SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K/A
Current Report Pursuant
To Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of report (Date of earliest event reported): July 28, 1998
NATIONAL VISION ASSOCIATES, LTD.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Georgia
----------------------------------------------
(State or Other Jurisdiction of Incorporation)
0-20001 58-1910859
------------------------ ---------------------------------------
(Commission File Number) (I.R.S. Employer Identification Number)
296 Grayson Highway, Lawrenceville, Georgia 30045
-------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(770) 822-3600
----------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
N/A
-------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On July 28, 1998, the registrant acquired all the issued and outstanding
capital stock of Frame-n-Lens Optical, Inc. ("Frame-n-Lens"), which operates
approximately 160 free-standing retail vision centers as well as approximately
130 retail vision centers located in Sam's Clubs and Wal-Mart stores. Frame-n-
Lens also operates an optical laboratory and has its administrative offices in
Fullerton, California. The registrant paid approximately $35,000,000 consisting
of cash, the assumption of debt and related acquisition costs. The transaction
was financed through the registrant's revolving credit facility. The sellers
consisted of all owners of the common and preferred stock of Frame-n-Lens.
The registrant intends to continue to operate the optical laboratory as
well as substantially all of the vision centers.
Item 7. Financial Statements, Pro Forma Financial Information
and Exhibits.
(a) Financial Statements of Business Acquired
Frame-n-Lens Optical, Inc. Consolidated Financial Statements
Report of Independent Auditors F-1
Consolidated Balance Sheets for the years ended
December 29, 1996 and December 28, 1997 and
June 28, 1998 (Unaudited) F-2
Consolidated Statements of Operations for the years
ended December 31, 1995, December 29, 1996, and
December 28, 1997 and for the Six months ended
June 29, 1997 and June 28, 1998 (Unaudited) F-3
Consolidated Statements of Shareholders' Equity at
December 31, 1995, December 29, 1996, December 28,
1997 and June 28, 1998 (Unaudited) F-4
Consolidated Statements of Cash Flows for the years
ended December 31, 1995, December 29, 1996, December 28,
1997; and for the Six Months Ended June 29, 1997 and
June 28, 1998 (Unaudited) F-5
Notes to Consolidated Financial Statements for the
Year Ended December 28, 1997 (Unaudited with respect
to the periods ended June 29, 1997 and June 28, 1998) F-6
(b) Pro forma Financial Information
Unaudited Pro Forma Condensed Consolidated Financial
Data of National Vision Associates, Ltd. and
Subsidiaries PF-1
Unaudited Pro Forma Condensed Consolidated
Balance Sheet as of July 4, 1998 PF-2
National Vision Associates, Ltd. and Subsidiaries
Notes to Unaudited Pro Forma Condensed Consolidated
Balance Sheet as of July 4, 1998 PF-3
National Vision Associates, Ltd. and Subsidiaries
Unaudited Pro Forma Condensed Consolidated
Statement of Operations for the Year Ended
January 3, 1998 PF-5
<PAGE>
National Vision Associates, Ltd. and Subsidiaries
Unaudited Pro Forma Condensed Consolidated
Statement of Operations for the Six Months
Ended July 4, 1998 PF-6
National Vision Associates, Ltd. and Subsidiaries
Notes to Unaudited Pro Forma Condensed Consolidated
Statement of Operations for the Six Months
Ended July 4, 1998 PF-7
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Frame-n-Lens Optical, Inc.
We have audited the accompanying consolidated balance sheets of
Frame-n-Lens Optical, Inc. as of December 29, 1996, and December 28,
1997, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in
the period ended December 28, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
Since the date of completion of our audit of the accompanying
financial statements and initial issuance of our report thereon dated
February 20, 1998, which report contained an explanatory paragraph
regarding the Company's ability to continue as a going concern, the
Company, as discussed in Note 10, has been acquired. Therefore, the
conditions that raised substantial doubt about whether the Company
will continue as a going concern no longer exist.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Frame-n-Lens Optical, Inc. at December 29, 1996
and December 28, 1997, and the consolidated results of its operations
and its cash flows for each of for the three years in the period ended
December 28, 1997 in conformity with generally accepted accounting
principles.
ERNST & YOUNG, LLP
Los Angeles, California
February 20, 1998, except for
Note 10 as to which the date
is July 25, 1998
F-1
<PAGE>
<TABLE>
<CAPTION>
FRAME-N-LENS OPTICAL, INC.
