
Capital Resources" in Management's Discussion and Analysis of Financial
Condition and Results of Operations) and (b) approximately $99.4 million from
the Equity Contribution through the sale of capital stock to THL, Bernard W.
Andrews and other members of management 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 New Preferred Stock. The Company used the proceeds from
such bank borrowings, the sale of the Initial Notes, and the Equity Contribution
principally to finance the conversion into cash of the shares of Common Stock
which were not retained by existing shareholders, 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 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.
The following is a discussion of certain factors affecting the Company's
results of operations from fiscal 1996 to fiscal 1998 and its liquidity and
capital resources. This discussion should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
document.
21
<PAGE> 24
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to net revenues
of certain income statement data.
<TABLE>
<CAPTION>
INCOME STATEMENT DATA:
FISCAL YEAR ENDED
-------------------------------------
----- ----- -----
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Net Revenues:
Optical sales 100.0% 99.7% 98.9%
Management fee -- 0.3 1.1
----- ----- -----
Total net revenues 100.0 100.0 100.0
Operating costs and expenses:
Cost of goods sold(a) 32.8 35.2 34.3
Selling, general and administrative expenses(a) 58.1 55.0 56.3
Recapitalization and other expenses -- -- 10.8
Amortization of intangibles 1.9 1.3 1.6
----- ----- -----
Total operating costs and expenses 92.7 91.2 102.0
----- ----- -----
Income (loss) from operations 7.3 8.8 (2.0)
Interest expense, net 6.3 6.3 8.1
In-substance defeased bonds interest expense, net -- -- 1.0
----- ----- -----
Income (loss) before income taxes 1.0 2.5 (11.1)
Income tax expense (0.1) (0.1) --
----- ----- -----
Net income (loss) before extraordinary item 0.9 2.4 (11.1)
Extraordinary loss on early extinguishment of
long-term Debt -- -- 3.5
Net income (loss) 0.9 2.4 (14.6)
===== ===== =====
EBITDA margin 15.1% 15.6% 15.6%
</TABLE>
(a) Percentages based on optical sales only
FISCAL 1998 COMPARED TO 1997
Net Revenues. The increase in net revenues to $237.9 million in 1998 from
$219.6 million in fiscal 1997 was largely the result of the Hour Eyes
Acquisition and the VisionWorld Acquisition and an increase in comparable store
sales of 1.1%. These acquisitions resulted in an increase in net revenues of
$16.7 million for fiscal 1998.
Gross Profit. Gross profit increased to $157.2 million in fiscal 1998 from
$142.5 million in fiscal 1997. Gross profit as a percentage of optical sales
increased to 65.7% ($154.6 million) in fiscal 1998 as compared to 64.8% ($141.8
million) in fiscal 1997. This percentage increase was primarily due to stores
acquired in the Hour Eyes Acquisition ("Hour Eyes Stores") which perform at a
higher margin than the stores owned by the Company prior to the Hour Eyes
Acquisition. This is primarily due to the doctor examination revenues and
expenses at the Hour Eyes Stores, which are not earned by the Company's other
locations.
Selling General & Administrative Expenses (SG&A). SG&A increased to $132.4
million in fiscal 1998 from $120.3 in fiscal 1997. SG&A as a percentage of
optical sales increased to 56.3% in fiscal 1998 from 55.0% in fiscal 1997. This
percentage increase was due primarily to
22
<PAGE> 25
increases in operating lease expenditures and increases in overhead expenses
related to a delayed point-of-sale system implementation. These increased costs
were partially offset by savings realized through economies of scale achieved in
advertising.
Recapitalization and Other Expenses. As a result of the Recapitalization,
the Company has incurred approximately $25.1 million of non-recurring expenses.
These expenses consisted of compensation expense recorded in connection with the
exercise of employee stock options and other transaction related expenses.
Additionally, the Company incurred approximately $0.7 million in connection with
a point-of-sale system write-off.
Amortization Expense. Amortization expense (excluding the amortization of
store pre-opening costs) increased to $3.7 million for fiscal 1998 from $2.9
million in fiscal 1997. This increase was due to amortization of the goodwill
related to the Hour Eyes Acquisition and the VisionWorld Acquisition, which were
recorded during the fourth quarter of fiscal 1997 and fiscal 1998, respectively.
Net Interest Expense. Net interest expense increased to $19.2 million for
fiscal 1998 from $13.7 million for fiscal 1997. This increase was due to the
increased borrowings made in connection to the Recapitalization but is partially
offset by reduced rates on the new debt issued in the Recapitalization.
In-substance Defeased Bonds Net Interest Expense. Net interest expense
related to the in-substance defeased bonds was $2.4 million in 1998 and reflects
the net amount of interest expense related to the in-substance defeased bonds
and the interest income related to the investment securities-restricted from
April 24, 1998 (date the bonds were in-substance defeased) until the defeasement
on October 1, 1998.
Extraordinary Item. An extraordinary loss of $8.4 million that was due to
the write-off of deferred financing fees related to the early extinguishment of
debt and to the call premiums on the Senior Notes was incurred during fiscal
1998.
1997 COMPARED TO 1996
Net Revenues. The increase in net revenues of 38.8% to $219.6 million in
fiscal 1997 from $158.2 million in fiscal 1996 was primarily the result of the
$52.2 million in sales attributable to a full year of Visionworks stores and
three months of Hour Eyes stores in the Company's fiscal 1997 results and an
increase in comparable store sales of 3.8% in fiscal 1997. In addition, fiscal
1997 was a fifty-three week year and fiscal 1996 was a fifty-two week year.
Gross Profit. Gross profit as a percentage of net revenues decreased by 3.4%
to 64.9% in fiscal 1997 as compared to 67.2% in fiscal 1996. Gross profit was
$142.5 million in fiscal 1997 compared to $106.3 million in fiscal 1996. This
percentage decrease was primarily due to the inclusion of a complete year of the
Visionworks stores in the Company's fiscal 1997 results. Visionworks stores
operate at a lower gross margin primarily due to the sale of contact lenses,
which have lower gross margins and are not sold at a majority of the Company's
other locations.
23
<PAGE> 26
Selling, General and Administrative Expenses. SG&A increased by 30.9% to
$120.3 million in fiscal 1997 as compared to fiscal 1996. SG&A as a percentage
of net revenues decreased by 5.7% to 54.8% in fiscal 1997 from 58.1% for the
same period of fiscal 1996. This percentage decrease was due primarily to
savings realized through more efficient payroll management and increased
leveraging of advertising expenditures due to the inclusion of a complete year
of the Visionworks stores in the Company's fiscal 1997 results.
Amortization Expense. Amortization expense (excluding the amortization of
store pre-opening costs) remained at $2.9 million in fiscal 1997.
Net Interest Expense. Net interest expense in fiscal 1997 increased by 38.4%
to $13.7 million as compared to $9.9 million in fiscal 1996. This increase was
due to the interest expense associated with the $49.0 million which the Company
borrowed to consummate the Visionworks Acquisition and the Hour Eyes Acquisition
and the interest on the $10.0 million capital lease which the Company assumed as
a result of the Visionworks Acquisition.
SYSTEMS CONVERSION; YEAR 2000 ISSUE
The Company is aware of the potential for industry wide business
disruption which could occur due to problems related 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.
State of Readiness
The Company has developed a comprehensive plan to reduce the
probability of operational difficulties due to Year 2000 related failures. While
there is still a significant amount of work to do, the Company believes that it
is on track towards a timely completion in the fall of 1999. Overall the Company
estimates that it has completed approximately 80% of the Year 2000 issue
identification process, approximately 50% of the process of remediating year
2000 issues that have been identified to date.
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
24
<PAGE> 27
and the Company's point-of-sale system. Systems that are in the process of being
remediated are the payroll/human resources system and the merchandising system
both of which should be compliant by the summer of 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 vendors or any
other single vendor for frames or lenses, the Company has identified vendors
that may otherwise be viewed as critical to its business. The Company is
defining a critical vendor as one who's inability to continue to provide goods
and services would 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. 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, as in most companies, 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 January 1, 2000, resulting in
possible interruptions of security, heating, elevator, telephone and other
services.
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.
25
<PAGE> 28
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 $650,000, with $300,000 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.
The Company continues to evaluate the risks associated with potential
Year 2000 related failures. As it better understands the risks within its unique
set of business partners, production processes, and internal systems, it will
develop a formal contingency plan to alleviate the impact of high potential or
serious failures. The Company anticipates having this contingency plan outlined
by March 1999. Until the contingency plan is completed, the Company does not
possess the information necessary to estimate the potential impact of Year 2000
compliance issues relating to its IT systems, non-IT systems, its vendors, its
customers, and other parties.
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 is
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.
26
<PAGE> 29
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities provided net cash for 1998, 1997 and
1996 of $0.2 million, $15.5 million and $14.0 million, respectively. As of
January 2, 1999, the Company had $5.1 million of cash available to meet the
Company's obligations.
Capital expenditures for 1998, 1997 and 1996 were $20.7 million, $9.5
million and $4.2 million respectively. Capital expenditures for 1999 are
projected to be approximately $15 to $17 million. Capital expenditures are
related to the construction of new stores, repositioning of existing stores in
some markets and new computer systems for the stores. These capital expenditures
include leasehold improvements, laboratory, equipment, furniture and fixtures,
doctors' equipment, point-of-sale equipment, and computer hardware and software.
On April 24, 1998, the Company entered into a credit agreement (the "New
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. The proceeds of the "New Credit Facility" were used to pay long
term debt outstanding under the previous credit facility. At January 2, 1999,
the Company had $55.0 million in term loans outstanding under the Term Loan
Facility and $30.1 million outstanding under the Acquisition Facility which
funded the VisionWorld Acquisition. Approximately $10.0 million of the Revolving
Credit Facility is restricted for the repayment of the capital lease obligation
to Eckerd Corporation. Borrowings made under the New 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 New Credit Facility) plus 1.25%. The Term Loan
Facility matures five years from the closing date of the New Credit Facility and
will amortize quarterly in aggregate annual principal amounts of approximately
$0.0 million, $4.0 million, $12.0 million, $18.0 million, and $21.0 million,
respectively, for years one through five after April 24, 1998.
In connection with the Recapitalization, the Company in-substance defeased
its previously issued 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 constitutes the principal amount,
premium and interest payable on the Senior Notes on the October 1, 1998
redemption date. On October 1, 1998, the Senior Notes were defeased as scheduled
and the Company recorded an extraordinary charge of $4.2 million on the
statement of operations for defeasance costs during the third quarter related to
the call premium on the bonds.
In connection with the Recapitalization, the Company completed a debt
offering of the Initial Notes, consisting of the Fixed Rate Notes and the
Floating Rate Notes. Interest on the Initial Notes will be payable semiannually
on each May 1
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<PAGE> 30
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 in the
Indenture) plus 3.98%. The Initial Notes will not be entitled to the benefit of
any mandatory sinking fund. For discussion of restrictions on subsidiaries, see
Note 8 to the January 2, 1999 Consolidated Financial Statements. On April 24,
1998, the Company entered into an interest rate swap agreement that converts a
portion of the Floating Rate Notes to a fixed rate.
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.
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.
In connection with the Visionworks Acquisition, the Company assumed an
agreement to sublease land, buildings and equipment at eight operating
locations. Under the terms of the agreement, the Company committed to purchase
such properties for $10.0 million and to pay Eckerd Corporation an annual rent
of $1.3 million for the subleases.
The Company anticipates that cash from operations and funds available under
the Revolving Credit Facility will be sufficient to finance the Company's
continuing operations and to make all required payments of principal and
interest on the Exchange Notes through the next twelve months.
In August 1997, the Company sold, for net proceeds of $4.8 million, the
building in which its corporate headquarters is located. The Company entered
into a 15 year operating lease with the new owners and will maintain its current
location. As a result of this transaction, the Company recorded a deferred gain,
which will be amortized over the life of the lease.
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.
SEASONALITY AND QUARTERLY RESULTS
The Company's sales fluctuate seasonally. Historically, the Company's
highest sales and earnings occur in the first and third quarters. In addition,
quarterly results are affected by the opening of new stores; therefore, the
Company's growth, the Visionworks Acquisition, the Hour Eyes
28
<PAGE> 31
Acquisition and the VisionWorld Acquisition may affect seasonal fluctuations.
Hence, quarterly results are not necessarily indicative of results for the
entire year.
ITEM 7A. 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.
INTEREST RATE RISK
The Company's primary market risk exposure is interest rate risk, with
specific vulnerability to changes in LIBOR. At January 2, 1999, $130.1 million
of the Company's long-term debt bears interest at variable rates, with $100.0
million of that amount effectively converted to fixed rates through interest
rate swap agreements. Accordingly, the Company's net income is affected by
changes in interest rates. Assuming a two hundred basis point change in the 1998
average interest rate under the $30.1 million in unhedged borrowings, the
Company's 1998 interest expense would have changed approximately $600,000.
At January 2, 1999, the Company had an unrealized loss of $1.2 million
related to the $100.0 million swap portfolio. The Company's fixed pay rate is
5.9% while the floating receive rate is based on LIBOR, 5.0% at end of fiscal
1998. A two hundred basis point change in the receive rate would affect the
Company's position by $2.0 million.
In the event of an adverse change in interest rates, management could take
actions to mitigate its exposure. However, due to the uncertainty of the actions
that would be taken and their possible effects, this analysis assumes no such
actions. Further, this analysis does not consider the effects of the change in
the level of overall economic activity that could exist in such an environment.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are set forth in this
annual report on Form 10-K commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
29
<PAGE> 32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The table below sets forth the names, ages and positions of the executive
officers and directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Bernard W. Andrews 57 Chairman and Chief Executive Officer
David E. McComas 56 President and Chief Operating Officer
Alan E. Wiley 52 Executive Vice President, Chief Financial Officer, Secretary and Treasurer
George E. Gebhardt 48 Executive Vice President of Merchandising and Managed Vision Care
Michele M. Benoit 42 Senior Vice President of Human Resources
Charles A. Brizius 30 Director
Anthony J. DiNovi 36 Director
Norman S. Matthews 65 Director
Warren C. Smith, Jr. 42 Director
Antoine G. Treuille 49 Director
</TABLE>
Directors of the Company are elected at the annual shareholders' meeting
and hold office until their successors have been elected and qualified. The
officers of the Company are chosen by the Board of Directors and hold office
until they resign or are removed by the Board of Directors.
Bernard W. Andrews has been Chairman of the Company since the consummation
of the Recapitalization. Mr. Andrews joined the Company as Director and Chief
Executive Officer in March 1996. From January 1994 to April 1995, Mr. Andrews
was President and Chief Operating Officer, as well as a Director of Montgomery
Ward-Retail. He was an Executive Vice President and a Director of Circuit City
Stores, Inc., from October 1983 to May 1990, serving as President-Hardlines,
Executive Vice President-Marketing and Vice President-Home Fashions. Prior to
that, Mr. Andrews spent twenty years with Sears, Roebuck & Co. in a number of
merchandising, marketing and operating positions.
David E. McComas has served as the President and Chief Operating Officer of
the Company since July 1998. Prior to that, Mr. McComas was Western Region
President and Corporate Vice President, Circuit City Stores, Inc., responsible
for eight Western States and Hawaii since 1994. Prior to 1994, Mr. McComas was
General Manager of Circuit City Stores, Inc. Mr. McComas has over thirty years
of store management experience including stints at Montgomery Ward Holding
Corporation and Sears, Roebuck & Co.
Alan E. Wiley has served as Executive Vice President and Chief Financial
Officer of the Company since November 1998. Prior to that, since 1992, Mr. Wiley
served as the Senior Executive Vice President, Secretary, Chief Financial and
Administrative Officer and a Director of The Cato Corporation. From 1981 through
1990, Mr. Wiley held senior administrative and financial positions with British
American Tobacco, U.S. in various companies of the specialty retail division.
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<PAGE> 33
George E. Gebhardt has served as the Company's Executive Vice President of
Merchandising, since September 1996 when the Company purchased his former
employer, Visionworks, and Managed Vision Care since February 1999. Mr. Gebhardt
was with Visionworks from February 1994 to September 1996 serving in various
positions, most recently Senior Vice President of Merchandising and Marketing.
Prior to that, Mr. Gebhardt spent over thirteen years with Eckerd Corporation in
various operational positions including Senior Vice President, General Manager
of Eckerd Vision Group. Mr. Gebhardt also spent seven years working for Procter
& Gamble serving in various positions including Unit Sales Manager of Procter &
Gamble's Health and Beauty Care Division.
Michele M. Benoit has served as the Company's Senior Vice President of
Human Resources since April 1997. From 1995 until joining the Company, she was
Vice President, Human Resources for Ben Franklin Retail Stores, Inc. Prior to
that, Ms. Benoit was a Vice President and Managing Director with Kennedy and
Company, a retail executive search firm based in Chicago, Illinois. She also
spent fourteen years with Montgomery Ward and Company where she held a variety
of human resources and operational positions.
Norman S. Matthews has served as a Director of the Company since October
1993 and served as Chairman from December 1996 to April 1998. Mr. Matthews is
Chairman of the Executive Committee of the Company's Board of Directors. From
1988 to the present, Mr. Matthews has been an independent retail consultant and
venture capitalist. Mr. Matthews was President of Federated Department Stores
from 1987 to 1988, and served as Vice Chairman from 1983 to 1987. He is also a
Director of Finlay Fine Jewelry Corporation, Toys "R" Us, Inc., The Progressive
Corporation, Loehmann's, Inc. and Lechters, Inc.
Antoine G. Treuille has served as a Director of the Company since October
1993. In March 1998, Mr. Treuille became Managing Director of Financo, Inc., an
investment bank. Mr. Treuille has served as President of Charter Pacific Corp.
since May 1996. Prior to his current position, Mr. Treuille served as Senior
Vice President of DCMI. From September 1985 to April 1992, he served as
Executive Vice President with the investment firm of Entrecanales, Inc. Mr.
Treuille also serves as a Director of Societe BIC S.A. and Special Metals Corp.
Anthony J. DiNovi has served as a Director of the Company since the
consummation of the Recapitalization. Mr. DiNovi has been employed by Thomas H.
Lee Company since 1988 and currently serves as a Managing Director. Mr. DiNovi
is a Managing Director and Member of THL Equity Advisors IV, LLC, the general
partner of Thomas H. Lee Equity Fundy IV, LP and Vice President of Thomas H. Lee
Advisors I and T.H. Lee Mezzanine II, affiliates of ML-Lee Acquisition Fund
L.P., ML-Lee Acquisition Fund II, L.P. and ML-Lee Acquisition fund II
(Retirement Accounts), L.P., respectively. Mr. DiNovi also serves as a Director
of Safelite Glass Corp., The Learning Company, Inc. and Fisher Scientific
International, Inc.
Warren C. Smith, Jr., has served as a Director of the Company since the
consummation of the Recapitalization. Mr. Smith has been employed by Thomas H.
Lee Company since 1990 and currently serves as a Managing Director. Mr. Smith is
a Managing Director and Member of THL Equity Advisors IV, LLC, the general
partner of Thomas H. Lee Equity Fund IV, LP and Vice President of Thomas H. Lee
Advisors I and T.H. Lee Mezzanine II, affiliates of ML-Lee Acquisition Fund,
L.P., ML-Lee Acquisition Fund II, L.P. and ML-Lee Acquisition Fund II
(Retirement Accounts), L.P., respectively. Mr. Smith also serves as a Director
of Rayovac Corporation, Finlay Fine Jewelry Corporation and Just For Feet, Inc.
Charles A. Brizius has served as a Director of the Company since the
consummation of the Recapitalization. Mr. Brizius worked as Thomas H. Lee
Company from 1993 to 1995, rejoined in 1997 and currently serves as an
Associate. Mr. Brizius is a Member of THL Equity Advisors IV, LLC, the general
partner of Thomas H. Lee Equity Fund IV, LP. From 1991 to 1993, Mr. Brizius
worked as Morgan Stanley & Co. Incorporated in the Corporate Finance Department.
31
<PAGE> 34
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the
compensation paid during the last three years to the Company's Chief Executive
Officer during fiscal 1998 and the four other most highly compensated executive
officers serving as executive officers at the end of fiscal 1998 (the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL --------------
COMPENSATION AWARDS
-------------------------------------------- --------------
OTHER ANNUAL SECURITIES ALL OTHER
COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($)(a) BONUS($)(b) ($)(c) OPTIONS(#) ($)(d)
- --------------------------- ---- ------------ ----------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Bernard W. Andrews 1998 489,480 -- -- 371,376 8,663,996
Chairman and Chief 1997 398,567 -- -- -- 4,591
Executive Officer 1996 289,902 325,000 137,439 75,000 4,200
David E. McComas 1998 153,750 500,000 -- 120,000 --
President and Chief 1997 -- -- -- -- --
Operating Officer 1996 -- -- -- -- --
George E. Gebhardt 1998 205,577 -- -- 35,000 790,175
Executive Vice President 1997 188,231 -- 49,166 -- --
of Merchandising, 1996 39,846 17,444 -- 13,000 --
Construction And Design
William Shertzer (e) 1998 158,385 -- -- 30,000 1,459,678
Senior Vice President of 1997 144,846 -- -- -- --
Managed Vision Care 1996 139,039 58,441 -- 10,000 894
Michele Benoit 1998 143,673 -- -- 25,000 384,379
Senior Vice President of 1997 81,731 25,000 55,798 7,000 --
Human Resources 1996 -- -- -- -- --
</TABLE>
- ------------
(a) Represents annual salary, including any compensation deferred by the
Named Executive Officer pursuant to the Company's 401(k) defined
contribution plan or the Company's deferred stock plan.
(b) Represents annual bonus earned by the Named Executive Officer for the
relevant fiscal year.
(c) Except with respect to Mr. George E. Gebhardt and Ms. Michele Benoit for
1997 and Mr. Bernard W. Andrews for 1996, the dollar value of the
perquisites and other personal benefits, securities or property paid to
each Named Executive Officer did not exceed the lesser of $50,000 or 10%
of reported annual salary and bonus received by the Named Executive
Officer. Of the total other annual compensation received by Mr. Gebhardt
in 1997, $41,966 related to relocation expenses paid by the Company on
behalf of Mr. Gebhardt. Of the total other annual compensation received
by Ms. Benoit in 1997, $51,090 related to relocation expenses paid by the
Company on behalf of Ms. Benoit. Of the total other annual compensation
received by Mr. Andrews in 1996, $131,861 related to relocation expenses
paid by the Company on behalf of Mr. Andrews.
(d) In connection with the Recapitalization, all outstanding options were
simultaneously vested and exercised. Except with respect to Mr. Bernard
W. Andrews' term life insurance premiums discussed below, all 1998
amounts represent the compensation amounts related to the exercise of
options. During 1998, 1997 and 1996, the Company paid $4,893, $4,591 and
$4,200, respectively, for premiums for term life insurance for Mr.
Andrews. The remaining 1996 amount in this column relates to
contributions made by the Company to the Company's 401(k) defined
contribution plan on behalf of the respective Named Executive Officer.
(e) William Shertzer resigned from the Company effective February 26, 1999.
32
<PAGE> 35
STOCK OPTION GRANTS. The following table sets forth information with
respect to the Named Executive Officers concerning options granted during fiscal
1998. The Named Executive Officers have not been granted any SARs.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZED VALUE AT
NUMBER OF ------------------------------ ASSUMED ANNUAL RATES OF
SECURITIES % OF TOTAL EXERCISE STOCK PRICE APPRECIATION
UNDERLYING OPTIONS GRANTED OR BASE FOR OPTION TERM
OPTIONS TO EMPLOYEES IN PRICE EXPIRATION -------------------------------
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5% 10%
- ---- ----------- --------------- -------- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
Bernard W. Andrews 371,376 43.5% $ 10.41 7/08 $ 5,997,472 $ 9,115,883
David E. McComas 120,000 14.1% $ 10.41 7/08 $ 1,937,919 $ 2,945,548
George E. Gebhardt 35,000 4.1% $ 10.41 7/08 $ 565,226 $ 859,118
William Shertzer 30,000 3.5% $ 10.41 7/08 $ 484,480 $ 736,387
Michele Benoit 25,000 2.9% $ 10.41 7/08 $ 403,733 $ 613,656
</TABLE>
STOCK OPTION EXERCISES AND HOLDINGS TABLE. The following table sets forth
information with respect to the Named Executive Officers concerning unexercised
options held as of January 2, 1999. The Named Executive Officers have not been
granted any SARs.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS OPTIONS
AT FY-END (#) AT FY-END ($)
SHARES VALUED ---------------- ----------------
ACQUIRED ON REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#)(a) ($)(c) UNEXERCISABLE UNEXERCISABLE(b)
- ---- -------------- --------- ---------------- ----------------
<S> <C> <C> <C> <C>
Bernard W. Andrews 75,000 $ 8,205,796 -/371,376 --
David E. McComas -- -- -/120,000 --
George E. Gebhardt 13,000 $ 778,846 -/35,000 --
William Shertzer 13,292 $ 1,248,268 -/30,000 --
Michele Benoit 7,000 $ 384,379 -/25,000 --
</TABLE>
(a) Exercise occurred prior to Recapitalization and therefore number of
shares does not reflect 12 for 1 stock split.
(b) There is currently no active trading market for the Common Stock and thus
the fair market value as of January 2, 1999 is not determinable.
(c) Value realized is the difference between the recapitalization option
price per share and the option exercise price.
33
<PAGE> 36
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has an Executive Committee of which Norman S.
Matthews is chairman and, as of the date hereof, the sole member.
The Board of Directors has a Compensation Committee currently consisting of
Messrs. Matthews, DiNovi and Smith. The Compensation Committee makes
recommendations concerning the salaries and incentive compensation of employees
of and consultants to the Company.
The Board of Directors has an Audit Committee currently consisting of
Messrs. DiNovi, Smith, Treuille and Brizius. The Audit Committee is responsible
for reviewing the results and scope of audits and other services provided by the
Company's independent auditors.
DIRECTOR COMPENSATION
The Company may compensate its directors for services rendered in such
capacity.
The Company entered into a three year consulting agreement (the "Consulting
Agreement"), effective as of the closing of the Recapitalization, with Norman S.
Matthews, which provides for the payment of an annual consulting fee of $50,000.
The Consulting Agreement provides for the grant to Mr. Matthews, concurrently
with the closing of the Recapitalization, of an option to purchase up to 1.5% of
the fully diluted Common Stock or approximately 110,000 shares as of the closing
of the Recapitalization, subject to a vesting schedule which will be one-half
time based and one-half performance based, at an exercise price equal to
approximately $10.41 per share, the same price paid by THL in connection with
the Recapitalization.
EMPLOYMENT AGREEMENT
Bernard W. Andrews entered into an employment agreement with the Company,
effective as of the closing of the Recapitalization, which provides for his
employment with the Company for an initial term of three years, and will
thereafter be renewed for consecutive one year terms unless terminated by either
party. Mr. Andrews is entitled to a base salary of $500,000 during the first
year following the Recapitalization, $550,000 during the second year and
$600,000 during the third year. Mr. Andrews will be eligible to receive an
annual performance bonus upon the achievement by the Company of certain EBITDA
targets as determined from year to year by the Board of Directors.
Under the terms of his employment agreement, Mr. Andrews purchased $1.0
million of Common Stock at the same price that THL paid in connection with the
Recapitalization. Mr. Andrews paid for these shares by delivering a promissory
note with an original purchase amount of $1.0 million, which shall accrue
interest at a fixed rate equal to the Company's initial borrowing rate. The
repayment of such note is secured by Mr. Andrews' shares of Common Stock.
34
<PAGE> 37
Mr. Andrews is entitled to receive severance of two times his base salary
upon termination by the Company without cause or by Mr. Andrews for good reason.
Severance shall be paid over twelve months. Mr. Andrews also will be subject to
a standard restrictive covenants agreement (including non-competition,
non-solicitation, and non-disclosure covenants) during the term of his
employment and for a period of three years following termination for any reason.
Mr. Andrews has received non-qualified options to purchase 371,376 shares of
Common Stock. Certain of these options vest over time and others vest upon the
Company reaching certain profitability levels. If the profitability levels are
not reached for a given year, the options fail to become exercisable and are
carried forward to the next succeeding vesting period.
STOCK OPTION PLAN
The Company has granted stock options to certain officers under the
Company's 1998 stock option plan. As of March 23, 1999, options to purchase
411,500 shares of Common Stock were outstanding. Subject to acceleration under
certain circumstances, the options vest over a four-year period. The per option
exercise price is $10.41. Generally, all unvested options will be forfeited upon
termination of employment.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. During 1998,
the Compensation Committee consisted of Messrs. Matthews, DiNovi and Smith, none
of whom were an officer or employee of the Company.
35
<PAGE> 38
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth information with respect to the
anticipated beneficial ownership of shares of the Common Stock as of March 23,
1999 by persons who are beneficial owners of more than 5% of the common stock,
by each director, by each Named Executive Officer of the Company and by all
directors and executive officers as a group, as determined in accordance with
Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). All shares of the Common Stock are voting stock.
<TABLE>
<CAPTION>
Shares of Percentage
Name of Beneficial Owner(a) Common Stock of Class
<S> <C> <C>
Thomas H. Lee Equity Fund IV, L.P. (and affiliates of THL Co.)(b) ......... 6,664,800 89.9%
Equity-Linked Investors-II (c) ............................................ 383,616 5.2
Bernard W. Andrews (e) .................................................... 254,016 3.4
David E. McComas (f) ...................................................... 24,015 *
Norman S. Matthews (g) .................................................... 19,692 *
Antoine G. Treuille (h) ................................................... 6,528 *
George E. Gebhardt (i) .................................................... 19,212 *
Michele Benoit (j) ........................................................ 9,600 *
Anthony J. DiNovi (b) ..................................................... 6,664,800 89.9
Warren C. Smith (b) ....................................................... 6,664,800 89.9
Charles A. Brizius (b) .................................................... 6,664,800 89.9
All directors and executive officers of the Company as a group (11)(d) .... 7,017,075 93.9
</TABLE>
- ----------
* Less than 1%.
(a) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and reflects general voting power
and/or investment power with respect to securities.
(b) The business address for such person(s) is c/o Thomas H. Lee Company, 75
State Street, Suite 2600, Boston, Massachusetts 02109. All such voting
securities may be deemed to be beneficially owned by THL Equity Advisors
IV, LLC ("Advisors"), the general partner of THL Fund IV, Thomas H. Lee,
Messrs. DiNovi, Smith and the other managing directors and by Mr.
Brizius and the other officers of THL Co., in each case pursuant to the
definition of beneficial ownership provided in footnote (a). Each of
such persons disclaims beneficial ownership of such shares.
(c) Equity-Linked Investors-II is an investment partnership managed by Desai
Capital Management Incorporated. The business address for such person is
c/o Desai Capital Management Incorporated, 540 Madison Avenue, New York,
New York 10022.
(d) Includes 6,664,800 shares beneficially owned by THL described in
footnote (b).
(e) Includes 61,896 shares issuable pursuant to presently exercisable
options (or those exercisable prior to May 22, 1999). Excludes 309,480
shares issuable pursuant to options which are not currently exercisable
(or exercisable prior to May 22, 1999).
36
<PAGE> 39
(f) Excludes 120,000 shares issuable pursuant to options which are not
currently exercisable (or exercisable prior to May 22, 1999).
(g) Excludes 111,412 shares issuable pursuant to options which are not
currently exercisable (or exercisable prior to May 22, 1999).
(h) Excludes 5,000 shares issuable pursuant to options which are not
currently exercisable (or exercisable prior to May 22, 1999).
(i) Excludes 35,000 shares issuable pursuant to options which are not
currently exercisable (or exercisable prior to May 22, 1999).
(j) Excludes 25,000 shares issuable pursuant to options which are not
currently exercisable (or exercisable prior to May 22, 1999).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT AGREEMENT
The Company and THL Co. entered into a management agreement as of the
closing date of the Recapitalization (the "Management Agreement"), pursuant to
which THL Co. received a financial advisory fee of $6.0 million in connection
with structuring, negotiating and arranging the Recapitalization and
structuring, negotiating and arranging the debt financing. In addition, pursuant
to the Management Agreement, THL Co. initially receives $500,000 per year plus
expenses for management and other consulting services provided to the Company,
including one percent (1%) of the gross purchase price for acquisitions for its
participation in the negotiation and consummation of any such acquisition. The
Management Agreement continues unless and until terminated by mutual consent of
the parties in writing, for so long as THL Co. provides management and other
consulting services to the Company. The Company believes that the terms of the
Management Agreement are comparable to those that would have been obtained from
unaffiliated sources.
STOCKHOLDERS' AGREEMENT
The Company entered into a Stockholders' Agreement (the "Stockholders'
Agreement") among THL and the other shareholders of the Company upon the
consummation of the Recapitalization. Pursuant to the Stockholders' Agreement,
the shareholders are required to vote their shares of capital stock of the
Company to elect a Board of Directors of the Company consisting of directors
designated by THL. The Stockholders' Agreement also grants THL the right to
require the Company to effect the registration of shares of Common Stock they
hold for sale to the public, subject to certain conditions and limitations. If
the Company proposes to register any of its securities under the Securities Act
of 1933, as amended, whether for its own account or otherwise, the shareholders
are entitled to notice of such registration and are entitled to include their
shares in such registration, subject to certain conditions and limitations. All
fees, costs and expenses of any registration effected on behalf of such
shareholders under the Stockholders' Agreement (other than underwriting
discounts and commissions) will be paid by the Company.
37
<PAGE> 40
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report.
<TABLE>
<CAPTION>
Page of 10-K
------------
<S> <C>
1. FINANCIAL STATEMENTS
Report of Independent Auditors F-2
Consolidated Balance Sheets at January 3, 1998 and January 2, 1999 F-3
Consolidated Statements of Operations for the Years Ended December 28, 1996,
January 3, 1998 and January 2, 1999 F-4
Consolidated Statements of Shareholders' Equity/(Deficit) at December 28,
1996, January 3, 1998 and January 2, 1999 F-5
Consolidated Statements of Cash Flows at December 28, 1996, January 3, 1998
and January 2, 1999 F-6
Notes to the Consolidated Financial Statements F-8
2. FINANCIAL STATEMENT SCHEDULES
Schedule II - Consolidated Valuation and Qualifying Accounts - for the Years
Ended December 28, 1996, January 3, 1998 and January 2, 1999 F-37
</TABLE>
3. EXHIBITS
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)
38
<PAGE> 41
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)
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)
3.3 Amended and Restated By-laws of Eye Care Centers of
America, 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)
10.1 Form of Stockholders' Agreement dated as of April 24,
1998 by and among Eye Care of America, Inc. and the
shareholders listed therein. (a)
10.2 1998 Stock Option Plan. (a)
10.3 Amended and Restated Deferred Stock Plan of Eye Care
Centers of America, Inc. (a)
10.4 Employment Agreement dated April 24, 1998 by and
between Eye Care Centers of America, Inc. and Bernard
W. Andrews. (a)
10.5 Stock Option Agreement dated April 24, 1998 by and
between Bernard W. Andrews and Eye Care Centers of
America, Inc. (a)
10.6 Form of Employment Agreement dated January 1, 1998
between Eye Care Centers of America, Inc. and Mark T.
Pearson, William A. Shertzer, Jr., George Gebhardt and
Kent M. Keish. (a)
10.7 Employment Agreement dated March 24, 1997 between Eye
Care Centers of America, Inc. and Michele Benoit. (a)
39
<PAGE> 42
10.8 Management Agreement, dated as of April 24, 1998, by
and between Thomas H. Lee Company and Eye Care Centers
of America, Inc. (a)
10.9 Retail Business Management Agreement, dated September
30, 1997, by and between Dr. Samit's Hour Eyes
Optometrist, P.C., a Virginia professional
corporation, and Visionary Retail Management, Inc., a
Delaware corporation. + (a)
10.10 Professional Business Management Agreement dated
September 30, 1997, by and between Dr. Samit's Hour
Eyes Optometrists, P.C., a Virginia professional
corporation, and Visionary MSO, Inc., a Delaware
corporation. + (a)
10.11 Contract for Purchase and Sale dated May 29, 1997 by
and between Eye Care Centers of America, Inc. and JDB
Real Properties, Inc. (a)
10.11 Contract for Purchase and Sale dated May 29, 1997 by
and between Eye Care Centers of America, Inc. and JDB
Real Properties, Inc. (a)
10.12 Amendment to Contract for Purchase and Sale dated July
3, 1997 by and between Eye Care Centers of America,
Inc. and JDB Real Properties, Inc. (a)
10.13 Second Amendment to Contract for Purchase and Sale
dated July 10, 1997 by and between Eye Care Centers of
America, Inc. and JDB Real Properties, Inc. (a)
10.14 Third Amendment to Contract for Purchase and Sale by
and between Eye Care Centers of America, Inc., John D.
Byram, Dallas Mini #262. Ltd. and Dallas Mini #343,
Ltd. (a)
10.15 Commercial Lease Agreement dated August 19, 1997 by
and between John D. Byram, Dallas Mini #262, Ltd. and
Dallas Mini #343, Ltd. And Eye Care Centers of
America, Inc. (a)
10.16 1997 Incentive Plan for Key Management. (a)
10.17 1998 Incentive Plan for Key Management. (a)
10.18 Employment Agreement and Noncompetition Agreement,
dated December 31, 1996 by and between Eye Care
Centers of America, Inc. and Gary D. Hahs, together
with letter, dated November 21, 1997, regarding
extension of term. (a)
10.19 Master Lease Agreement, dated August 12, 1997, by and
between Pacific Financial Company and Eye Care Centers
of America, Inc., together with all amendments, riders
and schedules thereto. (a)
10.20 Credit Agreement, dated as of April 23, 1998, among
Eye Care Centers of America, Inc., Various Lenders,
Bankers Trust Company, as Administrative Agent, and
Merrill Lynch Capital Corporation, as Syndication
Agent. (a)
10.21 Purchase Agreement, dated as of April 24, 1998, by and
among Eye Care Centers of America, Inc., the
subsidiaries of Eye Care Centers of America, Inc.
named therein, BT Alex. Brown Incorporated and Merrill
Lynch, Pierce, Fenner & Smith Incorporated. (a)
10.22 Secured Promissory Note, dated April 24, 1998, issued
by Bernard W. Andrews in favor of Eye Care Centers of
America, Inc. (a)
40
<PAGE> 43
10.23 Form of Eye Care Centers of America, Inc. standard
managed care contract. (a)
10.24 Employment Agreement, dated July 8, 1998, by and
between Eye Care Centers of America, Inc. and David E.
McComas. (a)
10.25 Employment Agreement, dated November 2, 1998, by and
between Eye Care Centers of America, Inc. and Alan E.
Wiley. (a)
10.26 Retail Business Management Agreement, dated October 1,
1998, by and between Visionary Retail Management,
Inc., a Delaware corporation, and Dr. Mark Lynn &
Associates, PLLC, a Kentucky professional limited
liability company. + (b)
10.27 Professional Business Management Agreement, dated
October 1, 1998, by and between Visionary MSO, Inc., a
Delaware Corporation, and Dr. Mark Lynn & Associates,
PLLC, a Kentucky professional limited liability
company. + (b)
12.1 Statement re Computation of Ratios (b)
21.1 List of subsidiaries of Eye Care Centers of America,
Inc. (b)
24.1 Powers of Attorney (contained on the signature pages
to this report). (b)
27.1 Financial Data Schedule. (b)
- ----------
+ Portions of this Exhibit have been omitted pursuant to an
application for an order declaring confidential treatment filed
with the Securities and Exchange Commission.
(a) Incorporated by reference from the Registration Statement on Form
S-4 (File No. 333 - 56551).
(b) Filed herewith.
(b) The Company filed no current reports on Form 8-K with the Securities and
Exchange Commission during the thirteen weeks ended January 2, 1999.
Supplemental information to be furnished with reports filed pursuant to
Section 15(d) of the Act by Registrants which have not registered
securities pursuant to Section 12 of the Act.
No annual report or proxy materials has been sent to security holders of
the Company.
41
<PAGE> 44
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SAN
ANTONIO, STATE OF TEXAS, ON APRIL 2, 1999.
EYE CARE CENTERS OF AMERICA, INC.
By: /s/ BERNARD W. ANDREWS
------------------------------------------
BERNARD W. ANDREWS
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears below
constitutes and appoints Bernard W. Andrews and Alan E. Wiley and each of them,
with the power to Act without the other, his true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution, for him or in his
name, place and stead, in any and all capacities to sign any and all amendments
to this report, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every Act and thing requisite or
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents or any of them, or their or his
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Chairman of the Board and Chief April 2, 1999
/s/ Bernard W. Andrews Executive Officer
- -------------------------------------------------- (Principal Executive Officer)
BERNARD W. ANDREWS
Executive Vice President and Chief April 2, 1999
/s/ Alan E. Wiley Financial Officer
- -------------------------------------------------- (Principal Financial and
ALAN E. WILEY Accounting Officer)
/s/ Norman S. Matthews Director April 2, 1999
- --------------------------------------------------
NORMAN S. MATTHEWS
/s/ Antoine G. Treuille Director April 2, 1999
- --------------------------------------------------
ANTOINE G. TREUILLE
/s/ Anthony J. DiNovi Director April 2, 1999
- --------------------------------------------------
ANTHONY J. DINOVI
/s/ Warren C. Smith, Jr. Director April 2, 1999
- --------------------------------------------------
WARREN C. SMITH, JR.
/s/ Charles A. Brizius Director April 2, 1999
- --------------------------------------------------
CHARLES A. BRIZIUS
</TABLE>
42
<PAGE> 45
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
EYE CARE CENTERS OF AMERICA, INC. AND SUBSIDIARIES
<TABLE>
<S> <C>
Report of Independent Auditors F-2
Consolidated Balance Sheets at January 3, 1998 and January 2, 1999. F-3
Consolidated Statements of Operations for the Years Ended December 28, 1996,
January 3, 1998 and January 2, 1999. F-4
Consolidated Statements of Shareholders' Equity/(Deficit) as of December 28, 1996,
January 3, 1998 and January 2, 1999. F-5
Consolidated Statements of Cash Flows for the Years Ended December 28, 1996,
January 3, 1998 and January 2, 1999. F-6
Notes to the Consolidated Financial Statements F-8
Schedule II - Consolidated Valuation and Qualifying Accounts - for the Years
Ended December 28, 1996, January 3, 1998 and January 2, 1999. F-37
</TABLE>
<PAGE> 46
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Eye Care Centers of America, Inc.
