File No. 333-71825
As filed with the Securities and Exchange Commission on February 26, 1999.
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------------
VISTA EYECARE, INC.
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(Exact name of issuer as specified in its charter)
Georgia 5990 58-1910859
- ------------------------------- ------------------- ---------------------
(State or other jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or organization) Industrial Identification Number)
Classification Code
Number)
296 Grayson Highway, Lawrenceville, Georgia 30045
(770) 822-3600
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(Address, including zip code, and telephone number, including area code,
of issuer's principal executive offices)
Mitchell Goodman, Esquire
Senior Vice President and General Counsel
Vista Eyecare, Inc.
296 Grayson Highway, Lawrenceville, Georgia 30045
(770) 822-3600
- ------------------------------------------------------------------------
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
Copies to:
David A. Stockton, Esquire
Kilpatrick Stockton LLP
1100 Peachtree Street, Atlanta, Georgia 30309-4530
Telephone: (404) 815-6500
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes
effective.
If the securities being registered on this Form are being offered
in connection with the formation of a holding company and there is
compliance with General Instruction G, check the following box: / /
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same
offering: / /
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier
registration statement for the same offering: / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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PROSPECTUS March 1, 1999
[LOGO]
VISTA EYECARE, INC.
OFFER TO EXCHANGE
12 3/4% SENIOR NOTES DUE 2005, SERIES B
FOR
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12 3/4% SENIOR NOTES DUE 2005, SERIES A
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- ------------------------------------------------------------ -------------------------------------------------------------
| Terms of Exchange Offer | | Terms of Exchange Notes |
- ------------------------------------------------------------ -------------------------------------------------------------|
| | | |
|* Offer | | THE TERMS OF THE EXCHANGE NOTES AND THE OUTSTANDING |
| ----- | | NOTES ARE IDENTICAL IN ALL MATERIAL RESPECTS, EXCEPT FOR |
| We are offering to exchange up[ to $125 million in | | CERTAIN TRANSFER RESTRICTIONS, REGISTRATION RIGHTS AND |
| principal amount of our: | | PENALTY INTEREST PROVISIONS RELATING TO THE OUTSTANDING |
| | | NOTES. |
| 12 3/4% SENIOR NOTES DUE 2005, SERIES B | | |
| | | * Maturity |
| for the same principal amount of our outstanding: | | -------- |
| | | October 15, 2005. |
| 12 3/4% SENIOR NOTES DUE 2005, SERIES A. | | |
| | | * Redemption |
| We are making this offer pursuant to a Registration | | ---------- |
| Rights Agreement, dated October 8, 1998, relating | | Before October 15, 2001, we may redeem up to 35% |
| to the original issuance of the outstanding notes. | | of the aggregate principal of the notes with the |
| | | proceeds of certain equity offerings. |
|* Procedures | | After October 15, 2003, we may redeem the notes at |
| ---------- | | ant time. |
| To tender, you must submit a signed letter of | | |
| transmittal and your outstanding notes to State | | * Mandatory Offer to Repurchase |
| Street Bank and Trust Company, our exchange | | ----------------------------- |
| agent. Special procedures apply in some cases. | | If we sell certain assets or experience specific kinds of |
| You must tender outstanding notes if $1,000 | | changes in control, we must offer to repurchase the |
| multiples. | | notes. |
| | | |
|* Withdrawal | | * Security |
| ---------- | | -------- |
| You may withdraw tendered notes until the offer | | These notes will be general unsecured obligations. |
| expires. | | |
| | | * Guarantees |
|* Expiration | | ---------- |
| ---------- | | Some of our subsidiaries will guarantee the notes. |
| This offer expires at 5:00 p.m., eastern standard | | |
| time on March 31, 1999, unless extended. | | * Ranking |
| | | ------- |
|* Unaccepted Tenders | | These notes and the subsidiary guarantees are |
| ------------------ | | subordinated to all of our and the guarantors': |
| We will return any tendered outstanding notes that | | |
| we do not accept for exchange for any reason. | | + current and future unsubordinated debt, and, |
| | | + current and future secured debt, to the extent of |
|* Proceeds and Expenses | | the assets securing such debt. |
| --------------------- | | |
| We will not receive any proceeds from the issuance | | * Interest |
| of the exchange notes. | | -------- |
| We have agreed to pay the expenses associated with | | Fixed annual rate of 12 3/4%. |
| this exchange offer. | | Paid every six months on April 15 and October 15. |
- ------------------------------------------------------------ -------------------------------------------------------------
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This investment involves risks. See the Risk Factors section
beginning on page 14.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of the exchange
notes or passed upon the adequacy or accuracy of this Prospectus. Any
representation to the contrary is a criminal offense.
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TABLE OF CONTENTS
Page
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . 14
The New West Acquisition . . . . . . . . . . . . . . . . . 28
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . 29
Capitalization . . . . . . . . . . . . . . . . . . . . . . 29
The Exchange Offer . . . . . . . . . . . . . . . . . . . . 30
Unaudited Pro Forma Condensed
Consolidated Financial Data . . . . . . . . . . . . . . . 40
Selected Consolidated Financial and
Other Data . . . . . . . . . . . . . . . . . . . . . . . 48
Management's Discussion and Analysis
of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . . . . . . . . 50
Business . . . . . . . . . . . . . . . . . . . . . . . . . 60
Management . . . . . . . . . . . . . . . . . . . . . . . . 74
Principal Shareholders . . . . . . . . . . . . . . . . . . 80
Description of New Credit Facility . . . . . . . . . . . . 81
Description of the Notes . . . . . . . . . . . . . . . . . 82
Registration Rights . . . . . . . . . . . . . . . . . . . 117
Certain U.S. Federal Income Tax Considerations . . . . . . 120
Plan of Distribution . . . . . . . . . . . . . . . . . . . 123
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . 124
Independent Auditors . . . . . . . . . . . . . . . . . . . 124
Available Information . . . . . . . . . . . . . . . . . . . 124
Incorporation of Certain Documents by
Reference . . . . . . . . . . . . . . . . . . . . . . . . 126
Index to Consolidated Financial
Statements . . . . . . . . . . . . . . . . . . . . . . . F-1
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2
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SUMMARY
The following summary contains basic information about this
exchange offering. It likely does not contain all the information that
is important to you. For a more complete understanding of this
offering, we encourage you to read this entire document and the
documents to which we have referred you.
On the cover page, in this summary and in the "Risk Factors"
section, the words "Company," "we," "our," "ours," and "us" refer to
Vista Eyecare, Inc., formerly known as National Vision Associates,
Ltd., and our subsidiaries, including Frame-n-Lens Optical, Inc.,
which we acquired on July 28, 1998, and New West Eyeworks, Inc., which
we acquired on October 23, 1998. The words "exchange notes" or
"notes" refer to our 12 3/4% Senior Notes due 2005, Series B, which we
are offering to issue in exchange for our 12 3/4% Senior Notes due
2005, Series A, which we refer to as the "outstanding notes." The
words "this offer," "the exchange offering" and "the exchange offer"
refer to our offer, described in this Prospectus, to issue exchange
notes in exchange for outstanding notes.
Unless the context otherwise indicates, (1) references to "Vista"
refer to Vista Eyecare, Inc. prior to the acquisitions of Frame-n-Lens
and New West, (2) all store information is as of October 3, 1998, and
(3) the source of all industry information and data is industry
publications.
THE COMPANY
We are the second largest retail optical company in the United
States by number of locations. We operate 915 vision centers, of
which 889 are in 44 states and Puerto Rico, and the remaining 26 are
in Mexico. Our product line includes a broad selection of
prescription eyeglasses, contact lenses and accessories. The
following table presents historical information on our net sales and
earnings before interest, taxes, depreciation and amortization
(EBITDA):
Compound
Since 1993 (Vista Only) Annual Growth
---------------------- -------------
Net Sales 20.5%
EBIDTA 54.8%
Of our 915 vision centers:
* 331 are free-standing vision centers (151 in California), and
* 584 are located inside host stores.
Our free-standing vision centers are located in regional shopping centers,
power centers, strip shopping centers, and free-standing sites. Our
host vision centers are located in the host stores as illustrated in the
following table:
3
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Name of Host Number of Vision Centers
------------ ------------------------
Wal-Mart Stores, Inc. 372
Sam's Club 121
Fred Meyer, Inc. 52
Wal-Mart de Mexico, S.A. de C.V. 26
United States Military Exchanges 13
---
Total 584
Our merchandising philosophy is to provide excellent value and
superior customer service at all of our vision centers. Free-standing
vision centers typically range in size from 700 to 1,500 square feet,
with separate areas for merchandise display, customer service, and
contact lens fitting. Host vision centers use a similar format except
that they carry more inventory than free-standing stores. In addition,
each Wal-Mart host vision center has a laboratory that enables us to
provide one-hour service on single vision eyeglasses. Of our 915 vision
centers, 639 offer the services of independent optometrists in or adjacent
to the vision center. We are currently adding optometrists to many of the
vision centers that do not have them. We anticipate that the additional
optometric services will increase retail sales in those vision centers.
We currently operate four manufacturing facilities, which also
serve as distribution facilities. Our 66,000 square foot facility in
Lawrenceville, Georgia houses our headquarters, an optical laboratory
and a distribution center that uses modern equipment and systems. We
also operate a 45,000 square foot manufacturing and distribution
facility in Fullerton, California, and a smaller optical laboratory in
St. Cloud, Minnesota. In 1998, we consolidated two other
manufacturing facilities, located in Los Angeles, California and
Portland, Oregon, into our Fullerton location. We intend to
consolidate our Tempe, Arizona facility with the Fullerton facility
during 1999. We believe that our manufacturing facilities will
accommodate our current growth plans over the next five years.
RECENT ACQUISITIONS
MIDWEST VISION. In October 1997, we acquired Midwest Vision,
Inc. for approximately $4.7 million, including the assumption of
certain indebtedness. Based in St. Cloud, Minnesota, before the
acquisition Midwest Vision operated 51 free-standing vision centers in
the midwest United States.
FRAME-N-LENS. In July 1998, we acquired Frame-n-Lens for
approximately $32.3 million, including the assumption of certain
indebtedness. Based in Fullerton, California, before the acquisition
Frame-n-Lens operated 286 vision centers, mainly in the western United
States. These centers included 156 free-standing vision centers, 123
host vision centers in Sam's Club stores, and seven host vision
centers in Wal-Mart stores.
NEW WEST. On October 23, 1998, we purchased approximately 98% of
the outstanding capital stock of New West in a tender offer. On the
same day, we caused New West to merge with our wholly-owned subsidiary
NW Acquisition Corp. As a result, we now hold all of the shares of
New West. We paid approximately $68.3 million, including the
assumption of certain indebtedness, to acquire New West. See "The New
West Acquisition." Based in Tempe, Arizona, New West operated 178 vision
centers in 13 states, including 126 free-standing vision centers and 52
host vision centers in Fred Meyer stores. New West also operates a managed
care business, Vista Eyecare Network.
4<PAGE>
For a complete discussion of the Company's key strengths, the
optical industry, and the Company's business strategies, you should
read the "Business" section of this prospectus.
The Company was incorporated in Georgia in 1990.
Executive Offices: Telephone number:
------------------ -----------------
296 Grayson Highway (770) 822-3600
Lawrenceville, Georgia 30045
5
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The Exchange Offer
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The Exchange Offer........................ We are offering to exchange up to $125,000,000 in principal amount of our
12 3/4% Senior Notes due 2005, Series B for up to $125,000,000 in principal
amount of our outstanding 12 3/4% Senior Notes due 2005, Series A.
The Exchange Notes........................ The notes we will issue in this exchange offer are identical in all
material respects to the outstanding notes, except for certain transfer
restrictions, registration rights and interest provisions relating to the
outstanding notes. We will issue the exchange notes without legends
restricting their transfer. See "Description of the Notes," beginning on
page 81.
Expiration Date; Withdrawal
of Tender................................ The exchange offer will expire at 5:00 p.m., eastern standard time, on
March 31, 1999, unless we extend the offer. Until the offer
expires, you may withdraw any notes that you previously tendered. If we
do not accept your outstanding notes for exchange for any reason, we will
return them to you at our cost, as soon as possible after the exchange
offer.
Certain Conditions to the Exchange
Offer.................................... The exchange offer is subject to certain customary conditions, which
we may waive. See "The Exchange Offer -- Certain Conditions to the Exchange
Offer," beginning on page 32.
Procedures for Tendering Outstanding
Notes.................................... If you hold outstanding notes and wish to accept the exchange offer, you
must:
* complete, sign and date the letter of transmittal and
* mail or deliver the letter of transmittal to State Street Bank and
Trust Company, our exchange agent.
Be sure to include the outstanding notes you wish to exchange and any
other required documentation. You must tender outstanding notes for
exchange in $1,000 multiples.
By executing the letter of transmittal, you will represent to us that,
among other things,
(1) you will acquire the exchange notes in the ordinary course of your
business,
(2) you have no arrangement with any person to participate in the
distribution of the exchange notes, and
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(3) (A) you are not our "affiliate," as defined in Rule
405 of the Securities Act of 1933, or,
(B) if you are our affiliate, you will comply with
the registration and prospectus delivery requirements of the
Securities Act.
Special Procedures for Beneficial
Owners.................................. This paragraph applies to the beneficial owners of outstanding notes
registered in the name of a broker, dealer, commercial bank, trust
company or other nominee. If you are a beneficial owner and wish to
tender your outstanding notes in the exchange offer, please contact the
registered holder and instruct it to tender on your behalf. If you wish
to tender on your own behalf, you must either re-register the outstanding
notes in your name or obtain a properly completed bond power from the
registered holder. You may not be able to re-register your outstanding
notes in time to participate in the exchange offer.
Guaranteed Delivery
Procedures.............................. If you wish to tender your outstanding notes, but they are not
immediately available, or you cannot deliver your outstanding notes, the
letter of transmittal, or any other required documents to State Street
Bank and Trust Company before the offer expires, you must tender your
outstanding notes using the guaranteed delivery procedures described in
"The Exchange Offer -- Guaranteed Delivery Procedures," beginning on page
36.
Registration Requirements............... We will use our best efforts to complete the registered exchange offer to
allow you an opportunity to exchange your outstanding notes for the
exchange notes. In the event that applicable interpretations of the
staff of the Securities and Exchange Commission do not permit us to effect
the exchange offer or in certain other circumstances, we have agreed to file
a shelf registration statement covering resales of the outstanding notes.
In such event, we will use our best efforts to cause the shelf registration
statement to be declared effective under the Securities Act and, subject
to certain exceptions, to keep the shelf registration statement effective
until October 8, 2000.
Certain U.S. Federal Income Tax We discuss certain federal income tax considerations relating to the
Considerations.......................... exchange notes in "Certain U.S. Federal Income Tax Consequences,"
beginning on page 119.
Use of Proceeds......................... We will not receive any proceeds from the exchange of notes in this
exchange offer.
Exchange Agent.......................... State Street Bank and Trust Company is our exchange agent. Its address
and telephone number are listed in "The Exchange Offer -- Exchange Agent,"
on page 37.
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SUMMARY DESCRIPTION OF THE EXCHANGE NOTES
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Exchange Notes Offered.................. $125,000,000 in principal amount of 12 3/4% Senior Notes due 2005, Series
B.
Maturity................................ October 15, 2005.
Interest Payment Dates.................. April 15 and October 15 of each year, commencing April 15, 1999.
Ranking................................. These exchange notes will be general, unsecured senior obligations of the
Company. They will rank equally with all of our existing and future
unsubordinated indebtedness. They will rank senior to all of our
subordinated indebtedness.
The notes will be effectively subordinated to all of our secured
indebtedness to the extent of the assets securing such indebtedness.
As of October 3, 1998, on a pro forma basis after giving effect to our
recent acquisitions, the issuance of the outstanding notes, and our new
credit facility, we and our subsidiaries would have had:
* $130.5 million of unsecured indebtedness, and
* $6.3 million of secured indebtedness.
These numbers exclude $20.0 million of unused commitments under our new
credit facility. The indenture permits us and our subsidiaries to incur
additional indebtedness, subject to certain limitations.
Optional Redemption..................... Beginning October 15, 2003, we may redeem some or all of these notes at any
time at the cash redemption prices described in this prospectus, together
with interest to the date of redemption. See "Description of the Notes --
Redemption," beginning on page 82.
Before October 15, 2001, we may use the proceeds of certain equity
offerings to redeem up to 35% of the sum of (1) $125,000,000 plus (2) the
initial aggregate principal amount of any notes issued under the indenture
after October 8, 1998. The redemption price will be 112.75% of the
principal amount redeemed, plus interest to the redemption date.
Immediately after such redemption, however, there must remain outstanding
at least 65% of the sum of (1) $125,000,000 plus (2) the initial aggregate
principal amount of the any notes issued under the indenture after October 8,
1998. See "Description of the Notes -- Redemption," beginning on page 82.
Change of Control ...................... Upon a change of control, we are required to offer to repurchase the
exchange notes at a purchase price equal to 101% of their principal amount,
plus interest to the date of repurchase. See "Description of the Notes --
Change of Control," beginning on page 83.
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Guarantees ............................. The exchange notes will be unconditionally guaranteed on an unsecured
senior basis by some of our current domestic and future subsidiaries. Each
guarantee will rank equally with all of the guarantor's existing and future
unsubordinated indebtedness. It will rank senior to all of the guarantor's
subordinated indebtedness.
Each guarantee will be effectively subordinated to all of the guarantor's
secured indebtedness to the extent of the assets securing such
indebtedness. See "Description of the Notes -- Guarantees," beginning on page
83.
Certain Covenants....................... We will issue the exchange notes under an indenture with State Street Bank
and Trust Company, as trustee. The indenture contains certain covenants
with respect to the Company and some of our subsidiaries, which will
restrict, among other things, our ability to:
* incur additional debt,
* pay dividends and make other restricted payments,
* create certain liens,
* make certain payments affecting subsidiaries,
* enter into transactions with affiliates, and
* sell certain assets or merge with or into other companies.
These restrictions and requirements are subject to a number of important
qualifications and exceptions. See "Description of the Notes -- Certain
Covenants," beginning on page 84.
Risk Factors ........................... You should carefully consider the "Risk Factors" described on pages 14 to
27 before making an investment decision about the exchange notes.
9
<PAGE>
SUMMARY CONSOLIDATED HISTORICAL FINANCIAL AND OTHER DATA
The following table sets forth summary consolidated historical
financial and other data of Vista as of and for each of the years in
the five-year period ended January 3, 1998 and the nine-month periods
ended September 27, 1997 and October 3, 1998. The summary
consolidated historical financial data as of and for each of the years
in the five-year period ended January 3, 1998 were derived from the
audited consolidated financial statements of Vista included elsewhere
in this Prospectus. The summary consolidated historical financial
data as of and for the nine-month periods ended September 27, 1997
and October 3, 1998 were derived from the unaudited consolidated
financial statements of Vista included elsewhere in this Prospectus.
In the opinion of management, such unaudited consolidated financial
statements include all adjustments, consisting of only normal recurring
items, necessary for a fair presentation of the financial condition and
results of operations of Vista for such periods. Operating results for
the nine-month periods ended September 27, 1997 and October 3, 1998 are
not necessarily indicative of the results that may be expected for the
full year. The information contained in this table should be read in
conjunction with "Selected Consolidated Financial and Other Data,"
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" and Vista's historical consolidated financial statements,
including the notes thereto, included elsewhere in this Prospectus.
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Year Ended Nine Months Ended
-------------------------------------------------------- --------------------
December December December December January September October
31, 31, 31, 28, 3, 27, 3,
1993 1994 1995(a) 1996 1998 1997 1998
-------- -------- -------- -------- ------- --------- -------
(dollars in thousands)
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INCOME STATEMENT DATA:
Net sales..................................... $ 88,340 $ 119,395 $ 145,573 $ 160,376 $ 186,354 $ 134,736 $173,099
Gross profit.................................. 46,895 65,497 77,607 83,684 99,991 73,013 93,987
Selling, general and
administrative expense..................... 48,602 63,911 74,390 76,920 89,156 63,323 81,838
Other nonrecurring charges(b)................. 11,311 2,011
--------- --------- --------- --------- --------- --------- --------
Operating income (loss)....................... (13,018) 1,586 1,206 6,764 10,835 9,690 12,149
Interest expense, net......................... 83 1,322 2,639 2,072 1,568 1,202 1,257
Other expense (income),
net........................................ (237) (127) (13) 12 (14) (9) (9)
--------- --------- --------- --------- --------- --------- --------
Income (loss) before
income taxes............................... (12,864) 391 (1,420) 4,680 9,281 8,497 10,901
Provision (benefit) for
income taxes............................... (900) 40 100 1,200 3,708 3,365 4,454
--------- --------- --------- --------- --------- --------- --------
Net income (loss)............................. $(11,964) $ 351 $ (1,520) $ 3,480 $ 5,573 $ 5,132 $ 6,447
======== ========= ======== ========= ========= ========= ========
OTHER FINANCIAL DATA:
Depreciation and
amortization.............................. $ 5,512 $ 7,567 $ 10,378 $ 10,058 $ 11,035 $ 7,876 $ 9,227
Capital expenditures(c)...................... 16,858 15,963 13,175 2,713 8,049 6,029 7,198
EBITDA(d) ................................... 3,805 9,153 13,595 16,822 21,870 17,566 21,376
EBITDA margin................................ 4.3% 7.7% 9.3% 10.5% 11.7% 13.0% 12.3%
STORE DATA:
End of period stores......................... 245 298 355 341 443 378 737
Wal-Mart comparable
store sales growth(e)....................... -- -- (0.5%) 4.0% 7.0% 6.0% 3.5%
Sales per store(f)........................... $ 495 $ 456 $ 443 $ 484 $ 505 $ 356 $ 235
BALANCE SHEET DATA (END
OF PERIOD):
Cash and cash equivalents.................... $ 2,002 $ 2,400 $ 1,307 $ 1,110 $ 2,559 $ 2,218 $ 2,408
Working capital.............................. 6,954 8,723 14,556 13,502 12,171 11,806 11,716
Total assets................................. 66,172 77,612 81,237 74,564 83,250 79,928 137,565
Total debt .................................. 15,761 31,129 38,480 26,500 24,203 22,100 59,579
Shareholders' equity ........................ 31,577 29,613 26,326 29,906 36,368 35,076 46,413
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See accompanying notes to Summary Consolidated Historical Financial and Other Data.
10
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NOTES TO SUMMARY CONSOLIDATED HISTORICAL FINANCIAL AND OTHER DATA
(a) Effective January 1, 1995, Vista changed its year end to a 52/53
week retail calendar with the fiscal year ending on the Saturday
closest to December 31.
(b) Other nonrecurring charges consists of (i) provisions for the
disposition of assets ($7,727 in fiscal 1993 and $958 in fiscal 1995),
(ii) stock option compensation expense ($834 in fiscal 1993) and (iii)
other charges ($2,750 in fiscal 1993 and $1,053 in fiscal 1995).
(c) Capital expenditures exclude assets acquired in the Midwest,
Frame-n-Lens and New West acquisitions.
(d) EBITDA represents the sum of operating income (loss) plus
depreciation and amortization (excluding amortization of deferred
financing costs, which is included in interest expense, net), and
other nonrecurring charges. EBITDA is presented because it is a widely
accepted financial indicator of a company's ability to service or
incur indebtedness. However, EBITDA does not represent cash flow from
operations as defined by generally accepted accounting principles("GAAP"),
is not necessarily indicative of cash available to fund all
cash flow needs, should not be considered an alternative to net
income, or to cash flows from operations (as determined in accordance
with GAAP) and should not be considered as an indication of the
Company's operating performance or as a measure of liquidity. EBITDA
is not necessarily comparable to similarly titled measures for other
companies.
(e) Wal-Mart comparable store sales growth is based on Vista's
domestic Wal-Mart business and is calculated by comparing net sales
for the period to net sales of the prior period for all stores open at
least twelve months prior to the later period. This information is
not available for 1993 and 1994.
(f) Sales per store is calculated on a quarterly basis by dividing
total net sales by the total number of stores open during the period.
Annual and semi-annual net sales per store is the sum of the
applicable quarterly calculations.
11
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SUMMARY UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL AND OTHER DATA
The following summary unaudited pro forma condensed consolidated
financial and other data as of October 3, 1998, for the year ended
January 3, 1998 and for the nine-month period ended October 3, 1998
has been derived by the application of pro forma adjustments to the
historical financial statements of Vista, Frame-n-Lens, and New West
included elsewhere in this prospectus. The unaudited pro forma
condensed consolidated balance sheet data has been prepared to give
effect to the New West acquisition, the closing of our new credit
facility and the sale of the outstanding notes as if each occurred on
October 3, 1998. The unaudited pro forma condensed consolidated
income statement data for the year ended January 3, 1998 and the nine-
month period ended October 3, 1998 has been prepared to give effect to
the Frame-n-Lens acquisition, the New West acquisition (using the
financial data for the corresponding fiscal periods of the respective
companies), the closing of our new credit facility, and the sale of
the outstanding notes as if each occurred at the beginning of the
respective periods.
The Pro Forma Financial Statements include pro forma data relative
to the Frame-n-Lens acquisition completed July 28, 1998. Such data is
incorporated in the pro forma financial statements to provide a more
complete representation of the pro forma condensed consolidated
statement of operations of Vista.
The summary unaudited pro forma condensed consolidated financial
data do not purport to represent what the Company's results would have
been if the Frame-n-Lens acquisition, the New West acquisition, the
closing of the New Credit Facility, and the sale of the outstanding notes
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 unaudited summary pro forma condensed
consolidated financial data should be read in conjunction with
"Unaudited Pro Forma Condensed Consolidated Financial Data" and the
Consolidated Financial Statements, including the notes thereto.
Year Ended Nine Months Ended
January 3, October 3,
1998 1998
----------- ------------------
(dollars in thousands)
INCOME STATEMENT DATA:
Net sales .............................. $ 313,937 $ 253,438
Gross profit ........................... 171,630 139,988
Selling, general and administrative
expense.............................. 153,205 122,997
Operating income........................ 18,425 16,991
Interest expense, net .................. 18,593 12,487
Net income (loss)....................... (568) 223
OTHER FINANCIAL DATA:
Depreciation and amortization .......... $ 18,567 $ 13,943
Capital expenditures.................... 14,187 10,920
EBITDA(a)............................... 36,992 29,478
EBITDA margin........................... 11.8% 11.6%
STORE DATA:
End of period stores ................... 894 915
Comparable store sales growth(b)........ 4.7% (0.1%)
Sales per store(c) ..................... $ 351 $ 235
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
As of October 3,
1998
----------------
<S> <C>
Balance Sheet Data:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,207
Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,169
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224,273
Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136,768
Shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,413
(/TABLE>
See accompanying notes to Summary Unaudited Pro Forma
Condensed Consolidated Financial and Other Data.
12
<PAGE>
NOTES TO SUMMARY UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
AND OTHER DATA
(a) EBITDA represents the sum of operating income plus depreciation
and amortization (excluding amortization of deferred financing costs,
which is included in interest expense, net), and other nonrecurring
charges. For the pro forma periods, there were no other nonrecurring
charges. EBITDA is presented because it is a widely accepted
financial indicator of a company's ability to service or incur
indebtedness. However, EBITDA does not represent cash flow from
operations as defined by GAAP, is not necessarily indicative of cash
available to fund all cash flow needs, should not be considered an
alternative to net income, or to cash flows from operations as
determined in accordance with GAAP and should not be considered as an
indication of the Company's operating performance or as a measure of
liquidity. EBITDA is not necessarily comparable to similarly titled
measures for other companies.
Pro forma EBITDA represents EBITDA as defined above, with the
following pro forma adjustments:
</TABLE>
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
January 3,1998 October 3, 1998
-------------- -----------------
(dollars in thousands)
<S> <C> <C>
Elimination of duplicate expenses
through the consolidation of
certain
manufacturing facilities <F1> $ 2,648 $ 2,471
Elimination of duplicate expenses
through the consolidation of
certain
administrative facilities <F2> 6,649 5,070
__________
<FN>
<F1> In connection with the Frame-n-Lens acquisition and the New
West acquisition, the Company will consolidate three manufacturing
facilities (located in Los Angeles, California, Tempe, Arizona, and
Portland, Oregon) into the Frame-n-Lens operations located in
Fullerton, California. Amounts shown represent the savings for
payroll related costs and reduced occupancy expense.
<F2> In connection with the Frame-n-Lens acquisition and the New
West acquisition, the Company will (i) close the existing home office
for New West, (ii) substantially reduce the number of employees at the
home office of Frame-n-Lens and (iii) consolidate operations with the
Company's home office in Lawrenceville, Georgia.
</FN>
(/TABLE>
(b) Comparable store sales growth is calculated by comparing net
sales for the period to net sales of the prior period for all stores
open at least twelve months prior to the later period. For Vista, the
calculation is based on Vista's domestic Wal-Mart business.
<PAGE>
(c) Pro forma sales per store is calculated by dividing total net
sales by the total number of stores open during the period.
13
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS IN ADDITION TO
THE OTHER INFORMATION IN THIS PROSPECTUS BEFORE INVESTING IN THESE
NOTES. ANY OR ALL OF THE RISK FACTORS DISCUSSED BELOW COULD
MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION,
RESULTS OF OPERATIONS AND PROSPECTS. THIS PROSPECTUS INCLUDES
"FORWARD LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE
SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT INCLUDING, IN
PARTICULAR, THE STATEMENTS ABOUT THE COMPANY'S PLANS, STRATEGIES, AND
PROSPECTS UNDER THE HEADINGS "PROSPECTUS SUMMARY," "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," AND "BUSINESS."
ALTHOUGH WE BELIEVE THAT OUR PLANS, INTENTIONS AND EXPECTATIONS
REFLECTED IN OR SUGGESTED BY SUCH FORWARD-LOOKING STATEMENTS ARE
REASONABLE, WE CAN GIVE NO ASSURANCE THAT WE WILL ACHIEVE THEM.
IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THE FORWARD-LOOKING STATEMENTS WE MAKE IN THIS PROSPECTUS ARE SET
FORTH BELOW AND ELSEWHERE IN THIS PROSPECTUS. ALL FORWARD-LOOKING
STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON OUR BEHALF
ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE FOLLOWING CAUTIONARY
STATEMENTS.
SUBSTANTIAL LEVERAGE - OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY
AFFECT OUR FINANCIAL HEALTH AND PREVENT US FROM FULFILLING OUR
OBLIGATIONS UNDER THESE NOTES.
As a result of the sale of the outstanding notes, we are highly
leveraged. As of October 3, 1998, assuming we had completed the sale
of the outstanding notes and after giving effect to our recent
acquisitions and the establishment of our new credit facility, we had:
* total indebtedness of $136.8 million, including $123.6 million
of presented by the outstanding notes, and
* total availability of $20.0 million under our new credit
facility, subject to certain borrowing limitations.
See "Capitalization" and "Unaudited Pro Forma Condensed Consolidated
Financial Data" and "Description of the Notes."
Our ability to pay or refinance our indebtedness, including under
these notes, or to fund our planned capital expenditures will depend
on our future performance. This, to a certain extent, is subject to
general economic, financial, competitive, legislative, regulatory and
other factors that are beyond our control.
Based upon our current level of operations and anticipated revenue
growth, we believe that our cash flow from operations, available cash,
and available borrowings under our credit facility, will be adequate
to meet our future liquidity needs for at least the next several
years. A decrease in revenues, coupled with the borrowing base limitation
contained in our new credit facility, could require us to postpone or put
off planned capital expenditures, including new store openings.
We may, however, need to refinance all or a portion of the principal
of these notes on or before maturity. We cannot assure you that our
business will generate sufficient cash flow from operations, that
anticipated revenue growth will be realized or that future borrowings
will be available under our credit facility in an amount sufficient to
enable us to pay our indebtedness, including these notes, or to fund
<PAGE>
our other liquidity needs. In addition, we cannot assure you that we
will be able to refinance our indebtedness on commercially reasonable
terms or at all. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
14
<PAGE>
Our substantial indebtedness could have important consequences to
you. For example, it could:
* make it more difficult for us to satisfy our obligations under
these notes,
* increase our vulnerability to general adverse economic and
industry conditions,
* limit our ability to obtain additional financing to fund
future working capital, capital expenditures and other general
corporate requirements,
* require us to dedicate a substantial portion of our cash flow
from operations to the payment of our indebtedness, thereby
reducing the availability of our cash flow to fund working
capital, capital expenditures or other general corporate
purposes,
* limit our flexibility in planning for, or reacting to, changes
in our business and our industry,
* place us at a competitive disadvantage compared to competitors
that have less debt, and
* limit, along with the financial and other restrictive
covenants in our indebtedness, our ability to borrow
additional funds. Our failure to comply with these covenants
could result in an event of default which, if not cured or
waived, could have a material adverse effect on us.
