<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 JULY 1, 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:
<TABLE>
<CAPTION>
Class Outstanding at August 4, 2000
----- -----------------------------
<S> <C>
Common Stock, $.01 par value 7,426,945 shares
</TABLE>
================================================================================
<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 July 1, 2000 (Unaudited)...........................................................2
Condensed Consolidated Statements of Operations for the
Thirteen Weeks and Twenty-Six Weeks Ended July 3, 1999
(Unaudited) and July 1, 2000 (Unaudited)..............................................3
Condensed Consolidated Statements of Cash Flows for the
Twenty-Six Weeks Ended July 3, 1999 (Unaudited)
and July 1, 2000 (Unaudited)...........................................................4
Notes to Condensed Consolidated Financial Statements.........................................5-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................................................12-17
Item 3. Quantitative and Qualitative Disclosures About Market Risk.....................................18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..............................................................................18
Item 6. Exhibits and Reports on Form 8-K............................................................19-20
</TABLE>
1
<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, JULY 1,
2000 2000
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................. $ 2,955 $ 2,129
Accounts and notes receivable, net ......... 11,215 14,319
Inventory .................................. 30,146 28,109
Prepaid expenses and other ................. 1,514 1,729
Deferred income taxes ...................... 446 446
------------ ------------
Total current assets ............................. 46,276 46,732
PROPERTY & EQUIPMENT, net ........................ 74,489 77,667
INTANGIBLE ASSETS, net ........................... 129,908 128,039
OTHER ASSETS ..................................... 11,005 10,095
------------ ------------
Total assets ..................................... $ 261,678 $ 262,533
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable ........................... $ 22,773 $ 25,584
Deferred revenue ........................... 6,132 6,912
Current maturities of long-term debt ....... 10,799 18,582
Accrued payroll expense .................... 4,832 4,573
Accrued interest ........................... 3,584 3,880
Other accrued expenses ..................... 10,573 12,034
------------ ------------
Total current liabilities ........................ 58,693 71,565
LONG-TERM DEBT, less current maturities .......... 272,968 261,418
DEFERRED INCOME TAXES ............................ 446 446
DEFERRED RENT .................................... 3,599 3,837
DEFERRED GAIN .................................... 2,467 2,350
------------ ------------
Total liabilities ................................ 338,173 339,616
------------ ------------
SHAREHOLDERS' DEFICIT:
Common stock ............................... 74 74
Preferred stock ............................ 37,268 39,730
Additional paid-in capital ................. 55,738 52,954
Accumulated deficit ........................ (169,575) (169,841)
------------ ------------
Total shareholders' deficit ...................... (76,495) (77,083)
------------ ------------
$ 261,678 $ 262,533
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
EYE CARE CENTERS OF AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
<TABLE>
<CAPTION>
THIRTEEN WEEKS TWENTY-SIX WEEKS
ENDED ENDED
---------------------------------------------------------------
JULY 3, JULY 1, JULY 3, JULY 1,
1999 2000 1999 2000
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET REVENUES:
Optical sales ........................................ $ 68,960 $ 84,194 $ 143,324 $ 179,213
Management fee ....................................... 813 640 1,523 1,256
------------ ------------ ------------ ------------
Total net revenues ......................................... 69,773 84,834 144,847 180,469
OPERATING COSTS AND EXPENSES:
Cost of goods sold ................................... 22,845 26,905 47,723 57,217
Selling, general and administrative expenses ......... 39,442 52,307 79,575 105,266
Amortization of intangibles .......................... 1,206 1,733 2,381 3,582
------------ ------------ ------------ ------------
Total operating costs and expenses ......................... 63,493 80,945 129,679 166,065
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS ..................................... 6,280 3,889 15,168 14,404
INTEREST EXPENSE, NET ...................................... 5,885 6,800 11,883 13,704
INCOME TAX EXPENSE ......................................... 317 831 392 966
------------ ------------ ------------ ------------