San Antonio, Texas
We have audited the accompanying consolidated balance sheets of Eye Care Centers
of America, Inc. and Subsidiaries as of January 2, 1999 and January 3, 1998, and
the related consolidated statements of operations, shareholders' equity
(deficit), and cash flows for the fiscal years ended January 2, 1999, January 3,
1998, and December 28, 1996. Our audits also included the financial statement
schedules listed in the Index at Item 14(a). These financial statements and
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedules based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Eye
Care Centers of America, Inc. and Subsidiaries at January 2, 1999 and January
3, 1998, and the consolidated results of their operations and their cash flows
for the fiscal years ended January 2, 1999, January 3, 1998, and December 28,
1996, in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedules, when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
San Antonio, Texas
March 10, 1999
F-2
<PAGE> 47
EYE CARE CENTERS OF AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS UNLESS INDICATED OTHERWISE)
<TABLE>
<CAPTION>
---------- ----------
ASSETS January 3, January 2,
1998 1999
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,172 $ 5,127
Accounts and notes receivable, less allowance for doubtful accounts of $318 in 1997
and $559 in 1998 5,722 6,453
Inventory, less reserves of $561 in 1997 and $852 in 1998 26,007 26,977
Prepaid expenses and other 3,566 2,286
Deferred income taxes 386 391
--------- ---------
Total current assets 42,853 41,234
Property and equipment, net of accumulated depreciation and amortization of
$41,766 in 1997 and $58,134 in 1998 57,212 68,118
Intangibles, net of accumulated amortization of $6,578 in 1997 and $10,344 in 1998 75,279 102,459
Other assets 4,800 11,096
--------- ---------
$ 180,144 $ 222,907
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT)
Current liabilities:
Accounts payable $ 12,801 $ 20,921
Current portion of long-term debt 7,003 3,578
Deferred revenue 3,804 5,331
Accrued payroll expense 2,969 2,788
Accrued interest 2,976 3,347
Other accrued expenses 9,200 8,186
--------- ---------
Total current liabilities 38,753 44,151
Deferred income taxes 384 391
Long-term debt, less current maturities 115,386 242,945
Deferred rent 3,042 3,246
Deferred gain 2,334 2,175
--------- ---------
Total liabilities 159,899 292,908
--------- ---------
Mandatorily redeemable cumulative preferred stock 12,117 --
Commitments and contingencies
Shareholders' equity/(deficit):
Common stock, par value $.01 per share; 20,000,000 shares authorized; issued
and outstanding 1,011,548 in 1997 and 7,451,030 in 1998 10 75
Preferred stock, par value $.01 per share, 300,000 share authorized, issued
and outstanding in 1998 -- 32,793
Additional paid-in capital 31,245 60,958
Accumulated deficit (23,127) (163,827)
--------- ---------
Total shareholders' equity/(deficit) 8,128 (70,001)
--------- ---------
$ 180,144 $ 222,907
========= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements
F-3
<PAGE> 48
EYE CARE CENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS UNLESS INDICATED OTHERWISE)
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------------
December 28, January 3, January 2,
1996 1998 1999
------------ ---------- ----------
<S> <C> <C> <C>
Optical sales $ 158,224 $ 218,958 $ 235,236
Management fees -- 653 2,615
--------- --------- ---------
Net revenues 158,224 219,611 237,851
Operating costs and expenses:
Cost of goods sold 51,884 77,134 80,636
Selling, general and administrative expenses 91,897 120,319 132,390
Recapitalization and other expenses -- -- 25,803
Amortization of intangibles:
Goodwill 1,424 2,722 3,552
Noncompete and other intangibles 1,514 148 153
--------- --------- ---------
Total operating costs and expenses 146,719 200,323 242,534
--------- --------- ---------
Income (loss) from operations 11,505 19,288 (4,683)
Interest expense, net 9,899 13,738 19,159
In-substance defeased bonds
interest expense, net -- -- 2,418
--------- --------- ---------
Income (loss) before income taxes 1,606 5,550 (26,260)
Income tax expense 188 335 13
--------- --------- ---------
Net income (loss) before extraordinary item 1,418 5,215 (26,273)
Extraordinary loss on early extinguishment of
long-term debt -- -- 8,355
--------- --------- ---------
Net income (loss) $ 1,418 $ 5,215 $ (34,628)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-4
<PAGE> 49
EYE CARE CENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY/(DEFICIT)
(DOLLAR AMOUNTS IN THOUSANDS UNLESS INDICATED OTHERWISE)
<TABLE>
<CAPTION>
Additional Cumulative Accumulated Total
Common Stock Paid-In Translation Preferred (Deficit) Shareholders'
Shares Amount Capital Adjustment Stock Earnings Equity/(deficit)
---------- ---------- ---------- ----------- --------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 30, 1995 996,774 $ 10 $ 31,760 $ (679) $ -- $ (29,760) $ 1,331
Proceeds from deferred stock
compensation plan -- -- 158 -- -- -- 158
Purchase of deferred stock -- -- (182) -- -- -- (182)
shares
Purchase of common stock (6,452) -- (200) -- -- -- (200)
Issuance of common stock 10,000 -- 310 -- -- -- 310
Stock options exercised 8,226 -- 238 -- -- -- 238
Dividends accrued on
mandatorily redeemable -- -- (220) -- -- -- (220)
preferred stock
Translation and other -- -- -- 679 -- -- 679
Net income -- -- -- -- -- 1,418 1,418
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 28, 1996 1,008,548 $ 10 $ 31,864 $ -- $ -- $ (28,342) $ 3,532
Proceeds from deferred stock
compensation plan -- -- 179 -- -- -- 179
Purchase of deferred stock -- -- (96) -- -- -- (96)
shares
Stock options exercised 3,000 -- 195 -- -- -- 195
Dividends accrued on
mandatorily redeemable -- -- (897) -- -- -- (897)
preferred stock
Net income -- -- -- -- -- 5,215 5,215
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at January 3, 1998 1,011,548 $ 10 $ 31,245 $ -- $ -- $ (23,127) $ 8,128
Dividends accrued on
mandatory redeemable
preferred stock -- -- (268) -- -- -- (268)
Repurchase of common stock and
conversion of options and
warrants as a part of the
recapitalization (1,011,548) (10) (30,977) -- -- (98,198) (129,185)
Common stock issued as a part
of the recapitalization 565,923 6 70,684 -- -- -- 70,690
Rollover of shares of common stock
to common stock and preferred
stock as a part of the
recapitalization 45,030 -- 5,624 -- 2,250 (7,874) --
Common stock issued for shareholder
loan as a part of the
recapitalization 8,005 -- -- -- -- -- --
Preferred stock issuance as a part
of the recapitalization -- -- -- -- 27,750 -- 27,750
Recapitalization fees -- -- (12,733) -- -- -- (12,733)
Stock split 6,808,538 68 (68) -- -- -- --
Dividends accrued on preferred
stock -- -- (2,793) -- 2,793 -- --
Stock buyback (19,680) -- (205) -- -- -- (205)
Issuance of common stock 43,227 1 449 -- -- -- 450
Net loss -- -- -- -- -- (34,628) (34,628)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at January 2, 1999 7,451,043 $ 75 $ 60,958 $ -- $ 32,793 $ (163,827) $ (70,001)
========== ========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements
F-5
<PAGE> 50
EYE CARE CENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS UNLESS INDICATED OTHERWISE)
<TABLE>
<CAPTION>
Fiscal Year Ended
------------------------------------------
December 28, January 3, January 2,
1996 1998 1999
------------ ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,418 $ 5,215 $ (34,628)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation 9,646 12,131 12,345
Amortization of intangibles 2,938 2,870 3,705
Other amortization 671 983 1,578
Amortization of deferred gain -- (53) (159)
Deferred revenue (378) 232 654
Deferred rent 417 602 204
Other 217 (125) (515)
(Gain) loss on disposition of property and equipment 80 (120) 633
Extraordinary loss on early extinguishment of long-term debt -- -- 8,355
Changes in operating assets and liabilities:
Accounts and notes receivable (23) (1,667) (189)
Inventory 325 951 68
Prepaid expenses and other 194 (2,848) 1,168
Accounts payable and accrued liabilities (1,542) (2,655) 6,974
-------- -------- ---------
Net cash provided by operating activities 13,963 15,516 193
-------- -------- ---------
Cash flows from investing activities:
Acquisition of property and equipment (4,233) (9,470) (20,656)
Net outflow for Visionworks Holdings, Inc. common stock (53,521) -- --
Proceeds from sale of property and equipment -- 5,731 1,196
Payment received on notes receivable 17 375 177
Net outflow for The Samit Group, Inc. -- (17,462) --
Net outflow for the VisionWorld acquisition -- -- (33,042)
Purchase of investment securities-restricted -- -- (76,618)
Maturity of investment securities-restricted -- -- 78,400
-------- -------- ---------
Net cash used in investing activities $(57,737) $(20,826) $ (50,543)
-------- -------- ---------
</TABLE>
F-6
<PAGE> 51
EYE CARE CENTERS OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS UNLESS INDICATED OTHERWISE)
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------
December 28, January 3, January 2,
1996 1998 1999
------------ ----------- ------------
<S> <C> <C> <C>
Cash flows from financing activities:
Payments related to deferred compensation $ (382) $ (96) $ --
Proceeds from issuance of long-term debt 40,000 9,000 234,611
Proceeds from the stock option exercises 238 195 --
Proceeds from the issuance of common stock 310 -- 71,140
Proceeds from issuance of preferred stock 11,000 -- 27,750
Payments related to debt issuance (1,350) -- (11,153)
Payments to retire mandatorily redeemable preferred stock -- -- (12,385)
Redemption of common stock -- -- (129,390)
Recapitalization fees -- -- (12,733)
Payments on debt and capital leases (500) (7,440) (112,917)
Proceeds from deferred stock compensation plan 158 179 --
Payment of call premium -- -- (4,200)
Payment of in-substance defeased bonds interest expense, net -- -- (2,418)
--------- --------- ---------
Net cash (used in) provided by financing activities 49,474 1,838 48,305
--------- --------- ---------
Effect of exchange rate changes on cash and cash
equivalents 577 -- --
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 6,277 (3,472) (2,045)
Cash and cash equivalents at beginning of period 4,367 10,644 7,172
--------- --------- ---------
Cash and cash equivalents at end of period $ 10,644 $ 7,172 $ 5,127
========= ========= =========
Supplemental cash flow disclosures:
Cash paid during the period for:
Interest $ 8,885 $ 13,580 $ 17,781
Taxes $ 163 $ 160 $ --
Noncash investing and financing activities:
Additions of property and equipment $ 214 $ 495 $ 588
Dividends accrued on mandatorily redeemable
cumulative preferred stock $ 220 $ 897 $ 268
Dividends accrued on preferred stock $ -- $ -- $ 2,793
Adjustment of Visionworks property and equipment
to fair market value $ -- $ 4,684 $ --
Adjustment of Hour Eyes property and equipment
to fair market value $ -- $ -- $ 43
Rollover of common stock to
common stock as part of
the recapitalization $ -- $ -- $ 5,624
Rollover of common stock to
preferred stock as a part of
the recapitalization $ -- $ -- $ 2,250
Loan to shareholder to acquire
common stock $ -- $ -- $ 1,000
Adjustment of noncompete
agreement to goodwill $ -- $ -- $ 735
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements
F-7
<PAGE> 52
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS UNLESS INDICATED OTHERWISE)
1. DESCRIPTION OF BUSINESS AND ORGANIZATION
Description of Business. Eye Care Centers of America, Inc. (the "Company")
operates super optical retail stores which sell prescription eyewear, sunglasses
and ancillary optical products, and feature on-site laboratories. The Company's
operations are located in the Southwest, Midwest, Southeast, along the Gulf
Coast, in the Mid-Atlantic states and in the Pacific Northwest.
Organization. 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 Company financed the Recapitalization with (a) the proceeds from the
offering of $150.0 million aggregate principal amount of its senior subordinated
notes due 2008, consisting of $100.0 million aggregate principal amount of its 9
1/8% Senior Subordinated Notes due 2008 (the "Fixed Rate Notes") and $50.0
million aggregate principal amount of its Floating Interest Rate Subordinated
Term Securities due 2008 (the "Floating Rate Notes" and, together with the Fixed
Rate Notes, the "Initial Notes") (b) approximately $55.0 million of borrowings
under the New Credit Facility (defined herein) and (c) 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 $71.7 million from the sale of Common Stock and (ii) approximately
$27.7 million from the sale of shares of a newly created series of preferred
stock of the Company ("New Preferred Stock"). Additionally, existing
stockholders rolled over $7.9 million in Common Stock and New Preferred Stock.
The proceeds from such bank borrowings, the sale of the Notes, and the Equity
Contribution was used 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,
F-8
<PAGE> 53
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS UNLESS INDICATED OTHERWISE)
1998 and (ii) United States government securities in an amount necessary to
yield on October 1, 1998 $78.4 million, which constitutes the principal amount,
premium and interest payable on the Senior Notes on the October 1, 1998
redemption date. The Bonds were defeased on October 1, 1998 and the company
recorded an extraordinary charge of $4.2 million on the statement of operations
for defeasance costs during the third quarter related to the call premium on the
bonds. Additionally, an extraordinary loss of $4.2 million related to the
write-off of unamortized deferred loan costs related to the early extinguishment
of debt was recorded as part of the Recapitalization.
As a result of the Recapitalization, the Company has incurred approximately
$25.1 million of non-recurring expenses. These expenses consisted of
compensation expense recorded in connection with the exercise of employee stock
options and other transaction related expenses. Additionally, the Company
incurred approximately $0.7 million in connection with a point-of-sale system
write-off.
Effective April 24, 1998, the Board of Directors of the Company authorized
a twelve-for-one stock split to shareholders of record on that date. The par
value of the Common Stock remained at $0.01. The stock split had no effect on
the percentage ownership of shareholders.
Recent Acquisitions. On September 27, 1996 ("Visionworks Acquisition") the
Company acquired all of the outstanding shares of the capital stock of
Visionworks Holdings, Inc. ("VHI"). At the time of the acquisition, VHI was a 60
store optical retailer located along the Atlantic Coast from Florida to
Washington, D.C. with 49 superstores and 11 optical centers located near Eckerd
Corporation drug stores. The Visionworks Acquisition price of $61.5 million was
financed through (i) the issuance of $11.0 million in mandatorily redeemable
preferred stock plus nondetachable warrants to purchase 150,000 shares of common
stock of the Company, (ii) borrowing under an amended and restated credit
facility agreement of $40.0 million, (iii) existing cash from the Company and
(iv) the assumption of a capital lease with Eckerd Corporation.
The Visionworks Acquisition was accounted for using the purchase method of
accounting. Accordingly, a portion of the purchase price was allocated to the
identifiable net assets acquired based on their estimated fair values with the
balance of the purchase price, $38.6 million, included in goodwill. The cost in
excess of net assets of the business acquired is being amortized over 25 years.
Results of operations for this acquired entity were included in the Company's
operating results from the date of acquisition.
Effective September 30, 1997, the Company acquired The Samit Group, Inc.
and its subsidiaries (collectively, "TSGI"), with ten stores in Maryland and
Washington, D.C., and certain of the assets of Hour Eyes Doctors of Optometry,
P.C., a Virginia professional corporation formerly known as Dr. Samit's Hour
Eyes Optometrist, P.C. (the "PC"), and simultaneously entered into a long-term
management agreement with the PC to manage the PC's twelve stores in Virginia
(collectively, the "Hour Eyes Acquisition"). The acquisition cost to the Company
was $22.25 million less TSGI's acquisition date liabilities. The Hour Eyes
Acquisition was
F-9
<PAGE> 54
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS UNLESS INDICATED OTHERWISE)
financed through (i) borrowing under the Amended Credit Facility (defined
herein) of $9.0 million and (ii) existing cash from the Company.
The Hour Eyes Acquisition, which occurred during the fourth quarter of
1997, was accounted for using the purchase method of accounting. Accordingly, a
portion of the purchase price was allocated to the identifiable net assets
acquired based on their estimated fair values with the balance of the purchase
price included in goodwill. Included in identifiable net assets acquired is a
management agreement being amortized over 25 years and a noncompete agreement
being amortized over three years. The cost in excess of identifiable net assets
of the business acquired is being amortized over 25 years.
Results of operations for this acquired entity were included in the
Company's operating results from the date of acquisition. As a result of the
long-term business management agreement with the PC, the Company records a
management fee but does not include the results of operations from the twelve
Virginia stores in the Company's consolidated results of operations.
On September 30, 1998, the Company acquired (the "VisionWorld Acquisition")
substantially all of the assets, properties and rights (collectively, the
"Assets") of Dr. Bizer's VisionWorld, PLLC and its affiliates: Doctor's
ValuVision, PLLC; Bizer Enterprises, LLC; Bizer Service Company, LLC; Eye Care
Associates, PLLC; Optical Processors, LLC; The Eye Surgery Center, PSC; American
Vision Administrators, LLC; and Vision for Less of Kentucky, Inc. (collectively,
the "Companies"). Each of the Companies is engaged in the business of providing
optometric and ophthalmologic services, selling optical goods and providing
other related services in Kentucky, Tennessee, Indiana and Missouri. Results of
operations for this acquisition were included in the Company's operating results
from the date of acquisition. Simultaneously with the VisionWorld Acquisition,
the Company entered into a long-term business management agreement with a
private optometrist to manage the stores. The aggregate cash consideration paid
by the Company in the VisionWorld Acquisition was $32.3 million. The VisionWorld
Acquisition was financed through borrowings under the Company's Acquisition
Facility (defined herein) and $3.0 million of the Company's existing cash.
The VisionWorld 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. Included in
identifiable net assets acquired is a noncompete agreement being amortized over
five years. The cost in excess of identifiable net assets acquired is being
amortized over 25 years on a straight-line basis. Assuming the VisionWorld
Acquisition had occurred at the beginning of fiscal year 1998 the consolidated
pro forma results of operations (unaudited) would have shown the following
results:
F-10
<PAGE> 55
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS UNLESS INDICATED OTHERWISE)
<TABLE>
<CAPTION>
FISCAL FISCAL
1997 1998
---------- ---------
<S> <C> <C>
Revenues $ 254,184 $ 266,122
Net income/(loss) before
extraordinary item $ 4,477 $ (27,555)
Net income/(loss) $ 4,477 $ (35,910)
</TABLE>
Such pro forma amounts are not necessarily indicative of what actual
consolidated results of operations might have been if the acquisition had been
effective at the beginning of such fiscal years nor should such results be
deemed predictive of future results of operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The financial statements include the accounts of the
Company and its wholly owned subsidiaries, Enclave Advancement Group, Inc., ECCA
Managed Vision Care, Inc., VisionWorks Holdings, Inc. and Eye Care Holdings,
Inc. All significant intercompany accounts and transactions have been eliminated
in consolidation. Certain reclassifications have been made to the prior period
statements to conform to the current period presentation.
Use of Estimates. In preparing financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions. These estimates and assumptions affect the reported
amount of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and revenues and expenses
during the reporting period. Actual results could differ from these estimates.
Reporting Periods. The Company uses a 52/53-week reporting format. The
fiscal years ended 1996 and 1998 consisted of 52 weeks. The fiscal year ended
1997 consisted of 53 weeks.
Segment Disclosure. As of January 4, 1998, the Company adopted SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information ("Statement
131"). Statement 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports. Statement 131 also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. The adoption of Statement 131 did not affect results of
operations or financial position. Furthermore, the statement did not affect
disclosure of segment information as the Company operates in one business
segment, the optical retail segment.
The first set of criteria for determining what constitutes a segment is
dependent upon a segment being a profit and expense center, the availability of
discrete financial information, and the level of review utilized by the
Company's chief operating decision maker to assess performance and allocate
resources. While the Company's stores are broken into various operating units
for review purposes, resources are not allocated based upon these units.
Furthermore, these operating units fall under Statement 131's aggregation
criteria, which allow
F-11
<PAGE> 56
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS UNLESS INDICATED OTHERWISE)
combination of units for reporting purposes. The aggregation of operating units
must be consistent with the objectives and principles of Statement 131, the
operating segments have similar economic characteristics, and the units have
similar basic characteristics in relation to the nature of the
products/services, production processes, type/class of customer and method of
distribution. Management believes each of these criteria is met and that
disclosing the company's results as one segment is appropriate.
Foreign Currency Translation. Prior to December 1996, the financial
position and results of operations of the Company's subsidiary in Mexico were
measured using the local currency as the functional currency. Assets and
liabilities denominated in foreign currencies were translated into U.S. dollars
at exchange rates in effect at year-end, while revenues and expenses were
translated at average exchange rates prevailing during the year. Through the
third quarter of 1996, the resulting translation gains and losses were charged
directly to cumulative translation adjustment, a component of stockholders'
equity. During the fourth quarter of 1996, the Mexican economy was assessed by
management to be highly inflationary based on the decline of the peso to the
U.S. dollar and therefore, impacted the Company's investment in its subsidiary
in Mexico. As such the cumulative translation adjustment as of December 28, 1996
of $560 was recorded through the results of operations. During fiscal year 1997
and 1998, the U.S. dollar represented the functional currency of the Mexico
subsidiary. During fiscal year 1997 and 1998, translation gains and losses are
included in determining net income and foreign currency transaction gains and
losses are included in net income. The retail Mexico location was sold in the
fourth quarter of fiscal 1998 and all operations of the subsidiary have ceased.
Cash and Cash Equivalents. All short-term investments that mature in less
than 90 days when purchased are considered cash equivalents for purposes of
disclosure in the consolidated balance sheets and consolidated statements of
cash flows. Cash equivalents are stated at cost, which approximates market
value.
Accounts and Notes Receivable. Accounts and notes receivable include
receivables from credit card companies, insurance reimbursements, merchandise,
rent, license fee receivables and notes receivable from certain optometrists
which have purchased optical equipment from the Company. Merchandise receivables
result from product returned to vendors pending credit or exchange for new
product.
Inventory. Inventory consists principally of eyeglass frames, ophthalmic
lenses and contact lenses and is stated at the lower of cost or market. Cost is
determined using the weighted average method which approximates the first-in,
first-out (FIFO) method.
The Company purchases approximately 61% of its lenses from two principal
vendors and while these suppliers provide a significant share of the lenses used
by the Company, lenses are considered a commodity product and can be purchased
from a number of other vendors on comparable terms. The Company believes its
relationships with its existing vendors are satisfactory.
F-12
<PAGE> 57
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS UNLESS INDICATED OTHERWISE)
Prepaid Expenses - Store Preopening Costs. Preopening costs directly
associated with store openings are capitalized and amortized using the
straight-line method over one year following each store's opening. Amortization
expense of store preopening costs for fiscal 1996, 1997 and 1998 was
approximately $126, $178, and $234 respectively. Store preopening costs of $156
and $405 are included in Prepaid Expenses and Other as of January 3, 1998, and
January 2, 1999, respectively.
In April 1998, the AICPA issued Statement of Position 98-5, Reporting on
the Costs of Start-Up Activities ("SOP 98-5"). SOP 98-5 requires that start-up
costs, including organizational costs, be expensed as incurred. The SOP broadly
defines start-up activities as those one-time activities related to opening a
new facility, introducing a new product or services, conducting business in a
new territory, conducting business with a new class of customer or beneficiary,
initiating a new process in an existing facility, or commencing some new
operation. The SOP is effective for most entities for fiscal years beginning
after December 15, 1998. As such, the Company adopted this SOP for the fiscal
year ended January 1, 2000. The effect of the adoption of the SOP on the
Company's results of operations was a write off of previously capitalized
pre-opening and organization costs of approximately $500, which will be
reflected as a cumulative effect of change in accounting principle during the
first quarter of fiscal 1999. Additionally, the Company expects annual charges
to earnings of approximately $200 related to store opening costs.
Income Taxes. The Company records income taxes under FASB No. 109 using the
liability method. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases 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.
Property and Equipment. Property and equipment is recorded at cost. For
property and equipment acquired through acquisitions, balances are adjusted to
reflect their fair market value, as determined by an independent appraisal. For
financial statement purposes, depreciation of building, furniture and equipment
is calculated using the straight-line method over the estimated useful lives of
the assets. Leasehold improvements are amortized on a straight-line method over
the shorter of the life of the lease or the estimated useful lives of the
assets. Depreciation of capital leased assets is included in depreciation
expense and is calculated using the straight-line method over the term of the
lease.
Estimated useful lives are as follows:
<TABLE>
<S> <C>
Building 20 years
Furniture and equipment 3 to 10 years
Leasehold improvements 5 to 10 years
</TABLE>
Maintenance and repair costs are charged to expense as incurred.
Expenditures for significant betterments are capitalized.
F-13
<PAGE> 58
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS UNLESS INDICATED OTHERWISE)
Intangibles. Intangibles principally consist of the amounts of excess
purchase price over the market value of acquired net assets ("goodwill"),
management agreements, and noncompete agreements. Goodwill is being amortized on
a straight-line basis over a period of 25 years. The noncompete agreement
intangibles, which are related to the Hour Eyes Acquisition and the VisionWorld
Acquisition, are being amortized over the life of the agreements on a
straight-line basis.
Other Assets. Other assets consist primarily of deferred debt financing
costs associated with the Recapitalization. These costs are being amortized into
expense over the life of the associated debt.
Long-Lived Assets. Periodically, the Company evaluates the realizability of
long-lived assets based upon expectations of nondiscounted cash flows and
operating income. Based upon its most recent analysis, the Company believes that
no impairment of long-lived assets exists at January 2, 1999.
Deferred Revenue - Replacement Certificates and Warranty Contracts. At the
time of a frame sale, some customers purchase a warranty contract covering frame
defects or damage during the 12-month period subsequent to the date of the sale.
Revenue relating to these contracts is deferred and recognized on a
straight-line basis over the life of the warranty contract (one year). Costs
incurred to fulfill the warranty are expensed when incurred. Certain frame
purchases include a one-year warranty period without requiring the separate
purchase of a warranty contract. Reserves are established for the expected cost
of repair related to these frame sales. At the end of fiscal 1997 and 1998, the
Company has established a reserve of approximately $100 and $392, respectively,
related to these warranties which is included in other accrued expenses on the
accompanying balance sheet.
Revenue Recognition. Sales and related costs are recognized by the Company
upon the sale of products at company-owned retail locations. Licensing fees
collected from independent optometrists for using the Company's trade name
"Master Eye Associates" are recognized when earned. Historically, the Company's
highest sales occur in the first and third quarters.
Advertising Costs. Advertising costs of the Company include costs related
to broadcast and print media advertising expenses. The Company expenses
production costs and media advertising costs the first time the advertising
takes place. For the fiscal years ended 1996, 1997 and 1998, advertising costs
amounted to approximately $21,779, $24,611 and $23,816, respectively.
F-14
<PAGE> 59
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS UNLESS INDICATED OTHERWISE)
Interest Expense, Net. Interest expense, net consists of the following:
<TABLE>
<CAPTION>
Year-Ended
----------------------------------------------------------------
December 28, 1996 January 3, January 2,
1998 1999
---------------------- ------------------ ----------------
<S> <C> <C> <C>
Interest expense $ 10,342 $ 14,380 $ 23,804
Interest income (443) (642) (2,227)
---------------------- ------------------ ----------------
Interest expense, net $ 9,899 $ 13,738 $ 21,577
====================== ================== ================
</TABLE>
Pension Benefits. In February 1998, the Financial Accounting Standards Board
(FASB) issued SFAS No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits, which is required to be adopted in years beginning
after December 15, 1998. As the Company has no pension plans or postretirement
benefits, the adoption of this statement will not have an effect on earnings or
the financial position of the Company.
Stock Based Compensation. The Company grants stock options for a fixed
number of shares to employees with an exercise price equal to the fair value of
the shares at the date of grant. During the first quarter of 1996, the Company
adopted FASB No. 123, "Accounting for Stock-Based Compensation". In accordance
with FASB No. 123, the Company has continued to account for stock option grants
in accordance with APB Opinion No. 25, "Accounting for Stock Issues to
Employees", and, accordingly, recognized no compensation expense for the stock
option grants.
Comprehensive Income. As of January 4, 1998, the Company adopted SFAS No.
130, Reporting Comprehensive Income ("Statement 130"). Statement 130 establishes
new rules for the reporting and display of comprehensive income and its
components; however, the adoption of Statement 130 had no impact on the
Company's net income or shareholders' equity (deficit). There were no other
components of comprehensive income other than net income (loss).
Derivatives. Derivatives are used to hedge interest rate exposure by
modifying the interest rate characteristics of related balance sheet
instruments. The specific criteria for derivatives used for these purposes are
described below. Derivatives used as hedges must be effective at reducing the
risk associated with the exposure being hedged and must be designated as a hedge
at the inception of the derivative contract. Derivatives currently used for
hedging purposes include interest rate swaps. These swap transactions allow
management to structure the interest rate sensitivity of the liability side of
the Company's long-term debt. The fair value of derivative contracts are carried
off-balance sheet and the unrealized gains or losses on derivative contracts are
generally deferred. The interest component associated with derivatives used as
hedges or to modify the interest rate characteristics of liabilities is
recognized over the life of the
F-15
<PAGE> 60
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS UNLESS INDICATED OTHERWISE)
contract in interest expense. Upon contract settlement or early termination, the
cumulative change in the market value of such derivatives is recorded as ad
adjustment to the carrying value of the underlying liability and recognized in
interest expense over the expected remaining life of the derivative contract. In
instances where the underlying hedge instrument is repaid, the cumulative change
in the value of the associated derivative is recognized immediately in earnings.
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. 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.
3. RELATED PARTY TRANSACTIONS
Prior to the Recapitalization, the Company was party to an agreement with
Desai Capital Management, Inc. ("DCMI") whereby the Company paid DCMI $144 per
year as an advisory fee for consulting and strategic advice and $56 per year for
the consulting services of certain Board of Directors members who are also
employees and/or officers of DCMI. As a result of the Recapitalization, the
agreement with DCMI has been canceled, and DCMI is no longer a majority
shareholder of the Company.
The Company and THL Co. entered into a management agreement as of the
closing date of the Recapitalization (the "Management Agreement"), pursuant to
which THL Co. received a financial advisory fee of $6.0 million in connection
with structuring, negotiating and arranging the Recapitalization and related
debt financing. In addition, pursuant to the Management Agreement, THL Co. will
initially receive $500 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.
F-16
<PAGE> 61
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS UNLESS INDICATED OTHERWISE)
4. PREPAID EXPENSES AND OTHER
Prepaid expenses and other consists of the following:
<TABLE>
<CAPTION>
January 3, January 2,
1998 1999
---------------- ----------------
<S> <C> <C>
Prepaid insurance $102 $787
Prepaid store supplies 927 1,001
Prepaid rentals 2,282 16
Other 255 482
---------------- ----------------
$3,566 $2,286
================ ================
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment, net consists of the following:
<TABLE>
<CAPTION>
January 3, January 2,
1998 1999
-------------- --------------
<S> <C> <C>
Land $ 6,000 $ 6,000
Building 3,144 3,201
Furniture and equipment 57,737 77,775
Leasehold improvements 32,097 39,276
-------------- --------------
98,978 126,252
Less accumulated depreciation and amortization (41,766) (58,134)
-------------- --------------
Property and equipment, net $ 57,212 $ 68,118
============== ==============
</TABLE>
F-17
<PAGE> 62
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS UNLESS INDICATED OTHERWISE)
6. INTANGIBLE ASSETS
The following is a summary of the components of intangible assets along
with the related accumulated amortization for the fiscal years then ended.
<TABLE>
<CAPTION>
January 3, January 2,
1998 1999
-------------- --------------
<S> <C> <C>
Goodwill and other $ 72,869 $ 103,989
Management agreement 7,988 7,988
Less accumulated amortization (6,495) (10,148)
-------------- --------------
Net 74,362 101,829
-------------- --------------
Noncompete agreements 1,000 826
Less accumulated amortization (83) (196)
-------------- --------------
Net 917 630
-------------- --------------
Intangibles, net $ 75,279 $ 102,459
============== ==============
</TABLE>
The Company obtained an appraisal of the noncompete agreement related to the
Hour Eyes Acquisition. Based on the appraisal, the value of the noncompete asset
was reduced by $735 with a corresponding increase to goodwill.
7. OTHER ACCRUED EXPENSES
Other accrued expenses consists of the following:
<TABLE>
<CAPTION>
January 3, January 2,
1998 1999
-------------- --------------
<S> <C> <C>
Property taxes $ 1,266 $ 1,159
Professional fees 489 478
Payroll and sales/use taxes 573 622
Store expenses 1,198 952
Insurance 354 230
Construction 495 1,083
Advertising 652 1,598
Acquisition liability 2,250 --
Other 1,923 2,064
-------------- --------------
Other accrued expenses $ 9,200 $ 8,186
============== ==============
</TABLE>
F-18
<PAGE> 63
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS UNLESS INDICATED OTHERWISE)
8. LONG-TERM DEBT
New Credit Facility. In September 1997, the Company entered into an amended
and restated credit agreement which provided for $49.0 million in term loans and
$5.0 million in revolving loans (collectively, the "Amended Credit Facility"),
subject to certain customary conditions including a borrowing base condition. In
addition, the Company has agreed to guarantee a $1.0 million loan that is
related to the long-term business agreement entered into at the time of the Hour
Eyes Acquisition. In connection with the Recapitalization, the amounts owed
under the Amended Credit Facility were paid in full and the facility canceled.
Simultaneously, the Company entered into a credit agreement (the "New 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 January 2, 1999, the Company had $55.0 million in term loans
outstanding under the Term Loan Facility and $30.1 million outstanding under the
Acquisition Facility which funded the VisionWorld Acquisition. Approximately
$10.0 million of the Revolving Credit Facility is restricted for the repayment
of the capital lease obligation to Eckerd Corporation. Borrowings made under the
New 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 New Credit Facility) plus
1.25%. The Term Loan Facility matures five years from the closing date of the
New Credit Facility and will amortize quarterly in aggregate annual principal
amounts of approximately $0.0 million, $4.0 million, $12.0 million, $18.0
million, and $21.0 million, respectively, for years one through five after the
closing of the New Credit Facility on April 24, 1998.
Senior Notes. In 1993, the Company issued $70.0 million 12 percent senior
notes with detachable warrants to acquire common stock (the "Warrants"). The
senior notes and the Warrants were offered as Units (the "Units") consisting of
$1,000 principal amount of senior notes and one Warrant to acquire 0.4522 share
of common stock of the Company for no additional consideration. The fair value
of the Warrants at issuance was $600 and this value was recorded in
shareholders' equity/(deficit) with a corresponding discount from the face value
of the senior notes. This discount was accreted to interest expense using the
effective interest method over the life of the debt.
In June 1994, the senior notes discussed above were exchanged for $70.0
million of publicly registered 12% Senior Notes. The Senior Notes contained
substantially the same provisions as the senior notes issued described above.
In connection with the Recapitalization, the Company in-substance defeased
its previously issued 12% Senior Notes due 2003 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 constitutes the
principal amount, premium and interest payable on the Senior Notes on the
October 1, 1998 redemption date. On October 1, 1998, the Senior Notes were
defeased as
F-19
<PAGE> 64
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS UNLESS INDICATED OTHERWISE)
scheduled and the Company recorded an extraordinary charge of $4.2 million on
the statement of operations for defeasance costs during the third quarter
related to the call premium on the bonds.
In connection with the Recapitalization, the Company completed a debt
offering of the Initial Notes, consisting of the Fixed Rate Notes and the
Floating Rate Notes. Interest on the Initial 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
plus 3.98%. The Fixed Rate Notes and Floating Rate Notes will not be entitled to
the benefit of any mandatory sinking fund. As discussed in Note 9, on April 24,
1998, the Company entered into an interest rate swap agreement that converts a
portion of the Floating Rate Notes to a fixed rate.
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.
The Exchange Notes are senior uncollateralized obligations of the Company
and will rank pari passu with all other indebtedness of the Company that by its
terms other indebtedness is not subordinate to the Exchange Notes. In connection
with the issuance of the Exchange Notes, the Company incurred approximately
$11.2 million in debt issuance costs. These amounts are classified within other
assets in the accompanying balance sheets and are being amortized over the life
of the Exchange Notes. The unamortized amount of debt issuance costs as of
January 2, 1999 related to the Exchange Notes was $10.5 million.
The Exchange Notes contain various restrictive covenants which apply to
both the Company and the Guarantor Subsidiaries (defined herein), including
limitations on additional indebtedness, restriction on dividends and sale of
assets other than in the normal course of business. The New Credit Facility
contains additional restrictive covenants including a limitation on capital
requirements, minimum interest coverage, maximum leverage ratio, minimum net
worth and working capital requirements. As of January 2, 1999 the Company was in
compliance with the financial reporting covenants.
Capital Leases. In connection with the Visionworks Acquisition, the
Company assumed an agreement to sublease land, buildings and equipment at eight
operating locations. Under the terms of the agreement, the Company committed to
purchase such properties for $10.0 million and to pay Eckerd Corporation an
annual interest amount of $1.3 million. Additionally, in connection with the
VisionWorld Acquisition, the Company assumed agreements to sublease equipment
at the related operating locations. The Company has accounted for these
transactions as capital leases and has recorded the assets, as shown below, and
the future obligations on the balance sheet at $11.9 million.
F-20
<PAGE> 65
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS UNLESS INDICATED OTHERWISE)
<TABLE>
<CAPTION>
January 3, January 2,
1998 1999
------------------- -------------------
<S> <C> <C>
Land $ 6,000 $ 6,000
Buildings and equipment 3,979 5,884
------------------- -------------------
$ 9,979 $ 11,884
=================== ===================
</TABLE>
The Company's scheduled future minimum lease payments for the next five fiscal
years under the equipment capital lease are as follows:
<TABLE>
<S> <C>
1999 $ 713
2000 603
2001 570
2002 296
2003 --
Beyond 2003 --
-------------------
Total minimum lease payments 2,182
===================
Amounts representing interest 277
-------------------
Present value of minimum lease payments $ 1,905
===================
</TABLE>
Long-term debt outstanding, including capital lease obligations, consists of the
following:
<TABLE>
<CAPTION>
January 3, 1998 January 2, 1999
------------------- -------------------
<S> <C> <C>
Exchange Notes, face amount of $150,000, net of unamortized
debt discount of $461 $ -- $ 149,539
Senior Notes, face amount of $70,000, net of unamortized
debt discount of $370 69,630 --
New Credit Facility -- 85,100
Amended Credit Facility 42,645 --
Doctor notes 135 --
Capital lease obligations 9,979 11,884
------------------- -------------------
122,389 246,523
Less current portion (7,003) (3,578)
------------------- -------------------
$ 115,386 $ 242,945
=================== ===================
</TABLE>
F-21
<PAGE> 66
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS UNLESS INDICATED OTHERWISE)
Future principal maturities for long-term debt and capital lease obligations are
as follows:
<TABLE>
<S> <C>
1999 $ 3,578
2000 10,518
2001 24,536
2002 30,559
2003 22,785
Beyond 2003 154,547
------------------
Total future principal payments on debt $ 246,523
==================
</TABLE>
As of the end of fiscal 1998, the fair value of the Company's Exchange
Notes was approximately $150.0 million. As of January 2, 1999, the fair value
of the capital lease obligations was approximately $11.9 million. These fair
values were estimated using quoted market prices and the present value of
estimated future cash flows. The carrying amount of the variable rate New Credit
Facility approximates its fair value.
9. INTEREST RATE SWAP
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 Average
Notional Amounts Weighted Average Fixed Floating Receive
January 2, 1999 Maturity Date Pay Rate Rate
--------------------------- --------------------- ------------------------ ------------------------
<S> <C> <C> <C>
$33.3 million 1999 5.9% 5.0%
$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 the Floating Rate Notes and
$50.0 million of the New Credit 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 $1,247 as of January 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
F-22
<PAGE> 67
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS UNLESS INDICATED OTHERWISE)
received is accrued as an adjustment to interest expense. Upon termination of
interest rate swaps, the fair value of the swaps is recorded through operations.
If the hedged item is repaid early, the Company will evaluate if the swap
agreement is to be redesignated or exited.
10. CONDENSED CONSOLIDATING INFORMATION
The Exchange Notes described in Note 8 were issued by Eye Care Centers of
America, Inc. ("ECCA") and are guaranteed by Enclave Advancement Group, Inc.
("EAGI"), ECCA Managed Vision Care, Inc. ("MVC"), Visionworks Holdings, Inc.
("VHI") and Eye Care Holdings, Inc. ("Holdings') but are not guaranteed by
certain private optometrists ("OD"). 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) ECCA, as parent,
as if it accounted for its subsidiaries on the equity method, (ii) EAGI, MVC,
VHI and Holdings (the "Guarantor Subsidiaries"), and (iii) OD. There were no
transactions between the Guarantor Subsidiaries during any of the periods
presented. 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 fiscal 1998 and prior to this date
all subsidiaries were guarantors.