See "Description of New Credit Facility."
RESTRICTIONS IMPOSED BY TERMS OF INDEBTEDNESS - THE TERMS OF OUR CREDIT
FACILITY AND THE INDENTURE RESTRICT OUR CORPORATE ACTIVITIES.
Our credit facility contains various restrictive covenants and
requires us to maintain specified financial ratios and satisfy certain
financial tests, such as:
* minimum EBITDA requirements,
* minimum fixed charge ratios, and
* maximum leverage ratios.
Our ability to meet these financial ratios and tests may be affected
by events beyond our control, and we cannot assure you we will meet
such tests. Our new credit facility also limits our:
* capital expenditures,
* investments,
* indebtedness,
* liens,
* dividends,
* guarantee obligations,
* prepayments of other indebtedness,
* mergers,
* acquisitions or sales of assets,
* changes in business activities,
* transactions with affiliates, and
* issuance of equity.
Our breach of any of these covenants could result in an event of
default under our credit facility. If a default occurs, our lenders
can declare our indebtedness, both principal and interest, immediately
due and payable, and could terminate their commitments to make future
advances. We have pledged substantially all of the assets that we
finance under our credit facility. If we fail to repay all amounts
declared due and payable, our lenders could proceed against the
collateral granted to them to satisfy our obligations. It is likely
15<PAGE>
that our assets would be insufficient to repay in full that
indebtedness and our other indebtedness, including these notes.
The indenture also restricts our ability and that of our
subsidiaries, among other things, to:
* incur additional indebtedness,
* incur liens,
* pay dividends or make certain other restricted payments or
investments,
* make certain asset sales, and
* enter into certain transactions with affiliates.
See "Description of New Credit Facility" and "Description of the
Notes - Certain Covenants."
EXPANSION STRATEGY
We cannot control our expansion in our host stores, including Wal-
Mart, beyond those currently under contract. Although we periodically
discuss expansion opportunities with each host, we cannot assure you
that any host will offer to extend our current agreements or offer us
additional vision centers. Nor can we assure you that any renewal or
new store offer will be on terms similar to those in our current
agreements. Wal-Mart operates its own optical division. After we
have opened 400 locations pursuant to our Wal-Mart agreement,
Wal-Mart may allocate future vision centers to its own optical
division.
Our agreement with Wal-Mart provides for a nine-year base term at
each vision center that begins at opening and includes a three-year
option. We opened six vision centers in 1990 under our Wal-Mart
agreement and another 54 in 1991. We have opened additional vision
centers in subsequent years. Beginning in 1999, we will determine
whether to exercise our three-year extension options for our Wal-Mart
vision centers. We will make those decisions based upon various
factors, including, for example:
* the sales levels of each vision center,
* the estimated future profitability of each vision center, and
* the increased minimum license fees charged by Wal-Mart during
the option period.
We must exercise our extension option for any Wal-Mart vision center
at least six months before its initial license expires. We expect to
extend the licenses for a substantial majority of these vision
centers. We cannot assure you, however, how many licenses we will
actually extend. Additionally, the leases for our 121 Sam's Club
vision centers will expire at various dates through 2003. See
"Business - Relationship with Host Companies."
Our continued growth depends in large part on our ability to open
profitable new stores in existing and new markets. To a lesser
extent, our continued growth depends on increasing comparable store
sales. In recent years, we have opened the following new stores:
New Store Openings Fiscal Year
------------------ -----------
86 1995
38 1996
129 1997
44 1998
16<PAGE>
We cannot assure you that we will be able to :
* open new stores in a timely manner,
* hire, train and integrate employees at new stores,
* locate and obtain favorable store sites, or
* adapt our distribution, information management and other
operating systems as necessary.
New stores may not achieve the same sales level or profitability
that our existing stores achieve. A significant economic downturn and
a resulting decrease in eyewear purchases could adversely affect our
expansion plans. We expect our quarterly results of operations to
fluctuate depending on
* the timing and amount of revenue contributed by new stores,
and
* the timing of costs associated with opening new stores.
See "Business."
DEPENDENCE ON HOST COMPANIES - A SUBSTANTIAL NUMBER OF OUR VISION
CENTERS ARE LOCATED IN DEPARTMENT STORES, PARTICULARLY WAL-MART.
We are substantially dependent on Wal-Mart and its affiliates for
our current operations. The following chart shows, as of October 3,
1998, certain information about our vision centers in Wal-Mart and
Sam's Club host stores:
Category Number
-------- -------
Total Vision Centers 915
Total Host Vision Centers 584
Wal-Mart Locations 372
Wal-Mart Mexico 26
Sam's Club 121
In addition, including the net sales of the companies we recently
acquired, we derived 67% of our net sales for the fiscal year ended
January 3, 1998 from vision centers located in Wal-Mart and Sam's Club
stores. Vision centers in Wal-Mart stores rely largely on customer
traffic generated by the Wal-Mart host store. Our agreement with Wal-
Mart does not require Wal-Mart to maintain any existing Wal-Mart store
or to open new ones.
ABILITY TO ACHIEVE ANTICIPATED COST SAVINGS OR REVENUE GROWTH - IF WE
FAIL TO ACHIEVE THE COST SAVINGS OR REVENUE GROWTH DESCRIBED IN THIS
PROSPECTUS, OUR ACTUAL FINANCIAL RESULTS COULD DIFFER SUBSTANTIALLY
FROM OUR PROJECTIONS.
The following important factors, among others, could cause us not to
achieve the results contemplated in this Prospectus or otherwise
adversely affect our future business, financial condition or results
of operations:
17
<PAGE>
* loss of managed vision care arrangements,
* loss or retirement of key members of management,
* increased competitive pressures,
* increased interest rates or cost of borrowing,
* changes in customer spending levels,
* changes in environmental or other government regulations,
* changes in general economic conditions,
* unanticipated costs related to our recent acquisitions and the
integration of the acquired companies, or
* default under any material agreement.
See "Business - Business Strategy" and "Business - Key Business
Strengths".
Our Frame-n-Lens subsidiary has experienced significant negative
comparable store sales at many locations. We believe that we can
reverse that trend through application of our business strengths and
growth strategies. Nonetheless, these measures may be insufficient to
reverse the trend and this would adversely affect our future business
and cash flow generated from operations.
Additionally, references in this document to pro forma EBITDA
reflect our estimates of annualized synergies from our acquisitions of
Frame-n-Lens and New West. We expect to realize these synergies
through:
* eliminating duplicate expenses through consolidation of
manufacturing and administrative facilities, and
* reducing our purchasing costs.
We estimate our cost savings and reductions to be $7.5 million on a pro forma
basis for the nine-month period ended October 3, 1998. These synergies do
not, however, include anticipated cost savings from our expected reduced
purchasing costs. As of the date of this Prospectus, we have begun to realize
a portion of the possible cost-savings through consolidated purchasing contracts
and the closing of the Portland, Oregon facility. We cannot assure you,
however, that we will be able to achieve all of our estimated costs savings or
reductions within our estimated time frame, if at all. You should therefore
not place undue reliance on these estimates. Moreover, the costs of
achieving these synergies may exceed our estimates.
LACK OF COMBINED OPERATING HISTORY AND INTEGRATION OF ACQUISITIONS - OUR
FUTURE PROSPECTS DEPEND IN LARGE PART ON OUR ABILITY TO INTEGRATE
THREE FORMERLY SEPARATE BUSINESS.
Vista, Frame-n-Lens and New West do not have a consolidated
operating history. Our future operating results will depend in large
part on our ability to integrate the acquired businesses with our
existing business. Even though we intend to operate as an integrated
entity, we cannot assure you that our integration of Frame-n-Lens and
New West or future acquisitions will be successful or that we will
realize the anticipated strategic benefits of these acquisitions. Our
failure successfully to integrate acquired companies may adversely
affect our business, results of operations or financial condition.
The assimilation of acquired businesses, including Frame-n-Lens and
New West, requires us to incur certain non-recurring expenditures. We
cannot assure you that the acquired operations will be sufficiently
profitable to offset these costs, or that the acquisitions will not
adversely affect the operations of the acquired companies or our own
historical business.
18
<PAGE>
EFFECTIVE AND STRUCTURAL SUBORDINATION OF NOTES - THE NOTES WILL BE
UNSECURED. YOUR RIGHT TO RECEIVE PAYMENTS ON THESE NOTES WILL RANK
EQUALLY WITH CLAIMS OF OUR OTHER UNSECURED, UNSUBORDINATED CREDITORS,
AND WILL BE JUNIOR TO OUR BORROWINGS UNDER OUR CREDIT FACILITY AND
POSSIBLY ALL OF OUR FUTURE BORROWINGS.
These notes will be our general unsecured obligations, and will not
be secured by any of our or our subsidiaries' assets. Your right of
payment under these notes will rank equally with all of our
unsubordinated indebtedness, and will rank senior to all of our
subordinated indebtedness. These notes will also be effectively
subordinated to all of our secured indebtedness to the extent of the
assets securing that indebtedness.
Our indebtedness under our new credit facility is secured by liens
against substantially all of our assets. In the event of a default on
our secured indebtedness, or a bankruptcy, liquidation or
reorganization of the Company and our subsidiaries, these assets will
be available to satisfy obligations with respect to the secured
indebtedness before they can be used to satisfy our obligations under
the notes.
EFFECTIVE AND STRUCTURAL - SUBORDINATION OF GUARANTEES THE GUARANTEES
WILL BE UNSECURED. YOUR RIGHT TO PAYMENT UNDER THE GUARANTEES WILL
RANK EQUALLY WITH CLAIMS OF THE GUARANTORS' OTHER UNSECURED,
UNSUBORDINATED CREDITORS, AND WILL BE JUNIOR TO THEIR EXISTING SECURED
BORROWINGS, INCLUDING UNDER OUR CREDIT FACILITY, AND POSSIBLY TO ALL
OF THEIR FUTURE BORROWINGS.
These notes will be unconditionally guaranteed by some of our
current and future subsidiaries. The guarantees will be general
unsecured obligations of the guarantors, and will not be secured by
any of their assets. Your right of payment under the guarantees will
rank equally with all unsubordinated indebtedness of the guarantors
and will rank senior to their subordinated indebtedness. The
guarantees will also be effectively subordinated to all of the
guarantors' secured indebtedness to the extent of the assets securing
that indebtedness.
COMPETITION - OUR INDUSTRY IS HIGHLY COMPETITIVE.
We compete with department stores and other optical chains and
retail stores, some of which have greater financial resources than we.
Wal-Mart has an in-house optical division that also operates vision
centers in Wal-Mart stores. We believe these Wal-Mart operated vision
centers are generally located in trading areas where we do not
operate.
19
<PAGE>
DEPENDENCE ON KEY PERSONNEL - WE DO NOT HAVE EMPLOYMENT AGREEMENTS WITH
KEY MANAGEMENT. THE DEPARTURE OF KEY EXECUTIVES COULD ADVERSELY
AFFECT OUR BUSINESS.
We depend on the continuing efforts of our executive officers and
senior management, including individuals who have joined us as a
result of our recent acquisitions. The departure of these individuals
in significant numbers could adversely affect our business and
prospects if we are unable to attract and retain qualified
replacements. As a matter of policy, we do not enter into employment
agreements with any personnel, including key executive officers and
management. However, we offer our executives and management bonus and
stock-based incentives related to our performance.
AVAILABILITY OF OPTOMETRISTS AND OPTICAL PROFESSIONALS - FAILURE TO HAVE
INDEPENDENT VISION CARE PROFESSIONALS AVAILABLE IN OR NEAR OUR VISION
CENTERS WOULD ADVERSELY AFFECT OUR ABILITY TO WIN MANAGED CARE AND
HOST STORE CONTRACTS, AND COULD PREVENT US FROM OPERATING IN SOME
STATES.
Our business and marketing strategies emphasize the availability of
independent optometrists in close proximity to our vision centers.
Typically, a licensed optometrist occupies a space in or adjacent to
each of our stores. Additionally, our agreement with Wal-Mart
requires us to make optometrists available at least 48 hours per week
if permitted by law. Some states require that licensed opticians be
present when eyeglasses or contact lenses are fitted or dispensed.
Any difficulties or delays in securing the services of such optical
professionals could adversely affect our business and our relationship
with our host stores. Consequences of difficulty or delay could
include:
* termination of our host store licenses for those vision
centers, and
* imposition of legal sanctions against us, including closure of
vision centers without licensed professionals.
See "Business - Optometrists."
REGULATION - FEDERAL AND STATE GOVERNMENTS EXTENSIVELY REGULATE THE
HEALTH CARE AND INSURANCE INDUSTRIES. A FINDING THAT WE HAVE VIOLATED
EXISTING REGULATIONS, OR FUTURE ADVERSE CHANGES IN THOSE REGULATIONS,
COULD NEGATIVELY AFFECT OUR BUSINESS AND ITS PROSPECTS.
Both federal and state governments extensively regulate the delivery
of health care, including relationships among health care providers
such as optometrists and eyewear providers like us. Many states
prohibit business corporations from practicing medicine or controlling
the medical judgments or decisions of physicians. States often also
prohibit certain financial arrangements, such as splitting fees with
physicians. The legality of our relationships with opticians and
independent optometrists has been and may continue to be challenged
from time to time. Regulations vary from state to state and are
enforced by both courts and regulatory authorities, each with broad
discretion. A ruling that we have violated these laws could, for
example, result in:
* censure,
* delicensing of optometrists,
* civil or criminal penalties, including large civil monetary
penalties,
* invalidation or modification of our agreements with
optometrists and opticians, or
* an order requiring us to change our business practices.
20<PAGE>
These consequences could have an adverse effect on our business.
Also, changes in our relationships with independent optometrists and
opticians could adversely affect our relationship with Wal-Mart or our
other host stores.
The fraud and abuse provisions of the Social Security Act and anti-
kickback laws and regulations adopted in many states prohibit
soliciting, paying, receiving or offering any compensation for making,
or to cause someone to make, certain referrals of patients, items or
services. The Social Security Act also imposes significant penalties
for false or improper Medicare and Medicaid billings. Many states
have adopted similar laws applicable to any payor of health care
services. In addition, the Stark Self-Referral Law restricts
referrals for Medicare or Medicaid covered services where the
referring physician has a financial relationship with the service
provider. In some cases, the rental of space constitutes a financial
relationship under this law. Many states have adopted similar self-
referral laws which are not limited to Medicare or Medicaid reimbursed
services. Violations of these laws may result in:
* substantial civil or criminal penalties, including double and
treble civil monetary penalties, and
* in the case of federal laws, exclusion from the Medicare and
Medicaid programs.
Such exclusions and penalties, if applied to us, could have a
material adverse effect on our business. See "Business - Government
Regulation."
RISKS ASSOCIATED WITH MANAGED CARE CONTRACTS - OUR SUCCESS INCREASINGLY
DEPENDS ON OUR ABILITY TO DEVELOP AND MAINTAIN RELATIONSHIP WITH
MANAGED VISION CARE COMPANIES.
An increasing percentage of patients receive health care coverage
through managed care payors. As this trend continues, our success
will increasingly depend on our ability to negotiate contracts with
health maintenance organizations ("HMOs"), employer groups and other
private third party payors. We cannot assure you that we will be able
to establish or maintain satisfactory relationships with managed care
and other third party payors. Many managed care payors have existing
provider structures in place that they may be unable or unwilling to
change. Our inability to enter into such arrangements in the future
could materially adversely affect our business.
We have established a network of optometrists and other providers
located in or adjacent to our stores in order to enhance our ability
to contract with managed care payors for both professional services
and retail eyewear supplies. Managed care contracts include a variety
of reimbursement methods, such as capitation (or risk basis) and fee
for service. Our contracts with managed care companies on the one
hand, and with networks of optometrists and other providers on the
other, are subject to federal and state regulations, for example:
INSURANCE LICENSURE. Most states impose strict licensure
requirements on companies that engage in the business of insurance,
including health insurance companies and HMOs. Many licensing laws
mandate strict financial and other requirements which we may not be
able to meet, were we deemed to be an engaging in the business of
insurance. Additionally, the licensure process can be lengthy and
time consuming.
<PAGE>
ANY WILLING PROVIDER LAWS. Some states require managed care payors
to include any provider who is willing to abide by the terms of the
payor's contracts. Some states also prohibit termination of providers
21
<PAGE>
without cause. Other states are considering similar requirements.
Such laws limit our ability to develop effective managed care provider
networks.
ANTITRUST LAWS. A range of antitrust laws apply to us and our
provider network. These laws prohibit anti-competitive conduct,
including:
* price-fixing,
* concerted refusals to deal, and
* divisions of markets.
We cannot assure you that our operations will not be challenged on
antitrust grounds in the future. See "Business - Government
Regulation."
UNCERTAINTIES REGARDING HEALTHCARE REFORM - PROPOSED REFORMS MAY AFFECT
OUR BUSINESS.
There have been numerous reform initiatives at the federal and state
levels relating to the payment for and availability of healthcare
services. We believe that such initiatives will continue for the
foreseeable future. If adopted, some of these reforms could adversely
affect our business.
DEPENDENCE ON THIRD-PARTY REIMBURSEMENT - WE RELY ON THIRD PARTIES TO
PAY MANY OF OUR CUSTOMERS' COSTS.
A significant portion of medical care in the United States is
funded by government and private insurance programs, such as Medicare,
Medicaid and corporate health insurance plans. According to
government projections, more medical beneficiaries who are significant
consumers of eye care services will enroll in managed care
organizations. Governmental and private third party payors are trying
to contain medical costs by:
* lowering reimbursements,
* imposing use restrictions and risk-based compensation
arrangements,
* redesigning benefits, and
* exploring more cost-effective methods of health care delivery.
These cost containment efforts may lead to limitations or reductions
in reimbursement for eye care services, which would adversely affect
our future sales. Additionally, some reimbursement programs require
collection of amounts by the Company. Our inability to fully collect
reimbursable amounts could adversely affect cash flow generated from
operations.
MEDICAL AND TECHNOLOGICAL CHANGES - NEW ADVANCES MAY REDUCE THE NEED FOR
OUR PRODUCTS OR ALLOW OTHER MANUFACTURERS TO PRODUCE EYEWEAR AT LOWER
COST THAN WE CAN.
Corneal refractive surgery procedures such as radial-keratotomy and
photo-refractive keratectomy may change the demand for our products.
The development of new drugs may have a similar effect. Technological
advances such as wafer technology and lens casting may make our
current lens manufacturing method uncompetitive or obsolete. Such
medical and technological advances may have a material adverse effect
on our operations.
22
<PAGE>
ACQUISITIONS - FAILURE TO IDENTIFY SUITABLE ACQUISITION TARGETS, OR THE
COSTS AND DIFFICULTIES OF ACQUIRING AND INTEGRATING EXISTING
BUSINESSES COULD ADVERSELY AFFECT OUR FUTURE GROWTH AND
COMPETITIVENESS.
From time to time we may consider growth through opportunistic
acquisitions. We will evaluate possible acquisitions on a case-by-
case basis. We cannot assure you that we will successfully identify
or conclude any acquisitions. Even if we acquire another business,
the integration of that business into our operations may create
substantial costs, delays, or other problems. Acquisitions may also
expose us to particular risks, for example:
* diversion of management attention,
* assumption of liabilities, and
* amortization of goodwill and other acquired intangible assets.
These impacts could materially and adversely affect our financial
condition or results of operations. Depending on the value and nature
of the consideration we pay, acquisitions may adversely affect our
liquidity. In making acquisitions, we may compete with other bidders,
some of which will have greater financial resources than we do. We
anticipate that we will finance future acquisitions through cash on
hand, issuance of common stock, and borrowings under our new credit
facility. The indenture and our new credit facility limit our ability
to issue equity or incur indebtedness to finance acquisitions. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources," "Business,"
"Description of New Credit Facility" and "Description of the Notes
Certain Covenants."
MEXICAN OPERATIONS - OPERATING IN OTHER COUNTRIES PRESENTS
SPECIAL RISKS THAT MAY AFFECT OUR RESULTS OF OPERATIONS.
Our Mexican operations face risks substantially similar to those we
face in our Wal-Mart stores, including dependence on the host store
and limits on expansion. We cannot assure you that our Mexican
operations will be able to attain profitability.
Our foreign operations expose us to all of the risks of investing
and operating in foreign countries generally, including:
* differing regulatory, political and governmental environments,
* currency fluctuations,
* high inflation,
* price controls,
* restrictions on profit repatriation,
* generally lower per capita income and spending levels,
* import duties and value-added taxes, and
* difficulties of cross-cultural marketing.
See "Business - Mexican Operations."
23
<PAGE>
ANTI-TAKEOVER PROVISIONS - OUR ARTICLES OF INCORPORATION AND BY-LAWS
CONTAIN PROVISIONS WHICH MAKE IT MORE DIFFICULT TO EFFECT A CHANGE IN
CONTROL OF THE COMPANY.
These include provisions:
* authorizing the issuance of preferred stock without
shareholder approval,
* requiring a supermajority shareholder vote in certain
circumstances,
* restricting who may call a special meeting of shareholders,
* permitting our Board of Directors to consider constituencies
in addition to the shareholders, and
* requiring shareholders to comply with certain procedures in
connection with any shareholder proposals or director
nominations.
In addition, our Board of Directors has adopted a Shareholders'
Rights Agreement which entitles common shareholders to purchase our
Series A Participating Cumulative Preferred Stock if a third party
acquires beneficial ownership of 15% or more of our common stock. Our
shareholders may also purchase the stock of an acquiring person (as
defined in the agreement) at a discount upon the occurrence of certain
triggering events. These provisions of our Articles of Incorporation
and By-Laws, and the Shareholders' Rights Agreement, could discourage
tender offers or other transactions that would result in shareholders
receiving a premium over the market price for our common stock.
YEAR 2000 COMPLIANCE - OUR COMPUTER SYSTEMS ARE BEING UPGRADED, BUT THE
YEAR 2000 PROBLEM MAY PRESENT RISKS THAT WE HAVE NOT YET IDENTIFIED.
The majority of our internal information systems are currently Year
2000 compliant or being replaced with fully compliant new systems. We
have identified approximately 300 point of sale systems that require
hardware upgrades to be Year 2000 compliant, of which we had replaced
280 as of October 3, 1998. We expect to complete our new system
modifications by the end of the third quarter of 1999. We will use
internal and external resources to reprogram, replace, and test
software for Year 2000 compliance. We expect to spend approximately
$1.1 million on Year 2000 compliance projects, including software and
hardware changes. Our estimate is based on numerous assumptions about
the continued availability of certain resources, third party
modification plans and other factors. We cannot guarantee that these
assumptions will hold, and the actual costs and results of our Year
2000 compliance efforts could differ materially. Hardware and new
software purchases will be capitalized as incurred and amortized over
three years.
We deal with many vendors, financial institutions and managed care
organizations that use information systems to capture and transmit
transactions. We are coordinating our Year 2000 compliance efforts
with these organizations. The estimated future cost of this
transition is minimal. We cannot assure you that these organizations
will make their systems Year 2000 compliant. The failure of these
organizations, particularly any managed care payors, to become Year
2000 compliant could have a material adverse effect on us.
LIMITATIONS ON REPURCHASE OF NOTES UPON CHANGE OF CONTROL - WE MAY NOT
HAVE THE ABILITY TO RAISE THE FUNDS NECESSARY TO FINANCE THE CHANGE OF
CONTROL REPURCHASE CONTEMPLATED BY THE INDENTURE.
<PAGE>
Upon certain changes of control, holders of the notes have the right
to require us to repurchase all or a portion of the notes. See
"Description of the Notes - Change of Control." If a change of control
occurs, we cannot assure you that we will have sufficient funds to
repurchase all of the notes tendered. Our failure to repurchase
tendered notes would be an event of default under the indenture.
24<PAGE>
Changes of control are also restricted by, and constitute a default
under, our credit facility, as well as under other loan, credit and
security agreements. If the lenders under our credit facility or any
other secured lenders accelerate our obligations due to a default,
they would have a priority claim to the proceeds from the sale of our
assets securing such indebtedness.
FRAUDULENT CONVEYANCE - FEDERAL AND STATE STATUTES ALLOW COURTS, UNDER
SPECIFIC CIRCUMSTANCES, TO VOID GUARANTEES AND REQUIRE NOTE HOLDERS TO
RETURN PAYMENTS RECEIVED FROM THE GUARANTORS.
If any guarantor receives less than reasonably equivalent value in
exchange for its guarantees, any liabilities or payments under its
guarantee could be avoided under federal or applicable state
fraudulent transfer laws, regardless of whether it was subject to any
bankruptcy or insolvency proceedings. In particular, to the extent
that any guarantor becomes liable for any of our obligations, the
relevant guarantee could be voided if the guarantor, at the time it
incurred the indebtedness evidenced by the guarantee,
* received less than reasonably equivalent value or fair
consideration for the incurrence of the guarantee,
* was or became insolvent by reason of such incurrence,
* was engaged in a business or transaction for which the
guarantor's remaining assets constituted unreasonably small
capital, or
* intended to incur, or believed it would incur, debts beyond
its ability to pay such debts as they matured.
If any guarantees are avoided, the noteholders could lose the
benefit of the guarantees, and could also be required to return to the
guarantors the amount of any payment or other property received in
respect of the notes.
The indenture requires that certain of our future subsidiaries
guarantee the notes. If certain bankruptcy or insolvency proceedings
are initiated by or against these new subsidiaries within 90 days (or,
possibly, one year) after they issue a guaranty or if any guarantor
incurs obligations under its guarantees in anticipation of insolvency,
all or a portion of the affected guarantees could be avoided as a
preferential transfer under federal bankruptcy or applicable state
law. In addition, a court could require holders to return all
payments made under any such guarantees within such 90 day period (or,
possibly, one year) as preferential transfers.
The measures of insolvency under these fraudulent transfer laws will
depend upon the law applied in any proceeding to determine whether a
fraudulent transfer has occurred. Generally, however, a guarantor
would be considered insolvent if:
* the sum of its debts, including contingent liabilities, was
greater than the fair saleable value of all of its assets,
* the present fair saleable value of its assets was less than
the amount that would be required to pay its probable
liability on its existing debts, including contingent
liabilities, as they become absolute and mature, or
* it could not pay its debts as they become due.
We do not believe that any guarantor, as a result of the issuance of
the guarantees,
25<PAGE>
* will be insolvent or rendered insolvent under the standards
described above,
* will be engaged in a business or transaction for which its
remaining assets constitute unreasonably small capital, or
* will have debts beyond its ability to pay such debts as they
mature.
These beliefs are based on the guarantors' operating history and net
worth, as well as our analysis of their internal cash flow projections
and estimated assets and liabilities at the time of this offering. A
court could, however, decide these issues differently.
CONSEQUENCES OF FAILURE TO EXCHANGE; POSSIBLE ADVERSE EFFECT ON
TRADING MARKET FOR OUTSTANDING NOTES - YOU MAY NOT BE ABLE TO SELL THE
NOTES YOU HOLD IF YOU DO NOT EXCHANGE THEM IN THIS OFFER.
If you hold outstanding notes and do not exchange them in this
offer, you will remain subject to the transfer restrictions applicable
to the outstanding notes and reflected in their legend. We issued the
outstanding notes under exemptions from the registration requirements
of the Securities Act and applicable state securities laws. In
general, holders of the outstanding notes may not offer or sell them
unless they are exempt from registration or registered under the
Securities Act and applicable state laws. We have agreed, in certain
circumstances, to file a shelf registration statement covering resales
of the outstanding notes. Except in those circumstances, we do not
intend to register the outstanding notes under the Securities Act.
After consummation of this exchange offering, we will have no further
obligation to do so.
If you tender outstanding notes in this exchange offer for the
purpose of participating in a distribution of the exchange notes, you
may be deemed to have received restricted securities. If so, you will
be required to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale
transaction. Additionally, as a result of the exchange offer, it is
expected that the aggregate principal amount of the outstanding notes
will decrease substantially. As a result, it is unlikely that a
liquid trading market will exist for the outstanding notes at any
time. This lack of liquidity will make transactions more difficult
and may reduce the trading price of the outstanding notes. See "The
Exchange Offer" and "Registration Rights".
ABSENCE OF PUBLIC MARKET FOR THE NOTES - YOU CANNOT BE SURE THAT AN
ACTIVE TRADING MARKET WILL DEVELOP FOR THESE NOTES.
There is no existing market for the exchange notes. We cannot
assure you that any market that may develop for the notes will be
liquid or that you will be able to sell your exchange notes. In
addition, we cannot offer assurances as to the price at which you
would be able to sell the notes. Future trading prices of the
exchange notes will depend on many factors, including, for example:
* prevailing interest rates,
* our operating results, and
* the market for similar securities.
We do not intend to list the exchange notes on any securities
exchange or the NASDAQ National Market. The initial purchasers have
informed us that they currently intend to make a market in these notes
26<PAGE>
after this exchange offering is completed. However, the initial
purchasers may discontinue their market-making activities at any time
without notice. The Securities Act and the Exchange Act will limit
this market-making activity. The outstanding notes are eligible for
trading in the Private Offerings, Resale and Trading through Automated
Linkages (PORTAL) market. Although we intend to have them designated
for trading in the PORTAL market, the exchange notes offered by this
prospectus will constitute a new issue of securities with no
established trading market. If a trading market does not develop, you
may experience difficulty in reselling these exchange notes or may be
unable to sell them.
27
<PAGE>
THE NEW WEST ACQUISITION
On July 13, 1998, Vista and NW Acquisition Corp. entered into the
Merger Agreement with New West, which was amended on October 5, 1998.
Pursuant to the merger agreement, Vista acquired all of the
outstanding common stock, and options and warrants to acquire common
stock, of New West for $11.50 per share, or approximately $68.3
million in the aggregate (including the assumption of approximately
$2.5 million of indebtedness). To effect the New West acquisition,
Vista commenced a cash tender offer for all of the shares of common
stock of New West on July 20, 1998 (as amended from time to time, the
"Tender Offer"). The Tender Offer was conditioned upon, among other
things, there being validly tendered and not withdrawn prior to the
expiration of the Tender Offer at least 51% of the outstanding shares
of common stock of New West.
The Tender Offer closed on October 23, 1998. After the closing of
Tender Offer, Vista caused New West to be merged with its acquisition
subsidiary and for each remaining share of common stock of New West to
be converted into $11.50 in cash as a result thereof. This merger was
approved under the Delaware General Corporation Law by the directors
of Vista without a separate vote of the stockholders of New West
because Vista held 90% or more of the outstanding common stock of New
West as a result of the Tender Offer.
28
<PAGE>
USE OF PROCEEDS
This exchange offer is intended to satisfy certain of our
obligations under the Registration Rights Agreement. We will not
receive any proceeds from the issuance of the exchange notes. In
consideration for issuing the notes, we will receive outstanding notes
in like principal amount. The form and terms of the exchange notes
are identical in all material respects to the form and terms of the
outstanding notes, except as described in "The Exchange Offer Terms of
the Exchange Offer". The outstanding notes surrendered in exchange
for the exchange notes will be retired and cancelled and cannot be
reissued. Therefore, issuance of the exchange notes will not result
in any increase in our outstanding debt.
CAPITALIZATION
The following table sets forth our capitalization as of October 3,
1998, on an actual basis and on a pro forma basis to reflect the sale
of the outstanding notes, the Frame-n-Lens acquisition, the New West
acquisition, and the new credit facility and the application of the
net proceeds therefrom. This table should be read in conjunction with
the "Selected Consolidated Financial and Other Data," the "Unaudited
Pro Forma Condensed Consolidated Financial Data" and the Consolidated
Financial Statements, including the notes thereto.
</TABLE>
<TABLE>
<CAPTION>
As of October 3, 1998
---------------------
Actual Pro Forma
-------- ---------
(in thousands)
<S> <C> <C>
Long-term debt, including current maturities:
Existing credit facility................................... $ 52,000 $
New credit facility ....................................... 5,000
Notes offered hereby, net of discount...................... 123,580
Other debt(a) ............................................. 7,579 8,188
-------- --------
Total long-term debt, including current maturities .... 59,579 136,768
-------- --------
Shareholders' equity:
Preferred Stock ..........................................