NET INCOME/(LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE ....................................... 78 (3,742) 2,893 (266)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ........ -- -- 491 --
------------ ------------ ------------ ------------
NET INCOME/(LOSS) .......................................... $ 78 $ (3,742) $ 2,402 $ (266)
============ ============ ============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements
3
<PAGE>
EYE CARE CENTERS OF AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
TWENTY-SIX TWENTY-SIX
WEEKS ENDED WEEKS ENDED
JULY 3, JULY 1,
1999 2000
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) .............................................. $ 2,402 $ (266)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ............................... 9,699 13,943
Other amortization .......................................... 725 788
Cumulative effect of change in accounting principle ......... 491 --
Deferred liabilities and other .............................. 362 (569)
Expenses to affect capital lease retirement ................. (431) --
Loss on disposition of property and equipment ............... 348 51
Increase/(decrease) in operating assets and liabilities ........ (4,621) 1,712
------------ ------------
Net cash provided by operating activities ............................ 8,975 15,659
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment .......................... (10,472) (11,823)
Proceeds from sale of property and equipment ................... 17 50
Purchase of retail outlet ...................................... (368) --
Payments received on notes receivable .......................... 97 23
------------ ------------
Net cash used for investing activities ............................... (10,726) (11,750)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt and capital leases ............................ (1,361) (4,457)
Distribution to affiliated OD .................................. -- (260)
Redemption of common stock ..................................... (440) (18)
------------ ------------
Net cash used for financing activities ............................... (1,801) (4,735)
------------ ------------
NET DECREASE IN CASH ................................................. (3,552) (826)
CASH AND CASH EQUIVALENTS, beginning of period ....................... 5,127 2,955
------------ ------------
CASH AND CASH EQUIVALENTS, end of period ............................. $ 1,575 $ 2,129
============ ============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
EYE CARE CENTERS OF AMERICA, INC.
NOTES TO CONDENSED 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 twenty-six week periods ended
July 1, 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
twenty-six week periods ended July 3, 1999 and July 1, 2000, the Company
incurred $250,000, respectively, related to the agreement.
3. INCOME TAXES
Deferred tax assets and liabilities are determined based on
differences between financial reporting and tax basis of assets and
liabilities and are measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse. The Company
currently has a net deferred tax asset related to its temporary differences.
Based upon the weight of available evidence allowed under the criteria set
forth under FASB Statement No. 109, including the lack of carryback
potential, uncertainties exist as to the future realization of the deferred
tax asset. These uncertainties include lack of carryback potential as the
Company has incurred taxable losses in past years. The Company has
established a full valuation allowance for its deferred tax assets.
5
<PAGE>
4. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TWENTY-SIX TWENTY-SIX
WEEKS ENDED WEEKS ENDED
JULY 3, JULY 1,
1999 2000
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash paid for interest ........................... $ 11,445 $ 12,097
Dividends accrued on preferred stock ............. $ 2,166 $ 2,462
Retirement of capital lease obligation ........... $ 5,652 $ --
Obligations incurred for capital lease ........... $ -- $ 665
</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
July 1, 2000.
<TABLE>
<CAPTION>
Weighted Average Weighted Average
Notional Amount Maturity Fixed Pay Floating Receive
July 1, 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 $319,000 as of July 1, 2000.
The change in the market value of these interest rate swaps is not recorded
in the financial position or operations of the Company. Interest to be paid
or received is accrued as an adjustment to interest expense. Upon 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
6
<PAGE>
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.
Additionally, for the twenty-six week periods ended July 3, 1999 and July 1,
2000, the Company's charges to operations were $272,175 and $89,479,
respectively, related to store opening costs.
7. 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, 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.