F-23
<PAGE> 68
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS UNLESS INDICATED OTHERWISE)
Consolidating Balance Sheet
January 2, 1999
<TABLE>
<CAPTION>
Guarantor Consolidated
ASSETS Parent Subsidiaries OD Eliminations Company
--------- ------------ --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 3,119 $ 2,008 $ -- $ -- $ 5,127
Accounts and notes receivable 83,553 17,165 64 (94,329) 6,453
Inventory 16,210 10,767 -- -- 26,977
Prepaid expenses and other 1,915 371 -- -- 2,286
Deferred income taxes 391 -- -- -- 391
--------- --------- --------- ---------- ---------
Total current assets 105,188 30,311 64 (94,329) 41,234
Property and equipment 38,780 29,338 -- -- 68,118
Intangibles 19,488 82,872 99 -- 102,459
Other assets 10,606 490 -- -- 11,096
Investment in subsidiaries 6,235 -- -- (6,235) --
--------- --------- --------- ---------- ---------
$ 180,297 $ 143,011 $ 163 $ (100,564) $ 222,907
========= ========= ========= ========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 27,711 $ 87,539 $ -- $ (94,329) $ 20,921
Current portion of long-term debt 3,000 578 -- -- 3,578
Deferred revenue 3,497 1,834 -- -- 5,331
Accrued payroll expense 1,415 1,373 -- -- 2,788
Accrued interest 2,953 394 -- -- 3,347
Other accrued expenses 5,345 2,841 -- -- 8,186
--------- --------- --------- ---------- ---------
Total current liabilities 43,921 94,559 -- (94,329) 44,151
Deferred income taxes 391 -- -- -- 391
Long-term debt, less current maturities 201,539 41,306 100 -- 242,945
Deferred rent 2,272 974 -- -- 3,246
Deferred gain 2,175 -- -- -- 2,175
--------- --------- --------- ---------- ---------
Total liabilities 250,298 136,839 100 (94,329) 292,908
--------- --------- --------- ---------- ---------
Shareholders' equity/(deficit):
Common stock 75 -- -- -- 75
Preferred stock 32,793 -- -- -- 32,793
Additional paid-in capital 60,958 -- -- -- 60,958
Accumulated deficit (163,827) 6,172 63 (6,235) (163,827)
--------- --------- --------- ---------- ---------
Total shareholders' equity/(deficit) (70,001) 6,172 63 (6,235) (70,001)
--------- --------- --------- ---------- ---------
$ 180,297 $ 143,011 $ 163 $ (100,564) $ 222,907
========= ========= ========= ========== =========
</TABLE>
Consolidating Income Statement
For the Year Ended January 2, 1999
<TABLE>
<CAPTION>
Guarantor Consolidated
Parent Subsidiaries OD Eliminations Company
--------- ------------ --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Optical sales $ 147,973 $ 79,545 $ 7,718 $ -- $ 235,236
Management fees 1,438 2,615 -- (1,438) 2,615
Investment earnings in subsidiaries 2,398 -- -- (2,398)
--------- --------- --------- --------- ---------
Net revenues 151,809 82,160 7,718 (3,836) 237,851
Operating costs and expenses:
Cost of goods sold 49,314 29,552 1,770 -- 80,636
Selling, general and administrative expenses 83,388 44,558 5,882 (1,438) 132,390
Recapitalization and other expenses 25,819 (16) -- -- 25,803
Amortization of intangibles:
Goodwill 994 2,557 1 -- 3,552
Noncompete and other intangibles -- 153 -- -- 153
--------- --------- --------- --------- ---------
Total operating costs and expenses 159,515 76,804 7,653 (1,438) 242,534
--------- --------- --------- --------- ---------
Income (loss) from operations (7,706) 5,356 65 (2,398) (4,683)
Interest expense, net 16,058 3,099 2 -- 19,159
In-substance defeased bonds
interest expense, net 2,418 -- -- -- 2,418
--------- --------- --------- --------- ---------
Income (loss) before income taxes (26,182) 2,257 63 (2,398) (26,260)
Income tax expense 91 (78) -- -- 13
--------- --------- --------- --------- ---------
Net income (loss) before extraordinary item (26,273) 2,335 63 (2,398) (26,273)
Extraordinary loss on early extinguishment of
long-term debt 8,355 -- -- -- 8,355
--------- --------- --------- --------- ---------
Net income (loss) $ (34,628) $ 2,335 $ 63 $ (2,398) $ (34,628)
========= ========= ========= ========= =========
</TABLE>
F-24
<PAGE> 69
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS UNLESS INDICATED OTHERWISE)
Consolidating Statement of Cash Flows
For the Year Ended January 2, 1999
<TABLE>
<CAPTION>
Guarantor Consolidated
Parent Subsidiaries OD Eliminations Company
--------- ------------ --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (34,628) $ 2,335 $ 63 $ (2,398) $ (34,628)
Adjustments to reconcile net income (loss) to net
Cash provided by operating activities:
Depreciation 8,656 3,689 -- -- 12,345
Amortization of intangibles 993 2,711 1 -- 3,705
Other Amortization 1,415 163 -- -- 1,578
Amortization of deferred gain (159) -- -- -- (159)
Deferred revenue 494 160 -- -- 654
Deferred rent 99 105 -- -- 204
Other (1,511) 996 -- -- (515)
(Gain) loss on disposition of property and
equipment 775 (142) -- -- 633
Extraordinary loss on early extinguishment of
long-term debt 8,355 -- -- -- 8,355
Changes in operating assets and liabilities:
Accounts and notes receivable (62,032) (12,959) (64) 74,866 (189)
Inventory 669 (601) -- -- 68
Prepaid expenses and other 661 507 -- -- 1,168
Accounts payable and accrued liabilities 21,005 60,835 -- (74,866) 6,974
--------- --------- --------- --------- ---------
Net cash provided by (used in) operating activities (55,208) 57,799 -- (2,398) 193
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Acquisition of property and equipment (16,923) (3,733) -- -- (20,656)
Proceeds from sale of property and equipment 1,011 185 -- -- 1,196
Payment received on notes receivable 2 175 -- -- 177
Net outflow for The Visionworld Acquisition -- (32,942) (100) -- (33,042)
Purchase of investment securities-restricted (76,618) -- -- -- (76,618)
Maturity of investment securities-restricted 78,400 -- -- -- 78,400
Investment in Subsidiaries (2,398) -- -- 2,398 --
Reclass Mexico Retained Earning to Parent (1,997) 1,997 -- -- --
--------- --------- --------- --------- ---------
Net cash provided by (used in) investing activities (18,523) (34,318) (100) 2,398 (50,543)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 204,511 30,000 100 -- 234,611
Proceeds from the issuance of common stock 71,140 -- -- -- 71,140
Proceeds from issuance of preferred stock 27,750 -- -- -- 27,750
Payments related to debt issuance (11,153) -- -- -- (11,153)
Payments to retire mandatorily redeemable
preferred stock -- (12,385) -- -- (12,385)
Redemption of common stock (130,775) 1,385 -- -- (129,390)
Recapitalization fees (12,733) -- -- -- (12,733)
Payments on debt and capital leases (70,000) (42,917) -- -- (112,917)
Payment of call premium (4,200) -- -- -- (4,200)
Payment of in-substance defeased bonds
interest expense, net (2,418) -- -- -- (2,418)
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing activities 72,122 (23,917) 100 -- 48,305
--------- --------- --------- --------- ---------
Net decrease in cash and cash equivalents (1,609) (436) -- -- (2,045)
Cash and cash equivalents at beginning of period 4,728 2,444 -- -- 7,172
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period $ 3,119 $ 2,008 $ -- $ -- $ 5,127
========= ========= ========= ========= =========
</TABLE>
F-25
<PAGE> 70
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS UNLESS INDICATED OTHERWISE)
11. PREFERRED STOCK
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 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.
12. SHAREHOLDERS' EQUITY
Warrants. As discussed in Note 8, the Senior Notes were issued with
detachable warrants entitling the holder to acquire, for no additional
consideration, 0.4522 shares of common stock. In conjunction with the
Recapitalization and the repayment of the Senior Notes, the warrants were
issued.
Senior Officers' Stock Options. In 1993, the Company entered into
employment agreements with certain senior officers (the "Senior Officers"). In
connection with these employment agreements, each Senior Officer also entered
into a non-qualified stock option agreement whereby each Senior Officer was
granted stock options to purchase common stock of the Company at $31.00 per
share. Certain of these options vested at issuance while others vest over
time or upon the Company reaching certain profitability levels for fiscal years
1995 through 1998. In connection with the Recapitalization, the outstanding
options were simultaneously vested and exercised on April 24, 1998.
Following is a summary of activity in the plan for fiscal years 1996, 1997
and 1998 and does not reflect the 12 for 1 stock split on April 24, 1998.
F-26
<PAGE> 71
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS UNLESS INDICATED OTHERWISE)
<TABLE>
<CAPTION>
Avg. Option
Price Options Options
Per Share($) Outstanding Exercisable
---------------- ------------------ ------------------
<S> <C> <C> <C>
Outstanding - December 30, 1995 100,808 22,159
Granted 31.00 75,000 --
Became Exercisable 31.00 -- 14,748
Canceled or expired 31.00 (100,808) (26,907)
------------------ ------------------
Outstanding - December 28, 1996 75,000 10,000
Granted 31.00 -- --
Became Exercisable 31.00 -- 28,333
Canceled or expired -- --
------------------ ------------------
Outstanding - January 3, 1998 75,000 38,333
Granted 31.00 -- --
Became Exercisable 31.00 -- 36,667
Exercised 31.00 (75,000) (75,000)
------------------ ------------------
Outstanding - January 2, 1999 -- --
================== ==================
</TABLE>
1993 Executive Stock Option Plan. In 1993, the Company authorized a
non-qualified stock option plan whereby key executives (other than the Senior
Officers) may be offered options to purchase the Company's common stock. Under
the plan, the exercise price set by the Board of Directors of the Company must
at least equal the fair market value of the Company's common stock at the date
of grant. The options vest in four equal annual installments provided the
optionee is an employee of the Company on the anniversary date and shall expire
10 years after the date of grant. In connection with the Recapitalization, the
outstanding options were simultaneously vested and exercised on April 24, 1998.
F-27
<PAGE> 72
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS UNLESS INDICATED OTHERWISE)
Following is a summary of activity in the plan for the years 1996, 1997 and 1998
and does not reflect the 12 for 1 stock split on April 24, 1998.
<TABLE>
<CAPTION>
Avg. Option
Price Options Options
Per Share($) Outstanding Exercisable
----------------- ---------------- -----------------
<S> <C> <C> <C>
Outstanding - December 30, 1995 31,813 4,655
Granted -- --
Became exercisable 31.00 -- 6,461
Canceled or expired 31.00 (13,168) (3,438)
---------------- -----------------
Outstanding - December 28, 1996 18,645 7,678
Granted -- --
Became exercisable 31.00 -- 8,584
Canceled or expired -- --
---------------- -----------------
Outstanding - January 3, 1998 18,645 16,262
Granted -- --
Became exercisable 31.00 -- 2,383
Exercised 31.00 (18,645) (18,645)
---------------- -----------------
Outstanding - January 2, 1999 -- --
================ =================
</TABLE>
1996 Executive Stock Option Plan. On September 5, 1996, the Company
authorized a non-qualified stock option plan whereby key executives (other than
the Senior Officers) may be offered options to purchase the Company's common
stock. Under the plan, the exercise price set by the Board of Directors of the
Company must at least equal the fair market value of the Company's common stock
at the date of grant. The options begin vesting one year after the date of grant
in four installments of 10%, 15%, 25% and 50% provided the optionee is an
employee of the Company on the anniversary date and shall expire 10 years after
the date of grant. Under certain specified conditions the vesting schedule may
be altered. During 1996, the Company granted options to purchase 91,000 shares
under this plan at an option price of $31 to $65 per share. During 1997, the
Company granted options to purchase 26,000 shares under this plan. In connection
with the Recapitalization, the outstanding options were simultaneously vested
and exercised on April 24, 1998.
F-28
<PAGE> 73
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS UNLESS INDICATED OTHERWISE)
Following is a summary of activity in the plan for the years 1996, 1997 and 1998
and does not reflect the 12 for 1 stock split on April 24, 1998.
<TABLE>
<CAPTION>
Avg. Option Price Options Options
Per Share($) Outstanding Exercisable
------------------------- -------------------- -------------------
<S> <C> <C> <C>
Outstanding - December 30, 1995 -- --
Granted 31.00 to 65.00 91,000 --
Became exercisable -- --
Canceled or expired -- --
-------------------- -------------------
Outstanding - December 28, 1996 91,000 --
Granted 70.00 to 105.00 26,000 --
Became exercisable 31.00 to 65.00 -- 6,450
Canceled or expired 31.00 (7,500) (200)
-------------------- -------------------
Outstanding - January 3, 1998 109,500 6,250
Granted 70.00 to 105.00 -- --
Became exercisable 31.00 to 65.00 -- 103,250
Exercised 31.00 to 105.00 (109,500) (109,500)
-------------------- -------------------
Outstanding - January 2, 1999 -- --
==================== ===================
</TABLE>
1998 Executive Stock Option Plan. On April 25, 1998, the Company authorized
a non-qualified stock option plan whereby key executives and senior officers may
be offered options to purchase the Company's Common Stock. Under the plan, the
exercise price set by the Board of Directors of the Company must at least equal
the fair market value of the Company's Common Stock at the date of grant. The
options begin vesting one year after the date of grant in four installments of
10%, 15%, 25% and 50% provided the optionee is an employee of the Company on the
anniversary date and shall expire 10 years after the date of grant. Under
certain specified conditions the vesting schedule may be altered. During 1998,
the Company granted options to purchase 482,000 shares under this plan at an
option price of $10.41 per share. Following is a summary of activity in the plan
for fiscal 1998.
<TABLE>
<CAPTION>
Avg. Option Price Options Options
Per Share($) Outstanding Exercisable
--------------------- ----------------- ------------------
<S> <C> <C> <C>
Outstanding - January 3, 1998 -- --
Granted 10.41 482,000 --
Became exercisable -- --
Canceled or expired 10.41 (12,500) --
----------------- ------------------
Outstanding - January 2, 1999 469,500 --
================= ==================
</TABLE>
F-29
<PAGE> 74
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS UNLESS INDICATED OTHERWISE)
Other Stock Options and Warrants. In November 1993, the Company granted
stock options to two directors to purchase 3,000 and 6,000 shares, respectively,
of the Company's common stock. Each option is exercisable at $31.00 per share to
be vested in equal installments on December 31, of each of 1994, 1995, and 1996
with such options expiring 10 years from the date of grant. Additionally, in
December 1995 the Company granted stock options to a director to purchase 4,000
shares of the Company's common stock. The option is exercisable at $31.00 per
share to vest upon the date of grant and expire 10 years from the date of grant.
In December 1996, the Company granted stock options to three directors to
purchase shares of the Company's common stock. Each option vests in four equal
installments starting on December 5, 1997 and expires ten years from the date of
grant. One director was granted stock options of 5,000, 4,000 and 4,000 shares
exercisable at $70, $90 and $110 per share, respectively. Another director was
granted 1,000 shares at $70 per share. A third director was granted 1,000 and
3,000 shares at $70 and $65 per share, respectively. Also, the third director
was granted 3,000 shares at $70 per share. In connection with the
Recapitalization, all 29,226 outstanding options under the plan were
simultaneously vested and exercised on April 24, 1998.
Subsequent to the Recapitalization, two directors were granted options to
purchase 5,000 and 111,412 shares, respectively. Each option is exercisable at
$10.41 per share and begin vesting one year after the date of grant in four
installments of 10%, 15%, 25%, and 50% with such options expiring 10 years from
the date of grant. Similarly, the Company's chief executive officer was granted
options to purchase 371,376 shares. Each option is exercisable at $10.41 per
share and subject to a vesting schedule which will be one-half time based and
one-half performance based.
In November 1993, the Company granted a warrant to a foreign bank to
purchase a total of 3,000 shares of the Company's common stock. In connection
with the Recapitalization, the warrant was exercised on April 24, 1998.
The Company has elected to follow Accounting Principles Board Opinion No.
25 "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123 "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options of privately held companies. Under APB 25, because the exercise
price of the Company's employee stock options equals the estimated fair value of
the underlying stock on the date of grant, no compensation expense is
recognized.
Pro forma information regarding net income and earnings per share is
required by FASB Statement No. 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated at the date of the
grant using the minimum value method with the following assumptions for 1996,
1997 and 1998, respectively: risk-free interest rates of 6%; no dividend yield;
and a weighted-average expected life of the options of 4 years.
F-30
<PAGE> 75
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS UNLESS INDICATED OTHERWISE)
Option valuation models require the input of highly subjective assumptions.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma net income for fiscal year 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
FISCAL FISCAL
1997 1998
----------------------- ---------------------------------
<S> <C> <C>
Pro forma Net Income/(Loss) $ 4,802 $ (34,735)
</TABLE>
The pro forma calculations include only the effects of 1995 through 1998 grants.
As such, the impacts are not necessarily indicative of the effects on reported
net income of future years.
Deferred Stock Plan. Effective January 1, 1994, the Company adopted a
Deferred Stock Plan whereby certain directors, executives or employees of the
Company (as approved by the Board of Directors) may elect to defer part of their
compensation to be used to purchase common stock of the Company at fair market
value to be determined in advance by the Board of Directors. At April 24, 1998,
all 17,291 issuable shares in the plan were issued in connection with the
Recapitalization.
F-31
<PAGE> 76
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS UNLESS INDICATED OTHERWISE)
13. INCOME TAXES
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
Year Ended
---------------------------------------------------------------
December 28, January 3, January 2,
1996 1998 1999
------------------ ------------------- -------------------
<S> <C> <C> <C>
Current $ 188 $ 335 $ 13
Deferred -- -- --
------------------ ------------------- -------------------
$ 188 $ 335 $ 13
================== =================== ===================
</TABLE>
For the years ended December 28, 1996, January 3, 1998 and January 2, 1999 there
was approximately $188, $335 and $13 of federal income tax expense.
The reconciliation between the federal statutory tax rate at 34% and the
Company's effective tax rate is as follows:
<TABLE>
<CAPTION>
January 3, January 2,
1998 1999
------------------ ------------------
<S> <C> <C>
Expected tax expense (benefit) $ 1,887 $ (11,769)
Goodwill 872 1,079
Deferred rent 142 142
Investment in foreign subsidiary 45 -
Nondeductible meals and donations 29 26
Change in valuation allowance (2,924) 9,938
Other 284 597
------------------ ------------------
$ 335 $ 13
================== ==================
</TABLE>
The components of the net deferred tax assets are as follows:
<TABLE>
<CAPTION>
January 3, January 2,
1998 1999
------------------- -------------------
<S> <C> <C>
Total deferred tax liabilities, current $ (55) $ (37)
Total deferred tax liabilities, long-term (329) (354)
Total deferred tax assets, current 2,458 3,274
Total deferred tax assets, long-term 4,817 13,944
Valuation allowance (6,889) (16,827)
------------------- -------------------
Net deferred tax assets $ 2 $ --
=================== ===================
</TABLE>
F-32
<PAGE> 77
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS UNLESS INDICATED OTHERWISE)
The sources of the difference between the financial accounting and tax
basis of the Company's assets and liabilities which give rise to the deferred
tax assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
January 3, January 2,
1998 1999
-------------- ----------------
<S> <C> <C>
Deferred tax assets:
Deferred rent $ 743 $ 678
Deferred compensation 9 --
Deferred revenue 1,055 1,402
Net operating loss and credit carryforwards 2,057 9,535
Noncompete and SearsCard
agreements $31 --
Inventory basis differences 453 590
Accrued salaries 198 433
Property and equipment 2,729 4,409
Other - 171
-------------- ----------------
Total deferred tax assets 7,275 17,218
Valuation allowance (6,889) (16,827)
-------------- ----------------
Net deferred tax assets $ 386 $ 391
============== ================
Deferred tax liabilities:
Store preopening costs $ 53 $ 135
Deferred financing costs 76 --
Accounts receivable 37 102
Other 218 154
-------------- ----------------
Net deferred tax liability $ 384 $ 391
============== ================
</TABLE>
At January 2, 1999 and January 3, 1998, the Company had, subject to the
limitations discussed below, net operating loss carryforwards for tax purposes
of $28,044 and $4,513, respectively. These loss carryforwards will expire from
2000 through 2013 if not utilized.
During September 1996, the Company consummated the Visionworks Acquisition.
As a result of the limitations imposed by Section 382, the use of net operating
loss carryforwards of $6,288 acquired in the acquisition are limited to
approximately $3,567 per year.
In addition to the Section 382 limitations, uncertainties exist as to the
future realization of the deferred tax asset under the criteria set forth under
FASB Statement No. 109. Therefore, the Company has established a valuation
allowance for deferred tax assets of $16,827 at January 2, 1999 and $6,889 at
January 3, 1998.
F-33
<PAGE> 78
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS UNLESS INDICATED OTHERWISE)
14. EMPLOYEE BENEFITS
401 (K) Plan. The Company maintains a defined contribution plan whereby
substantially all employees who have been employed for at least six consecutive
months are eligible to participate. Contributions are made by the Company as a
percentage of employee contributions. In addition, discretionary contributions
may be made at the direction of the Company's Board of Directors. Total Company
contributions were approximately $97, $163 and $127 for fiscal 1996, 1997 and
1998 respectively.
15. LEASES
The Company is obligated as lessee under operating leases for substantially
all of the Company's retail facilities as well as certain warehouse space. In
addition to rental payments, the leases generally provide for payment by the
Company of property taxes, insurance, maintenance and its pro rata share of
common area maintenance. These leases range in terms of up to 15 years. Certain
leases also provide for additional rent in excess of the base rentals calculated
as a percentage of sales.
The Company subleases a portion of substantially all of the stores to an
independent optometrist or a corporation controlled by an independent
optometrist. The terms of these leases or subleases are principally one to
fifteen years with rentals consisting of a percentage of gross receipts, base
rentals, or a combination of both. Certain of these leases contain renewal
options.
Certain of the Company's lease agreements contain provisions for scheduled
rent increases or provide for occupancy periods during which no rent payment is
required. For financial statement purposes, rent expense is recorded based on
the total rentals due over the entire lease term and charged to rent expense on
a straight-line basis. The difference between the actual cash rentals paid and
rent expenses recorded for financial statement purposes is recorded as a
deferred rent obligation. At the end of fiscal years 1997 and 1998, deferred
rent obligations aggregated approximately $3.0 million and $3.2 million,
respectively.
In December 1993, the Company purchased its headquarters facilities
location, which was previously leased under an operating lease. During 1997, the
Company sold this location for net proceeds of $4.8 million. The Company entered
into a 15 year operating lease with the new owners and will maintain its
corporate headquarters at its current location. As a result of this transaction,
the Company recorded a deferred gain, which will be amortized over the life of
the lease. In addition, the Company continues to sublease office space on terms
that range from one to four years within the headquarters facility.
F-34
<PAGE> 79
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS UNLESS INDICATED OTHERWISE)
Rent expense for all locations, net of lease and sublease income, is as
follows. For the purposes of this table, base rent expense includes common area
maintenance costs. Common area maintenance costs were approximately 25, 22 and
21 percent of base rent expense for fiscal years 1996, 1997 and 1998.
<TABLE>
<CAPTION>
------------------ --------------- ----------------
December 28, January 3, January 2,
1996 1998 1999
------------------ --------------- ----------------
<S> <C> <C> <C>
Base rent expense $ 17,547 $ 24,007 $ 26,204
Rent as a percent of sales 80 186 151
Lease and sublease income (2,280) (4,338) (4,211)
------------------ --------------- ----------------
Rent expense, net $ 15,347 $ 19,855 $ 22,144
================== =============== ================
</TABLE>
Future minimum lease payments, excluding common area maintenance costs, net
of future minimum lease and sublease income under noncancelable operating leases
for the next five years and beyond are as follows:
<TABLE>
<CAPTION>
Operating Lease and Operating
Rental Sublease Lease
Payments Income Net
--------------- ------------ --------------
<S> <C> <C> <C>
1999 $ 21,811 $ 1,820 $ 19,991
2000 20,250 1,704 18,546
2001 17,904 1,488 16,416
2002 15,553 1,251 14,302
2003 13,025 1,017 12,008
Beyond 2003 47,564 1,839 45,725
--------------- ------------ --------------
Total minimum lease payments $ 136,107 $ 9,119 $ 126,988
=============== ============ ==============
</TABLE>
F-35
<PAGE> 80
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS UNLESS INDICATED OTHERWISE)
16. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position or consolidated results of operations.
F-36
<PAGE> 81
SCHEDULE II
EYE CARE CENTERS OF AMERICA, INC.
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
CHARGE TO/ CHARGE TO/
BALANCE AT CREDITED FROM CREDITED FROM DEDUCTIONS BALANCE
BEGINNING COSTS AND OTHER FROM AT CLOSE
OF PERIOD EXPENSES ACCOUNTS RESERVE OF PERIOD
----------- ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts of
current receivables:
Year Ended December 28, 1996 ............. 130,000 -- 121,000 -- 251,000
Year Ended January 3, 1998 ............... 251,100 -- 67,000 -- 318,000
Year Ended January 2, 1999 ............... 318,000 -- 243,000 -- 561,000
Inventory obsolescence reserves:
Year Ended December 28, 1996 ............. 361,000 -- 200,000 -- 561,000
Year Ended January 3, 1998 ............... 561,000 -- -- -- 561,000
Year Ended January 2, 1999 ............... 561,000 (9,000) 300,000 -- 852,000
</TABLE>
F-37
<PAGE> 82
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER 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)
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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)
3.3 Amended and Restated By-laws of Eye Care Centers of America, 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)
10.1 Form of Stockholders' Agreement dated as of April 24, 1998 by and among Eye Care of America, Inc. and the
shareholders listed therein. (a)
10.2 1998 Stock Option Plan. (a)
10.3 Amended and Restated Deferred Stock Plan of Eye Care Centers of America, Inc. (a)
10.4 Employment Agreement dated April 24, 1998 by and between Eye Care Centers of America, Inc. and Bernard W.
Andrews. (a)
10.5 Stock Option Agreement dated April 24, 1998 by and between Bernard W. Andrews and Eye Care Centers of America,
Inc. (a)
10.6 Form of Employment Agreement dated January 1, 1998 between Eye Care Centers of America, Inc. and Mark T.
Pearson, William A. Shertzer, Jr., George Gebhardt and Kent M. Keish. (a)
10.7 Employment Agreement dated March 24, 1997 between Eye Care Centers of America, Inc. and Michele Benoit. (a)
</TABLE>
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<TABLE>
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10.8 Management Agreement, dated as of April 24, 1998, by and between Thomas H. Lee Company and Eye Care Centers of
America, Inc. (a)
10.9 Retail Business Management Agreement, dated September 30, 1997, by and between Dr. Samit's Hour Eyes
Optometrist, P.C., a Virginia professional corporation, and Visionary Retail Management, Inc., a Delaware
corporation. + (a)
10.10 Professional Business Management Agreement dated September 30, 1997, by and between Dr. Samit's Hour Eyes
Optometrists, P.C., a Virginia professional corporation, and Visionary MSO, Inc., a Delaware corporation. + (a)
10.11 Contract for Purchase and Sale dated May 29, 1997 by and between Eye Care Centers of America, Inc. and JDB Real
Properties, Inc. (a)
10.11 Contract for Purchase and Sale dated May 29, 1997 by and between Eye Care Centers of America, Inc. and JDB Real
Properties, Inc. (a)
10.12 Amendment to Contract for Purchase and Sale dated July 3, 1997 by and between Eye Care Centers of America, Inc.
and JDB Real Properties, Inc. (a)
10.13 Second Amendment to Contract for Purchase and Sale dated July 10, 1997 by and between Eye Care Centers of
America, Inc. and JDB Real Properties, Inc. (a)
10.14 Third Amendment to Contract for Purchase and Sale by and between Eye Care Centers of America, Inc., John D.
Byram, Dallas Mini #262. Ltd. and Dallas Mini #343, Ltd. (a)
10.15 Commercial Lease Agreement dated August 19, 1997 by and between John D. Byram, Dallas Mini #262, Ltd. and Dallas
Mini #343, Ltd. And Eye Care Centers of America, Inc. (a)
10.16 1997 Incentive Plan for Key Management. (a)
10.17 1998 Incentive Plan for Key Management. (a)
10.18 Employment Agreement and Noncompetition Agreement, dated December 31, 1996 by and between Eye Care Centers of
America, Inc. and Gary D. Hahs, together with letter, dated November 21, 1997, regarding extension of term. (a)
10.19 Master Lease Agreement, dated August 12, 1997, by and between Pacific Financial Company and Eye Care Centers of
America, Inc., together with all amendments, riders and schedules thereto. (a)
10.20 Credit Agreement, dated as of April 23, 1998, among Eye Care Centers of America, Inc., Various Lenders, Bankers
Trust Company, as Administrative Agent, and Merrill Lynch Capital Corporation, as Syndication Agent. (a)
10.21 Purchase Agreement, dated as of April 24, 1998, by and among Eye Care Centers of America, Inc., the subsidiaries
of Eye Care Centers of America, Inc. named therein, BT Alex. Brown Incorporated and Merrill Lynch, Pierce,
Fenner & Smith Incorporated. (a)
10.22 Secured Promissory Note, dated April 24, 1998, issued by Bernard W. Andrews in favor of Eye Care Centers of
America, Inc. (a)
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10.23 Form of Eye Care Centers of America, Inc. standard managed care contract. (a)
10.24 Employment Agreement, dated July 8, 1998, by and between Eye Care Centers of America, Inc. and David E. McComas.
(a)
10.25 Employment Agreement, dated November 2, 1998, by and between Eye Care Centers of America, Inc. and Alan E.
Wiley. (a)
10.26 Retail Business Management Agreement, dated October 1, 1998, by and between Visionary Retail Management, Inc., a
Delaware corporation, and Dr. Mark Lynn & Associates, PLLC, a Kentucky professional limited liability company.+
(b)
10.27 Professional Business Management Agreement, dated October 1, 1998, by and between Visionary MSO, Inc., a
Delaware Corporation, and Dr. Mark Lynn & Associates, PLLC, a Kentucky professional limited liability company.+
(b)
12.1 Statement re Computation of Ratios (b)
21.1 List of subsidiaries of Eye Care Centers of America, Inc. (b)
24.1 Powers of Attorney (contained on the signature pages to this report). (b)
27.1 Financial Data Schedule. (b)
</TABLE>
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+ Portions of this Exhibit have been omitted pursuant to an
application for an order declaring confidential treatment filed
with the Securities and Exchange Commission.
(a) Incorporated by reference from the Registration Statement on Form
S-4 (File No. 333 - 56551).
(b) Filed herewith.
<PAGE> 1
EXHIBIT 10.26
RETAIL BUSINESS MANAGEMENT AGREEMENT
This Retail Business Management Agreement is made and entered into
effective as of October 1, 1998 by and between Visionary Retail Management,
Inc., a Delaware corporation ("Retail Business Manager"), and Dr. Mark Lynn &
Associates, PLLC, a Kentucky professional limited liability company (the
"Practice").
R E C I T A L S
A. The Practice is a Kentucky limited liability company duly organized
and validly existing under the laws of the Commonwealth of Kentucky which is
engaged in the provision of Professional Eye Care Services (as defined below)
and Optical Services (as defined below) to the general public in the states of
Kentucky, Indiana, Tennessee and Missouri (including the states that the
Practice may in the future conduct such services, the "Practice Areas" and each
state a "Practice Area") through individual Professionals (as defined below)
each of whom is licensed to practice optometry and/or ophthalmology in the
Practice Areas in which he or she provides services for the Practice and who are
employed or otherwise retained by the Practice.
B. Retail Business Manager is a business corporation duly organized and
validly existing under the laws of the State of Delaware.
C. The Practice desires to devote substantially all of its energies,
expertise and time to the delivery of Professional Eye Care Services to
patients.
D. The Practice desires to engage Retail Business Manager to provide
facilities, equipment and such management, administrative and business services
as are necessary and appropriate for the day-to-day administration of the retail
optical aspects of the Practice as well as certain personnel and services for
the Practice's professional eye care practice, and Retail Business Manager
desires to provide such, upon the terms and conditions hereinafter set forth,
for the purpose of enhancing the cost-efficiency and quality of services
rendered by the Practice to its patients.
NOW, THEREFORE, for and in consideration of the mutual agreements,
terms, covenants and conditions contained herein and other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
Parties agree as follows:
ARTICLE I
DEFINITIONS
For the purposes of this Retail Business Management Agreement, the
following terms shall have the following meanings ascribed thereto, unless
otherwise clearly required by the context in which such term is used:
1.1 Account. The term "Account" shall mean the bank account described
in Sections 3.9 and 3.10.
1.2 Adjusted Gross Revenue. The term "Adjusted Gross Revenue" shall
mean all revenues for Optical Services, Professional Eye Care Services, or
otherwise, generated by or on behalf of the Practice and/or its Professionals,
or other personnel during the term of this Retail Business Management Agreement,
<PAGE> 2
calculated on an accrual basis under GAAP, including all technical fees from
ancillary services, all proceeds from key person life and disability insurance
policies purchased by Retail Business Manager, in agreement with the Practice,
in accordance with Section 3.14, all amounts paid by third parties for
contractual liabilities, including, but not limited to, payments under
non-shareholder Professionals' non-competition agreements and compensation
payments under any service agreement between the Practice and another entity,
and all consultant, teaching and expert witness fees minus any allowances for
bad debts, uncollectible accounts, Medicare, Medicaid and other payor
contractual adjustments, discounts, workers' compensation adjustments,
reasonable professional courtesies, and other reductions in collectible revenue
that result from activities that do not result in collectible charges.
1.3 Adjusted Net Revenue. The term "Adjusted Net Revenue" shall have
the meaning set forth in Section 5.2 hereof.
1.4 Bonus. The term "Bonus shall mean the bonus to which the President
may be entitled under the terms of the President's Employment Agreement, not to
exceed Twenty Thousand And No/100 Dollars $20,000 on an annualized basis
1.5 Budget. The term "Budget" shall mean an operating budget and
capital expenditure budget for each fiscal year as prepared in accordance with
Section 3.11(a).
1.6 Capitation Revenues. The term "Capitation Revenues" shall mean all
collections from managed care organizations or third-party payors where such
payment is made periodically on a per member basis for the partial or total
needs of a subscribing patient, less amounts that are payable to other providers
of health care items and services to capitation patients. Capitation Revenues
shall include any co-payments and incentive bonuses received as a result of a
capitation plan.
1.7 Clinical Duties. The term "Clinical Duties " shall mean those
duties of Non-Professional Personnel (as defined below) which entail directly or
indirectly assisting a Professional (as defined below) in the scheduling,
examination or care of patients in the course of providing Professional Eye Care
Services, regardless of whether the performance of such duties requires
licensure under applicable state law.
1.8 Confidential Information. The term "Confidential Information" shall
mean any information of Retail Business Manager or the Practice, as appropriate
(whether written or oral), including all business management or economic
studies, patient lists, proprietary forms, proprietary business or management
methods, marketing data, fee schedules, or trade secrets of the Retail Business
Manager or of the Practice, as applicable, whether or not such Confidential
Information is disclosed or otherwise made available to one Party by the other
Party pursuant to this Retail Business Management Agreement. Confidential
Information shall also include the terms and provisions of this Retail Business
Management Agreement and any transaction or document executed by the Parties
pursuant to this Retail Business Management Agreement. Confidential Information
does not include any information that the receiving party can establish (a) is
or becomes generally available to and known by the public or the optometric or
optical communities (other than as a result of an unpermitted disclosure
directly or indirectly by the receiving party or its affiliates, advisors, or
Representatives); (b) is or becomes available to the receiving party on a
nonconfidential basis from a source other than the furnishing party or its
affiliates, advisors or Representatives, provided that such source is not and
was not bound by a confidentiality agreement with or other obligation of secrecy
to the furnishing party of which the receiving party has knowledge; or (c) has
already been or is hereafter independently acquired or developed by the
receiving party without violating any confidentiality agreement with or other
obligation of secrecy to the furnishing party.
1.9 Dispensary. The term "Dispensary" shall mean all facilities and
locations, or portions thereof, used by the Practice and all business operations
of the Practice related to the Practice's optical
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<PAGE> 3
dispensaries or businesses, which are to be administered by Retail Business
Manager under this Retail Business Management Agreement but excluding all
facilities and locations, or portions thereof, used by the Practice in, and all
business operations related to, the Practice's optometric, clinical and/or
therapeutic optometric practice.
1.10 Dispensary Expense. The term "Dispensary Expense" shall mean all
operating and non-operating expenses incurred by the Retail Business Manager in
the provision of Management Services (as defined below) to the Practice and
shall include all operating and non-operating expenses incurred by the Practice
relating to the items set forth in this Section. The Retail Business Manager
shall be reimbursed by the Practice for any reasonable Dispensary Expense
incurred by the Retail Business Manager in the provision of services to the
Practice, upon request by the Retail Business Manager. Dispensary Expense shall
not include any Retail Business Manager Expense, Practice Expense or Shareholder
Expense or any state, local or federal income or franchise tax.
Without limitation, Dispensary Expense shall include the following expenses:
(a) the salaries, benefits, payroll taxes, and other direct
costs of all employees of Retail Business Manager primarily working at the
Dispensary Practice and the salaries, benefits, payroll taxes, and other direct
costs of the Non-Professional Personnel and non-clinical employees of the
Practice primarily working at the Dispensary, but not the salaries, benefits,
payroll taxes or other direct costs of the Professionals;
(b) the direct cost of any employee or consultant that
provides services at or in connection with the Dispensary for improved
Dispensary performance, such as management, billing and collections, business
office consultation, and accounting and legal services, but only when such
services are coordinated by Retail Business Manager and/or included in the
Budget; provided, however, that Retail Business Manager shall obtain the consent
of the Practice before any consultant may be hired whose charge for services
would result in unbudgeted Dispensary Expenses charged to the Practice of
$5,000.00 or more in any calendar year, which consent shall not be unreasonably
withheld;
(c) reasonable recruitment costs and out-of-pocket expenses of
Retail Business Manager associated with the recruitment of additional Retail
Business Manager employees primarily located at the Dispensary Practice;
(d) personal property and intangible property taxes assessed
against Retail Business Manager's assets used in connection with the operation
of the Dispensary;
(e) comprehensive general and professional liability insurance
covering the Dispensary, employees of the Practice in connection with the
operation of the Dispensary and employees of Retail Business Manager in
connection with the operation of the Dispensary;
(f) the expense of using, leasing, purchasing or otherwise
procuring and maintaining the Dispensary and Dispensary related equipment;
(g) the cost of capital (whether as actual interest on
indebtedness incurred on behalf of the Practice, or reasonable imputed interest
on capital advanced by Retail Business Manager, which shall be equal to the
average cost of borrowing by Retail Business Manager as reflected on its most
recent published financial statements, or in the absence of either of the
foregoing, eight percent (8%)) to finance or refinance obligations of the
Practice incurred in connection with the Dispensary, or to finance new ventures
of the Practice in connection with the Dispensary; in any such case only as such
cost of capital is set forth in the Budget or otherwise approved in advance by
the Practice Advisory Council;
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<PAGE> 4
(h) the reasonable travel expenses associated with attending
meetings, conferences, or seminars to benefit the Practice so long as such
expenses are related to individuals located at the Dispensary and the Practice's
pro rata share for individuals who are consultants of or employed by Retail
Business Manager who provide material services to the Dispensary;
(i) the cost of Dispensary supplies, inventory and utilities;
(j) billing and collection costs and expenses;
(k) the Practice's pro-rata share of reasonable corporate
overhead charges or other reasonable expenses (including computer and data
processing costs) which are incurred by Retail Business Manager in connection
with corporate headquarters expenses which relate to the provision of benefits
or services by Retail Business Manager on behalf of the Practice as reflected in
the Budget including without limitation direct or indirect costs of the
Executive Dispensary Administrator and other Retail Business Manager personnel;
(l) all other expenses which are set forth in the Budget and
which directly or indirectly benefit the Practice incurred by Retail Business
Manager in carrying out its obligations under this Retail Business Management
Agreement;
(m) reasonable costs and expenses (to the extent not covered
by insurance) of lawsuits or claims against the Retail Business Manager or its
personnel, or the Practice, its Professional(s), or other personnel related to
their performance of duties at the Dispensary or their interest in the leasehold
or other assets used in connection with the Dispensary, provided that if any of
the Retail Business Manager or its personnel, or the Practice, its
Professional(s), or other personnel do not prevail in the lawsuit or claim or
settle the matter with a material payment by the party (the party at "fault"),
such costs and expenses shall be deemed a Retail Business Manager Expense in the
event of Retail Business Manager's fault or the fault of its personnel
(including Clinical Personnel) and a Practice Expense in the event of fault by
the Practice, its Professional(s), or other personnel whereupon the Practice and
such Professional(s) or other personnel shall be jointly responsible for the
immediate reimbursement of the sums advanced by Retail Business Manager;
provided further that Retail Business Manager shall not advance such costs and
expenses from the Account if the Practice Advisory Council concludes that (i) it
is unlikely that the Account will be reimbursed if the party involved will not
prevail in the lawsuit or claim, or (ii) a reasonable third person would believe
that obtaining a reimbursement of the advanced sums will be difficult to
achieve; and the Parties acknowledge that nothing in this Section shall create
any liability on the part of a Professional who would otherwise be shielded from
personal liability by the corporate or limited liability structure of the
Practice; and
(n) key person life and disability insurance premiums related
to policies which the Parties agree to acquire on the life of the Practice's
Shareholders or Professionals, whereupon any proceeds shall be paid to the
Account as Adjusted Gross Revenues, unless the Parties agree to a specific split
of the proceeds. Should only the Practice choose to obtain key person life
insurance, the Practice shall pay all premiums as a Practice Expense and shall
receive all proceeds. Further, if only the Retail Business Manager chooses to
obtain such insurance, Retail Business Manager shall pay all premiums as a
Retail Business Manager Expense and shall receive all proceeds. The Practice
shall cause its Shareholders and Professionals to submit to a medical
examination necessary to obtain such insurance.
In the event that any of the individuals described in Section 1.10(b)
devote a substantial amount of time to serving one or more optometric practices
other than the Practice, which is not prohibited hereunder, or the above
described Dispensary is utilized to a substantial degree by one or more
optometric practices other than the Practice, the Dispensary Expenses shall be
allocated between the Practice and such other
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<PAGE> 5
optometric practices to reflect each practice's pro-rata share of any expenses
or costs relating to such individuals or Dispensary (including the recruitment
costs of such individuals and the comprehensive and general liability insurance
expenses with respect to such individuals). Expenses contemplated in this
paragraph which potentially and primarily relate to Sections 1.10 (b), (c), (d),
(e), (f), (g), (h), (k) and (l) shall be in the Budget or approved by the
Practice Advisory Council, and where reasonably determinable, are intended to be
reasonable and customary based upon similar relationships generally existing
between national practice management companies and practices they manage. The
Practice's pro-rata portion of expenses related to individuals who are
consultants of or employed by Retail Business Manager and who provide services
benefiting more than one practice shall be based upon the actual time expended
by the individuals in performing such services as compared to the time spent by
such individuals with other practices managed by the Retail Business Manager,
or, if not reasonably calculable, as determined by Retail Business Manager,
based upon the estimated proportionate revenue size of the Practice as compared
to the aggregate revenue size as estimated in all of the Budgets of all other
practices managed by the Retail Business Manager which are benefiting from such
individual's services. Likewise, other benefits provided by the Retail Business
Manager to several Practices shall be split pro-rata based upon the use or
benefit derived by each Practice, but if not calculable, shall be based upon the
estimated proportionate revenue size as set forth in the preceding sentence.
Notwithstanding anything to the contrary herein, unless an expense is expressly
designated as a Retail Business Manager Expense, a Practice Expense or a
Shareholder Expense in this Retail Business Management Agreement or any exhibit
thereto, all expenses incurred by Retail Business Manager in providing services
pursuant to this Retail Business Management Agreement shall be considered a
Dispensary Expense. Any and all expenses which are incurred by Retail Business
Manager, Professional Business Manager or the Practice shall be allocated to the
appropriate expense category or categories in accordance with the terms and
conditions of the Retail Business Management Agreement and the Professional
Business Management Agreement.
1.11 Executive Dispensary Administrator. The term "Executive Dispensary
Administrator" shall mean the employee of Retail Business Manager having
executive authority and responsibility for the general and active management of
the Retail Business Manager.
1.12 GAAP. The term "GAAP" shall mean generally accepted United States
accounting principles.
1.13 Interest Expense. The term "Interest Expense shall mean the
accrued interest on the debt, if any, incurred by the Practice with respect to
the financing of the purchase of Doctor's Assets pursuant to that certain Master
Asset Purchase Agreement, dated August 22, 1998 by and among Eye Care Centers of
America, Inc., a Texas corporation, the Practice, the Companies (as defined
therein) and the Owners (as defined therein), and the interest on any
refinancing thereof.
1.14 Management Fee. The term "Management Fee" shall mean the Retail
Business Manager's compensation established as described in Article V hereof.