CONSOLIDATED BALANCE SHEETS
December 29, December 28, June 28,
1996 1997 1998
-------------- ------------ ------------
(Unaudited)
ASSETS(2)
<S> <C> <C> <C>
Current assets:
Cash.............................................................. $ 484,472 $ 542,748 $ 284,170
Accounts receivable, net of allowance for doubtful accounts of
$30,563 (December 29, 1996), $15,462 (December 28, 1997) and
$20,105 (June 28, 1998)......................................... 324,630 458,186 464,519
Inventories:
Frames, lenses and cases........................................ 4,463,224 4,679,599 5,514,294
Work in process and finished goods.............................. 360,824 379,014 378,850
------------ ------------ ------------
4,824,048 5,058,613 5,893,144
Prepaid expenses and other current assets......................... 377,559 572,512 160,294
Income tax receivable............................................. --- 829,200 426,677
Deferred income taxes............................................. 630,000 494,100 494,100
------------ ------------ ------------
Total current assets 6,640,709 7,955,359 7,722,904
Furniture, equipment and improvements, at cost:
Store equipment and improvements.................................. 9,159,937 11,543,894 11,449,381
Lab equipment and improvements.................................... 5,162,245 4,253,500 4,270,874
Office furniture and equipment.................................... 1,814,406 3,682,197 4,074,636
Automobiles....................................................... 60,721 48,131 30,946
------------ ------------ ------------
16,197,309 19,527,722 19,825,837
Less accumulated depreciation and amortization
(10,022,931) (12,239,140) (13,211,671)
------------- ------------ ------------
6,174,378 7,288,582 6,614,166
Goodwill, net of $2,312,110 (December 29, 1996), $3,185,829
(December 28, 1997) and $3,622,689 (June 28, 1998) of
accumulated amortization.......................................... 10,797,647 10,134,406 9,750,492
Deferred income taxes............................................... 196,000 76,000 76,000
Other assets........................................................ 493,449 143,448 132,482
------------ ------------ ------------
Total assets $ 24,302,183 $ 25,597,795 $ 24,296,044
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................. $ 4,975,432 $ 6,697,094 $ 6,512,104
Customer deposits................................................. 1,233,545 1,224,695 1,329,969
Accrued compensation and related expenses......................... 4,207,964 3,726,966 3,801,110
Deferred revenue.................................................. 1,443,647 1,849,498 2,052,398
Other current liabilities......................................... 2,771,811 3,144,302 3,566,648
Current portion of bank credit line............................... --- 1,157,877 1,643,248
Current portion of capital lease obligations...................... 660,083 397,102 279,597
Current maturities of long-term debt.............................. 1,327,484 5,431,827 4,647,497
------------ ------------ ------------
Total current liabilities................................... 16,619,966 23,629,361 23,832,571
Bank line of credit................................................. 83,418 --- ---
Long-term debt...................................................... 3,860,723 --- 359,938
Capital lease obligations........................................... 477,326 70,242 ---
Commitments and contingencies
Shareholders' equity:
Preferred stock, $1,000 par value:
Authorized shares - 5,042
Issued and outstanding shares - 3,675 (December 29, 1996),
3,823 (December 28, 1997) and 3,899 (June 28, 1998)
Liquidation preference at $1,000 per share...................... 3,675,000 3,823,000 3,899,000
Common stock, no par value:
Authorized shares - 1,546,000
Issued and outstanding shares - 432,096 (December 29, 1996),
424,615 (December 28, 1997) and 423,480 (June 28, 1998)....... 2,471,219 1,956,984 1,879,825
Redeemable warrants .............................................. 969,701 1,024,140 628,888
Accumulated deficit .............................................. (3,855,170) (4,905,932) (6,304,178)
------------ ------------ ------------
Total shareholders' equity.................................. 3,260,750 1,898,192 103,535
------------ ------------ ------------
Total liabilities and shareholders' equity.................. $ 24,302,183 $ 25,597,795 $ 24,296,044
============ ============ ============
</TABLE>
See accompanying notes.
F-2
<PAGE>
<TABLE>
<CAPTION>
FRAME-N-LENS OPTICAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended Six months ended
----------------------------------------- ------------------------
December 31, December 29, December 28, June 29, June 28,
1995 1996 1997 1997 1998
------------ ----------- ----------- ----------- ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net sales..................... $71,895,523 $79,486,433 $78,370,815 $41,186,837 $ 38,890,403
Cost of sales................. 28,550,548 28,454,098 28,632,435 14,800,460 13,837,225
----------- ----------- ----------- ----------- ------------
Gross profit.................. 43,344,975 51,032,335 49,738,380 26,386,377 25,053,178
Operating expenses:
Selling, general and
administrative........... 44,453,076 47,819,434 49,782,968 25,187,643 26,336,568
Impairment of long-lived
assets 1,902,667 --- --- --- ---
Leasehold abandonments 290,101 --- --- --- ---
----------- ----------- ----------- ----------- ------------
Total operating
expenses............. 46,645,844 47,819,434 49,782,968 25,187,643 26,336,568
----------- ----------- ----------- ----------- ------------
Operating income (loss)....... (3,300,869) 3,212,901 (44,588) 1,198,734 (1,283,390)
Interest...................... 974,278 851,696 803,735 380,963 464,799
----------- ----------- ----------- ----------- ------------
Income (loss) before
income tax provision
(benefit)................... (4,275,147) 2,361,205 (848,323) 817,771 (1,748,189)
Income tax provision
(benefit)................... --- 959,000 --- 333,384 (30,691)
----------- ----------- ----------- ----------- ------------
Net income (loss) $(4,275,147) $ 1,402,205 $ (848,323) $ 484,387 $(1,717,498)
=========== =========== ========== =========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
<TABLE>
<CAPTION>
FRAME-N-LENS OPTICAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Total
Common Preferred Redeemable Accumulated Shareholders'
Stock Stock Warrants Deficit Equity