7
<PAGE>
CONDENSED CONSOLIDATING BALANCE SHEET
JANUARY 1, 2000
<TABLE>
<CAPTION>
Guarantor Consolidated
ASSETS Parent Subsidiaries ODs Eliminations Company
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
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
------------ ------------ ------------ ------------ ------------
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>
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE TWENTY-SIX WEEKS ENDED JULY 3, 1999
<TABLE>
<CAPTION>
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Revenues:
Optical sales ................................. $ 81,788 $ 42,845 $ 18,691 $ -- $ 143,324
Management fee ................................ 3,508 1,523 -- (3,508) 1,523
Investment earnings in subsidiaries ........... 5,606 -- -- (5,606) --
------------ ------------ ------------ ------------ ------------
Total net revenues ............................... 90,902 44,368 18,691 (9,114) 144,847
Operating costs and expenses:
Cost of goods sold ............................ 26,719 16,559 4,445 -- 47,723
Selling, general and administrative expenses .. 49,966 19,554 13,563 (3,508) 79,575
Amortization of intangibles ................... 522 1,857 2 -- 2,381
------------ ------------ ------------ ------------ ------------
Total operating costs and expenses ............... 77,207 37,970 18,010 (3,508) 129,679
------------ ------------ ------------ ------------ ------------
Income (loss) from operations .................... 13,695 6,398 681 (5,606) 15,168
Interest expense, net ............................ 10,536 1,343 4 -- 11,883
Income tax expense ............................... 125 -- 267 -- 392
------------ ------------ ------------ ------------ ------------
Net income (loss) before cumulative effect of
change in accounting principle ................ 3,034 5,055 410 (5,606) 2,893
Cumulative effect of change in accounting
principle ..................................... 365 126 -- -- 491
------------ ------------ ------------ ------------ ------------
Net income (loss) ................................ $ 2,669 $ 4,929 $ 410 $ (5,606) $ 2,402
============ ============ ============ ============ ============
</TABLE>
8
<PAGE>
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THIRTEEN WEEKS ENDED JULY 3, 1999
<TABLE>
<CAPTION>
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Revenues:
Optical sales ................................. $ 39,696 $ 20,809 $ 8,455 $ -- $ 68,960
Management fee ................................ 1,499 813 -- (1,499) 813
Investment earnings in subsidiaries ........... 3,119 -- -- (3,119)
------------ ------------ ------------ ------------ ------------
Total net revenues ............................... 44,314 21,622 8,455 (4,618) 69,773
Operating costs and expenses:
Cost of goods sold ............................ 12,995 8,195 1,655 -- 22,845
Selling, general and administrative expenses .. 25,231 8,852 6,858 (1,499) 39,442
Amortization of intangibles ................... 274 931 1 -- 1,206
------------ ------------ ------------ ------------ ------------
Total operating costs and expenses ............... 38,500 17,978 8,514 (1,499) 63,493
------------ ------------ ------------ ------------ ------------
Income (loss) from operations .................... 5,814 3,644 (59) (3,119) 6,280
Interest expense, net ............................ 5,419 464 2 -- 5,885
Income tax expense ............................... 50 -- 267 -- 317
------------ ------------ ------------ ------------ ------------
Net income (loss) before cumulative effect of
change in accounting principle ................ 345 3,180 (328) (3,119) 78
Cumulative effect of change in
accounting principle .......................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Net income (loss) ................................ $ 345 $ 3,180 $ (328) $ (3,119) $ 78
============ ============ ============ ============ ============
</TABLE>
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE TWENTY-SIX WEEKS ENDED JULY 3, 1999
<TABLE>
<CAPTION>
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................ $ 2,669 $ 4,929 $ 410 $ (5,606) $ 2,402
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization ................ 5,629 4,068 2 -- 9,699
Other amortization ........................... 742 (17) -- -- 725
Cumulative effect of change in
accounting principle ..................... 365 126 -- -- 491
Deferred liabilities and other ............... 577 (215) -- -- 362
Expenses to affect capital lease
retirement ............................... -- (431) -- -- (431)
Loss on disposition of property and
equipment ................................ 348 -- -- -- 348
Decrease in operating assets and
liabilities .............................. (524) (3,685) (412) -- (4,621)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) operating
activities .................................. 9,806 4,775 -- (5,606) 8,975
------------ ------------ ------------ ------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment ........ (9,157) (1,315) -- -- (10,472)