1.15 Management Services. The term "Management Services" shall mean the
business, administrative, and management services to be provided for the
Practice and the Dispensary, including, without limitation, the provision of
equipment, inventory and supplies, support services, personnel (excluding
Professionals), management, administration, financial record keeping and
reporting, and other business office services, all as reasonably contemplated by
this Retail Business Management Agreement and which are necessary for the
conduct of the Practice's business.
1.16 Non-Professional Personnel. The term "Non-Professional Personnel"
shall mean those individuals employed primarily at the Practice who are not
Optometrists or Ophthalmologists.
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<PAGE> 6
1.17 Office. The term "Office" shall have the meaning set forth in the
Professional Business Management Agreement (as defined below).
1.18 Office Expense. The term "Office Expense" shall have the meaning
set forth in the Professional Business Management Agreement.
1.19 Optical Services. The term "Optical Services" shall mean the
filling of optical prescriptions, dispensing of optical goods, the fitting of
eyewear, all activities related to any of the foregoing, and the direction,
supervision, and control of those who perform these tasks.
1.20 Optical Laboratory Services. The term "Optical Laboratory
Services" shall mean the fabrication of optical goods, including the grinding of
spectacle lenses and the fabrication of spectacles.
1.21 Optometrist. The term "Optometrist" shall mean each individually
licensed Optometrist, if any, who is employed or otherwise retained by or
associated with the Practice, each of whom shall meet at all times the
qualifications described in Section 4.2 and Section 4.3.
1.22 Ophthalmologist. The term "Ophthalmologist" shall mean each
individually licensed Ophthalmologist, if any, who is employed or otherwise
retained by or associated with the Practice, each of whom shall meet at all
times the qualifications described in Section 4.2 and Section 4.3.
1.23 Parties. The term "Parties" shall mean the Practice and Retail
Business Manager.
1.24 Practice. The term "Practice" shall have the meaning set forth in
the Recitals.
1.25 Practice Advisory Council. The term "Practice Advisory Council"
shall have the meaning set forth in Section 2.6 of this Agreement.
1.26 Practice Areas. The term " Practice Areas" shall have the meaning
set forth in the Recitals.
1.27 Practice Expenses. The term "Practice Expenses" shall mean (a) all
reasonable non-shareholder Professionals' salaries, benefits, payroll taxes and
other direct costs related to their services to the Practice (including
reasonable and customary professional dues, subscriptions, continuing education
and technical training expenses, and severance payments); (b) the cost of
optometric supplies (including, but not limited to drugs, pharmaceuticals,
products, substances, items, or optometric devices); (c) reasonable and
customary professional liability insurance expenses of Professionals; (d) travel
costs for continuing education, technical training, and necessary business
travel for non-shareholder Professionals; (e) to the extent not covered by
insurance and subject to the advance provisions contained herein, the defense
costs and expenses of any litigation or claims brought against the Practice or
its Professionals or other personnel by any third party in which the Practice,
or its Professionals, or other personnel do not prevail or the matter settles
with a material payment and the Practice or its Professionals or other personnel
are at fault, and any liability judgment or material settlement assessed against
the Practice or its Professionals or other personnel; (f) certain equipment
expenses described in Sections 3.2(c) and 3.2(d) of this Retail Business
Management Agreement and 3.2(c) and 3.2(d) of the Professional Business
Management Agreement; (g) interest on any funds advanced to the Practice by
Professional Business Manager to the extent that Professional Business Manager
is a net lender in accordance with the terms of the Professional Business
Management Agreement; (h) interest on any funds advanced to the Practice by
Retail Business Manager to the extent that Retail Business Manager is a net
lender in accordance with the terms of this Retail Business Management
Agreement; and (i) any income taxes or franchise taxes of the Practice; and (j)
consulting, accounting, or legal fees which relate solely to the Practice.
Notwithstanding the foregoing, the term
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<PAGE> 7
Practice Expenses shall specifically exclude (i) business travel requested by
Professional Business Manager, which shall be an Office Expense; (ii) business
travel requested by Retail Business Manager, which shall be a Dispensary
Expense, (iii) any and all compensation or expenses attributable to
Shareholders, which shall be Shareholder Expenses (except reasonable and
customary expenses for malpractice insurance which shall be a Practice Expense),
(iv) "tail" insurance coverage for Shareholders, which shall be a Shareholder
Expense, or (v) such other items agreed to in advance in writing by the Parties
hereto. During this Retail Business Management Agreement, for so long as a
current Shareholder of the Practice is an employee of, contractor to, or
Shareholder of the Practice, such Shareholder shall be deemed to be a
Shareholder for the purposes of this definition. Such expenses are to be
approved annually in the Budget.
1.28 Professional. The term "Professional" shall mean any Optometrist
or Ophthalmologist.
1.29 Professional Business Management Agreement. The term "Professional
Business Management Agreement" shall mean the instrument made and entered into
as of even date by and between Visionary MSO, Inc. ("Professional Business
Manager") and the Practice whereby Professional Business Manager shall provide
certain facilities, equipment, and management, administrative, and business
services to the Practice in connection with its provision of Professional Eye
Care Services as originally executed and delivered, or, if amended or
supplemented, as so amended or supplemented.
1.30 Professional Business Manager. The term "Professional Business
Manager" shall have the meaning set forth in the Professional Business
Management Agreement
1.31 Professional Eye Care Services. The term "Professional Eye Care
Services" shall mean professional health care items and services, including, but
not limited to, the practice of optometry, and all related professional health
care services provided by the Practice through Optometrists, Ophthalmologists,
and other professional health care providers that are retained by or
professionally affiliated with the Practice. The term shall exclude any and all
business whatsoever in connection with any optical businesses owned or operated,
or to be owned or operated in the future, in whole or in part, by the Practice
or any of its Professionals during the terms of this Retail Business Management
Agreement, except as otherwise required by applicable state law.
1.32 Professional Practice Account. The term "Professional Practice
Account" shall mean the bank account described in Section 3.10 of the
Professional Business Management Agreement.
1.33 Representatives. The term "Representatives" shall mean a Party's
officers, directors, managers, employees, or other agents.
1.34 Retail Business Management Agreement. The term "Retail Business
Management Agreement" shall mean this instrument as originally executed and
delivered, or, if amended or supplemented, as so amended or supplemented.
1.35 Retail Business Manager. The term "Retail Business Manager" shall
have the meaning set forth in the Recitals hereto.
1.36 Retail Business Manager Expense. The term "Retail Business Manager
Expense" shall mean an expense or cost incurred by the Retail Business Manager,
for which the Retail Business Manager is financially liable and is not entitled
to reimbursement from the Practice. Retail Business Manager Expense shall
specifically include: (a) any income or franchise taxes of the Retail Business
Manager, (b) the expense of providing, leasing, purchasing or otherwise
procuring the Dispensary equipment, including depreciation of furniture and
equipment, and (c) any other expenses or costs that are not reasonable and
customary reimbursements based upon a national practice management company's
usual arrangement with a practice.
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1.37 Shareholder. The term "Shareholder" shall mean any current or
future shareholder of the Practice.
1.38 Shareholder Expense. The term "Shareholder Expense" shall be
limited to the following expenses: (a) Shareholders' salaries, Bonus, benefits,
payroll taxes, and other direct costs (including professional dues,
subscriptions, continuing education expenses, severance payments, entertainment,
and travel costs for continuing education or other business travel but excluding
business travel requested by Retail Business Manager, which shall be a
Dispensary Expense and business travel requested by Professional Business
Manager which shall be an Office Expense, and excluding any other expense of a
Shareholder approved as a Dispensary Expense or Office Expense in advance by the
Parties); (b) "tail" coverage malpractice insurance expenses for the
Shareholders and any malpractice insurance expenses of any Professional which
are in excess of those which are customary and reasonable; and (c) consulting,
accounting, or legal fees which relate solely to the Shareholders. The Practice
shall reimburse the Retail Business Manager for any Shareholder Expense incurred
by the Retail Business Manager. Unless expressly designated as a Management Fee,
a Retail Business Manager Expense, a Professional Business Manager Expense, a
Dispensary Expense, an Office Expense, or a Practice Expense in this Retail
Business Management Agreement or in any exhibit hereto or in the Professional
Business Management Agreement or in any exhibit thereto or in any written
agreement of the Parties, any expense incurred by the Practice shall be
considered a Shareholder Expense. Notwithstanding the above, the Practice may
require certain Professionals to pay certain expenses incurred for them
specifically. Nothing in this Section shall create personal liability on the
part of the Practice's Shareholders.
1.39 Term. The term "Term" shall mean the initial and any renewal
periods of duration of this Retail Business Management Agreement as described in
Section 6.1.
ARTICLE II
APPOINTMENT OF RETAIL BUSINESS MANAGER
2.1 Appointment. The Practice hereby appoints Retail Business Manager
as its sole and exclusive agent for the management and administration of the
retail optical aspects of the Practice, including, but not limited to, the
operation of the Dispensary and the provision of Optical Services by the
Practice, and Retail Business Manager hereby accepts such appointment, subject
at all times to the provisions of this Retail Business Management Agreement.
2.2 Authority. Consistent with the provisions of this Retail Business
Management Agreement, Retail Business Manager shall have the responsibility and
commensurate authority to provide Management Services for the Practice. The
Practice shall give Retail Business Manager thirty (30) days' prior notice of
the Practice's intent to execute any agreement creating a binding legal
obligation on the Practice. The Parties acknowledge and agree that the Practice,
through its Professionals, shall be responsible for and shall have complete
authority, responsibility, supervision, and control over the provision of all
Professional Eye Care Services and other professional health care services
performed for patients, and that all diagnoses, treatments, procedures, and
other professional health care services shall be provided and performed
exclusively by or under the supervision of Professionals as such Professionals,
in their sole discretion, deem appropriate. Retail Business Manager shall have
and exercise absolutely no control, influence, authority or supervision over the
provision of Professional Eye Care Services.
2.3 Patient Referrals. Retail Business Manager and the Practice agree
that the benefits to the Practice and to Retail Business Manager hereunder do
not require, are not payment for, and are not in any way contingent upon the
referral, admission, or any other arrangement for the provision of any item or
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service offered by Retail Business Manager to patients of the Practice in any
facility, laboratory, center, or health care operation controlled, managed, or
operated by Retail Business Manager or upon the referral, admission, or any
other arrangement for the provision of any item or service offered by the
Practice.
2.4 Internal Decisions of the Practice. Matters involving the
Practice's allocation of professional income among its Shareholders and the
Professional employees of the Practice, tax planning, and pension and investment
planning shall remain the responsibility of the Practice and the Shareholders of
the Practice. The Retail Business Manager may not and shall not directly or
indirectly control or attempt to control, dictate or influence, directly or
indirectly, the professional judgment, including, but not limited to, the level
or type of care or services rendered, the manner of practice, or the practice of
the Practice or any Professional employed by the Practice.
2.5 Practice of Optometry. The Parties acknowledge that Retail Business
Manager is not authorized or qualified to engage in any activity that may be
construed or deemed to constitute the practice of optometry. To the extent any
act or service herein required to be performed by Retail Business Manager should
be construed by a court of competent jurisdiction or by the Board of Optometry
to constitute the practice of optometry, the requirement to perform that act or
service by Retail Business Manager shall be deemed waived and unenforceable.
Although Retail Business Manager shall provide Non-Professional Personnel to the
Practice and Professional Business Manager and Retail Business Manager shall
manage the administrative aspects of their employment, all Non-Professional
Personnel in the performance of any and all Clinical Duties shall be subject
solely to the direction, supervision, and control of the Practice and its
Professionals and, in the performance of Clinical Duties shall not be subject to
any direction or control by, or liability to, Retail Business Manager. Retail
Business Manager may not and shall not control or attempt to control, directly
or indirectly, the professional judgment, the manner of practice, or the
practice of the Practice or any Professional employed by the Practice. In this
regard, Retail Business Manager shall not attempt to dictate, influence, or
control the scope, level, or type of optometric and/or therapeutic optometric
services provided to patients of the Dispensary, the discipline of any
Professionals who are Practice employees, the fees charged for Professional Eye
Care Services provided to patients of the Dispensary (except to the extent
necessary to establish the Budget or negotiate managed care contracts), or any
other matter that impinges on the professional judgment of the Practice or any
Professional employed by the Practice.
2.6 Formation and Operation of the Practice Advisory Council. The
Parties hereby establish a Practice Advisory Council which shall be responsible
for advising Retail Business Manager and the Practice with respect to developing
the Dispensary and implementing management and administrative policies for the
overall operation of the Dispensary and for providing dispute resolution on
certain matters. The Practice Advisory Counsel shall consist of six (6) members.
Retail Business Manager shall designate, in its sole discretion, two (2) members
of the Practice Advisory Council or may have one (1) member with two (2) votes.
The Practice shall designate, in its sole discretion, two (2) members of the
Practice Advisory Council or may have one (1) member with two (2) votes.
Professional Business Manager shall designate, in its sole discretion, two (2)
members of the Practice Advisory Council or may have one member with two (2)
votes. The Practice Advisory Council members selected by the Practice shall be
full-time Professional employees of the Practice. Each Party's representatives
to the Practice Advisory Council shall have the authority to make decisions on
behalf of the respective Party. Except as may otherwise be provided, the act of
a majority of the members of the Practice Advisory Council shall be the act of
the Practice Advisory Council, provided that (i) the affirmative vote of the
Practice member(s) shall be required on all votes of the Practice Advisory
Council; (ii) the affirmative vote of the Retail Business Manager shall be
required on all matters relating to Optical Services or the Dispensary; and
(iii) the affirmative vote of the Professional Business Manager shall be
required on all matters relating to the Office. The decisions, resolutions,
actions, or recommendations of the Practice Advisory Council shall be
implemented by Retail Business Manager, Professional Business Manager, or the
Practice, as appropriate.
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2.7 Duties and Responsibilities of the Practice Advisory Council. The
Practice Advisory Council shall review, evaluate, make recommendations, and
where specifically authorized herein and permitted by law, make decisions with
respect to the following matters:
(a) Facility Improvements and Expansion. Any renovation and
expansion plans and capital equipment expenditures with respect to the
Practice's facilities shall be reviewed by the Practice Advisory Council which
shall make recommendations to the Practice with respect to proposed changes
therein. Such renovation and expansion plans and capital equipment expenditures
shall be based upon economic feasibility, optometry support, productivity and
then current market conditions.
(b) Marketing and Public Relations. The Practice Advisory
Council shall review and make recommendations to the Practice with respect to
all marketing and public relations services and programs promoting the
Practice's Professional Eye Care Services, Optical Services and ancillary
services.
(c) Patient Fees; Collection Policies. The Practice Advisory
Council shall review and make recommendations to the Practice concerning the fee
schedule and collection policies for all Professional Eye Care Services, Optical
Services and ancillary services rendered by the Practice.
(d) Ancillary Services. The Practice Advisory Council must
approve any new non-professional ancillary services to be rendered by the
Practice, including Optical Services, and the pricing, continuation of, access
to, and quality of such services.
(e) Provider and Payor Relationships. The Practice Advisory
Council shall review and make recommendations to the Practice regarding the
establishment or maintenance of relationships between the Practice and
institutional health care providers and third-party payors, and the Practice
shall review and approve all agreements with institutional health care providers
and third-party payors. The Practice Advisory Council shall also make
recommendations to the Practice concerning discounted fee schedules, including
capitated fee arrangements of which the Practice shall be a party, and the
Practice shall review and approve all such capitated fee arrangements.
(f) Strategic Planning. The Practice Advisory Council may make
recommendations to the Practice concerning development of long-term strategic
planning objectives for the Practice.
(g) Capital Expenditures. The Practice Advisory Council shall
make recommendations to the Practice concerning the priority of major capital
expenditures, and shall review and approve any commitment to make any capital
expenditures, relating to the Dispensary or the Office involving amounts in
excess of $15,000 individually, or $50,000 in the aggregate, in any one fiscal
year, which amounts may be increased from time-to-time by agreement of the
Parties.
(h) Fee Dispute Resolution. At the request of Retail Business
Manager or the Practice, the Practice Advisory Council shall make
recommendations to Retail Business Manager with respect to any dispute
concerning a set off or reduction in Management Fees.
(i) Grievances Referrals. The Practice Advisory Council shall
consider and make recommendations to Retail Business Manager and the Practice
regarding grievances pertaining to matters not specifically addressed in this
Retail Business Management Agreement as referred to it by Retail Business
Manager or the Practice's Board of Directors.
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(j) Termination of Retail Business Manager's Personnel. The
Practice Advisory Council shall review and approve any decision by the Retail
Business Manager to terminate any of Retail Business Manager's personnel
primarily located at the Dispensary who occupy manager or high level positions.
(k) Approval of New Offices or Dispensary. The Practice
Advisory Council shall approve any move of any current Office or Dispensary
location or expansion to an additional Practice location. Additionally, the
Practice Advisory Council shall approve the establishment of any optical
business of the Practice and the move or expansion of any such business.
Except in those specific instances set forth above in which the Practice
Advisory Council has been granted the authority to make decisions binding upon
the Retail Business Manager and the Practice, it is acknowledged and agreed that
recommendations of the Practice Advisory Council are intended for the advice and
guidance of Retail Business Manager and the Practice and that the Practice
Advisory Council does not have the power to bind Retail Business Manager or the
Practice. Where discretion with respect to any matter is vested in Retail
Business Manager or the Practice under the terms of this Retail Business
Management Agreement, Retail Business Manager or the Practice, as the case may
be, shall have ultimate responsibility for the exercise of such discretion,
notwithstanding any recommendations of the Practice Advisory Council. Retail
Business Manager and the Practice shall, however, take such recommendations of
the Practice Advisory Council into account in good faith in the exercise of such
discretion.
2.8 Professional Health Care Decisions. Notwithstanding anything herein
to the contrary, all decisions required by applicable law to be made solely by
health care professionals will be made solely by the appropriate Professionals.
The Practice shall have ultimate and exclusive authority concerning issues
related to:
(a) Types, levels, and scope of Professional Eye Care Services
to be provided (provided, however, that the Practice Advisory Council shall have
the authority set forth in Section 2.7(d) with respect to non-professional
ancillary services);
(b) Recruitment of Professionals to the Practice, including
the specific qualifications and specialties of recruited Professionals;
(c) Any optometric related functions;
(d) Fee schedules;
(e) Frequency and/or volume of patient encounters;
(f) The discipline of any Professionals or Non-Professional
Personnel who are employed by, retained by, or otherwise affiliated with the
Practice with respect to the performance of Professional Eye Care Services or
Clinical Duties, as applicable; and
(g) Any other decisions required by applicable law to be made
solely by Professionals and not by non-Professionals.
2.9 Meetings of the Practice Advisory Council. The Practice Advisory
Council shall meet on a regular basis as mutually agreed by the Parties. A
special meeting of the Practice Advisory Council may be called by Professional
Business Manager, Retail Business Manager or the Practice upon two (2) weeks'
notice, except in the event of an emergency, in which case a special meeting may
be called by Professional
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Business Manager, Retail Business Manager or the Practice upon three (3)
business days' notice. Meetings may be held telephonically or by any other means
agreeable to the Parties.
ARTICLE III
OBLIGATIONS AND RESPONSIBILITIES OF RETAIL MANAGER
3.1 Management Services. Retail Business Manager shall provide all
Management Services necessary and appropriate for the day-to-day operation of
the Dispensary and such personnel and services as set forth herein for the
operation of the Office, pursuant to the terms of this Retail Business
Management Agreement. Retail Business Manager shall operate in a reasonable and
customary manner with due consideration to the Practice's past business
practices and shall operate in accordance with all applicable laws, rules and
regulations which are necessary and material to the Retail Business Manager's
performance of the Management Services. Retail Business Manager will provide in
good faith and with due diligence its services consistent with management
services generally provided in operations of an optical dispensary similar in
size, type and operations in the Practice Areas. All reasonable costs and
expenses related to Retail Business Manager's duties contained in this Article
III shall be Dispensary Expenses unless limited or excluded as a Dispensary
Expense pursuant to the terms of this Retail Business Management Agreement.
Retail Business Manager hereby consents and agrees to provide all Management
Services to all Dispensary facilities and locations; provided, however, that
during the Term of this Retail Business Management Agreement, and except for its
obligations pursuant to this Retail Business Management Agreement, the Practice
shall not establish, operate, or provide Optical Services at any new Dispensary
facility or location without the consent and approval of the Practice Advisory
Council; and provided further that during the Term of this Agreement the
Practice shall not engage any individual or entity other than Retail Business
Manager to provide Management Services to the Practice without the consent and
approval of the Practice Advisory Council.
3.2 Dispensary, Facilities and Equipment.
(a) Retail Business Manager shall procure for or on behalf of
the Practice one or more Dispensaries that are deemed by the Parties to be
reasonable, necessary and appropriate, and the expense associated therewith
shall be a Dispensary Expense. Retail Business Manager shall consult with the
Practice regarding the condition, use and needs of Dispensary facilities,
offices and improvements. The Practice shall pay when due all rents and expenses
of the Dispensary, including without limitation expenses for leasehold or
facility improvements. Such rents and expenses shall be Dispensary Expenses.
(b) Retail Business Manager shall negotiate and administer all
leases of and agreements for Dispensary facilities or locations on behalf of the
Practice, provided, however, that Retail Business Manager shall consult with the
Practice on all professional or clinical matters relating thereto and that the
Practice shall consent to any lease negotiated by Retail Business Manager, which
consent shall not be unreasonably withheld.
(c) Retail Business Manager shall provide all equipment,
fixtures, office supplies, furniture and furnishings as are reasonable and
approved in the Budget for the operation of the Dispensary and the provision of
Optical Services. If the Practice wishes to choose additional equipment, which
the Retail Business Manager determines not to acquire or lease, the Practice may
acquire or lease such equipment, and the expense related thereto shall be deemed
a Practice Expense.
(d) Retail Business Manager shall provide, finance, or cause
to be provided or financed optical related equipment as reasonably required by
the Practice. The Practice shall have final authority in all health care
equipment selections; provided, however, that if the Practice chooses to acquire
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health care equipment which is not in the Budget and which Retail Business
Manager reasonably chooses not to acquire, expenses related thereto shall be
treated as a Practice Expense and such equipment shall be owned by the Practice;
provided further that following such acquisition or lease by the Practice, if
the Practice Advisory Council determines after a period of six months of use
that such equipment is reasonably certain to result in material profit to Retail
Business Manager (taking into account the cost or expense and anticipated
revenues associated with such equipment), then Retail Business Manager shall
acquire such equipment from the Practice by either (at Retail Business Manager's
option), paying cash or by assuming the liability associated with such
equipment, or if such equipment is then being leased by the Practice, by
assuming such lease. In the event of such an acquisition by Retail Business
Manager, it shall reimburse the Practice for previous expenses applied thereto.
Except for equipment which Retail Business Manager elects not to acquire or
lease which are acquired or leased by the Practice pursuant to Section 3.2(c) or
(d), all optical and non-optical equipment, other than Professional-owned
automobiles, acquired for the use of the Practice shall be owned by Retail
Business Manager and the depreciation and related capital charge shall be a
Retail Business Manager Expense. Retail Business Manager may make
recommendations to the Practice on the relationship between its health care
equipment decisions and the overall administrative and financial operations of
the Practice.
(e) Retail Business Manager shall be responsible for the
repair and maintenance of the Dispensary, consistent with the Practice's
responsibilities under the terms of any lease or other use arrangement, and for
the prompt repair, maintenance, and replacement of all equipment other than such
repairs, maintenance and replacement necessitated by the gross negligence or
willful misconduct of the Practice, its Professionals or other personnel
employed by the Practice, the repair or replacement of which shall be a Practice
Expense and not a Dispensary Expense. Replacement equipment shall be acquired
where Retail Business Manager in good faith determines, in consultation with the
Practice, that such replacement is necessary or where the Budget has made
allowances for such replacement.
3.3 Optical Supplies. Retail Business Manager shall order, procure,
purchase and provide on behalf of and as agent for the Practice all reasonable
optical supplies unless otherwise prohibited by federal and/or state law.
Furthermore, Retail Business Manager shall ensure that the Dispensary is at all
times adequately stocked with the optical supplies that are necessary and
appropriate for the operation of the Dispensary and required for the provision
of Optical Services. All costs and expenses relating to such supplies shall be a
Dispensary Expense.
3.4 Optical Laboratory Services. Retail Business Manager shall procure,
provide, or otherwise obtain for or on behalf of and as agent for the Practice
all Optical Laboratory Services necessary to the operation of the Dispensary.
3.5 Support Services. Retail Business Manager shall provide or arrange
for all printing, stationery, forms, postage, duplication or photocopying
services, and other support services as are reasonably necessary and appropriate
for the operation of the Dispensary and the provision of Optical Services
therein.
3.6 Licenses and Permits. Retail Business Manager shall, on behalf of
and in the name of the Practice, coordinate all development and planning
processes, and apply for and use reasonable efforts to obtain and maintain all
federal, state and local licenses and regulatory permits required for or in
connection with the operation of the Dispensary and the equipment (existing and
future) located at the Dispensary. The expenses and costs associated with
obtaining and maintaining permits with respect to the Dispensary shall be deemed
a Dispensary Expense.
3.7 Personnel.
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(a) Selection and Retention of Retail Business Manager's
Personnel. Except as specifically provided in Section 4.2 of this Retail
Business Management Agreement, Retail Business Manager shall, in consultation
with the Practice, employ or otherwise retain and shall be responsible for
selecting, hiring, training, supervising, and terminating, all management,
administrative, technical, clerical, secretarial, bookkeeping, accounting,
payroll, billing and collection and other personnel (excluding Professionals) as
Retail Business Manager deems reasonably necessary and appropriate for the
operation of the Dispensary and Office and for Retail Business Manager's
performance of its duties and obligations under this Retail Business Management
Agreement, provided that, where required by applicable state law, Retail
Business Manager personnel while engaged in providing Optical Services shall be
under the direction, supervision, and control of the Practice and its
Professionals. Consistent with reasonably prudent personnel management policies,
Retail Business Manager shall seek and consider the advice, input, and requests
of the Practice in regard to personnel matters. Retail Business Manager shall
have sole responsibility for determining the salaries and providing fringe
benefits, and for withholding, as required by law, any sums for income tax,
unemployment insurance, social security, or any other withholding required by
applicable law or governmental requirement. Retail Business Manager reserves the
right to change the number, composition or employment terms of such personnel in
the future at Retail Business Manager's discretion; provided, however, that the
termination of any of Retail Business Manager's personnel who occupy manager or
high level positions, and are primarily located at the Office or Dispensary must
receive the approval of the Practice Advisory Council. Retail Business Manager
and the Practice recognize and acknowledge that Retail Business Manager and
personnel retained by Retail Business Manager may from time-to-time perform
services for persons other than the Practice. This Retail Business Management
Agreement shall not be construed to prevent or prohibit Retail Business Manager
from performing such services for others or restrict Retail Business Manager
from using its personnel to provide services to others. Retail Business Manager
hereby disclaims any liability relating to the effect of its employees on the
qualification of the Practice's retirement plans under the Internal Revenue
Code, and all liabilities for such classification shall be solely the
responsibility of the Practice.
(b) Termination of Retail Business Manager's Personnel. If the
Practice is dissatisfied with the services of any employee of Retail Business
Manager or any personnel under Retail Business Manager's direction, supervision,
and control, the Practice shall consult with Retail Business Manager. Retail
Business Manager shall in good faith determine whether the performance of that
employee could be brought to acceptable levels through counsel and assistance,
or whether such employee should be relocated or terminated. All of Retail
Business Manager's determinations regarding Retail Business Manager's personnel
shall be governed by the overriding principle and goal of providing high quality
Optical Services and optometric and/or therapeutic optometric support services.
Employee assignments shall be made to assure consistent and continued rendering
of high quality Optical Services and optometric and/or therapeutic optometric
support services. The Retail Business Manager shall maintain established working
relationships wherever possible, and Retail Business Manager shall make every
effort consistent with sound business practices to honor the specific requests
of the Practice with regard to the assignment of employees. Notwithstanding that
which is contained in this Section 3.7(b), the Practice shall have the right and
obligation to determine the direction, supervision and control of any personnel
while said personnel are involved in the performance of Clinical Duties, and
where applicable state law so requires while involved in providing Optical
Services, including prohibiting said personnel from being involved in the
performance of Clinical Duties and, where applicable state law so dictates, in
the provision of Optical Services.
3.8 Contract Negotiations. Retail Business Manager shall evaluate,
assist in negotiations and administer on behalf of the Practice contracts that
do not relate to the provision of Professional Eye Care Services as set forth in
this Retail Business Management Agreement and/or as approved in the Budget. To
the extent permitted by law, Retail Business Manager shall evaluate, assist in
negotiations, administer and execute on the Practice's behalf, all contractual
arrangements with third parties as are reasonably necessary and appropriate for
the Practice's operation of the Dispensary or the provision of Optical Services.
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3.9 Billing and Collection. As an agent on behalf of and for the
account of the Practice, Retail Business Manager shall establish and maintain
credit and billing and collection services, policies and procedures, and shall
use reasonable efforts to timely bill and collect all fees for all billable
Professional Eye Care Services and Optical Services provided by the Practice,
the Professionals, or other personnel employed or otherwise retained by the
Practice. In connection with the billing and collection services to be provided
hereunder, and throughout the Term (and thereafter as provided in Section 6.3),
the Practice hereby grants to Retail Business Manager an exclusive special power
of attorney and appoints Retail Business Manager as the Practice's exclusive
true and lawful agent and attorney-in-fact (which shall be deemed revoked in the
event of termination for cause by the Practice), and Retail Business Manager
hereby accepts such special power of attorney and appointment, for the following
purposes:
(a) To bill the Practice's patients, in the Practice's name
using the Practice's tax identification number and on the Practice's behalf, for
all billable Professional Eye Care Services and Optical Services provided by the
Practice to patients.
(b) To bill, in the Practice's name using the Practice's tax
identification number and on the Practice's behalf, all claims for reimbursement
or indemnification from health maintenance organizations, self-insured
employers, insurance companies, Medicare, Medicaid, and all other third-party
payors or fiscal intermediaries for all covered billable Professional Eye Care
Services and Optical Services provided by the Practice to patients.
(c) To collect and receive, in the Practice's name and on the
Practice's behalf, all accounts receivable generated by such billings and claims
for reimbursement, to administer such accounts including, but not limited to,
extending the time of payment of any such accounts; suing, assigning or selling
at a discount such accounts to collection agencies; or taking other measures to
require the payment of any such accounts; provided, however, that the Practice
shall review and approve (which approval shall not be unreasonably withheld) any
decision by Retail Business Manager to undertake extraordinary collection
measures, such as filing lawsuits, discharging or releasing obligors, or
assigning or selling accounts at a discount to collection agencies. Retail
Business Manager shall act in a professional manner and in compliance with all
federal and state fair debt collection practices laws in rendering billing and
collection services.
(d) To deposit all amounts collected on behalf of the Practice
into the Account which shall be and at all times remain in the Practice's name.
The Practice covenants to transfer and deliver to the Account all funds received
by the Practice from patients or third-party payors for billable Professional
Eye Care Services and Optical Services. Upon receipt by Retail Business Manager
of any funds from patients or third-party payors or from the Practice pursuant
hereto for billable Professional Eye Care Services and Optical Services, Retail
Business Manager shall immediately deposit the same into the Account. On the
first day of each calendar month during the Term of this Retail Business
Management Agreement, Retail Business Manager shall pay to Professional Business
Manager for deposit into the Professional Practice Account all amounts collected
during the previous month on behalf of the Practice for billable Professional
Eye Care Services, less any refunds, adjustments, or reductions in revenue then
owed to, on behalf of, or in connection with the Practice's patients by the
Practice in connection with its provision of Professional Eye Care Services.
Retail Business Manager shall administer, be responsible for, and be obligated
to pay for all Dispensary Expenses; provided, however, that Retail Business
Manager shall only be liable for Dispensary Expenses to the extent of funds in
the Account. Retail Business Manager shall disburse funds from the Account to
creditors and other persons on behalf of the Practice, maintaining records of
such receipt and disbursement of funds.
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(e) To take possession of, endorse in the name of the
Practice, and deposit into the Account any notes, checks, money orders,
insurance payments, and any other instruments received in payment of accounts
receivable of the Practice.
(f) To sign checks on behalf of the Practice, and to make
withdrawals from the Account for payments specified in this Retail Business
Management Agreement. Upon request of Retail Business Manager, the Practice
shall execute and deliver to the financial institution wherein the Account is
maintained, such additional documents or instruments as may be necessary to
evidence or effect the special power of attorney granted to Retail Business
Manager by the Practice pursuant to this Section 3.9. The special power of
attorney granted herein shall be coupled with an interest and shall be
irrevocable except with Retail Business Manager's written consent. The
irrevocable power of attorney shall expire when this Retail Business Management
Agreement has been terminated, all accounts receivable payable to Retail
Business Manager pursuant to this Retail Business Management Agreement have been
collected, and all Management Fees due to Retail Business Manager have been
paid. If Retail Business Manager assigns this Retail Business Management
Agreement in accordance with its terms, the Practice shall execute a power of
attorney in favor of the assignee in a form acceptable to Retail Business
Manager.
3.10 Maintenance of Account.
(a) Power of Attorney. Retail Business Manager shall have
access to the Account solely for the purposes stated herein. In connection
herewith and throughout the term of this Retail Business Management Agreement,
the Practice hereby grants to Retail Business Manager an exclusive special power
of attorney for the purposes stated herein and appoints Retail Business Manager
as the Practice's exclusive, true, and lawful agent and attorney-in-fact, and
Retail Business Manager hereby accepts such special power of attorney and
appointment, to deposit into the Account all funds, fees, and revenues collected
by Retail Business Manager for billable Professional Eye Care Services and
Optical Services rendered to patients of the Practice, and for all other
Practice services and to make withdrawals from the Account for payments
specified in this Retail Business Management Agreement and as requested from
time-to-time by the Practice. Notwithstanding the exclusive special power of
attorney granted to Retail Business Manager hereunder, the Practice may, upon
reasonable advance notice to Retail Business Manager, draw checks on the
Account; provided, however, that the Practice shall neither draw checks on the
Account nor request Retail Business Manager to do so if the balance remaining in
the Account after such withdrawal would be insufficient to enable Retail
Business Manager to pay on behalf of the Practice any Dispensary Expense
attributable to the operations of the Dispensary or to the provision of Optical
Services at the Dispensary, and/or any other obligations of the Practice. Limits
on authority to sign checks and purchase orders shall be mutually agreed upon by
Retail Business Manager and the Practice.
(b) Payments from the Account. From the funds collected and
deposited by the Retail Business Manager in the Account, the Retail Business
Manager shall pay in the following order of priority and in accordance with
applicable requirements under law or contract:
(i) any refunds owed to patients by the Practice;
(ii) funds to be deposited into the Professional Practice
Account pursuant to Section 3.9(d) hereof;
(iii) all Dispensary Expenses;
(iv) any unpaid or past due compensation owed to the
Retail Business Manager pursuant to Section 5.1 hereof;
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(v) the current Base Management Fee compensation owed to
the Retail Business Manager pursuant to Section 5.1 hereof;
(vi) the current Supplemental Management Fee compensation
owed to Retail Business Manager pursuant to Section 5.2 hereof; and
(vii) all other Shareholder Expenses and Interest Expense.
(c) Additional Documents. Upon request of Retail Business
Manager, the Practice shall execute and deliver to the financial institution
wherein the Account is maintained, such additional documents or instruments as
may be necessary to evidence or effect the special power of attorney granted to
Retail Business Manager by the Practice pursuant to this Section 3.10. The
special power of attorney granted herein shall be coupled with an interest and
shall be irrevocable except with Retail Business Manager's written consent. The
irrevocable power of attorney shall expire when this Retail Business Management
Agreement has been terminated, all accounts receivable payable to Retail
Business Manager pursuant to this Retail Business Management Agreement have been
collected, and all Management Fees due to Retail Business Manager have been
paid. If Retail Business Manager assigns this Retail Business Management
Agreement in accordance with its terms, the Practice shall execute a power of
attorney in favor of the assignee in a form acceptable to Retail Business
Manager. Retail Business Manager shall not make any withdrawal from the
Practice's account unless expressly authorized in this Agreement.
3.11 Fiscal Matters.
(a) Annual Budget. The initial Annual Budget shall be agreed
upon by the parties before the execution of this Retail Business Management
Agreement. Thereafter, annually and at least thirty (30) days prior to the
commencement of each fiscal year of the Practice, the Retail Business Manager,
in consultation with the Practice, shall prepare and deliver to the Practice a
proposed Budget, setting forth an estimate of the Practice's revenues and
expenses for the upcoming fiscal year. The Practice shall review the proposed
Budget and either approve the proposed Budget or request any changes within
twenty-one (21) days after receiving the proposed Budget. Disputes concerning
the Budget shall, at the request of either party hereto, be submitted to the
Practice Advisory Council. In the event the Parties are unable to agree on a
Budget by the beginning of the fiscal year, until an agreement is reached, the
Budget for the prior year shall be deemed to be adopted as the Budget for the
current year, with each line item in the Budget (with the exception of the
Management Fee which shall be established pursuant to the terms of this Retail
Business Management Agreement) increased or decreased by one of the following,
whichever is most appropriate relative to the particular item of income or
expense, (i) the percentage by which the Adjusted Gross Revenue in the current
year, excluding any damages paid by any Professional to the Practice under any
Restrictive covenant or otherwise, has increased or decreased compared to the
corresponding period of the prior year; (ii) the increase or decrease from the
prior year in the Consumer Price Index - Health/Medical Services for the
relevant region; and (iii) the proportionate increase or decrease in mutually
agreed upon personnel costs as measured by the increase or decrease in
full-time-equivalent personnel. The Practice Advisory Council may revise or
modify the Budget from time to time during the applicable fiscal year to reflect
changing circumstances affecting the Practice. Additionally, notwithstanding the
above, no change in an adopted Budget shall be contrary to the terms and spirit
of this Agreement nor shall it have any effect on the Management Fee expressly
agreed to herein, unless approved in advance in writing by the Parties hereto.
(b) Obligations of Retail Business Manager. Retail Business
Manager shall use commercially reasonable efforts to manage and administer the
operations of the Dispensary as herein provided so that the actual revenues,
costs and expenses of the operation and maintenance of the Dispensary during any
applicable period of the Practice's fiscal year shall be consistent with the
Budget.
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(c) Accounting and Financial Records. Retail Business Manager
shall establish and administer accounting procedures, controls, and systems for
the development, preparation, and safekeeping of administrative or financial
records and books of account relating to the business and financial affairs of
the Dispensary and the provision of Optical Services, all of which shall be
prepared and maintained in accordance with GAAP. The Practice shall have the
right to inspect such records and books of account at its expense at any time,
upon reasonable notice to Retail Business Manager. Retail Business Manager shall
prepare and deliver to the Practice (i) within sixty (60) days of the end of
each of the first three (3) fiscal quarters in each fiscal year, and (ii) within
ninety (90) days of the end of each fiscal year, a balance sheet and a profit
and loss statement reflecting the financial status of the Practice in regard to
the provision of Optical Services as of the end of such period, all of which
shall be prepared in accordance with GAAP consistently applied. In addition,
Retail Business Manager shall prepare or assist in the preparation of any other
financial statements or records the Practice may reasonably request.
(d) Sales and Use Taxes. Retail Business Manager and the
Practice acknowledge and agree that to the extent that any of the services to be
provided by Retail Business Manager hereunder may be subject to any state sales
and use taxes, Retail Business Manager may have a legal obligation to collect
such taxes from the Practice and to remit the same to the appropriate tax
collection authorities. The Practice agrees to have applicable state sales and
use taxes attributable to the services to be provided by Retail Business Manager
hereunder treated as a Dispensary Expense.
3.12 Reports and Records.
(a) Health Care Records. All files and records relating to the
operation of the Dispensary, including without limitation, accounting, billing
and collection, and patient records shall at all times be and remain the
property of the Practice and shall remain under its possession, custody, and
control. Subject to the foregoing and to the extent permitted by applicable law,
Retail Business Manager shall, in consultation with the Practice, establish,
monitor, and maintain procedures and policies for the timely, appropriate, and
efficient preparation, filing, retrieval, and secure storage of such records.
Patient records shall be located at Dispensary facilities so that they are
readily accessible for patient care. Patient records shall not be removed from
Dispensary premises without the express written consent of the Practice, except
as specified herein. Patient records for patients not seen within the last three
years may be stored in a commercial storage facility or other location Retail
Business Manager shall designate, provided that Retail Business Manager shall
notify the Practice of the location of said records. All such health care
records shall be retained and maintained by the Practice, and the Retail
Business Manager as agent for the Practice in accordance with all applicable
state and federal laws relating to the confidentiality and retention thereof. In
this regard, Retail Business Manager shall use its best efforts to preserve the
confidentiality of patient records and shall use information contained in such
records only as the agent for the Practice and for the limited purposes
necessary to perform the services set forth herein.
(b) Other Reports and Records. Retail Business Manager shall
timely create, prepare, and file such additional reports and records as are
reasonably necessary and appropriate for the Practice's provision of Optical
Services, and shall be prepared to analyze and interpret such reports and
records upon the request of the Practice.
3.13 Confidential and Proprietary Information. Retail Business Manager
agrees that it shall not disclose any Confidential Information of the Practice
to other persons without the Practice's express written authorization, such
Confidential Information shall not be used in any way detrimental to the
Practice, and Retail Business Manager will keep such Confidential Information
confidential and will ensure that its affiliates and advisors who have access to
such Confidential Information comply with these nondisclosure obligations;
provided, however, that Retail Business Manager may disclose Confidential
Information to those of its Representatives who need to know Confidential
Information for the purposes of this Retail
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Business Management Agreement, it being understood and agreed by Retail Business
Manager that such Representatives will be informed of the confidential nature of
the Confidential Information, will agree to be bound by this Section, and will
be directed by Retail Business Manager not to disclose to any other person any
Confidential Information.
3.14 Retail Business Manager's Insurance. Throughout the Term, Retail
Business Manager shall, as a Dispensary Expense, obtain and maintain with
commercial carriers, through self-insurance or some combination thereof,
appropriate workers' compensation coverage for Retail Business Manager's
employed personnel provided pursuant to this Retail Business Management
Agreement, and professional, casualty and comprehensive general liability
insurance covering Retail Business Manager, Retail Business Manager's personnel,
and all of Retail Business Manager's equipment in such amounts, on such basis
and upon such terms and conditions as Retail Business Manager deems appropriate
but which insurance is consistent with the insurance which is maintained by the
Practice pursuant to Section 4.5 of this Retail Business Management Agreement.