---------- ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1995....... $2,871,828 $3,397,000 $ 1,048,000 $ (810,943) $6,505,885
Net loss ....................... --- --- --- (4,275,147) (4,275,147)
Increase warrant to
redemption value............. --- --- 91,827 (91,827) ---
Issuance of warrants to
purchase 8,588 shares of
stock ...................... --- --- 17,176 --- 17,176
Cumulative preferred
dividends, 136 shares........ --- 136,000 --- (136,000) ---
Repurchase of stock, 591
shares....................... (48,494) --- --- --- (48,494)
---------- ---------- ----------- ----------- -----------
Balances at December 31,
1995 ........................... 2,823,334 3,533,000 1,157,003 (5,313,917) 2,199,420
Net income...................... --- --- --- 1,402,205 1,402,205
Decrease warrant to
redemption value............. --- --- (198,542) 198,542 ---
Issuance of warrants to
purchase 5,620 shares of
stock ....................... --- --- 11,240 --- 11,240
Cumulative preferred
dividends, 142 shares........ --- 142,000 --- (142,000) ---
Repurchase of stock, 4,557
shares ...................... (352,115) --- --- --- (352,115)
---------- ---------- ----------- ----------- -----------
Balances at December 29,
1996............................ 2,471,219 3,675,000 969,701 (3,855,170) 3,260,750
Net loss........................ --- --- --- (848,323) (848,323)
Increase warrant to
redemption value............. --- --- 54,439 (54,439) ---
Cumulative preferred
dividends, 148 shares........ --- 148,000 --- (148,000) ---
Repurchase of stock, 7,577
shares (514,235) --- --- --- (514,235)
---------- ---------- ----------- ----------- -----------
Balances at December 28,
1997............................ $1,956,984 $3,823,000 $ 1,024,140 $(4,905,932) $ 1,898,192
Net loss (unaudited)............ --- --- --- (1,717,498) (1,717,498)
Decrease warrant to
redemption value
(unaudited).................. --- --- (395,252) 395,252 ---
Cumulative preferred
dividends, 76 shares
(unaudited).................. --- 76,000 --- (76,000) ---
Repurchase of stock, 2,026
shares (unaudited)........... (77,159) --- --- --- (77,159)
---------- ---------- ----------- ----------- -----------
Balances at June 28, 1998
(unaudited)..................... $1,879,825 $3,899,000 $ 628,888 $(6,304,178) $ 103,535
========== ========== =========== ============ ===========
</TABLE>
See accompanying notes.
F-4<PAGE>
<TABLE>
<CAPTION>
FRAME-N-LENS OPTICAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended Six months ended
----------------------------------------- ---------------------
December 31, December 29, December 28, June 29, June 28,
1995 1996 1997 1997 1998
------------ ------------ ------------ -------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)..................... $ (4,275,147) $ 1,402,205 $ (848,323) $ 484,387 $ (1,717,498)
------------ ----------- ----------- ---------- ------------
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Charge for long-lived asset
impairment......................... 1,902,667 --- --- --- ---
Goodwill amortization................ 873,917 873,917 873,719 437,860 436,860
Depreciation and amortization........ 2,757,352 1,945,864 2,172,058 962,966 972,531
Loss on disposition of furniture,
equipment and improvements......... 374,990 39,717 76,645 --- 17,164
Deferred income taxes................ (201,000) 90,000 255,900 --- ---
Reserve for inventories.............. 100,000 --- --- --- 75,000
Changes in operating assets and
liabilities:
Accounts receivable................ (158,912) 62,385 (133,556) (328,188) (6,333)
Inventories ....................... (505,667) (455,299) (234,562) (509,818) (909,531)
Prepaid expenses and other
current assets................... (26,582) (195,661) (194,953) 188,004 412,218
Income tax receivable.............. --- --- (829,200) --- 402,523
Other assets....................... 282,226 (41,746) 51,494 265,213 (41,951)
Accounts payable and other
current liabilities.............. 1,599,239 (1,144,824) 2,094,153 1,034,564 237,356
Customer deposits.................. 404,095 (56,343) (8,850) (49,421) 105,274
Accrued compensation and
related expenses................. 517,726 1,392,578 (480,998) (879,374) 74,144
Deferred revenue................... 394,675 616,074 405,851 280,224 202,900
------------ ---------- ---------- ---------- -----------
Net cash provided by
operating activities........ 4,039,579 4,528,867 3,199,378 1,886,417 260,657
INVESTING ACTIVITIES
Purchase of furniture, equipment
and improvements..................... (3,583,339) (1,455,901) (3,273,881) (1,755,566) (315,279)
------------ ---------- ---------- ---------- -----------
Net cash used in investing activities (3,583,339) (1,455,901) (3,273,881) (1,755,566) (315,279)
FINANCING ACTIVITIES
Principal payments on capital
lease obligations.................... (599,899) (753,576) (670,065) (352,954) (187,747)
Proceeds from long-term debt........... --- 5,000,000 1,249,992 --- ---
Repayment of long-term debt............ (2,202,732) (5,039,962) (1,334,192) (530,346) (424,392)
Net (payments) proceeds from bank
line of credit....................... 1,639,833 (1,109,165) 1,074,459 585,451 485,371
(Repayment of) proceeds from note
payable to shareholders.............. 750,000 (750,000) --- --- ---
Purchase of treasury stock............. (48,494) (81,441) (187,415) (61,354) (77,188)
------------ ----------- ---------- ---------- ------------
Net cash provided by (used
in) financing activities.... (461,292) (2,734,144) 132,779 (359,203) (203,956)
------------- ---------- ---------- ---------- -----------
Increase (decrease) in cash............ (5,052) 338,822 58,276 (228,352) (258,578)
Cash at beginning of year.............. 150,702 145,650 484,472 484,472 542,748
------------ ----------- ----------- --------- -----------
Cash at end of period.................. $ 145,650 $ 484,472 $ 542,748 $ 256,120 $ 284,170
============ =========== =========== ========= ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the year for:
Interest............................. $ 886,000 $ 652,000 $ 686,000 $ 349,000 $ 376,000
Income taxes......................... 112,000 904,000 532,000 303,000 ---
</TABLE>
The Company acquired approximately $732,000, $556,000, $0, $0 and
$104,000 in equipment under capital leases and issued 136, 142, 148,
73 and 76 shares of preferred stock as dividends for the years ended
December 31, 1995, December 29, 1996, December 28, 1997, and six
months ended June 29, 1997, and June 28, 1998, respectively.