Common Stock ............................................. 212 212
Additional paid-in capital................................ 46,634 46,634
Retained earnings ........................................ 3,640 3,640
Cumulative foreign currency exchange rate translation..... (4,073) (4,073)
-------- --------
Total shareholders' equity ............................ 46,413 46,413
-------- --------
Total capitalization ............................ $105,992 $183,181
======== ========
</TABLE>
__________
(a) Other debt consists of deferred purchase price obligations and
other amounts due to shareholders in connection with the Frame-n-Lens
acquisition, as well as fixed payment amounts related to the ELI
transaction (as defined) and capital leases. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations" and Note 6 to Vista Consolidated
Financial Statements.
29<PAGE>
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
On October 8, 1998, we sold the outstanding notes to Schroder &
Co., Inc., First Union Capital Markets and NationsBanc Montgomery
Securities LLC. These initial purchasers sold the outstanding notes to
certain institutional investors in reliance on Rule 144A and
Regulation D promulgated by the Securities and Exchange Commission (the
"Commission") under the Securities Act. When we sold the outstanding
notes, we and our subsidiary guarantors signed a Registration Rights
Agreement for the benefit of holders of outstanding notes. Under that
agreement we agreed:
(1) to file a registration statement with respect to
an offer to exchange the outstanding notes for senior debt
securities with substantially identical terms within 120
days after we originally issued the outstanding notes, and
(2) to use our best efforts to cause the registration
statement to become effective under the Securities Act
within 180 days after the issue date.
We also agreed that if:
* applicable law or Commission staff interpretations do not permit
us to effect the exchange offer,
* the exchange offer is not consummated within 210 days after
the date we initially issued the outstanding notes,
* the initial purchasers request, with respect to outstanding
notes not eligible for exchange in the exchange offer,
* any holder of outstanding notes is not eligible to participate
in the exchange offer, or
* any holder of outstanding notes would not receive freely
tradable exchange notes in the exchange offer,
then, we and our subsidiary guarantors would, at our expense:
(1) promptly file a shelf registration statement
permitting periodic resales of the outstanding notes,
(2) use our best efforts to cause the shelf
registration statement to become effective, and
(3) use our best efforts to keep the shelf
registration statement current and effective until the
second anniversary of the date we initially issued the
outstanding notes, unless all the notes are sold under the
shelf registration statement in a shorter timeframe.
The interest rate on the outstanding notes will increase under certain
circumstances if we do not comply with our obligations under the
Registration Rights Agreement. See "Registration Rights."
Each holder of outstanding notes who wishes to exchange them in the
exchange offer will be required to make certain representations to us.
These include representations that the holder:
(1) will acquire the exchange notes in the ordinary course of
its business,
(2) has no arrangement with any person to participate
in the distribution of the exchange notes, and
(3) (a) is not our "affiliate," as defined in Rule 405 of the
Securities Act, or,
30
<PAGE>
(b) if the holder is our affiliate, it will
comply with the registration and prospectus delivery
requirements of the Securities Act.
See "Registration Rights."
Resale of Exchange Notes
We believe that holders of exchange notes issued in the exchange offer
may generally offer them for resale, resell and otherwise transfer
them without compliance with the registration and prospectus delivery
provisions of the Securities Act. Our belief is based on existing Commission
staff interpretations and is subject to the exceptions and
qualifications described in "Plan of Distribution."
TERMS OF THE EXCHANGE OFFER
We will accept for exchange all outstanding notes properly tendered
and not withdrawn prior to 5:00 p.m., eastern standard time, on the
date this offer expires. The initial expiration date will be
March 31, 1999. We may extend the exchange offer in our discretion.
We will only accept outstanding notes that are tendered in compliance
with this Prospectus and the terms of the letter of transmittal. You
must tender outstanding notes in $1,000 multiples. We will issue
$1,000 in principal amount of exchange notes in exchange for each
$1,000 in principal amount of outstanding notes tendered and accepted
for exchange.
The form and terms of the exchange notes will be substantially the
same as those of the outstanding notes, except that the exchange notes
will be registered under the Securities Act. Accordingly, the exchange
notes will not bear legends restricting their transfer. The terms of
the exchange notes will also not include certain registration rights
and penalty interest provisions applicable to the outstanding notes.
The exchange notes will evidence the same debt as the outstanding
notes. We will issue the exchange notes under the same indenture as
the outstanding notes. The indenture treats the exchange notes and the
outstanding notes as a single class of debt securities. The exchange
notes and the outstanding notes will be entitled to the same benefits
under the indenture.
We are not conditioning this exchange offer upon any minimum
aggregate principal amount of outstanding notes being tendered for
exchange. Holders of outstanding notes will not have any appraisal or
dissenters' rights in connection with the exchange offer.
As of the date of this Prospectus, we have issued $125,000,000 in
principal amount of the outstanding notes, all of which remain
outstanding. We are sending this Prospectus, together with the letter
of transmittal, to all registered holders of outstanding notes. We
will not fix a record date for determining registered holders of
outstanding notes entitled to participate in the exchange offer.
We intend to conduct the exchange offer in accordance with the
Registration Rights Agreement, the applicable requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and the rules and regulations of the SEC. Any outstanding notes not
exchanged in the exchange offer will remain valid and continue to
accrue interest. Holders of such notes will remain entitled to the
rights and benefits of the indenture and the Registration Rights
Agreement.
We will be deemed to have accepted tendered outstanding notes for
exchange only when, as, and if we so notify State Street Bank and
31<PAGE>
Trust Company, the exchange agent, and have complied with the
Registration Rights Agreement. We will deliver the exchange notes to
State Street Bank and Trust Company, as agent for the tendering
holders.
Except for certain taxes, we will generally pay all charges and
expenses in connection with the exchange offer. Tendering note holders
will not be required to pay brokerage commissions or fees or, in most
cases, transfer taxes, with respect to the exchange of their
outstanding notes in the exchange offer. See "The Exchange Offer --
Fees and Expenses."
If, for any reason, we do not accept any tendered outstanding notes
for exchange, we will return them, without expense to the tendering
holder, as soon as practical after the expiration or termination of
the exchange offer.
EXTENSIONS; AMENDMENTS; TERMINATION
We may extend the exchange offer by notice to the exchange agent.
If we extend the exchange offer, we will notify the registered holders
of outstanding notes. We may extend the offer until 9:00 a.m.,
eastern standard time, on the business day after the offer is
scheduled to end. During any extension, we may continue to accept for
exchange any previously tendered outstanding notes that have not been
withdrawn.
We reserve the right, in our sole discretion to:
(1) delay our acceptance for exchange of any outstanding notes,
(2) extend the exchange offer,
(3) terminate the exchange offer if any of the
conditions described in "The Exchange Offer -- Conditions"
are not satisfied, or
(4) amend the terms of the exchange offer in any manner.
We may delay acceptance, extend or terminate the exchange offer by
notice to the exchange agent. We will also notify the registered
holders of outstanding notes of any delay in acceptance, extension,
termination, or amendment as promptly as practicable. If we amend the
exchange offer in a way we consider material, we will distribute a
prospectus supplement to the registered holders. Depending upon the
significance of the amendment and the means we choose to notify
registered holders, we may extend the exchange offer, if we deem
necessary, to allow registered holders time to consider the effect of
the amendment.
INTEREST ON THE EXCHANGE NOTES
As with the outstanding notes, we will pay interest on the exchange
notes at an annual rate of 12 3/4%. We will pay accrued interest semi-
annually, on April 15 and October 15. We will make our first interest
payment on April 15, 1999. The first payment will include interest
from the date we initially issue the exchange notes, plus any accrued
interest on the outstanding notes for the period from their initial
issue through the date of exchange. Once we issue the exchange notes,
interest will no longer accrue on outstanding notes accepted for
exchange.<PAGE>
CONDITIONS
We are not required to accept any outstanding notes for exchange,
or to issue any exchange notes, and we may terminate the exchange
offer before we accept any outstanding notes for exchange, if:
32<PAGE>
(1) any person sues, or threatens to sue, in any forum
with respect to the exchange offer and, in our sole
judgment, the suit might materially impair our ability to
proceed with the exchange offer,
(2) a government proposes, adopts or enacts any law,
statute, rule or regulation, or the Commission staff interprets
any existing law, statute, rule or regulation in a way that, we
believe, in our sole judgment, might materially impair our
ability to proceed with the exchange offer, or
(3) we do not receive any governmental approval that
we, in our sole discretion, deem necessary to complete the
exchange offer.
These conditions are for our sole benefit. We may assert or waive
them as, when, and if we choose, in our sole discretion. Our exercise
or delay in exercising any of these rights does not mean we have
waived any of them. Each of these rights is an ongoing right which we
may assert at any time and from time to time.
In addition, we will not accept any outstanding notes for exchange,
and we will not issue any exchange notes, if the Commission has threatened or
issued a stop order with respect to:
* the Registration Statement of which this Prospectus is a part,
or
* the qualification of the indenture under the Trust Indenture
Act of 1939.
PROCEDURES FOR TENDERING
You may only tender outstanding notes held by you in the exchange
offer. To tender in the exchange offer, you must complete, sign, and
date the letter of transmittal or a facsimile of the letter of
transmittal. Under certain circumstances described in the letter of
transmittal, you must have your signature guaranteed. You must mail or
deliver the letter of transmittal to the exchange agent before 5:00
p.m., eastern standard time, on the day the offer expires. In
addition, either
(1) you must deliver your outstanding notes to the
exchange agent with your letter of transmittal,
(2) the Depository Trust Company must confirm to the
exchange agent that the outstanding notes have been
transferred by book entry into the exchange agent's account
with Depository Trust Company, or
(3) you must comply with the guaranteed delivery
procedures.
We discuss the procedures for book entry transfer and
guaranteed delivery below.
THE EXCHANGE AGENT MUST RECEIVE THE LETTER OF TRANSMITTAL AND OTHER
REQUIRED DOCUMENTS BEFORE 5:00 P.M., EASTERN STANDARD TIME, ON THE
DATE THE OFFER EXPIRES. OTHERWISE, WE WILL NOT CONSIDER YOUR NOTES TO
BE PROPERLY TENDERED AND WE WILL NOT ACCEPT THEM FOR EXCHANGE. The
exchange agent's address is printed on page 37 of this Prospectus.
By tendering and not withdrawing outstanding notes before the
exchange offer expires, you agree to the terms and conditions
described in this Prospectus and the letter of transmittal.
33
<PAGE>
YOU ARE RESPONSIBLE FOR CHOOSING HOW TO DELIVER YOUR OUTSTANDING
NOTES, THE LETTER OF TRANSMITTAL AND ANY OTHER REQUIRED DOCUMENTS TO
THE EXCHANGE AGENT. YOU ALONE BEAR THE RISK OF NON-DELIVERY OR LATE
DELIVERY. DO NOT SEND YOUR LETTER OF TRANSMITTAL OR ANY OUTSTANDING
NOTES TO US.
We recommend that you use an overnight or hand delivery service
instead of regular mail. In all cases, you should allow sufficient
time for your tender materials to be delivered to the exchange agent
before the offer expires. You may ask your broker, dealer, commercial
bank, trust company or other nominee to handle these formalities for
you.
If you wish to tender any outstanding notes of which you are the
beneficial owner but that are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee, you should
contact the registered holder as soon as possible and instruct it to
tender on your behalf. If you wish to tender on your own behalf, you
must first either:
* arrange to re-register the outstanding notes in your name, or
* obtain a properly completed bond power from the registered
holder of the outstanding notes.
Please note that the transfer of registered ownership may take
considerable time. We cannot assure you that you will be able to re-
register your outstanding notes before the exchange offer expires.
Signatures on a letter of transmittal or a notice of withdrawal
must be guaranteed by:
* a member firm of a registered national securities exchange,
* a member firm of the National Association of Securities
Dealers, Inc.,
* a commercial bank or trust company having an office or
correspondent in the United States, or
* an "eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Exchange Act and which is a member of a
recognized signature guarantee program identified in the
letter of transmittal.
The signature guarantee requirement does not apply to you if:
* you do not check the "Special Issuance Instructions" or
"Special Delivery Instructions" boxes on the letter of
transmittal, or
* you are tendering for the account of an eligible institution.
If the letter of transmittal is signed by anyone other than the
registered holder of the tendered outstanding notes, we will only
accept the notes for exchange if:
(1) the registered holder:
(a) endorses the outstanding notes, or
(b) executes a properly completed bond power, and
(2) an eligible guarantor institution guarantees the registered
holder's signature.
If you sign a letter of transmittal or any outstanding notes or
bond powers in your capacity as a trustee, executor, administrator,
guardian, attorney-in-fact, corporate officer or other fiduciary or
representative, you should indicate your capacity when signing. You
must provide evidence satisfactory to us of your authority to act with
the letter of transmittal.
34<PAGE>
We will resolve all questions as to the validity, form, eligibility
(including time of receipt), acceptance, and withdrawal of tendered
outstanding notes in our sole discretion. Our determinations on these
issues and our interpretation of the terms and conditions of the
exchange offer, including the instructions in the letter of
transmittal, will be final and binding on all parties. We reserve the
right to reject:
* any outstanding notes that are not properly tendered, or
* any outstanding notes where our acceptance would, in the
opinion of our counsel, be unlawful.
We also reserve the right to waive any defects, irregularities or
conditions of tender as to particular outstanding notes. We may, in
our discretion, allow tendering note holders an opportunity to cure
any defects or irregularities with respect to particular outstanding
notes. Although we intend to notify holders of any defects or
irregularities affecting their tenders, neither we, the exchange agent
nor any other person shall be liable for any failure to give such
notice. We will not consider a holder to have tendered outstanding
notes until the holder cures or we waive any defects or
irregularities. Unless the holder instructs differently in the letter
of transmittal, the exchange agent will return improperly tendered
outstanding notes to the tendering holder as soon as practical after
the exchange offer expires.
We will issue exchange notes only after the exchange agent timely
receives:
(1) (a) the tendered outstanding notes, or
(b) confirmation that they have been transferred
by book entry into the exchange agent's account at the
Depository Trust Company,
(2) a properly completed, duly executed letter of transmittal,
and
(3) all other required documents.
If we do not accept your tendered outstanding notes for exchange for
any reason, or if you submit more outstanding notes than your letter
of transmittal indicates you wish to exchange, we will return the
unaccepted or excess outstanding notes to you, without cost, as soon
as practical after the expiration or termination of the exchange
offer. If you tendered the outstanding notes by book-entry transfer,
we will have the unaccepted or excess outstanding notes credited to an
account maintained with the Depository Trust Company.
BOOK-ENTRY TRANSFER
Within two days after the date of this Prospectus, the exchange
agent will ask the Depository Trust Company to establish an account
for purposes of receiving outstanding notes tendered in connection
with the exchange offer. Any financial institution that participates
in the Depository Trust Company system may deliver outstanding notes
by having the Depository Trust Company transfer them by book-entry in
the exchange agent's account.
IF YOU DELIVER OUTSTANDING NOTES BY BOOK-ENTRY TRANSFER, YOU STILL
MUST DELIVER THE LETTER OF TRANSMITTAL, WITH ANY REQUIRED SIGNATURE
GUARANTEES, AND ANY OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT
BEFORE THE EXCHANGE OFFER EXPIRES. PLEASE NOTE THAT DELIVERY OF
DOCUMENTS TO THE DEPOSITORY TRUST COMPANY DOES NOT CONSTITUTE DELIVERY
---
TO THE EXCHANGE AGENT.
35<PAGE>
GUARANTEED DELIVERY PROCEDURES
You may use the guaranteed delivery procedures we describe in this
section if you wish to tender your outstanding notes and either:
* you do not have immediate access to your outstanding notes, or
* you cannot deliver your outstanding notes, the letter of
transmittal or any other required document to the exchange
agent before the offer expires.
You may still tender if:
(1) the tender is made through an eligible institution, or
(2) before the exchange offer expires, an eligible
institution delivers a notice of guaranteed delivery (by
fax, mail or hand delivery) to the exchange agent. This
notice must:
* identify the name and address of the holder,
* identify the registered number(s) and principal amount of
the outstanding notes tendered,
* state that the outstanding notes are being tendered, and
* guarantee that the eligible institution will deliver the
letter of transmittal, the outstanding notes, and any
other required documents to the exchange agent within
three (3) NASDAQ National Market System trading days after
the offer expires, and
(3) the exchange agent actually receives the letter of
transmittal, the tendered outstanding notes, and all other
required documents within three (3) NASDAQ National Market
System trading days after the offer expires. The eligible
institution may deliver the outstanding notes by book-entry
transfer as described in the preceding section.
Upon request, the exchange agent will send a notice of guaranteed
delivery to holders who wish to use these guaranteed delivery
procedures. If you use the guaranteed delivery procedures, you must
comply with them within the time period described in this section.
WITHDRAWAL OF TENDERS
Except as otherwise provided in this Prospectus, you may withdraw
your tender of outstanding notes at any time before 5:00 p.m.,
eastern standard time, on the day the exchange offer expires.
For your withdrawal to be effective, the exchange agent must
receive a timely written notice of withdrawal at one of the addresses
listed in the "Exchange Agent" section below. The notice of withdrawal
must:
* identify the person who tendered the outstanding notes,
* identify the outstanding notes to be withdrawn, including
their principal amount(s), and
* where certificates for outstanding notes have been
transmitted, specify the name of the registered holder of the
outstanding notes if different from the name of the
withdrawing holder.
If the exchange agent receives certificates for outstanding notes,
then, before it will release the certificates, the withdrawing holder
must also provide:
36<PAGE>
(1) the serial numbers of the particular certificates to be
withdrawn, and
(2) a signed notice of withdrawal with signatures
guaranteed by an eligible institution, unless the
withdrawing holder is itself an eligible institution.
If you tendered outstanding notes using the book-entry transfer
procedures, we will have the outstanding notes credited to an account
maintained with the Depository Trust Company. Your notice of
withdrawal must specify the name and number of the account at the
Depository Trust Company to which you want the withdrawn outstanding
notes credited. Your notice of withdrawal must also comply with any
procedures of the Depository Trust Company.
As mentioned earlier, we reserve the right to resolve all questions
as to the validity, form and eligibility, including time of receipt,
of notices of withdrawal. Our determination on these issues will be
final and binding on all parties.
We will treat any withdrawn outstanding notes as not validly
tendered, and will return them to their holder without cost, as soon
as practical after withdrawal. You may re-tender any properly
withdrawn outstanding notes by again following the tender procedures
described in this Prospectus before the offer expires.
EXCHANGE AGENT
We have appointed State Street Bank and Trust Company as our
exchange agent for this exchange offer. You should contact the
exchange agent with any questions or requests for:
* assistance,
* additional copies of this Prospectus,
* additional copies of the letter of transmittal, or
* copies of the notice of guaranteed delivery.
HOW TO CONTACT THE EXCHANGE AGENT:
By Overnight Courier or Hand Delivery: By Registered or Certified Mail:
------------------------------------- -------------------------------
Corporate Trust Division Corporate Trust Division
Attn: Kellie Mullen Attn: Kellie Mullen
Two International Place Two International Place
Boston, MA 02110 Boston, MA 02110
By Facsimile:
------------
(617) 664-5290
(For eligible institutions only)
Confirm by Telephone:
(617) 664-5587
37<PAGE>
FEES AND EXPENSES
We will pay the expenses of soliciting tenders. We will make the
principal solicitation by mail. We may make additional solicitations
by telegraph or telephone. We may also have our officers and regular
employees make in-person solicitations.
We have not retained any dealer-manager in connection with the
exchange offer. We will not pay any broker-dealers or others to
solicit acceptances of the exchange offer. We will pay the exchange
agent reasonable and customary fees for its services and will
reimburse its reasonable out-of-pocket expenses in connection with the
exchange offer.
We estimate that we will incur and pay $95,000 in cash expenses
in connection with the exchange offer. These expenses include:
* registration fees,
* fees and expenses of the exchange agent and trustee,
* accounting and legal fees,
* printing costs, and
* related fees and expenses.
TRANSFER TAXES
We will pay any transfer taxes imposed on the exchange of notes in
the exchange offer. We will not, however, pay any transfer taxes
arising for any other reason. The tendering holder will be required to
pay such taxes, whether imposed on the registered holder or any other
person. For example, we will not pay taxes imposed on:
* the transfer, issuance or delivery of unexchanged outstanding
notes to any person other than their registered holder, or
* the registration of any outstanding notes or exchange notes in
the name of any person other than the tendering registered
holder.
If the tendering holder does not provide satisfactory evidence that it
has paid or is exempt from these transfer taxes with the letter of
transmittal, such transfer taxes will be billed directly to such
tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
If you do not exchange your outstanding notes in the exchange
offer, your notes will continue to be subject to transfer
restrictions, as reflected in their restrictive legends. These
restrictions apply because we issued the outstanding notes under
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities
laws. In general, you may not offer or sell the outstanding notes
unless they are registered under the Securities Act, except pursuant
to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws.
We do not plan to register the outstanding notes under the
Securities Act. Based on current Commission staff interpretations, you
may generally offer for resale, resell or otherwise transfer exchange
notes issued in the exchange offer without compliance with the
registration and prospectus delivery provisions of the Securities Act.
This exception to the registration and delivery requirements is
38<PAGE>
subject to the qualifications and limitations described in the "Plan
of Distribution" section, which you should review carefully.
The securities laws of certain states and other jurisdictions also
prohibit the offer or sale of the outstanding notes and exchange notes
unless they have been registered under those laws or are exempt from
their registration requirements. We have agreed in the Registration
Rights Agreement, subject to certain limitations, to register or
qualify the exchange notes for offer or sale under the securities or
blue sky laws of such jurisdictions if a holder of exchange notes
reasonably requests in writing. We do not intend to register or
qualify the outstanding notes under any such laws.
39
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma condensed consolidated financial
data ("Pro Forma Financial Statements") as of October 3, 1998, for the
year ended January 3, 1998, and for the nine-month period ended
October 3, 1998 have been derived by the application of pro forma
adjustments to the historical financial statements of Vista, Frame-n-
Lens, and New West. The unaudited pro forma condensed consolidated
balance sheet has been prepared to give effect to the New West
acquisition, the closing of our new credit facility, and the sale of
the outstanding notes as if each had occurred on October 3, 1998. The
unaudited pro forma condensed consolidated statements of operations
for the year ended January 3, 1998 and the nine-month period ended
October 3, 1998 have been presented to give effect to the Frame-n-Lens
acquisition, the New West acquisition (using the financial data for
the corresponding fiscal periods of the respective companies), the
closing of our new credit facility, and the sale of the outstanding
notes as if each occurred at the beginning of the respective periods.
The Pro Forma Financial Statements include pro forma data relative
to the Frame-n-Lens acquisition completed July 28, 1998. Such data is
incorporated in the pro forma financial statements to provide a more
complete presentation of the pro forma condensed consolidated
statement of operations of Vista.
The pro forma adjustments are described in the accompanying notes
and are based upon available information and certain assumptions that
the Company believes are reasonable, including assumptions relating to
the preliminary allocation of the consideration paid in connection
with the acquisitions of Frame-n-Lens and New West to the respective
assets and liabilities based on estimates of their respective fair
values.
The Pro Forma Financial Statements do not purport to represent what
the Company's results would have been if the Frame-n-Lens acquisition,
the New West acquisition, the closing of our new credit facility, and
the sale of the outstanding notes 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.
40
<PAGE>
<TABLE>
<CAPTION>
VISTA EYECARE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF OCTOBER 3, 1998
Pro forma
Vista New West Acquisition Financing October 3,
Historical Eyeworks Adjustments Adjustments 1998
---------- --------- ------------ ------------ -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................$ 2,408 $ 397 $ (72,145) (a) $ 123,547 (c) $ 2,207
(52,000) (d)
Accounts receivable (net)........................ 8,583 2,483 (255) (a) 10,811
Inventories (net)................................ 28,248 4,466 (445) (a) 32,269
Other current assets............................. 2,347 777 (180) (a) 2,944
--------- -------- --------- --------- ---------
Total current assets.......................... 41,586 8,123 (73,025) 71,547 48,231
--------- -------- --------- --------- ---------
Net property and equipment........................... 48,191 11,550 (358) (a) 59,383
Other assets and deferred costs (net)................ 6,032 14 5,033 (c) 11,079
Intangible assets (net).............................. 41,756 348 63,476 (a) 105,580
--------- -------- --------- --------- ---------
Total assets................................. $ 137,565 $ 20,035 $ (9,907) $ 76,580 $ 224,573
========= ======== ========== ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ $ 11,624 $ 5,256 $ $ $ 16,880
Accrued expenses and other current liabilities.. 17,354 2,195 2,068 (a) 21,617
Current portion of long-term debt............... 892 1,215 (542) (a) 1,565
--------- -------- ---------- --------- ---------
Total current liabilities.................... 29,870 8,666 1,526 40,062
Revolving credit facility ---long-term.............. 52,000 5,000 (c) 5,000
(52,000)(d)
Long-term notes payable, net of debt discount, less
current portion................................ 6,687 1,936 (2,000) (a) 123,580 (c) 130,203
Deferred income tax liabilities.................... 2,595 2,595
Shareholders' equity:
Preferred Stock................................ 5,460 (5,460) (b)
Common Stock................................... 212 49 (49) (b) 212
Additional paid-in-capital..................... 46,634 15,746 (15,746) (b) 46,634
Retained Earnings (deficit).................... 3,640 (11,822) 11,822 (b) 3,640
Cumulative foreign currency exchange rate
translation.................................. (4,073) (4,073)
---------- -------- --------- --------- ---------
Total shareholders' equity.................. 46,413 9,433 (9,433) 46,413
---------- -------- --------- --------- ---------
Total liabilities and shareholders' equity.. $ 137,565 $ 20,035 $ (9,907) $ 76,580 $ 224,273
========= ======== ========= ========= =========
</TABLE>
41
<PAGE>
<PAGE>
VISTA EYECARE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED BALANCE SHEET
(dollars in thousands)
(a) The Pro Forma Financial Statements include information concerning
the following acquisitions:
NEW WEST ACQUISITION. On October 23, 1998, the Company acquired all
the outstanding common stock and common stock equivalents of New West.
The New West acquisition will be accounted for as a purchase, with the
excess purchase price over the fair value of the net assets acquired
allocated to goodwill. Goodwill has been estimated to be $63,476 and
will be amortized over 30 years. A summary of the purchase price and
the related purchase allocation follows:
AGGREGATE PURCHASE PRICE
Cash paid at closing .............................. $ 65,778
Financial, accounting, legal and other direct
acquisition costs ................................ 3,825
Cash paid to extinguish line of credit ............. 2,542
--------
Aggregate purchase price.................. $ 72,145
========
PRELIMINARY ALLOCATION OF PURCHASE PRICE
Aggregate purchase price: .......................... $ 72,145
Less net book value of assets acquired............ (11,975)
--------
Excess of cost over the net book value of assets
acquired ........................................ 60,170
Adjustments to record assets and liabilities at
fair market value:
Accounts receivable .............................. 255
Inventory ........................................ 445
Other Current Assets.............................. 180
Property, Plant and Equipment..................... 358
Current Liabilities, including severance costs.... 2,068
--------
Total adjustments ........................ 3,306
--------
Goodwill ........................................ $ 63,476
========
FRAME-N-LENS ACQUISITION. On July 28, 1998, the Company
acquired all the outstanding capital stock of Frame-n-Lens.
The Frame-n-Lens 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 is $25,961
and will be amortized over 30 years.
The results of operations for Frame-n-Lens after the date of
acquisition are included in the consolidated results of operations
for Vista. Financial information for Frame-n-Lens included in the
unaudited pro forma condensed consolidated statements of operations
as of October 3, 1998 reflects only the periods prior to the Frame-n-Lens
acquisition.
42<PAGE>
<PAGE>
VISTA EYECARE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED BALANCE SHEET -- (CONTINUED)
(dollars in thousands)
(b) Represents elimination of historical equity balances of
New West.
(c) Reflects the issuance of the outstanding notes and the new credit facility:
Issuance of the outstanding notes, net of discount... $ 123,580
New credit facility ................................. 5,000
Fees and expenses ................................... (5,033)
---------
$ 123,547
=========
(d) Reflects the repayment of outstanding balances under, and
termination of, the existing credit facility.
43<PAGE>
<PAGE>
<TABLE>
<CAPTION>
VISTA EYECARE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 3, 1998
Frame-n- New West Acquisition Financing
Vista Lens Eyeworks Adjustments Adjustments Pro Forma
---------- ---------- -------- ------------ ------------ ---------
(dollars in thousands)
<C> <C> <C> <C> <C> <C> <C>
Net sales........................................... $ 186,354 $ 78,371 $ 49,212 $ $ $ 313,937
Cost of goods sold.................................. 86,363 28,632 24,253 5,707 (a)
(2,648) (b) 142,307
-------- -------- -------- -------- --------- ---------
Gross Profit........................................ 99,991 49,739 24,959 (3,059) 171,630
Selling, general, and administrative
expenses......................................... 89,156 49,783 23,641 (5,707) (a) 153,205
(6,649) (c)
2,981 (d)
-------- -------- -------- ------- -------- ---------
Operating Income (loss)............................. 10,835 (44) 1,318 6,316 18,425
Interest expense, net............................... 1,568 804 56 (533) (e) 16,475 (g) 18,593
223 (f)
Other expense (Income), net......................... (14) (14)
-------- -------- -------- ------- --------- ---------
Income (loss) before income taxes 9,281 (848) 1,262 6,626 (16,475) (154)
Provision (benefit) for income taxes................ 3,708 (547) 3,843 (h) (6,590) (h) 414
-------- -------- -------- ------- --------- ---------
Net Income (loss)................................... $ 5,573 $ (848) $ 1,809 $ 2,783 $ (9,885) $ (568)
======== ======== ======== ======= ========= =========
Ratio of earnings to fixed charges (i).............. [1.0x]
</TABLE>
44<PAGE>
<PAGE>
<TABLE>
<CAPTION>
VISTA EYECARE, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED OCTOBER 3, 1998
Frame-n- New West Acquisition Financing
Vista Lens Eyeworks Adjustments Adjustments Pro Forma
-----------------------------------------------------------------------
(dollars in thousands)
<C> <C> <C> <C> <C> <C> <C>
Net sales..................................... $173,099 $38,890 $41,449 $ $253,438
Cost of goods sold............................ 79,112 13,837 20,556 $ 2,416 (a) 113,450
(2,471) (b)
--------------------------------------- ----------- --------
Gross Profit.................................. 93,987 25,053 20,893 55 139,988
Selling, general, and administrative
expenses................................... 81,838 26,336 20,290 (2,416) (a) 122,997
(5,070) (c)
2,019 (d)
--------------------------------------- ----------- --------
Operating income (loss)....................... 12,149 (1,283) 603 5,522 16,991
Interest expense, net......................... 465 154 (453) (e) 12,154 (g) 12,487
167 (f)
Other expense (income), net................... 1,248 270 1,518
--------------------------------------- ------- --------
Income (loss) before income taxes............. 10,901 (1,748) 179 5,808 (12,154) 2,986
Provision (benefit) for income taxes.......... 4,454 (31) 71 3,131 (h) (4,862) (h) 2,763
--------------------------------------- ------- --------
Net Income (loss)............................. $ 6,447 $(1,717) $ 108 $ 2,677 $ (7,292) $ 223
======================================= ======== ========
Ratio of earnings to fixed charges (i)........ [1.2x]
</TABLE>
45
<PAGE>
<PAGE>
VISTA EYECARE, INC. 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 and store rent for New West and Frame-n-Lens,
respectively, to conform with Vista's historical presentation.
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
January 3, 1998 October 3, 1998
--------------- ---------------
<S> <C> <C>
NEW WEST
COGS .................... $(1,430) $(1,423)
SG&A .................... 1,430 1,423
FRAME-N-LENS
COGS .................... $ 7,137 $ 3,839
SG&A .................... (7,137) (3,839)
COMBINED
COGS .................... $ 5,707 $ 2,416
SG&A .................... (5,707) (2,416)
</TABLE>
(b) In connection with the Frame-n-Lens acquisition and the New West
acquisition, the Company initiated a plan to consolidate three
manufacturing facilities (located in Los Angeles, California;
Tempe, Arizona; and Portland, Oregon) into the Frame-n-Lens
operations located in Fullerton, California. Amounts shown
below represent estimated savings for payroll related costs and
reduced occupancy expense for the applicable periods:
Year Ended Nine Months Ended
January 3, 1998 October 3, 1998
--------------- -----------------
$ 2,648 $ 2,471
(c) In connection with the Frame-n-Lens acquisition and the New West
acquisition, the Company initiated a plan to (i) close the
corporate support office for Frame-n-Lens and New West, and (ii)
consolidate operations with the Company's corporate support office in
Lawrenceville, Georgia. Amounts shown below represent the savings
resulting from the elimination of duplicative expenses for the
applicable periods:
Year Ended Nine Months Ended
January 3, 1998 October 3, 1998
--------------- ---------------
$ 6,649 $ 5,070
(d) Reflects additional amortization of goodwill over 30 years.