Proceeds from sale of property and
equipment ................................ 17 -- -- -- 17
Purchase of retail outlet .................... (368) -- -- -- (368)
Payment received on notes receivable ......... 23 74 -- -- 97
Investment in subsidiaries ................... (5,606) -- -- 5,606 --
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) investing
activities .................................. (15,091) (1,241) -- 5,606 (10,726)
------------ ------------ ------------ ------------ ------------
Cash flows from financing activities:
Payments on debt and capital leases .......... (1,000) (361) -- -- (1,361)
Repurchase of common stock ................... (440) -- -- -- (440)
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) financing
activities .................................. (1,440) (361) -- -- (1,801)
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents ................................. (6,725) 3,173 -- -- (3,552)
Cash and cash equivalents at beginning of
period ...................................... 3,119 2,008 -- -- 5,127
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of period ....... $ (3,606) $ 5,181 $ -- $ -- $ 1,575
============ ============ ============ ============ ============
</TABLE>
9
<PAGE>
CONDENSED CONSOLIDATING BALANCE SHEET
JULY 1, 2000
<TABLE>
<CAPTION>
Guarantor Consolidated
ASSETS Parent Subsidiaries ODs Eliminations Company
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents ................ $ 679 $ 973 $ 477 $ -- $ 2,129
Accounts and notes receivable, net ....... 102,175 28,469 3,381 (119,706) 14,319
Inventory ................................ 15,148 11,514 1,447 -- 28,109
Prepaid expenses and other ............... 1,249 434 46 -- 1,729
Deferred income taxes ..................... 446 -- -- -- 446
------------ ------------ ------------ ------------ ------------
Total current assets ........................ 119,697 41,390 5,351 (119,706) 46,732
Property and equipment, net ................. 46,679 30,988 -- -- 77,667
Intangible assets, net ...................... 18,277 109,669 93 -- 128,039
Other assets ................................ 9,063 1,032 -- -- 10,095
Investment in subsidiaries .................. 12,754 -- -- (12,754) --
------------ ------------ ------------ ------------ ------------
Total assets ................................ $ 206,470 $ 183,079 $ 5,444 $ (132,460) $ 262,533
============ ============ ============ ============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable ......................... 20,294 120,535 4,461 (119.706) 25,584
Deferred revenue ......................... 4,503 2,405 4 -- 6,912
Current maturities of long-term debt ..... 15,945 2,637 -- -- 18,582
Accrued payroll expense .................. 1,588 2,981 4 -- 4,573
Accrued interest ......................... 3,392 488 -- -- 3,880
Other accrued expenses ................... 5,299 6,516 219 -- 12,034
------------ ------------ ------------ ------------ ------------
Total current liabilities ................... 51,021 135,562 4,688 (119,706) 71,565
Long-term debt, less current maturities ..... 228,291 33,027 100 -- 261,418
Deferred income taxes ....................... 446 -- -- -- 446
Deferred rent ............................... 2,527 1,310 -- -- 3,837
Deferred gain ............................... 1,769 581 -- -- 2,350
------------ ------------ ------------ ------------ ------------
Total liabilities ........................... 284,054 170,480 4,788 (119,706) 339,616
------------ ------------ ------------ ------------ ------------
Shareholders' equity/(deficit):
Common stock ............................. 74 -- -- -- 74
Preferred stock .......................... 39,730 -- -- -- 39,370
Additional paid-in capital ............... 52,453 1,092 (591) (5,514) 52,954
Accumulated deficit ...................... (169,841) 11,507 1,247 (7,240) (169,841)
------------ ------------ ------------ ------------ ------------
Total shareholders' equity/(deficit) ........ (77,584) 12,599 656 (12,754) (77,083)
============ ============ ============ ============ ============
$ 206,470 $ 183,079 $ 5,444 $ (132,460) $ 262,533
============ ============ ============ ============ ============
</TABLE>
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE TWENTY-SIX WEEKS ENDED JULY 1, 2000
<TABLE>
<CAPTION>
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Revenues:
Optical sales ................................. $ 90,137 $ 61,439 $ 27,637 $ -- $ 179,213
Management fee ................................ -- 10,834 -- (9,578) 1,256
Investment earnings in subsidiaries ........... 7,240 -- -- (7,240) --
------------ ------------ ------------ ------------ ------------
Total net revenues ............................... 97,377 72,273 27,637 (16,818) 180,469
Operating costs and expenses:
Cost of goods sold ............................ 27,979 23,408 5,830 -- 57,217
Selling, general and administrative expenses .. 56,282 37,401 21,161 (9,578) 105,266
Amortization of intangibles ................... 528 3,052 2 -- 3,582
