<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000.
OR
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number 33-70572
EYE CARE CENTERS OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
TEXAS 74-2337775
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification number)
11103 WEST AVENUE
SAN ANTONIO, TEXAS 78213
(Address of principal executive offices, including zip code)
(210) 340-3531
(Registrant's telephone number, including area code)
--------------------------------------------------------------------------------
Indicate by check mark whether the registrant has (1) filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Class Outstanding at October 31, 2000
----- -------------------------------
Common Stock, $.01 par value 7,426,945 shares
================================================================================
<PAGE>
EYE CARE CENTERS OF AMERICA, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at January 1, 2000
and September 30, 2000 (Unaudited).....................................................2
Condensed Consolidated Statements of Operations for the
Thirteen Weeks and Thirty-Nine Weeks Ended October 2, 1999
(Unaudited) and September 30, 2000 (Unaudited)........................................3
Condensed Consolidated Statements of Cash Flows for the
Thirty-Nine Weeks Ended October 2, 1999 (Unaudited)
and September 30, 2000 (Unaudited).....................................................4
Notes to Condensed Consolidated Financial Statements.........................................5-13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................................14-20
Item 3. Quantitative and Qualitative Disclosures About Market Risk.....................................20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................20
Item 6. Exhibits and Reports on Form 8-K............................................................21-22
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EYE CARE CENTERS OF AMERICA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
JANUARY 1, SEPTEMBER 30,
2000 2000
------------ ------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,955 $ 2,654
Accounts and notes receivable, net 11,215 14,264
Inventory 30,146 29,535
Prepaid expenses and other 1,514 5,360
Deferred income taxes 446 446
------------ ------------
Total current assets 46,276 52,259
PROPERTY & EQUIPMENT, net 74,489 74,402
INTANGIBLE ASSETS, net 129,908 120,856
OTHER ASSETS 11,005 9,644
------------ ------------
Total assets $ 261,678 $ 257,161
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 22,773 $ 27,944
Deferred revenue 6,132 7,068
Current maturities of long-term debt 10,799 24,129
Accrued payroll expense 4,832 4,375
Accrued interest 3,584 7,543
Other accrued expenses 10,573 11,899
------------ ------------
Total current liabilities 58,693 82,958
LONG-TERM DEBT, less current maturities 272,968 251,755
DEFERRED INCOME TAXES 446 446
DEFERRED RENT 3,599 3,890
DEFERRED GAIN 2,467 2,318
------------ ------------
Total liabilities 338,173 341,367
------------ ------------
SHAREHOLDERS' DEFICIT:
Common stock 74 74
Preferred stock 37,268 41,021
Additional paid-in capital 55,738 51,339
Accumulated deficit (169,575) (176,640)
------------ ------------
Total shareholders' deficit (76,495) (84,206)
------------ ------------
$ 261,678 $ 257,161
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
EYE CARE CENTERS OF AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
<TABLE>
<CAPTION>
THIRTEEN WEEKS THIRTY-NINE WEEKS
ENDED ENDED
---------------------------- ---------------------------
OCTOBER 2, SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30,
1999 2000 1999 2000
----------- ------------- ----------- -------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET REVENUES:
Optical sales $ 74,587 $ 86,627 $ 217,911 $ 265,840
Management fee 832 810 2,355 2,066
----------- ----------- ----------- -----------
Total net revenues 75,419 87,437 220,266 267,906
OPERATING COSTS AND EXPENSES:
Cost of goods sold 25,920 27,408 73,643 84,625
Selling, general and administrative expenses 43,534 52,540 123,109 157,806
Store Closure -- 3,580 -- 3,580
Amortization of intangibles 1,295 3,070 3,676 6,651
----------- ----------- ----------- -----------
Total operating costs and expenses 70,749 86,598 200,428 252,662
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 4,670 839 19,838 15,244
INTEREST EXPENSE, NET 5,658 7,505 17,541 21,210
INCOME TAX EXPENSE 582 133 974 1,099
----------- ----------- ----------- -----------
NET INCOME/(LOSS) BEFORE
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (1,570) (6,799) 1,323 (7,065)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE -- -- 491 --
----------- ----------- ----------- -----------
NET INCOME/(LOSS) $ (1,570) $ (6,799) $ 832 $ (7,065)
=========== =========== =========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
<PAGE>
EYE CARE CENTERS OF AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
THIRTY-NINE THIRTY-NINE
WEEKS ENDED WEEKS ENDED
OCTOBER 2, SEPTEMBER 30,
1999 2000
------------------- ------------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss).................................................... $ 832 $ (7,065)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization..................................... 15,082 21,863
Other amortization................................................ 1,065 1,210
Cumulative effect of change in accounting principle............... 491 -
Deferred liabilities and other.................................... 783 1,227
Expenses to affect capital lease retirement...................... (431) -
Loss on disposition of property and equipment..................... 752 51
Increase/(decrease) in operating assets and liabilities.............. (2,265) 5,595
------------- --------------
Net cash provided by operating activities................................. 16,309 22,881
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment................................ (16,482) (16,619)
Proceeds from sale of property and equipment......................... 20 54
Purchase of retail outlet............................................ (368) -
Net outflow for Vision Twenty-One Retail Acquisition................. (38,851) (87)
Payments received on notes receivable................................ 145 28
------------- --------------
Net cash used for investing activities.................................... (55,536) (16,624)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt and capital leases.................................. (2,656) (5,979)
Proceeds from issuance of long-term debt............................ 39,118 -
Proceeds from the issuance of common stock.......................... 64 -
Redemption of common stock........................................... (440) (234)
Equity distribution.................................................. (268) (345)
------------- --------------
Net cash provided by (used for) financing activities....................... 35,818 (6,558)
------------- --------------
NET INCREASE/(DECREASE) IN CASH............................................ (3,409) (301)
CASH AND CASH EQUIVALENTS, beginning of period............................. 5,127 2,955
============= ==============
CASH AND CASH EQUIVALENTS, end of period................................... $ 1,718 $ 2,654
============= ==============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
<PAGE>
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts
of the Company, its wholly owned subsidiaries and certain private optometrists
with practices managed by subsidiaries of the Company (the "ODs"). 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.