See accompanying notes.
F-5<PAGE>
Frame-n-Lens Optical, Inc.
Notes to Consolidated Financial Statements
December 28, 1997
(Unaudited with respect to the periods ended June 29, 1997 and June 28, 1998)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Frame-n-Lens Optical, Inc. (the "Company") sells eyeglasses from 159
California retail stores which it owns and operates. One of the
Company's wholly owned subsidiaries, Family Vision Centers, Inc. ("FVC")
sells eyeglasses from 130 retail stores that are located in the Sam's
Club and Wal-Mart retail chains within the United States. The
Company's fiscal year end is the Sunday nearest December 31.
INTERIM FINANCIAL INFORMATION (UNAUDITED)
The interim financial statements as of June 29, 1997 and June 28,
1998 and for each of the six months then ended, have been prepared on
the same basis as the audited financial statements. In the opinion of
management, all adjustments (consisting of normal accruals) considered
necessary for a fair presentation have been included in the unaudited
financial statements. The results for the six months ended June 28,
1998 are not necessarily indicative of the results to be expected for
the full year and for any other interim period.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All
significant intercompany transactions have been eliminated in
consolidation.
ACCOUNTING ESTIMATES
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could
differ from those estimates.
REVENUE RECOGNITION
The Company collects deposits from customers in advance of filling
orders and recognizes the related revenues on product sales upon
delivery to the customer. Additionally, the Company defers revenue
received on sales of separately priced warranties and recognizes the
revenue on a straight-line basis over the warranty period.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense for
the years ended December 31, 1995, December 29, 1996, and December 28,
1997, was approximately $3,263,000, $5,078,000, and $5,386,000,
respectively.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost
determined by approximating the first-in, first-out method.
Approximately 12% ($2,964,000), 9% ($2,460,000) and 11% ($3,140,000),
of total purchases were acquired from one vendor during 1995, 1996 and
1997 fiscal years, respectively.
F-6<PAGE>
Frame-n-Lens Optical, Inc.
Notes to Consolidated Financial Statements -- (Continued)
GOODWILL
The cost in excess of fair value of assets acquired resulted from
the acquisition of FVC and is being amortized on a straight-line basis
over 15 years.
DEPRECIATION AND AMORTIZATION
Depreciation of furniture and equipment is provided on the straight-
line method over their estimated useful lives (primarily five years).
Leasehold improvements are amortized over the shorter of the lease
term or useful life.
INCOME TAXES
The Company accounts for income taxes under the liability method
required by FASB Statement 109. Deferred income taxes reflect the net
tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial statement purposes and the amount
used for income tax purposes. Tax bases of assets and liabilities are
measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
ASSET IMPAIRMENT
The Company adopted FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," in March 1995. Statement No. 121 requires impairment
losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets'
carrying amounts. Statement 121 also addresses the accounting for
long-lived assets that are expected to be disposed of.
RECLASSIFICATIONS
Certain balances from the December 31, 1995 and December 29, 1996,
financial statements have been reclassified to conform to the December
28, 1997, presentation.
STOCK-BASED COMPENSATION
The Company has elected to continue to account for stock-based
compensation plans using the intrinsic value-based method prescribed
by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25) and related Interpretations. Management
has determined that the effect of applying Financial Accounting
Standards Board Statement No. 123's fair-value method to the Company's
stock-based compensation plans results in net income that is not
materially different from amounts reported. Under APB 25, because the
exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no
compensation expense is recognized.
F-7<PAGE>
Frame-n-Lens Optical, Inc.
Notes to Consolidated Financial Statements -- (Continued)
2. BANK FINANCING
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 29, December 28,
1996 1997
----------- -------------
<S> <C> <C>
Bank line of credit .............................. $ 83,418 $ 1,157,877
Term loan to bank................................. 4,791,668 4,833,333
Other ............................................ 396,539 598,494
----------- ------------
5,271,625 6,589,704
Less amounts due within one year ................. (1,327,484) (6,589,704)
----------- ------------
$ 3,944,141 $ ---
=========== ============
</TABLE>
The Company maintains a credit facility with a bank (the "Credit
Facility"), providing for a line of credit and a term loan. The Credit
Facility, as amended, currently consists of a $2,300,000 line of credit
and a $5,000,000 term loan. The Credit Facility is secured by
substantially all of the Company's assets. The loan agreements contain
certain restrictive covenants, including limitations on capital
expenditures, compensation to shareholders and incurrence of new debt,
and requirements to maintain certain financial ratios. At December 28,
1997, the Company was in violation of certain of the covenants.
The line of credit matures on May 1, 1998, with interest payable
monthly at prime (8.5% at December 28, 1997), plus 4% and principal
due at maturity. The line of credit has $1,157,877 outstanding at
December 28, 1997, and has been included in the current maturities of
long-term debt on the balance sheet. The $5,000,000 term loan also
matures May 1, 1998, with interest payable monthly at prime (8.5% at
December 28, 1997), plus 1%.
3. STOCK PURCHASE WARRANT
In connection with the financing obtained originally on March 31,
1989, for the establishment of an Employee Stock Option Plan, the
Company issued a stock purchase warrant to a bank to purchase 3% of
the Company's outstanding common stock (including the warrant shares)
on the date the warrant is exercised at a purchase price of $.01 per
share. The warrant may be exercised at anytime through March 31, 1999.