------------ ------------ ------------ ------------ ------------
Total operating costs and expenses ............... 84,789 63,861 26,993 (9,578) 166,065
------------ ------------ ------------ ------------ ------------
Income (loss) from operations .................... 12,588 8,412 644 (7,240) 14,404
Interest expense, net ............................ 12,933 767 4 -- 13,704
Income tax expense ............................... (79) 1,045 -- -- 966
------------ ------------ ------------ ------------ ------------
Net income (loss) ................................ $ (266) $ 6,600 $ 640 $ (7,240) $ (266)
============ ============ ============ ============ ============
</TABLE>
10
<PAGE>
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THIRTEEN WEEKS ENDED JULY 1, 2000
<TABLE>
<CAPTION>
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Revenues:
Optical sales ................................. $ 42,434 $ 29,433 $ 12,327 $ -- $ 84,194
Management fee ................................ -- 4,812 -- (4,172) 640
Investment earnings in subsidiaries ........... 1,660 -- -- (1,660) --
------------ ------------ ------------ ------------ ------------
Total net revenues ............................... 44,094 34,245 12,327 (5,832) 84,834
Operating costs and expenses:
Cost of goods sold ............................ 12,978 11,281 2,646 -- 26,905
Selling, general and administrative expenses .. 27,997 18,717 9,765 (4,172) 52,307
Amortization of intangibles ................... 214 1,518 1 -- 1,733
------------ ------------ ------------ ------------ ------------
Total operating costs and expenses ............... 41,189 31,516 12,412 (4,172) 80,945
------------ ------------ ------------ ------------ ------------
Income (loss) from operations .................... 2,905 2,729 (85) (1,660) 3,889
Interest expense, net ............................ 6,822 (24) 2 -- 6,800
Income tax expense ............................... (175) 1,006 -- -- 831
------------ ------------ ------------ ------------ ------------
Net income (loss) ................................ $ (3,742) $ 1,747 $ (87) $ (1,660) $ (3,742)
============ ============ ============ ============ ============
</TABLE>
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE TWENTY-SIX WEEKS ENDED JULY 1, 2000
<TABLE>
<CAPTION>
Guarantor Consolidated
Parent Subsidiaries ODs Eliminations Company
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................ $ (266) $ 6,600 $ 640 $ (7,240) $ (266)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization ................ 6,994 6,947 2 -- 13,943
Other amortization ........................... 646 142 -- -- 788
Deferred liabilities and other ............... 345 (918) 4 -- (569)
Loss on disposition of property and
equipment ................................ 64 (13) -- -- 51
Increase/(decrease) in operating assets
and liabilities .......................... 11,210 (9,152) (346) -- 1,712
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) operating
activities .................................. 18,993 3,606 300 (7,240) 15,659
------------ ------------ ------------ ------------ ------------
Cash flows from investing activities:
Acquisition of property and equipment ........ (7,947) (3,876) -- -- (11,823)
Proceeds from sale of property and
equipment ................................ 29 21 -- -- 50
Payment received on notes receivable ......... -- 23 -- -- 23
Investment in Subsidiaries ................... (7,240) -- -- 7,240 --
------------ ------------ ------------ ------------ ------------
Net cash provided by (used in) investing
activities .................................. (15,158) (3,832) -- 7,240 (11,750)
------------ ------------ ------------ ------------ ------------
Cash flows from financing activities:
Payments on debt and capital leases .......... (4,000) (457) -- -- (4,457)
Distribution to affiliated OD ................ -- -- (260) -- (260)
Redemption of common stock ................... (18) -- -- -- (18)
------------ ------------ ------------ ------------ ------------
Net cash used in financing activities ............ (4,018) (457) (260) -- (4,735)
------------ ------------ ------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents ................................. (183) (683) 40 -- (826)
Cash and cash equivalents at beginning of
period ...................................... 862 1,656 437 -- 2,955
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of period ....... $ 679 $ 973 $ 477 $ -- $ 2,129
============ ============ ============ ============ ============
</TABLE>
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Eye Care Centers of America, Inc. is the third largest retail optical chain
in the United States as measured by net revenues, operating 362 stores, 286 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" 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 a strategic alliance with Vision Twenty-One involving
their respective managed care programs, optometry and ophthalmology practices
and the co-marketing of Vision Twenty-One's refractive surgery program.