The accompanying unaudited Condensed Consolidated Financial Statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation have been included and
are of a normal, recurring nature. Operating results for the thirteen week and
thirty-nine week periods ended September 30, 2000 are not necessarily
indicative of the results that may be expected for the fiscal year ended
December 30, 2000 ("fiscal 2000"). For further information, refer to the
consolidated financial statements and footnotes thereto included in the Eye
Care Centers of America, Inc.'s annual report on Form 10-K for the year ended
January 1, 2000 ("fiscal 1999").
2. RELATED PARTY TRANSACTIONS
The Company and Thomas H. Lee Company ("THL Co.") entered into a
management agreement as of April 24, 1998 (the "Management Agreement"). After a
term of ten years from April 24, 1998, the Management Agreement is
automatically renewable on an annual basis unless either party serves notice of
termination at least ninety days prior to the renewal date. For the thirteen
week and thirty-nine week periods ended September 30, 2000, the Company
incurred $125,000 and $375,000, respectively, related to the Management
Agreement.
3. INCOME TAXES
Deferred tax assets and liabilities are determined based on
differences between financial reporting and tax basis of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. The Company currently has a net
deferred tax asset related to its temporary differences. Based upon the weight
of available evidence allowed under the criteria set forth under FAS Statement
No. 109, including the lack of carryback potential, uncertainties exist as to
the future realization of the deferred tax asset. These uncertainties include
lack of carryback potential as the Company has incurred taxable losses in past
years. The Company has established a full valuation allowance for its deferred
tax assets.
<PAGE>
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THIRTY-NINE THIRTY-NINE
WEEKS ENDED WEEKS ENDED
OCTOBER 2, SEPTEMBER 30,
1999 2000
-------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash paid for interest $12,889 $14,618
Dividends accrued on preferred stock $ 3,302 $ 3,753
Retirement of capital lease obligation $ 5,652 $ --
Obligations incurred for capital lease $ -- $ 665
Store closure expenses incurred $ -- $ 3,580
Adjustment of VTO Retail Acquisition property and equipment to fair
market value $ -- $ 668
Adjustment of goodwill to noncompete agreement $ -- $ 5,575
</TABLE>
5. INTEREST RATE SWAPS
The Company does not hold or issue financial instruments for trading
purposes nor is it a party to leveraged derivatives. The Company uses interest
rate swaps that are "vanilla" and involve little complexity as hedge instruments
to manage interest rate risk. The counter parties to the Company's derivatives
consist of major international financial institutions. Because of the number of
these institutions and their high credit ratings, management believes these
derivatives do not present significant credit risk to the Company. Below is a
summary or interest rate swaps outstanding as of September 30, 2000.
<TABLE>
<CAPTION>
Weighted Average Weighted Average
Notional Amount Maturity Fixed Pay Floating Receive
September 30, 2000 Date Rate Rate
-------------------------------- --------------- ---------------------- ----------------------
<S> <C> <C> <C>
$ 33.3 million May 1, 2001 5.9% 6.1%
</TABLE>
Interest rate swap agreements effectively convert floating rates on
long-term debt to fixed rates. The Company's intent is to reduce overall
interest expense while maintaining an acceptable level of risk to interest rate
fluctuations. The swap agreements specifically hedge a portion of both $50.0
million aggregate principle amount of the Company's Floating Interest Rate
Subordinated Term Securities due 2008 and $50.0 million of the Company's Credit
Facility, which consists of (i) the $55.0 million term loan facility; (ii) the
$35.0 million revolving credit facility; and (iii) the $100.0 million
acquisition facility. As market interest rates fluctuate, the unrealized gain or
loss on the swap portfolio moves in relationship to the fair value of the
underlying debt. The Company had an unrealized gain on the interest rate swap
portfolio of approximately $256,937 as of September 30, 2000. The change in the
market
<PAGE>
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
value of these interest rate swaps is not recorded in the financial position or
operations of the Company. Interest to be paid or received is accrued as an
adjustment to interest expense. Upon 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.
6. NEW ACCOUNTING PRONOUNCEMENTS
DERIVATIVES. In June 1998, the Financial Accounting Standards Board issued
FASB No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES,
which is required to be adopted in years beginning after June 15, 1999. In June
1999, FASB No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES-DEFERRAL OF THE EFFECTIVE DATE OF FASB 133 (AN AMENDMENT OF FASB
133), was issued, which delays the required adoption of FASB No. 133 by one
year. The statement permits early adoption as of the beginning of any fiscal
quarter after its issuance. In 2000, the FASB issued FASB No. 138, "Accounting
for Derivative Instruments and Hedging Activities" an amendment to FASB No. 133
which addresses certain implementation issues related to FASB No. 133. Statement
No. 133 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 FASB No. 133 will have on
the earnings and financial position of the Company.
PREOPENING COSTS. On January 3, 1999, the Company adopted the AICPA'S
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 effect of the adoption of the
SOP on the Company's result of operations was a write-off of previously
capitalized pre-opening and organization costs of $491,000, which is reflected
as a cumulative effect of change in accounting principle during the first
quarter of fiscal 1999.
7. STORE CLOSURE EXPENSE
In connection with a comprehensive operational review during the third
quarter of 2000, the Company's management identified ten existing stores
which were unprofitable and five undeveloped lease sites which did not fit
into the Company's future business plan. Management determined that the ten
existing stores should be closed and the leases at the undeveloped sites
should be terminated. A charge of $3.6 million was recorded to reflect the
necessary write-off of related assets and expenses to be incurred in the
closing of these locations. The charge consists of $1.4 million in goodwill
associated with two of the identified stores that were acquired by the
Company through the Company's various acquisitions, $1.4 million in leasehold
improvements at the stores and $0.8 million in estimated lease buy-out
payments. The comprehensive operating review and resulting store closures and
lease terminations were not part of management's constant evaluation of the
performance of its stores in which, through the course of ongoing operations,
it periodically decides not to renew certain leases or to relocate certain
stores.