Effective March 31, 1994, the warrant holder may request the Company
to repurchase the warrant at its fair market value on the date
exercised, payable in twelve quarterly installments. The Company has
changed the value of the warrant from the value assigned at the date
of issuance to the highest redemption price, which is estimated by
management to be $82, $68, and $78 at December 31, 1995, December 29,
1996, and December 28, 1997, respectively, and is based upon a
valuation of the Company as of December 31, 1994, December 31, 1995
and December 31, 1996, respectively. This resulted in a
charge/(credit) to accumulated deficit of $91,827 at December 31,
1995, $(198,542) at December 29, 1996 and $54,439 at December 28,
1997.
F-8<PAGE>
Frame-n-Lens Optical, Inc.
Notes to Consolidated Financial Statements -- (Continued)
In accordance with a term note payable which was repaid in full
during 1996, the Company issued warrants to purchase 8,588 and 5,620
shares of common stock during the years ended December 31, 1995 and
December 29, 1996. There were warrants outstanding to purchase 17,042
shares of Common Stock, Series D, at December 29, 1996 and December 28,
1997, respectively.
4. EMPLOYEE BENEFIT PLANS
The Company maintains an Employees' 401(k) Plan and
Health/Disability Plan (the "401(k) Plan") covering substantially all
employees. Under the 401(k) Plan, employees may elect to contribute a
portion of their wages to a retirement fund. The Company, at its
discretion, may make contributions to the 401(k) Plan, which are
allocated among the participants. The Company made no contributions
for the years ended December 31, 1995, December 29, 1996 and December 28,
1997.
The Company has an Employee Stock Ownership Plan (the "ESOP") which
provides employees an opportunity to participate and share in the
growth of the Company through stock ownership. All full-time employees
who are at least 18 years of age are eligible to participate in the
ESOP as of their initial date of employment, provided they have
completed four months of employment by the end of the ESOP year. There
was no contribution expense for the years ended December 31, 1995,
December 29, 1996 and December 28, 1997.
At the option of the participants, the Company may purchase shares
from the participant who is withdrawing from the plan. During 1995,
1996 and 1997, the Company repurchased 591, 4,557 and 7,577 shares,
respectively, from participants who withdrew from the plan at either
$68 or $82 per share, and recorded notes payable in original amounts
of $0, $284,450 and $395,488, respectively. Repurchased shares are
redeemed and treated as authorized but unissued shares.
5. INCOME TAXES
Significant components of the provision (benefit) for income taxes
attributable to operations are as follows:
<TABLE>
<CAPTION>
December 31, December 29, December 28,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal......... $ 139,000 $ 711,000 $ (261,500)
State........... 62,000 158,000 1,900
---------- ---------- ----------
201,000 869,000 (259,600)
Deferred:
Federal........ (1,314,000) 51,000 (6,900)
State.......... (391,000) 39,000 (13,200)
---------- ---------- ----------
(1,705,000) 90,000 (20,100)
Valuation allowance .......... 1,504,000 --- 279,700
---------- ---------- ----------
$ --- $ 959,000 $ ---
========== ========= ==========
</TABLE>
F-9<PAGE>
Frame-n-Lens Optical, Inc.
Notes to Consolidated Financial Statements -- (Continued)
Significant components of the Company's deferred tax assets and
tax liabilities are as follows:
<TABLE>
<CAPTION>
December 29, December 28,
1996 1997
------------ -----------
<S> <C> <C>
Deferred tax assets:
Accrued expenses not currently deductible for tax................. $1,812,000 $1,981,700
Assets impaired................................................... 748,000 748,000
Other, net........................................................ 123,000 188,200
---------- ----------
Total deferred tax assets........................................... 2,683,000 2,917,900
Deferred tax liabilities:
Goodwill.......................................................... (181,000) (167,300)
Tax depreciation in excess of book depreciation................... (18,000) (219,000)
Expenses deducted for tax......................................... (154,000) (177,800)
---------- ----------
Total deferred tax liabilities...................................... (353,000) (564,100)
---------- ----------
Net................................................................. 2,330,000 2,353,800
Valuation allowance................................................. (1,504,000) (1,783,700)
---------- ----------
$ 826,000 $ 570,100
========== ==========
</TABLE>
6. CAPITAL STOCK
Shares authorized under the Company's articles of incorporation
amount to 1,551,042 and are allocated to five series as of December 28,
1997, as follows:
Authorized
----------
Series A Preferred................................... 5,042
Series A Common...................................... 500,000
Series B Common...................................... 500,000
Series C Common...................................... 500,000
Series D Common...................................... 46,000
Series A Preferred shareholders are entitled to receive dividends
(the Dividends) at the rate of $40.00 (4%) per share per annum out of
any funds legally available prior, and in preference, to (i) the
declaration or payment of a dividend (other than a dividend payable in
common stock) on the common stock of the Company, or (ii) a redemption
or repurchase of the common stock of the Company. The Dividends
accumulate daily from the date of issuance and are payable
semiannually beginning six months after the date that the Series A
Preferred is first issued by the Company and continuing on each six-
month anniversary thereafter. The payment of such dividends may be
made in cash or by issuing additional Series A Preferred shares.
Series A Preferred shareholders shall be entitled to receive $1,000
per share prior and in preference to distribution of any of the assets
or surplus funds of the Company to the holders of the common stock.
F-10<PAGE>
Frame-n-Lens Optical, Inc.