(e) Reflects elimination of interest expense on debt repaid upon the
Frame-n-Lens and New West acquisitions.
(f) Reflects amortization of the discount on deferred purchase price
obligation related to the Frame-n-Lens acquisition.
46<PAGE>
<PAGE>
VISTA EYECARE, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS -- (CONTINUED)
(dollars in thousands)
(g) Reflects the following:
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
January 3, 1998 October 3, 1998
--------------- ------------------
<S> <C> <C>
Interest expense on the notes.......... $ 15,938 $ 11,953
Interest expense on the new credit
facility ............................ 688 516
-------- --------
Total cash interest
expense ................... 16,626 12,469
Amortization of deferred financing
costs and debt discount ............. 1,609 1,207
-------- --------
Total interest expense ...... 18,235 13,676
Less: Interest expense on the
existing credit facility............. (1,524) (1,420)
Amortization of deferred financing
fees on the existing credit
facility .......................... (236) (102)
-------- --------
$ 16,475 $ 12,154
======== ========
</TABLE>
(h) Represents the net additional income tax expense (benefit)
as a result of the acquisitions and financing adjustments
at an effective rate of 40%.
(i) For the purpose of computing the ratio of earnings to fixed charges,
"earnings" consists of earnings before provision for income taxes
plus fixed charges. "Fixed charges" consists of interest expense,
including amortization of debt issue costs and the interest portion
of the Company's rent expense.
47
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth selected consolidated financial
and other data of Vista as of and for each of the years in the five-
year period ended January 3, 1998 and the nine-month periods ended
September 27, 1997 and October 3, 1998. The selected consolidated
financial data as of and for each of the years in the five-year period
ended January 3, 1998 were derived from the audited consolidated
financial statements of Vista included elsewhere in this Prospectus.
The selected consolidated financial data as of and for the nine-month
periods ended September 27, 1997 and October 3, 1998 were derived
from the unaudited consolidated financial statements of Vista included
elsewhere in this Prospectus. In the opinion of management, such
unaudited consolidated financial statements include all adjustments,
consisting of only normal recurring items, necessary for a fair
presentation of the financial condition and results of operations
of Vista for such periods. Operating results for the nine-month
periods ended September 27, 1997 and October 3, 1998 are not
necessarily indicative of the results that may be expected for
the full year. The information contained in this table should be
read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Vista's
historical consolidated financial statements, including the notes
thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Years Ended Nine Months Ended
----------------------------------------------------------- ---------------------
December December December December January September October
31, 31, 31, 28, 3, 27, 3,
1993 1994 1995(a) 1996 1998 1997 1998
----------- -------- -------- -------- ------- --------- -------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT
DATA:
Net sales ............................. $ 88,340 $ 119,395 $ 145,573 $ 160,376 $ 186,354 $ 134,736 $ 173,099
Gross profit........................... 46,895 65,497 77,607 83,684 99,991 73,013 93,987
Selling, general and
administrative expense............... 48,602 63,911 74,390 76,920 89,156 63,323 81,838
Other nonrecurring
charges(b)........................... 11,311 2,011
---------- ---------- -------- -------- --------- --------- ---------
Operating income (loss)................ (13,018) 1,586 1,206 6,764 10,835 9,690 12,149
Interest expense, net.................. 83 1,322 2,639 2,072 1,568 1,202 1,257
Other expense (income),
net.................................. (237) (127) (13) 12 (14) (9) (9)
---------- ---------- -------- -------- --------- --------- ---------
Income (loss) before income
taxes ............................... (12,864) 391 (1,420) 4,680 9,281 8,497 10,901
Provision (benefit) for
income taxes......................... (900) 40 100 1,200 3,708 3,365 4,454
---------- ---------- -------- -------- --------- --------- ---------
Net income (loss)...................... $ (11,964) $ 351 $ (1,520) $ 3,480 $ 5,573 $ 5,132 $ 6,447
========== ========== ======== ======== ========= ========= =========
OTHER FINANCIAL DATA:
Depreciation and
amortization......................... $ 5,512 $ 7,567 $ 10,378 $ 10,058 $ 11,035 $ 7,876 $ 9,227
Capital expenditures(c)................ 16,858 15,963 13,175 2,713 8,049 6,029 7,198
EBITDA(d).............................. 3,805 9,153 13,595 16,822 21,870 17,566 21,376
EBITDA margin.......................... 4.3% 7.7% 9.3% 10.5% 11.7% 13.0% 12.3%
Ratio of earnings to fixed
charges(e)........................... --- 1.3x 0.5x 2.9x 5.4x 6.3x 7.5x
<PAGE>
STORE DATA:
End of period stores................... 245 298 355 341 443 378 737
Wal-Mart comparable store
sales growth(f)...................... --- --- (0.5%) 4.0% 7.0% 6.0% 3.5%
Sales per store(g)..................... $ 495 $ 456 $ 443 $ 484 $ 505 $ 356 $ 235
BALANCE SHEET DATA (END OF PERIOD):
Cash and cash
equivalents ......................... $ 2,002 $ 2,400 $ 1,307 $ 1,110 $ 2,559 $ 2,218 $ 2,408
Working capital........................ 6,954 8,723 14,556 13,502 12,171 11,806 11,716
Total assets........................... 66,172 77,612 81,237 74,564 83,250 79,928 137,565
Total debt............................. 15,761 31,129 38,480 26,500 24,203 22,100 59,579
Shareholders' equity................... 31,577 29,613 26,326 29,906 36,368 35,076 46,413
See accompanying notes to Selected Consolidated Financial and Other Data.
</TABLE>
48<PAGE>
NOTES TO SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(dollars in thousands)
(a) Effective January 1, 1995, Vista changed its year end to a 52/53
week retail calendar with the fiscal year ending on the Saturday
closest to December 31.
(b) Other nonrecurring charges consists of (i) provisions for the
disposition of assets ($7,727 in fiscal 1993 and $958 in fiscal 1995),
(ii) stock option compensation expense ($834 in fiscal 1993) and (iii)
other charges ($2,750 in fiscal 1993 and $1,053 in fiscal 1995).
(c) Capital expenditures exclude assets acquired in the Midwest,
Frame-n-Lens and New West acquisitions.
(d) EBITDA represents the sum of operating income (loss) plus
depreciation and amortization (excluding amortization of deferred
financing costs, which is included in interest expense, net), and
other nonrecurring charges. EBITDA is presented because it is a
widely accepted financial indicator of a company's ability to service
or incur indebtedness. However, EBITDA does not represent cash flow
from operations as defined by GAAP, is not necessarily indicative of
cash available to fund all cash flow needs, should not be considered
an alternative to net income, or to cash flows from operations as
determined in accordance with GAAP and should not be considered as an
indication of the Company's operating performance or as a measure of
liquidity. EBITDA is not necessarily comparable to similarly titled
measures for other companies in accordance with GAAP.
(e) For the purpose of computing the ratio of earnings to fixed
charges, "earnings" consists of earnings before provision for income
taxes plus fixed charges. "Fixed charges" consists of interest
expense, including amortization of debt issue costs and the interest
portion of the Company's rent expense. The ratio for the year ended
December 31, 1993 is not presented as earnings were inadequate to
cover fixed charges by approximately $12,400.
(f) Wal-Mart comparable store sales growth is based on Vista's
domestic Wal-Mart business and is calculated by comparing net sales
for the period to net sales of the prior period for all stores open at
least twelve months prior to the later period. This information is
not available for 1993 and 1994.
(g) Sales per store is calculated on a quarterly basis by dividing
total net sales by the total number of stores open during the period.
Annual and semi-annual net sales per store is the sum of the
applicable quarterly calculations.
49
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company has experienced substantial growth since its formation
in 1990, primarily due to the opening of new vision centers within
Wal-Mart stores and more recently due to recent acquisitions. Vista
operated 245 vision centers at year end 1993 and 443 vision centers at
year end 1997, 383 of which were located within Wal-Mart stores.
After giving effect to the Frame-n-Lens acquisition and the New West
acquisition, the Company operates 915 vision centers as of October 3,
1998.
RESULTS OF OPERATIONS
The Company's results of operations in any period are significantly
affected by the number and mix of vision centers opened and operating
during such period. Given the Company's rapid expansion through
recent acquisitions and dispositions of significant operating units
(both domestic and foreign), period-to-period comparisons may not be
meaningful and the results of operations for historical periods may
not be indicative of future results.
Effective January 1, 1995, Vista changed its year end to a 52/53
week retail calendar with the fiscal year ending on the Saturday
closest to December 31. Fiscal 1997 consisted of 53 weeks. Sales for
the 53rd week approximated $3.0 million in fiscal 1997. International
operations are reported using a fiscal year ended November 30.
COMPARISON OF THE NINE MONTHS ENDED OCTOBER 3, 1998 TO THE NINE MONTHS
ENDED SEPTEMBER 27, 1997
NET SALES. Net sales during the nine month period ended October 3,
1998 increased to $173.1 million from $134.7 million for the nine
month period ended September 27, 1997. Average weekly net sales per
vision center decreased from $9,800 during the nine month period ended
September 27, 1997 to $8,500 during the nine month period ended
October 3, 1998. The decrease is due primarily to averaging the
effect of Midwest Vision and Frame-n-Lens stores, which have a lower
average weekly net sales per store. The domestic host store business
achieved a comparable store sales increase of 3.5% during the nine
month period ended October 3, 1998. In addition, sales under managed
care programs increased from the nine month period ended September 27,
1997.
Net sales from international operations declined slightly in the
nine-month period ended August 31, 1998 at $2.9 million, due in part
to the disposition of the Czech operations at the end of the first
quarter 1998.
GROSS PROFIT. For the nine month period ended October 3, 1998,
gross profit increased to $94.0 million from $73.0 million in the nine
month period ended September 27, 1997. This increase was primarily
due to the increased net sales described above. Gross profit as a
percentage of sales was 54.3% in the nine month period ended October
3, 1998 slightly up from 54.2% in the nine month period ended
September 27, 1997. The Company has achieved cost reductions for its
contact lens disposable products; consequently, the price
repositioning on the contact lens disposable business has not had a
significant impact on gross profit margins.
50<PAGE>
SELLING, GENERAL, AND ADMINISTRATIVE ("SG&A") EXPENSES. SG&A
expense (which includes both store operating expenses and home office
overhead) increased to $81.8 million in the nine month period ended
October 3, 1998 from $63.3 million for the nine month period ended
September 27, 1997, reflecting operating expenses of the additional
vision centers. As a percentage of net sales, SG&A expense was 47.3%
in the nine month period ended October 3, 1998, compared to 47.0% for
the nine month period ended September 27, 1997. The percentage
increase was due primarily to the averaging effect of the Frame-n-Lens
acquisition, with SG&A expense as a percent of sales slightly higher
than the domestic host business.
OPERATING INCOME. Operating income for the nine month period ended
October 3, 1998 increased to $12.1 million, a 25.4% increase over $9.7
million in the nine month period ended September 27, 1997.
International operations generated an operating loss (which excludes
allocated corporate overhead, interest, and taxes) of $51,000 for the
nine months ended August 31, 1998 as opposed to an operating profit of
$37,000 in the comparable period a year ago.
OTHER EXPENSE. Interest expense was $1.2 million in each of the
nine month period ended October 3, 1998 and the nine month period
ended September 27, 1997.
PROVISION FOR INCOME TAXES. The effective income tax rate on
consolidated pre-tax income in the nine month period ended October 3,
1998 is 40.9%. Due to the Company's current tax net operating loss
carryforward position, current year earnings were not be subject to
regular Federal Income Tax. However, the Company was subject to
Federal Alternative Minimum Tax and state income tax, which
resulted in the Company making cash payments approximating 30% of
consolidated pre-tax earnings.
NET INCOME. Net income was $6.4 million, or $0.31 basic earnings
per common share, as compared to net income of $5.1 million, or $0.25
basic earnings per common share, in the nine month period ended
September 27, 1997.
COMPARISON OF THE YEAR ENDED JANUARY 3, 1998 TO THE YEAR ENDED
DECEMBER 28, 1996
NET SALES. Net sales during fiscal 1997 increased to $186.4 million
from $160.4 million for the prior year. Such increase was due to a
6.8% increase in comparable store sales for domestic vision centers as
well as an increase in the number of domestic vision centers.
Consolidated average weekly net sales per vision center increased 1.1%
from $9,300 during fiscal 1996 to $9,400 during fiscal 1997. Such
improvement was due primarily to the increase in comparable store
sales on the domestic business, offset in part by the acquisition in
the fourth quarter of 1997 of Midwest Vision, a retail optical company
with annual sales in 1997 of approximately $14.4 million. Average
weekly net sales for vision centers open less than one year were lower
than the average for vision centers open less than one year in fiscal
1996.
Continued success of "life style" selling programs, improved
merchandising and product presentation, as well as continued focus on
customer service, contributed to the sales improvement. In stores open
for more than one year, average spectacle unit sales per week and the
average spectacle transaction value increased over that attained in
fiscal 1996. In addition, sales under managed care programs increased
from the prior year.
Net sales from international operations increased from $3.8 million
in the 12-month period ending November 30, 1996 to $4.0 million in the<PAGE>
comparable period ending November 30, 1997. The increase is
attributable primarily to new store openings.
51
<PAGE>
GROSS PROFIT. For fiscal 1997, gross profit increased to $100.0
million from $83.7 million in the prior year. This increase was due to
the increase in net sales described above. Gross profit percentage
increased from 52.2% in 1996 to 53.7% in 1997. Gross profit percentage
was positively affected primarily by increased receipts of occupancy
fees from independent optometrists as a result of the EyeCare Leasing,
Inc. ("ELI") and Stewart-Phillips, Inc. ("SPI") transactions which
closed in January 1997. Additionally, a focus on lifestyle selling
contributed to the improvement in gross profit percentage. See
"Business - The Industry."
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. SG&A expense (which
includes both store operating expenses and home office overhead)
increased to $89.2 million in fiscal 1997 from $77.0 million in 1996.
As a percentage of net sales, SG&A expense was 47.8% in 1997, compared
to 48.0% for 1996. The decrease was due primarily to improved
efficiencies at the store level partially offset by increases in
administrative expenses related to responsibilities assumed in
connection with the ELI and SPI transactions and transition costs
resulting from the acquisition of Midwest Vision.
OPERATING INCOME. Operating income for fiscal 1997 increased to
$10.8 million from $6.8 million in 1996 representing an increase in
operating margin from 4.2% in 1996 to 5.8% in 1997. In addition,
Vista's international operations (29 vision centers at November 30,
1997) generated an operating loss of $28,000 in fiscal 1997, as
opposed to an operating loss of $612,000 in the comparable period a
year ago. International operating results do not include allocated
corporate overhead, interest, and taxes.
OTHER EXPENSE. The decrease in other expense to $1.6 million,
compared to $2.1 million in 1996, is due, for the most part, to
reduced interest expense, resulting from the reduction of outstanding
borrowings under the Existing Credit Facility.
PROVISION FOR INCOME TAXES. The effective income tax rate on
consolidated pre-tax income is 40%, which represents a tax provision
of 39% on domestic earnings. Due to Vista's tax net operating loss
carry forward position, current year earnings will not be subject to
regular Federal Income Tax. However, Vista will be subject to Federal
Alternative Minimum Tax and state income tax, which will result in
Vista making cash payments approximating 24% of consolidated pre-tax earnings.
NET INCOME. Net income for fiscal 1997 was $5.6 million, or $0.27
per share, as compared to net income of $3.5 million, or $0.17 per
share, in 1996. The increase in net income of $2.1 million over fiscal
1996 represents a 60% increase in net income on a sales increase of 16%.
COMPARISON OF THE YEAR ENDED DECEMBER 28, 1996 TO THE YEAR ENDED
DECEMBER 30, 1995
NET SALES. Net sales during 1996 increased to $160.4 million from
$145.6 million for the prior year, due to the net effect of the
following: (i) an increase in the number of domestic vision centers;
(ii) a 4% increase in comparable sales for domestic vision centers
(those open for at least one year); and (iii) a reduction in revenues
resulting from the disposition and closure of businesses in the fourth
quarter 1995 and the first quarter 1996. Consolidated average weekly
net sales per vision center increased from approximately $8,700 in
1995 to $9,300 in 1996 due primarily to the disposition of under
performing vision centers in certain domestic operations and Mexican
operations. The improvement in average weekly net sales for comparable
domestic stores was partially offset by a reduction in average weekly
net sales for vision centers opened in 1996.
52<PAGE>
In the first quarter of 1996, Vista implemented a new merchandising
program for spectacles. Initially, the new program served to increase
the average number of sales transactions per vision center (market
share) over the prior year, but at a lower dollar value per
transaction. Vista experienced an increase in average number of
transactions per vision center for the remainder of the year. In the
latter part of 1996, the average transaction value increased. For the
year, the improvement in sales resulting from market share increases
more than offset the effect on sales resulting from the decline in the
average transaction value.
Consistent with the trend experienced in 1994 and 1995, average
weekly sales volumes for new domestic vision centers opened in 1996
were lower than vision centers opened in the previous year. The effect
of lower new store results in 1996, which had a negative impact on
consolidated average weekly sales, was offset by an increase in
average weekly sales for stores opened in 1995 and 1994.
GROSS PROFIT. For fiscal 1996, gross profit increased to $83.7
million from $77.6 million in 1995, primarily because of increased net
sales. Gross profit as a percentage of sales declined from 53.3% in
1995 to 52.2% in 1996. Vista maintained margins from product sales at
store level, but margins were negatively affected by a reduction in
promotional monies from vendors (because of fewer store openings) and
increased freight costs related to the reset of store inventory
planograms.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. SG&A expenses
(which include both vision center operating expenses and home office
overhead) increased to $77.0 million in 1996 from $74.4 million in
1995, reflecting the addition of new vision centers in 1996. Average
weekly store expense per vision center remained constant. As a
percentage of sales, SG&A expenses decreased from 51.1% in 1995 to
48.0% in 1996. The decrease was attributable to comparable store sales
increases achieved during 1996 and to continued improved efficiencies
in the operation of administrative offices.
OTHER EXPENSE. Other expense decreased from $2.6 million in
fiscal 1995 to $2.1 million in 1996 due to a decrease in average
borrowings by Vista under its Existing Credit Facility, in addition to
a reduction in the effective interest rate paid by Vista in 1996 versus 1995.
PROVISION FOR INCOME TAXES. The effective income tax rate in 1996 was 26%.
NET INCOME. In fiscal 1996, Vista achieved net income of $3.5
million, or $0.17 per share, as compared to a net loss of $1.5
million, or $0.07 per share, in fiscal 1995. Results of operations for
1995 included charges approximating $2.0 million.
INTERNATIONAL RESULTS IN FISCAL 1996
At November 30, 1996, Vista operated 21 vision centers
internationally versus 36 vision centers at November 30, 1995.
International locations included 18 in Mexico and two and one in the
Czech Republic and Slovakia, respectively. Financial results for
international operations during 1996 are based on the 12 months ended
November 30.
NET INTERNATIONAL SALES. Net international sales for the 12
months ended November 30, 1996 were $3.8 million, a decrease from $8.9
million during the 12 months ended November 30, 1995. Such decrease
was principally due to closure of vision centers in France and in
Mexico.
53<PAGE>
GROSS PROFIT. Gross profit decreased to $1.6 million from $4.4
million in 1995, primarily the result of decreased sales. Gross profit
as a percentage of sales declined from 49% in 1995 to 43% in 1996, due
primarily to the effect of selling the French operation, which
realized a higher gross profit percentage than the average for the
international business.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES EXCLUDING
INTERCOMPANY ALLOCATIONS. SG&A expense decreased from $5.8 million
for the 12 months ended 1995 to $2.0 million for the 12 months ended
November 30, 1996, as a result of the dispositions mentioned above.
SG&A expense as a percentage of sales decreased to 53% for the 12
months ended November 30, 1996 from 65% of sales for the 12 months
ended November 30, 1995. Reductions in selected expenses at store
level coupled with favorable leveraging of administrative expense
reduced SG&A expense as a percentage of sales.
OPERATING LOSS. The operating loss for international operations
does not include allocated corporate overhead, interest or taxes.
International operations generated a net operating loss of $612,000 in
the 12 months ended November 30, 1996, as opposed to net operating
loss of $1.3 million in the 12 months ended November 30, 1995. Mexican
operations generated an operating loss of $294,000 in the 12 months
ended November 30, 1996.
INFLATION
Although the Company cannot determine the precise effects of
inflation, it does not believe that inflation has had a material
effect on its domestic sales or results of operations. The Company
cannot determine whether inflation will have a material long-term
effect on its sales or results of operations. Continued inflation in
Mexico may cause consumers to reduce discretionary purchases such as
eyeglasses.
As a result of inflation in prior years, the Company has in the
past adjusted its retail pricing. Further pricing adjustments are
contingent upon competitive pricing levels in the marketplace.
Management monitors the continuing impact of these inflationary
trends.
LIQUIDITY AND CAPITAL RESOURCES
The Company's historical capital requirements have been primarily
for working capital, capital expenditures, and acquisitions. The
Company's primary sources of capital to finance such needs have been
cash flow from operations and borrowing under bank credit facilities.
In July 1997, Vista entered into a two-year $45.0 million revolving
credit facility (the "Existing Credit Facility"). The Existing Credit
Facility contained, among other covenants, a material adverse change
clause and certain minimum net worth and other requirements. At
October 3, 1998, Vista had borrowed $52 million under the Existing
Credit Facility versus outstanding borrowings of $19.5 million as of
January 3, 1998. In July 1998, the Existing Credit Facility was
expanded to $60.0 million and the Company borrowed $28.9 million to
fund the acquisition of Frame-n-Lens.
54<PAGE>
As of October 3, 1998, the Company planned to open between 15 and
20 domestic host vision centers during the next 15 months. Consistent with
prior years, the number of ultimate openings is dependent on the construction
schedules of the host store. In addition, the Company plans to open between
25 and 30 free-standing vision centers during the next 15 months. Average
costs for opening domestic host vision centers have approximated $140,000
for fixed assets and $25,000 for inventory, whereas the costs for opening
free-standing vision centers range from $80,000 to $120,000 for fixed
assets and $20,000 for inventory. The Company incurs approximately
$20,000 for pre-opening expenses for each opening of a domestic vision
center. Prior to 1998, such costs were capitalized and amortized over
12 months. Effective in 1998, such costs will be expensed as incurred
in accordance with proposed AICPA Statement of Position, "Reporting on
the Costs of Start-Up Activities." Capital for leasehold improvements
and other fixed assets in Mexican vision centers is approximately
$75,000 per vision center.
In June 1998, Vista announced that it had executed an agreement
to acquire Frame-n-Lens. This transaction closed on July 28, 1998.
On July 14, 1998, Vista announced that it had agreed to acquire
New West. This transaction, which closed on October 23, 1998, was
financed through the sale of the outstanding notes. In connection with
this financing, Vista entered into a new revolving debt facility for an
additional amount of $25.0 million. The Company utilized funds from
the sale of the outstanding notes and the new credit facility to consummate
the New West acquisition, to repay all amounts outstanding under the
Existing Credit Facility and to pay certain expenses associated with
the acquisitions of Frame-n-Lens and New West and the new credit
facility.
In the remainder of 1998, the Company focused its efforts on the
integration of the Frame-n-Lens acquisition and the New West
acquisition. Consequently, a majority of the cash expenditures during
1998 related to new store openings and capital improvements related to
Vista's existing businesses and the Frame-n-Lens acquisition and the
New West acquisition.
During 1997, store openings and other capital requirements as
well as the acquisition of Midwest Vision were funded through internal
cash flow. The acquisition of Midwest Vision included a cash payment
of $1.9 million, issuance of a debt instrument in the principal amount
of $620,000 payable over five years, and issuance of 110,795 shares of
common stock. Additionally, Vista made cash payments of $239,000
related to investment advisory fees and other costs directly related
to such acquisition. Subsequent to the consummation of the
acquisition, Vista paid off long-term debt of $1.4 million assumed in
the transaction.
Vista issued unsecured promissory notes relative to various
transactions completed with ELI and SPI and to the Midwest Vision
acquisition. The notes are fixed rate instruments, with annual
interest rates ranging from 6.4% to 8.5%. The promissory notes
payable to ELI and SPI require quarterly payments through January 2009
whereas the Midwest Vision note requires monthly payments through
October 2002. The fair market value of the promissory notes is
approximately $80,000 less than book value at July 4, 1998.
55
<PAGE>
Vista has entered into rate swap agreements which effectively
convert underlying variable rate debt based on LIBOR to fixed rate debt.
The agreements extend through February 20, 2000. The notional
principal amount on one agreement was $20 million, with an effective
fixed annual rate of 6.93%, which expired on February 20, 1998. At
that date, two separate agreements commenced with an aggregate
notional principal amount of $10 million and an effective fixed annual
rate which averages 7.52%. At October 3, 1998, the fair market value of
the fixed rate hedges approximated book value. Under existing
accounting standards, this activity is accounted for as a hedging
activity. The swaps are settled every 90 days.
In anticipation of the sale of the outstanding notes, Vista entered
into three anticipatory hedging transactions with a notional amount of
$100 million. See "--Derivative Financial Instruments---Interest Rate Risk."
The Company anticipates that internally generated funds, as well
as funds available under the new credit facility, will be sufficient
to fund ongoing operating costs associated with its current vision
centers and vision centers currently scheduled to be opened during
1999. In light of the borrowing base limitations contained in the new
credit facility, a downturn in revenues could require the Company to
postpone or put off planned capital expenditures, including new store
openings. See "Description of New Credit Facility."
IMPACT OF THE YEAR 2000 ISSUE
Generally, the year 2000 risk involves computer software and hardware
that are not able to perform without interruption into the year 2000. The
arrival of the year 2000 poses a unique worldwide challenge to the ability
of all systems to correctly recognize the date change from December 31, 1999
to January 1, 2000. If the Company's systems did not correctly recognize such
a date change, computer applications that rely on that date field could fail
or create erroneous results. Such erroneous results could result in the
temporary inability to process transactions, send invoices or engage in
similar normal business activities. If not adequately addressed by the
Company or its suppliers or other companies with which it does business,
the year 2000 issue could result in a material adverse impact on the Company's
financial condition and results of operations.
The Company's State of Readiness
--------------------------------
The majority of the Company's internal information systems are currently
Year 2000 compliant or in the process of being replaced with new fully-compliant
systems. The Company's Year 2000 compliance plan included (1) identifying
all hardware and equipment that require upgrading and (2) identifying all
application software that require upgrade or replacement to be year 2000
compliant. The Company has utilized both internal and external resources to
reprogram, or replace, and test software for Year 2000 compliance. Among the
findings, the Company has identified approximately 300 point of sale systems
that require hardware upgrades to be Year 2000 compliant, of which 280 have
been replaced as of October 3, 1998.
In November 1998, as part of its Year 2000 compliance efforts, the
Company engaged an independent consulting firm to perform a risk assessment
of its Year 2000 compliance project. The consulting firm's evaluation included
both hardware infrastructure and software applications. Although the firm can
make no guarantees, its findings confirmed that the Company has a sound Year
2000 compliance plan and is proceeding in accordance with its plan.
56<PAGE>
The Company is in the process of developing an enhanced point of
sale software system which is scheduled to be in the retail stores by
the fourth quarter of 1999. The primary purpose of the system is to
upgrade data processing, broaden in-store capabilities, and improve
the accuracy of processing managed care sales transactions. In addition to
the above improvements, the system will be designed to be Year 2000 compliant.
Costs to Address Year 2000 Issues
---------------------------------
The total cost of software changes, hardware changes, testing, and
implementation for Year 2000 compliance projects is estimated to be
approximately $1.1 million. The Company has currently spent approximately
$0.7 million for its Year 2000 project. The remaining planned expenditures
of $0.4 million consist primarily of software application upgrades and
remediation costs. Costs related to hardware and new software purchases will
be capitalized as incurred and amortized over three years. These new system
modifications have been initiated and are expected to be completed by the end
of the third quarter of 1999.
The costs of the Year 2000 project and the date on which the Company
plans to complete Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future
events including the continued availability of certain resources, third
party modification plans and other factors. However, there can be no
guarantee that these estimates will be realized and actual results could
differ materially from those plans. See "Risk Factors--Year 2000 Compliance."
Risks of Third-Party Year 2000 Issues
-------------------------------------
The impact of year 2000 non-compliance by outside parties with whom
the Company transacts business cannot be accurately gauged. Some of the
Company's vendors, financial institutions, and managed care organizations
utilize equipment to capture and transmit transactions. The Company is
in the process of coordinating its Year 2000 compliance efforts with those
of such organizations. The future cost of this transition is estimated by
the Company to be minimal. No assurance can be given that such organizations
will make their systems Year 2000 compliant. The failure of such
organizations, particularly any third party billing or managed care payor
organizations, to become Year 2000 compliant could have a material adverse
affect on the Company.
The Company's Contingency Plans
-------------------------------
The Company is developing contingency plans to address reasonably
likely worst case year 2000 scenarios. These scenarios include: (1)
an interruption in the supply of goods and services from the Company's
vendors; and (2) the failure of point of sale systems in individual
retail stores.
The Company has not yet completed its contingency planning with
respect to these and other scenarios. It is contacting key vendors
regarding year 2000 compliance and attempting to gain assurance of the
vendors' compliance programs. Should the Company believe that a key
vendor will not be ready for the year 2000 date change, the Company
may purchase critical inventory from alternate acceptable vendors
or stockpile important product lines. The Company believes that
if the Company's point of sale systems fail, then the Company
would be able to utilize manual systems until appropriate repairs
or upgrades can be made.
57
<PAGE>
DERIVATIVE FINANCIAL INSTRUMENTS
MARKET RISK
Market risk is the potential change in an instrument's value
caused by, for example, fluctuations in interest and currency exchange
rates. The Company's primary market risk exposures are interest rate
risk and the risk of unfavorable movements in exchange rates between
the U.S. dollar and the Mexican peso. Monitoring and managing these
risks is a continual process carried out by senior management, which
reviews and approves the Company's risk management policies. Market
risk is managed based on an ongoing assessment of trends in interest
rates, foreign exchange rates, and economic developments, giving
consideration to possible effects on both total return and reported
earnings. The Company's financial advisors, both internal and
external, provide ongoing advice regarding trends that affect
management's assessment.
INTEREST RATE RISK
The Company borrows long-term debt under the new credit facility
at variable interest rates indexed to LIBOR which exposes it to the
risk of increased interest costs if interest rates rise. To reduce
the risk related to unfavorable interest rate movements, the Company
enters into interest rate swap contracts to pay a fixed rate and
receive a variable rate that is indexed to LIBOR. The ratio of the
swap notional amount to the principal amount of variable rate debt
issued changes periodically based on management's ongoing assessment
of the future trend in interest rate movements. The Company's
financial advisors, both internal and external, provide ongoing advice
regarding trends that affect management's assessment. The notional
amount of fixed interest rate swaps in place at October 3, 1998
represents approximately 19.0% of Vista's variable rate debt.
In anticipation of the sale of the outstanding notes, Vista entered
into three anticipatory hedging transactions with a notional amount of
$100 million. The interest rates on these instruments were tied to U.S.
Treasury securities and ranged from 5.43% to 5.62%. The Company
settled these transactions for approximately $4.6 million in September
1998 with $0.6 million cash and additional borrowings of $4.0 million
on the Existing Credit Facility. The settlement costs will be treated
as deferred financing costs amortized over the life of the outstanding
notes.
FOREIGN EXCHANGE RATE RISK
The Securities and Exchange Commission has qualified Mexico as a
highly inflationary economy under the provisions of SFAS No. 52
Foreign Currency Translation. Consequently, in 1997, the financial
statements of the Mexico operation were remeasured with the U.S.
dollar as the functional currency. During 1997 and 1998, an immaterial
loss resulted from changes in foreign currency rates between the peso
and the U.S. dollar, as calculated in the remeasurement process, and was
recorded in Vista's statement of operations. Continued increases in
the conversion rate for the peso will generate further losses in
future years.