<PAGE>
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. CONDENSED CONSOLIDATING INFORMATION (UNAUDITED)
The $100,000,000 in principal amount of 9 1/8% Senior Subordinated
Notes due 2008 and $50,000,000 in principal amount of Floating Interest Rate
Subordinated Term Securities due 2008 were issued by the Company and are
guaranteed by its subsidiaries (the "Guarantor Subsidiaries") but are not
guaranteed by the ODs. 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) Eye Care Centers of
America, Inc. as parent, as if it accounted for its subsidiaries on the equity
method, (ii) the Guarantor Subsidiaries, and (iii) the ODs. 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.
CONDENSED CONSOLIDATING BALANCE SHEET
JANUARY 1, 2000
<TABLE>
<CAPTION>
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
--------- ------------ -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 862 $ 1,656 $ 437 $ - $ 2,955
Accounts and notes receivable, net 111,532 4,146 2,609 (107,072) 11,215
Inventory 16,463 12,330 1,353 - 30,146
Prepaid expenses and other 1,026 444 44 - 1,514
Deferred income taxes 446 - - - 446
--------- ------------ -------- ------------ ------------
Total current assets 130,329 18,576 4,443 (107,072) 46,276
Property and equipment, net 44,153 30,336 - - 74,489
Intangible assets, net 18,805 111,008 95 - 129,908
Other assets 9,666 1,339 - - 11,005
Investment in subsidiaries 5,514 - - (5,514) -
--------- ------------ -------- ------------ ------------
Total assets $ 208,467 $161,259 $4,538 $(112,586) $ 261,678
========= ============ ======== ============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 16,899 $108,996 $3,950 $(107,072) $ 22,773
Deferred revenue 4,213 1,919 - - 6,132
Current maturities of long-term debt 10,000 799 - - 10,799
Accrued payroll expense 1,884 2,944 4 - 4,832
Accrued interest 3,134 450 - - 3,584
Other accrued expenses 6,615 3,750 208 - 10,573
--------- ------------ -------- ------------ ------------
Total current liabilities 42,745 118,858 4,162 (107,072) 58,693
Long-term debt, less current maturities 238,211 34,657 100 - 272,968
Deferred income taxes 446 - - - 446
Deferred rent 2,472 1,127 - - 3,599
Deferred gain 1,849 618 - - 2,467
--------- ------------ -------- ------------ ------------
Total liabilities 285,723 155,260 4,262 (107,072) 338,173
--------- ------------ -------- ------------ ------------
<PAGE>
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Shareholders' equity/(deficit):
Common stock 74 - - - 74
Preferred stock 37,268 - - - 37,268
Additional paid-in capital 54,977 1,092 (331) - 55,738
Accumulated deficit (169,575) 4,907 607 (5,514) (169,575)
--------- ------------ -------- ------------ ------------
Total shareholders' equity/(deficit) (77,256) 5,999 276 (5,514) (76,495)
--------- ------------ -------- ------------ ------------
$ 208,467 $161,259 $4,538 $(112,586) $ 261,678
========= ============ ======== ============ ============
</TABLE>
CONSOLIDATING INCOME STATEMENT
FOR THE THIRTY-NINE WEEKS ENDED OCTOBER 2, 1999
<TABLE>
<CAPTION>
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
--------- ------------ -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Revenues:
Optical sales $ 122,621 $ 67,273 $ 28,017 $ -- $ 217,911
Management fees -- 7,546 -- (5,191) 2,355
Investment earnings in subsidiaries 963 -- -- (963) --
--------- ------------ -------- ------------ ------------
Total net revenues 123,584 74,819 28,017 (6,154) 220,266
Operating costs and expenses:
Cost of goods sold 41,656 24,622 7,365 73,643
Selling, general and administrative expenses 63,677 44,610 20,013 (5,191) 123,109
Amortization of intangibles 786 2,887 3 3,676
--------- ------------ -------- ------------ ------------
Total operating costs and expenses 106,119 72,119 27,381 (5,191) 200,428
--------- ------------ -------- ------------ ------------
Income (loss) from operations 17,465 2,700 636 (963) 19,838
Interest expense, net 15,574 1,961 6 -- 17,541
Income tax expense 694 -- 280 -- 974
--------- ------------ -------- ------------ ------------
Net income (loss) before cumulative effect of
change in accounting principle 1,197 739 350 (963) 1,323
Cumulative effect of change in accounting
principle 365 126 -- -- 491
--------- ------------ -------- ------------ ------------
Net income (loss) $ 832 $ 613 $ 350 $ (963) $ 832
========= ============ ======== ============ ============
</TABLE>
CONSOLIDATING INCOME STATEMENT
FOR THE THIRTEEN WEEKS ENDED OCTOBER 2, 1999
<TABLE>
<CAPTION>
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
--------- ------------ -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Revenues:
Optical sales $ 40,833 $ 24,428 $ 9,326 $ -- $ 74,587
Management fees -- 2,515 -- (1,683) 832
Investment earnings in subsidiaries (4,643) -- -- 4,643
--------- ------------ -------- ------------ ------------
Total net revenues 36,190 26,943 9,326 2,960 75,419
Operating costs and expenses:
Cost of goods sold 14,937 8,063 2,920 -- 25,920
Selling, general and administrative expenses 13,711 25,056 6,450 (1,683) 43,534
Amortization of intangibles 264 1,030 1 -- 1,295
--------- ------------ -------- ------------ ------------
Total operating costs and expenses 28,912 34,149 9,371 (1,683) 70,749
--------- ------------ -------- ------------ ------------
Income (loss) from operations 7,278 (7,206) (45) 4,643 4,670
Interest expense, net 5,038 618 2 -- 5,658
Income tax expense 569 -- 13 -- 582
--------- ------------ -------- ------------ ------------
Net income (loss) before cumulative effect of
change in accounting principle 1,671 (7,824) (60) 4,643 (1,570)
Cumulative effect of change in accounting
principle -- -- -- -- --
<PAGE>
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------- ------------ -------- ------------ ------------
Net income (loss) $ 1,671 $ (7,824) $ (60) $ 4,643 $ (1,570)
========= ============ ======== ============ ============
</TABLE>
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THIRTY-NINE WEEKS ENDED OCTOBER 2, 1999
<TABLE>
<CAPTION>
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
--------- ------------ -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 832 $ 613 $ 350 $ (963) $ 832