Notes to Consolidated Financial Statements -- (Continued)
Series A and B Common shareholders shall be entitled to one vote for
each share of stock held, and shall each be entitled to elect two
members of the Board of Directors. Series A preferred and Series C and
D Common shareholders have no voting rights, and Series C and Series D
Common shares are convertible into Series A and Series B Common shares
upon a change of control of the Company.
In connection with the acquisition of FVC in 1994, 2,947 shares of
common stock were placed in escrow as collateral for a note from
certain former FVC shareholders which resulted from their
indemnification of liabilities and net worth of FVC in the acquisition.
7. COMMITMENTS AND CONTINGENCIES
Commitments
-----------
The Company leases office, manufacturing and retail store facilities
under operating lease agreements. The minimum annual rents for most of
these leases are subject to increases based on changes in the Consumer
Price Index. Additionally, most leases have renewal options, and
several leases are subject to contingent rents based upon a percentage
of sales. The amount of rent based upon a percentage of sales
(included in rent expense) is approximately $2,048,000, $2,805,000 and
$2,592,000 for the years December 31, 1995, December 29, 1996 and
December 28, 1997, respectively.
Minimum future lease payments under capital leases and noncancelable
operating leases with an initial term of one year or more and future
minimum capital lease payments at December 28, 1997, are approximately
as follows:
Capital Operating
Leases Leases
--------- -----------
1998 ......................................... $424,335 $ 4,767,000
1999 ......................................... 67,786 4,013,000
2000 ......................................... --- 3,312,000
2001 ......................................... --- 2,813,000
2002 ......................................... --- 2,460,000
Thereafter .................................... --- 4,361,000
-------- -----------
Total minimum lease payments......... 492,121 $21,726,000
===========
Less amount representing interest ............. 24,777
--------
Present value of minimum capital lease payments
(including current portion of $397,102) ....... $467,344
========
Rent expense under operating leases approximated $7,835,000,
$8,335,000 and $7,543,615 for the years ended December 31, 1995,
December 29, 1996 and December 28, 1997, respectively.
F-11
<PAGE>
Frame-n-Lens Optical, Inc.
Notes to Consolidated Financial Statements -- (Continued)
During the years ended December 29, 1996, and December 28, 1997, the
Company entered into several capital leases for lab and computer
equipment. Total cost and accumulated amortization related to assets
under capital leases amounted to $3,143,555 and $2,216,649,
respectively, at December 29, 1996, and $1,453,715 and $805,313,
respectively, at December 28, 1997. Amortization of assets recorded
under capital leases is included in depreciation expense.
Contingencies
-------------
There are certain legal actions pending against the Company which
have arisen in the normal course of operations. In the opinion of
management, after consultation with counsel, the ultimate resolution
of such actions is not expected to have a significant effect on the
financial position or operations of the Company.
8. STOCK OPTIONS
The Company has granted nonqualified stock options to a key officer
to purchase an aggregate of 18,000 shares of Series C Common Stock at
appraised values of either $60.63 or $82 per share, which management
believes approximated market value at the grant dates. The options
vest (i) 10,000 shares over a five-year period in accordance with the
option agreement (at December 31, 1995, December 29, 1996, and
December 28, 1997, options to purchase 7,600, 9,200 and 10,000 shares,
respectively, were exercisable), and (ii) 4,000 shares at June 17,
1996, and 4,000 shares at December 17, 1998.
Additionally, as of fiscal years December 31, 1995, December 29,
1996, and December 28, 1997, the Company has granted nonqualified
stock options to key employees to purchase shares of Series C Common
Stock. These options vest 20% per year commencing on each employee's
employment anniversary date. Such options are canceled upon
termination prior to vesting.
A summary of the Company's stock option activity and related
information for the following years follows:
<TABLE>
<CAPTION>
December 31, 1995 December 29, 1996 December 28, 1997
----------------- ------------------ -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of
year................................. 31,500 $72.60 41,500 $74.86 53,500 $73.32
Options exercised...................... --- --- --- --- --- ---
Options granted........................ 10,000 82.00 12,000 68.00 --- ---
Options forfeited/canceled............. --- --- --- --- 8,000 71.50
------- ------ ------
Options outstanding, end of year....... 41,500 74.86 53,500 73.32 45,500 73.64
Exercisable at end of year............. 19,386 72.60 27,282 72.90 32,300 72.31
</TABLE>
F-12
<PAGE>
Frame-n-Lens Optical, Inc.
Notes to Consolidated Financial Statements -- (Continued)
Exercise prices for options outstanding as of December 28, 1997,
ranged from $60.63 to $82. The weighted-average remaining contractual
life of those options is six years.
9. YEAR 2000 ISSUE - UNAUDITED
The Company has developed a plan to modify its information
technology to be ready for the year 2000 and has begun converting
critical data processing systems. The Company currently expects the
project to be substantially complete by early 1999. The Company does
not expect this project to have a significant effect on operations.
10. SUBSEQUENT EVENT
On July 28, 1998, the Company was acquired by National Vision
Associates, Ltd. The transaction consisted of cash and the assumption
of debt amounting to approximately $32.3 million. In connection with
the acquisition, the Credit Facility was repaid.
F-13<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma condensed consolidated financial
data ("Pro Forma Financial Statements") as of July 4, 1998, for the
year ended January 3, 1998 and for the six-month period ended July 4,
1998 have been derived by application of pro forma adjustments to the
historical financial statements of National Vision Associates, Ltd.