Retail Business Manager shall cause the Practice to be named as an additional
insured on Retail Business Manager's professional, casualty and comprehensive
general liability policy. Upon the request of the Practice, Retail Business
Manager shall provide the Practice with a certificate evidencing such insurance
coverage. Retail Business Manager, in agreement with the Practice, may also
carry, as a Dispensary expense, key person life and disability insurance on any
Shareholder or Professional employee of the Practice in amounts determined
reasonable and sufficient by the Retail Business Manager. Retail Business
Manager shall be the owner and beneficiary of any such insurance, although the
Parties hereby agree that the proceeds of any such insurance shall be paid to
the Account as Adjusted Gross Revenues unless the Parties agree to a specific
split of the proceeds. Should only the Practice choose to obtain key person life
and disability insurance, the Practice shall pay all premiums as a Practice
Expense and shall receive all proceeds. Further, if only the Retail Business
Manager chooses to obtain such insurance, Retail Business Manager shall pay all
premiums as a Retail Business Manager Expense and shall receive the proceeds.
The Practice shall cause its Professionals to submit to a medical examination
necessary to obtain such insurance.
3.15 No Warranty or Representations. The Practice acknowledges that
Retail Business Manager has not made and will not make any express or implied
warranties or representations that the Management Services provided by Retail
Business Manager will result in any particular amount or level of income to the
Practice. Specifically, Retail Business Manager has not represented that its
Management Services will result in higher revenues, lower expenses, greater
profits, or growth in the number of patients receiving Optical Services at the
Dispensary.
3.16 Marketing and Public Relations. Retail Business Manager
acknowledges that the Practice desires a public relations program to enhance its
optical practice and to extend the Dispensary's ability to provide Optical
Services to patients. Subject to the Practice's approval, Retail Business
Manager shall design and implement an appropriate public relations program on
behalf of the Practice, with appropriate emphasis on public awareness of the
availability of Optical Services at the Dispensary. The public relations program
shall be conducted in compliance with applicable laws and regulations governing
advertising by the optical and optometric professions.
3.17 Acquisition of Services and Supplies. In obtaining services,
supplies and personnel for or on behalf of the Practice pursuant to this Retail
Business Management Agreement, Retail Business Manager shall be authorized to
obtain such services, supplies and personnel from an affiliate of Retail
Business Manager; provided that the Dispensary Expenses which are incurred by or
on behalf of the Retail Business Manager shall be consistent with the expenses
of optical dispensaries similar in size, type, and operations in the Practice
Areas.
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3.18 Coordination of Obligations and Responsibilities. Retail Business
Manager shall, in good faith, coordinate all of its obligations and
responsibilities under this Retail Business Management Agreement with
Professional Business Manager's performance of its obligations and
responsibilities under the Professional Business Management Agreement. Any
dispute, conflict or disagreement between Professional Business Manager and
Retail Business Manager regarding their respective obligations and
responsibilities shall be referred to the Practice Advisory Council for
resolution.
ARTICLE IV
OBLIGATIONS AND RESPONSIBILITIES OF THE PRACTICE.
4.1 Professional Services. The Practice shall diligently conduct the
business of an optometric and/or therapeutic optometric practice, including
utilizing its capacities to the greatest extent practicable to provide
Professional Eye Care Services and Optical Services to patients of the Office
and the Dispensary. The Practice shall retain that number of Professionals as
are reasonably necessary and appropriate in the sole discretion of the Practice
for the provision of Professional Eye Care Services and Optical Services and
shall determine their assignment and scheduled hours of practice at Office and
Dispensary locations. The Practice shall provide professional services to the
Office's and the Dispensary's patients in compliance at all times with ethical
standards, laws and regulations applying to the optometric and/or therapeutic
optometric and optical professions. The Practice shall ensure that each
Professional associated with or employed by the Practice to provide Professional
Eye Care Services and Optical Services to the Office's and the Dispensary's
patients is licensed in each Practice Area in which he or she provides such
services.. The Practice shall establish and implement a program to monitor the
quality of Professional Eye Care Services and Optical Services provided at the
Office and the Dispensary (the "Continuous Quality Improvement Program"). The
Continuous Quality Improvement Program shall be designed to promote and maintain
quality care consistent with accepted practices prevailing from time to time in
the area where each Office and Dispensary facility is situated.
4.2 Employment of Professionals. The Practice shall be responsible for
the hiring, compensation, supervision, evaluation, and termination of all
Professionals. At the request of the Practice, Retail Business Manager shall be
available to consult with the Practice respecting such matters. The Practice
shall be responsible for the payment of such Practice employees' salaries and
wages, payroll taxes, benefits, and all other taxes and charges now or hereafter
applicable to them. The Practice shall employ and contract only with licensed
Professionals who meet applicable credentialing guidelines established by the
Practice. The Practice shall not in any fiscal year contract in the aggregate
with Professionals for an amount (including the cost of associated benefits,
payroll expense, and professional liability coverage) which is greater than the
amount provided for such purpose in the Budget for such fiscal year. The
Practice represents, warrants and covenants that, if requested by the Retail
Business Manager, on or before ninety (90) days from the date of such request,
it will use its best efforts to obtain, shall in the future obtain, and shall
enforce formal written employment agreements from each of its present full-time
(an average of thirty (30) or more hours per week) Professionals, except for the
President of the Practice, and those employed in the future in substantially the
form attached hereto as Exhibit 4.2A ("Employment Agreement") and containing a
restrictive covenant (the "Restrictive Covenant"). It is agreed that the Retail
Business Manager has not requested that such employment agreements and
Restrictive Covenants be entered into as of the execution of this Agreement. The
Practice further represents, warrants and covenants that the President of the
Practice has entered into an employment agreement substantially in the form
attached hereto as Exhibit 4.2B (the "President's Employment Agreement"), which
agreement is currently and shall remain in force and effect during the term of
this Agreement unless terminated in accordance therewith.
4.3 Professional Standards. As a continuing condition of Retail
Business Manager's obligations hereunder each Professional and any other
Professional personnel retained by the Practice to
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provide Professional Eye Care Services and Optical Services must (i) have and
maintain a valid and unrestricted license to practice optometry or ophthalmology
in the Practice Areas in which such Professional is providing services, (ii)
comply with, be controlled and governed by and provide Professional Eye Care
Services and Optical Services in accordance with applicable federal, state and
municipal laws, rules, regulations, ordinances and orders, and the ethics and
standard of care of the optometric and optical communities wherein the principal
Office and Dispensary of the Practice is located, and (iii) provide on a
continual basis, quality care to its patients.
4.4 Practice's Insurance. The Practice shall, as a Practice Expense,
obtain and maintain with commercial carriers chosen by the Practice appropriate
workers' compensation coverage for the Practice's employed personnel, if any,
and professional and comprehensive general liability insurance covering the
Practice and each of the Professionals involved in the provision of Professional
Eye Care Services. The comprehensive general liability coverage with respect to
each of the Professionals shall be in the minimum amount of One Million Dollars
($1,000,000) and professional liability coverage shall be in the minimum amount
of One Million Dollars ($1,000,000) for each occurrence and One Million Dollars
($1,000,000) annual aggregate. The insurance policy or policies shall provide
for at least thirty (30) days' advance written notice to the Practice from the
insurer as to any alteration of coverage, cancellation, or proposed cancellation
for any cause. Upon the termination of this Retail Business Management Agreement
for any reason, the Practice shall continue to carry professional liability
insurance in the amounts specified herein for the shorter period of (i) the
period set forth in each Practice Area's statute of repose (or if no statute of
repose exists, each Practice Area's statute of limitations) for bringing
professional malpractice claims based upon injuries which are not immediately
discoverable plus any applicable tolling periods, or (ii) ten (10) years after
termination; or if the Practice dissolves or ceases to practice optometry, the
Practice shall obtain and maintain as a Practice Expense "tail" professional
liability coverage, in the amounts specified in this Section for the shorter
period of (i) the period set forth in each Practice Area's statute of repose (or
if no statute of repose exists, each Practice Area's statute of limitations) for
bringing professional malpractice claims based upon injuries which are not
immediately discoverable plus any applicable tolling periods, or (ii) ten (10)
years. The Practice shall be responsible for paying all premiums for Shareholder
"tail" insurance coverage and such coverage shall be a Shareholder Expense;
provided, however, that the Practice may cause its Professionals to be
responsible for paying the premiums for such "tail" insurance coverage.
4.5 Confidential and Proprietary Information. The Practice agrees that
it shall not disclose any Confidential Information of the Retail Business
Manager to other persons without Retail Business Manager's express written
authorization, such Confidential Information shall not be used in any way
detrimental to Retail Business Manager, and the Practice will keep such
Confidential Information confidential and will ensure that its affiliates and
advisors who have access to such Confidential Information comply with these
nondisclosure obligations; provided, however, that the Practice may disclose
Confidential Information to those of its Representatives who need to know
Confidential Information for the purposes of this Retail Business Management
Agreement, it being understood and agreed by the Practice that such
Representatives will be informed of the confidential nature of the Confidential
Information, will agree to be bound by this Section, and will be directed by the
Practice not to disclose to any other person any Confidential Information.
4.6 Non-Competition. The Practice hereby recognizes, acknowledges, and
avers that Retail Business Manager will incur substantial costs in providing the
equipment, support services, personnel, management, administration, and other
items and services that are the subject matter of this Retail Business
Management Agreement and that in the process of providing services under this
Retail Business Management Agreement, the Practice will be privy to financial
and Confidential Information, to which the Practice would not otherwise be
exposed. The Parties also recognize that the services to be provided by Retail
Business Manager will be feasible only if the Practice operates an active
practice to which the Professionals associated with the Practice devote their
full time and attention. The Practice agrees,
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acknowledges, and avers that the non-competition covenants described hereunder
are necessary for the protection of Retail Business Manager, and that Retail
Business Manager would not have entered into this Retail Business Management
Agreement without the following covenants.
(a) Except as specifically agreed to by Retail Business
Manager in writing, the Practice covenants and agrees that during the Term of
this Retail Business Management Agreement and for a period of one (1) year from
the date this Retail Business Management Agreement is terminated, other than if
terminated by the Practice for cause, or expires the Practice shall not directly
or indirectly own (excluding ownership of less than one percent (1%) of the
equity of any publicly traded entity and excluding ownership of the common stock
of Retail Business Manager), manage, operate, control, contract with, lend funds
to, lend its name to, maintain any interest whatsoever in, or be employed by,
any enterprise (i) having to do with the provision, distribution, promotion, or
advertising of any type of management or administrative services or products to
third parties in competition with Retail Business Manager, within a 10 mile
radius of any Dispensary of the Practice; and/or (ii) offering any type of
service(s) or product(s) to third parties substantially similar to those offered
by Retail Business Manager to the Practice in competition with Retail Business
Manager within a 10 mile radius of any Dispensary of the Practice; and/or (iii)
providing Optical Services in competition with Retail Manager within a ten (10)
mile radius of any Dispensary of the Practice.
(b) Restrictive Covenants by Optometrists. Under the
Restrictive Covenant, to the extent then required by the Retail Business
Manager, the non-shareholder Professionals agree not to practice optometry
and/or therapeutic optometry or provide Optical Services within a certain
radius, as set forth in Exhibit 4.6A, of any Dispensary location at which such
Professionals performed services on a regular basis for sixteen (16) or more
hours per week or one thousand (1,000) hours during the last twelve months of
such non-Shareholder Professionals' employment with the Practice. The
Restrictive Covenant shall be effective for a period of one (1) year following
termination of employment with the Practice and may be subject to a liquidated
damages provision as authorized hereafter.
(c) Liquidated Damages. The Practice represents, warrants and
covenants that the Restrictive Covenant described above, if then required by the
Retail Business Manager, contains a liquidated damages provision, consistent
with the laws of the Commonwealth of Kentucky, mandating the payment of
$25,000.00 in liquidated damages. Any liquidated damage amount collected by the
Practice through enforcement of the Restrictive Covenant shall be delivered
immediately to Retail Business Manager for deposit in the Account and included
in the Adjusted Gross Revenue. The Practice hereby stipulates and agrees that
Retail Business Manager will suffer severe harm if the Practice fails or refuses
to obtain and enforce the Restrictive Covenant, including the aforesaid
liquidated damages provision. The Practice further stipulates and agrees that
the parties may be unable to quantify such severe harm, and, accordingly, the
Practice shall pay to Retail Business Manager the amount of $25,000.00, as
agreed upon stipulated damages in the event of such failure or refusal to obtain
and enforce the Restrictive Covenant. Any liquidated damage amount collected
from the Practice as a result of its failure or refusal to enforce the
Restrictive Covenant shall be immediately paid to Retail Business Manager and
shall not be included in the Adjusted Gross Revenue for the Practice.
(d) The Practice understands and acknowledges that Retail
Business Manager shall suffer severe harm in the event that the foregoing
non-competition covenants in Section 4.6 are violated, and accordingly, if the
Practice breaches any obligation of Section 4.6, in addition to any other
remedies available under this Retail Business Management Agreement, at law or in
equity, Retail Business Manager shall be entitled to enforce this Retail
Business Management Agreement by injunctive relief and by specific performance
of the Retail Business Management Agreement, such relief to be without the
necessity of posting a bond, cash or otherwise. Additionally, nothing in this
Section 4.6(d) shall limit Retail Business Manager's right to recover any other
damages to which it is entitled as a result of the Practice's breach. The time
period for which the non-competition covenant is effective shall be extended day
for day for the time
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period the Practice is in violation of the non-competition covenant. If any
provision of the covenants is held by a court of competent jurisdiction to be
unenforceable due to an excessive time period, geographic area, or restricted
activity, the covenant shall be reformed to comply with such time period,
geographic area, or restricted activity that would be held enforceable.
Following termination of this Retail Business Management Agreement pursuant to
Section 6.2(b) hereof, the Practice shall not amend, alter or otherwise change
any term or provision of the Restrictive Covenants or liquidated damages
provisions of the Employment Agreements or the President's Employment Agreement
with the Professionals. Following termination of this Agreement pursuant to
Section 6.2(a) hereof, the Practice and the Professionals shall be relieved of
the restrictions imposed by this Section 4.6.
4.7 Name, Trademark. The Practice represents and warrants that on and
after sixty (60) days from the effective date of this Retail Business Management
Agreement, the Practice shall conduct its professional practice under the name
of, and only under the names of Dr. Bizer's VisionWorld, Dr. Bizer's Vision
World, Doctor's ValuVision and the Eye Surgery Center and that such names are
duly registered, qualified, or licensed under the laws of the Practice Areas in
which they are being used, and that, to the Practice's knowledge, the Practice
is the sole and absolute owner of the names in the Practice Areas. The Practice
covenants and promises that, without the prior written consent of the Retail
Business Manager, the Practice will not:
(a) take any action that is reasonably likely to result in the
loss of registration, qualification or licensure of the name;
(b) fail to take any reasonably necessary action that will
maintain the registration, qualification, or licensure current;
(c) license, sell, give, or otherwise transfer the name or the
right to use the name to any optometry practice, Optometrist, professional
corporation, optical dispensary or any other entity; or
(d) cease conducting the professional practice of the Practice
under the name.
4.8 Billing Information and Assignments; Establishment of Fees. The
Practice shall promptly provide the Retail Business Manager with all billing and
other information reasonably requested by the Retail Business Manager to enable
it to bill and collect the Dispensary's fees and other charges and reimbursement
claims pursuant to Section 3.9, and the Practice shall use its best efforts to
procure consents to assignments and other approvals and documents necessary to
enable the Retail Business Manager to obtain payment or reimbursement from third
parties for such fees, other charges and claims.
4.9 Provider Agreements. The Practice shall have ultimate authority
with regard to all contractual arrangements with third parties for the
Practice's provision of Optical Services, and the Practice may at its sole
discretion reject or otherwise refuse to enter into any such contractual
arrangement.
4.10 Tax Matters. The Practice shall prepare or arrange for the
preparation by an accountant selected by the Practice of all appropriate
corporate tax returns and reports required of the Practice including such
returns and reports required with respect to the Account. All costs and expenses
relating to the preparation of such returns and reports shall be deemed a
Practice Expense.
4.11 Shareholders' Undertaking to Enforce Certain Provisions of
Agreement. The Practice shall cause to be executed by all Shareholders of the
Practice an undertaking in the form of Exhibit 4.11 by such Shareholders to
ensure that the covenants not to compete described in Section 4.6 of this Retail
Business Management Agreement are enforced by the Practice against any
individuals violating such covenants.
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4.12 Limitations on Actions of the Practice. The Practice shall not
take any of the following actions without the express prior written consent of
Retail Business Manager:
(a) Any action leading to or intended to result in the merger,
combination or consolidation of the Practice or Dispensary with, or acquisition
of the Practice, the Dispensary, or their businesses by, any other entity;
(b) Mortgage or encumber any of the Practice's real, personal
or mixed property as security for any indebtedness which is not contemplated by
the Budget;
(c) Pay any dividend or make any other distribution, whether
in cash or in kind, to Shareholders of the Practice, if any compensation owed by
the Practice to Retail Business Manager hereunder has not been paid in full, and
if any and all monetary obligations of the Practice to Retail Business Manager
have not been fully paid in accordance with the terms of any and all documents
governing such obligations, provided, however, that the foregoing shall not
prevent payment of Shareholders' Salary, Bonus, payroll taxes thereon, and
certain Shareholder Expenses as set forth in Section 3.10(b) of the Professional
Business Management Agreement;
(d) Dissolve or liquidate the Practice, or take any action
with a view to or likely to have the result of the dissolution or liquidation of
the Practice; or
(e) Authorize the provision of professional services such that
the income derived therefrom is not owned by the Practice; provided that no such
consent is necessary for (i) professional services performed by Professionals
during said Professionals' vacation time, or (ii) professional services
performed in connection with duties and responsibilities as a member of the
Reserves or National Guard.
4.13 Leases of Dispensary Locations. The Practice shall maintain and
fulfill all of its obligations under leases of Dispensary facilities or
locations.
ARTICLE V
RETAIL MANAGER'S COMPENSATION.
5.1 Base Management Fee. The Practice and Retail Business Manager agree
to the compensation set forth herein as being paid to Retail Business Manager in
consideration of a substantial commitment made by Retail Business Manager
hereunder and that such fees are fair and reasonable. Each month Retail Business
Manager shall be paid that percentage set forth in Exhibit 5.1 of Adjusted Gross
Revenue.
5.2 Supplemental Management Fee. In consideration of the improved
efficiencies expected to be effected by Retail Business Manager, as an incentive
to Retail Business Manager to effect those efficiencies, and as additional
compensation for the services provided by Retail Business Manager, Retail
Business Manager shall be paid each month, during the Term of this Retail
Business Management Agreement, that percentage set forth in Exhibit 5.2 of
Adjusted Net Revenue. Adjusted Net Revenue shall be calculated as the amount
remaining after subtracting from Adjusted Gross Revenue (i) Dispensary Expenses,
(ii) Office Expenses, (iii) Practice Expenses, and (iv) the following
Shareholder Expenses: (A) Shareholder's salary not to exceed One Hundred Ninety
Thousand And No/100 Dollars ($190,000.00) on an annualized basis; (B) the amount
of the Bonus with respect to such period as set forth in the President's
Employment Agreement not to exceed Twenty Thousand And No/100 Dollars ($20,000)
on an annualized basis; (C) payroll taxes related to Shareholder's salary and
the Bonus; and (D) other Shareholder Expenses not to exceed Five Thousand And
No/100 Dollars ($5,000) unless otherwise agreed to by the Retail Business
Manager.
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5.3 Reasonable Value. Payment of the Management Fee is not intended to
be and shall not be interpreted or applied as permitting Retail Business Manager
to share in the Practice's fees for Professional Eye Care Services and Optical
Services or any other services, but is acknowledged as the Parties' negotiated
agreement as to the reasonable fair market value of Retail Business Manager's
commitment to pay all Dispensary Expenses and the fair market value of the
equipment, contract analysis and support, other support services, purchasing,
personnel, management, administration, strategic management and other items and
services furnished by Retail Business Manager pursuant to the Retail Business
Management Agreement, considering the nature and volume of the services required
and the risks assumed by Retail Business Manager. The Practice and Retail
Business Manager recognize and acknowledge that Retail Business Manager will
incur substantial costs and business risks in undertaking to pay all Dispensary
Expenses and in providing the support services, personnel, marketing,
management, administration, and other items and services that are the subject
matter of this Retail Business Management Agreement. It is the intent of the
Parties that the Management Fee reasonably compensate Retail Business Manager
for the value to the Practice of Retail Business Manager's administrative
expertise, given the considerable business risk to Retail Business Manager in
providing the Management Services that are the subject of this Retail Business
Management Agreement.
5.4 Payment of Management Fee. To facilitate the payment of the
Management Fee as provided in Section 5.1 hereof, the Practice hereby expressly
authorizes Retail Business Manager to make withdrawals of the Management Fee
from the Account as such fee becomes due and payable during the Term in
accordance with Section 3.10(a) and after termination as provided in Section
6.3. Retail Business Manager shall deliver to the Practice an invoice for the
Management Fee accompanied by a reasonably detailed statement of the information
upon which the Management Fee calculation is based.
5.5 Disputes Regarding Fees.
(a) It is the Parties' intent that any disputes regarding
performance standards of the Retail Business Manager be resolved to the extent
possible by good faith negotiation. To that end, the Parties agree that if the
Practice in good faith believes that Retail Business Manager has failed to
perform its obligations, and that as a result of such failure, the Practice is
entitled to a set-off or reduction in its Management Fees, the Practice shall
give Retail Business Manager notice of the perceived failure and request in the
notice a set-off or reduction in Management Fees. Retail Business Manager and
the Practice shall then negotiate the dispute in good faith, and if an agreement
is reached, the Parties shall implement the resolution without further action.
At the request of Retail Business Manager or the Practice, the Practice Advisory
Council shall make recommendations to Retail Business Manager with respect to
any dispute concerning a set off or reduction in Management Fees.
(b) If the Parties cannot reach a resolution within a
reasonable time, the Parties shall submit the dispute to mediation to be
conducted in accordance with the American Arbitration Association's Commercial
Mediation Rules.
(c) If the mediation process fails to resolve the dispute, the
dispute shall be submitted by either Party to binding arbitration under Section
8.7.
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ARTICLE VI
TERM AND TERMINATION
6.1 Initial and Renewal Term. The Term of this Retail Business
Management Agreement will be for an initial period of forty (40) years after the
effective date, and shall be automatically renewed for successive five (5) year
periods thereafter, provided that neither Retail Business Manager nor the
Practice shall have given notice of termination of this Retail Business
Management Agreement at least one hundred twenty (120) days before the end of
the initial term or any renewal term, or unless otherwise terminated as provided
in Section 6.2 of this Retail Business Management Agreement.
6.2 Termination.
(a) Termination by the Practice. The Practice may immediately
terminate this Retail Business Management Agreement at its discretion, upon
written notice pursuant to Section 8.3, as follows:
(i) If Retail Business Manager becomes insolvent by reason
of its inability to pay its debts as they mature; is adjudicated bankrupt or
insolvent; files a petition in bankruptcy, reorganization or similar proceeding
under the bankruptcy laws of the United States or shall have such a petition
filed against it which is not discharged within thirty (30) days; has a receiver
or other custodian, permanent or temporary, appointed for its business, assets
or property; makes a general assignment for the benefit of creditors; has its
bank accounts, property or accounts attached; has execution levied against its
business or property; or voluntarily dissolves or liquidates or has a petition
filed for corporate dissolution and such petition is not dismissed with thirty
(30) days;
(ii) If the Retail Business Manager fails to comply with
any material provision of this Agreement, and does not correct such failure
within ninety (90) days after written notice of such failure to comply is
delivered by the Practice specifying the nature of the breach in reasonable
detail; or
(iii) Retail Business Manager commits any act of fraud,
misappropriation or embezzlement, or any other felony and as a result the Retail
Business Manager is unable to substantially perform under the terms of this
Retail Business Management Agreement.
(b) Termination by Retail Business Manager Retail Business
Manager may immediately terminate this Retail Business Management Agreement at
its discretion, upon written notice pursuant to Section 8.3, as follows:
(i) The revocation, suspension, cancellation or
restriction of any Shareholder's license to practice optometry in any of the
Practice Areas if, in the reasonable discretion of the Retail Business Manager,
the Practice will not be financially viable after such revocation, suspension,
cancellation, or restriction;
(ii) If the Practice becomes insolvent by reason of its
inability to pay its debts as they mature; is adjudicated bankrupt or insolvent;
files a petition in bankruptcy, reorganization or similar proceeding under the
bankruptcy laws of the United States or shall have such a petition filed against
it which is not discharged within thirty (30) days; has a receiver or other
custodian, permanent or temporary, appointed for its business, assets or
property; makes a general assignment for the benefit of creditors; has its bank
accounts, property or accounts attached; has execution levied against its
business or property; or
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voluntarily dissolves or liquidates or has a petition filed for corporate
dissolution and such petition is not dismissed with thirty (30) days;
(iii) If the Practice fails to comply with any material
provision of this Agreement, or any other agreement with Retail Business
Manager, and does not correct such failure within ninety (90) days after written
notice of such failure to comply is delivered by Retail Business Manager
specifying the nature of the breach in reasonable detail;
(iv) The Practice or any of the Practice Professionals
commit any act of fraud, misappropriation or embezzlement, or any other felony
and as a result the Practice as an entire entity is unable to substantially
perform under the terms of this Retail Business Management Agreement; or
(v) Any of the material representations of the Practice
are false or incorrect when made or hereafter become materially false or
incorrect or any warranty of the Practice is materially breached.
(c) Termination by Agreement. In the event the Practice and
Retail Business Manager shall mutually agree in writing, this Retail Business
Management Agreement may be terminated on the date specified in such written
agreement.
(d) Legislative, Regulatory or Administrative Change. In the
event there shall be a change in the Medicare or Medicaid statutes, federal
statutes, state statutes, case law, administrative interpretations, regulations
or general instructions, the adoption of new federal or state legislation, or a
change in any third-party reimbursement system, or any finding, ruling, or
decree of any regulatory body concerning this Retail Business Management
Agreement, any of which are reasonably likely to materially and adversely affect
the manner in which either Party may perform or be compensated for its services
under this Retail Business Management Agreement or which shall make this Retail
Business Management Agreement or any related agreements unlawful or
unenforceable, or which would be reasonably likely to subject either Party to
this Retail Business Management Agreement, or any member, shareholder, officer,
director, employee, agent or affiliated organization to any civil or criminal
penalties or administrative sanctions, the Parties shall immediately use their
best efforts to enter into a new service arrangement or basis for compensation
for the services furnished pursuant to this Retail Business Management Agreement
that complies with the law, regulation, policy, finding, ruling, or decree, or
which minimizes the possibility of such penalties, sanctions or
unenforceability, and that approximates as closely as possible the economic
position of the Parties prior to the change. If the Parties are unable to reach
a new agreement within sixty (60) days, this Retail Business Management
Agreement shall be terminated upon ninety (90) days written notice by either
Party to the other.
6.3 Effects of Termination.
(a) Obligation After Termination. Upon termination of this
Retail Business Management Agreement, as hereinabove provided, neither Party
shall have any further obligations hereunder except for
(i) obligations accruing prior to the date of termination,
including, without limitation, payment of the Management Fee relating to
services provided prior to the termination of this Retail Business Management
Agreement;
(ii) obligations, promises, or covenants set forth herein
that are expressly made to extend beyond the Term, including, without
limitation, insurance, indemnities and non-competition provisions, which
provisions shall survive the expiration or termination of this Retail Business
Management Agreement;
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(iii) the obligation of the Practice described in Section
6.4; and
(iv) the obligation of the Practice to repay amounts
advanced by Retail Business Manager to the Practice.
(b) Receipt of Collections After Termination. In effectuating
the provisions of this Section 6.3, the Practice specifically acknowledges and
agrees that if this Retail Business Management Agreement terminates pursuant to
Sections 6.2(b) or (d), Retail Business Manager shall continue for a period not
to exceed ninety (90) days to exclusively collect and receive on behalf of the
Practice all cash collections from accounts receivable in existence at the time
this Retail Business Management Agreement is terminated, it being understood
that
(i) such cash collections will represent compensation to
Retail Business Manager to the extent of any outstanding obligations to Retail
Business Manager by the Practice pursuant to this Retail Business Management
Agreement for Management Services already rendered;
(ii) Retail Business Manager shall not be entitled to
collect accounts receivable after the termination date if this Agreement is
terminated pursuant to Section 6.2(a);
(iii) the Retail Business Manager shall deduct from such
cash collections any other amounts owed to Retail Business Manager under this
Retail Business Management Agreement, including, without limitation, ten percent
(10%) of such cash collections as its Management Fee during any period after the
termination of this Retail Business Management Agreement while such collections
are taking place and any reasonable costs incurred by Retail Business Manager in
carrying out the post termination procedures and transactions contemplated
herein; and
(iv) Retail Business Manager shall remit remaining amounts
from such collection activities, if any, to the Practice.
(c) Surrender of Books After Termination. Upon the expiration
or termination of this Retail Business Management Agreement for any reason or
cause whatsoever, Retail Business Manager shall surrender to the Practice all
books and records pertaining to the Dispensary.
6.4 Purchase Obligation. Upon expiration of this Retail Business
Management Agreement in accordance with Section 6.1 or termination of this
Retail Business Management Agreement by Retail Business Manager, as set forth in
Sections 6.2(b) or 6.2(d) above, the Practice shall upon Retail Business
Manager's demand:
(a) Purchase from Retail Business Manager at book value all of
the assets, tangible and intangible, including without limitation equipment,
furniture, goodwill, intellectual property, inventory, and supplies, used in, or
related to, the operations of the Dispensary and all replacements and additions
thereto made by Retail Business Manager pursuant to the performance of its
obligations under this Retail Business Management Agreement, set forth on the
books of Retail Business Manager as adjusted through the last day of the month
most recently ended prior to the date of such termination in accordance with
GAAP to reflect operations of the Dispensary, depreciation, amortization, and
other adjustments of assets shown on the books of Retail Business Manager;
(b) Assume all contracts and leases and the Practice's pro
rata share of all debts and payables that are obligations of Retail Business
Manager and that relate principally to the performance of Retail Business
Manager's obligations under this Retail Business Management Agreement; provided,
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however, that the Practice shall only be obligated to assume such contracts and
leases if a reasonable third person would conclude that the Practice will be
able to enjoy the benefits of the contracts and leases following such
assumption; and
(c) Cause to be executed by Shareholders of the Practice such
security agreements reasonably required by Retail Business Manager in connection
with the purchase described in this Section 6.4. All current Shareholders of the
Practice shall on or before the effective date of this Retail Business
Management Agreement, and all individuals who become Shareholders of the
Practice after the effective date of commencement of this Retail Business
Management Agreement shall upon becoming a Shareholder of the Practice, execute
and deliver to Retail Business Manager an undertaking to comply with this
Section 6.4 which shall be in the form of Exhibit 6.4.
6.5 Closing of Purchase. When the Practice purchases the assets
pursuant to Section 6.4, the Practice shall pay cash or deliver a note payable
in equal monthly installments over five (5) years at an interest rate not to
exceed "prime" plus one (1%) percent ("prime" being the commercial lending rate
of NationsBank, N.A.) per annum for the purchased assets. The amount of the
purchase price shall be reduced by the amount of debt and liabilities of Retail
Business Manager, if any, assumed by the Practice, by any payment the Retail
Business Manager has failed to make under this Retail Business Management
Agreement, and by any unpaid portion of any promissory notes payable by Retail
Business Manager to any Shareholder of the Practice. The Practice and all
Shareholders of the Practice shall execute such documents as may be required to
assume the liabilities set forth in Section 6.4(b) and to remove Retail Business
Manager from any liability with respect to such purchased assets. The closing
date for the purchase shall be determined by the Parties, but shall in no event
occur later than the expiration date of this Retail Business Management
Agreement if this Agreement expires in accordance with Section 6.1, or sixty
(60) days from the date of the notice of termination for cause. The termination
of this Retail Business Management Agreement shall become effective upon the
closing of the sale of the assets if the assets are purchased, and all Parties
shall be released from any restrictive covenants provided for in Section 4.6 on
the closing date. From and after any termination, each Party shall provide the
other Party with reasonable access to the books and records then owned by it to
permit such requesting Party to satisfy reporting and contractual obligations
that may be required of it.
6.6 Limitation of Liability. IN NO EVENT SHALL RETAIL BUSINESS MANAGER
BE LIABLE TO THE PRACTICE FOR ANY INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES OR
LOST PROFITS, ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE PERFORMANCE OR
BREACH THEREOF, EVEN IF RETAIL BUSINESS MANAGER HAS BEEN ADVISED OF THE
POSSIBILITY THEREOF; PROVIDED, HOWEVER, THAT THE FOREGOING SHALL NOT PREVENT
RECOVERY OF ACTUAL DAMAGES ARISING OUT OF OR RELATED TO THIS RETAIL BUSINESS
MANAGEMENT AGREEMENT.
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ARTICLE VII
INDEMNIFICATION; THIRD PARTY CLAIMS
7.1 Indemnification by the Practice. The Practice shall indemnify and
hold harmless Retail Business Manager and Retail Business Manager's
shareholders, directors, officers, agents and employees, from and against all
claims, demands, liabilities, losses, damages, costs and expenses, including
reasonable attorneys' fees, resulting in any manner, directly or indirectly,
from the negligent or intentional acts or omissions of the Practice or its
members, Shareholders, directors, officers, employees, agents or independent
contractors, including but not limited to any such claims, demands, liabilities,
losses, damages, costs and expenses which accrued or arose prior to the date of
execution of this Retail Business Management Agreement.
7.2 Indemnification by Retail Business Manager. Retail Business Manager
shall indemnify and hold harmless the Practice, and the Practice's members,
Shareholders, directors, officers, agents and employees, from and against any
and all claims, demands, liabilities, losses, damages, costs and expenses,
including reasonable attorneys' fees, resulting in any manner, directly or
indirectly, from the negligent or intentional acts or omissions of Retail
Business Manager or its shareholders, directors, officers, employees, agents or
independent contractors.
7.3 Notice of Claim for Indemnification. No claims for indemnification
under this Retail Business Management Agreement relating to claims solely
between the Parties shall be valid unless notice of such claim is delivered to
the Practice (in the case of a claim by Retail Business Manager) or Retail
Business Manager (in the case of a claim by the Practice) within one (1) year
after the Party making such claim first obtained knowledge of the facts upon
which such claim is based. Any such notice shall set forth in reasonable detail,
to the extent known by the Party giving such notice, the facts on which such
claim is based and the resulting estimated amount of damages.
7.4 Matters Involving Third Parties.
(a) If the Practice or Retail Business Manager receives notice
or acquires knowledge of any matter which may give rise to a claim by another
person and which may then result in a claim for indemnification under this
Retail Business Management Agreement, then: (i) if such notice or knowledge is
received or acquired by the Practice, the Practice shall promptly notify Retail
Business Manager; and (ii) if such notice or knowledge is received or acquired
by Retail Business Manager, the Retail Business Manager shall promptly notify
the Practice; except that no delay in giving such notice shall diminish any
obligation under this Retail Business Management Agreement to provide
indemnification unless (and then solely to the extent) the Party from whom such
indemnification is sought is prejudiced.
(b) Any Party from whom such indemnification (the
"Indemnifying Party") is sought shall have the right to defend the Party seeking
such indemnification (the "Indemnified Party") against such claim by another
person (the "Third Party Claim") with counsel of the Indemnifying Party's choice
reasonably satisfactory to the Indemnified Party so long as: (i) within fifteen
(15) days after the Indemnified Party has given notice of the Third Party Claim
to the Indemnifying Party, the Indemnifying Party notifies the Indemnified Party
that the Indemnifying Party will indemnify the Indemnified Party from and
against all adverse consequences the Indemnified Party may suffer caused by,
resulting from, arising out of or relating to such Third Party Claim; (ii) the
Indemnifying Party provides the Indemnified Party with evidence reasonably
satisfactory to the Indemnified Party that the Indemnifying Party has the
financial resources necessary to defend against the Third Party Claim and
fulfill its indemnification obligations; (iii) the Third Party Claim seeks money
damages; (iv) settlement of, or an adverse judgment with respect to, the Third
Party Claim (other than an optometric malpractice claim) is not, in the good
faith judgment of the
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Indemnified Party, likely to establish a precedential custom or practice adverse
to the continuing business interests of the Indemnified Party; and (v) the
Indemnifying Party conducts the defense of the Third Party Claim actively and
diligently.
(c) So long as the Indemnifying Party is conducting the
defense of the Third Party Claim in accordance with Section 7.4(b): (i) the
Indemnified Party may retain separate co-counsel at its sole cost and expense
and participate in the defense of the Third Party Claim; (ii) the Indemnified
Party shall not consent to the entry of any judgment or enter into any
settlement with respect to the Third Party Claim without the prior consent of
the Indemnifying Party; and (iii) the Indemnifying Party shall not consent to
the entry of any judgment or enter into any settlement with respect to the Third
Party Claim without the prior consent of the Indemnified Party.
(d) If any of the conditions specified in Section 7.4(b) is
not satisfied, however; (i) the Indemnified Party may defend against, and
consent to the entry of any judgment or enter into any settlement with respect
to, the Third Party Claim in any manner it may deem advisable (and the
Indemnified Party need not consult with, or obtain any consent from, any
Indemnifying Party in connection therewith); (ii) the Indemnifying Party shall
reimburse the Indemnified Party promptly and periodically for the costs of
defending against the Third Party Claim (including reasonable attorneys' and
accountants' fees and expenses); and (iii) the Indemnifying Party shall remain
responsible for any adverse consequences the Indemnified Party may suffer caused
by, resulting from, arising out of or relating to such Third Party Claim to the
fullest extent provided in this Agreement.
7.5 Settlement. Except as permitted by Section 7.4, a Party shall not
compromise or settle any claim for which the other Party is obligated to
indemnify it without the written consent of such Party.
7.6 Cooperation. The Indemnified Party shall make available all
information and assistance that the Indemnifying Party may reasonably request in
conjunction with assessing, defending and settling said claim.
ARTICLE VIII
MISCELLANEOUS
8.1 Administrative Services Only. Nothing in this Retail Business
Management Agreement is intended or shall be construed to allow Retail Business
Manager to exercise control, authority or direction over the manner or method by
which the Practice and its Professionals perform Professional Eye Care Services
or other professional health care services. The rendition of all Professional
Eye Care Services, including, but not limited to, the prescription or
administration of medicine and drugs, shall be the sole responsibility of the
Practice and its Professionals, and Retail Business Manager shall not interfere
in any manner or to any extent therewith. Nothing contained in this Retail
Business Management Agreement shall be construed to permit Retail Business
Manager to engage in the practice of optometry, it being the sole intention of
the Parties hereto that the services to be rendered to the Practice by Retail
Business Manager are solely for the purpose of providing non-optometric
management and administrative services (including, where permitted by applicable
state law, Optical Services) to the Dispensary so as to enable the Practice to
devote its full time and energies to the professional conduct of its
professional eye care practice and provision of Professional Eye Care Services
to its patients.
8.2 Status of Independent Contractor. It is expressly acknowledged that
the Parties hereto are "independent contractors," and nothing in this Retail
Business Management Agreement is intended and nothing shall be construed to
create an employer/employee, partnership, or joint venture relationship, or to
allow either to exercise control or direction over the manner or method by which
the other performs the
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services that are the subject matter of this Retail Business Management
Agreement; provided always that the services to be provided hereunder shall be
furnished in a manner consistent with the standards governing such services and
the provisions of this Retail Business Management Agreement. Each Party
understands and agrees that (i) the other will not be treated as an employee for
federal tax purposes, (ii) neither will withhold on behalf of the other any sums
for income tax, unemployment insurance, social security, or any other
withholding pursuant to any law or requirement of any governmental body or make
available any of the benefits afforded to its employees, (iii) all of such
payments, withholdings, and benefits, if any, are the sole responsibility of the
Party incurring the liability, and (iv) each will indemnify and hold the other
harmless from any and all loss or liability arising with respect to such
payments, withholdings, and benefits, if any.
8.3 Notices. Any notice, demand, or communication required, permitted,
or desired to be given hereunder shall be deemed effectively given when in
writing and personally delivered or mailed by prepaid certified or registered
mail, return receipt requested, addressed as follows:
The Practice: Dr. Mark Lynn & Associates, PLLC
516 East Highway 131
Clarksville, Indiana 47129
Attention: Mark E. Lynn, O.D., President
Retail Business Manager: Visionary Retail Management, Inc.
11103 West Avenue
San Antonio, Texas 78213
Attention: Mark Alsteadt
with a copy to: Cox & Smith Incorporated
112 E. Pecan, Suite 1800
San Antonio, Texas 78205
Attention: James B. Smith, Jr.
or to such other address, or to the attention of such other person or officer,
as any party may by written notice designate.
8.4 Governing Law. This Retail Business Management Agreement shall in
all respects be governed, interpreted and construed in accordance with the laws
of the Commonwealth of Kentucky without giving effect to principles of comity or
conflicts of laws thereof.
8.5 Jurisdiction and Venue. Retail Business Manager and the Practice
hereby consent to the personal jurisdiction and venue of the state and federal
courts in the judicial circuit where the Practice has its principal corporate
office, and do hereby waive all questions of personal jurisdiction and venue,
including, without limitation, the claim or defense that such courts constitute
an inconvenient forum.
8.6 Assignment. Except as may be herein specifically provided to the
contrary, this Retail Business Management Agreement shall inure to the benefit
of and be binding upon the Parties hereto and their respective legal
representatives, successors, and assigns; provided, however, that the Practice
may not assign this Retail Business Management Agreement without the prior
written consent of Retail Business Manager, which consent may be withheld.
Retail Business Manager may assign or transfer its rights and obligations under
this Retail Business Management Agreement only in the following situations: (a)
pursuant
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to a merger of Retail Business Manager into another entity or the sale of
substantially all of the assets of Retail Business Manager; (b) pursuant to the
sale and/or assignment of this Retail Business Management Agreement with the
Practice's consent, which shall not be unreasonably withheld; (c) pursuant to a
transfer or assignment of this Agreement to one of Retail Business Manager's
subsidiaries; or (d) pursuant to any transfer or assignment to or by any
financial lender of the Retail Business Manager, and this Retail Business
Management Agreement is subordinate to the rights of such lender. After such
assignment and transfer, the Practice agrees to look solely to such assignee or
transferee for performance of this Retail Business Management Agreement.
8.7 Arbitration. Any and every dispute of any nature whatsoever that
may arise between the Parties, whether sounding in contract, statute, tort,
fraud, misrepresentation, 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. If the amount in controversy in the arbitration exceeds Two
Hundred Fifty Thousand Dollars ($250,000), exclusive of interest, attorneys'
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 neutral arbitrators by
mutual agreement. If such 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, or 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 the
arbitrator(s) for such arbitration. If three (3) arbitrators are selected, the
arbitrators shall elect a chairperson to preside at all meetings and hearings.