Adjustments to reconcile net income (loss)
to net
Cash provided by operating activities:
Depreciation and amortization 8,660 6,419 3 -- 15,082
Other amortization 1,055 10 -- 1,065
Cumulative effect of change in
accounting principle 365 126 -- -- 491
Deferred liabilities and other 1,000 (217) -- -- 783
Expenses to affect capital lease
retirement -- (431) -- -- (431)
(Gain) loss on disposition of property
and equipment 505 247 -- -- 752
Increase/(decrease) in operating assets
and liabilities (37,853) 35,673 (85) -- (2,265)
--------- ------------ -------- ------------ ------------
Net cash provided by (used in) operating
activities (25,436) 42,440 268 (963) 16,309
--------- ------------ -------- ------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment (13,217) (3,265) -- -- (16,482)
Proceeds from sale of property and
equipment 18 2 -- -- 20
Purchase of retail outlet (368) -- -- -- (368)
Purchase of Vision Twenty-One Retail
Acquisition (1,691) (37,160) -- -- (38,851)
Payment received on notes receivable 3 142 -- -- 145
Investment in subsidiaries (963) -- -- 963 --
--------- ------------ -------- ------------ ------------
Net cash provided by (used in) investing
activities (16,218) (40,281) -- 963 (55,536)
--------- ------------ -------- ------------ ------------
Cash flows from financing activities:
Payments on debt and capital leases (2,000) (656) -- -- (2,656)
Proceeds from issuance of long-term debt 39,118 -- -- -- 39,118
Proceeds from issuance of common stock 64 -- -- -- 64
Repurchase of common stock (440) -- -- -- (440)
Equity distribution -- -- (268) -- (268)
--------- ------------ -------- ------------ ------------
Net cash provided by (used in) financing
activities 36,742 (656) (268) -- 35,818
--------- ------------ -------- ------------ ------------
Net decrease in cash and cash equivalents (4,912) 1,503 -- -- (3,409)
Cash and cash equivalents at beginning of
period 3,119 2,008 -- -- 5,127
--------- ------------ -------- ------------ ------------
Cash and cash equivalents at end of period $ (1,793) $ 3,511 $ -- $ -- $ 1,718
========= ============ ======== ============ ============
</TABLE>
<PAGE>
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING BALANCE SHEET
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Guarantor Consolidated
ASSETS Parent Subsidiaries ODs Eliminations Company
--------- ------------ --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 416 $ 1,758 $ 480 $ -- $ 2,654
Accounts and notes receivable, net 102,318 30,138 4,298 (122,490) 14,264
Inventory 17,667 10,421 1,447 -- 29,535
Prepaid expenses and other 3,114 2,200 46 -- 5,360
Deferred income taxes 446 -- -- -- 446
--------- ------------ --------- ------------ ------------
Total current assets 123,961 44,517 6,271 (122,490) 52,259
Property and equipment, net 45,076 29,326 -- -- 74,402
Intangible assets, net 17,061 103,703 92 -- 120,856
Other assets 8,670 974 -- -- 9,644
Investment in subsidiaries 8,262 -- -- (8,262) --
--------- ------------ --------- ------------ ------------
Total assets $ 203,030 $ 178,520 $ 6,363 $(130,752) $ 257,161
========= ============ ========= ============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 20,720 $ 118,577 $ 11,137 $(122,490) $ 27,944
Deferred revenue 4,463 2,597 8 -- 7,068
Current maturities of long-term debt 19,890 4,239 -- -- 24,129
Accrued payroll expense 1,613 2,758 4 -- 4,375
Accrued interest 7,034 509 -- -- 7,543
Other accrued expenses 6,340 5,350 209 -- 11,899
--------- ------------ --------- ------------ ------------
Total current liabilities 60,060 134,030 11,358 (122,490) 82,958
Long-term debt, less current maturities 222,858 28,797 100 -- 251,755
Deferred income taxes 446 -- -- -- 446
Deferred rent 2,532 1,358 -- -- 3,890
Deferred gain 1,756 562 -- -- 2,318
--------- ------------ --------- ------------ ------------
Total liabilities 287,652 164,747 11,458 (122,490) 341,367
--------- ------------ --------- ------------ ------------
Shareholders' equity/(deficit):
Common stock 74 -- -- -- 74
Preferred stock 41,021 -- -- -- 41,021
Additional paid-in capital 50,923 1,092 (676) 51,339
Accumulated deficit (176,640) 12,681 (4,419) (8,262) (176,640)
--------- ------------ --------- ------------ ------------
Total shareholders' equity/(deficit) (84,622) 13,773 (5,095) (8,262) (84,206)
--------- ------------ --------- ------------ ------------
$ 203,030 $ 178,520 $ 6,363 $(130,752) $ 257,161
========= ============ ========= ============ ============
</TABLE>
<PAGE>
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
--------- ------------ --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Revenues:
Optical sales $ 133,638 $ 89,400 $ 42,802 $ -- $ 265,840
Management fee 569 16,229 -- (14,732) 2,066
Investment earnings in subsidiaries 2,748 -- -- (2,748) --
--------- ------------ --------- ------------ ------------
Total net revenues 136,955 105,629 42,802 (17,480) 267,906
Operating costs and expenses:
Cost of goods sold 40,804 33,743 10,078 -- 84,625
Selling, general and administrative expenses 79,783 55,014 37,741 (14,732) 157,806
Store Closure 3,580 -- -- -- 3,580
Amortization of intangibles 423 6,225 3 -- 6,651
--------- ------------ --------- ------------ ------------
Total operating costs and expenses 124,590 94,982 47,822 (14,732) 252,662
--------- ------------ --------- ------------ ------------
Income (loss) from operations 12,365 10,647 (5,020) (2,748) 15,244
Interest expense, net 19,301 1,903 6 -- 21,210
Income tax expense 129 970 -- -- 1,099
--------- ------------ --------- ------------ ------------
Net income (loss) $ (7,065) $ 7,774 $ (5,026) $ (2,748) $ (7,065)
========= ============ ========= ============ ============
</TABLE>
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THIRTEEN WEEKS ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
--------- ------------ --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Revenues:
Optical sales $ 43,501 $ 27,961 $ 15,165 $ -- $ 86,627
Management fee 569 5,395 -- (5,154) 810
Investment earnings/(loss) in subsidiaries (4,492) -- -- 4,492 --
--------- ------------ --------- ------------ ------------
Total net revenues 39,578 33,356 15,165 (662) 87,437
Operating costs and expenses:
Cost of goods sold 12,825 10,335 4,248 -- 27,408
Selling, general and administrative expenses 23,501 17,613 16,580 (5,154) 52,540
Store Closure 3,580 -- -- -- 3,580
Amortization of intangibles (104) 3,173 1 -- 3,070
<PAGE>
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------- ------------ --------- ------------ ------------
Total operating costs and expenses 39,802 31,121 20,829 (5,154) 86,598
--------- ------------ --------- ------------ ------------
Income (loss) from operations (224) 2,235 (5,664) 4,492 839
Interest expense, net 6,367 1,136 2 -- 7,505
Income tax expense (benefit) 208 (75) -- -- 133
--------- ------------ --------- ------------ ------------
Net income (loss) $ (6,799) $ 1,174 $ (5,666) $ 4,492 $ (6,799)
========= ============ ========= ============ ============
</TABLE>
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
-------- ------------ --------- ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (7,065) $ 7,774 $ (5,026) $ (2,748) $ (7,065)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization 10,059 11,801 3 -- 21,863
Other amortization 1,038 172 -- -- 1,210
Deferred liabilities and other 310 909 8 -- 1,227
Loss on disposition of property and
equipment 51 -- -- -- 51
Increase/(decrease) in operating assets
and liabilities 15,024 (14,832) 5,403 -- 5,595
-------- ------------ --------- ------------ ------------
Net cash provided by (used in) operating
activities 19,417 5,824 388 (2,748) 22,881
-------- ------------ --------- ------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment (11,393) (5,226) -- -- (16,619)
Proceeds from sale of property and
equipment 12 42 -- -- 54
Net outflow for Vision Twenty-One
Retail Acquisition -- (87) -- -- (87)
Payment received on notes receivable -- 28 -- -- 28
Investment in Subsidiaries (2,748) -- -- 2,748 --
-------- ------------ --------- ------------ ------------
Net cash provided by (used in) investing
activities (14,129) (5,243) -- 2,748 (16,624)
-------- ------------ --------- ------------ ------------
Cash flows from financing activities:
Payments on debt and capital leases (5,500) (479) -- -- (5,979)
Redemption of common stock (234) -- -- -- (234)
Equity distribution -- -- (345) -- (345)
-------- ------------ --------- ------------ ------------
Net cash used in financing activities (5,734) (479) (345) -- (6,558)
-------- ------------ --------- ------------ ------------
Net increase (decrease) in cash and cash
equivalents (446) 102 43 -- (301)
Cash and cash equivalents at beginning of
period 862 1,656 437 -- 2,955
-------- ------------ --------- ------------ ------------
Cash and cash equivalents at end of period $ 416 $ 1,758 $ 480 $ -- $ 2,654
======== ============ ========= ============ ============
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Eye Care Centers of America, Inc. together with its subsidiaries
(collectively, the "Company") is the third largest retail optical chain in
the United States as measured by net revenues, operating 359 stores, 287 of
which are optical superstores. The Company operates predominately under the
trade name "EyeMasters," and in certain geographical regions under the trade
names "Binyon's," "Visionworks," "Hour Eyes," "Dr. Bizer's VisionWorld," "Dr.
Bizer's ValuVision," "Doctor's VisionWorld," "Doctor's ValuVision," "Stein
Optical," "Vision World", "Doctor's Visionworks" and "Eye DRx." The Company
operates in the $5.0 billion retail optical chain sector of the $16.0 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.
The industry is highly fragmented and is undergoing significant
consolidation. Under the current management team, the Company has
successfully acquired and integrated four acquisitions.
- In September 1996, the Company acquired Visionworks Holdings, Inc. and
its subsidiaries, a sixty store optical retailer located along the
Atlantic Coast from Florida to Washington, D.C.
- In September 1997, the Company acquired The Samit Group, Inc. and its
subsidiaries with ten Hour Eyes stores in Maryland and Washington,
D.C., and certain of the assets of Hour Eyes Doctors of Optometry, P.C.
(the "PC"), a Virginia professional corporation, and simultaneously
entered into long-term management agreements with the PC to manage the
PC's twelve stores in Virginia.
- In September 1998, the Company acquired (the "Bizer Acquisition)
certain of the assets of Dr. Bizer's VisionWorld, PLLC and related
entities, a nineteen store optical retailer located primarily in
Kentucky and Tennessee, and simultaneously entered into long-term
management agreements with a private optometrist to manage such
nineteen stores.
- In August 1999, the Company acquired from Vision Twenty-One, Inc.
("Vision Twenty-One") substantially all of the assets used to operate
an aggregate of 76 retail eyewear outlets (the "VTO Retail
Acquisition") located in Minnesota, North Dakota, Iowa, South Dakota
and Wisconsin operating under the tradename "Vision World," in
Wisconsin operating under the tradename "Stein Optical," and in New
Jersey operating under the tradename "Eye DRx." Simultaneously, the
Company assumed the rights and obligations under a management agreement
with a private optometrist to manage the nineteen Eye DRx stores.
Concurrent with the closing of the VTO Retail Acquisition, the Company entered
into an Agreement Regarding Strategic Alliance (the "Strategic Alliance
Agreement") with Vision Twenty-One involving their respective managed care
programs, optometry and ophthalmology practices and the co-marketing of Vision
Twenty-One's refractive surgery program. Subsequent to the closing of the VTO
Retail Acquisition, (i) certain purchase price adjustments arose in connection
with the VTO Retail Acquisition resulting in Vision Twenty-One owing the Company
the amount of $4,031,873 and (ii) Vision Twenty-One announced it had decided to
substantially exit the business of managing practices of optometry and
<PAGE>
ophthalmology and the discontinuation of selected managed care contracts that
are not consistent with its business plan. Since such announcement, Vision
Twenty-One and the Company had been negotiating a resolution of the outstanding
matters and their business relationship.