58<PAGE>
OPTION TO EXTEND LICENSE AGREEMENT
The Company's agreement with Wal-Mart (the "Wal-Mart Agreement")
provides for a nine-year base term and a three-year option for each
vision center, with the base term beginning on the date of opening.
Vista opened six vision centers in 1990 under the Wal-Mart Agreement
and 54 such vision centers in 1991, with additional vision centers
being opened in subsequent years. Accordingly, beginning in 1999,
the Company will determine whether to exercise options to extend the
licenses for such vision centers. The Company will make such decisions
based upon various factors, including, without limitation, the sales
levels of each vision center, its estimated future profitability,
increased minimum license fees charged by Wal-Mart during the option
period, and other relevant factors. Each option must be exercised at
least six months prior to the expiration of the license for each vision
center. Although the Company expects that it will extend the licenses
of a substantial majority of these vision centers, no assurance can be
given as to the number of vision centers the licenses of which will be
extended.
59<PAGE>
BUSINESS
THE COMPANY
The Company is the second largest retail optical company in the
United States based on number of locations. The Company operates a
total of 915 vision centers, 889 of which are in 44 states and Puerto
Rico and 26 of which are in Mexico. The Company's product line
includes a broad selection of prescription eyeglasses, contact lenses
and accessories.
Of the Company's 915 vision centers, a total of 331 are free-
standing vision centers located in regional shopping centers, power
centers, strip shopping centers, and free-standing vision centers of
which 151 are located in California. In addition, 584 of the
Company's vision centers are host vision centers, with 372 in Wal-Mart
stores, 121 in Sam's Club stores, 52 in Fred Meyer stores, 26 in Wal-
Mart Mexico stores and 13 in United States Military Exchanges.
The Company's merchandising philosophy is to provide excellent
value and superior customer service. The free-standing vision centers
typically range in size from 700 to 1,500 square feet, with separate
areas for merchandise display, customer service, and contact lens
fitting. The Company's host vision centers operate in a similar
format except that they carry more inventory than do free-standing
vision centers. In addition, each Wal-Mart vision center has a
laboratory that permits the Company to provide one-hour service on
single vision eyeglasses. Of the Company's 915 vision centers, 639
offer the services of independent optometrists in or adjacent to the
vision center. The Company is in the process of adding optometrists
to many of its vision centers that do not have optometrists, and
anticipates that the addition of optometric services will increase
retail sales in those vision centers.
The Company currently operates four manufacturing facilities,
three of which also serve as distribution facilities. The Company's
66,000 square foot facility in Lawrenceville, Georgia houses, along
with the Company's administrative headquarters, an optical laboratory
and a distribution center that utilizes modern equipment and systems.
The Company also operates a 45,000 square foot manufacturing and
distribution facility in Fullerton, California and a smaller optical
laboratory in St. Cloud, Minnesota. The Company currently operates
one other manufacturing facility, located in Tempe, Arizona, that the
Company intends to consolidate into its Fullerton, California
facility. The Company believes that the manufacturing facilities will
accommodate the Company's current growth plans over the next five
years.
KEY BUSINESS STRENGTHS
STRONG OPERATIONAL FOCUS. Since the beginning of fiscal year
1994, the year in which James W. Krause became Chief Executive Officer
of Vista, Vista added 299 new store locations and has disposed of 91
unprofitable store locations, including 65 international locations.
Since fiscal 1994, Vista's sales and EBITDA increased at compound
annual growth rates of 16.0% and 33.7%, respectively. In addition,
Vista delivered consistent comparable store sales growth since early
1996. Under Barry J. Feld (Chief Executive Officer of New West since
1994), New West achieved 26 consecutive quarters of positive
comparable store sales growth. Since fiscal 1995, comparable store
sales growth has been 5.9%, 8.8%, and 8.6%, respectively.
60<PAGE>
Mr. Krause and his management team place a premium on controlling
costs and have successfully implemented cost controls at the
administrative offices and the retail locations. Selling, general and
administrative expense for Vista (which includes both administrative
and retail level expense) declined as a percentage of sales from 51.1%
in fiscal 1995 to 47.8% in fiscal 1997. The Company employs a payroll
matrix system that allows it to adjust staffing at retail locations in
accordance with increases and decreases of sales volume. Vista's
store payroll as a percentage of sales decreased from 21.7% in fiscal
1995 to 21.0% in fiscal 1997.
SCALE EFFICIENCIES. Combined with the operational focus
discussed above, the addition of Frame-n-Lens and New West creates
substantial cost savings opportunities at the administrative and
manufacturing levels. The administrative offices of Frame-n-Lens now
serve as the Western Regional office of the Company but at sharply
reduced employment levels. The New West administrative headquarters
located in Tempe, Arizona will be closed. Management estimates that,
for the year ended January 3, 1998 total pro forma administrative
costs would have been reduced by approximately $6.6 million as the
result of these consolidations. In addition, management plans to
consolidate one manufacturing facility in addition to the
consolidation of facilities in Los Angeles, California and Portland,
Oregon into its Fullerton, California facility, which, for the year
ended January 3, 1998, would have resulted in pro forma cost savings
of approximately $2.6 million. As a consequence of these
consolidations, the Company will increase its utilization of the
remaining manufacturing facilities, which it expects will reduce the
manufacturing costs of each individual pair of eyeglasses.
PURCHASING POWER. The Company is the second largest optical
retailer in the United States in terms of number of retail units and
third in terms of overall revenues. The Company is therefore one of
the largest purchasers of optical goods in the United States.
Management believes that the size of the Company will enhance the
Company's buying power and generate additional cost savings. For the
year ended January 3, 1998, based upon discussions with vendors,
management estimates that pro forma purchasing costs would have been
reduced by approximately $1.1 million as the result of this purchasing
power. At this time, the Company has entered into purchasing contracts
with many of its vendors, resulting in a decrease in the cost of ophthalmic
lenses and frames.
POSITIONED TO CAPITALIZE ON MANAGED VISION CARE OPPORTUNITY.
Managed vision care represents the fastest growing segment of the
optical industry. As a result of its expanded nationwide distribution
network and its low-cost strategy, the Company believes that it is
well positioned to compete for future managed vision care contracts.
In addition, several key members of senior management, including Barry
J. Feld, the Company's President and Chief Operating Officer, have
significant expertise in managed vision care. Under the leadership of
Mr. Feld, New West's managed care operation increased its revenues by
a compound annual growth rate of 42% since 1993 and represented
approximately 29% of New West's net sales for fiscal 1997. The
Company anticipates that its improved managed care platform will
enable it to significantly increase managed care sales from Vista's
level of 7% prior to the acquisition of New West.
EXPERIENCED MANAGEMENT TEAM. James W. Krause, President and
Chief Executive Officer of the Company since 1994, has 14 years of
experience in retail and manufacturing operations with Sherwin-
Williams Company and most recently was President of its automotive and
international divisions prior to joining the Company. Barry J. Feld,
formerly Chief Executive Officer of New West, became President and
Chief Operating Officer of the Company upon the consummation of the<PAGE>
New West acquisition. Prior to joining New West, Mr. Feld was Chief
Executive Officer of Frame-n-Lens, which was acquired by the Company
on July 28, 1998. Messrs. Krause and Feld jointly have experience
managing all three of the Company's major operating platforms and lead
61
<PAGE>
a team of 13 senior executives with an average of over 13 years of
optical and/or retailing experience.
THE INDUSTRY
Retail optical sales in the U.S. totaled approximately $15
billion in 1997, exclusive of revenue from eye examinations. Since
1987, the retail optical market has grown at an average annual rate of
approximately 5%. Management believes that the market will continue
to grow at a similar rate over the next several years due in part to
the favorable trends discussed below.
FAVORABLE DEMOGRAPHICS. Approximately 60% of the U.S. population
and approximately 90% of people over the age of 45 require some form
of corrective eyewear. In 1997, 51% of total eyewear retail dollar
sales in the U.S. came from the population segment of persons 45 years
of age and older; it is estimated that by the year 2000, this figure
will reach 57%. In addition to its high utilization of corrective
eyewear, the older segment of the population spends more per pair of
glasses purchased than other age segments. This is due to the older
segment's need for premium priced products such as bifocals and
progressive lenses ("no-line bifocals") as well as this segment's
higher levels of discretionary income relative to other age segments.
In addition, as the "baby boom" generation ages and life expectancies
increase, management believes the number of eyewear customers and the
average price per purchase is likely to increase.
INCREASING ROLE OF MANAGED VISION CARE. Management expects that
retail optical sales through managed vision care programs will
increase substantially over the next several years as a percentage of
overall retail optical sales. Under managed vision care programs,
participants fulfill their eyecare and eyewear needs at specific
locations designated by the program sponsor. Management believes that
large retail optical chains are likely to benefit from this managed
vision care trend because program sponsors will seek to contract with
organizations that: (1) offer competitive prices; (2) provide a
nationwide network of convenient locations with flexible hours of
operation; (3) possess sophisticated information, management and
billing systems; and (4) deliver superior customer service.
CONSOLIDATION. The retail optical industry in the U.S. is highly
fragmented and consists of retail optical chains, independent
practitioners (including opticians, optometrists and
ophthalmologists), and warehouse clubs and mass merchandisers.
Although the retail optical market is highly fragmented, the industry
is experiencing increasing consolidation. Management believes that
the following factors are likely to drive further consolidation: (1)
the importance of scale to managed care programs because such programs
require providers to offer favorable price terms, operational
efficiency, and multiple convenient locations and (2) efficiencies of
scale in merchandising, marketing, manufacturing and sourcing of
products. Management believes that, as the second largest optical
retail company as measured by number of locations, the Company should
benefit from this consolidation trend.
LIFESTYLE DISPENSING. Both consumers and opticians have come to
expect and accept "lifestyle dispensing," the dispensing of eyewear
for different occasions and circumstances. Consumers purchase
multiple eyewear products for distinct uses, such as work, casual,
fashion, and sports activities. In 1997, the frequency of eyewear
purchases averaged once every 1.5 years.
<PAGE>
BUSINESS STRATEGY
The Company's strategy is to capitalize on the favorable industry
trends described above and its significant experience as a value
merchandiser by creating a national chain of retail optical units, both in
62
<PAGE>
host and free-standing locations, that emphasizes value merchandising and
marketing programs and excellent customer service. The Company also intends
to generate increased managed care sales through its vision center density
and broad network, its operating efficiency, and the competitiveness of its
price and benefit offerings. The Company further believes that its host and
free-standing vision centers are well positioned to capitalize on the value
segment of the retail optical market, which the Company believes is
significantly under-served.
CREATE A NATIONAL BRANDED RETAIL OPTICAL CHAIN. Utilizing its
significant experience as a value merchandiser gained through eight
years of operating in a discount host environment, the Company plans
to create a national branded value oriented retail optical chain using
its 331 free-standing vision centers as a platform. All existing
free-standing vision centers will be re-branded as "Vista Optical,"
which will also become the corporate name of the Company. The Company
also intends to increase its number of free-standing vision centers by
opening locations in new markets. The Company currently plans to open
or acquire up to 35 new free-standing vision centers per year over the
next five years. Management believes that the Company has sufficient
systems and infrastructure to execute this new store opening plan.
New West uses a system of modular construction for its free-standing
vision centers. For such vision centers, capital expenditures,
inventory, and pre-opening costs total approximately $120,000 to $160,000.
Because of the speed of construction associated with this format, the Company
intends to use this format for its free-standing vision centers.
UTILIZE SCALE AND EXPERIENCE TO EXPAND MANAGED VISION CARE. The
Company believes its network of 915 vision centers, combined with the
convenience of their locations, and the Company's ability to use its
low-cost centralized manufacturing strategy, should enable the Company
to make competitive bids for managed care contracts. As part of the
New West acquisition, the Company acquired considerable management
expertise in the managed vision care business. The managed vision
care business generated approximately 29% of New West's fiscal 1997
net sales, a 23% increase from fiscal 1996. In contrast, 7% of
Vista's net sales were derived from managed vision care in fiscal 1997.
The Company believes that this difference presents it with a significant
opportunity that is a key component of the Company's business strategy.
The Company operates 237 vision centers in California, where a
high percentage of the population relative to the rest of the United
States is currently covered by managed care programs. The Company
believes that, as a low cost provider with operational scale, it will
be better positioned than other optical retailers to compete for
managed vision care contracts in California. The Company currently
operates two separate single service health maintenance organizations
in California, giving it an additional competitive advantage in the
bidding for managed vision care contracts. The Company also has
obtained a comparable license in North Carolina, permitting it to
solicit directly managed vision care contracts in that state.
SELECTIVELY EXPAND HOST OPERATIONS. The Company operates 584
host vision centers. Because of the volume of business typically
generated by the host store, the Company benefits from substantial
customer traffic that drives sales. The average host vision center
located in a Wal-Mart store generates approximately $500,000 in annual
sales. The Company believes that it can continue to generate strong
sales levels and cash flow from these locations. Additionally, a
number of the Wal-Mart stores in which the Company operates vision
centers have been converted to Wal-Mart Super Centers. The Company
has benefited from this trend because, with each conversion, the
Company receives a new license with a nine-year term. See "Business--
Relationships with Host Companies."
63<PAGE>
Although expansion of its host operations is outside its control,
the Company believes that it will have opportunities to expand certain
of its current host operations. The Company will evaluate such
opportunities on a case by case basis. The Company operates 52 vision
stores in Fred Meyer stores in the Northwest and believes that it will
have the opportunity to open additional vision centers in Fred Meyer
stores. The Company will also consider, on a case by case basis,
opportunities to open vision centers in new host environments.
CONSOLIDATE MANUFACTURING FACILITIES. A primary component of the
Company's low cost strategy is to consolidate its laboratory
operations in order to capitalize on efficiencies associated with
large-scale, centralized eyeglass manufacturing. The Company believes
that centralized laboratories offer substantial advantages over in-
store ("one-hour") manufacturing facilities. Through its centralized
laboratories, which process a large number of jobs in a repetitive
fashion, the Company can achieve cost efficiencies and consistent
product quality, while producing a variety of eyeglass offerings,
including scratch-resistant and anti-reflective lenses. The Company
has begun implementing this consolidation strategy by reducing the
number of laboratories it operates from four to three. The Company
intends to complete this strategy by the consolidation of the Tempe,
Arizona facility into the Fullerton, California facility by the end of
1999. The Company believes that its remaining centralized
laboratories, located in Georgia, Minnesota and California, will be
positioned to meet the supply requirements of the Company's broadly
distributed vision centers in a cost effective manner.
MARKETING STRATEGY
As a result of the expansion of the Company's free-standing
vision centers, the Company's marketing strategy will become more
focused on increasing consumer visits at free-standing vision centers.
The Company actively supports its vision centers by aggressive local
advertising in individual geographical markets. The Company utilizes
a variety of advertising media and promotions in order to establish
the Company's image as a high quality, value eyewear provider with a
broad product offering. In addition, the Company's strategy of
clustering free-standing vision centers in each targeted market area
allows it to maximize the benefit of its advertising expenditures.
Brand awareness of the Company's "Vista Optical" tradename will be
increased through the use of mass media, including television, radio
and print, and direct mail. Marketing efforts will also be directed
towards obtaining managed care contracts through in-store point of
purchase materials, plan information brochures and various selling
materials targeted towards plan administrators, HMOs and employee
benefit managers. As managed care becomes a larger part of the
Company's business in certain local markets, advertising expenditures
as a percentage of sales are likely to decrease in those markets,
since managed care programs tend to reduce the need for marketing
expenditures to attract customers to shop the Company's vision
centers.
VISION CENTER OPERATIONS
OVERVIEW. The location of the Company's vision centers is an
essential element of its strategy to compete effectively in the retail
optical market. The Company's host vision centers, particularly those
located in Wal-Mart, have premium retail locations within a high
traffic host environment. All the Company's host vision centers in
Wal-Mart are located in front of the host store near the cash
registers, and thereby benefit from high visibility and heavy traffic
counts. The Company's free-standing vision centers are typically
located in regional shopping centers, power centers, strip shopping
centers and free-standing sites. The Company generally targets retail<PAGE>
space that is close to high volume retail anchor stores frequented by
clientele which seeks value and low prices. To generate economies of
scale in advertising, management and field overhead expenses, the
64<PAGE>
Company attempts to cluster its free-standing vision centers within a
direct marketing area.
STORE MANAGEMENT. Each vision center has a strategic operating
plan, which generates appropriate staffing levels to maximize
profitability. Each vision center is run by a manager who is
responsible for its day to day operations. Sales personnel are
trained to assist customers effectively in making purchasing
decisions. A significant portion of each manager's compensation is
based on sales and profitability at that particular vision center.
Vision centers are open during normal retail hours, typically 10:00
a.m. to 9:00 p.m. six days a week, and typically 12:00 p.m. to 6:00
p.m. on Sundays.
FIELD MANAGEMENT. The Company's field management includes
regional vice presidents and district managers. Each district manager
is responsible for approximately 12 vision centers and each regional
vice president is responsible for approximately ten districts. The
compensation of all field managers is significantly based on sales and
profitability.
MERCHANDISING. The Company's merchandising strategy is to offer
its customers a wide selection of quality and fashionable frames at
value price points, with particular emphasis on branded frames. The
Company's product offering is supported by strong customer service and
advertising. The key elements of the Company's merchandising strategy
are described below.
BREADTH AND DEPTH OF SELECTION. The Company offers its customers
high quality frames, lenses, accessories and sunglasses, including
designer and private label frames. On average, each vision center
contains between 750 and 1,100 frames. The Company believes that a
broad selection of high-quality, lower-priced private label frames
allows it to offer more value to customers while improving the
Company's gross margin. The Company also offers customers a wide
variety of value-added eyewear features and services on which it
realizes a higher gross margin. These include thinner and lighter
lenses, progressive lenses, and custom lens features, such as tinting,
anti-reflecting coatings, scratch-resistant coatings, ultra-violet
protection and edge polishing.
VALUE/PROMOTIONAL STRATEGY. In keeping with its value
merchandising strategy, the Company's retail prices are generally
lower than those of its direct competitors. The Company employs an
everyday low price strategy in its host vision centers and its
free-standing vision centers, which is complemented with a comprehensive
promotional strategy on a wide selection of frames and/or lenses options.
The promotions are highly effective at attracting customers to shop the
Company's vision centers.
EFFECTIVE PRODUCT DISPLAY. The Company employs an "easy-to-shop"
store layout. Merchandise in each store is organized by gender
suitability, frame style and brand. Price points are highlighted.
Sales personnel are trained to assist customers in selecting frames
which complement an individual's attributes such as facial features,
face shape and skin tone.
<PAGE>
EMPLOYEE TRAINING. The Company believes that its dedication to
employee training improves customer service, increases morale among
its employees, and contributes to the Company's increased productivity
levels. All new retail employees participate in a twelve week
optician training program. Eligible employees participate in a
manager-in-training program of approximately four months. Employees
typically receive approximately 50 hours of training annually.
Managers participate in approximately 70 hours of annual training.
Employee training emphasizes customer service, product and service
65
<PAGE>
knowledge, optical knowledge, selling techniques, and the use of store
performance data to better manage day to day operations.
VISION CENTER LAYOUT. Each of the Company's existing host vision
centers occupies between 400 and 1,000 square feet in the front of the
host store, with separate areas for merchandise display, customer
service and contact lens fitting. Services of independent optometrists
are generally available from offices that are approximately 500 square feet
and located in, adjacent to, or nearby the vision center, depending upon
regulatory requirements.
Free-standing vision centers are located in malls and strip shopping
centers. In general, these locations offer the services of independent
optometrists in or nearby the vision centers. The mall locations range in
size from 700 to 1,500 square feet while stores located in strip shopping
centers range from 700 to 1,200 square feet.
OPTOMETRISTS
A key element of the Company's business strategy is the
availability of independent optometrists at clinics in, adjacent to,
or nearby the Company's vision centers. These optometrists, whose
activities and relationships with entities such as the Company are
subject to state and local regulation, are typically not employed by
the Company. See "--Government Regulation." Such independent
optometrists sublicense the eye examination facilities and equipment
from the Company. The services of optometrists are available at
virtually all of the Company's vision centers, except the Frame-n-Lens
locations (where the Company is in the process of refixturing many of
the vision centers to install optometric facilities) and the Sam's
Club locations (where the Company is evaluating whether to install
optometric facilities on a case by case basis). In connection with
the Sam's Club vision centers, the Company will base its decision on
various factors, including the length of the relevant lease and any
requests or proposals made by representatives of Sam's Club. See
"--Relationships with Host Companies." Historically, the Company has
had little difficulty recruiting optometrists, although there can be no
assurance that this trend will continue.
MANAGEMENT INFORMATION AND FINANCIAL SYSTEMS
In 1996, the Company completed the installation of a new point of
sale system and a new perpetual inventory system in all domestic store
locations. The system facilitates the processing of customer sales
information and replenishment of store inventory by passing such
information, including customer specific orders, to the Company's home
office and Company in-house lens laboratory for further processing.
The Company is in the process of developing an enhanced point of
sale software system which is currently being implemented in the
retail stores. The primary purpose of the system is to upgrade data
processing, broaden in-store capabilities, and improve the processing
of managed care sales transactions. In addition to the above
improvements, the system will be designed to be Year 2000 compliant.
See "Risk Factors---Year 2000 Compliance" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations---Year
2000 Compliance."
66<PAGE>
RELATIONSHIP WITH HOST COMPANIES
WAL-MART
The Company operates 372 host vision centers in Wal-Mart stores
and 26 in Wal-Mart Mexico stores. The Company's relationship with
each of Wal-Mart and Wal-Mart Mexico is governed by a master license
agreement which grants a separate license to the Company for each
vision center. Each agreement provides for the payment of minimum and
percentage license fees and contains other customary terms and
conditions. Certain terms are described below:
Term of Company
Each License Options Other
------------ -------------------- -----
Wal-Mart Agreement 9 years one for three years <F1>
Mexico Agreement 5 years two for two years; <F2>
one for one year
__________
[FN]
<F1> The Wal-Mart Agreement, as amended, provides that Wal-Mart
is to offer the Company the opportunity to open, no later
than April 30, 2000, at least 400 vision centers (including
those currently open). In January 1995, the Company made a
lump sum payment in exchange for such commitment. Such
payment is being amortized over the initial term of vision
centers opened after January 1, 1995. In 1997, the Wal-Mart
Agreement was amended to provide that, with one exception,
all new vision centers opened after 1997 will be located in
California and North Carolina. Because seven of the host
vision centers located in Wal-Mart stores were acquired as
part of the Frame-n-Lens acquisition, these stores are not
covered by the Wal-Mart Agreement. These leases expire at
various times between now and 2003.
<F2> The Company has a right of first refusal in Mexico for any
store in which Wal-Mart Mexico proposes to open a vision
center. The Mexico Agreement contains a mutual non-
competition agreement preventing each party from dealing
with other parties (excluding affiliates of the Company and
Wal-Mart Mexico) in Mexico for the operation of vision
centers in a host environment. The Mexico Agreement also
contains provisions which entitle each party to terminate
the license for each vision center if such vision center
fails to meet certain minimum sales requirements.
The Company opened six vision centers in 1990 under the Wal-Mart
Agreement and 54 such vision centers in 1991, with additional vision
centers being opened in subsequent years. Accordingly, beginning in
1999, the Company will determine whether to exercise the three-year
options to extend the licenses for vision centers reaching the ninth
year of operation. The Company will make such decisions based upon
various factors, including, without limitation, the sales levels of
each vision center, its estimated future profitability and cash flow,
increased minimum license fees charged by Wal-Mart during the option
period, and other relevant factors. Each option must be exercised at
least six months prior to the expiration of the license for each
vision center. The Company's Wal-Mart licenses for existing vision
centers will become eligible for renewal in the years 1999 to 2007,
and, if extended by the Company, will expire during the years 2002 to
2010. Although the Company expects that it will extend the licenses
of a substantial majority of these vision centers, no assurance can be
given as to the number of vision centers the licenses of which will be
extended. Recently, Wal-Mart has begun to implement a plan to convert<PAGE>
or relocate many of its existing stores to a larger "supercenter"
format. Where the converted or relocated store contains a vision
center operated by the Company, the Wal-Mart Agreement provides that,
upon relocation of the Company's vision center, the term of the
license of such vision center begins again.
67<PAGE>
SAM'S CLUB
The Company also operates 121 host vision centers in Sam's Club
stores in 21 states. Each such vision center is subject to a separate
lease, which provides for payment of percentage and minimum rent and
other customary terms and conditions. The leases for these vision
centers began expiring in 1998 and the term for the remaining leases
will expire at various times through 2003. The Company has no option
or right to extend the term of such leases. The Sam's Club vision
centers generated approximately $32 million and $5.0 million in
revenues and EBITDA, respectively, in 1997.
FRED MEYER
The Company operates 52 host vision centers in stores owned by
Fred Meyer. Each such vision center is subject to a separate lease,
which provides for minimum and percentage rent and other customary
terms and conditions. Generally, the term of each lease is for five
years, with a five year option. The Company believes that it will
have the opportunity to expand these operations, should it wish to do
so. The Company is in the process of renegotiating its agreement with
Fred Meyer.
The following table sets forth the number of leases for existing
domestic host vision centers that expire in each year, assuming that
the Company exercises all available options to extend the terms of the
leases:
<TABLE>
<CAPTION>
Number of Leases Expiring In
------------------------------------------------------------------
Host Company 1999 2000 2001 2002 2003 2004 2005 2006 and After
---- ---- ---- ---- ---- ---- ---- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Wal-Mart....... 1 2 4 4 51 63 49 198
Sam's Club..... 8 35 21 56 1 0 0 0
Fred Meyer..... 17 9 1 2 3 8 7 5
-- -- -- -- -- -- -- ---
26 46 26 62 55 71 56 203
== == == == == == == ===
</TABLE>
MANUFACTURING AND DISTRIBUTION
The Company currently utilizes four in-house lens laboratories
and one independent laboratory to manufacture prescription eyeglasses
for its vision centers. Substantially all prescription spectacle
requirements of the Company's domestic vision centers opened in the
future will be supplied from Company-owned laboratories. The Company
has a modern coating facility in its Lawrenceville headquarters,
capable of coating lenses with anti-reflective and mirror surfaces.
Each vision center in Wal-Mart stores has its own finishing laboratory
which manufactures lenses for approximately half of all customers
purchasing spectacle lenses.
The Company's centralized distribution center in its
Lawrenceville, Georgia headquarters facility provides lens blanks,
frames, sunglasses and contact lenses to all vision centers. The
Company's central distribution center and all laboratories are
interfaced with the Company's management information system. The
Company's central distribution center ships completed customer orders
and inventory replenishment requirements, including frames and
spectacle and contact lenses, to the Company's vision centers
<PAGE>
throughout the United States by overnight delivery services. The
Company also maintains distribution centers in Fullerton, California
(which was acquired as a part of the Frame-n-Lens acquisition) and St.
Cloud, Minnesota. As part of the New West acquisition, the Company
acquired two additional laboratory and distribution facilities located
in Tempe, Arizona and Portland, Oregon. The Company has already
consolidated the Portland facility, along with its Los Angeles,
68<PAGE>
California facility, into its Fullerton, California facility. The
Company intends to consolidate the Tempe facility into the Fullerton
facility by the end of 1999.
STORE EXPANSION
The Company's business strategy is to continue to grow through
the opening of additional locations. The Company plans to open up to
35 new stores per year over the next five years. Management expects
to focus on Florida, Minnesota and California markets in its new store
expansion plan. The new stores are expected to have an on-site
optometrist and to be serviced by the Company's centralized
laboratories. In connection with its free-standing vision centers,
the Company will employ a modular construction format, which permits
the Company to open new locations quickly at an approximate capital
expenditure of $80,000 to $120,000 per vision center. In addition,
pre-opening costs average $20,000 and initial inventory requirements
for new stores average $20,000, of which a majority is supplied by
vendors at a reduced cost.
The Company regularly explores opportunities to expand outside of
its existing host environments and continues to consider various
options, such as opening free-standing vision centers, acquiring
optical companies, and expanding in another host environment.
Management currently believes that the Company's most likely avenue of
additional expansion will be through the development and acquisition
of free-standing locations.
GOVERNMENT REGULATION
The Company is subject to a variety of federal, state, and local
laws, regulations, and ordinances, including state and local laws and
regulations regarding advertising, qualifications and practices of the
opticians employed by the Company, relations between independent
optometrists and optical firms such as the Company, and various trade
practices such as country of origin product labeling. In addition,
certain of the Company's products, specifically contact lenses and
contact lens solutions, must comply with quality control standards set
by the United States Food and Drug Administration. Through its
participation in Medicare and in managed care programs, the Company is
also subject to a variety of other laws, such as the Federal Anti-
Kickback Statute and the Health Insurance Portability Act of 1996.
Although government regulation has increased the cost to the
Company of commencing operations and decreased its flexibility in
managing its business, government regulation has not, to date, had a
material adverse effect on the Company's overall operations or
financial performance, or on its overall relationships with
independent optometrists. It is nevertheless possible that new
regulations or new interpretations of current regulations could
materially increase the Company's cost of doing business or have a
material adverse impact on the Company's sales by restricting or
eliminating the services of opticians or optometrists in, adjacent to,
or nearby the Company's vision centers. This risk is enhanced since
the Company's competitors often serve as, or exert influence on, local
regulators of the eyecare industry as independent optometrists and
opticians often serve on these local regulatory boards. Additional
risk is created because of the Company's increasing involvement in
managed care plans and general increased oversight by federal and
state governments of managed care relationships and operations.
The Company believes it is in substantial compliance with all
material governmental regulations applicable to its operations.
69<PAGE>
COMPETITION
The retail eyecare industry in the United States is highly
competitive. In addition to optical chains such as Cole Vision and
LensCrafters, there are numerous retail optical stores, individual
retail outlets and individual opticians, optometrists, and
ophthalmologists providing the public all or some of the goods and
services the Company sells or makes available through its vision
centers. Optical retailers generally serve individual, local or
regional markets, and, as a result, competition is fragmented and
varies substantially among locations and geographic areas. Several of
the Company's competitors have financial resources substantially
greater than those of the Company.
The Company believes that its primary competitive advantages are
its quality products and value at low prices, and its customer-driven
service philosophy. Additionally, the Company competes on the basis
of the quality and consistency of service, convenience, speed of
delivery, and selection.
In addition to competition for individual patients, there is
increasing competition in the eyecare industry for managed vision care
contracts with insurance companies, employers, and other groups. The
Company believes that the competitive advantages described above will
help the Company compete for managed care contracts. The density and
size of a vision care network are also a significant competitive
aspect, however. Several other optical chains, as well as other
organizations of vision care providers, have more service locations
and cover more geographical areas than does the Company.
MEXICAN OPERATIONS
RISKS
The Company's Mexican operations face risks substantially similar
to those faced by the Company in connection with its domestic
operations, including dependence on the host store and expansion
requirements. There can be no assurance that such operations will be
able to attain profitability. In addition, such operations expose the
Company to all of the risks arising from investing and operating in
foreign countries generally, including a different regulatory,
political, and governmental environment, currency fluctuations,
currency devaluations, inflation, price controls, restrictions on
profit repatriation, lower per capita income and spending levels,
import duties and other impediments to the delivery of inventory and
equipment to vision center locations, value-added taxes, and
difficulties of cross-cultural marketing.
ECONOMIC AND POLITICAL ENVIRONMENT
Regulations in Mexico do not currently include currency controls,
restrictions on profit repatriation, limitations on foreign ownership,
or restrictions on sourcing of products that would adversely affect
the Company's operations. The cumulative translation adjustment in
shareholders' equity for operations in foreign countries at January 3,
1998 was $4.1 million. As a result of inflation in prior years, the
Company has in the past adjusted its retail pricing. Further pricing
adjustments are contingent upon competitive pricing levels in the
marketplace. Management is monitoring the continuing impact of these
inflationary trends.
The Securities and Exchange Commission has qualified Mexico as a
highly inflationary economy under the provisions of SFAS No. 52,
70<PAGE>
"Foreign Currency Translation." Consequently, in 1997, the financial
statements of the Mexico operation were remeasured with the U.S.
dollar as the functional currency. During 1997, an immaterial loss
resulted from changes in foreign currency rates between the peso and
the U.S. dollar, as calculated in the remeasurement process, and was
recorded in the Company's statement of operations.