("NVAL") and Frame-n-Lens Optical, Inc. ("Frame -n- Lens"). The
unaudited pro forma condensed consolidated balance sheet has been
prepared to give effect to the acquisition of Frame-n-Lens as if it
occurred on July 4, 1998. The unaudited pro forma condensed
consolidated statements of operations for the year ended January 3,
1998 and the six-month period ended July 4, 1998 have been presented
to give effect to the acquisition of Frame-n-Lens as if it occurred at
the beginning of the respective periods.
The pro forma adjustments are described in the accompanying notes and
are based upon available information and certain assumptions that NVAL
believes are reasonable, including assumptions relating to the preliminary
allocation of the consideration paid in connection with the acquisition
of Frame-n-Lens to the respective assets and liabilities based on estimates
of their respective fair values. The actual purchase price allocation may
differ from that reflected in the Pro Forma Financial Statements.
The Pro Forma Financial Statements do not purport to represent what
NVAL's results would have been if the acquisition of Frame-n-Lens had
occurred on the date or for the periods indicated, or to project what
the Company's results of operations or financial position for any future
period or date will be. The Pro Forma Financial Statements should be
read in conjunction with the Consolidated Financial Statements including
the notes thereto contained in NVAL's Report on Form 10-K for fiscal 1997
and Reports on Form 10-Q for the first and second quarters of 1998.
PF-1<PAGE>
<TABLE>
<CAPTION>
NATIONAL VISION ASSOCIATES, LTD. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JULY 4, 1998
Acquisition
NVAL Frame-n-Lens Adjustments Pro Forma
---- ------------ ------------ ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 2,364 $ 284 $ (2,298)(a)(c) $ 350
Accounts receivable (net) 8,028 465 (78)(a) 8,415
Inventories (net) 23,070 5,893 (425)(a) 28,538
Other currents assets 1,250 1,081 47 (a) 2,378
------- ------- -------- ---------
Total current assets 34,712 7,723 (2,754) 39,681
Net property and equipment 43,365 6,614 49,979
Other assets and deferred costs (net) 910 209 1,119
Intangible assets (net) 5,499 9,750 25,961 (a) 41,210
------- ------- -------- ---------
Total assets $84,486 $24,296 $ 23,207 $ 131,989
======= ======= ======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable $7,371 $6,512 $ $ 13,883
Accrued expenses and other current liabilities 9,637 10,750 (2,133)(a) 18,254
Current portion of long-term debt 483 6,570 23,011 (a)(c) 30,064
------- ------- -------- ---------
Total current liabilities 17,491 23,832 20,878 62,201
Revolving credit facility-long term 16,500 16,500
Other long-term liabilities 2,433 (a) 2,433
Long-term notes payable, less current portion 3,889 360 4,249
Deferred income tax liabilities 2,089 2,089
Shareholders' equity:
Preferred stock 0 3,899 (3,899)(b) 0
Common stock 211 1,880 (1,880)(b) 211
Additional paid-in capital 46,591 46,591
Redeemable warrants 629 (629)(b) 0
Retained earnings (deficit) 1,788 (6,304) 6,304 (b) 1,788
Cumulative foreign currency exchange rate
translation (4,073) (4,073)
------- ------- -------- ---------
Total shareholders' equity 44,517 104 (104) 44,517
------- ------- -------- ---------
Total liabilities and shareholders equity $84,486 $24,296 $ 23,207 $131,989
======= ======= ======== =========
</TABLE>
PF-2<PAGE>
NATIONAL VISION ASSOCIATES, LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
(a) The Pro Forma Financial Statements include information concerning
the acquisition on July 28, 1998 of all the outstanding capital
stock of Frame-n-Lens.
Such acquisition is being accounted for as a purchase, with the excess
of the purchase price over the fair value of the net assets acquired
to be allocated to goodwill. Goodwill has been estimated to be $25,961
and will be amortized over 30 years. A summary of the purchase price and
the related purchase allocation follows:
AGGREGATE PURCHASE PRICE
<TABLE>
<CAPTION>
<S> <C>
Cash paid at closing $22,505
Deferred amounts 3,420 <F1>
Financial, accounting, legal, and other direct acquisition costs 2,317
Cash paid to existing creditors 6,376
-------
Aggregate purchase price $34,618
=======
<FN>
<F1> $2,920 of this amount represents a deferred
purchase price obligation that is payable to
the extent that the Company does not identify
any unrecorded liabilities or contingency
losses. If no amounts are identified, $3,664
will be payable to the existing shareholders
in equal quarterly installments over six
years. The discount of $744 is being
amortized to interest expense over six years
using the effective interest method.
</FN>
</TABLE>
PF-3
<PAGE>
PRELIMINARY ALLOCATION OF PURCHASE PRICE
<TABLE>
<CAPTION>
<S> <C>
Aggregate purchase price $34,618
Less net book value of assets acquired (6,480)
-------
Excess of cost over the net book value of assets acquired 28,138
-------
Adjustments to record assets and liabilities at fair market value:
Accounts receivable 78
Inventory 425
Other assets (47)
Accrued expenses and other accrued liabilities (2,633)
-------
Total adjustments (2,177)
-------
Goodwill $25,961
=======
</TABLE>
The adjustments to record assets and liabilities at fair market value are
tentative. The Company is continuing its review of assets, including the
performance of physical inventories, to ascertain the appropriate fair
market values.
(b) Represents elimination of historical equity balances.
(c) NVAL drew an additional $28.9 million on its credit facility
after July 4, 1998 to fund the acquisition of Frame-N-Lens.