On September 21, 2000, the Company and Vision Twenty-One, and certain
other interested and affiliated parties, entered into a Settlement Agreement
resolving certain outstanding matters including:
- Vision Twenty-One and each of its subsidiaries agreed to permit the
Company, and the optometrists with practices within or adjacent to the
Company's stores, to participate on their respective managed vision
care panels.
- The amount owed by Vision Twenty-One to the Company with respect to the
purchase price adjustment on the VTO Retail Acquisition was reduced to
$1,531,873, such debt to be evidenced by a convertible note
("Convertible Note") maturing on September 30, 2003. The Convertible
Note accrues interest at seven percent annually and is convertible into
common stock (at a conversion price of the greater of $.18 per share
or the market price at the time of closing of Vision Twenty-One's new
credit facility) at varying amounts up to October 1, 2002 at which time
it is fully convertible.
In addition, pursuant to the Settlement Agreement, the optometric practices
managed by Vision Twenty-One within or adjacent to the Company's stores were
transitioned to private optometrists, the parties settled certain amounts
owed to each other with respect to operating expenditures, and the Company
purchased certain optometric equipment from Vision Twenty-One.
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 four 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 1999 and the
thirty-nine week period ended September 30, 2000, approximately 26% and 35%,
respectively, 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.
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain statement of
income data as a percentage of net revenues:
<TABLE>
<CAPTION>
THIRTEEN THIRTY-NINE
WEEKS ENDED WEEKS ENDED
------------------------------------ ----------------------------------
SEPTEMBER 30, OCTOBER 2, SEPTEMBER 30,
OCTOBER 2, 1999 2000 1999 2000
---------------- ----------------- ------------- ------------------
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
NET REVENUES:
Optical sales 98.9 % 99.1 % 98.9 % 99.2 %
Management fee 1.1 0.9 1.1 0.8
---------------- ----------------- ------------- ------------------
Total net revenues 100.0 100.0 100.0 100.0
OPERATING COSTS AND EXPENSES:
Cost of goods sold 34.8 * 31.6 * 33.8 * 31.8 *
Selling, general and administrative expenses 58.4 * 60.7 * 56.5 * 59.4 *
Store closures - 4.1 - 1.3
Amortization of intangibles 1.7 3.5 1.7 2.5
---------------- ----------------- ------------- ------------------
Total operating costs and expenses 93.8 99.0 91.0 94.3
---------------- ----------------- ------------- ------------------
INCOME FROM OPERATIONS 6.2 1.0 9.0 5.7
INTEREST EXPENSE, NET 7.5 8.6 8.0 7.9
INCOME TAX EXPENSE 0.8 0.2 0.4 0.4
---------------- ----------------- ------------- ------------------
NET INCOME/(LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE (2.1) (7.8) 0.6 (2.6)
<PAGE>
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE - - 0.2 -
NET INCOME/(LOSS) (2.1) % (7.8) % 0.4 % (2.6) %
================ ================= ============= ==================
</TABLE>
* Percentages based on optical sales only
THE THIRTEEN WEEKS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THIRTEEN WEEKS ENDED
OCTOBER 2, 1999.
NET REVENUES. The increase in net revenues to $87.4 million for the thirteen
weeks ended September 30, 2000 from $75.4 million for the thirteen weeks ended
October 2, 1999 was largely the result of the VTO Retail Acquisition, an
increase in comparable store sales of 2.9% and revenues from stores open less
than twelve months of $1.9 million. The VTO Retail Acquisition resulted in an
increase in net revenues of $7.9 million during the third quarter of fiscal
2000, which represents the revenue for the period during which the Company did
not own the related stores in 1999.
GROSS PROFIT. Gross profit increased to $59.2 million for the thirteen weeks
ended September 30, 2000 from $48.7 million for the thirteen weeks ended October
2, 1999. Gross profit as a percentage of optical sales increased to 68.4% for
the thirteen weeks ended September 30, 2000 as compared to 65.2% for the
thirteen weeks ended October 2, 1999. This percentage increase was largely due
to improved buying efficiencies and a successful change in mix towards a lower
cost lens . Margin was further increased by improved lab efficiencies.
SELLING GENERAL & ADMINISTRATIVE EXPENSES (SG&A). SG&A increased to $52.5
million for the thirteen weeks ended September 30, 2000 from $43.5 million
for the thirteen weeks ended October 2, 1999. SG&A as a percentage of optical
sales increased to 60.7% for the thirteen weeks September 30, 2000 from 58.4%
for the thirteen weeks ended October 2, 1999. This percentage increase was
due primarily to an increase in payroll expenses as a result of payroll for
optometrists in lower volume stores acquired in the VTO Retail Acquisition
and an increase in overhead expenditures.
STORE CLOSURE. In connection with a comprehensive operational review during
the third quarter of 2000, the Company's management identified ten existing
stores which were unprofitable and five undeveloped lease sites which did not
fit into the Company's future business plan. Management determined that the
ten existing stores should be closed and the leases at the undeveloped sites
should be terminated. A charge of $3.6 million was recorded to reflect the
necessary write-off of related assets and expenses to be incurred in the
closing of these locations. The charge consists of $1.4 million in goodwill
associated with two of the identified stores that were acquired by the
Company through the Company's various acquisitions, $1.4 million in leasehold
improvements at the stores and $0.8 million in estimated lease buy-out
payments. The comprehensive operating review and resulting store closures and
lease terminations were not part of management's constant evaluation of the
performance of its stores in which, through the course of ongoing operations,
it periodically decides not to renew certain leases or to relocate certain
stores.
<PAGE>
AMORTIZATION EXPENSE. Amortization expense increased to $3.1 million for the
thirteen weeks ended September 30, 2000 from $1.3 million for the thirteen
weeks ended October 2, 1999. This increase was due to amortization of the
goodwill and the increased value and accelerated amortization of the
non-compete agreement related to the VTO Retail Acquisition, which was
completed during the third quarter of fiscal 1999.