TRADE NAMES AND TRADEMARKS
The Wal-Mart Agreement provides that, in connection with its Wal-
Mart vision centers, the Company must use the tradename "Vision Center
located in Wal-Mart" and indicate that the vision centers are operated
by the Company. Vision centers in stores owned by Wal-Mart Mexico do
business under the name "Centro de Vision." The Company also has
licensed the right to use the "Guy Laroche" trademark in its domestic
vision centers pursuant to a license agreement providing for royalty
payments and containing other customary terms and conditions. The Guy
Laroche agreement expires December 31, 2001.
"Vista Optical" and "Lee Optical" are federally registered
trademarks that were acquired as a part of the New West acquisition.
In addition, New West applied to the United States Patent and
Trademark Office to register "Vista Eyecare Network." Finally "Frame-
n-Lens" is a federally registered trademark acquired as part of the
Frame-n-Lens acquisition.
EMPLOYEES
As of October 3, 1998, the Company employed approximately 3,780
associates on a full-time basis and 1,030 associates on a part-time
basis. As of that date, the Company employed 3,960 associates in retail
sales, 510 in laboratory and distribution operations, and 340 in management
and administration. Apart from its Mexican employees, none of the
associates employed by the Company are covered by any collective
bargaining agreements. All associates (with the exception of home
office personnel) employed in the Company's Mexican operations are
covered by collective bargaining agreements. The Company considers
its employment relations to be good, and to date the Company has not
experienced any significant difficulties in staffing its vision
centers.
PROPERTIES
The Company's 889 domestic vision centers are located in the
following 44 states and Puerto Rico:
Alabama....................................... 12
Alaska........................................ 16
Arizona....................................... 44
Arkansas...................................... 5
California.................................... 237
Colorado...................................... 27
Connecticut................................... 9
Florida....................................... 39
Georgia....................................... 40
Hawaii........................................ 4
Idaho......................................... 11
Illinois...................................... 8
Indiana....................................... 4
Iowa.......................................... 17
Kansas........................................ 13
Kentucky...................................... 3
Louisiana..................................... 3
71<PAGE>
Maine......................................... 1
Maryland...................................... 4
Massachusetts................................. 5
Michigan...................................... 4
Minnesota..................................... 34
Missouri...................................... 9
Montana....................................... 5
Nevada........................................ 11
New Hampshire................................. 4
New Jersey.................................... 12
New Mexico.................................... 13
New York...................................... 29
North Carolina................................ 40
North Dakota.................................. 10
Ohio.......................................... 3
Oregon........................................ 40
Pennsylvania.................................. 22
Puerto Rico................................... 1
South Carolina................................ 14
South Dakota.................................. 1
Tennessee..................................... 7
Texas......................................... 42
Utah.......................................... 1
Virginia...................................... 25
Washington.................................... 46
West Virginia................................. 7
Wisconsin..................................... 4
Wyoming....................................... 3
The Company also has 26 vision centers in Mexico.
The Company's home office is located in an approximately 66,000
square foot facility in Lawrenceville, Georgia and is subleased from
Wal-Mart through the year 2001 (with a renewal option for seven
additional years). The Company's central distribution center, an
anti-reflective and mirror coating facility, and a lens laboratory are
located in the Company's Lawrenceville headquarters.
The Company has regional headquarters located in St. Cloud,
Minnesota, which is subject to a lease with a term expiring on October
1, 2007. This facility also contains a full-service optical
laboratory.
The Company's Fullerton, California operation is located in an
approximately 45,000 square foot facility, which is subject to a lease
with a term expiring on August 31, 2006. The Company has an option to
extend the lease for five years. The Company has consolidated other
recently acquired manufacturing facilities into this facility.
The Company's facility in Tempe, Arizona is owned by Alexis
Holdings, Inc. a wholly-owned subsidiary of New West.
72<PAGE>
ENVIRONMENTAL MATTERS
Under certain environmental laws, a current or previous owner of
real property, and parties that generate or transport hazardous
substances that are disposed of at real property, may be liable for
the costs of investigating and remediating such substances on or under
the property. The federal Comprehensive Environmental Response,
Compensation & Liability Act, as amended ("CERCLA"), and similar state
laws, impose liability on a joint and several basis, regardless of
whether the owner, operator, or other responsible party was at fault
for the presence of such hazardous or toxic substances. Environmental
laws also may impose restrictions on the manner in which property may
be used or businesses may be operated, and these restrictions may
require expenditures for compliance. In connection with the ownership
or operation of its facilities, the Company could be liable for such
costs in the future.
The Company currently is not aware of any material environmental
claims pending or threatened against it and does not believe it is
subject to any material environmental compliance obligations.
However, no assurance can be given that a material environmental claim
or compliance obligation will not arise in the future. The cost of
defending against any claims of liability, of remediating a
contaminated property, or of complying with future environmental
requirements could impose material costs on the Company.
LEGAL PROCEEDINGS
The Company is not currently a party to any legal proceedings the
result of which management believes could have a material adverse
effect upon its business or financial condition. The Company is
currently the defendant in a lawsuit (Commercial Court of Paris, Case
No. RG 95 108253) in France arising out of the Company's sale of its
French operations. The suit was initiated on December 6, 1995 by
Grand Optical Photoservice, S.A. ("GPS") to block the Company's sale
of its French operations to a third party. GPS claims that, in
selling its French operations to a third party, the Company breached a
letter of intent it had previously signed with GPS. By a decision
dated December 14, 1995, the trial court rejected the plaintiff's
claims and fined the plaintiff for filing a frivolous claim. The
plaintiff has filed an appeal. The Company believes that the
plaintiff's claims are without merit.
73
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS, AND KEY EMPLOYEES
Certain information regarding the directors, executive officers,
and key employees of the Company is set forth in the table below.
<TABLE>
<CAPTION>
Name Age Position
--- --- --------
<S> <C> <C>
James W. Krause 54 Chairman of the Board and Chief Executive Officer
Barry J. Feld 42 President and Chief Operating Officer
Richard Anderson 40 Senior Vice President, Real Estate
Michael J. Boden 51 Senior Vice President, Leased Retail Operations
Eduardo Egusquiza 46 Senior Vice President, Information Technology
Mitchell Goodman 45 Senior Vice President, General Counsel and Secretary
Charles M. Johnson 49 Senior Vice President, Manufacturing and Distribution
Angus C. Morrison 42 Senior Vice President, Chief Financial Officer and Treasurer
James W. Swanson 51 Senior Vice President, Vista Retail Operations and Managed Care
Myles S. Lewis 30 Vice President, Managed Care
Timothy Ranney 46 Vice President, Corporate Controller
Robert W. Stein 43 Vice President, Human Resources
Patric L. Welch 48 Vice President, Professional Services
David I. Fuente 53 Director
Ronald J. Green 51 Director
James E. Kanaley 57 Director
Campbell B. Lanier, III 48 Director
J. Smith Lanier, II 70 Director
</TABLE>
JAMES W. KRAUSE joined the Company in April 1994 as President and
Chief Executive Officer and a director. He was named Chairman of the
Company in June 1995. From 1980 until joining the Company, he was
President and General Manager of the automotive and international
divisions of Sherwin-Williams Company.
BARRY J. FELD joined the Company in October 1998 as President and
Chief Operating Officer as a result of the New West acquisition. Mr.
Feld served as President and a member of the Board of Directors of New
West since joining New West in May 1991, and as Chief Executive
Officer of New West since February 1994.
RICHARD ANDERSON joined the Company in January 1999 and was named
Senior Vice President, Real Estate in February 1999. From 1987 until
joining the Company, he was employed W.H. Smith, PLC where he served
as Vice President, Real Estate and Vice President, Development and
Construction.
MICHAEL J. BODEN joined the Company in June 1995 as Vice
President, Sales and Marketing and was named a Senior Vice President
in February 1998. He was named Senior Vice President, Leased Retail
Operations in February 1999. From 1992 until joining the Company, he
served as Vice President Store Operations of This End Up Furniture
Company.
EDUARDO EGUSQUIZA joined the Company in March 1998 as Senior Vice
President, Information Technology. From 1982 until joining the
Company, he was employed by Musicland Stores Corporation, Inc. where
he served as Vice President of Information Systems and Services.
MITCHELL GOODMAN joined the Company as General Counsel and
Secretary in September 1992 and was named a Vice President in November
1993 and Senior Vice President in May 1998.
74<PAGE>
CHARLES M. JOHNSON joined the Company in October 1997 as Senior
Vice President, Manufacturing and Distribution. From 1988 until
joining the Company, he was employed by the Sherwin-Williams Company,
where he served as Vice President and Director of Research and
Development.
ANGUS C. MORRISON joined the Company in February of 1995 as Vice
President, Corporate Controller. He was appointed Senior Vice
President, Finance, and Treasurer in March 1998. From 1993 until
joining the Company, he was Controller and Senior Financial Officer of
the Soap Division of The Dial Corp. He was Controller and Senior
Financial Officer of the Food Division of the same company from 1989
through 1992.
JAMES W. SWANSON joined the Company in October 1998 as a result
of the New West acquisition and was named Senior Vice President, Vista
Retail Operations and Managed Care in February 1999. He joined New
West in July 1991 and served as Chief Operating Officer and Executive
Vice President since September 1997.
MYLES S. LEWIS joined the Company in October 1998 as a result of
the New West acquisition. He was appointed Vice President, Managed
Care Sales and Marketing in February 1999. He was employed by New
West from 1993 until joining the Company. At New West, he served as
Vice President, Sales and Marketing.
TIMOTHY RANNEY joined the Company in September 1998 and was named
Vice President, Corporate Controller in October 1998. From 1991 until
joining the Company, he was employed by CVS Corporation where he
served as Store Controller and then as Director of Financial Systems.
ROBERT W. STEIN joined the Company as Director of Human Resources
in May 1992. In January 1993, he was appointed Vice President, Human
Resources.
PATRIC L. WELCH joined the Company as Director Eastern Region in
November 1994 and was appointed Vice President, Professional Services
in February 1997. He was District Manager of D.O.C. Optics Corp. from
1993 until joining the Company. Previously, he was Regional Vice
President of NuVision, Inc., where he was employed from 1986 until
1993.
DAVID I. FUENTE has been Chairman of the Board and Chief
Executive Officer of Office Depot, Inc. since 1987 and has been a
director of the Company since April 1992.
RONALD J. GREEN has been a partner in the accounting firm of
Stephen M. Berman & Associates, Atlanta, Georgia, since 1980 and has
been a director of the Company since 1990.
JAMES E. KANALEY was employed at the Bausch and Lomb Corporation
from 1978 until his retirement in 1997. From 1990 until 1993, he
served as Senior Vice President and Group President Contact Lens Care,
and from 1993 until his retirement he served as Senior Vice President
and President, North American Healthcare.
CAMPBELL B. LANIER, III is Chairman of the Board and Chief
Executive Officer of ITC Holding Company, a telecommunications
services company located in West Point, Georgia. He is also Chairman,
Chief Executive Officer and director of Powertel, Inc. He also serves
as a director of each of Mindspring Enterprises, Inc., K&G Men's
Center, Inc., and Innotrac Corporation.
75<PAGE>
J. SMITH LANIER, II is Chairman and Chief Executive Officer of J.
Smith Lanier & Co., an insurance sales company. He is also a director
of Interface, Inc. and has been a director of the Company since
October 1990. Mr. Lanier is the uncle of Campbell B. Lanier, III.
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE
The Audit Committee consists of two directors: Campbell B.
Lanier, III (Chairman) and J. Smith Lanier, II. The Audit Committee
is responsible for recommending the appointment of independent
auditors, reviewing with the independent auditors the scope and
results of the audit engagement, establishing and monitoring the
Company's financial policies and control procedures, reviewing and
approving related party transactions and reviewing and monitoring the
provision of non-audit services by the Company's auditors.
COMPENSATION COMMITTEE
The Compensation Committee consists of three directors: David I.
Fuente (Chairman), Ronald J. Green and Campbell B. Lanier, III. The
committee is responsible for establishing salaries, bonuses, and other
compensation for the Company's officers and making awards under the
Company's Restated Stock Option and Incentive Award Plan.
76
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
The following table discloses compensation received from the
Company by the Company's President and Chief Executive Officer, and
the Company's four most highly compensated officers other than the
President and Chief Executive Officer (all such individuals,
collectively, the "named executive officers") as of January 2, 1999.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long Term Compensation
---------------------------------- ---------------------------------
Name and Restricted Securities
Principal Fiscal Other Annual Stock Underlying All Other
Position Year Salary($) Bonus($) Compensation($) Awards($)<F1> Options/SARs(#) Compensation($)
------------------------- ------ --------- -------- --------------- ------------ --------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
James W.
Krause................... 1998 368,000 101,500 79,688<F2> 250,000 20,000<F3>
Chairman of 1997 338,000 247,000 72,000 50,000 20,000<F3>
the Board, 1996 307,000 177,000 143,000<F4> 50,000 20,000<F3>
President and
Chief Executive
Officer
Michael J.
Boden.................... 1998 193,000 38,000 26,563<F5> 15,000 ---
Senior Vice 1997 185,000 135,000 24,000 15,000 ---
President, Retail 1996 178,000 97,000 15,000 ---
Operations and
Merchandising
Mitchell
Goodman.................... 1998 148,000 39,000 26,563<F5> 15,000 ---
Senior Vice 1997 141,000 99,000 17,000<F6> 24,000 15,000 ---
President, 1996 135,000 75,000 17,000<F6> 15,000 ---
General Counsel
and Secretary
Charles M.
Johnson................... 1998 197,000 39,000 26,563<F7> 15,000 ---
Senior Vice 1997(8) 41,000 70,000 75,000 ---
President,
Manufacturing and
Distribution
Angus C.
Morrison.................. 1998 160,000 31,000 28,155<F9> 25,000 ---
Senior Vice 1997 107,000 49,000 14,438 10,000 ---
President, Chief 1996 98,000 37,000 10,000 ---
Financial Officer and Treasurer
__________
<FN>
<F1> Restricted Stock Awards vest and restrictions lapse after five-
year performance period to the extent and depending upon
achievement by the Company of return on asset goals relative to a
comparison group of companies. For awards made in 1998, restricted
shares, to the extent not vested after five years, vest after 10
years of employment. Vesting is accelerated automatically upon
a change of control (as defined). Dividends (if any are declared)
will be paid on restricted stock.
<F2> As of January 2, 1999, Mr. Krause had restricted stock holdings
representing 30,000 shares of Common Stock with a value of
$161,250.
<F3> The Company has executed a "split dollar" insurance agreement
with Mr. Krause. The annual premium (payable by the Company) is
$20,000. The term life portion of this premium is $2,500; the<PAGE>
non-term life portion is $17,500.
<F4> $83,000 represents reimbursement of relocation expenses; $60,000
represents tax reimbursement payments on the foregoing.
<F5> As of January 2, 1999, this executive had restricted stock
holdings representing 10,000 shares of Common Stock with a value
of $53,750.
<F6> Represents partial forgiveness of $50,000 loan made in 1992.
<F7> As of January 2, 1999, Mr. Johnson had restricted stock holdings
representing 5,000 shares of Common Stock with a value of
$26,875.
<F8> Mr. Johnson joined the Company in October 1997.
<F9> As of January 2, 1999, Mr. Morrison had restricted stock holdings
representing 8,000 shares of Common Stock with a value of
$43,000.
</TABLE>
77<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information on option grants to the
named executive officers by the Company in 1998. In accordance with
rules of the Commission, there are shown the hypothetical gains or
"option spreads" that would exist for the respective options. These
gains are based on assumed rates of annual compound stock price
appreciation of 5% and 10% from the date the options were granted over
the full option term.
<TABLE>
<CAPTION>
Potential Realizable
% of Total Value at Assumed
No. of % of Total Annual Rates of Stock
Securities Options/SARs Price Appreciation
Underlying Granted to for Option Terms($)<F2>
Option/SARs Employees in Exercise or Expiration ----------------------
Granted Fiscal Year<F1> Base Price($) Date 5% 10%
----------- -------------- ------------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
James W. Krause.......... 200,000 <F3> 17.2% 5.3125 2/17/08 667,500 1,693,500
50,000 <F4> 4.3% 5.3125 2/17/08 166,875 423,375
Michael J. Boden......... 15,000 <F4> 1.3% 5.3125 2/17/08 50,063 127,013
Mitchell Goodman......... 15,000 <F4> 1.3% 5.3125 2/17/08 50,063 127,013
Charles M. Johnson....... 15,000 <F4> 1.3% 5.3125 2/17/08 50,063 127,013
Angus C. Morrison........ 15,000 <F4> 1.3% 5.3125 2/17/08 50,063 127,013
__________
<FN>
<F1> The Company granted options covering 1,163,000 shares to
employees in 1998.
<F2> These amounts represent assumed rates of appreciation only.
Actual gains, if any, on stock option exercises and holdings of
Common Stock are dependent on the future performance of Common
Stock and overall stock market conditions. There can be no
assurance that the amounts reflected in this table will be
achieved.
<F3> Grant under the Company's Restated Stock Option and Incentive
Award Plan. Option vests 50% on each of eighth and ninth
anniversaries of grant date, subject to (a) continued employment
and (b) accelerated vesting if Company attains defined earnings
per share goals. Expiration date is 10th anniversary of grant
date.
<F4> Grants under the Company's Restated Stock Option and Incentive
Award Plan. Options vest 50% on second anniversary of grant date
and 25% on each of the third and fourth anniversary, subject to
continued employment. Expiration date is 10th anniversary of
grant date.
</FN>
</TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
AND OPTION VALUES
The following table provides information, as of January 2, 1999,
regarding each exercise of stock options during the last fiscal year
by each of the named executive officers and the number and value of
options held by the named executive officers.
<PAGE>
<TABLE>
<CAPTION>
No. of Securities Underlying Value of Unexercised
Shares Unexercised Options at In-the-Money Options
Acquired on Value Fiscal Year End At Fiscal Year End($)
Exercise Realized -------------------------------- -----------------------------
(#) ($) Exercisable Unexercisable <F1> Exercisable Unexercisable
----------- --------- ----------- ----------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James W. Krause..... 150,000 28,200 362,500 337,500 65,625 103,125
Michael J. Boden.... --- --- 45,000 50,000 66,094 42,657
Mitchell Goodman.... --- --- 31,978 41,250 19,688 27,189
Charles M. Johnson.. --- --- 0 90,000 0 938
Angus C. Morrison... --- --- 31,250 48,750 17,813 19,688
__________
<FN>
<F1> Shares represented were not exercisable as of January 2, 1999,
and future exercisability is subject to the executive's remaining
employed by the Company for up to four years from grant date of
options.
</FN>
</TABLE>
78<PAGE>
CHANGE IN CONTROL ARRANGEMENTS
There are agreements between the Company and the named executive
officers which provide severance benefits in the event of termination
of employment under certain circumstances following a change in
control of the Company. The circumstances are termination by the
Company (other than because of death or disability commencing prior to
a threatened change in control, or for cause), or by an officer as the
result of a voluntary termination. Following any such termination, in
addition to compensation and benefits already earned, the officer will
be entitled to receive a lump sum severance payment equal to up to
three times the officer's annual rate of base salary.
Cause for termination by the Company is the: (1) any act that
constitutes, on the part of the officer, (a) fraud, dishonesty, gross
negligence, or willful misconduct and (b) that directly results in
material injury to the Company, or (2) the officer's material breach
of the agreement, or (3) the officer's conviction of a felony or crime
involving moral turpitude.
Circumstances which would entitle the officer to terminate as a
result of voluntary termination following a change in control include,
among other things: (1) the assignment to the officer of any duties
inconsistent with the officer's title and status in effect prior to
the change in control or threatened change in control; (2) a reduction
by the Company of the officer's base salary; (3) the Company's
requiring the officer to be based anywhere other than the Company's
principal executive offices; (4) the failure by the Company, without
the officer's consent, to pay to the officer any portion of the
officer's then current compensation; (5) the failure by the Company to
continue in effect any material compensation plan in which the officer
participates immediately prior to the change in control or threatened
change in control; or (6) the failure by the Company to continue to
provide the officer with benefits substantially similar to those
enjoyed by the officer under any of the Company's life insurance,
medical, or other plans. The term of each agreement is for a rolling
three years unless the Company gives notice that it does not wish to
extend such term, in which case the term of the agreement would expire
three years from the date of the notice.
79<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of Common Stock by (i) each director of the
Company; (ii) each executive officer of the Company; (iii) all
directors and executive officers of the Company as a group and (iv)
each person known to the Company to beneficially own more than 5.0% of
the outstanding Common Stock. Unless otherwise indicated, all shares
are owned directly and the indicated person has sole voting and
investment power. Unless otherwise indicated, the number of shares
represents the number of shares of Common Stock the person holds as of
December 31, 1998.
<TABLE>
<CAPTION>
Percent of
Number of Shares Outstanding
Name and Address of Beneficial Owner <F1> Beneficially Owned Common Stock
- --------------------------------------- ------------------- ------------
<S> <C> <C>
Campbell B. Lanier, III 2,197,668(2)(3) 10.4%
James W. Krause 639,378(4) 3.0%
J. Smith Lanier, II 271,610(3)(5) 1.3%
Ronald J. Green 105,875(3)(6) *
Barry J. Feld 100,000 *
David I. Fuente 69,875(3)(7) *
James E. Kanaley 0 *
Mitchell Goodman 59,706(8) *
Robert W. Stein 78,352(9) *
Michael J. Boden 81,827(10) *
Angus C. Morrison 71,000(11) *
Eduardo A. Egusquiza 5,000(12) *
Charles M. Johnson 5,000(12) *
Richard Anderson 0 *
Timothy Ranney 0 *
James W. Swanson 0 *
Rayna Casey 1,808,152(13) 8.5%
Edward G. Weiner 1,505,800(14) 7.1%
All directors and executive officers as a group (seventeen
persons) 3,685,291 16.8%
__________
* Represents less than one percent of the outstanding Common Stock.
<F1> Unless otherwise indicated below, the address of the persons named is 296 Grayson Highway,
Lawrenceville, GA 30045.
<F2> Includes shares owned by the following individuals and entities, who may be deemed a "group"
within the meaning of the beneficial ownership provisions of the federal securities laws: Mr. Lanier
(136,957 shares); Mr. Lanier's wife (750 shares); Campbell B. Lanier, IV (25,550 shares); ITC Service
Company (1,110,448 shares); the Campbell B. Lanier, III Grantor Retained Annuity Trust (the "Trust")
(700,000 shares); William H. Scott, III (782,782 shares, inclusive of 700,000 shares owned by the Trust,
of which Mr. Scott is the sole trustee); Martha J. Scott (28,000 shares); William H. Scott, III
Irrevocable Trust F/B/O Martha Scott (10,000 shares); Bryan W. Adams (8,000 shares); J. Douglas Cox
(48,406 shares); and Sandy Cox (29,900 shares).
<F3> Includes 16,875 shares which this individual has the right to acquire under the Company's Non-
Employee Director Stock Option Plan.
<F4> Includes 412,500 shares which Mr. Krause has the right to acquire under the Company's Restated
Stock Option and Incentive Award Plan (the "Plan"). Also includes 30,000 shares of restricted stock
awarded under the Plan.
<F5> Includes 1,800 shares owned by Mr. Lanier's wife, as to which he disclaims beneficial ownership.
<F6> Includes 9,000 shares owned by Mr. Green's children, as to which he disclaims beneficial
ownership.
<F7> Includes 25,000 shares which Mr. Fuente has the right to acquire from Mr. Weiner pursuant to a
stock option agreement.<PAGE>
<F8> Includes 46,978 shares which Mr. Goodman has the right to acquire pursuant to the Plan, and 2,728
shares owned by Mr. Goodman's wife, as to which he disclaims beneficial ownership. Also includes 10,000
shares of restricted stock awarded under the Plan.
<F9> Includes 64,661 shares which Mr. Stein has the right to acquire pursuant to the Plan. Also
includes 10,000 shares of restricted stock awarded under the Plan.
<F10> Includes 68,750 shares which Mr. Boden has the right to acquire pursuant to the Plan. Also
includes 10,000 shares of restricted stock awarded under the Plan.
<F11> Includes 7,200 shares held as custodian for his children, 47,500 shares which Mr. Morrison has
the right to acquire pursuant to the Plan, and 8,000 shares of restricted stock under the Plan.
<F12> Represents 5,000 shares of restricted stock awarded under the Plan.
<F13> Includes 159,948 shares owned by a trust of which Ms. Casey is the trustee and her daughter the
beneficiary. Ms. Casey's address is 712 West Paces Ferry Road, Atlanta, Georgia.
<F14> Includes 25,000 shares that Mr. Weiner owns but which he may be obligated to transfer to a
director of the Company. Mr. Weiner's address is 500 Southeast Mizner Boulevard, Boca Raton, Florida
33432.
</FN>
</TABLE>
80
<PAGE>
DESCRIPTION OF NEW CREDIT FACILITY
Concurrent with the closing of the sale of the outstanding notes,
the Company entered into a credit agreement with First Union National
Bank ("First Union"), Bank of America, FSB and certain other financial
institutions (collectively, the "Banks"). This agreement provides for
a new three-year, $25.0 million revolving credit facility. The new credit
facility will include a sub-limit of up to $10.0 million for standby letters
of credit. The availability under the new credit facility is limited to
certain percentages of accounts receivable, inventory and twelve-month
trailing EBITDA. Given the Company's current accounts receivable and inventory,
the Company has availability under the credit facility of up to $20.0 million.
The amount available will be reduced by outstanding letters of credit issued
under the standby letter of credit facility.
The proceeds of the new credit facility have been or will be
available for financing a portion of the New West acquisition, refinancing
existing debt, working capital, acquisitions subsequent to the closing of the
sale of the outstanding notes, if any, and general corporate purposes. All of
our obligations under the new credit facility are unconditionally and
irrevocably guaranteed jointly and severally by certain of our subsidiaries.
SECURITY. Borrowings under the new credit facility are
secured by substantially all assets of the Company and our
subsidiaries. The new credit facility contains a negative covenant
limiting our right to grant security interests or other liens on our
assets and our subsidiaries' other assets.
INTEREST RATES AND FEES. The new credit facility bears
interest at rates per annum equal to, at our option, either (1) First
Union's Reference Rate plus the applicable margin or (2) the LIBOR
rate plus the applicable margin. The applicable margin is a maximum
of 2.00% for the Reference Rate and 3.25% for the LIBOR rate, which
may be reduced depending on our ratio of total debt to EBITDA. We
pays a fee of 0.50% per annum on the unused portion of the new credit
facility, which may be reduced depending on our ratio of total debt to
EBITDA. In addition, we will pay fees on any letters of credit issued
under the new credit facility, which are calculated based on the daily
average of the amount of outstanding letters of credit.
COVENANTS. The new credit facility contains covenants with
which we and our subsidiaries must comply that are customary for a
secured revolving credit facility, including, among others:
* covenants restricting the incurrence of indebtedness,
* the creation or existence of liens,
* the guarantee of other indebtedness,
* acquisitions,
* certain investments,
* the declaration or payment of dividends,
* the repurchase or redemption of debt and equity securities of the
Company,
* change in business activities, affiliate transactions, and
certain corporate transactions, such as sales and purchases of
assets, mergers, or consolidations, and
* and delivery of financial and other information to the Banks and
other matters.
The new credit facility also contains certain financial covenants relating
to:
* minimum EBITDA requirements,
* minimum fixed charge ratios,
* minimum interest and rent coverage ratios,
81<PAGE>
* maximum leverage ratios, and
* limitations on capital expenditures.
EVENTS OF DEFAULT. The new credit facility contains certain
events of default customary for a secured revolving credit facility,
including, among others:
* payment events of default,
* breach of representations or warranties,
* covenant defaults,
* an event of default based on a change in control of the Company,
* cross-defaults to other indebtedness of, and bankruptcy and
judgment defaults against, the Company,
* ERISA events of default,
* material adverse change events of default, and
* certain adverse government action events of default.
DESCRIPTION OF THE NOTES
You can find the definitions of certain terms used in this
description under the subheading "Certain Definitions." In this
description, the word "Company" refers only to Vista Eyecare, Inc. and
not to any of its subsidiaries.
The Company issued the outstanding notes under an Indenture
(the "Indenture") among itself, the Guarantors and State Street Bank
and Trust Company, as trustee (the "Trustee"). The terms of the notes
include those stated in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act of 1939 (the "Trust
Indenture Act").
The following description is a summary of the material
provisions of the Indenture. It does not restate that agreement in
its entirety. We urge you to read the Indenture because it, and not
this description, define your rights as holders of these notes. We
have filed copies of the Indenture as an exhibit to the registration
statement which includes this prospectus.
BRIEF DESCRIPTION OF THE NOTES
These notes:
* are general unsecured obligations of the Company;
* rank equally in right of payment with all existing and future
unsubordinated Indebtedness of the Company;
* are senior in right of payment to all subordinated Indebtedness
of the Company;
* are effectively subordinated to all secured Indebtedness of the
Company to the extent of assets securing such Indebtedness; and
* are unconditionally guaranteed by certain of our domestic
subsidiaries and certain of our future subsidiaries.
PRINCIPAL, MATURITY AND INTEREST
The outstanding notes are limited to $125,000,000 in
aggregate principal amount. The notes will be issued in fully
registered form only, without coupons, in denominations of $1,000 and
integral multiples thereof. The notes will mature on October 15,
2005.
82<PAGE>
Interest on the notes will accrue at the rate of 12 3/4% per
annum and will be payable semiannually in cash on each April 15 and
October 15 commencing on April 15, 1999, to the persons who are
registered Holders at the close of business on the April 1 and October 1
immediately preceding the applicable interest payment date.
Interest on the notes will accrue from the most recent date
to which interest has been paid or, if no interest has been paid, from
and including the date of issuance.
PAYING AGENT AND REGISTRAR FOR THE NOTES
Initially, the Trustee will act as Paying Agent and
Registrar for the notes.
TRANSFER AND EXCHANGE
The notes may be presented for registration or transfer and
exchange at the offices of the Registrar, which initially will be the
Trustee's corporate trust office. The Company may change any Paying
Agent and Registrar without notice to holders of the notes (the
"Holders"). Any outstanding notes that remain outstanding after the
completion of the exchange offer, together with the exchange notes
issued in connection with the exchange offer, will be treated as a
single class of securities under the Indenture.
METHODS OF PAYMENTS
The Company will pay principal (and premium, if any) on the
notes at the Trustee's corporate office in New York, New York. At the
Company's option, interest may be paid at the Trustee's corporate
trust office or by check mailed to the registered address of Holders.
REDEMPTION
MANDATORY REDEMPTION. The notes are not subject to any
mandatory sinking fund redemption prior to maturity.
OPTIONAL REDEMPTION. The notes will be redeemable, at the
Company's option, in whole or in part. After October 15, 2003, the
Company may redeem all or a part of the notes upon not less than 30
nor more than 60 days' notice, at the following redemption prices
(expressed as percentages of the principal amount thereof) if redeemed
during the twelve-month period commencing on October 15 of the year
set forth below, plus, in each case, accrued and unpaid interest
thereon, if any, to the date of redemption:
Year Percentage
---- ----------
2003..................................... 105.000%
2004 and thereafter...................... 100.000%
OPTIONAL REDEMPTION UPON EQUITY OFFERINGS. Prior to October 15,
2001, the Company may redeem up to 35% of the initial aggregate
principal amount of the notes issued under the Indenture with the net
cash proceeds of one or more Equity Offerings at a redemption price
equal to 112.75% of the principal amount thereof, plus accrued and
unpaid interest, if any, to the redemption date; provided, however,
that
(1) at least 65% of the initial aggregate principal amount
of the notes issued under the Indenture remain outstanding
(other than any notes owned by the Company or any of its
Affiliates); and <PAGE>
(2) the redemption must occur within 120 days after the
closing of any such Equity Offering.
"Equity Offering" means a sale of Qualified Capital Stock of
the Company other than Indebtedness or Disqualified Capital Stock
convertible or exchangeable into Capital Stock of the Company.
83<PAGE>
SELECTION AND NOTICE OF REDEMPTION. In the event that less
than all of the notes are to be redeemed at any time, the Trustee will
select notes for redemption as follows:
(1) if the notes are listed, in compliance with the
requirements of the principal national securities exchange
on which such notes are listed; or
(2) if such notes are not listed, on a pro rata basis, by
lot or by such method as the Trustee shall deem fair and
appropriate.