Additionally, Vision Twenty-One currently manages 20 optometric practices in
Florida which are located in or adjacent to the Company's stores. On October
25, 1999, Vision Twenty-One announced it has developed an initial plan to
substantially exit the business of managing practices of optometry and
ophthalmology and the discontinuation of select managed care contracts that
are not consistent with its business plan. In connection with Vision
Twenty-One exiting of this business, the Company has subleased to private
optometrists the spaces adjacent to 15 of its retail locations
12
<PAGE>
which were previously occupied by Vision Twenty-One, and entered into a
long-term management agreement with such private optometrists to manage its
optometric practices at these locations. In light of the foregoing, the
status of the strategic alliance with Vision Twenty-One and the impact on the
Company's stores located adjacent to the optometric practices managed by
Vision Twenty-One is uncertain.
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,
approximately 26% 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.
13
<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 TWENTY-SIX
WEEKS ENDED WEEKS ENDED
------------------------------ ----------------------------
JULY 3, JULY 1, JULY 3, JULY 1,
1999 2000 1999 2000
--------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
NET REVENUES:
Optical sales 98.8% 99.2% 98.9% 99.3%
Management fee 1.2 0.8 1.1 0.7
--------------- ------------- ------------- -------------
Total net revenues 100.0 100.0 100.0 100.0
OPERATING COSTS AND EXPENSES:
Cost of goods sold 33.1* 32.0* 33.3* 31.9*
Selling, general and administrative expenses 57.2* 62.1* 55.5* 58.7*
Amortization of intangibles 1.7 2.0 1.7 2.0
--------------- ------------- ------------- -------------
Total operating costs and expenses 91.0 95.4 89.5 92.0
--------------- ------------- ------------- -------------
INCOME FROM OPERATIONS 9.0 4.6 10.5 8.0
INTEREST EXPENSE, NET 8.4 8.0 8.2 7.6
INCOME TAX EXPENSE 0.5 1.0 0.3 0.5
--------------- ------------- ------------- -------------
NET INCOME/(LOSS) BEFORE CHANGE IN ACCOUNTING PRINCIPLE 0.1 (4.4) 2.0 (0.1)
--------------- ------------- ------------- -------------
CHANGE IN ACCOUNTING PRINCIPLE - - 0.3 -
--------------- ------------- ------------- -------------
NET INCOME/(LOSS) 0.1% (4.4)% 1.7% (0.1)%
=============== ============= ============= =============
</TABLE>
* Percentages based on optical sales only
THE THIRTEEN WEEKS ENDED JULY 1, 2000 COMPARED TO THE THIRTEEN WEEKS ENDED
JULY 3, 1999.
NET REVENUES. The increase in net revenues to $84.8 million for the thirteen
weeks ended July 1, 2000 from $69.8 million for the thirteen weeks ended July 3,
1999 was largely the result of the VTO Retail Acquisition, an increase in
comparable store sales of 0.9% and revenues from stores open less than twelve
months of $2.1 million. The VTO Retail Acquisition resulted in an increase in
net revenues of $12.3 million during the second thirteen weeks of fiscal 2000.
14
<PAGE>
GROSS PROFIT. Gross profit increased to $57.3 million for the thirteen weeks
ended July 1, 2000 from $46.1 million for the thirteen weeks ended July 3,
1999. Gross profit as a percentage of optical sales increased to 68.0% for
the thirteen weeks ended July 1, 2000 as compared to 66.9% for the thirteen
weeks ended July 3, 1999. This percentage increase was largely due to
improved buying efficiencies and a successful change in mix towards a lower
cost lens as experienced in the first quarter of fiscal 2000. Margin was
further impacted by improved inventory shrinkage control.
SELLING GENERAL & ADMINISTRATIVE EXPENSES (SG&A). SG&A increased to $52.3
million for the thirteen weeks ended July 1, 2000 from $39.4 million for the
thirteen weeks ended July 3, 1999. SG&A as a percentage of optical sales
increased to 62.1% for the thirteen weeks ended July 1, 2000 from 57.2% for
the thirteen weeks ended July 3, 1999. Consistent with the first quarter of
fiscal 2000, this percentage increase was due primarily to the inclusion of
store payroll expenses for the stores acquired through the VTO Retail
Acquisition and increases in doctor payroll as a result of purchasing lower
volume stores in the VTO Retail Acquisition.