NET INTEREST EXPENSE. Net interest expense increased to $7.5 million for the
thirteen weeks ended September 30, 2000 from $5.7 million for the thirteen
weeks ended October 2, 1999. This increase was due to the increased
borrowings related to the VTO Retail Acquisition.
NET INCOME. Net loss increased to $6.8 million for the thirteen weeks ended
September 30, 2000 from a net loss of $1.6 million for the thirteen weeks
ended October 2, 1999.
THE THIRTY-NINE WEEKS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THIRTY-NINE
WEEKS ENDED OCTOBER 2, 1999.
NET REVENUES. The increase in net revenues to $267.9 million for the
thirty-nine weeks ended September 30, 2000 from $220.3 million for the
thirty-nine weeks ended October 2, 1999 was largely the result of the VTO
Retail Acquisition, an increase in comparable store sales of 2.7% and
revenues from stores open less than twelve months of $6.9 million. The VTO
Retail Acquisition resulted in an increase in net revenues of $34.8 million
during the thirty-nine week period ended September 30, 2000, which represents
the revenue for the period during which the Company did not own the related
stores in 1999.
GROSS PROFIT. Gross profit increased to $181.2 million for the thirty-nine
weeks ended September 30, 2000 from $144.3 million for the thirty-nine weeks
ended October 2, 1999. Gross profit as a percentage of optical sales
increased to 68.2% for the thirty-nine weeks ended September 30, 2000 as
compared to 66.2% for the thirty-nine weeks ended October 2, 1999. This
percentage increase was largely due to improved buying efficiencies and a
successful change in mix towards a lower cost lens. Margin was further
increased by improved inventory shrinkage control and increased lab
efficiencies.
SELLING GENERAL & ADMINISTRATIVE EXPENSES (SG&A). SG&A increased to $157.8
million for the thirty-nine weeks ended September 30, 2000 from $123.1
million for the thirty-nine weeks ended October 2, 1999. SG&A as a percentage
of optical sales increased to 59.4% for the thirty-nine weeks ended September
30, 2000 from 56.5% for the thirty-nine weeks ended October 2, 1999. This
percentage increase was due primarily to an increase in payroll expenses as a
result of payroll for optometrists in lower volume stores acquired in the VTO
Retail Acquisition and an increase in overhead expenditures.
STORE CLOSURE. In connection with a comprehensive operational review
during the third quarter of 2000, the Company's management identified ten
existing stores which were unprofitable and five undeveloped lease sites
which did not fit into the Company's future business plan. Management
determined that the ten existing stores should be closed and the leases at
the undeveloped sites should be terminated. A charge of $3.6 million was
recorded to reflect the necessary write-off of related assets and expenses to
be incurred in the closing of these locations. The charge consists of $1.4
million in goodwill associated with two of the identified stores that were
acquired by the Company through the Company's various acquisitions,
<PAGE>
$1.4 million in leasehold improvements at the stores and $0.8 million in
estimated lease buy-out payments. The comprehensive operating review and
resulting store closures and lease terminations were not part of management's
constant evaluation of the performance of its stores in which, through the
course of ongoing operations, it periodically decides not to renew certain
leases or to relocate certain stores.
AMORTIZATION EXPENSE. Amortization expense increased to $6.7 million for the
thirty-nine weeks ended September 30, 2000 from $3.7 million for the
thirty-nine weeks ended October 2, 1999. This increase was due to
amortization of the goodwill related to the VTO Retail Acquisition, which was
completed during the third quarter of fiscal 1999.
NET INTEREST EXPENSE. Net interest expense increased to $21.2 million for the
thirty-nine weeks ended September 30, 2000 from $17.5 million for the
thirty-nine weeks ended October 2, 1999. This increase was due to the
increased borrowings related to the VTO Retail Acquisition.
NET INCOME. Net loss increased to $7.1 million for the thirty-nine weeks
ended September 30, 2000 from a net loss of $0.8 million for the thirty-nine
weeks ended October 2, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities provided net cash of $22.9
million for the thirty-nine weeks ended September 30, 2000 as compared to
$16.3 million for the thirty-nine weeks ended October 2, 1999. As of
September 30, 2000, the Company had $2.7 million of cash available to meet
the Company's obligations.
Capital expenditures are related to the construction of new stores,
repositioning of existing stores in some markets, new computer systems for
the stores and maintenance of existing facilities. Capital expenditures for
the thirty-nine weeks ended September 30, 2000 were $16.6 million. Capital
expenditures for fiscal 2000 are anticipated to be approximately $20.0
million. Of the fiscal 2000 capital expenditures, approximately $16.2 million
are expected to be related to new stores and approximately $3.8 million are
expected to be for maintenance of existing facilities.
On April 24, 1998, the Company entered into a credit agreement (the
"Credit Facility") which consists of (i) a $55.0 million term loan facility
(the "Term Loan Facility"); (ii) a $35.0 million revolving credit facility
(the "Revolving Credit Facility"); and (iii) a $100.0 million acquisition
facility (the "Acquisition Facility"). The proceeds of the Credit Facility
were used to pay long-term debt outstanding under the previous credit
facility. At September 30, 2000, the Company had $45.0 million in term loans
outstanding under the Term Loan Facility, $9.0 million outstanding under the
Revolving Credit Facility, $69.2 million outstanding under the Acquisition
Facility (which funded the Bizer Acquisition and the VTO Retail Acquisition),
$149.6 million in notes payable outstanding (the "Notes") and $3.1 million in
capital lease obligations. Borrowings made under the Credit Facility bear
interest at a rate equal to, at the Company's option, LIBOR plus 2.25% or the
Base Rate (as defined in the Credit Facility) plus 1.25%. The Term Loan
Facility matures five years from the closing date of the Credit Facility and
will amortize quarterly in aggregate annual principal amounts of
approximately $0.0 million, $4.0 million, $12.0 million, $18.0 million, and
$21.0 million, respectively, for years one through five after April 24, 1998.