PF-4<PAGE>
<TABLE>
<CAPTION>
NATIONAL VISION ASSOCIATES, LTD. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 3, 1998
Acquisition
NVAL Frame-n-Lens Adjustments Pro Forma
-------- ------------ ------------ ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Net sales $186,354 $78,371 $ $264,725
Cost of goods sold 86,363 28,632 7,137 (a) 121,266
(866)(b)
-------- ------- -------- --------
Gross profit 99,991 49,739 (6,271) 143,459
Selling, general, and administrative 89,156 49,783 (7,137)(a) 131,401
expense (1,266)(c)
865 (d)
-------- ------- -------- --------
Operating income (loss) 10,835 (44) 1,267 12,058
Interest expense, net 1,568 804 (505)(e) 2,090
223 (f)
Other expense (income), net (14) (14)
-------- ------- ------- --------
Income (loss) before income taxes 9,281 (848) 1,549 9,982
Provision (benefit) for income taxes 3,708 967(g) 4,675
-------- ------- -------- --------
Net income (loss) $ 5,573 $ (848) $ 582 $ 5,307
======== ======= ======== ========
</TABLE>
PF-5<PAGE>
<TABLE>
<CAPTION>
NATIONAL VISION ASSOCIATES, LTD. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JULY 4, 1998
Acquisition
NVAL Frame-n-Lens Adjustments Pro Forma
-------- ------------ ------------ ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Net sales $105,445 $38,890 $ $144,335
Cost of goods sold 48,355 13,837 3,839 (a) 65,533
(498)(b)
-------- ------- -------- --------
Gross profit 57,090 25,053 (3,341) 78,802
Selling, general and administrative 48,813 26,336 (3,839)(a) 71,112
expense (661)(c)
433 (d)
-------- ------- -------- --------
Operating income (loss) 8,247 (1,283) 726 7,690
Interest expense (income), net 518 465 (307)(e) 791
115(f)
Other expense (income), net (6) (6)
-------- ------- -------- --------
Income (loss) before income taxes 7,735 (1,748) 918 6,905
Provision (benefit) for income taxes 3,140 (31) 540(g) 3,649
-------- ------- -------- --------
Net income (loss) $ 4,595 $(1,717) $ 378 $ 3,256
======== ======= ======== ========
</TABLE>
PF-6
<PAGE>
NATIONAL VISION ASSOCIATES, LTD. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands)
(a) Primarily represents the reclassification of other miscellaneous
store expense to conform with NVAL's historical presentation.
<TABLE>
<CAPTION>
Year Ended Six Months Ended
January 3, 1998 July 4, 1998
--------------- ----------------
<S> <C> <C>
Cost of goods sold $ 7,137 $ 3,839
Selling, general, and administrative (7,137) (3,839)
</TABLE>
(b) In connection with the acquisition of Frame-n-Lens, NVAL will
consolidate certain manufacturing facilities into the Frame-n-Lens
operations located in Fullerton, California. Amounts shown below
represent the savings for payroll-related costs and reduced occupancy
expense for the applicable periods:
Year Ended Six Months Ended
January 3, 1998 July 4, 1998
--------------- ----------------
$866 $498
(c) In connection with the acquisition of Frame-n-Lens, NVAL will (i)
substantially reduce the number of employees at the home office
of Frame-n-Lens and (ii) consolidate operations with NVAL's home
office in Lawrenceville, Georgia. Amounts shown below represent
the savings resulting from the elimination of duplicative expenses
for the applicable periods:
Year Ended Six Months Ended
January 3, 1998 July 4, 1998
--------------- ----------------
$1,266 $661
(d) Reflects additional amortization of goodwill over 30 years.
(e) Reflects elimination of interest expense of debt repaid upon the
acquisition of Frame-n-Lens.
(f) Reflects amortization of the discount on deferred purchase price
obligation.
(g) Reflects the net additional income tax expense as a result of the
acquisition adjustments at an effective rate of 40%.
PRELIMINARY & TENTATIVE
PF-7
<PAGE>
(c) Exhibits
Exhibit
Number
----------
10.56* Stock Purchase Agreement dated as of June 9, 1998 by and
among Frame-n-Lens Optical, Inc., the Company, and the
sellers named therein.
23.1** Consent of Ernst & Young LLP
*Incorporated by reference to the Company's Form 10-Q for the quarterly period
ended July 4, 1998.
** Filed herewith.
<PAGE>
SIGNATURE
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 hereunto duly authorized.
NATIONAL VISION ASSOCIATES, LTD.
BY: /s/ Angus C. Morrison
Angus C. Morrison
Senior Vice President, Chief Financial Officer
and Treasurer
Dated: October 12, 1998
<PAGE>
Exhibit Index
Exhibit No. Description
- ----------- -----------
23.1 Consent of Ernst & Young LLP
CONSENT OF INDEPENDENT AUDITORS
We consent to incorporation by reference in the Registration
Statements (Form S-8 No. 333-06579) pertaining to the Restated
Stock Option and Incentive Award Plan and (Form S-8 No. 333-71882)
pertaining to the Restated Non-Employee Director Stock Option
Plan of National Vision Associates, Ltd. of our report dated
February 20, 1998, except for Note 10 as to which the date is
July 25, 1998, with respect to the consolidated financial
statements of Frame-n-Lens Optical, Inc. for the years ended
December 29, 1996 and December 28, 1997 included in this
Form 8-K.
/s/ Ernst & Young LLP
Ernst & Young LLP
Los Angeles, California
October 12, 1998