AMORTIZATION EXPENSE. Amortization expense increased to $1.7 million for the
thirteen weeks ended July 1, 2000 from $1.2 million for the thirteen weeks
ended July 3, 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 $6.8 million for the
thirteen weeks ended July 1, 2000 from $5.9 million for the thirteen weeks
ended July 3, 1999. This increase was due to the increased borrowings related
to the VTO Retail Acquisition.
NET INCOME (LOSS). Net loss decreased to ($3.7) million for the thirteen weeks
ended July 1, 2000 from net income of $0.1 million for the thirteen weeks ended
July 3, 1999.
THE TWENTY-SIX WEEKS ENDED JULY 1, 2000 COMPARED TO THE TWENTY-SIX WEEKS ENDED
JULY 3, 1999.
NET REVENUES. The increase in net revenues to $180.5 million for the twenty-six
weeks ended July 1, 2000 from $144.8 million for the twenty-six weeks ended July
3, 1999 was largely the result of the VTO Retail Acquisition, an increase in
comparable store sales of 2.6% and revenues from stores open less than twelve
months of $4.9 million. The VTO Retail Acquisition resulted in an increase in
net revenues of $26.9 million during the first twenty-six weeks of fiscal 2000.
GROSS PROFIT. Gross profit increased to $122.0 million for the twenty-six weeks
ended July 1, 2000 from $95.6 million for the twenty-six weeks ended July 3,
1999. Gross profit as a percentage of optical sales increased to 68.1% for the
twenty-six weeks ended July 1, 2000 as compared to 66.7% for the twenty-six
weeks ended July 3, 1999. This percentage increase was largely due to improved
buying efficiencies and a successful change in mix towards a lower cost lens.
SELLING GENERAL & ADMINISTRATIVE EXPENSES (SG&A). SG&A increased to $105.3
million for the twenty-six weeks ended July 1, 2000 from $79.6 million for the
twenty-six weeks ended July 3, 1999. SG&A as a percentage of optical sales
increased to 58.7 % for the twenty-six weeks ended July 1, 2000 from 55.5% for
the twenty-six weeks ended July 3, 1999. This percentage increase was due
primarily to the inclusion of doctor payroll expenses for the stores acquired
through the VTO Retail Acquisition and increases in store payroll as a result of
purchasing lower volume stores in the VTO Retail Acquisition.
15
<PAGE>
AMORTIZATION EXPENSE. Amortization expense increased to $3.6 million for the
twenty-six weeks ended July 1, 2000 from $2.4 million for the twenty-six weeks
ended July 3, 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 $13.7 million for the
twenty-six weeks ended July 1, 2000 from $11.9 million for the twenty-six weeks
ended July 3, 1999. This increase was due to the increased borrowings related to
the VTO Retail Acquisition.
NET INCOME (LOSS). Net loss decreased to ($0.3) million for the twenty-six weeks
ended July 1, 2000 from net income of $2.4 million for the twenty-six weeks
ended July 3, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities have provided net cash of $15.6
million for the twenty-six weeks ended July 1, 2000 as compared to $9.0 million
for the twenty-six weeks ended July 3, 1999. As of July 1, 2000, the Company had
$2.1 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 twenty-six weeks ended July 1, 2000 were $11.8 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) 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"). The proceeds of the "New Credit
Facility" were used to pay long-term debt outstanding under the previous
credit facility. At July 1, 2000, the Company had $48.0 million in term loans
outstanding under the Term Loan Facility, $7.5 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 $5.7 million in
capital lease obligations. 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.
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. The ability of the Company to meet its debt service
obligations, reduce its debt and remain in compliance with its financial
covenants of the New 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
16
<PAGE>
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 VTO Retail Acquisition may affect
seasonal fluctuations. Hence, quarterly results are not necessarily indicative
of results for the entire year.