Based upon current operations, anticipated cost savings and future
growth, the Company believes that its cash flow from operations, together
with borrowings currently available under the Revolving Credit Facility, will
be adequate to meet its anticipated requirements for working capital, planned
capital expenditures and scheduled principal and interest payments. The
Company believes that its ability to repay the Notes and amounts outstanding
under the Revolving Credit Facility and the Acquisition Facility may require
additional financing. In light of the recent industry trends and Company
<PAGE>
performance, management has engaged its agent bank in discussions related to
future financing needs and to align its financial performance with future
covenant requirements. The ability of the Company to meet its debt service
obligations, reduce its debt and remain in compliance with its financial
covenants of the Credit Facility will be dependent on the future performance
of the Company, which in turn, will be subject to general economic conditions
and to financial, business, and other factors, including factors beyond the
Company's control. A portion of the Company's debt bears interest at floating
rates; therefore, its financial condition is and will continue to be affected
by changes in prevailing interest rates.
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 fiscal
quarters; however, the opening of new stores and the Bizer Acquisition and
the VTO Retail Acquisition may affect seasonal fluctuations. Hence, quarterly
results are not necessarily indicative of results for the entire year.
FORWARD LOOKING STATEMENTS
The foregoing Form 10-Q contains various "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Forward-looking statements represent the Company's expectations or
belief concerning future events, including the following: any statements
regarding future sales and gross profit percentages, any statements regarding
the continuation of historical trends, and any statements regarding the
sufficiency of the Company's cash balances and cash generated from operating
and financing activities for the Company's future liquidity and capital
resource needs. Without limiting the foregoing, the words "believes,"
"anticipates," "plans," "expects," and similar expressions are intended to
identify forward-looking statements. The Company cautions that these
statements are further qualified by important economic and competitive
factors that could cause actual results to differ materially from those in
the forward-looking statements, including, without limitation, risks of the
eye care industry, including a highly competitive industry with many
well-established competitors with greater financial and other resources than
the Company, and the impact of changes in consumer tastes, local, regional
and national economic conditions, demographic trends, traffic patterns,
employee availability and cost increases. In addition, the Company's ability
to expand is dependent upon various factors, such as the availability of
attractive sites for new stores, the ability to negotiate suitable lease
terms, the ability to generate or borrow funds to develop new stores and
obtain various government permits and licenses and the recruitment and
training of skilled management and employees. Accordingly, such
forward-looking statements do not purport to be predictions of future events
or circumstances and may not be realized.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various market risks. Market risk is the
potential loss arising from adverse changes in market prices and rates. The
Company does not enter into derivative or other financial instruments for
trading or speculative purposes. There have been no material changes in the
Company's market risk during the third quarter of fiscal 2000. For further
discussion, refer to the Eye Care Centers of America, Inc.'s annual report on
Form 10-K for the year ended January 1, 2000.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to routine litigation in the ordinary course of
its business. There have been no such pending matters, individually or in the
aggregate, that are deemed to be material to the business or financial
condition of the Company that have arisen during the third quarter of fiscal
2000. For further discussion, refer to the Eye Care Centers of America,
Inc.'s annual report on Form 10-K for the year ended January 1, 2000.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report.
2.1 Stock Purchase Agreement, dated August 15, 1996, by and
between Eye Care Centers of America, Inc., Visionworks
Holdings, Inc. and the Sellers listed therein. (a)
2.2 Stock Purchase Agreement, dated September 30 1997, by and
among Eye Care Centers of America, Inc., a Texas
corporation, Robert A. Samit, O. D. and Michael Davidson, O.
D. (a)
2.3 Recapitalization Agreement dated as of March 6, 1998 among
ECCA Merger Corp., Eye Care Centers of America, Inc. and the
sellers listed therein. (a)
2.4 Amendment No. 1 to the Recapitalization Agreement dated as
of April 23, 1998 among ECCA Merger Corp., Eye Care Centers
of America, Inc, and the sellers listed therein. (a)
2.5 Amendment No. 2 to the Recapitalization Agreement dated as
of April 24, 1998 among ECCA Merger Corp., Eye Care Centers
of America, Inc. and the sellers listed therein. (a)
2.6 Articles of Merger of ECCA Merger Corp. with and into Eye
Care Centers of America, Inc. dated April 24, 1998. (a)
2.7 Master Asset Purchase Agreement, dated as of August 22,
1998, by and among Eye Care Centers of America, Inc., Mark
E. Lynn, Dr. Mark Lynn & Associates, PLLC and 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 and Dr. Bizer's VisionWorld, PLLC and its affiliates.
(a)
2.9 Asset Purchase Agreement, dated July 7,1999, by and among
Eye Care Centers of America, Inc., Vision Twenty-One, Inc.,
and The Complete Optical Laboratory, Ltd., Corp. + (c)
2.10 Letter Agreement, dated August 31,1999, amending and
modifying that certain Asset Purchase Agreement, dated July
7,199 by and among Eye Care Centers of America, Inc., Vision
Twenty-One, Inc., and The Complete Optical Laboratory, Inc.,
Corp. (d)
2.11 Agreement Regarding Strategic Alliance, dated August 31,
1999 by and among Eye Care Centers of America, Inc. and
Vision Twenty-One, Inc. (d)
<PAGE>
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 Settlement Agreement dated September 21, 2000 between Eye
Care Centers of America, Inc., a Texas corporation, and
Vision Twenty-One, Inc. (e)
27.1 Financial Data Schedule. (e)
----------
+ 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. 33-70572).
(b) Incorporated by reference from the Company's Annual Report on Form
10-K for the year ended January 2, 1999.
(c) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the quarter ended July 3, 1999.
(d) Previously, provided with, and incorporated by reference from, the
Company's Quarterly Report on Form 10-Q for the quarter ended October
2,1999.
(e) Filed herewith.
(b) The Company filed no current reports on Form 8-K with the Securities and
Exchange Commission during the thirty-nine weeks ended September 30, 2000.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EYE CARE CENTERS OF AMERICA, INC.
November 13, 2000 /s/ Alan E. Wiley
------------------------ --------------------------------
Dated Alan E. Wiley
Executive Vice President and
Chief Financial Officer