No notes of $1,000 or less shall be redeemed in part. If a
partial redemption is made with the proceeds of an Equity Offering,
selection of the notes or portions thereof for redemption shall be
made by the Trustee only on a pro rata basis or on as nearly a pro
rata basis as is practicable (subject to DTC procedures), unless such
method is otherwise prohibited.
Notice of redemption shall be mailed by first-class mail at
least 30 but not more than 60 days before the redemption date to each
Holder of notes to be redeemed at its registered address. If any Note
is to be redeemed in part only, the notice of redemption that relates
to such Note shall state the portion of the principal amount thereof
to be redeemed.
A new Note in a principal amount equal to the unredeemed
portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note. On and after the redemption date,
interest ceases to accrue on notes or portions thereof called for
redemption.
GUARANTEES
Each Guarantor unconditionally guarantees, jointly and
severally, the Company's obligations under the Indenture and the
notes. The obligations of each Guarantor are limited as necessary to
prevent that Guarantee from constituting a fraudulent conveyance under
applicable law. Each Guarantor that makes a payment or distribution
under a Guarantee shall be entitled to a contribution from each other
Guarantor in an amount pro rata, based on the net assets of each
Guarantor, determined in accordance with GAAP.
Each Guarantor may consolidate with or merge into or sell
its assets to the Company or another Guarantor that is a Wholly Owned
Restricted Subsidiary of the Company without limitation, or with other
Persons upon the terms and conditions set forth in the Indenture. See
"--Certain Covenants-- Merger, Consolidation and Sale of Assets." In
the event all of the Capital Stock of a Guarantor is sold by the
Company and the sale complies with the provisions set forth in
"--Certain Covenants--Limitation on Asset Sales," the Guarantor's
Guarantee will be released.
The notes are guaranteed by certain of the Company's
operating subsidiaries, including Frame-n-Lens Optical, Inc. and New
West Eyeworks, Inc., and separate financial information of Frame-n-
Lens Optical, Inc. and New West Eyeworks, Inc. is included elsewhere
herein. The Company has certain other subsidiaries which have also
guaranteed the notes. Separate financial information for these
Guarantors has not been presented as the information is not material.
The Company's Mexican subsidiaries are not Guarantors of the notes.
<PAGE>
CHANGE OF CONTROL
If a Change of Control occurs, each Holder will have the
right to require that the Company purchase all or a portion of such
Holder's notes pursuant to the Change of Control Offer, at a purchase
price equal to 101% of the principal amount of notes repurchased plus
accrued and unpaid interest to the date of purchase.
Within 30 days following any Change of Control, the Company
will mail a notice to each Holder, with a copy to the Trustee, which
notice shall govern the terms of the Change of Control Offer. The
notice will state, among other things, the purchase date, which must
be no earlier than 30 days nor later than 45 days from the date such
notice is mailed, other than as may be required by law. Holders
84<PAGE>
electing to have a Note purchased pursuant to a Change of Control
Offer will be required to surrender the Note, with the form entitled
"Option of Holder to Elect Purchase" on the reverse of the Note
completed, to the Paying Agent at the address specified in the notice
prior to the close of business on the third business day prior to the
purchase date.
If a Change of Control occurs, there can be no assurance
that the Company will have available funds sufficient to pay the
Change of Control purchase price for all the notes that might be
delivered by Holders seeking to accept the Change of Control Offer.
If the Company is required to purchase outstanding notes as a result
of a Change of Control, the Company expects that it would seek third
party financing to the extent it does not have available funds to meet
its purchase obligations. However, there can be no assurance that the
Company would be able to obtain such financing.
Neither the Board of Directors of the Company nor the
Trustee may waive the covenant relating to a Holder's right to
repurchase upon a Change of Control. Restrictions in the Indenture on
the ability of the Company and its Restricted Subsidiaries to incur
additional Indebtedness, to grant Liens on its property, to make
Restricted Payments and to make Asset Sales may also make more
difficult or discourage a takeover of the Company, whether favored or
opposed by the management of the Company. Consummation of any such
transaction in certain circumstances may require redemption or
repurchase of the notes, and there can be no assurance that the
Company or the acquiring party will have sufficient financial
resources to effect such redemption or repurchase. Such restrictions
and the restrictions on transactions with Affiliates may, in certain
circumstances, make more difficult or discourage any leveraged buyout
of the Company or any of its Subsidiaries by the management of the
Company. While such restrictions cover a wide variety of arrangements
which have traditionally been used to effect highly leveraged
transactions, the Indenture may not afford the Holders of notes
protection in all circumstances from the adverse aspects of a highly
leveraged transaction, reorganization, restructuring, merger or
similar transaction.
The Company will comply with the requirements of Rule 14e-1
under the Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in
connection with the repurchase of notes as a result of a Change of
Control. To the extent that the provisions of any securities laws or
regulations conflict with the "Change of Control" provisions of the
Indenture, the Company shall comply with the applicable securities
laws and regulations and shall not be deemed to have breached its
obligations under the "Change of Control" provisions of the Indenture
by virtue thereof.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
LIMITATION ON INCURRENCE OF ADDITIONAL INDEBTEDNESS
The Company will not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly, create, incur,
assume, guarantee, acquire, become liable, contingently or otherwise,
with respect to, or otherwise become responsible for payment of
(collectively, "incur") any Indebtedness (other than Permitted
Indebtedness). If no Default or Event of Default has occurred and is
continuing at the time of or as a consequence of the incurrence of any
such Indebtedness, the Company and the Guarantors may incur<PAGE>
Indebtedness (including, without limitation, Acquired Indebtedness) if
on the date of the incurrence, after giving effect to the incurrence
thereof, the Consolidated Fixed Charge Coverage Ratio of the Company
is greater than 2.0 to 1.0 if such incurrence is on or prior to
October 15, 2000 and 2.25 to 1.0 if such incurrence is thereafter.
The first paragraph of this covenant will not apply to the
incurrence of any of the following (collectively, "Permitted
Indebtedness"):
(1) Indebtedness under the notes, the Indenture and the
Guarantees not to exceed $125,000,000 in aggregate principal
amount;
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<PAGE>
(2) Indebtedness incurred pursuant to or in connection with the
New Credit Facility in an aggregate principal amount at any time
outstanding not to exceed the greater of (x) $30,000,000 and (y) the
sum, at such time, of (I) 85% of the consolidated book value of
accounts receivable of the Company and its Restricted Subsidiaries and
(II) 60% of the consolidated book value of inventory of the Company
and its Restricted Subsidiaries;
(3) other Indebtedness of the Company and its Restricted
Subsidiaries outstanding on the Issue Date reduced by the amount of
any scheduled amortization payments or mandatory prepayments, when
actually paid (except to the extent paid from the proceeds of
Refinancing Indebtedness);
(4) Interest Swap Obligations of the Company covering
Indebtedness of the Company or any of its Restricted Subsidiaries and
Interest Swap Obligations of any Restricted Subsidiary of the Company
covering Indebtedness of such Restricted Subsidiary; provided,
however, that such Interest Swap Obligations are entered into to
protect the Company and its Restricted Subsidiaries from fluctuations
in interest rates on Indebtedness incurred in accordance with the
Indenture;
(5) Indebtedness under Currency Agreements; provided that in the
case of Currency Agreements which relate to Indebtedness, such
Currency Agreements do not increase the Indebtedness of the Company
and its Restricted Subsidiaries outstanding other than as a result of
fluctuations in foreign currency exchange rates or by reason of fees,
indemnities and compensation payable thereunder;
(6) Indebtedness of a Wholly Owned Restricted Subsidiary of the
Company to the Company or to a Wholly Owned Restricted Subsidiary of
the Company for so long as such Indebtedness is held by the Company or
a Wholly Owned Restricted Subsidiary of the Company, in each case
subject to no Lien other than Liens permitted under the Indenture;
provided that if as of any date any Person other than the Company or a
Wholly Owned Restricted Subsidiary of the Company owns or holds any
such Indebtedness or holds a Lien in respect of such Indebtedness
other than a Lien permitted under the Indenture, such date shall be
deemed the incurrence of Indebtedness not constituting Permitted
Indebtedness by the issuer of such Indebtedness;
(7) Indebtedness of the Company to a Wholly Owned Restricted
Subsidiary of the Company for so long as such Indebtedness is held by
a Wholly Owned Restricted Subsidiary of the Company, in each case
subject to no Lien other than a Lien permitted under the Indenture;
provided that
(a) any Indebtedness of the Company to any Wholly
Owned Restricted Subsidiary of the Company is unsecured and
subordinated, pursuant to a written agreement, to the
Company's obligations under the Indenture and the notes
(including any Indebtedness that is pari passu with the
Indenture and the notes), and
(b) if as of any date any Person other than a Wholly Owned
Restricted Subsidiary of the Company owns or holds any such
Indebtedness or any Person holds a Lien in respect of such
Indebtedness other than a Lien permitted under the Indenture,
such date shall be deemed the incurrence of Indebtedness not
constituting Permitted Indebtedness by the Company;
<PAGE>
(8) Indebtedness arising from the honoring by a bank or other
financial institution of a daylight overdraft or Indebtedness arising
from the honoring by a bank or other financial institution of a check,
draft or similar instrument inadvertently drawn against insufficient
funds in the ordinary course of business; provided, however, that such
Indebtedness is extinguished within two business days of incurrence;
(9) Indebtedness of the Company or any of its Restricted
Subsidiaries represented by reimbursement obligations in respect of
letters of credit for the account of the Company or such Restricted
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<PAGE>
Subsidiary, as the case may be, which letters of credit were issued in
order to provide security for workers' compensation claims, payment
obligations in connection with self-insurance or similar requirements
in the ordinary course of business;
(10) Indebtedness in respect of trade letters of credit, standby
letters of credit or performance, surety or appeal bonds, in each
case incurred in the ordinary course of business and securing
obligations not constituting Indebtedness;
(11) Indebtedness represented by Capitalized Lease Obligations
and Purchase Money Indebtedness of the Company and its Restricted
Subsidiaries not to exceed the greater of (i) $7,500,000 and (ii) 5%
of Consolidated Tangible Assets of the Company and its Restricted
Subsidiaries at any one time outstanding;
(12) Refinancing Indebtedness; and
(13) additional Indebtedness of the Company and its Restricted
Subsidiaries in an aggregate principal amount not to exceed $7,500,000
at any one time outstanding (which amount may, but need not, be
incurred in whole or in part under the New Credit Facility).
For purposes of determining any particular amount of Indebtedness
under this covenant, guarantees, Liens or obligations with respect to
letters of credit supporting Indebtedness otherwise included in the
determination of such particular amount shall not be included.
Indebtedness of any Person which is outstanding at the time such
Person becomes a Restricted Subsidiary or is merged with or into or
consolidated with the Company or a Restricted Subsidiary will be
deemed to have been incurred at the time such Person becomes a
Restricted Subsidiary or is merged with or into or consolidated with
the Company or a Restricted Subsidiary. Indebtedness which is assumed
at the time of the acquisition of any asset will be deemed to have
been incurred at the time of such acquisition.
The Company will not, and will not permit any Guarantor to, incur
any Indebtedness which by its terms (or by the terms of any agreement
governing such Indebtedness) is subordinated in right of payment to
any other Indebtedness of the Company or such Guarantor, as the case
may be, unless such Indebtedness is also by its terms (or by the terms
of any agreement governing such Indebtedness) made expressly
subordinate in right of payment to the notes or the Guarantee of such
Guarantor, as the case may be, pursuant to subordination provisions
that are substantially identical to the subordination provisions of
such Indebtedness (or such agreement) that are most favorable to the
holders of any other Indebtedness of the Company or such Guarantor, as
the case may be.
LIMITATION ON RESTRICTED PAYMENTS
The Company shall not, and shall not cause or permit any of its
Restricted Subsidiaries to, directly or indirectly,
(1) declare or pay any dividend or make any distribution (other
than dividends or distributions payable in Qualified Capital Stock of
the Company) on or in respect of shares of the Company's Capital Stock
to holders of such Capital Stock;
(2) purchase, redeem or otherwise acquire or retire for value
any Capital Stock of the Company or any warrants, rights or options to
purchase or acquire shares of any class of such Capital Stock;
<PAGE>
(3) make any principal payment on, purchase, defease, redeem,
prepay, decrease or otherwise acquire or retire for value, prior to
any scheduled final maturity, scheduled repayment or scheduled sinking
fund payment, any Indebtedness of the Company that is subordinate or
junior in right of payment to the notes; or
87<PAGE>
(4) make any Investment (other than Permitted Investments) (each
of the foregoing actions set forth in clauses (1), (2) (3) and (4)
being referred to as a "Restricted Payment"),
if at the time of such Restricted Payment or immediately after
giving effect thereto,
(1) a Default or an Event of Default shall have occurred and be
continuing; or
(2) the Company is not able to incur at least $1.00 of
additional Indebtedness (other than Permitted Indebtedness) in
compliance with the "Limitation on Incurrence of Additional
Indebtedness" covenant; or
(3) the aggregate amount of Restricted Payments (including such
proposed Restricted Payment) made subsequent to the Issue Date (the
amount expended for such purposes, if other than in cash, being the
fair market value of such property as determined reasonably and in
good faith by the Board of Directors of the Company) shall exceed the
sum of:
(a) 50% of the cumulative Consolidated Net Income (or if
cumulative Consolidated Net Income shall be a loss, minus 100%
of such loss) of the Company earned subsequent to the Issue
Date and on or prior to the date the Restricted Payment occurs
(the "Reference Date") (treating such period as a single
accounting period), plus
(b) 100% of the aggregate net cash proceeds received by the
Company from any Person (other than a Subsidiary of the Company)
from the issuance and sale subsequent to the Issue Date and on
or prior to the Reference Date of Qualified Capital Stock of
the Company, plus
(c) without duplication of any amounts included in clause (b)
above, 100% of the aggregate net cash proceeds of any equity
contribution received by the Company from a holder of the
Company's Capital Stock (excluding, in the case of clauses (b)
and (c), any net cash proceeds from an Equity Offering to the
extent used to redeem the notes), plus
(d) without duplication, the sum of (i) the aggregate amount
returned in cash on or with respect to Investments (other than
Permitted Investments) made subsequent to the Issue Date whether
through interest payments, principal payments, dividends or other
distributions or payments, (ii) the net cash proceeds received
by the Company or any of its Restricted Subsidiaries from the
disposition of all or any portion of such Investments (other
than to a Subsidiary of the Company) and (iii) upon redesigna-
tion of an Unrestricted Subsidiary as a Restricted Subsidiary,
the fair market value of such Subsidiary; provided, however,
that the sum of clauses (i), (ii) and (iii) above shall not
exceed the aggregate amount of all such Investments made
subsequent to the Issue Date.
The preceding provisions do not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration of such dividend if the dividend would have been
permitted on the date of declaration;
(2) if no Default or Event of Default shall have occurred and be
continuing, the acquisition of any shares of Capital Stock of
the Company, either <PAGE>
(a) solely in exchange for shares of Qualified Capital Stock of
the Company, or
(b) through the application of net proceeds of a substantially
concurrent sale for cash (other than to a Subsidiary of the
Company) of shares of Qualified Capital Stock of the
Company;
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<PAGE>
(3) if no Default or Event of Default shall have occurred and be
continuing, the acquisition of any Indebtedness of the Company
that is subordinate or junior in right of payment to the notes
either
(a) solely in exchange for shares of Qualified Capital Stock of
the Company, or
(b) through the application of net proceeds of a substantially
concurrent sale for cash (other than to a Subsidiary of the
Company) of (i) shares of Qualified Capital Stock of the
Company or (ii) Refinancing Indebtedness;
(4) so long as no Default or Event of Default shall have
occurred and be continuing, repurchases by the Company of
Common Stock of the Company from employees of the Company or
any of its Subsidiaries or their authorized representatives
or successors upon the death, disability or termination of
employment of such employees, in an aggregate amount not to
exceed $1,000,000 in any calendar year; and
(5) the repurchase by the Company of Common Stock of the Company
pursuant to the terms of the Put Option Agreement in an aggregate
amount not to exceed $900,000.
In determining the aggregate amount of Restricted Payments made
subsequent to the Issue Date in accordance with clause 3 above,
amounts expended pursuant to clauses (1), (2)(a), 3(b)(i), (4) and (5)
shall be included in such calculation.
No later than the date of making any Restricted Payment, the
Company shall deliver to the Trustee an officers' certificate stating
that such Restricted Payment complies with the Indenture and setting
forth in reasonable detail the basis upon which the required
calculations were computed, which may be based upon the Company's
latest available internal quarterly financial statements.
LIMITATION ON ASSET SALES
The Company will not, and will not permit any of its Restricted
Subsidiaries to, consummate an Asset Sale unless
(1) the Company or the applicable Restricted Subsidiary, as the
case may be, receives consideration at the time of such Asset
Sale at least equal to the fair market value of the assets sold
or otherwise disposed of (as determined in good faith by the
Company's Board of Directors);
(2) at least 75% of the consideration received by the Company or
the Restricted Subsidiary, as the case may be, from such Asset
Sale shall be in the form of Qualified Proceeds and shall be
received at the time of such disposition; and
(3) upon the consummation of an Asset Sale, the Company shall
apply, or cause such Restricted Subsidiary to apply, the Net Cash
Proceeds relating to such Asset Sale within 360 days of receipt
thereof either
(a) to prepay any Indebtedness ranking at least pari passu with
the notes (including Indebtedness under the New Credit
Facility) and, in the case of any such Indebtedness under
any revolving credit facility, effect a permanent reduction
in the availability under such revolving credit facility, or
<PAGE>
(b) to make an investment in properties and assets that replace
the properties and assets that were the subject of such
Asset Sale or in properties and assets that will be used in
the business of the Company and its Restricted Subsidiaries
as existing on the Issue Date or in businesses reasonably
related or complementary thereto ("Replacement Assets"), it
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<PAGE>
being understood that the receipt of Qualified Proceeds
(other than cash or Cash Equivalents) is deemed to be a valid
application of such Qualified Proceeds pursuant to this
clause (3)(b), or (c) a combination of repayment and
investment permitted by the foregoing clauses (3)(a)
and (3)(b).
On the 361st day after an Asset Sale or such earlier date, if
any, as the Board of Directors of the Company or of such Restricted
Subsidiary determines not to apply the Net Cash Proceeds relating to
such Asset Sale as set forth in clauses (3)(a), (3)(b) and (3)(c)
above, such aggregate amount of Net Cash Proceeds which have not been
applied on or before such date shall be applied by the Company or such
Restricted Subsidiary to make a Net Proceeds Offer, from all Holders,
on a pro rata basis, that amount of notes that may be purchased out of
the New Cash Proceeds. The offer price will be equal to 100% of the
principal amount of the notes to be purchased, plus accrued and unpaid
interest thereon, if any, to the date of purchase; provided, however,
that if at any time any non-cash consideration received by the Company
or any Restricted Subsidiary of the Company, as the case may be, in
connection with any Asset Sale is converted into or sold or otherwise
disposed of for cash (other than interest received with respect to any
such non-cash consideration), then such conversion or disposition
shall be deemed to constitute an Asset Sale hereunder and the Net Cash
Proceeds thereof shall be applied in accordance with this covenant.
The Company may defer the Net Proceeds Offer until there is an
aggregate unutilized Net Proceeds Offer Amount equal to or in excess
of $5,000,000 resulting from one or more Asset Sales (at which time,
the entire unutilized Net Proceeds Offer Amount, and not just the
amount in excess of $5,000,000, shall be applied as required pursuant
to this paragraph). Upon completion of a Net Proceeds Offer, the
amount of Net Cash Proceeds and the amount of aggregate unutilized Net
Proceeds Offer Amount will be reset to zero. Accordingly, to the
extent that any Net Cash Proceeds remain after consummation of a Net
Proceeds Offer, the Company may use such Net Cash Proceeds for any
purpose not prohibited by the Indenture and no Net Proceeds Offer will
be required until the Net Proceeds Offer amount again accumulates to
$5,000,000.
In the event of the transfer of substantially all (but not all)
of the property and assets of the Company and its Restricted
Subsidiaries as an entirety to a Person in a transaction permitted
under " Merger, Consolidation and Sale of Assets," the surviving
entity shall be deemed to have sold the properties and assets of the
Company and its Restricted Subsidiaries not so transferred for
purposes of this covenant, and shall comply with the provisions of
this covenant with respect to such deemed sale as if it were an Asset
Sale. In addition, the fair market value of such properties and
assets of the Company or its Restricted Subsidiaries deemed to be sold
shall be for cash in an Asset Sale for purposes of this covenant.
Each Net Proceeds Offer will be mailed to the record Holders as
shown on the register of Holders within 25 days following the Net
Proceeds Offer Trigger Date, with a copy to the Trustee, and shall
comply with the procedures set forth in the Indenture. Upon receiving
notice of the Net Proceeds Offer, Holders may elect to tender their
notes in whole or in part in integral multiples of $1,000 in exchange
for cash. To the extent Holders properly tender notes in an amount
exceeding the Net Proceeds Offer Amount, notes of tendering Holders
will be purchased on a pro rata basis (based on amounts tendered). A
Net Proceeds Offer shall remain open for a period of 20 business days
or such longer period as may be required by law.<PAGE>
The Company shall comply with the requirements of Rule 14e-1
under the Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in
connection with the repurchase of notes pursuant to a Net Proceeds
Offer. To the extent that the provisions of any securities laws or
regulations conflict with the "Asset Sale" provisions of the
Indenture, the Company shall comply with the applicable securities
laws and regulations and shall not be deemed to have breached its
obligations under the "Asset Sale" provisions of the Indenture by
virtue thereof.
90<PAGE>
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Company shall not, and shall not cause or permit any of its
Restricted Subsidiaries to, directly or indirectly, create or
otherwise cause or permit to exist or become effective any encumbrance
or restriction on the ability of any Restricted Subsidiary of the
Company to
(1) pay dividends or make any other distributions on or in
respect of its Capital Stock;
(2) make loans or advances or to pay any Indebtedness or other
obligation owed to the Company or any other Restricted Subsidiary
of the Company; or
(3) transfer any of its property or assets to the Company or any
other Restricted Subsidiary of the Company.
The preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) applicable law;
(2) the Indenture;
(3) any instrument governing Acquired Indebtedness, which
encumbrance or restriction is not applicable to any Person,
or the properties or assets of any Person, other than the Person
or the properties or assets of the Person so acquired;
(4) agreements existing on the Issue Date to the extent and in
the manner such agreements are in effect on the Issue Date;
(5) any security or pledge agreements, leases or options (or
similar agreements) containing customary restrictions on transfers
of the assets encumbered thereby or leased or subject to option or
on the transfer or subletting of the leasehold interest represented
thereby to the extent such agreements, leases or options are not
otherwise prohibited under the Indenture;
(6) restrictions on cash or other deposits or net worth and
prohibitions on assignment imposed by leases that are permitted
under the Indenture;
(7) customary provisions in joint venture agreements and other
similar agreements;
(8) the New Credit Facility and any instruments issued pursuant
thereto;
(9) any agreement or instrument governing Capital Stock of any
Person that is acquired after the Issue Date;
(10) Liens permitted to be incurred pursuant to the provisions of
the covenant described under the caption "--Limitation on Liens";
(11) any restrictions on a Managed Care Entity pursuant to the
applicable rules or regulations of, or undertakings made to, any
regulatory entity having jurisdiction and authority over such Managed
Care Entity ; or
(12) an agreement governing Indebtedness incurred to Refinance
the Indebtedness issued, assumed or incurred pursuant to an agreement
referred to in clauses (2) through (11) above; provided, however, that
<PAGE>
the provisions relating to such encumbrance or restriction contained
in any such Indebtedness are no less favorable to the Company in any
material respect as determined by the Board of Directors of the
Company in their reasonable and good faith judgment than the
91<PAGE>
provisions relating to such encumbrance or restriction contained in
agreements referred to in such clauses (2) through (11).
LIMITATION ON PREFERRED STOCK OF RESTRICTED SUBSIDIARIES
The Company will not permit any of its Restricted Subsidiaries to
issue any Preferred Stock (other than to the Company or to a Wholly
Owned Restricted Subsidiary of the Company) or permit any Person
(other than the Company or a Wholly Owned Restricted Subsidiary of the
Company) to own any Preferred Stock of any Restricted Subsidiary of
the Company.
LIMITATION ON LIENS
The Company will not, and will not cause or permit any of its
Restricted Subsidiaries to, directly or indirectly, create, incur,
assume or permit or suffer to exist any Liens of any kind against or
upon any property or assets of the Company or any of its Restricted
Subsidiaries whether owned on the Issue Date or acquired after the
Issue Date, or any proceeds therefrom, or assign or otherwise convey
any right to receive income or profits therefrom unless:
(1) in the case of Liens securing Indebtedness that is expressly
subordinate or junior in right of payment to the notes, the notes
are secured by a Lien on such property, assets or proceeds that
is senior in priority to such Liens; and
(2) in all other cases, the notes are equally and ratably secured
and the Trustee, at the reasonable request of the Company,
shall enter into an intercreditor agreement to effectuate such
equal and ratable security, except for
(a) Liens existing as of the Issue Date to the extent and in the
manner such Liens are in effect on the Issue Date,
(b) Liens securing Indebtedness and other obligations under
the New Credit Facility,
(c) Liens securing the notes and the Guarantees,
(d) Liens of the Company or a Wholly Owned Restricted Subsidiary
of the Company on assets of any Subsidiary of the Company,
(e) Liens securing Refinancing Indebtedness which is incurred to
Refinance any Indebtedness which has been secured by a Lien
permitted under the Indenture and which has been incurred in
accordance with the provisions of the Indenture; provided,
however, that such Liens (i) are no less favorable to the
Holders and are not more favorable to the lienholders with
respect to such Liens than the Liens in respect of the
Indebtedness being Refinanced and (ii) do not extend to or
cover any property or assets of the Company or any of its
Restricted Subsidiaries not securing the Indebtedness so
Refinanced, and
(f) Permitted Liens.
MERGER, CONSOLIDATION AND SALE OF ASSETS
The Company will not, in a single transaction or series of
related transactions, consolidate or merge with or into any Person, or
sell, assign, transfer, lease, convey or otherwise dispose of (or
cause or permit any Restricted Subsidiary of the Company to sell,
assign, transfer, lease, convey or otherwise dispose of) all or
substantially all of the Company's assets (determined on a<PAGE>
consolidated basis for the Company and the Company's Restricted
Subsidiaries) whether as an entirety or substantially as an entirety
to any Person unless:
(1) either
92<PAGE>
(a) the Company shall be the surviving or continuing
corporation, or
(b) the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or the
Person which acquires by sale, assignment, transfer,
lease, conveyance or other disposition the properties and
assets of the Company and of the Company's Restricted
Subsidiaries substantially as an entirety
(i) shall be a corporation organized and validly existing
under the laws of the United States or any State
thereof or the District of Columbia, and
(ii) shall expressly assume, by supplemental indenture (in
form and substance satisfactory to the Trustee),
executed and delivered to the Trustee, the due and
punctual payment of the principal of, and premium, if any,
and interest on all of the notes and the performance
of every covenant of the notes, the Indenture and the
Registration Rights Agreement on the part of the
Company to be performed or observed;
(2) immediately after giving effect to such transaction and the
assumption contemplated by clause (1)(b)(i) above (including giving
effect to any Indebtedness and Acquired Indebtedness incurred or
anticipated to be incurred in connection with or in respect of such
transaction), the Company or such Surviving Entity, as the case may
be,
(a) shall have a Consolidated Net Worth equal to or greater than
the Consolidated Net Worth of the Company immediately prior to
such transaction, and
(b) shall be able to incur at least $1.00 of additional Indebtedness
(other than Permitted Indebtedness) pursuant to the "Limitation
on Incurrence of Additional Indebtedness" covenant;
(3) immediately before and immediately after giving effect to
such transaction and the assumption contemplated by clause (1)(b)(i)
above (including, without limitation, giving effect to any
Indebtedness and Acquired Indebtedness incurred or anticipated to be
incurred and any Lien granted in connection with or in respect of the
transaction), no Default or Event of Default shall have occurred or be
continuing; and
(4) the Company or the Surviving Entity shall have delivered to
the Trustee an officers' certificate and an opinion of counsel, each
stating that such consolidation, merger, sale, assignment, transfer,
lease, conveyance or other disposition and, if a supplemental
indenture is required in connection with such transaction, such
supplemental indenture comply in all material respects with the
applicable provisions of the Indenture and that all conditions
precedent in the Indenture relating to such transaction have been
satisfied.
Notwithstanding the immediately foregoing clauses (2) and (3),
(1) any Restricted Subsidiary may consolidate with, merge into
or transfer all or part of its properties and assets to the Company or
to another Restricted Subsidiary and
<PAGE>
(2) the Company may merge with or transfer all of its properties
and assets to an Affiliate incorporated or formed solely for the
purpose of either reincorporating or reforming the Company in another
State of the United States so long as the amount of Indebtedness of
the Company and its Restricted Subsidiaries is not increased thereby.
93<PAGE>
For purposes of the foregoing, the transfer (by lease,
assignment, sale or otherwise, in a single transaction or series of
transactions but excluding the creation of any Lien permitted under
the "--Limitation on Liens" covenant) of all or substantially all of
the properties or assets of one or more Restricted Subsidiaries of the
Company the Capital Stock of which constitutes all or substantially
all of the properties and assets of the Company, shall be deemed to be
the transfer of all or substantially all of the properties and assets
of the Company.
The Indenture provides that upon any consolidation, combination
or merger or any transfer of all or substantially all of the assets of
the Company in accordance with the foregoing, in which the Company is
not the continuing corporation, the successor Person formed by such
consolidation or into which the Company is merged or to which such
conveyance, lease or transfer is made shall succeed to, and be
substituted for, and may exercise every right and power of, the
Company under the Indenture and the notes with the same effect as if
such surviving entity had been named as such.
Each Guarantor (other than any Guarantor whose Guarantee is to be
released in accordance with the terms of the Guarantee and the
Indenture in connection with any transaction complying with the
provisions of " Limitation on Asset Sales") will not, and the Company
will not cause or permit any Guarantor to, consolidate with or merge
with or into or sell, assign, transfer, lease, convey or otherwise
dispose of all or substantially all of its assets to any Person other
than the Company or any other Guarantor unless:
(1) the entity formed by or surviving any such consolidation or
merger (if other than the Guarantor) or to which such sale, lease,
conveyance or other disposition shall have been made is a corporation
organized and existing under the laws of the United States or any
State thereof or the District of Columbia;
(2) such entity assumes by supplemental indenture all of the
obligations of the Guarantor on the Guarantee;
(3) immediately after giving effect to such transaction, no
Default or Event of Default shall have occurred and be continuing; and
(4) immediately after giving effect to such transaction and the
use of any net proceeds therefrom on a pro forma basis, the Company
could satisfy the provisions of clause (2) of the first paragraph of
this covenant.
Any merger or consolidation of a Guarantor with and into the
Company (with the Company being the surviving entity) or another
Guarantor that is a Wholly Owned Restricted Subsidiary of the Company
need only comply with clause (4) of the first paragraph of this
covenant.
The creation of a Lien permitted under the " Limitations on
Liens" covenant shall not constitute a disposition for the purposes of
this covenant.
LIMITATIONS ON TRANSACTIONS WITH AFFILIATES
The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, enter into or permit to exist
any transaction or series of related transactions (including, without
limitation, the purchase, sale, lease or exchange of any property or
the rendering of any service) with, or for the benefit of, any of its
Affiliates (each an "Affiliate Transaction"), other than
<PAGE>
(1) Affiliate Transactions permitted below; and
(2) Affiliate Transactions on terms that are no less favorable
than those that might reasonably have been obtained in a
comparable transaction at such time on an arm's-length basis
from a Person that is not an Affiliate of the Company or such
Restricted Subsidiary.
94<PAGE>
All Affiliate Transactions (and each series of related Affiliate
Transactions which are similar or part of a common plan) involving
aggregate payments or other property with a fair market value in
excess of $250,000 shall be approved by a majority of non-interested
directors of the Board of Directors or a majority of non-interested
directors of a committee of the Board of Directors of the Company or
such Restricted Subsidiary, as the case may be. Such approval will be
evidenced by a Board Resolution stating that such majority of non-
interested directors of the Board of Directors or such majority of
non-interested directors of the committee of the Board of Directors,
as the case may be, have determined that such transaction complies
with the foregoing provisions.