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 thereof. 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 arbitrators 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,
attorney's fees, declaratory relief, and permanent injunctive relief, if
applicable. Unless otherwise agreed by the parties, the arbitration shall be
held in Louisville, Kentucky. This Section 8.7 shall not prevent either Party
from seeking a temporary restraining order or temporary or preliminary
injunctive relief from a court of competent jurisdiction in order to protect its
rights under this Agreement. In the event a Party seeks such injunctive relief
pursuant to this Agreement, such action shall not constitute a waiver of the
provisions of this Section 8.7, which shall continue to govern any and every
dispute between the Parties, including without limitation the right to damages,
permanent injunctive relief and any other remedy, at law or in equity.
8.8 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, THOSE DISPUTES RELATING TO,
OR INVOLVING IN ANY WAY, THE CONSTRUCTION, PERFORMANCE OR BREACH OF THIS
AGREEMENT OR ANY OTHER AGREEMENT BETWEEN THE PARTIES, THE PROVISIONS OF ANY
FEDERAL, STATE OR LOCAL LAW, REGULATION OR ORDINANCE NOTWITHSTANDING. By
execution of this Agreement, each of the parties hereto
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acknowledges and agrees that it has had an opportunity to consult with legal
counsel and that he/she/it knowingly and voluntarily waives any right to a trial
by jury of any dispute pertaining to or relating in any way to the transactions
contemplated by this Agreement, the provisions of any federal, state or local
law, regulation or ordinance notwithstanding.
8.9 Waiver of Breach. The waiver by either Party of a breach or
violation of any provision of this Retail Business Management Agreement shall
not operate as, or be construed to constitute, a waiver of any subsequent breach
of the same or another provision hereof.
8.10 Enforcement. In the event either Party resorts to legal action to
enforce or interpret any provision of this Retail Business Management Agreement,
the prevailing Party shall be entitled to recover the costs and expenses of such
action so incurred, including, without limitation, reasonable attorneys' fees.
8.11 Gender and Number. Whenever the context of this Retail Business
Management Agreement requires, the gender of all words herein shall include the
masculine, feminine, and neuter, and the number of all words herein shall
include the singular and plural.
8.12 Additional Assurances. Except as may be herein specifically
provided to the contrary, the provisions of this Retail Business Management
Agreement shall be self-operative and shall not require further agreement by the
Parties; provided, however, at the request of either Party, the other Party
shall execute such additional instruments and take such additional acts as are
reasonable and as the requesting Party may deem necessary to effectuate this
Retail Business Management Agreement.
8.13 Consents, Approvals, and Exercise of Discretion. Whenever this
Retail Business Management Agreement requires any consent or approval to be
given by either Party, or either Party must or may exercise discretion, and
except where specifically set forth to the contrary, the Parties agree that such
consent or approval shall not be unreasonably withheld or delayed, and that such
discretion shall be reasonably exercised.
8.14 Force Majeure. Neither Party shall be liable or deemed to be in
default for any delay or failure in performance under this Retail Business
Management Agreement or other interruption of service deemed to result, directly
or indirectly, from acts of God, civil or military authority, acts of public
enemy, war accidents, fires, explosions, earthquakes, floods, failure of
transportation, strikes or other work interruptions by either Party's employees,
or any other similar cause beyond the reasonable control of either Party unless
such delay or failure in performance is expressly addressed elsewhere in this
Retail Business Management Agreement. Notwithstanding the same, the Parties
hereto agree to continue this Retail Business Management Agreement to the best
degree they can so long as reasonably possible and the Practice shall not be
excused from its obligations under Sections 4.1, 6.4 and 6.5 pursuant to this
Section 8.14.
8.15 Severability. The Parties hereto have negotiated and prepared the
terms of this Retail Business Management Agreement in good faith with the intent
that each and every one of the terms, covenants and conditions herein be binding
upon and inure to the benefit of the respective Parties. Accordingly, if any one
or more of the terms, provisions, promises, covenants or conditions of this
Retail Business Management Agreement or the application thereof to any person or
circumstance shall be adjudged or rendered to any extent invalid, unenforceable,
void or voidable for any reason whatsoever by a court of competent jurisdiction,
an arbitration tribunal, a regulatory agency, or statute such provision shall be
reformed, construed and enforced as if such unenforceable provision had not been
contained herein, and each and all of the remaining terms, provisions, promises,
covenants and conditions of this Retail Business Management Agreement or their
application to other persons or circumstances shall not be affected thereby and
shall be valid and enforceable to the fullest extent permitted by law. To the
extent this Retail Business
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Management Agreement is in violation of applicable law, then the Parties agree
to negotiate in good faith to amend the Retail Business Management Agreement, to
the extent possible consistent with its purposes, to conform to law.
8.16 Press Releases and Public Announcements. Except as otherwise
required by law or by applicable rules of any securities exchange or association
of securities dealers, neither the Practice nor the Retail Business Manager
shall issue any press release, make any public announcement or otherwise
disclose any information for the purpose of publication by any print, broadcast
or other public media, relating to the transactions contemplated by this
Agreement, without the prior approval of the other Party.
8.17 Divisions and Headings. The division of this Retail Business
Management Agreement into articles, sections, and subsections and the use of
captions and headings in connection therewith are solely for convenience and
shall not affect in any way the meaning or interpretation of this Retail
Business Management Agreement.
8.18 Amendments and Execution. This Retail Business Management
Agreement and any amendments hereto shall be in writing and executed in multiple
copies on behalf of the Practice by its President, and on behalf of Retail
Business Manager by its President. Each multiple copy shall be deemed an
original, but all multiple copies together shall constitute one and the same
instrument.
8.19 Licenses, Permits and Certificates. Retail Business Manager and
the Practice shall each obtain and maintain in effect, at all times during the
term of this Retail Business Management Agreement, all licenses, permits and
certificates required by law which are applicable to the performance of their
respective obligations pursuant to this Retail Business Management Agreement.
8.20 No Third Party Beneficiaries. Except as otherwise provided herein,
this Retail Business Management Agreement shall not confer any rights or
remedies upon any person other than Retail Business Manager and the Practice and
their respective successors and permitted assigns.
8.21 Compliance with Applicable Laws. Retail Business Manager and the
Practice shall comply with all applicable federal, state and local laws,
regulations, rules and restrictions in the conduct of their obligations under
this Retail Business Management Agreement.
8.22 Language Construction. The Practice and Retail Business Manager
acknowledge that each Party hereto and its counsel have reviewed and revised
this Retail Business Management Agreement and agree that the normal rule of
construction to the effect that any ambiguities are to be resolved against the
drafting Party shall not be employed in the interpretation of this Retail
Business Management Agreement.
8.23 Entire Retail Business Management Agreement. With respect to the
subject matter of this Retail Business Management Agreement, this Retail
Business Management Agreement supersedes all previous contracts and constitutes
the entire agreement between the Parties. Neither Party shall be entitled to
benefits other than those specified herein. No prior oral statements or
contemporaneous negotiations or understandings or prior written material not
specifically incorporated herein shall be of any force and effect, and no
changes in or additions to this Retail Business Management Agreement shall be
recognized unless incorporated herein by amendment as provided herein, such
amendment(s) to become effective on the date stipulated in such amendment(s).
The Parties specifically acknowledge that, in entering into and executing this
Retail Business Management Agreement, the Parties rely solely upon the
representations and agreements contained in this Retail Business Management
Agreement and no others.
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<PAGE> 36
8.24 Authority. Retail Business Manager and the Practice hereby warrant
and represent to each other that they have the requisite corporate authority to
execute and deliver this Retail Business Management Agreement in their
respective names.
(The remainder of this page is intentionally left blank.)
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<PAGE> 37
IN WITNESS WHEREOF, the Practice and Retail Business Manager have
caused this Retail Business Management Agreement to be executed by their duly
authorized representatives, all as of the day and year first above written.
DR. MARK LYNN & ASSOCIATES, PLLC
"The Practice"
By: /s/ MARK E. LYNN
-------------------------------------
Mark E. Lynn, O.D., President
VISIONARY RETAIL MANAGEMENT, INC.
"Retail Business Manager"
By: /s/ DOUG SHEPARD
-------------------------------------
Douglas C. Shepard, Vice President,
Secretary and Treasurer
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<PAGE> 38
EXHIBIT 4.2A
EMPLOYMENT AGREEMENT (PROFESSIONAL)
SEE ATTACHED
<PAGE> 39
EXHIBIT 4.2B
EMPLOYMENT AGREEMENT (PRESIDENT OF PRACTICE)
SEE ATTACHED
<PAGE> 40
EXHIBIT 4.6A
COVENANT NOT TO COMPETE
<TABLE>
<CAPTION>
Radius From Miles
----------- -----
<S> <C>
Kentucky Offices 5
Missouri Offices 5
Indiana Offices 5
Tennessee Offices 5
All Other Offices 5
</TABLE>
<PAGE> 41
EXHIBIT 4.11
SHAREHOLDERS' UNDERTAKING TO MAINTAIN PRACTICE'S
CORPORATE EXISTENCE AND ENFORCEMENT OF COVENANTS
NOT TO COMPETE
As an inducement to the Retail Business Manager to enter into this
Retail Business Management Agreement with the Practice or as required in the
Retail Business Management Agreement, each of the undersigned person(s), having
an ownership interest in the Practice, irrevocably and unconditionally covenants
and agrees to maintain in good standing the existence of the Practice under the
laws of the States of Indiana, Tennessee, Missouri, and Kentucky and to cause
the Practice to use its best efforts to enforce employment agreements (including
the Restrictive Covenant described in Section 4.6), to the extent then required
by Retail Business Manager, against any individuals violating such employment
agreements. The undersigned persons further unconditionally covenant and agree
to indemnify and hold harmless Retail Business Manager from and against any and
all claims requirements, demands, liabilities, losses, damages, costs and
expenses, including reasonable attorneys' fees, resulting in any manner from the
failure of the Practice to remain in good standing under the laws of the States
of Indiana, Tennessee, Missouri, and Kentucky or the failure of the Practice to
use its best efforts to enforce the aforesaid employment agreements and the
Restrictive Covenants described in Section 4.6 of such Retail Business
Management Agreement, a copy of which has been delivered to the undersigned for
his review, to the extent then required by Retail Business Manager. This
Undertaking may be assumed by a successor to Shareholder or Shareholders,
whereupon the undersigned shall be released to the extent of such assumption,
provided that any such successor Shareholder executes a form similar to this.
IN WITNESS WHEREOF, the undersigned(s) have executed this Shareholders'
Undertaking as of the day and year written opposite such shareholder's name.
Date: October 1, 1998 /s/ DR. MARK LYNN
---------------------------------------
Mark E. Lynn, O.D.
<PAGE> 42
EXHIBIT 6.4
SHAREHOLDERS' UNDERTAKING TO CARRY OUT
PRACTICE'S PURCHASE OBLIGATION
As an inducement to the Retail Business Manager to enter into this
Retail Business Management Agreement with the Practice or as required in Retail
Business Management Agreement, each of the undersigned person(s), having an
ownership interest in the Practice, irrevocably and unconditionally covenants
and agrees subject to the limitations contained in the Retail Business
Management Agreement to (i) cause the Practice to carry out the purchase
obligation described in Section 6.4 of the Retail Business Management Agreement,
(ii) personally execute and deliver the security agreements referred to in
Section 6.4(c) of such Retail Business Management Agreement, a copy of which has
been delivered to the undersigned for his review, and (iii) execute the
documents described in Section 6.5. The undersigned acknowledges that he or she
has received adequate consideration for the execution hereof.
IN WITNESS WHEREOF, the undersigned(s) have executed this Shareholders'
Undertaking as of the day and year written opposite such shareholder's name.
Date: October 1, 1998 /s/ DR. MARK E. LYNN
---------------------------------------
Mark E. Lynn, O.D.
<PAGE> 1
EXHIBIT 10.27
PROFESSIONAL BUSINESS MANAGEMENT AGREEMENT
This Professional Business Management Agreement is made and entered
into effective as of October 1, 1998, by and between Visionary MSO, Inc., a
Delaware corporation ("Professional Business Manager"), and Dr. Mark Lynn &
Associates, PLLC, a Kentucky professional limited liability company (the
"Practice").
R E C I T A L S
A. The Practice is a professional limited liability company duly
organized and validly existing under the laws of the Commonwealth of Kentucky
which is engaged in the provision of Professional Eye Care Services (as defined
below) and Optical Services (as defined below) to the general public in the
states of Kentucky, Indiana, Tennessee and Missouri (including the states that
the Practice may in the future conduct such services, the "Practice Areas" and
each state a "Practice Area") through individual Professionals (as defined
below) each of whom is licensed to practice optometry and/or ophthalmology in
the Practice Areas in which he or she provides services for the Practice and who
are employed or otherwise retained by the Practice.
B. Professional Business Manager is a business corporation duly
organized and validly existing under the laws of the State of Delaware.
C. The Practice desires to devote substantially all of its energies,
expertise and time to the delivery of Professional Eye Care Services to
patients.
D. The Practice desires to engage Professional Business Manager to
provide facilities, equipment and such management, administrative and business
services as are necessary and appropriate for the day-to-day administration of
the non-optometric aspects of the Practice's professional eye care practice, and
Professional Business Manager desires to provide such, upon the terms and
conditions hereinafter set forth, for the purpose of enhancing the
cost-efficiency and quality of services rendered by the Practice to its
patients.
NOW, THEREFORE, for and in consideration of the mutual agreements,
terms, covenants and conditions contained herein and other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
Parties agree as follows:
ARTICLE I
DEFINITIONS
For the purposes of this Professional Business Management Agreement,
the following terms shall have the following meanings ascribed thereto, unless
otherwise clearly required by the context in which such term is used:
1.1 Account. The term "Account" shall mean the bank account described
in Sections 3.9 and 3.10 of the Retail Business Management Agreement (as defined
below).
<PAGE> 2
1.2 Adjusted Gross Revenue. The term "Adjusted Gross Revenue" shall
mean all revenues for Optical Services, Professional Eye Care Services, or
otherwise, generated by or on behalf of the Practice and/or its Professionals,
or other personnel during the term of this Professional Business Management
Agreement, calculated on an accrual basis under GAAP, including all technical
fees from ancillary services, all proceeds from key person life and disability
insurance policies purchased by Retail Business Manager, in agreement with the
Practice, in accordance with Section 3.15, all amounts paid by third parties for
contractual liabilities, including, but not limited to, payments under
non-shareholder Professionals' non-competition agreements and compensation
payments under any service agreement between the Practice and another entity,
and all consultant, teaching and expert witness fees minus any allowances for
bad debts, uncollectible accounts, Medicare, Medicaid and other payor
contractual adjustments, discounts, workers' compensation adjustments,
reasonable professional courtesies, and other reductions in collectible revenue
that result from activities that do not result in collectible charges.
1.3 Budget. The term "Budget" shall mean an operating budget and
capital expenditure budget for each fiscal year as prepared in accordance with
Section 3.11(a).
1.4 Capitation Revenues. The term "Capitation Revenues" shall mean all
collections from managed care organizations or third-party payors where such
payment is made periodically on a per member basis for the partial or total
needs of a subscribing patient, less amounts that are payable to other providers
of health care items and services to capitation patients. Capitation Revenues
shall include any co-payments and incentive bonuses received as a result of a
capitation plan.
1.5 Clinical Duties. The term "Clinical Duties " shall mean those
duties of Non-Professional Personnel (as defined below) which entail directly or
indirectly assisting a Professional (as defined below) in the scheduling,
examination or care of patients in the course of providing Professional Eye Care
Services, regardless of whether the performance of such duties requires
licensure under applicable state law.
1.6 Confidential Information. The term "Confidential Information" shall
mean any information of Professional Business Manager or the Practice, as
appropriate (whether written or oral), including all business management or
economic studies, patient lists, proprietary forms, proprietary business or
management methods, marketing data, fee schedules, or trade secrets of the
Professional Business Manager or of the Practice, as applicable, whether or not
such Confidential Information is disclosed or otherwise made available to one
Party by the other Party pursuant to this Professional Business Management
Agreement. Confidential Information shall also include the terms and provisions
of this Professional Business Management Agreement and any transaction or
document executed by the Parties pursuant to this Professional Business
Management Agreement. Confidential Information does not include any information
that the receiving party can establish (a) is or becomes generally available to
and known by the public or optometric community (other than as a result of an
unpermitted disclosure directly or indirectly by the receiving party or its
affiliates, advisors, or Representatives); (b) is or becomes available to the
receiving party on a nonconfidential basis from a source other than the
furnishing party or its affiliates, advisors or Representatives, provided that
such source is not and was not bound by a confidentiality agreement with or
other obligation of secrecy to the furnishing party of which the receiving party
has knowledge; or (c) has already been or is hereafter independently acquired or
developed by the receiving party without violating any confidentiality agreement
with or other obligation of secrecy to the furnishing party.
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<PAGE> 3
1.7 Dispensary. The term "Dispensary" shall have the meaning set forth
in the Retail Business Management Agreement.
1.8 Dispensary Expense. The term "Dispensary Expense" shall have the
meaning set forth in the Retail Business Management Agreement.
1.9 Executive Office Administrator. The term "Executive Office
Administrator" shall mean the employee of Professional Business Manager having
executive authority and responsibility for the general and active management of
the Professional Business Manager.
1.10 GAAP. The term "GAAP" shall mean generally accepted United States
accounting principles.
1.11 Interest Expense. The term "Interest Expense shall mean the
accrued interest on the debt, if any, incurred by the Practice with respect to
the financing of the purchase of Doctor's Assets pursuant to that certain Master
Asset Purchase Agreement, dated August 22, 1998 by and among Eye Care Centers of
America, Inc., a Texas corporation, the Practice, the Companies (as defined
therein) and the Owners (as defined therein), and the interest on any
refinancing thereof.
1.12 Management Fee. The term "Management Fee" shall mean the
Professional Business Manager's compensation established as described in Article
V hereof.
1.13 Management Services. The term "Management Services" shall mean the
business, administrative, and management services to be provided for the
Practice and the Office, including, without limitation, the provision of
equipment, inventory and supplies, support services, personnel (excluding
Professionals) management, administration, financial record keeping, and
reporting, and other business office services, all as reasonably contemplated by
this Professional Business Management Agreement and which are necessary for the
conduct of the Practice's business.
1.14 Non-Professional Personnel. The term "Non-Professional Personnel"
shall mean those individuals employed primarily at the Practice who are not
Optometrists or Ophthalmologists.
1.15 Office. The term "Office" shall mean all facilities and locations
used by the Practice, all business operations related to the Practice's
optometric and/or therapeutic optometric practice, and all related business
operations of the Practice which are to be administered by Professional Business
Manager under the Professional Business Management Agreement, but excluding all
facilities and locations, or portions thereof, used by the Practice and all
business operations of the Practice related to the Dispensary.
1.16 Office Expense. The term "Office Expense" shall mean all operating
and non-operating expenses incurred by the Professional Business Manager in the
provision of Management Services to the Office and shall include all operating
and non-operating expenses incurred by the Practice relating to the items set
forth in this Section. The Professional Business Manager shall be reimbursed by
the Practice for any reasonable Office Expense incurred by the Professional
Business Manager in the provision of services to the Practice, upon request by
the Professional Business Manager. Office Expense shall not include any
Professional Business Manager Expense, Practice Expense or Shareholder Expense
or any state, local or federal income or franchise tax. Without limitation,
Office Expense shall include the following expenses:
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<PAGE> 4
(a) the salaries, benefits, payroll taxes, and other direct
costs of all employees of Professional Business Manager primarily working at the
Office and the salaries, benefits, payroll taxes, and other direct costs of the
Non-Professional Personnel of the Practice primarily working at the Office, but
not the salaries, benefits, payroll taxes or other direct costs of the
Professionals;
(b) the direct cost of any employee or consultant that
provides services at or in connection with the Office for improved Office
performance, such as management, billing and collections, business office
consultation, and accounting and legal services, but only when such services are
coordinated by Professional Business Manager and/or included in the Budget;
provided, however, that Retail Business Manager shall obtain the consent of the
Practice before any consultant may be hired whose charge for services would
result in unbudgeted Office Expenses charged to the Practice of $5,000.00 or
more in any calendar year, which consent shall not be unreasonably withheld;
(c) reasonable recruitment costs and out-of-pocket expenses of
Professional Business Manager or the Practice associated with the recruitment of
additional Professionals, other employees of the Practice and Professional
Business Manager's employees primarily located at the Office;
(d) personal property and intangible property taxes assessed
against Professional Business Manager's assets used in connection with the
operation of the Office;
(e) comprehensive general and professional liability insurance
covering the Office, employees of the Practice in connection with the operation
of the Office and employees of Professional Business Manager in connection with
the operation of the Office;
(f) the expense of using, leasing, purchasing or otherwise
procuring and maintaining the Office and maintaining Office related equipment;
(g) the cost of capital (whether as actual interest on
indebtedness incurred on behalf of the Practice or reasonable imputed interest
on capital advanced by Professional Business Manager which shall be equal to the
average cost of borrowing by Professional Business Manager as reflected on its
most recent published financial statements, or in the absence of either of the
foregoing, eight percent (8%)) to finance or refinance obligations of the
Practice incurred in connection with the Office, or to finance new ventures of
the Practice in connection with the Office; in any such case only as such cost
of capital is set forth in the Budget or otherwise approved in advance by the
Practice Advisory Council;
(h) the reasonable travel expenses associated with attending
meetings, conferences, or seminars to benefit the Practice so long as such
expenses are related to individuals located at the Office and the Practice's pro
rata share for individuals who are consultants of or employed by Professional
Business Manager who provide material services to the Office;
(i) the cost of Office supplies, inventory and utilities;
(j) billing and collection costs and expenses;
(k) the Practice's pro-rata share of reasonable corporate
overhead charges or other reasonable expenses (including computer and data
processing costs) which are incurred by Professional Business Manager in
connection with corporate headquarters expenses which relate to the provision of
benefits or services by Professional Business Manager to the Office and are
reflected in the Budget
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<PAGE> 5
including without limitation direct or indirect costs of the Executive Office
Administrator and other Professional Business Manager personnel;
(l) all other expenses which are set forth in the Budget and
which directly or indirectly benefit the Practice incurred by Professional
Business Manager in carrying out its obligations under this Professional
Business Management Agreement;
(m) reasonable costs and expenses (to the extent not covered
by insurance) of lawsuits or claims against the Professional Business Manager or
its personnel, or the Practice, its Professional(s), or other personnel related
to their performance of duties at the Office or their interest in assets used in
connection with the Office, provided that if any of the Professional Business
Manager or its personnel, or the Practice, its Professional(s), or other
personnel do not prevail in the lawsuit or claim or settle the matter with a
material payment by the party (the party at "fault"), such costs and expenses
shall be deemed a Professional Business Manager Expense in the event of
Professional Business Manager's fault or the fault of its personnel and a
Practice Expense in the event of fault by the Practice, its Professional(s), or
other personnel whereupon the Practice and such Professional(s) or other
personnel shall be jointly responsible for the immediate reimbursement of the
sums advanced by Professional Business Manager; provided further that
Professional Business Manager shall not advance such costs and expenses from the
Account if the Practice Advisory Council concludes that (i) it is unlikely that
the Account will be reimbursed if the party involved will not prevail in the
lawsuit or claim, or (ii) a reasonable third person would believe that obtaining
a reimbursement of the advanced sums will be difficult to achieve; and the
Parties acknowledge that nothing in this Section shall create any liability on
the part of a Professional who would otherwise be shielded from personal
liability by the corporate or limited liability structure of the Practice;
(n) key person life and disability insurance premiums related
to policies which the Parties agree to acquire on the life of the Practice's
Shareholders or Professionals, whereupon any proceeds shall be paid to the
Account as Adjusted Gross Revenues, unless the Parties agree to a specific split
of the proceeds. Should only the Practice choose to obtain key person life
insurance, the Practice shall pay all premiums as a Practice Expense and shall
receive all proceeds. Further, if only the Professional Business Manager chooses
to obtain such insurance, Professional Business Manager shall pay all premiums
as a Professional Business Manager Expense and shall receive all proceeds. The
Practice shall cause its Shareholders and Professionals to submit to a medical
examination necessary to obtain such insurance.
In the event that any of the individuals described in Section 1.16(b)
devote a substantial amount of time to serving one or more optometric practices
other than the Practice, which is not prohibited hereunder, or the above
described Office is utilized to a substantial degree by one or more optometric
practices other than the Practice, the Office Expenses shall be allocated
between the Practice and such other optometric practices to reflect each
practice's pro-rata share of any expenses or costs relating to such individuals
or Office (including the recruitment costs of such individuals and the
comprehensive and general liability insurance expenses with respect to such
individuals). Expenses contemplated in this paragraph which potentially and
primarily relate to Sections 1.16 (b), (c), (d), (e), (f), (g), (h), (k), and
(l) shall be in the Budget or approved by the Practice Advisory Council, and
where reasonably determinable, are intended to be reasonable and customary based
upon similar relationships generally existing between national practice
management companies and practices they manage. The Practice's pro-rata portion
of expenses related to individuals who are consultants of or employed by
Professional Business Manager and who provide services benefiting more than one
practice shall be based upon the actual time expended by the individuals in
performing such services as compared to the time spent by such individuals with
other practices managed
-5-
<PAGE> 6
by the Professional Business Manager, or, if not reasonably calculable, as
determined by Professional Business Manager, based upon the estimated
proportionate revenue size of the Practice as compared to the aggregate revenue
size as estimated in all of the Budgets of all other practices managed by the
Professional Business Manager which are benefiting from such individual's
services. Likewise, other benefits provided by the Professional Business Manager
to several Practices shall be split pro-rata based upon the use or benefit
derived by each Practice, but if not calculable, shall be based upon the
estimated proportionate revenue size as set forth in the preceding sentence.
Notwithstanding anything to the contrary herein, unless an expense is expressly
designated as a Professional Business Manager Expense, a Practice Expense or a
Shareholder Expense in this Professional Business Management Agreement or any
exhibit thereto, all expenses incurred by Professional Business Manager in
providing services pursuant to this Professional Business Management Agreement
shall be considered an Office Expense. Any and all expenses which are incurred
by Retail Business Manager, Professional Business Manager, or the Practice shall
be allocated to the appropriate expense category or categories in accordance
with the terms and conditions of the Retail Business Management Agreement and
the Professional Business Management Agreement.
1.17 Optical Services. The term "Optical Services" shall mean the
filling of optical prescriptions, dispensing of optical goods, the fitting of
eyewear, all activities related to any of the foregoing, and the direction,
supervision, and control of those who perform these tasks.
1.18 Optometrist. The term "Optometrist" shall mean each individually
licensed Optometrist, if any, who is employed or otherwise retained by or
associated with the Practice, each of whom shall meet at all times the
qualifications described in Section 4.3 and Section 4.4.
1.19 Ophthalmologist. The term "Ophthalmologist" shall mean each
individually licensed Ophthalmologist, if any, who is employed or otherwise
retained by or associated with the Practice, each of whom shall meet at all
times the qualifications described in Section 4.3 and Section 4.4.
1.20 Parties. The term "Parties" shall mean the Practice and
Professional Business Manager.
1.21 Practice. The term "Practice" shall have the meaning set forth in
the Recitals.
1.22 Practice Advisory Council. The term "Practice Advisory Council"
shall have the meaning set forth in Section 2.6 of this Agreement.
1.23 Practice Areas. The term "Practice Areas" shall have the meaning
set forth in the Recitals.
1.24 Practice Expenses. The term "Practice Expenses" shall mean (a) all
reasonable non-shareholder Professionals' salaries, benefits, payroll taxes and
other direct costs related to their services to the Practice (including
reasonable and customary professional dues, subscriptions, continuing education
and technical training expenses, and severance payments); (b) the cost of
optometric supplies (including, but not limited to, drugs, pharmaceuticals,
products, substances, items or optometric devices); (c) reasonable and customary
professional liability insurance expenses of Professionals; (d) travel costs for
continuing education, technical training and necessary business travel for
non-shareholder Professionals; (e) to the extent not covered by insurance and
subject to the advance provisions contained herein, the defense costs and
expenses of any litigation or claims brought against the Practice or its
Professionals or other personnel by any third party in which the Practice or its
Professionals or other personnel do not prevail or the matter settles with a
material payment and the Practice or its Professionals or other personnel are at
fault, and any
-6-
<PAGE> 7
liability judgment or material settlement assessed against the Practice or its
Professionals or other personnel; (f) certain equipment expenses described in
Sections 3.2(c) and 3.2(d) of this Professional Business Management Agreement
and 3.2(c) and 3.2(d) of the Retail Business Management Agreement; (g) interest
on any funds advanced to the Practice by Professional Business Manager to the
extent that Professional Business Manager is a net lender in accordance with the
terms of this Professional Business Management Agreement; (h) interest on any
funds advanced to the practice by Retail Business Manager to the extent that
Retail Business Manager is a net lender in accordance with the terms of the
Retail Management Agreement; (i) any income taxes or franchise taxes of the
Practice; and (j) consulting, accounting, or legal fees which relate solely to
the Practice. Notwithstanding the foregoing, the term Practice Expenses shall
specifically exclude (i) business travel requested by Professional Business
Manager, which shall be an Office Expense, (ii) business travel requested by
Retail Business Manager, which shall be a Dispensary Expense, (iii) any and all
compensation or expenses attributable to Shareholders, which shall be
Shareholder Expenses (except reasonable and customary expenses for malpractice
insurance which shall be a Practice Expense), (iv) "tail" insurance coverage for
Shareholders, which shall be a Shareholder Expense, and (v) such other items
agreed to in advance in writing by the Parties hereto. During this Professional
Business Management Agreement, for so long as a current Shareholder of the
Practice is an employee of, contractor to, or Shareholder of the Practice, such
Shareholder shall be deemed to be a Shareholder for the purposes of this
definition. Such expenses are to be approved annually in the Budget.
1.25 Professional. The term "Professional" shall mean any Optometrist
or Ophthalmologist.
1.26 Professional Business Management Agreement. The term "Professional
Business Management Agreement" shall mean this instrument as originally executed
and delivered, or, if amended or supplemented, as so amended or supplemented.
1.27 Professional Business Manager. The term "Professional Business
Manager" shall have the meaning set forth in the Recitals hereto.
1.28 Professional Business Manager Expense. The term "Professional
Business Manager Expense" shall mean an expense or cost incurred by the
Professional Business Manager, for which the Professional Business Manager is
financially liable and is not entitled to reimbursement from the Practice.
Professional Business Manager Expense shall specifically include (a) any income
or franchise taxes of the Professional Business Manager; (b) the expense of
providing, leasing, purchasing or otherwise procuring and maintaining the Office
equipment, including depreciation in the case of furniture and equipment; and
(c) any other expenses or costs that are not reasonable and customary
reimbursements based upon a practice management company's usual arrangement with
a practice.
1.29 Professional Eye Care Services. The term "Professional Eye Care
Services" shall mean professional health care items and services, including, but
not limited to, the practice of optometry, and all related professional health
care services provided by the Practice through Optometrists, Ophthalmologists,
and other professional health care providers that are retained by or
professionally affiliated with the Practice. The term shall exclude any and all
business whatsoever in connection with any optical businesses owned or operated,
or to be owned or operated in the future, in whole or in part, by the Practice
or any of its Professionals during the terms of this Professional Business
Management Agreement, except as otherwise required by applicable state law.
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<PAGE> 8
1.30 Professional Practice Account. The term "Professional Practice
Account" shall mean the bank account described in Section 3.10.
1.31 Representatives. The term "Representatives" shall mean a Party's
officers, directors, managers, employees, or other agents.
1.32 Retail Business Management Agreement. The term "Retail Business
Management Agreement" shall mean the instrument made and entered into as of even
date by and between Visionary Retail Management, Inc. ("Retail Business
Manager") whereby Retail Business Manager shall provide certain facilities,
equipment, and management, administrative, and business services to the Practice
in connection with its provision of Optical Services.
1.33 Retail Business Manager. The term "Retail Business Manager" shall
have the meaning set forth in the Retail Business Management Agreement.
1.34 Shareholder. The term "Shareholder" shall mean any current or
future shareholder of the Practice.
1.35 Shareholder Expense. The term "Shareholder Expense" shall be
limited to the following expenses: (a) Shareholders' salaries, benefits, payroll
taxes, and other direct costs (including professional dues, subscriptions,
continuing education expenses, severance payments, entertainment, and travel
costs for continuing education or other business travel but excluding business
travel requested by Professional Business Manager, which shall be an Office
Expense, and travel requested by Retail Business Manager which shall be a
Dispensary Expense and excluding any other expense of a Shareholder approved as
an Office Expense or Dispensary Expense in advance by the Parties); (b) "tail"
coverage malpractice insurance expenses for the Shareholders and any malpractice
insurance expenses of any Professional which are in excess of those which are
customary and reasonable; and (c) consulting, accounting, or legal fees which
relate solely to the Shareholders. The Practice shall reimburse the Professional
Business Manager for any Shareholder Expense incurred by the Professional
Business Manager. Unless expressly designated as a Management Fee, a
Professional Business Manager Expense, a Retail Business Manager Expense, an
Office Expense, a Dispensary Expense or a Practice Expense in this Professional
Business Management Agreement or in any exhibit hereto or in the Retail Business
Management Agreement or in any exhibit thereto or in any written agreement of
the Parties, any expense incurred by the Practice shall be considered a
Shareholder Expense. Notwithstanding the above, the Practice may require certain
Professionals to pay certain expenses incurred for them specifically. Nothing in
this Section shall create personal liability on the part of the Practice's
Shareholders.
1.36 Term. The term "Term" shall mean the initial and any renewal
periods of duration of this Professional Business Management Agreement as
described in Section 6.1.
-8-
<PAGE> 9
ARTICLE II
APPOINTMENT OF PROFESSIONAL BUSINESS MANAGER
2.1 Appointment. The Practice hereby appoints Professional Business
Manager as its sole and exclusive agent for the management and administration of
the business functions and business affairs of the Office, and Professional
Business Manager hereby accepts such appointment, subject at all times to the
provisions of this Professional Business Management Agreement.
2.2 Authority. Consistent with the provisions of this Professional
Business Management Agreement, Professional Business Manager shall have the
responsibility and commensurate authority to provide Management Services for the
Practice. The Practice shall give Professional Business Manager thirty (30)
days' prior notice of the Practice's intent to execute any agreement creating a
binding legal obligation on the Practice. The Parties acknowledge and agree that
the Practice, through its Professionals, shall be responsible for and shall have
complete authority, responsibility, supervision, and control over the provision
of all Professional Eye Care Services and other professional health care
services performed for patients, and that all diagnoses, treatments, procedures,
and other professional health care services shall be provided and performed
exclusively by or under the supervision of Professionals as such Professionals,
in their sole discretion, deem appropriate. Professional Business Manager shall
have and exercise absolutely no control, influence, authority or supervision
over the provision of Professional Eye Care Services.
2.3 Patient Referrals. Professional Business Manager and the Practice
agree that the benefits to the Practice and to Professional Business Manager
hereunder do not require, are not payment for, and are not in any way contingent
upon the referral, admission, or any other arrangement for the provision of any
item or service offered by Professional Business Manager to patients of the
Practice in any facility, laboratory, center, or health care operation
controlled, managed, or operated by Professional Business Manager or upon the
referral, admission, or any other arrangement for the provision of any item or
service offered by the Practice.
2.4 Internal Decisions of the Practice. Matters involving the
Practice's allocation of professional income among its Shareholders and the
Professional employees of the Practice, tax planning, and pension and investment
planning shall remain the responsibility of the Practice and the Shareholders of
the Practice. The Professional Business Manager may not and shall not directly
or indirectly control or attempt to control, dictate or influence, directly or
indirectly, the professional judgment, including, but not limited to, the level
or type of care or services rendered, the manner of practice, or the practice of
the Practice or any Professional employed by the Practice.
2.5 Practice of Optometry. The Parties acknowledge that Professional
Business Manager is not authorized or qualified to engage in any activity that
may be construed or deemed to constitute the practice of optometry. To the
extent any act or service herein required to be performed by Professional
Business Manager should be construed by a court of competent jurisdiction or by
the Board of Optometry to constitute the practice of optometry, the requirement
to perform that act or service by Professional Business Manager shall be deemed
waived and unenforceable. Although Professional Retail Business Manager shall
provide Non-Professional Personnel to the Practice and Professional Retail
Business Manager and Retail Business Manager shall manage the administrative
aspects of their employment, all Non-Professional Personnel shall be subject to
the direction, supervision, and control of the Practice and its Professionals in
the performance of any and all Clinical Duties and in the performance of
Clinical Duties shall not be subject to any direction or control by, or
liability to, Professional Business Manager and Retail Business Manager.
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Professional Business Manager may not and shall not control or attempt to
control, directly or indirectly, the professional judgment, the manner of
practice, or the practice of the Practice or any Professional employed by the
Practice. In this regard, Professional Business Manager shall not attempt to
dictate, influence, or control the scope, level, or type of Professional Eye
Care Services provided to patients of the Office, the frequency of patient
contacts at the Office, the discipline of any Professionals who are Practice
employees, the fees charged for Professional Eye Care Services provided to
patients of the Office (except to the extent necessary to establish the Budget
or negotiate managed care contracts), or any other matter that impinges on the
professional judgment of the Practice or any Professional employed by the
Practice.
2.6 Formation and Operation of the Practice Advisory Council. The
Parties hereby establish a Practice Advisory Council which shall be responsible
for advising Professional Business Manager and the Practice with respect to
developing the Office and implementing management and administrative policies
for the overall operation of the Office and for providing dispute resolution on
certain matters. The Practice Advisory Counsel shall consist of six (6) members.
Professional Business Manager shall designate, in its sole discretion, two (2)
members of the Practice Advisory council or may have one (1) member with two (2)
votes. The Practice shall designate, in its sole discretion, two (2) members of
the Practice Advisory Council or may have one (1) member with two (2) votes.
Retail Business Manager shall designate, in its sole discretion, two (2) members
of the Practice Advisory Council or may have one member with two (2) votes. The
Practice Advisory Council members selected by the Practice shall be full-time
Professional employees of the Practice. Each Party's representatives to the
Practice Advisory Council shall have the authority to make decisions on behalf
of the respective Party. Except as may otherwise be provided, the act of a
majority of the members of the Practice Advisory Council shall be the act of the
Practice Advisory Council, provided that (i) the affirmative vote of the
Practice member(s) shall be required on all votes of the Practice Advisory
Council; (ii) the affirmative vote of the Professional Business Manager shall be
required on all matters relating to the Office; and (iii) the affirmative vote
of the Retail Business Manager shall be required on all matters relating to
Optical Services or the Dispensary. The decisions, resolutions, actions, or
recommendations of the Practice Advisory Council shall be implemented by
Professional Business Manager, Retail Business Manager or the Practice, as
appropriate.
2.7 Duties and Responsibilities of the Practice Advisory Council. The
Practice Advisory Council shall review, evaluate, make recommendations, and
where specifically authorized herein and permitted by law, make decisions with
respect to the following matters:
(a) Facility Improvements and Expansion. Any renovation and
expansion plans and capital equipment expenditures with respect to the
Practice's facilities shall be reviewed by the Practice Advisory Council which
shall make recommendations to the Practice with respect to proposed changes
therein. Such renovation and expansion plans and capital equipment expenditures
shall be based upon economic feasibility, optometry support, productivity and
then current market conditions.
(b) Marketing and Public Relations. The Practice Advisory
Council shall review and make recommendations to the Practice with respect to
all marketing and public relations services and programs promoting the
Practice's Professional Eye Care Services, Optical Services and ancillary
services.
(c) Patient Fees; Collection Policies. The Practice Advisory
Council shall review and make recommendations to the Practice concerning the fee
schedule and collection policies for all Professional Eye Care Services, Optical
Services and ancillary services rendered by the Practice.
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(d) Ancillary Services. The Practice Advisory Council must
approve any new non-professional ancillary services to be rendered by the
Practice including Optical Services, and the pricing, continuation of, access
to, and quality of such services.
(e) Provider and Payor Relationships. The Practice Advisory
Council shall review and make recommendations to the Practice regarding the
establishment or maintenance of relationships between the Practice and
institutional health care providers and third-party payors, and the Practice
shall review and approve all agreements with institutional health care providers
and third-party payors. The Practice Advisory Council shall also make
recommendations to the Practice concerning discounted fee schedules, including
capitated fee arrangements of which the Practice shall be a party, and the
Practice shall review and approve all such capitated fee arrangements.
(f) Strategic Planning. The Practice Advisory Council may make
recommendations to the Practice concerning development of long-term strategic
planning objectives for the Practice.
(g) Capital Expenditures. The Practice Advisory Council shall
make recommendations to the Practice concerning the priority of major capital
expenditures, and shall review and approve any commitment to make any capital
expenditures, relating to the Office or the Dispensary, involving amounts in
excess of $15,000 individually, or $50,000 in the aggregate, in any one fiscal
year, which amounts may be increased from time-to-time by agreement of the
Parties.
(h) Fee Dispute Resolution. At the request of Professional
Business Manager or the Practice, the Practice Advisory Council shall make
recommendations to Professional Business Manager with respect to any dispute
concerning a set off or reduction in Management Fees.
(i) Grievances Referrals. The Practice Advisory Council shall
consider and make recommendations to Professional Business Manager and the
Practice regarding grievances pertaining to matters not specifically addressed
in this Professional Business Management Agreement as referred to it by
Professional Business Manager or the Practice's Board of Directors.
(j) Termination of Professional Business Manager's Personnel.
The Practice Advisory Council shall review and approve any decision by the
Professional Business Manager to terminate any of Professional Business
Manager's personnel primarily located at the Office who occupy office manager or
high level positions.
(k) Approval of New Offices or Dispensary. The Practice
Advisory Council shall approve any move of any current Office or Dispensary
location or the expansion to an additional Practice location. Additionally, the
Practice Advisory Council shall approve the establishment of any optical
business of the Practice and the move or expansion of any such business.
Except in those specific instances set forth above in which the Practice
Advisory Council has been granted the authority to make decisions binding upon
the Professional Business Manager and the Practice, it is acknowledged and
agreed that recommendations of the Practice Advisory Council are intended for
the advice and guidance of Professional Business Manager and the Practice and
that the Practice Advisory Council does not have the power to bind Professional
Business Manager or the Practice. Where discretion with respect to any matter is
vested in Professional Business Manager or the Practice under the terms of this
Agreement, Professional Business Manager or the Practice, as the case may be,
shall have ultimate
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responsibility for the exercise of such discretion, notwithstanding any
recommendations of the Practice Advisory Council. Professional Business Manager
and the Practice shall, however, take such recommendations of the Practice
Advisory Council into account in good faith in the exercise of such discretion.
2.8 Professional Health Care Decisions. Notwithstanding anything herein
to the contrary, all decisions required by applicable law to be made solely by
health care professionals will be made solely by the appropriate Professionals.