FORWARD-LOOKING STATEMENTS
Certain statements contained herein constitute "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." All statements other than statements of historical facts included
in this report regarding the Company's financial position, business strategy,
budgets and plans and objectives of management for future operations are
forward-looking statements. Although the management of the Company believes
that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to
have been correct. 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" in the Company's Registration Statement on
Form S-4 filed with the Commission and under the heading "Government
Regulation" in the Company's Annual Report on Form 10-K for 1999 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 THE FACT THAT STATEMENTS ARE 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, (V) CONTINUING IMPACT OF REFRACTIVE SURGERY,
(VI) THE COMPANY'S MANAGEMENT ARRANGEMENTS WITH PROFESSIONAL CORPORATIONS,
(VII) THE ABILITY OF THE COMPANY TO MAKE AND INTEGRATE ACQUISITIONS AND
(VIII) CONTINUED PARTICIPATION ON PROVIDER PANELS.
17
<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 second 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 the management of the Company has deemed to be material to
the business or financial condition of the Company that have arisen during
the second 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.
18
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report.
<TABLE>
<S> <C>
2.1 Stock Purchase Agreement dated August 15, 1996 by and
between Eye Care Centers of America, Inc., Visionworks
Holdings, Inc. and the Sellers listed therein. (a)
2.2 Stock Purchase Agreement, dated September 30 1997, by and
among Eye Care Centers of America, Inc., a Texas
corporation, Robert A. Samit, O. D. and Michael
Davidson, O.D. (a)
2.3 Recapitalization Agreement dated as of March 6, 1998 among
ECCA Merger Corp., Eye Care Centers of America, Inc. and the
sellers listed therein. (a)
2.4 Amendment No. 1 to the Recapitalization Agreement dated as
of April 23, 1998 among ECCA Merger Corp., Eye Care Centers
of America, Inc, and the sellers listed therein. (a)
2.5 Amendment No. 2 to the Recapitalization Agreement dated as
of April 24, 1998 among ECCA Merger Corp., Eye Care Centers
of America, Inc. and the sellers listed therein. (a)
2.6 Articles of Merger of ECCA Merger Corp. with and into Eye
Care Centers of America, Inc. dated April 24, 1998. (a)
2.7 Master Asset Purchase Agreement, dated as of August 22,
1998, by and among Eye Care Centers of America, Inc., Mark
E. Lynn, Dr. Mark Lynn & Associates, PLLC; Dr. Bizer's
Vision World, PLLC and its affiliates. (a)
2.8 Letter Agreement, dated October 1, 1998, amending and
modifying that certain Master Asset Purchase Agreement,
dated as of August 22, 1998, by and among Eye Care Centers
of America, Inc.; Mark E. Lynn; Dr. Mark Lynn & Associates,
PLLC; Dr. Bizer's VisionWorld, PLLC and its affiliates. (a)
2.9 Asset Purchase Agreement, date 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, date 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. (d)
3.1 Restated Articles of Incorporation of Eye Care Centers of
America Inc. (a)
19
<PAGE>
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 Professional Business Management Agreement dated February
27, 2000, by and between Eye Care Centers of America, Inc. a
Texas corporation and S.L. Christensen, O.D. & Associates,
P.C., an Arizona professional corporation. (e)
10.2 Professional Business Management Agreement dated June 19,
2000, by and between Visionary Retail Management, Inc. a
Delaware corporation and Dr. Tom Sowash, O.D. & Associates,
LLC, a Colorado limited liability company. (f)
27.1 Financial Data Schedule. (f)
</TABLE>
----------
+ Portions of this Exhibit have been omitted pursuant to an
application for an order declaring confidential treatment filed
with the Securities and Exchange Commission.
(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) Previously, provided with, and incorporated by reference from,
the Company's Quarterly Report on Form 10-Q for the quarter ended
April 1, 2000.
(f) Filed herewith.
(b) The Company filed no current reports on Form 8-K with the Securities and
Exchange Commission during the twenty-six weeks ended July 1, 2000.
20
<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.
August 15, 2000 /s/ Alan E. Wiley
------------------------ ---------------------------------------
Dated Alan E. Wiley
Executive Vice President and
Chief Financial Officer
21