The Practice shall have ultimate and exclusive authority concerning issues
related to:
(a) Types, levels, and scope of Professional Eye Care Services
to be provided (provided, however, that the Practice Advisory Council shall have
the authority set forth in Section 2.7(d) with respect to non-professional
ancillary services);
(b) Recruitment of Professionals to the Practice, including
the specific qualifications and specialties of recruited Professionals;
(c) Any optometric related functions;
(d) Fee schedules;
(e) Frequency and/or volume of patient encounters;
(f) The discipline of any Professionals or Non-Professional
Personnel who are employed by, retained by, or otherwise affiliated with the
Practice with respect to the performance of Professional Eye Care Services or
Clinical Duties, as applicable; and
(g) Any other decisions required by applicable law to be made
solely by Professionals and not by non-Professionals.
2.9 Meetings of the Practice Advisory Council. The Practice Advisory
Council shall meet on a regular basis as mutually agreed by the Parties. A
special meeting of the Practice Advisory Council may be called by Professional
Business Manager, Retail Business Manager or the Practice upon two (2) weeks'
notice, except in the event of an emergency, in which case a special meeting may
be called by Professional Business Manager, Retail Business Manager or the
Practice upon three (3) business days' notice. Meetings may be held
telephonically or by any other means agreeable to the Parties.
ARTICLE III
OBLIGATIONS AND RESPONSIBILITIES OF BUSINESS MANAGER
3.1 Management Services. Professional Business Manager shall provide
all Management Services as are necessary and appropriate for the day-to-day
administration of the business aspects of the Office's operations, pursuant to
the terms of this Professional Business Management Agreement. Professional
Business Manager shall operate in a reasonable and customary manner with due
consideration to the Practice's past business practices and shall operate in
accordance with all applicable laws, rules and regulations which are necessary
and material to the Professional Business Manager's performance of the
Management Services. Professional Business Manager will provide in good faith
and with due diligence its
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services consistent with management services generally provided in operations of
an optometric practice similar in size, type and operations in the Practice
Areas. All reasonable costs and expenses related to Professional Business
Manager's duties contained in this Article III shall be Office Expenses unless
limited or excluded as an Office Expense pursuant to the terms of this
Professional Business Management Agreement. Professional Business Manager hereby
consents and agrees to provide all Management Services to all Office facilities
and locations; provided, however, that during the Term of this Professional
Business Management Agreement and except for its obligations pursuant to this
Professional Business Management Agreement, the Practice shall not establish,
operate, or provide Professional Eye Care Services at any new Office facility or
location without the consent and approval of the Practice Advisory Council; and
provided further that during the Term of this Agreement the Practice shall not
engage any individual or entity other than Professional Business Manager to
provide Management Services to the Practice without the consent and approval of
the Practice Advisory Council.
3.2 Office, Facilities and Equipment.
(a) Professional Business Manager shall procure for or on
behalf of the Practice one or more Offices that are deemed by the Parties to be
reasonable, necessary and appropriate, and the expense associated therewith
shall be an Office Expense. Professional Business Manager shall consult with the
Practice regarding the condition, use and needs of Office facilities, offices
and improvements. The Practice shall pay when due all rents and expenses of the
Office, including without limitation expenses for leasehold or facility
improvements. Such rents and expenses shall be Office Expenses.
(b) To the extent required to provide Office space to the
Practice, Professional Business Manager shall negotiate and administer all
leases of and agreements for Office facilities or locations on behalf of the
Practice, provided, however, that Professional Business Manager shall consult
with the Practice on all professional or clinical matters relating thereto and
that the Practice shall consent to any lease negotiated by Professional Business
Manager, which consent shall not be unreasonably withheld.
(c) Professional Business Manager shall provide all non-health
care equipment, fixtures, office supplies, furniture and furnishings as are
reasonable and approved in the Budget for the operation of the Office and the
provision of Professional Eye Care Services. If the Practice wishes to choose
additional equipment, which the Professional Business Manager determines not to
acquire or lease, the Practice may acquire or lease such equipment, and the
expense related thereto shall be deemed a Practice Expense.
(d) Professional Business Manager shall provide, finance, or
cause to be provided or financed health care related equipment as reasonably
required by the Practice. The Practice shall have final authority in all health
care equipment selections; provided, however, that if the Practice chooses to
acquire health care equipment which is not in the Budget and which Professional
Business Manager reasonably chooses not to acquire, expenses related thereto
shall be treated as a Practice Expense and such equipment shall be owned by the
Practice; provided further that following such acquisition or lease by the
Practice, if the Practice Advisory Council determines after a period of six
months of use such equipment is reasonably certain to result in material profit
to Professional Business Manager (taking into account the cost or expense and
anticipated revenues associated with such equipment), then Professional Business
Manager shall acquire such equipment from the Practice by either (at
Professional Business Manager's option), paying cash or by assuming the
liability associated with such equipment, or if such equipment is then being
leased by the Practice, by assuming such lease. In the event of such an
acquisition by Professional Business Manager, it shall reimburse the Practice
for previous expenses applied thereto. Except for equipment which
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Professional Business Manager elects not to acquire or lease which are acquired
or leased by the Practice pursuant to Section 3.2(c) or (d), all health care and
non-health care equipment, other than Professional-owned automobiles, acquired
for the use of the Practice shall be owned by Professional Business Manager and
the depreciation and related capital charge shall be Professional Business
Manager Expense. Professional Business Manager may make recommendations to the
Practice on the relationship between its health care equipment decisions and the
overall administrative and financial operations of the Practice.
(e) Professional Business Manager shall be responsible for the
repair and maintenance of the Office, consistent with the Practice's
responsibilities under the terms of any lease or other use arrangement, and for
the prompt repair, maintenance, and replacement of all equipment other than such
repairs, maintenance and replacement necessitated by the gross negligence or
willful misconduct of the Practice, its Professionals or other personnel
employed by the Practice, the repair or replacement of which shall be a Practice
Expense and not an Office Expense. Replacement equipment shall be acquired where
Professional Business Manager in good faith determines, in consultation with the
Practice, that such replacement is necessary or where the Budget has made
allowances for such replacement.
3.3 Health Care Supplies. Professional Business Manager shall order,
procure, purchase and provide on behalf of and as agent for the Practice all
reasonable health care supplies unless otherwise prohibited by federal and/or
state law. Furthermore, Professional Business Manager shall ensure that the
Office is at all times adequately stocked with the health care supplies that are
necessary and appropriate for the operation of the Office and required for the
provision of Professional Eye Care Services. The ultimate oversight, supervision
and ownership for all health care supplies is and shall remain the sole
responsibility of the Practice and all costs and expenses relating to such
supplies shall be an Office Expense. As used in this provision, the term "health
care supplies" shall mean all drugs, pharmaceuticals, products, substances,
items or devices whose purchase, possession, maintenance, administration,
prescription or security requires the authorization or order of a licensed
health care provider or requires a permit, registration, certification or other
governmental authorization held by a licensed health care provider as specified
under any federal and/or state law.
3.4 Support Services. Professional Business Manager shall provide or
arrange for all printing, stationery, forms, postage, duplication or
photocopying services, and other support services as are reasonably necessary
and appropriate for the operation of the Office and the provision of
Professional Eye Care Services therein.
3.5 Quality Assurance, Risk Management, and Utilization Review.
Professional Business Manager shall assist the Practice in the Practice's
establishment and implementation of procedures to ensure the consistency,
quality, appropriateness, and necessity of Professional Eye Care Services
provided by the Practice and shall provide administrative support for the
Practice's overall quality assurance, risk management, and utilization review
programs. Professional Business Manager shall perform these tasks in a manner to
ensure the confidentiality and non-discoverability of these program actions to
the fullest extent allowable under state and federal law.
3.6 Licenses and Permits. Professional Business Manager shall, on
behalf of and in the name of the Practice, coordinate all development and
planning processes, and apply for and use reasonable efforts to obtain and
maintain all federal, state and local licenses and regulatory permits required
for or in connection with the operation of the Office and the equipment
(existing and future) located at the Office, other than those relating to the
practice of optometry or the administration of drugs by Professionals
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retained by or associated with the Practice. The expenses and costs associated
with obtaining and maintaining permits with respect to the Office shall be
deemed Office Expenses.
3.7 Personnel.
(a) Selection and Retention of Professional Business Manager's
Personnel. Except as specifically provided in Section 4.3 of this Professional
Business Management Agreement, Professional Business Manager shall, in
consultation with the Practice, employ or otherwise retain and shall be
responsible for selecting, hiring, training, supervising, and terminating, all
management, administrative, technical, clerical, secretarial, bookkeeping,
accounting, payroll, billing and collection and other personnel (excluding
Professionals) as Professional Business Manager deems reasonably necessary and
appropriate for the operation of the Office and for Professional Business
Manager's performance of its duties and obligations under this Professional
Business Management Agreement. Consistent with reasonably prudent personnel
management policies, Professional Business Manager shall seek and consider the
advice, input, and requests of the Practice in regard to personnel matters.
Professional Business Manager shall have sole responsibility for determining the
salaries and providing fringe benefits, and for withholding, as required by law,
any sums for income tax, unemployment insurance, social security, or any other
withholding required by applicable law or governmental requirement. Professional
Business Manager reserves the right to change the number, composition or
employment terms of such personnel in the future at Professional Business
Manager's discretion; provided, however, that the termination of any of
Professional Business Manager's personnel who occupy office manager or high
level positions, and are primarily located at the Office must receive the
approval of the Practice Advisory Council. Professional Business Manager and the
Practice recognize and acknowledge that Professional Business Manager and
personnel retained by Professional Business Manager may from time-to-time
perform services for persons other than the Practice. This Professional Business
Management Agreement shall not be construed to prevent or prohibit Professional
Business Manager from performing such services for others or restrict
Professional Business Manager from using its personnel to provide services to
others. Professional Business Manager hereby disclaims any liability relating to
the effect of its employees on the qualification of the Practice's retirement
plans under the Internal Revenue Code, and all liabilities for such
classification shall be solely the responsibility of the Practice.
(b) Termination of Professional Business Manager's Personnel.
If the Practice is dissatisfied with the services of any employee of
Professional Business Manager or any personnel under Professional Business
Manager's direction, supervision, and control, the Practice shall consult with
Professional Business Manager. Professional Business Manager shall in good faith
determine whether the performance of that employee could be brought to
acceptable levels through counsel and assistance, or whether such employee
should be relocated or terminated. All of Professional Business Manager's
determinations regarding Professional Business Manager's personnel shall be
governed by the overriding principle and goal of providing high quality
optometric and/or therapeutic optometric support services. Employee assignments
shall be made to assure consistent and continued rendering of high quality
optometric and/or therapeutic optometric support services. The Professional
Business Manager shall maintain established working relationships wherever
possible, and Professional Business Manager shall make every effort consistent
with sound business practices to honor the specific requests of the Practice
with regard to the assignment of employees. Notwithstanding that which is
contained in this Section 3.7(b), the Practice shall have the right and
obligation to determine the direction, supervision, and control of any personnel
while said personnel are involved in the performance of Clinical Duties,
including prohibiting said personnel from being involved in the performance of
Clinical Duties and, where applicable state law so dictates, in the provision of
Optical Services.
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3.8 Contract Negotiations. Professional Business Manager shall
evaluate, assist in negotiations and administer on behalf of the Practice
contracts that do not relate to the provision of Professional Eye Care Services
as set forth in this Professional Business Management Agreement and/or as
approved in the Budget. To the extent permitted by law, Professional Business
Manager shall evaluate, assist in negotiations, administer and execute on the
Practice's behalf, all contractual arrangements with third parties as are
reasonably necessary and appropriate for the Practice's provision of
Professional Eye Care Services, including, without limitation, negotiated price
agreements with third-party payors, alternative delivery systems, or other
purchasers of group health care services. The Professional Business Manager
shall review and make recommendations to the Practice regarding the
establishment or maintenance of relationships between the Practice and
institutional health care providers and third-party payors, and the Practice
shall review and approve all agreements with institutional health care providers
and third-party payors. The Professional Business Manager shall also make
recommendations to the Practice concerning discounted fee schedules, including
capitated fee arrangements of which the Practice shall be a party, and the
Practice shall review and approve all such capitated fee arrangements. The
Practice shall have the final authority with regard to the entry into all such
contractual arrangements relating to the provision of Professional Eye Care
Services.
3.9 Billing and Collection As an agent on behalf of and for the account
of the Practice, Professional Business Manager shall establish and maintain
credit and billing and collection services, policies and procedures, and shall
use reasonable efforts to timely bill and collect all fees for all billable
Professional Eye Care Services provided by the Practice, the Professionals or
other personnel employed or otherwise retained by the Practice, provided that
Professional Business Manager shall perform these billing and collection
services only to the extent that said services are not provided to, or arranged
for, the Practice by Retail Business Manager. In connection with the billing and
collection services to be provided hereunder, and throughout the Term (and
thereafter as provided in Section 6.3), the Practice hereby grants to
Professional Business Manager an exclusive special power of attorney and
appoints Professional Business Manager as the Practice's exclusive true and
lawful agent and attorney-in-fact (which shall be deemed revoked in the event of
termination for cause by the Practice), and Professional Business Manager hereby
accepts such special power of attorney and appointment, for the following
purposes:
(a) To bill the Practice's patients, in the Practice's name
using the Practice's tax identification number and on the Practice's behalf, for
all billable Professional Eye Care Services provided by the Practice to
patients;
(b) To bill, in the Practice's name using the Practice's tax
identification number and on the Practice's behalf, all claims for reimbursement
or indemnification from health maintenance organizations, self-insured
employers, insurance companies, Medicare, Medicaid, and all other third-party
payors or fiscal intermediaries for all covered billable Professional Eye Care
Services provided by the Practice to patients;
(c) To collect and receive, in the Practice's name and on the
Practice's behalf, all accounts receivable generated by such billings and claims
for reimbursement, to administer such accounts including, but not limited to,
extending the time of payment of any such accounts; suing, assigning or selling
at a discount such accounts to collection agencies; or taking other measures to
require the payment of any such accounts; provided, however, that the Practice
shall review and approve (which approval shall not be unreasonably withheld) any
decision by Professional Business Manager to undertake extraordinary collection
measures, such as filing lawsuits, discharging or releasing obligors, or
assigning or selling
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accounts at a discount to collection agencies. Professional Business Manager
shall act in a professional manner and in compliance with all federal and state
fair debt collection practices laws in rendering billing and collection
services;
(d) To deposit all amounts collected on behalf of the Practice
into the Professional Practice Account which shall be and at all times remain in
the Practice's name. The Practice covenants to transfer and deliver to the
Professional Practice Account all funds received by the Practice from patients
or third-party payors for billable Professional Eye Care Services and Optical
Services. Upon receipt by Professional Business Manager of any funds from
patients or third-party payors or from the Practice pursuant hereto for billable
Professional Eye Care Services and Optical Services, Professional Business
Manager shall immediately deposit the same into the Account. Professional
Business Manager shall administer, be responsible for, and be obligated to pay
for all Office Expenses; provided, however, that Professional Business Manager
shall only be liable for Office Expenses to the extent of funds in the
Professional Practice Account. Professional Business Manager shall disburse
funds from the Professional Practice Account to creditors and other persons on
behalf of the Practice, maintaining records of such receipt and disbursement of
funds;
(e) To take possession of, endorse in the name of the
Practice, and deposit into the Professional Practice Account any notes, checks,
money orders, insurance payments, and any other instruments received in payment
of accounts receivable of the Practice; and
(f) To sign checks on behalf of the Practice, and to make
withdrawals from the Professional Practice Account for payments specified in
this Professional Business Management Agreement. Upon request of Retail Business
Manager, the Practice shall execute and deliver to the financial institution
wherein the Professional Practice Account is maintained, such additional
documents or instruments as may be necessary to evidence or effect the special
power of attorney granted to Professional Business Manager by the Practice
pursuant to this Section 3.9. The special power of attorney granted herein shall
be coupled with an interest and shall be irrevocable except with Professional
Business Manager's written consent. The irrevocable power of attorney shall
expire when this Professional Business Management Agreement has been terminated,
all accounts receivable payable to Professional Business Manager pursuant to
this Professional Business Management Agreement have been collected, and all
Management Fees due to Professional Business Manager have been paid. If
Professional Business Manager assigns this Professional Business Management
Agreement in accordance with its terms, the Practice shall execute a power of
attorney in favor of the assignee in a form acceptable to Professional Business
Manager.
3.10 Maintenance of Professional Practice Account.
(a) Power of Attorney. Professional Business Manager shall
have access to the Professional Practice Account solely for the purposes stated
herein. In connection herewith and throughout the term of this Professional
Business Management Agreement, the Practice hereby grants to Professional
Business Manager an exclusive special power of attorney for the purposes stated
herein and appoints Professional Business Manager as the Practice's exclusive,
true, and lawful agent and attorney-in-fact, and Professional Business Manager
hereby accepts such special power of attorney and appointment, to deposit into
the Professional Practice Account all funds, fees, and revenues received from
Retail Business Manager pursuant to its obligations under the Retail Business
Management Agreement and/or collection by Professional Business Manager for
Professional Eye Care Services rendered to patients of the Office, and for all
other professional and Office services and to make withdrawals from the
Professional Practice Account for payments specified in this Professional
Business
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Management Agreement and as requested from time-to-time by the Practice.
Notwithstanding the exclusive special power of attorney granted to Professional
Business Manager hereunder, the Practice may, upon reasonable advance notice to
Professional Business Manager, draw checks on the Account; provided, however,
that the Practice shall neither draw checks on the Professional Practice Account
nor request Professional Business Manager to do so if the balance remaining in
the Professional Practice Account after such withdrawal would be insufficient to
enable Professional Business Manager to pay on behalf of the Practice any Office
Expense attributable to the operations of the Office or to the provision of
Professional Eye Care Services and/or any other obligations of the Practice.
Limits on authority to sign checks and purchase orders shall be mutually agreed
upon by Professional Business Manager and the Practice.
(b) Payments from the Professional Practice Account. From the
funds collected and deposited by the Professional Business Manager in the
Professional Practice Account, the Professional Business Manager shall pay in
the following order of priority and in accordance with applicable requirements
under law or contract:
(i) any refunds owed to patients by the Practice;
(ii) all Office Expenses;
(iii) Practice Expenses;
(iv) any unpaid or past due compensation owed to the
Professional Business Manager pursuant to Section 5.1 hereof;
(v) the following Shareholder Expenses: (A) Shareholder's
salary not to exceed One Hundred Ninety Thousand And No/100 Dollars
($190,000.00) on an annualized basis; (B) the amount of the Bonus with respect
to such period as set forth in the President's Employment Agreement not to
exceed Twenty Thousand And No/100 Dollars ($20,000) on an annualized basis; (C)
payroll taxes related to Shareholder's salary and Bonus; and (D) other
Shareholder Expenses not to exceed Five Thousand And No/100 Dollars ($5,000);
(vi) the current Base Management Fee compensation owed to
the Professional Business Manager pursuant to Section 5.1 hereof; and
(vii) all remaining Shareholder Expenses and Interest
Expense.
(c) Additional Documents. Upon request of Professional
Business Manager, the Practice shall execute and deliver to the financial
institution wherein the Professional Practice Account is maintained, such
additional documents or instruments as may be necessary to evidence or effect
the special power of attorney granted to Professional Business Manager by the
Practice pursuant to this Section 3.9. The special power of attorney granted
herein shall be coupled with an interest and shall be irrevocable except with
Professional Business Manager's written consent. The irrevocable power of
attorney shall expire when this Professional Business Management Agreement has
been terminated, all accounts receivable payable to Retail Business Manager
pursuant to this Retail Business Management Agreement have been collected, and
all Management Fees due to Retail Business Manager have been paid. If
Professional Business Manager assigns this Professional Business Management
Agreement in accordance with its terms, the Practice shall execute a power of
attorney in favor of the assignee in a form acceptable to
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Professional Business Manager. Professional Business Manager shall not make any
withdrawal from the Professional Practice's unless expressly authorized in this
Professional Business Management Agreement.
(d) Payroll Account. A Practice payroll account in the name of
the Practice shall be established on behalf of the Practice for payroll to
non-shareholder Professionals of the Practice. Funds for this account shall be
received as Practice Expenses. The Practice, as employer of said non-shareholder
Professionals, and Professional Business Manager, as agent and attorney of the
Practice shall each have signing capacity to access the account for payroll.
3.11 Fiscal Matters.
(a) Annual Budget. The initial Annual Budget shall be agreed
upon by the parties before the execution of this Professional Business
Management Agreement. Thereafter, annually and at least thirty (30) days prior
to the commencement of each fiscal year of the Practice, the Professional
Business Manager, in consultation with the Practice, shall prepare and deliver
to the Practice a proposed Budget, setting forth an estimate of the Practice's
revenues and expenses for the upcoming fiscal year. The Practice shall review
the proposed Budget and either approve the proposed Budget or request any
changes within twenty-one (21) days after receiving the proposed Budget.
Disputes concerning the Budget shall, at the request of either party hereto, be
submitted to the Practice Advisory Council. In the event the Parties are unable
to agree on a Budget by the beginning of the fiscal year, until an agreement is
reached, the Budget for the prior year shall be deemed to be adopted as the
Budget for the current year, with each line item in the Budget (with the
exception of the Management Fee which shall be established pursuant to the terms
of this Professional Business Management Agreement) increased or decreased by
one of the following, whichever is most appropriate relative to the particular
item of income or expense, (i) the percentage by which the Adjusted Gross
Revenue in the current year, excluding any damages paid by any Professional to
the Practice under any Restrictive covenant or otherwise, has increased or
decreased compared to the corresponding period of the prior year; (ii) the
increase or decrease from the prior year in the Consumer Price Index -
Health/Medical Services for the relevant region; and (iii) the proportionate
increase or decrease in mutually agreed upon personnel costs as measured by the
increase or decrease in full-time-equivalent personnel. The Practice Advisory
Council may revise or modify the Budget from time to time during the applicable
fiscal year to reflect changing circumstances affecting the Practice.
Additionally, notwithstanding the above, no change in an adopted Budget shall be
contrary to the terms and spirit of this Professional Business Management
Agreement nor shall it have any effect on the Management Fee expressly agreed to
herein, unless approved in advance in writing by the Parties hereto.
(b) Obligations of Professional Business Manager. Professional
Business Manager shall use commercially reasonable efforts to manage and
administer the operations of the Office as herein provided so that the actual
revenues, costs and expenses of the operation and maintenance of the Office
during any applicable period of the Practice's fiscal year shall be consistent
with the Budget.
(c) Accounting and Financial Records. Professional Business
Manager shall establish and administer accounting procedures, controls, and
systems for the development, preparation, and safekeeping of administrative or
financial records and books of account relating to the business and financial
affairs of the Office and the provision of Professional Eye Care Services, all
of which shall be prepared and maintained in accordance with GAAP. The Practice
shall have the right to inspect such records and books of account at its expense
at any time, upon reasonable notice to Professional Business Manager.
Professional Business Manager shall prepare and deliver to the Practice (i)
within sixty (60) days of the end of each of the first three (3) fiscal quarters
in each fiscal year, and (ii) within ninety (90) days of
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the end of each fiscal year, a balance sheet and a profit and loss statement
reflecting the financial status of the Practice in regard to the provision of
Professional Eye Care Services as of the end of such period, all of which shall
be prepared in accordance with GAAP consistently applied. In addition,
Professional Business Manager shall prepare or assist in the preparation of any
other financial statements or records as the Practice may reasonably request.
(d) Sales and Use Taxes. Professional Business Manager and the
Practice acknowledge and agree that to the extent that any of the services to be
provided by Professional Business Manager hereunder may be subject to any state
sales and use taxes, Professional Business Manager may have a legal obligation
to collect such taxes from the Practice and to remit the same to the appropriate
tax collection authorities. The Practice agrees to have applicable state sales
and use taxes attributable to the services to be provided by Professional
Business Manager hereunder treated as an Office Expense.
3.12 Reports and Records.
(a) Health Care Records. All files and records relating to the
operation of the Office, including without limitation, accounting, billing and
collection, and patient records shall at all times be and remain the property of
the Practice and shall remain under its possession, custody, and control.
Subject to the foregoing and to the extent permitted by applicable law,
Professional Business Manager shall, in consultation with the Practice,
establish, monitor, and maintain procedures and policies for the timely,
appropriate, and efficient preparation, filing, retrieval, and secure storage of
such records. Patient records shall be located at Office facilities so that they
are readily accessible for patient care. Patient records shall not be removed
from Office premises without the express written consent of the Practice, except
as specified herein. Patient records for patients not seen within the last three
years may be stored in a commercial storage facility or other location
Professional Business Manager shall designate, provided that Professional
Business Manager shall notify the Practice of the location of said records. All
such health care records shall be retained and maintained by the Practice and
the Professional Business Manager as agent for the Practice in accordance with
all applicable state and federal laws relating to the confidentiality and
retention thereof. In this regard, Professional Business Manager shall use its
best efforts to preserve the confidentiality of patient records and shall use
information contained in such records only as the agent for the Practice and for
the limited purposes necessary to perform the services set forth herein.
(b) Other Reports and Records. Professional Business Manager
shall timely create, prepare, and file such additional reports and records as
are reasonably necessary and appropriate for the Practice's provision of
Professional Eye Care Services, and shall be prepared to analyze and interpret
such reports and records upon the request of the Practice.
3.13 Recruitment of the Practice's Professionals. Upon the Practice's
request, Professional Business Manager shall coordinate, supervise or perform
all administrative services reasonably necessary and appropriate to recruit
potential Professionals to become employees of the Practice. It will be and
remain the sole and complete responsibility of the Practice to interview,
select, contract with, supervise, control and terminate all Professionals
performing Professional Eye Care Services or other professional services.
3.14 Confidential and Proprietary Information.
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(a) Professional Business Manager agrees that it shall not
disclose any Confidential Information of the Practice to other persons without
the Practice's express written authorization, that such Confidential Information
shall not be used in any way detrimental to the Practice, and that Professional
Business Manager will keep such Confidential Information confidential and will
ensure that its affiliates and advisors who have access to such Confidential
Information comply with these nondisclosure obligations; provided, however, that
Professional Business Manager may disclose Confidential Information to those of
its Representatives who need to know Confidential Information for the purposes
of this Professional Business Management Agreement, it being understood and
agreed by Professional Business Manager that such Representatives will be
informed of the confidential nature of the Confidential Information, will agree
to be bound by this Section, and will be directed by Professional Business
Manager not to disclose to any other person any Confidential Information.
(b) Notwithstanding clause (a) above, Professional Business
Manager may share, subject to the restrictions of this Section, with other
professional corporations, limited liability companies, associations,
ophthalmology and optometry practices, or health care delivery entities the
practice statistics of the Practice, including utilization review data, quality
assurance data, cost data, outcomes data, or other practice data. The Practice
statistics and confidential information may be disclosed within the Practice, to
managed care providers or other third party payors for the purpose of obtaining
or maintaining third party payor contracts or reimbursements, or to financial
analysts and underwriters; provided that any disclosure outside the Practice for
any purpose not related to managed care contracting shall not identify any
Professional by name without the Practice's consent and will not disclose or
divulge patient identifying information.
3.15 Professional Business Manager's Insurance. Throughout the Term,
Professional Business Manager shall, as an Office Expense, obtain and maintain
with commercial carriers, through self-insurance or some combination thereof,
appropriate workers' compensation coverage for Professional Business Manager's
employed personnel provided pursuant to this Professional Business Management
Agreement, and professional, casualty and comprehensive general liability
insurance covering Professional Business Manager, Professional Business
Manager's personnel, and all of Professional Business Manager's equipment in
such amounts, on such basis and upon such terms and conditions as Professional
Business Manager deems appropriate but which insurance is consistent with the
insurance which is maintained by the Practice pursuant to Section 4.5 of this
Professional Business Management Agreement. Professional Business Manager shall
cause the Practice to be named as an additional insured on Professional Business
Manager's professional, casualty and comprehensive general liability policy.
Upon the request of the Practice, Professional Business Manager shall provide
the Practice with a certificate evidencing such insurance coverage. Professional
Business Manager, in agreement with the Practice, may also carry, as an Office
expense, key person life and disability insurance on any Shareholder or
Professional employee of the Practice in amounts determined reasonable and
sufficient by the Professional Business Manager. Professional Business Manager
shall be the owner and beneficiary of any such insurance, although the Parties
hereby agree that the proceeds of any such insurance shall be paid to the
Account as Adjusted Gross Revenues unless the Parties agree to a specific split
of the proceeds. Should only the Practice choose to obtain key person life and
disability insurance, the Practice shall pay all premiums as a Practice Expense
and shall receive all proceeds. Further, if only the Professional Business
Manager chooses to obtain such insurance, Professional Business Manager shall
pay all premiums as a Professional Business Manager Expense and shall receive
the proceeds. The Practice shall cause its Professionals to submit to a medical
examination necessary to obtain such insurance.
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3.16 No Warranty or Representations. The Practice acknowledges that
Professional Business Manager has not made and will not make any express or
implied warranties or representations that the Management Services provided by
Professional Business Manager will result in any particular amount or level of
income to the Practice. Specifically, Professional Business Manager has not
represented that its Management Services will result in higher revenues, lower
expenses, greater profits, or growth in the number of patients treated by the
Practice's Professionals.
3.17 Marketing and Public Relations. Professional Business Manager
acknowledges that the Practice desires a public relations program to enhance its
optometric and/or therapeutic optometric practice and to extend the Office's
ability to provide Professional Eye Care Services to patients. Subject to the
Practice's approval, Professional Business Manager shall design and implement an
appropriate public relations program on behalf of the Practice, with appropriate
emphasis on public awareness of the availability of Professional Eye Care
Services at the Office. The public relations program shall be conducted in
compliance with applicable laws and regulations governing advertising by the
ophthalmological and optometric professions.
3.18 Acquisition of Services and Supplies. In obtaining services,
supplies and personnel for or on behalf of the Practice pursuant to this
Professional Business Management Agreement, Professional Business Manager shall
be authorized to obtain such services, supplies and personnel from an affiliate
of Professional Business Manager provided that the Office Expenses which are
incurred by or on behalf of the Professional Business Manager shall be
consistent with the expenses of optical dispensaries similar in size, type, and
operations in the Practice Areas.
3.19 Coordination of Obligations and Responsibilities. Professional
Business Manager shall, in good faith, coordinate all of its obligations and
responsibilities under this Professional Business Management Agreement with
Retail Business Manager's performance of its obligations and responsibilities
under the Retail Business Management Agreement. Any dispute, conflict or
disagreement between Professional Business Manager and Retail Business Manager
regarding their respective obligations and responsibilities shall be referred to
the Practice Advisory Council for resolution.
ARTICLE IV
OBLIGATIONS AND RESPONSIBILITIES OF THE PRACTICE.
4.1 Professional Services. The Practice shall diligently conduct the
business of an optometric and/or therapeutic optometric practice, including
utilizing its capacities to the greatest extent practicable to provide
Professional Eye Care Services to patients of the Office. The Practice shall
retain that number of Professional as are reasonably necessary and appropriate
in the sole discretion of the Practice for the provision of Professional Eye
Care Services and shall determine their assignment and scheduled hours of
practice at Office locations. The Practice shall provide Professional Eye Care
Services to the Office's patients in compliance at all times with ethical, laws
and regulations applying to the optometric and/or therapeutic optometric
professions. The Practice shall ensure that each Professional associated with or
employed by the Practice to provide optometric and/or therapeutic optometric
care to the Office's patients is licensed in each Practice Area in which he or
she provides such services. The Practice shall establish and implement a program
to monitor the quality of Professional Eye Care Services provided at the Office
(the "Continuous Quality Improvement Program"). The Continuous Quality
Improvement Program shall be designed to promote and maintain quality care
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consistent with accepted practices prevailing from time to time in the area
where each Office facility is situated
4.2 Optometric and Therapeutic Optometric Practice. The Practice shall
use and occupy the Office for the provision of Professional Eye Care Services
and shall comply with all applicable local rules, ordinances and all standards
of optometric and/or therapeutic optometric care. It is expressly acknowledged
by the parties that the optometric and/or therapeutic optometric practice or
practices conducted at the Office shall be conducted solely by Professionals
employed by or under contract with the Practice, and no other Professional shall
be permitted to use or occupy the Office without the prior written consent of
Professional Business Manager.
4.3 Employment of Professionals. Subject to Section 3.13 hereof, the
Practice shall be responsible for the hiring, compensation, supervision,
evaluation, and termination of all Professionals. At the request of the
Practice, Professional Business Manager shall be available to consult with the
Practice respecting such matters. The Practice shall be responsible for the
payment of such Professionals' salaries and wages, payroll taxes, benefits, and
all other taxes and charges now or hereafter applicable to them. The Practice
shall employ and contract only with licensed Professionals who meet applicable
credentialing guidelines established by the Practice. The Practice shall not in
any fiscal year contract in the aggregate with Professionals for an amount
(including the cost of associated benefits, payroll expense, and professional
liability coverage) which is greater than the amount provided for such purpose
in the Budget for such fiscal year. The Practice represents, warrants and
covenants that, if requested by the Professional Business Manager, on or before
ninety (90) days from the date of such request, it will use its best efforts to
obtain, shall in the future obtain, and shall enforce formal written employment
agreements from each of its present full-time (an average of thirty (30) or more
hours per week) Professionals, except for the President of the Practice, and
those employed in the future in substantially the form attached hereto as
Exhibit 4.3A ("Employment Agreement") containing a restrictive covenant (the
"Restrictive Covenant"). It is agreed that the Professional Business Manager has
not requested any such employment agreements and Restrictive Covenants as of the
execution of this Agreement. The Practice further represents, warrants and
covenants that the President of the Practice has entered into an employment
agreement substantially the form attached hereto as Exhibit 4.3B, (the
"Presidents Employment Agreement") which agreement is currently and shall remain
in force and effect during the term of this Agreement unless terminated in
accordance therewith.
4.4 Professional Standards. As a continuing condition of Professional
Business Manager's obligations hereunder each Professional and any other
Professional personnel retained by the Practice to provide Professional Eye Care
Services must (i) have and maintain a valid and unrestricted license to practice
optometry or ophthalmology in the Practice Areas in which such Professional
provides services, (ii) comply with, be controlled and governed by, and provide
Professional Eye Care Services in accordance with applicable federal, state and
municipal laws, rules, regulations, ordinances and orders, and the ethics and
standard of care of the optometric community wherein the principal Office of the
Practice is located, and (iii) provide on a continual basis, quality care to its
patients.
4.5 Practice's Insurance. The Practice shall, as a Practice Expense,
obtain and maintain with commercial carriers chosen by the Practice appropriate
workers' compensation coverage for the Practice's employed personnel, if any,
and professional and comprehensive general liability insurance covering the
Practice and each of the Professionals involved in the provision of Professional
Eye Care Services. The comprehensive general liability coverage with respect to
each of the Professionals shall be in the minimum amount of One Million Dollars
($1,000,000) and professional liability coverage shall be in the minimum
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amount of One Million Dollars ($1,000,000) for each occurrence and One Million
Dollars ($1,000,000) annual aggregate. The insurance policy or policies shall
provide for at least thirty (30) days' advance written notice to the Practice
from the insurer as to any alteration of coverage, cancellation, or proposed
cancellation for any cause. Upon the termination of this Professional Business
Management Agreement for any reason, the Practice shall continue to carry
professional liability insurance in the amounts specified herein for the shorter
period of (i) the period set forth in each Practice Area's statute of repose (or
if no statute of repose exists, each Practice Area's statute of limitations) for
bringing professional malpractice claims based upon injuries which are not
immediately discoverable plus any applicable tolling periods, or (ii) ten (10)
years after termination; or if the Practice dissolves or ceases to practice
optometry, the Practice shall obtain and maintain as a Practice Expense "tail"
professional liability coverage, in the amounts specified in this Section for
the shorter period of (i) the period set forth in each Practice Area's statute
of repose (or if no statute of repose exists, each Practice Area's statute of
limitations) for bringing professional malpractice claims based upon injuries
which are not immediately discoverable plus any applicable tolling periods, or
(ii) ten (10) years. The Practice shall be responsible for paying all premiums
for Shareholder "tail" insurance coverage and such coverage shall be a Practice
Expense; provided, however, that the Practice may cause its Professionals to be
responsible for paying the premiums for such "tail" insurance coverage.
4.6 Confidential and Proprietary Information. The Practice agrees that
it shall not disclose any Confidential Information of the Professional Business
Manager to other persons without Professional Business Manager's express written
authorization, such Confidential Information shall not be used in any way
detrimental to Professional Business Manager, and the Practice will keep such
Confidential Information confidential and will ensure that its affiliates and
advisors who have access to such Confidential Information comply with these
nondisclosure obligations; provided, however, that the Practice may disclose
Confidential Information to those of its Representatives who need to know
Confidential Information for the purposes of this Professional Business
Management Agreement, it being understood and agreed by the Practice that such
Representatives will be informed of the confidential nature of the Confidential
Information, will agree to be bound by this Section, and will be directed by the
Practice not to disclose to any other person any Confidential Information.
4.7 Non-Competition. The Practice hereby recognizes, acknowledges, and
avers that Professional Business Manager will incur substantial costs in
providing the equipment, support services, personnel, management,
administration, and other items and services that are the subject matter of this
Professional Business Management Agreement and that in the process of providing
services under this Professional Business Management Agreement, the Practice
will be privy to financial and Confidential Information, to which the Practice
would not otherwise be exposed. The Parties also recognize that the services to
be provided by Professional Business Manager will be feasible only if the
Practice operates an active practice to which the Professionals associated with
the Practice devote their full time and attention. The Practice agrees,
acknowledges, and avers that the non-competition covenants described hereunder
are necessary for the protection of Professional Business Manager, and that
Professional Business Manager would not have entered into this Professional
Business Management Agreement without the following covenants.
(a) Except as specifically agreed to by Professional Business
Manager in writing, the Practice covenants and agrees that during the Term of
this Professional Business Management Agreement and for a period of one (1) year
from the date this Professional Business Management Agreement is terminated
other than if terminated by the Practice for cause, or expires, the Practice
shall not directly or indirectly own (excluding ownership of less than one
percent (1%) of the equity of any publicly
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traded entity and excluding ownership of the common stock of Professional
Business Manager), manage, operate, control, contract with, lend funds to, lend
its name to, maintain any interest whatsoever in, or be employed by, any
enterprise (i) having to do with the provision, distribution, promotion, or
advertising of any type of management or administrative services or products to
third parties in competition with Professional Business Manager, within a 10
mile radius of any Office; and/or (ii) offering any type of service(s) or
product(s) to third parties substantially similar to those offered by
Professional Business Manager to the Practice in competition with Professional
Business Manager within a 10 mile radius of any Office. Notwithstanding the
above restriction, nothing herein shall prohibit (i) the Practice or any of its
Shareholders from providing management and administrative services to this or
their own optometry practice after the termination of this Professional Business
Management Agreement; (ii) the Practice or its Shareholders from contracting
with a third-party manager to provide administrative or management services for
its or their professional eye care practices after termination of this
Professional Business Management Agreement; (iii) any of the Practice's
Shareholders from providing management and administrative services to their own
optometry practices after the termination of their employment relationship with
the Practice; and (iv) such Shareholders from contracting with a third-party
manager to provide administrative or management services for their professional
eye care practices after the termination of their employment relationship with
the Practice.
(b) Restrictive Covenants by Optometrists. Under the
Restrictive Covenant, to the extent then required by the Professional Business
Manager, the non-Shareholder Professionals shall agree not to practice optometry
and/or therapeutic optometry or provide Optical Services within a certain
radius, as set forth in Exhibit 4.7A, of any Office location at which such
non-Shareholder Professionals performed services on a regular basis for sixteen
(16) or more hours per week or one thousand (1,000) hours during the last twelve
(12) months of such Professionals' employment with the Practice. The Restrictive
Covenant shall be effective for a period of one (1) year following termination
of employment with the Practice and may be subject to a liquidated damages
provision as authorized hereafter.
(c) Liquidated Damages. The Practice represents, warrants, and
covenants that the Restrictive Covenant described above, if then required by the
Professional Business Manager, will contain a liquidated damages provision,
consistent with the laws of the Commonwealth of Kentucky, mandating the payment
of $25,000.00 in liquidated damages. Any liquidated damage amount collected by
the Practice through enforcement of the Restrictive Covenant shall be delivered
immediately to Professional Business Manager for deposit in the Account and
included in the Adjusted Gross Revenue. The Practice hereby stipulates and
agrees that Professional Business Manager will suffer severe harm if the
Practice fails or refuses to obtain and enforce the Restrictive Covenant,
including the aforesaid liquidated damages provision. The Practice further
stipulates and agrees that the parties may be unable to quantify such severe
harm, and, accordingly, the Practice shall pay to Professional Business Manager
the amount of $25,000.00, as agreed upon stipulated damages in the event of such
failure or refusal to obtain and enforce the Restrictive Covenant. Any
liquidated damage amount collected from the Practice as a result of its failure
or refusal to enforce the Restrictive Covenant, shall be immediately paid to
Professional Business Manager, and shall not be included in the Adjusted Gross
Revenue for the Practice.
(d) The Practice understands and acknowledges that
Professional Business Manager shall suffer severe harm in the event that the
foregoing non-competition covenants in Section 4.7 are violated, and
accordingly, if the Practice breaches any obligation of Section 4.7, in addition
to any other remedies available under this Professional Business Management
Agreement, at law or in equity, Professional Business Manager shall be entitled
to enforce this Professional Business Management
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Agreement by injunctive relief and by specific performance of the Professional
Business Management Agreement, such relief to be without the necessity of
posting a bond, cash or otherwise. Additionally, nothing in this Section 4.7(d)
shall limit Professional Business Manager's right to recover any other damages
to which it is entitled as a result of the Practice's breach. The time period
for which the non-competition covenant is effective shall be extended day for
day for the time period the Practice is in violation of the non-competition
covenant. If any provision of the covenants is held by a court of competent
jurisdiction to be unenforceable due to an excessive time period, geographic
area, or restricted activity, the covenant shall be reformed to comply with such
time period, geographic area, or restricted activity that would be held
enforceable. Following termination of this Professional Business Management
Agreement pursuant to Section 6.2(b) hereof, the Practice shall not amend, alter
or otherwise change any term or provision of the Restrictive Covenants or
liquidated damages provisions of the Employment Agreements or the President's
Employment Agreement with the Professionals. Following termination of this
Agreement pursuant to Section 6.2(a) hereof, the Practice and the Professionals
shall be relieved of the restrictions imposed by this Section 4.7.
4.8 Name, Trademark. The Practice represents and warrants that on and
after sixty (60) days from the effective day of this Professional Business
Management Agreement, the Practice shall conduct its professional practice under
the name of, and only under the names of Dr. Bizer's VisionWorld, Dr. Bizer's
Vision World, Doctor's ValuVision and The Eye Surgery Center and that such names
are duly registered, qualified, or licensed under the laws of the Practice Areas
in which they are being used, and that, to the Practice's knowledge, the
Practice is the sole and absolute owner of such names in the Practice Areas. The
Practice covenants and promises that, without the prior written consent of the
Professional Business Manager, the Practice will not:
(a) take any action that is reasonably likely to result in the
loss of registration, qualification or licensure of the name;
(b) fail to take any reasonably necessary action that will
maintain the registration, qualification, or licensure current;
(c) license, sell, give, or otherwise transfer the name or the
right to use the name to any optometry practice, Optometrist, professional
corporation, professional limited liability company, office or any other entity;
or
(d) cease conducting the professional practice of the Practice
under the name.
4.9 Billing Information and Assignments; Establishment of Fees. The
Practice shall promptly provide the Professional Business Manager with all
billing and other information reasonably requested by the Professional Business
Manager to enable it to bill and collect the Office's fees and other charges and
reimbursement claims pursuant to Section 3.9, and the Practice shall use its
best efforts to procure consents to assignments and other approvals and
documents necessary to enable the Professional Business Manager to obtain
payment or reimbursement from third parties for such fees, other charges and
claims.
4.10 Provider Agreements. The Practice shall have ultimate authority
with regard to all contractual arrangements with third parties for the
Practice's provision of Professional Eye Care Services, and the Practice may at
its sole discretion reject or otherwise refuse to enter into any such
contractual arrangement.
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4.11 Tax Matters. The Practice shall prepare or arrange for the
preparation by an accountant selected by the Practice of all appropriate
corporate tax returns and reports required of the Practice including such
returns and reports required with respect to the Professional Practice Account.
All costs and expenses relating to the preparation of such returns and reports
shall be deemed a Practice Expense.
4.12 Shareholders' Undertaking to Enforce Certain Provisions of
Agreement. The Practice shall cause to be executed by all Shareholders of the
Practice an undertaking in the form of Exhibit 4.12 by such Shareholders to
ensure that the covenants not to compete described in Section 4.7 of this
Professional Business Management Agreement are enforced by the Practice against
any individuals violating such covenants.
4.13 Limitations on Actions of the Practice. The Practice shall not
take any of the following actions without the express prior written consent of
Professional Business Manager:
(a) Any action leading to or intended to result in the merger,
combination or consolidation of the Practice or Office with, or acquisition of
the Practice, the Office, or their businesses by, any other entity;
(b) Mortgage or encumber any of the Practice's real, personal
or mixed property as security for any indebtedness which is not contemplated by
the Budget;
(c) Pay any dividend or make any other distribution, whether
in cash or in kind, to Shareholders of the Practice, if any compensation owed by
the Practice to Professional Business Manager hereunder has not been paid in
full, and if any and all monetary obligations of the Practice to Professional
Business Manager have not been fully paid in accordance with the terms of any
and all documents governing such obligations; provided, however, that the
foregoing shall not prevent payment of Shareholder's Salary, Bonus, payroll
taxes thereon, and certain Shareholder Expenses as set forth in Section 3.10(b);
(d) Dissolve or liquidate the Practice, or take any action
with a view to or likely to have the result of the dissolution or liquidation of
the Practice; or
(e) Authorize the provision of professional services such that
the income derived therefrom is not owned by the Practice; provided that no such
consent is necessary for (i) professional services performed by Professionals
during said Professionals' vacation time, or (ii) professional services
performed in connection with duties and responsibilities as a member of the
Reserves or National Guard.
4.14 Leases of Office. The Practice shall maintain and fulfill all of
its obligations under leases of Office facilities or locations.
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ARTICLE V
BUSINESS MANAGER'S COMPENSATION
5.1 Base Management Fee. The Practice and Professional Business Manager
agree to the compensation set forth herein as being paid to Professional
Business Manager in consideration of a substantial commitment made by
Professional Business Manager hereunder and that such fees are fair and
reasonable. Each month Professional Business Manager shall be paid that
percentage set forth in Exhibit 5.1 of Adjusted Gross Revenue.
5.2 Reasonable Value. Payment of the Management Fee is not intended to
be and shall not be interpreted or applied as permitting Professional Business
Manager to share in the Practice's fees for Professional Eye Care Services or
any other services, but is acknowledged as the Parties' negotiated agreement as
to the reasonable fair market value of Professional Business Manager's
commitment to pay all Office Expenses and the fair market value of the
equipment, contract analysis and support, other support services, purchasing,
personnel, management, administration, strategic management and other items and
services furnished by Professional Business Manager pursuant to the Professional
Business Management Agreement, considering the nature and volume of the services
required and the risks assumed by Professional Business Manager. The Practice
and Professional Business Manager recognize and acknowledge that Professional
Business Manager will incur substantial costs and business risks in undertaking
to pay all Office Expenses and in providing the support services, personnel,
marketing, management, administration, and other items and services that are the
subject matter of this Professional Business Management Agreement. It is the
intent of the Parties that the Management Fee reasonably compensate Professional
Business Manager for the value to the Practice of Professional Business
Manager's administrative expertise, given the considerable business risk to
Professional Business Manager in providing the Management Services that are the
subject of this Professional Business Management Agreement.
5.3 Payment of Management Fee. To facilitate the payment of the
Management Fee as provided in Section 5.1 hereof, the Practice hereby expressly
authorizes Professional Business Manager to make withdrawals of the Management
Fee from the Professional Practice Account as such fee becomes due and payable
during the Term in accordance with Section 3.10(a) and after termination as
provided in Section 6.3. Professional Business Manager shall deliver to the
Practice an invoice for the Management Fee accompanied by a reasonably detailed
statement of the information upon which the Management Fee calculation is based.
5.4 Disputes Regarding Fees.
(a) It is the Parties' intent that any disputes regarding
performance standards of the Professional Business Manager be resolved to the
extent possible by good faith negotiation. To that end, the Parties agree that
if the Practice in good faith believes that Professional Business Manager has
failed to perform its obligations, and that as a result of such failure, the
Practice is entitled to a set-off or reduction in its Management Fees, the
Practice shall give Professional Business Manager notice of the perceived
failure and request in the notice a set-off or reduction in Management Fees.
Professional Business Manager and the Practice shall then negotiate the dispute
in good faith, and if an agreement is reached, the Parties shall implement the
resolution without further action. At the request of Professional Business
Manager or the
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Practice, the Practice Advisory Council shall make recommendations to
Professional Business Manager with respect to any dispute concerning a set off
or reduction in Management Fees.
(b) If the Parties cannot reach a resolution within a
reasonable time, the Parties shall submit the dispute to mediation to be
conducted in accordance with the American Arbitration Association's Commercial
Mediation Rules.
(c) If the mediation process fails to resolve the dispute, the
dispute shall be submitted by either Party to binding arbitration under Section
8.7.
ARTICLE VI
TERM AND TERMINATION
6.1 Initial and Renewal Term. The Term of this Professional Business
Management Agreement will be for an initial period of forty (40) years after the
effective date, and shall be automatically renewed for successive five (5) year
periods thereafter, provided that neither Professional Business Manager nor the
Practice shall have given notice of termination of this Professional Business
Management Agreement at least one hundred twenty (120) days before the end of
the initial term or any renewal term, or unless otherwise terminated as provided
in Section 6.2 of this Professional Business Management Agreement.
6.2 Termination.
(a) Termination by the Practice. The Practice may immediately
terminate this Professional Business Management Agreement at its discretion,
upon written notice pursuant to Section 8.3, as follows:
(i) If Professional Business Manager becomes insolvent by
reason of its inability to pay its debts as they mature; is adjudicated bankrupt
or insolvent; files a petition in bankruptcy, reorganization or similar
proceeding under the bankruptcy laws of the United States or shall have such a
petition filed against it which is not discharged within thirty (30) days; has a
receiver or other custodian, permanent or temporary, appointed for its business,
assets or property; makes a general assignment for the benefit of creditors; has
its bank accounts, property or accounts attached; has execution levied against
its business or property; or voluntarily dissolves or liquidates or has a
petition filed for corporate dissolution and such petition is not dismissed with
thirty (30) days;
(ii) If the Professional Business Manager fails to comply
with any material provision of this Professional Business Management Agreement
and does not correct such failure within ninety (90) days after written notice
of such failure to comply is delivered by the Practice specifying the nature of
the breach in reasonable detail; or
(iii) Professional Business Manager commits any act of
fraud, misappropriation or embezzlement, or any other felony and as a result the
Professional Business Manager is unable to substantially perform under the terms
of this Professional Business Management Agreement.
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(b) Termination by Professional Business Manager Professional
Business Manager may immediately terminate this Professional Business Management
Agreement at its discretion, upon written notice pursuant to Section 8.3, as
follows:
(i) The revocation, suspension, cancellation or
restriction of any Shareholders' license to practice optometry in any of the
Practice Areas if, in the reasonable discretion of the Professional Business
Manager, the Practice will not be financially viable after such revocation,
suspension, cancellation, or restriction.
(ii) If the Practice becomes insolvent by reason of its
inability to pay its debts as they mature; is adjudicated bankrupt or insolvent;
files a petition in bankruptcy, reorganization or similar proceeding under the
bankruptcy laws of the United States or shall have such a petition filed against
it which is not discharged within thirty (30) days; has a receiver or other
custodian, permanent or temporary, appointed for its business, assets or
property; makes a general assignment for the benefit of creditors; has its bank
accounts, property or accounts attached; has execution levied against its
business or property; or voluntarily dissolves or liquidates or has a petition
filed for corporate dissolution and such petition is not dismissed with thirty
(30) days;
(iii) If the Practice fails to comply with any material
provision of this Professional Business Management Agreement, or any other
agreement with Professional Business Manager, and does not correct such failure
within ninety (90) days after written notice of such failure to comply is
delivered by Professional Business Manager specifying the nature of the breach
in reasonable detail;
(iv) If the Practice or any of the Practice Professionals
commit any act of fraud, misappropriation or embezzlement, or any other felony
and as a result the Practice as an entire entity is unable to substantially
perform under the terms of this Professional Business Management Agreement; or
(v) If any of the material representations of the Practice
are false or incorrect when made or hereafter become materially false or
incorrect or any warranty of the Practice is materially breached.
(c) Termination by Agreement. In the event the Practice and
Professional Business Manager shall mutually agree in writing, this Professional
Business Management Agreement may be terminated on the date specified in such
written agreement.
(d) Legislative, Regulatory or Administrative Change. In the
event there shall be a change in the Medicare or Medicaid statutes, federal
statutes, state statutes, case law, administrative interpretations, regulations
or general instructions, the adoption of new federal or state legislation, a
change in any third-party reimbursement system, or any finding, ruling, or
decree of any regulatory body concerning this Professional Business Management
Agreement, any of which are reasonably likely to materially and adversely affect
the manner in which either Party may perform or be compensated for its services
under this Professional Business Management Agreement or which shall make this
Professional Business Management Agreement or any related agreements unlawful or
unenforceable, or which would be reasonably likely to subject either Party to
this Professional Business Management Agreement, or any member, shareholder,
officer, director, employee, agent or affiliated organization to any civil or
criminal penalties or administrative sanctions, the Parties shall immediately
use their best efforts to enter into a new service arrangement or basis for
compensation for the services furnished pursuant to this Professional
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Business Management Agreement that complies with the law, regulation, policy,
finding, ruling, or decree, or which minimizes the possibility of such
penalties, sanctions or unenforceability, and that approximates as closely as
possible the economic position of the Parties prior to the change. If the
Parties are unable to reach a new agreement within sixty (60) days, this
Professional Business Management Agreement shall be terminated upon ninety (90)
days written notice by either party to the other.
6.3 Effects of Termination.
(a) Obligation After Termination. Upon termination of this
Professional Business Management Agreement, as hereinabove provided, neither
Party shall have any further obligations hereunder except for
(i) obligations accruing prior to the date of termination,
including, without limitation, payment of the Management Fee relating to
services provided prior to the termination of this Professional Business
Management Agreement;
(ii) obligations, promises, or covenants set forth herein
that are expressly made to extend beyond the Term, including, without
limitation, insurance, indemnities and non-competition provisions, which
provisions shall survive the expiration or termination of this Professional
Business Management Agreement;
(iii) the obligation of the Practice described in Section
6.4; and
(iv) the obligation of the Practice to repay amounts
advanced by Professional Business Manager to the Practice.
(b) Receipt of Collections After Termination. In effectuating
the provisions of this Section 6.3, the Practice specifically acknowledges and
agrees that if this Professional Business Management Agreement terminates
pursuant to Sections 6.1, 6.2(b) or 6.2 (d), Professional Business Manager shall
continue for a period not to exceed ninety (90) days to exclusively collect and
receive on behalf of the Practice all cash collections from accounts receivable
in existence at the time this Professional Business Management Agreement is
terminated, it being understood that
(i) such cash collections will represent compensation to
Professional Business Manager to the extent of all outstanding obligations to
Professional Business Manager by the Practice pursuant to this Agreement for
Management Services already rendered;
(ii) Professional Business Manager shall not be entitled
to collect accounts receivable after the termination date if this Agreement is
terminated pursuant to Section 6.2(a);
(iii) the Professional Business Manager shall deduct from
such cash collections any other amounts owed to Professional Business Manager
under this Professional Business Management Agreement, including, without
limitation, ten percent (10%) of such cash collections as its Management Fee
during any period after the termination of this Professional Business Management
Agreement while such collections are taking place and any reasonable costs
incurred by Professional Business Manager in carrying out the post termination
procedures and transactions contemplated herein; and
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(iv) Professional Business Manager shall remit remaining
amounts from such collection activities, if any, to the Practice.
(c) Surrender of Books After Termination. Upon the expiration
or termination of this Professional Business Management Agreement for any reason
or cause whatsoever, Professional Business Manager shall surrender to the
Practice all books and records pertaining to the Office.
6.4 Purchase Obligation. Upon expiration of this Professional Business
Management Agreement in accordance with Section 6.1 or termination of this
Professional Business Management Agreement by Professional Business Manager, as
set forth in Sections 6.2(b) or 6.2(d) above, the Practice shall upon
Professional Business Manager's demand:
(a) Purchase from Professional Business Manager at book value
all of the assets, tangible and intangible, including without limitation
equipment, furniture, goodwill, intellectual property, inventory, and supplies,
used in, or related to, the operations of the Office and all replacements and
additions thereto made by Professional Business Manager pursuant to the
performance of its obligations under this Professional Business Management
Agreement, set forth on the books of Professional Business Manager as adjusted
through the last day of the month most recently ended prior to the date of such
termination in accordance with GAAP to reflect operations of the Office,
depreciation, amortization, and other adjustments of assets shown on the books
of Professional Business Manager;
(b) Assume all contracts and leases and the Practice's pro
rata share of all debts and payables that are obligations of Professional
Business Manager and that relate principally to the performance of Professional
Business Manager's obligations under this Professional Business Management
Agreement; provided, however, that the Practice shall only be obligated to
assume such contacts and leases if a reasonable third person would conclude that
the Practice will be able to enjoy the benefits of the contracts and leases
following such assumption; and
(c) Cause to be executed by Shareholders of the Practice such
security agreements reasonably required by Professional Business Manager in
connection with the purchase described in this Section 6.4. All current
Shareholders of the Practice shall on or before the effective date of this
Professional Business Management Agreement, and all individuals who become
Shareholders of the Practice after the effective date of commencement of this
Professional Business Management Agreement shall upon becoming a Shareholder of
the Practice, execute and deliver to Professional Business Manager an
undertaking to comply with this Section 6.4 which shall be in the form of
Exhibit 6.4.
6.5 Closing of Purchase. When the Practice purchases the assets
pursuant to Section 6.4, the Practice shall pay cash or deliver a note payable
in equal monthly installments over five (5) years at an interest rate not to
exceed "prime" plus one (1%) percent ("prime" being the commercial lending rate
of NationsBank, N.A. ), per annum, for the purchased assets. The amount of the
purchase price shall be reduced by the amount of debt and liabilities of
Professional Business Manager, if any, assumed by the Practice, by any payment
the Professional Business Manager has failed to make under this Professional
Business Management Agreement, and by any unpaid portion of any promissory notes
payable by Professional Business Manager to any Shareholder of the Practice. The
Practice and all Shareholders of the Practice shall execute such documents as
may be required to assume the liabilities set forth in Section 6.4(b) and to
remove Professional Business Manager from any liability with respect to such
purchased assets. The closing date for the purchase shall be determined by the
Parties, but shall in no event occur later than the
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expiration date of this Professional Business Management Agreement if this
Agreement expires in accordance with Section 6.1, or sixty (60) days from the
date of the notice of termination for cause. The termination of this
Professional Business Management Agreement shall become effective upon the
closing of the sale of the assets if the assets are purchased, and all Parties
shall be released from any restrictive covenants provided for in Section 4.7 on
the closing date. From and after any termination, each Party shall provide the
other Party with reasonable access to the books and records then owned by it to
permit such requesting Party to satisfy reporting and contractual obligations
that may be required of it.
6.6 Limitation of Liability. IN NO EVENT SHALL PROFESSIONAL BUSINESS
MANAGER BE LIABLE TO THE PRACTICE FOR ANY INDIRECT, SPECIAL OR CONSEQUENTIAL
DAMAGES OR LOST PROFITS, ARISING OUT OF OR RELATED TO THIS PROFESSIONAL BUSINESS
MANAGEMENT AGREEMENT OR THE PERFORMANCE OR BREACH THEREOF, EVEN IF PROFESSIONAL
BUSINESS MANAGER HAS BEEN ADVISED OF THE POSSIBILITY THEREOF; PROVIDED, HOWEVER,
THAT THE FOREGOING SHALL NOT PREVENT RECOVERY OF ACTUAL DAMAGES ARISING OUT OF
OR RELATED TO THIS PROFESSIONAL BUSINESS MANAGEMENT AGREEMENT.
ARTICLE VIII
INDEMNIFICATION; THIRD PARTY CLAIMS
7.1 Indemnification by the Practice. The Practice shall indemnify and
hold harmless Professional Business Manager and Professional Business Manager's
shareholders, directors, officers, agents and employees, from and against all
claims, demands, liabilities, losses, damages, costs and expenses, including
reasonable attorneys' fees, resulting in any manner, directly or indirectly,
from the negligent or intentional acts or omissions of the Practice or its
members, Shareholders, directors, officers, employees, agents or independent
contractors, including but not limited to any such claims, demands, liabilities,
losses, damages, costs and expenses which accrued or arose prior to the date of
execution of this Professional Business Management Agreement.
7.2 Indemnification by Professional Business Manager. Professional
Business Manager shall indemnify and hold harmless the Practice, and the
Practice's members, Shareholders, directors, officers, agents and employees,
from and against any and all claims, demands, liabilities, losses, damages,
costs and expenses, including reasonable attorneys' fees, resulting in any
manner, directly or indirectly, from the negligent or intentional acts or
omissions of Professional Business Manager or its shareholders, directors,
officers, employees, agents or independent contractors.
7.3 Notice of Claim for Indemnification. No claims for indemnification
under this Professional Business Management Agreement relating to claims solely
between the Parties shall be valid unless notice of such claim is delivered to
the Practice (in the case of a claim by Professional Business Manager) or
Professional Business Manager (in the case of a claim by the Practice) within
one (1) year after the Party making such claim first obtained knowledge of the
facts upon which such claim is based. Any such notice shall set forth in
reasonable detail, to the extent known by the Party giving such notice, the
facts on which such claim is based and the resulting estimated amount of
damages.
7.4 Matters Involving Third Parties.
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(a) If the Practice or Professional Business Manager receives
notice or acquires knowledge of any matter which may give rise to a claim by
another person and which may then result in a claim for indemnification under
this Professional Business Management Agreement, then: (i) if such notice or
knowledge is received or acquired by the Practice, the Practice shall promptly
notify Professional Business Manager; and (ii) if such notice or knowledge is
received or acquired by Professional Business Manager, the Professional Business
Manager shall promptly notify the Practice; except that no delay in giving such
notice shall diminish any obligation under this Professional Business Management
Agreement to provide indemnification unless (and then solely to the extent) the
Party from whom such indemnification is sought is prejudiced.
(b) Any Party from whom such indemnification (the
"Indemnifying Party") is sought shall have the right to defend the Party seeking
such indemnification (the "Indemnified Party") against such claim by another
person (the "Third Party Claim") with counsel of the Indemnifying Party's choice
reasonably satisfactory to the Indemnified Party so long as: (i) within fifteen
(15) days after the Indemnified Party has given notice of the Third Party Claim
to the Indemnifying Party, the Indemnifying Party notifies the Indemnified Party
that the Indemnifying Party will indemnify the Indemnified Party from and
against all adverse consequences the Indemnified Party may suffer caused by,
resulting from, arising out of or relating to such Third Party Claim; (ii) the
Indemnifying Party provides the Indemnified Party with evidence reasonably
satisfactory to the Indemnified Party that the Indemnifying Party has the
financial resources necessary to defend against the Third Party Claim and
fulfill its indemnification obligations; (iii) the Third Party Claim seeks money
damages; (iv) settlement of, or an adverse judgment with respect to, the Third
Party Claim (other than an optometric malpractice claim) is not, in the good
faith judgment of the Indemnified Party, likely to establish a precedential
custom or practice adverse to the continuing business interests of the
Indemnified Party; and (v) the Indemnifying Party conducts the defense of the
Third Party Claim actively and diligently.
(c) So long as the Indemnifying Party is conducting the
defense of the Third Party Claim in accordance with Section 7.4(b): (i) the
Indemnified Party may retain separate co-counsel at its sole cost and expense
and participate in the defense of the Third Party Claim; (ii) the Indemnified
Party shall not consent to the entry of any judgment or enter into any
settlement with respect to the Third Party Claim without the prior consent of
the Indemnifying Party; and (iii) the Indemnifying Party shall not consent to
the entry of any judgment or enter into any settlement with respect to the Third
Party Claim without the prior consent of the Indemnified Party.
(d) If any of the conditions specified in Section 7.4(b) is
not satisfied, however, (i) the Indemnified Party may defend against, and
consent to the entry of any judgment or enter into any settlement with respect
to, the Third Party Claim in any manner it may deem advisable (and the
Indemnified Party need not consult with, or obtain any consent from, any
Indemnifying Party in connection therewith); (ii) the Indemnifying Party shall
reimburse the Indemnified Party promptly and periodically for the costs of
defending against the Third Party Claim (including reasonable attorneys' and
accountants' fees and expenses); and (iii) the Indemnifying Party shall remain
responsible for any adverse consequences the Indemnified Party may suffer caused
by, resulting from, arising out of or relating to such Third Party Claim to the
fullest extent provided in this Professional Business Management Agreement.
7.5 Settlement. Except as permitted by Section 7.4, a Party shall not
compromise or settle any claim for which the other Party is obligated to
indemnify it without the written consent of such Party.
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7.6 Cooperation. The Indemnified Party shall make available all
information and assistance that the Indemnifying Party may reasonably request in
conjunction with assessing, defending and settling said claim.
ARTICLE VIII
MISCELLANEOUS
8.1 Administrative Services Only. Nothing in this Professional Business
Management Agreement is intended or shall be construed to allow Professional
Business Manager to exercise control, authority or direction over the manner or
method by which the Practice and its Professionals perform Professional Eye Care
Services or other professional health care services. The rendition of all
Professional Eye Care Services, including, but not limited to, the prescription
or administration of medicine and drugs, shall be the sole responsibility of the
Practice and its Professionals, and Professional Business Manager shall not
interfere in any manner or to any extent therewith. Nothing contained in this
Professional Business Management Agreement shall be construed to permit
Professional Business Manager to engage in the practice of optometry, it being
the sole intention of the Parties hereto that the services to be rendered to the
Practice by Professional Business Manager are solely for the purpose of
providing non-optometric management and administrative services (including,
where permitted by applicable state law, Optical Services) to the Practice so as
to enable the Practice to devote its full time and energies to the professional
conduct of its professional eye care practice and provision of Professional Eye
Care Services to its patients.
8.2 Status of Independent Contractor. The Practice and Professional
Business Manager and their shareholders are not, and shall not be deemed to be
by virtue of this Professional Business Management Agreement, joint venturers,
partners, employees or agents of each other (except as expressly provided in
this Professional Business Management Agreement). Except as may be expressly
provided herein, neither Party shall have any authority to bind the other
without the other's express written consent; and then only to the extent of the
authority conferred by such express written consent. Each Party is an
independent contractor, and each Party shall remain professionally and
economically independent of the other. In the course of the business
relationship contemplated in this Professional Business Management Agreement
only the Practice and its Professionals shall practice optometry and/or
therapeutic optometry, and they shall do so as independent professionals with no
employment relationship to Professional Business Manager. Professional Business
Manager and the Practice agree that the Practice shall retain absolute authority
to direct the optometric, professional, and ethical aspects of its optometric
and/or therapeutic optometric practice, any authority granted herein to
Professional Business Manager concerning the business and administrative aspects
of such practice notwithstanding. Each party shall be solely responsible for and
shall comply with all state and federal laws applicable to that party pertaining
to employment taxes, income tax withholding, unemployment compensation
contributions, and other employment related matters.
8.3 Notices. Any notice, demand, or communication required, permitted,
or desired to be given hereunder shall be deemed effectively given when in
writing and personally delivered or mailed by prepaid certified or registered
mail, return receipt requested, addressed as follows:
The Practice: Dr. Mark Lynn & Associates, PLLC
516 East Highway 131
Clarksville, Indiana 47129
Attention: Mark E. Lynn, O.D.,
President
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Professional Business Manager: Visionary MSO, Inc.
11103 West Avenue
San Antonio, Texas 78213
Attention: Mark Alsteadt, Vice
President
with a copy to: Cox & Smith Incorporated
112 E. Pecan, Suite 1800
San Antonio, Texas 78205
Attention: James B. Smith, Jr.
or to such other address, or to the attention of such other person or officer,
as any party may by written notice designate.
8.4 Governing Law. This Professional Business Management Agreement
shall in all respects be governed, interpreted and construed in accordance with
the laws of the Commonwealth of Kentucky without giving effect to principles of
comity or conflicts of laws thereof.
8.5 Jurisdiction and Venue. Professional Business Manager and the
Practice hereby consent to the personal jurisdiction and venue of the state and
federal courts in the judicial circuit where the Practice has its principal
corporate office, and do hereby waive all questions of personal jurisdiction and
venue, including, without limitation, the claim or defense that such courts
constitute an inconvenient forum.
8.6 Assignment. Except as may be herein specifically provided to the
contrary, this Professional Business Management Agreement shall inure to the
benefit of and be binding upon the Parties hereto and their respective legal
representatives, successors, and assigns; provided, however, that the Practice
may not assign this Professional Business Management Agreement without the prior
written consent of Professional Business Manager, which consent may be withheld.
Professional Business Manager may assign or transfer its rights and obligations
under this Professional Business Management Agreement only in the following
situations: (a) pursuant to a merger of Professional Business Manager into
another entity or the sale of substantially all of the assets of Professional
Business Manager; (b) pursuant to the sale and/or assignment of all of this
Professional Business Management Agreement with the Practice's consent, which
shall not be unreasonably withheld; (c) pursuant to a transfer or assignment of
this Professional Business Management Agreement to one of Professional Business
Manager's subsidiaries; or (d) pursuant to any transfer or assignment to or by
any financial lender of the Professional Business Manager, and this Professional
Business Management Agreement is subordinate to the rights of such lender. After
such assignment and transfer, the Practice agrees to look solely to such
assignee or transferee for performance of this Professional Business Management
Agreement.
8.7 Arbitration. Any and every dispute of any nature whatsoever that
may arise between the Parties, whether sounding in contract, statute, tort,
fraud, misrepresentation, 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. If the amount in controversy in the arbitration exceeds
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Two Hundred Fifty Thousand Dollars ($250,000), exclusive of interest, attorneys'
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 neutral arbitrators by
mutual agreement. If such 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, or 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 the
arbitrator(s) for such arbitration. If three (3) arbitrators are selected, the
arbitrators shall elect a chairperson to preside at all meetings and hearings.
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 thereof. 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 arbitrators 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,
attorney's fees, declaratory relief, and permanent injunctive relief, if
applicable. Unless otherwise agreed by the parties, the arbitration shall be
held in Louisville, Kentucky. This Section 8.7 shall not prevent either Party
from seeking a temporary restraining order or temporary or preliminary
injunctive relief from a court of competent jurisdiction in order to protect its
rights under this Agreement. In the event a Party seeks such injunctive relief
pursuant to this Agreement, such action shall not constitute a waiver of the
provisions of this Section 8.7, which shall continue to govern any and every
dispute between the Parties, including without limitation the right to damages,
permanent injunctive relief and any other remedy, at law or in equity.
8.8 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, THOSE DISPUTES RELATING TO,
OR INVOLVING IN ANY WAY, THE CONSTRUCTION, PERFORMANCE OR BREACH OF THIS
AGREEMENT OR ANY OTHER AGREEMENT BETWEEN THE PARTIES, THE PROVISIONS OF ANY
FEDERAL, STATE OR LOCAL LAW, REGULATION OR ORDINANCE NOTWITHSTANDING. 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 that he/she it
knowingly and voluntarily waives any right to a trial by jury of any dispute
pertaining to or relating in any way to the transactions contemplated by this
Agreement, the provisions of any federal, state or local law, regulation or
ordinance notwithstanding.
8.9 Waiver of Breach. The waiver by either Party of a breach or
violation of any provision of this Professional Business Management Agreement
shall not operate as, or be construed to constitute, a waiver of any subsequent
breach of the same or another provision hereof.
8.10 Enforcement. In the event either Party resorts to legal action to
enforce or interpret any provision of this Professional Business Management
Agreement, the prevailing Party shall be entitled to recover the costs and
expenses of such action so incurred, including, without limitation, reasonable
attorneys' fees.
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8.11 Gender and Number. Whenever the context of this Professional
Business Management Agreement requires, the gender of all words herein shall
include the masculine, feminine, and neuter, and the number of all words herein
shall include the singular and plural.
8.12 Additional Assurances. Except as may be herein specifically
provided to the contrary, the provisions of this Professional Business
Management Agreement shall be self-operative and shall not require further
agreement by the Parties; provided, however, at the request of either Party, the
other Party shall execute such additional instruments and take such additional
acts as are reasonable and as the requesting Party may deem necessary to
effectuate this Professional Business Management Agreement.
8.13 Consents, Approvals, and Exercise of Discretion. Whenever this
Professional Business Management Agreement requires any consent or approval to
be given by either Party, or either Party must or may exercise discretion, and
except where specifically set forth to the contrary, the Parties agree that such
consent or approval shall not be unreasonably withheld or delayed, and that such
discretion shall be reasonably exercised.
8.14 Force Majeure. Neither Party shall be liable or deemed to be in
default for any delay or failure in performance under this Professional Business
Management Agreement or other interruption of service deemed to result, directly
or indirectly, from acts of God, civil or military authority, acts of public
enemy, war accidents, fires, explosions, earthquakes, floods, failure of
transportation, strikes or other work interruptions by either Party's employees,
or any other similar cause beyond the reasonable control of either Party unless
such delay or failure in performance is expressly addressed elsewhere in this
Professional Business Management Agreement. Notwithstanding the same, the
Parties hereto agree to continue this Professional Business Management Agreement
to the best degree they can so long as reasonably possible and the Practice
shall not be excused from its obligations under Sections 4.1, 6.4 and 6.5
pursuant to this Section 8.14.
8.15 Severability. The Parties hereto have negotiated and prepared the
terms of this Professional Business Management Agreement in good faith with the
intent that each and every one of the terms, covenants and conditions herein be
binding upon and inure to the benefit of the respective Parties. Accordingly, if
any one or more of the terms, provisions, promises, covenants or conditions of
this Professional Business Management Agreement or the application thereof to
any person or circumstance shall be adjudged or rendered to any extent invalid,
unenforceable, void or voidable for any reason whatsoever by a court of
competent jurisdiction, an arbitration tribunal, a regulatory agency, or statute
such provision shall be reformed, construed and enforced as if such
unenforceable provision had not been contained herein, and each and all of the
remaining terms, provisions, promises, covenants and conditions of this
Professional Business Management Agreement or their application to other persons
or circumstances shall not be affected thereby and shall be valid and
enforceable to the fullest extent permitted by law. To the extent this
Professional Business Management Agreement is in violation of applicable law,
then the Parties agree to negotiate in good faith to amend the Professional
Business Management Agreement, to the extent possible consistent with its
purposes, to conform to law.
8.16 Press Releases and Public Announcements. Except as otherwise
required by law or by applicable rules of any securities exchange or association
of securities dealers, neither the Practice nor the Professional Business
Manager shall issue any press release, make any public announcement or otherwise
disclose any information for the purpose of publication by any print, broadcast
or other public media, relating to the transactions contemplated by this
Agreement, without the prior approval of the other Party.
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8.17 Divisions and Headings. The division of this Professional Business
Management Agreement into articles, sections, and subsections and the use of
captions and headings in connection therewith are solely for convenience and
shall not affect in any way the meaning or interpretation of this Professional
Business Management Agreement.
8.18 Amendments and Execution. This Professional Business Management
Agreement and any amendments hereto shall be in writing and executed in multiple
copies on behalf of the Practice by its President, and on behalf of Professional
Business Manager by its President or other authorized officer. Each multiple
copy shall be deemed an original, but all multiple copies together shall
constitute one and the same instrument.
8.19 Licenses, Permits and Certificates. Professional Business Manager
and the Practice shall each obtain and maintain in effect, at all times during
the term of this Professional Business Management Agreement, all licenses,
permits and certificates required by law which are applicable to the performance
of their respective obligations pursuant to this Professional Business
Management Agreement.
8.20 No Third Party Beneficiaries. Except as otherwise provided herein,
this Professional Business Management Agreement shall not confer any rights or
remedies upon any person other than Professional Business Manager and the
Practice and their respective successors and permitted assigns.
8.21 Compliance with Applicable Laws. Professional Business Manager and
the Practice shall comply with all applicable federal, state and local laws,
regulations, rules and restrictions in the conduct of their obligations under
this Professional Business Management Agreement.
8.22 Language Construction. The Practice and Professional Business
Manager acknowledge that each Party hereto and its counsel have reviewed and
revised this Professional Business Management Agreement and agree that the
normal rule of construction to the effect that any ambiguities are to be
resolved against the drafting Party shall not be employed in the interpretation
of this Professional Business Management Agreement.
8.23 Entire Professional Business Management Agreement. With respect to
the subject matter of this Professional Business Management Agreement, this
Professional Business Management Agreement supersedes all previous contracts and
constitutes the entire agreement between the Parties. Neither Party shall be
entitled to benefits other than those specified herein. No prior oral statements
or contemporaneous negotiations or understandings or prior written material not
specifically incorporated herein shall be of any force and effect, and no
changes in or additions to this Professional Business Management Agreement shall
be recognized unless incorporated herein by amendment as provided herein, such
amendment(s) to become effective on the date stipulated in such amendment(s).
The Parties specifically acknowledge that, in entering into and executing this
Professional Business Management Agreement, the Parties rely solely upon the
representations and agreements contained in this Professional Business
Management Agreement and no others.
8.24 Authority. Professional Business Manager and the Practice hereby
warrant and represent to each other that they have the requisite corporate
authority to execute and deliver this Professional Business Management Agreement
in their respective names.
(The remainder of this page is intentionally left blank.)
-39-
<PAGE> 40
IN WITNESS WHEREOF, the Practice and Professional Business Manager have
caused this Professional Business Management Agreement to be executed by their
duly authorized representatives, all as of the day and year first above written.
DR. MARK LYNN & ASSOCIATES, PLLC
"The Practice"
By: /s/ MARK E. LYNN, O.D.
-------------------------------------
Mark E. Lynn, O.D., President
VISIONARY MSO, INC.
"Professional Business Manager"
By: /s/ DOUGLAS C. SHEPARD
-------------------------------------
Douglas C. Shepard, Vice President
Secretary and Treasurer
-40-
<PAGE> 41
EXHIBIT 4.3A
EMPLOYMENT AGREEMENT (PROFESSIONAL)
SEE ATTACHED
<PAGE> 42
EXHIBIT 4.3B
EMPLOYMENT AGREEMENT
(PRESIDENT OF PRACTICE)
SEE ATTACHED
<PAGE> 43
EXHIBIT 4.7A
COVENANT NOT TO COMPETE
<TABLE>
<CAPTION>
Radius From Miles
----------- -----
<S> <C>
Kentucky Offices 5
Missouri Offices 5
Indiana Offices 5
Tennessee Offices 5
All Other Offices 5
</TABLE>
<PAGE> 44
SHAREHOLDERS' UNDERTAKING TO MAINTAIN PRACTICE'S
CORPORATE EXISTENCE AND ENFORCEMENT OF COVENANTS
NOT TO COMPETE
As an inducement to the Professional Business Manager to enter into
this Professional Business Management Agreement with the Practice or as required
in the Professional Business Management Agreement, each of the undersigned
person(s), having an ownership interest in the Practice, irrevocably and
unconditionally covenants and agrees to maintain in good standing the corporate
existence of the Practice under the laws of the states of Kentucky, Indiana,
Tennessee and Missouri and to cause the Practice to use its best efforts to
enforce employment agreements (including the Restrictive Covenant described in
Section 4.7), to the extent then required by Professional Business Manager,
against any individuals violating such employment agreements (and covenants not
to compete). The undersigned persons further unconditionally covenant and agree
to indemnify and hold harmless Professional Business Manager from and against
any and all claims requirements, demands, liabilities, losses, damages, costs
and expenses, including reasonable attorneys' fees, resulting in any manner from
the failure of the Practice to remain in good standing under the laws of
Kentucky, Indiana, Tennessee and Missouri or the failure of the Practice to use
its best efforts to enforce the aforesaid employment agreements and the
Restrictive Covenants described in Section 4.7 of such Professional Business
Management Agreement, a copy of which has been delivered to the undersigned for
his review, to the extent then required by Professional Business Manager. The
undersigned acknowledges that he or she has received adequate consideration for
the execution hereof. This undertaking may be assumed by a successor to
Shareholder or Shareholders, whereupon the undersigned shall be released to the
extent of such assumption, provided that any such successor Shareholder executes
a form similar to this.
IN WITNESS WHEREOF, the undersigned(s) have executed this Shareholders'
Undertaking as of the day and year written opposite such shareholder's name.
Date: October 1, 1998 /s/ DR. MARK E. LYNN
---------------------------------------
Mark E. Lynn, O.D.
<PAGE> 45
EXHIBIT 6.4
SHAREHOLDERS' UNDERTAKING TO CARRY OUT
PRACTICE'S PURCHASE OBLIGATION
As an inducement to the Professional Business Manager to enter into
this Professional Business Management Agreement with the Practice or as required
in the Professional Business Management Agreement, each of the undersigned
person(s), having an ownership interest in the Practice, irrevocably and
unconditionally covenants and agrees subject to the limitations contained in the
Professional Business Management Agreement to (i) cause the Practice to carry
out the purchase obligation described in Section 6.4 of the Professional
Business Management Agreement, (ii) personally execute and deliver the security
agreements referred to in Section 6.4(c) of such Professional Business
Management Agreement, a copy of which has been delivered to the undersigned for
his review, and (iii) execute the documents described in Section 6.5. The
undersigned acknowledges that he or she has received adequate consideration for
the execution hereof.
IN WITNESS WHEREOF, the undersigned(s) have executed this Shareholders'
Undertaking as of the day and year written opposite such shareholder's name.
Date: October 1, 1998 /s/ DR. MARK E. LYNN
---------------------------------------
Mark E. Lynn, O.D.
<PAGE> 1
EXHIBIT 12.1
EYE CARE CENTERS OF AMERICA, INC.
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
12/31/94 12/30/95 12/28/96 1/3/98 1/2/99
<S> <C> <C> <C> <C> <C>
Net earnings (loss) (15,615) (9,119) 1,418 5,215 (26,273)
Add: Income tax provision -- -- 188 355 13
------- ------- ------- ------- -------
(15,615) (9,119) 1,606 5,550 (26,260)
Fixed Charges:
Interest expense, net 9,271 9,046 10,341 14,380 23,804
Interest factor portion of rent expense 3,738 4,011 4,368 6,254 6,888
------- ------- ------- ------- -------
Total fixed charges 13,009 13,057 14,709 20,634 30,692
Earnings (loss) before income taxes
and fixed charges (2,606) 3,938 16,315 26,184 4,432
Ratio of earnings to fixed charges (a) 0.3 1.1 1.3 0.1
</TABLE>
(a) Earnings were insufficient to cover fixed charges by $2,606 for the fiscal
year ended December 31, 1994.
<PAGE> 1
EXHIBIT 21.1
EYE CARE CENTERS OF AMERICA, INC.
SUBSIDIARIES OF THE REGISTRANT
FOR THE YEAR ENDED 1/2/99
<TABLE>
<CAPTION>
JURISDICTION OF NAME UNDER WHICH THE SUBSIDIARY
SUBSIDIARY INCORPORATION DOES BUSINESS
- ------------------------------------- --------------- ---------------------------------
<S> <C> <C>
Enclave Advancement Group, Inc.(A) Texas Enclave Advance Group, Inc.
ECCA Managed Vision Care, Inc.(A) Texas ECCA Managed Vision Care, Inc.
Visionworks Holding, Inc.(A) Florida Visionworks Holding, Inc.
Visionworks, Inc.(B) Florida Visionworks
Visionworks Property, Inc.(B) Florida Visionworks Property, Inc.
Eye Care Holdings, Inc.(A) Delaware Eye Care Holdings, Inc.
Hour Eye's Inc.(C) Maryland Hour Eyes
Metropolitan Vision Services, Inc.(C) Virginia Metropolitan Vision Services
Visionary Retail Management, Inc.(C) Delaware Visionary Retail Management, Inc.
Visionary Properties, Inc.(C) Delaware Visionary Properties, Inc.
Visionary MSO, Inc.(C) Delaware Visionary MSO, Inc.
</TABLE>
(A) 100% owned by Eye Care Centers of America, Inc.
(B) 100% owned by Visionworks Holdings, Inc.
(C) 100% owned by Eye Care Holdings, Inc.
<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> YEAR
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-END> JAN-02-1999
<CASH> 5,127
<SECURITIES> 0
<RECEIVABLES> 7,012
<ALLOWANCES> 559
<INVENTORY> 27,468
<CURRENT-ASSETS> 40,843
<PP&E> 126,252
<DEPRECIATION> 58,134
<TOTAL-ASSETS> 222,516
<CURRENT-LIABILITIES> 44,152
<BONDS> 242,945
0
32,793
<COMMON> 75
<OTHER-SE> (102,868)
<TOTAL-LIABILITY-AND-EQUITY> 222,516
<SALES> 235,236
<TOTAL-REVENUES> 237,851
<CGS> 80,636
<TOTAL-COSTS> 242,534
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,577
<INCOME-PRETAX> (26,260)
<INCOME-TAX> 13
<INCOME-CONTINUING> (26,273)
<DISCONTINUED> 0
<EXTRAORDINARY> 8,355
<CHANGES> 0
<NET-INCOME> (34,628)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