If the Company or any Restricted Subsidiary of the Company enters
into an Affiliate Transaction (or a series of related Affiliate
Transactions related to a common plan) that involves an aggregate fair
market value of more than $5,000,000, the Company or such Restricted
Subsidiary, as the case may be, shall, prior to the consummation
thereof, obtain a favorable opinion as to the fairness of such
transaction or series of related transactions to the Company or the
relevant Restricted Subsidiary, as the case may be, from a financial
point of view, from an independent nationally recognized investment
banking firm and file the same with the Trustee.
The restrictions set forth above shall not apply to
(1) reasonable fees and compensation paid to and indemnity
provided on behalf of, officers, directors, employees or consultants
of the Company or any Restricted Subsidiary of the Company as
determined in good faith by the Company's Board of Directors or a
committee thereof or senior management;
(2) transactions exclusively between or among the Company and
any of its Wholly Owned Restricted Subsidiaries or exclusively between
or among such Wholly Owned Restricted Subsidiaries, provided such
transactions are not otherwise prohibited by the Indenture;
(3) any agreement as in effect as of the Issue Date or any
amendment thereto or any transaction contemplated thereby (including
pursuant to any amendment thereto) in any replacement agreement
thereto so long as any such amendment or replacement agreement is not
more disadvantageous to the Holders in any material respect than the
original agreement as in effect on the Issue Date;
(4) Restricted Payments permitted by the Indenture;
(5) any payment, issuance of securities or other payments,
awards or grants, in cash or otherwise, pursuant to, or the funding
of, employment arrangements and stock option and stock ownership plans
approved by the Board of Directors, or the appropriate committee of
the Board of Directors, of the Company; and
(6) loans or advances to officers, directors or employees of the
Company or its Restricted Subsidiaries not in excess of $1,000,000 at
any one time outstanding.
95<PAGE>
LIMITATION ON GUARANTEES OF INDEBTEDNESS BY RESTRICTED SUBSIDIARIES
The Company will not permit any of its Restricted Subsidiaries
that is not a Guarantor (whether formed or acquired before or after
the Issue Date), directly or indirectly, to guarantee the payment of
any Indebtedness under the New Credit Facility, unless such Restricted
Subsidiary, the Company and the Trustee execute and deliver a
supplemental indenture evidencing such Restricted Subsidiary's
Guarantee of the notes pursuant to the terms of the Indenture, such
Guarantee of the notes to be a senior unsecured obligation of such
Subsidiary; provided that if any such Restricted Subsidiary who
becomes a Guarantor as described above is released from its guarantee
with respect to Indebtedness and obligations outstanding under the New
Credit Facility, such Restricted Subsidiary who becomes a Guarantor as
described above shall automatically be released from its obligations
as a Guarantor. Nothing in this covenant shall be construed to permit
any Restricted Subsidiary of the Company to incur Indebtedness
otherwise prohibited by the "Limitation on Incurrence of Additional
Indebtedness" covenant.
ADDITIONAL SUBSIDIARY GUARANTEES
If the Company or any of its Restricted Subsidiaries transfers or
causes to be transferred, in one transaction or a series of related
transactions, any property to any domestic Restricted Subsidiary that
is not a Guarantor, or if the Company or any of its Restricted
Subsidiaries shall organize, acquire or otherwise invest in another
domestic Restricted Subsidiary having total assets with a book value
in excess of $500,000, then such transferee or acquired or other
Restricted Subsidiary shall
(1) execute and deliver to the Trustee a supplemental indenture
in form reasonably satisfactory to the Trustee pursuant to which such
Restricted Subsidiary shall unconditionally guarantee all of the
Company's obligations under the notes and the Indenture on the terms
set forth in the Indenture; and
(2) deliver to the Trustee an opinion of counsel, subject to
customary exceptions, that such supplemental indenture has been duly
authorized, executed and delivered by such Restricted Subsidiary and
constitutes a legal, valid, binding and enforceable obligation of such
Restricted Subsidiary.
Thereafter, such Restricted Subsidiary shall be a Guarantor for
all purposes of the Indenture. Any Restricted Subsidiary of the
Company which is or seeks to become a Managed Care Entity shall be a
Guarantor only at such time as and then only to the extent provided in
the definition of Guarantor.
CONDUCT OF BUSINESS
The Company and its Restricted Subsidiaries will not engage in
any businesses which are not the same, similar or reasonably related
to the businesses in which the Company and its Restricted Subsidiaries
are engaged on the Issue Date.
<PAGE>
REPORTS TO HOLDERS
The Company shall deliver to the Trustee within 15 days after the
filing of the same with the Commission, copies of the quarterly and
annual reports and of the information, documents and other reports, if
any, which the Company is required to file with the Commission
pursuant to Section 13 or 15(d) of the Exchange Act. The Indenture
further provides that, notwithstanding that the Company may not be
subject to the reporting requirements of Section 13 or 15(d) of the
Exchange Act, the Company will file with the Commission after the
consummation of the exchange offer, to the extent permitted, and
provide the Trustee and Holders with such annual reports and such
information, documents and other reports specified in Sections 13 and
15(d) of the Exchange Act. The Company will also comply with the
other provisions of TIA Section 314(a).
96
<PAGE>
ADDITIONAL COVENANTS
The Indenture also contains covenants with respect to the
following matters:
(1) payment of principal, premium and interest;
(2) maintenance of an office or agency in The City of New York;
(3) maintenance of corporate existence;
(4) payment of taxes and other claims;
(5) maintenance of properties; and
(6) maintenance of insurance.
EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of
Default":
(1) the failure to pay interest on any notes when the same
becomes due and payable and the default continues for a period of 30
days;
(2) the failure to pay the principal on any notes, when such
principal becomes due and payable, at maturity, upon redemption or
otherwise (including the failure to make a payment to purchase notes
tendered pursuant to a Change of Control Offer or a Net Proceeds
Offer);
(3) a default in the observance or performance of any other
covenant or agreement contained in the Indenture which default
continues for a period of 30 days after the Company receives written
notice specifying the default (and demanding that such default be
remedied) from the Trustee or the Holders of at least 25% of the
outstanding principal amount of the notes (except in the case of a
default with respect to the "Merger, Consolidation and Sale of Assets"
covenant, which will constitute an Event of Default with such notice
requirement but without such passage of time requirement);
(4) the failure to pay at final maturity (giving effect to any
applicable grace periods and any extensions thereof) the principal
amount of any Indebtedness of the Company or any Restricted Subsidiary
of the Company, or the acceleration of the final stated maturity of
any such Indebtedness (which acceleration is not rescinded, annulled
or otherwise cured within 20 days of receipt by the Company or such
Restricted Subsidiary of notice of any such acceleration) if the
aggregate principal amount of such Indebtedness, together with the
principal amount of any other such Indebtedness in default for failure
to pay principal at final maturity or which has been accelerated,
aggregates $5,000,000 or more at any time;
(5) one or more judgments in an aggregate amount in excess of
$5,000,000 shall have been rendered against the Company or any of its
Restricted Subsidiaries and such judgments remain undischarged, unpaid
or unstayed for a period of 60 days after such judgment or judgments
become final and non-appealable;
(6) certain events of bankruptcy affecting the Company or any of
its Significant Subsidiaries; or
<PAGE>
(7) any of the Guarantees ceases to be in full force and effect
or any of the Guarantees is declared to be null and void and
unenforceable or any of the Guarantees is found to be invalid or any
97
<PAGE>
of the Guarantors denies its liability under its Guarantee (other than
by reason of release of a Guarantor in accordance with the terms of
the Indenture).
If an Event of Default (other than an Event of Default specified
in clause (6) above) occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of outstanding notes may
declare the principal of and accrued interest on all the notes to be
due and payable. If an Event of Default specified in clause (6) above
occurs and is continuing, then all unpaid principal of, and premium,
if any, and accrued and unpaid interest on all of the outstanding
notes will become and be immediately due and payable without any
declaration or other act on the part of the Trustee or any Holder.
The Indenture provides that, at any time after a declaration of
acceleration with respect to the notes as described in the preceding
paragraph, the Holders of a majority in principal amount of the notes
may rescind and cancel such declaration and its consequences:
(1) if the rescission would not conflict with any judgment or
decree;
(2) if all existing Events of Default have been cured or waived
except nonpayment of principal or interest that has become due solely
because of the acceleration;
(3) to the extent the payment of such interest is lawful,
interest on overdue installments of interest and overdue principal,
which has become due otherwise than by such declaration of
acceleration, has been paid;
(4) if the Company has paid the Trustee its reasonable compensation
and reimbursed the Trustee for its expenses, disbursements and
advances; and
(5) in the event of the cure or waiver of an Event of Default of the
type described in clause (6)of the description above of Events of
Default, the Trustee shall have received an officers' certificate and
an opinion of counsel that such Event of Default has been cured or
waived.
No such rescission shall affect any subsequent Default or impair
any right consequent thereto.
The Holders of a majority in principal amount of the notes may
waive any existing Default or Event of Default under the Indenture,
and its consequences, except a default in the payment of the principal
of or interest on any notes.
Holders of the notes may not enforce the Indenture or the notes
except as provided in the Indenture and under the TIA. Subject to the
provisions of the Indenture relating to the duties of the Trustee, the
Trustee is under no obligation to exercise any of its rights or powers
under the Indenture at the request, order or direction of any of the
Holders, unless such Holders have offered to the Trustee reasonable
indemnity. Subject to all provisions of the Indenture and applicable
law, the Holders of a majority in aggregate principal amount of the
then outstanding notes have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the
Trustee or exercising any trust or power conferred on the Trustee.
<PAGE>
Under the Indenture, the Company is required to provide an
officers' certificate to the Trustee promptly upon any such officer
obtaining knowledge of any Default or Event of Default (provided that
such officers shall provide such certification at least annually
whether or not they know of any Default or Event of Default) that has
occurred and, if applicable, describe such Default or Event of Default
and the status thereof.
98<PAGE>
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations and the obligations of the Guarantors discharged with
respect to the outstanding notes ("Legal Defeasance"). Such Legal
Defeasance means that the Company shall be deemed to have paid and
discharged the entire indebtedness represented by the outstanding
notes, except for
(1) the rights of Holders to receive payments in respect of the
principal of, premium, if any, and interest on the notes when
such payments are due;
(2) the Company's obligations with respect to the notes
concerning issuing temporary notes, registration of notes,
mutilated, destroyed, lost or stolen notes and the maintenance
of an office or agency for payments;
(3) the rights, powers, trust, duties and immunities of the
Trustee and the Company's obligations in connection therewith;
and
(4) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time,
elect to have the obligations of the Company released with respect to
certain covenants that are described in the Indenture ("Covenant
Defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with
respect to the notes. In the event Covenant Defeasance occurs,
certain events (not including non-payment, bankruptcy, receivership,
reorganization and insolvency events) described under "Events of
Default" will no longer constitute an Event of Default with respect to
the notes.
In order to exercise either Legal Defeasance or Covenant
Defeasance,
(1) the Company must irrevocably deposit with the Trustee, in
trust, for the benefit of the Holders cash in U.S. dollars, non-
callable U.S. government obligations, or a combination thereof, in
such amounts as will be sufficient, in the opinion of a nationally
recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on the notes on the
stated date for payment thereof or on the applicable redemption
date, as the case may be;
(2) in the case of Legal Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee (which may be counsel to the
Company) confirming that (a) the Company has received from, or there
has been published by, the Internal Revenue Service a ruling or (b)
since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that,
and based thereon such opinion of counsel shall confirm that, the
Holders will not recognize income, gain or loss for federal income tax
purposes as a result of such Legal Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Legal Defeasance had
not occurred;
(3) in the case of Covenant Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee (which may be counsel to the
Company) confirming that the Holders will not recognize income, gain<PAGE>
or loss for federal income tax purposes as a result of such Covenant
Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been
the case if such Covenant Defeasance had not occurred;
(4) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or Event
of Default with respect to the Indenture resulting from the incurrence
of Indebtedness, all or a portion of which will be used to defease the
notes concurrently with such incurrence) or insofar as Events of
99
<PAGE>
Default from bankruptcy or insolvency events are concerned, at any
time in the period ending on the 91st day after the date of deposit;
(5) such Legal Defeasance or Covenant Defeasance shall not
result in a breach or violation of, or constitute a default under the
Indenture or any other material agreement or instrument to which the
Company or any of its Subsidiaries is a party or by which the Company
or any of its Subsidiaries is bound;
(6) the Company shall have delivered to the Trustee an officers'
certificate stating that the deposit was not made by the Company with
the intent of preferring the Holders over any other creditors of the
Company or with the intent of defeating, hindering, delaying or
defrauding any other creditors of the Company or others;
(7) the Company shall have delivered to the Trustee an officers'
certificate and an opinion of counsel, each stating that all
conditions precedent provided for or relating to the Legal Defeasance
or the Covenant Defeasance have been complied with;
(8) the Company shall have delivered to the Trustee an opinion
of counsel to the effect that after the 91st day following the
deposit, the trust funds will not be subject to the effect of any
applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally; and
(9) certain other customary conditions precedent are satisfied.
Notwithstanding the foregoing, the opinion of counsel required by
clause (2) above with respect to a Legal Defeasance need not be
delivered if all notes not theretofore delivered to the Trustee for
cancellation
(1) have become due and payable;
(2) will become due and payable on the maturity date within one
year; or
(3) are to be called for redemption within one year under
arrangements satisfactory to the Trustee for the giving of notice of
redemption by the Trustee in the name, and at the expense, of the
Company.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further
effect (except as to surviving rights or registration of transfer or
exchange of the notes, as expressly provided for in the Indenture) as
to all outstanding notes when
(1) either
(a) all the notes theretofore authenticated and delivered
(except lost, stolen or destroyed notes which have been
replaced or paid and notes for whose payment money has
theretofore been deposited in trust or segregated and held
in trust by the Company and thereafter repaid to the Company
or discharged from such trust) have been delivered to the
Trustee for cancellation, or
(b) all notes not theretofore delivered to the Trustee for
cancellation have become due and payable and the Company has
irrevocably deposited or caused to be deposited with the Trustee
funds in an amount sufficient to pay and discharge the entire
100<PAGE>
Indebtedness on the notes not theretofore delivered to the
Trustee for cancellation, for principal of, premium, if any, and
interest on the notes to the date of deposit together with
irrevocable instructions from the Company directing the Trustee
to apply such funds to the payment thereof at maturity or
redemption, as the case may be;
(2) the Company has paid all other sums payable under the
Indenture by the Company; and
(3) the Company has delivered to the Trustee an officers'
certificate and an opinion of counsel stating that all conditions
precedent under the Indenture relating to the satisfaction and
discharge of the Indenture have been complied with.
MODIFICATION OF THE INDENTURE
The Company, the Guarantors and the Trustee, without the consent
of the Holders, may amend the Indenture for certain specified
purposes, including curing ambiguities, defects or inconsistencies, so
long as such change does not, in the opinion of the Trustee, adversely
affect the rights of any of the Holders in any material respect. In
formulating its opinion on such matters, the Trustee will be entitled
to rely conclusively on such evidence as it deems appropriate,
including, without limitation, solely on an opinion of counsel (which
may be counsel to the Company) or an officers' certificate.
Other modifications and amendments of the Indenture may be made
with the consent of the Holders of a majority in principal amount of
the then outstanding notes issued under the Indenture, except that,
without the consent of each Holder affected thereby, no amendment may:
(1) reduce the amount of notes whose Holders must consent to an
amendment;
(2) reduce the rate of or change or have the effect of changing
the time for payment of interest, including defaulted interest,
on any notes;
(3) reduce the principal of or change or have the effect of
changing the fixed maturity of any notes, or change the date on
which any notes may be subject to redemption or repurchase, or
reduce the redemption or repurchase price therefor;
(4) make any notes payable in money other than that stated in
the notes;
(5) make any change in provisions of the Indenture protecting
the right of each Holder to receive payment of principal of and
interest on such Note on or after the due date thereof or to bring
suit to enforce such payment, or permitting Holders of a majority in
principal amount of notes to waive Defaults or Events of Default;
(6) after the Company's obligation to purchase notes arises
thereunder, amend, change or modify in any material respect the
obligation of the Company to make and consummate a Change of Control
Offer in the event of a Change of Control or make and consummate a Net
Proceeds Offer with respect to any Asset Sale that has been
consummated or, after such Change of Control has occurred or such
Asset Sale has been consummated, modify any of the provisions or
definitions with respect thereto;
<PAGE>
(7) modify or change any provision of the Indenture or the
related definitions affecting the ranking of the notes or the ranking
of any Guarantee in a manner which adversely affects the Holders; or
(8) release any Guarantor from any of its obligations under its
Guarantee or the Indenture otherwise than in accordance with the terms
of the Indenture.
101<PAGE>
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
The Indenture provides that no recourse for the payment of the
principal of, premium, if any, interest on or Additional Interest, if
any, with respect to any of the notes or for any claim based thereon
or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant or agreement of the Company in the Indenture, or
in any of the notes or because of the creation of any Indebtedness
represented thereby, shall be had against any director, officer,
employee or stockholder, as such, of the Company or any Guarantor, as
such. Each Holder, by accepting the notes, waives and releases all
such liability.
GOVERNING LAW
The Indenture provides that it, the notes and the Guarantees are
governed by, and construed in accordance with, the laws of the State
of New York but without giving effect to applicable principles of
conflicts of law to the extent that the application of the law of
another jurisdiction would be required thereby.
THE TRUSTEE
The Indenture provides that, except during the continuance of an
Event of Default, the Trustee will perform only such duties as are
specifically set forth in the Indenture. During the existence of an
Event of Default, the Trustee will exercise such rights and powers
vested in it by the Indenture, and use the same degree of care and
skill in its exercise as a prudent man would exercise or use under the
circumstances in the conduct of his own affairs.
The Indenture and the provisions of the TIA contain certain
limitations on the rights of the Trustee, should it become a creditor
of the Company, to obtain payments of claims in certain cases or to
realize on certain property received in respect of any such claim as
security or otherwise. Subject to the TIA, the Trustee will be
permitted to engage in other transactions; provided that if the
Trustee acquires any conflicting interest as described in the TIA, it
must eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used
in the Indenture. Reference is made to the Indenture for the full
definition of all such terms, as well as any other terms used herein
for which no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person or any of
its Subsidiaries existing at the time such Person becomes a Restricted
Subsidiary of the Company or at the time it merges or consolidates
with the Company or any of its Subsidiaries or assumed by the Company
or any of its Subsidiaries in connection with the acquisition of
assets from such Person and in each case not incurred by such Person
in connection with, or in anticipation or contemplation of, such
Person becoming a Restricted Subsidiary of the Company or such
acquisition, merger or consolidation.
"Additional Interest" has the meaning set forth in the
Registration Rights Agreement.
"Affiliate" means, with respect to any specified Person, any
other Person who directly or indirectly through one or more
intermediaries controls, or is controlled by, or is under common
control with, such specified Person. The term "control" means the
possession, directly or indirectly, of the power to direct or cause<PAGE>
the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative
of the foregoing.
"Asset Acquisition" means
(1) an Investment by the Company or any Restricted Subsidiary of
the Company in any other Person pursuant to which such Person shall
become a Restricted Subsidiary of the Company or any Restricted
Subsidiary of the Company, or shall be merged with or into the Company
or any Restricted Subsidiary of the Company; or
102<PAGE>
(2) the acquisition by the Company or any Restricted Subsidiary
of the Company of the assets of any Person (other than a Restricted
Subsidiary of the Company) which constitute all or substantially all
of the assets of such Person or comprises any division or line of
business of such Person or any other properties or assets of such
Person other than any such acquisition made in the ordinary course of
the Company or such Restricted Subsidiary's business.
"Asset Sale" means any direct or indirect sale, issuance,
conveyance, transfer, lease (other than operating leases entered into
in the ordinary course of business), assignment or other transfer for
value by the Company or any of its Restricted Subsidiaries (including
any Sale and Leaseback Transaction) to any Person other than the
Company or a Wholly Owned Restricted Subsidiary of the Company of
(1) any Capital Stock of any Restricted Subsidiary of the
Company; or
(2) any other property or assets of the Company (other than
Capital Stock of the Company) or any Restricted Subsidiary of the
Company other than in the ordinary course of business.
Asset sales or other dispositions shall not include:
(1) a transaction or series of related transactions for which
the Company or its Restricted Subsidiaries receive aggregate
consideration of less than $750,000;
(2) the sale, lease, conveyance, disposition or other transfer
of all or substantially all of the assets of the Company as permitted
under " Certain Covenants Merger, Consolidation and Sale of
Assets;"
(3) the sale, lease, conveyance, disposition or other transfer
by the Company or any Restricted Subsidiary of assets or property in
transactions constituting Investments that are not prohibited under
the "Limitation on Restricted Payments" covenant;
(4) leases or subleases to third persons not interfering in any
material respect with the business of the Company or any of its
Restricted Subsidiaries; or
(5) the creation of any Lien not prohibited by the Indenture.
"Board of Directors" means, as to any Person, the board of
directors of such Person or any duly authorized committee thereof.
"Board Resolution" means, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of
such Person to have been duly adopted by the Board of Directors of
such Person and to be in full force and effect on the date of such
certification, and delivered to the Trustee.
"Capitalized Lease Obligation" means, as to any Person, the
obligations of such Person under a lease that are required to be
classified and accounted for as capital lease obligations under GAAP
and, for purposes of this definition, the amount of such obligations
at any date shall be the capitalized amount of such obligations at
such date, determined in accordance with GAAP.
<PAGE>
"Capital Stock" means
(1) with respect to any Person that is a corporation, any and
all shares, interests, participations or other equivalents
(however designated and whether or not voting) of corporate
stock, including each class of Common Stock and Preferred Stock
of such Person; and
103<PAGE>
(2) with respect to any Person that is not a corporation, any
and all partnership, membership or other equity interests of
such Person.
"Cash Equivalents" means
(1) marketable direct obligations issued by, or unconditionally
guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the
United States, in each case maturing within one year from the
date of acquisition thereof;
(2) marketable direct obligations issued by any state of the
United States of America or any political subdivision of any such
state or any public instrumentality thereof maturing within one
year from the date of acquisition thereof and, at the time of
acquisition, having one of the two highest ratings obtainable
from either Standard & Poor's Ratings Group ("S&P") or Moody's
Investors Service, Inc. ("Moody's");
(3) commercial paper maturing no more than one year from the
date of creation thereof and, at the time of acquisition, having
a rating of at least A-1 from S&P or at least P-1 from Moody's;
(4) certificates of deposit or bankers' acceptances maturing
within one year from the date of acquisition thereof issued by
any bank organized under the laws of the United States of
America or any state thereof or the District of Columbia or any
U.S. branch of a foreign bank having at the date of acquisition
thereof combined capital and surplus of not less than
$500,000,000 and a Thompson or Keefe Bank Watch Rating of "B"
or better;
(5) repurchase obligations with a term of not more than seven
days for underlying securities of the types described in clause
(1) above entered into with any bank meeting the qualifications
specified in clause (4) above;
(6) in the case of any foreign Restricted Subsidiary,
Investments:
(a) in direct obligations of the sovereign nation (or any agency
thereof) in which such foreign Restricted Subsidiary is
organized or is conducting a substantial amount of business
or in obligations fully and unconditionally guaranteed by
such sovereign nation (or any agency thereof);
(b) of the type and maturity described in clauses (1) through
(5) above of foreign obligors, which Investments or obligors
(or the parents of such obligors) have ratings described in
such clauses or equivalent ratings from comparable foreign
rating agencies; or
(c) of the type and maturity described in clauses (1) through
(5) above of foreign obligors (or the parents of such
obligors), which Investments or obligors (or the parents of
such obligors), are not rated as provided in such clauses or
in clause (6)(b) but which are, in the reasonable judgment of
the Company, comparable in investment quality to such
Investments and obligors (or the parents of such obligors);
and
(7) investments in money market funds which invest substantially
all their assets in securities of the types described in clauses (1)
through (6) above.<PAGE>
"Change of Control" means the occurrence of one or more of the
following events:
(1) any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all or
substantially all of the assets of the Company to any Person or group
of related Persons for purposes of Section 13(d) of the Exchange Act
104<PAGE>
(a "Group"), together with any Affiliates thereof (whether or not
otherwise in compliance with the provisions of the Indenture) other
than the creation of a Lien permitted pursuant to the Indenture;
(2) the approval by the holders of Capital Stock of the Company
of any plan or proposal for the liquidation or dissolution of the
Company (whether or not otherwise in compliance with the provisions of
the Indenture);
(3) any Person or Group shall become the owner, directly or
indirectly, beneficially or of record, of shares representing more
than 50% of the aggregate ordinary voting power represented by the
issued and outstanding Capital Stock of the Company; or
(4) the replacement of a majority of the Board of Directors of
the Company over a two-year period from the directors who constituted
the Board of Directors of the Company at the beginning of such period,
and such replacement shall not have been approved by a vote of at
least a majority of the Board of Directors of the Company then still
in office who either were members of such Board of Directors at the
beginning of such period or whose election as a member of such Board
of Directors was previously so approved.
Notwithstanding anything to the contrary contained in the
foregoing, a "Change of Control" shall not be deemed to occur upon the
consummation of the merger of the Company with an Affiliate
incorporated solely for the purpose of reincorporating the Company in
another jurisdiction or the transfer of assets to a Restricted
Subsidiary of the Company who is or will become concurrently with such
transfer a Guarantor.
"Change of Control Offer" has the meaning set forth under "
Change of Control."
"Change of Control Payment Date" has the meaning set forth under
" Change of Control."
"Common Stock" of any Person means any and all shares, interests
or other participations in, and other equivalents (however designated
and whether voting or non-voting) of such Person's common stock,
whether outstanding on the Issue Date or issued after the Issue Date,
and includes, without limitation, all series and classes of such
common stock.
"Consolidated EBITDA" means, with respect to any Person, for any
period, the sum (without duplication) of
(1) Consolidated Net Income; and
(2) to the extent Consolidated Net Income has been reduced
thereby
(a) all income taxes of such Person and its Restricted
Subsidiaries paid or accrued in accordance with GAAP for
such period (other than income taxes attributable to
extraordinary, unusual or nonrecurring gains or losses or
taxes attributable to sales or dispositions outside the
ordinary course of business),
(b) Consolidated Interest Expense,
(c) Consolidated Non-cash Charges less any non-cash items
increasing Consolidated Net Income for such period, all as
determined on a consolidated basis for such Person and its
Restricted Subsidiaries in accordance with GAAP, and <PAGE>
(d) after-tax losses from Asset Sales or abandonments or
reserves relating thereto.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to
any Person, the ratio of Consolidated EBITDA of such Person during the
four full fiscal quarters for which financial statements are
reasonably available (the "Four Quarter Period") most recently ending
on or prior to the date of the transaction giving rise to the need to
105<PAGE>
calculate the Consolidated Fixed Charge Coverage Ratio (the
"Transaction Date") to Consolidated Fixed Charges of such Person for
the Four Quarter Period as determined from an officers' certificate
delivered to the Trustee at the time that such calculation is required
to be made.
In addition to and without limitation of the foregoing, for
purposes of this definition, "Consolidated EBITDA" and "Consolidated
Fixed Charges" shall be calculated after giving effect on a pro forma
basis for the period of such calculation to
(1) the incurrence or repayment of any Indebtedness of such
Person or any of its Restricted Subsidiaries (and the application
of the proceeds thereof) giving rise to the need to make such
calculation and any incurrence or repayment of other Indebtedness
(and the application of the proceeds thereof), other than the
incurrence or repayment of Indebtedness in the ordinary course of
business for working capital purposes pursuant to working capital
facilities, occurring during the Four Quarter Period or at any time
subsequent to the last day of the Four Quarter Period and on or
prior to the Transaction Date, as if such incurrence or repayment,
as the case may be (and the application of the proceeds thereof),
occurred on the first day of the Four Quarter Period; and
(2) any asset sales or other dispositions or Asset Acquisitions
(including, without limitation, any Asset Acquisition giving rise to
the need to make such calculation as a result of such Person or one
of its Restricted Subsidiaries (including any Person who becomes a
Restricted Subsidiary as a result of the Asset Acquisition)
incurring, assuming or otherwise being liable for Acquired
Indebtedness and also including any Consolidated EBITDA (including
any pro forma expense and cost reductions calculated on a basis
consistent with Regulation S-X under the Exchange Act) attributable
to the assets which are the subject of the Asset Acquisition or
asset sale or other disposition during the Four Quarter Period)
occurring during the Four Quarter Period or at any time subsequent
to the last day of the Four Quarter Period and on or prior to the
Transaction Date, as if such asset sale or other disposition or
Asset Acquisition (including the incurrence, assumption or
liability for any such Acquired Indebtedness) occurred on the first
day of the Four Quarter Period.
If such Person or any of its Restricted Subsidiaries directly or
indirectly guarantees Indebtedness of a third Person, the preceding
sentence shall give effect to the incurrence of such guaranteed
Indebtedness as if such Person or any Restricted Subsidiary of such
Person had directly incurred or otherwise assumed such guaranteed
Indebtedness; provided that if such guarantee is limited to a
principal amount that is less than the amount of such Indebtedness,
such effect shall be limited to the incurrence of such Indebtedness in
such limited amount.
Furthermore, in calculating "Consolidated Fixed Charges" for
purposes of determining the denominator (but not the numerator) of
this "Consolidated Fixed Charge Coverage Ratio,"
(1) interest on outstanding Indebtedness determined on a
fluctuating basis as of the Transaction Date and which will
continue to be so determined thereafter shall be deemed to have
accrued at a fixed rate per annum equal to the rate of interest
on such Indebtedness in effect on the Transaction Date;
<PAGE>
(2) if interest on any Indebtedness actually incurred on the
Transaction Date may optionally be determined at an interest rate
based upon a factor of a prime or similar rate, a eurocurrency
interbank offered rate, or other rates, then the interest rate in
effect on the Transaction Date will be deemed to have been in
effect during the Four Quarter Period; and
(3) notwithstanding clause (1) above, interest on Indebtedness
determined on a fluctuating basis, to the extent such interest is
covered by agreements relating to Interest Swap Obligations,
shall be deemed to accrue at the rate per annum resulting after
giving effect to the operation of such agreements.
106<PAGE>
"Consolidated Fixed Charges" means, with respect to any Person
for any period, the sum, without duplication, of
(1) Consolidated Interest Expense; plus
(2) the product of (x) the amount of all dividend payments on
any series of Preferred Stock of such Person (other than
dividends paid in Qualified Capital Stock) paid, accrued or
scheduled to be paid or accrued during such period times (y) a
fraction, the numerator of which is one and the denominator of
which is one minus the then current effective consolidated
federal, state and local tax rate of such Person, expressed as
a decimal.
"Consolidated Interest Expense" means, with respect to any Person
for any period, the sum of, without duplication:
(1) the aggregate of the interest expense of such Person and its
Restricted Subsidiaries for such period determined on a
consolidated basis in accordance with GAAP, including without
limitation,
(a) any amortization of debt discount and amortization or
write-off of deferred financing costs,
(b) the net costs under Interest Swap Obligations,
(c) all capitalized interest, and
(d) the interest portion of any deferred payment obligation; and
(2) the interest component of Capitalized Lease Obligations
paid, accrued and/or scheduled to be paid or accrued by such
Person and its Restricted Subsidiaries during such period as
determined on a consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person, for
any period, the aggregate net income (or loss) of such Person and its
Restricted Subsidiaries for such period on a consolidated basis,
determined in accordance with GAAP. The following are excluded from
Consolidated Net Income
(1) after-tax gains from Asset Sales or abandonments or reserves
relating thereto;
(2) after-tax items classified as extraordinary or nonrecurring
gains;
(3) the net income of any Person acquired in a "pooling of
interests" transaction accrued prior to the date it becomes a
Restricted Subsidiary of the referent Person or is merged or
consolidated with the referent Person or any Restricted
Subsidiary of the referent Person;
(4) the net income (but not loss) of any Restricted Subsidiary
of the referent Person to the extent that the declaration of
dividends or similar distributions by that Restricted
Subsidiary of that income is restricted by a contract,
operation of law or otherwise;
(5) the net income of any Person, other than a Restricted
Subsidiary of the referent Person, except to the extent of cash
dividends or distributions paid to the referent Person or to a
Wholly Owned Restricted Subsidiary of the referent Person by
such Person;<PAGE>
(6) any restoration to income of any contingency reserve, except
to the extent that provision for such reserve was made out of
Consolidated Net Income accrued at any time following the Issue
Date;
107<PAGE>
(7) income or loss attributable to discontinued operations
(including, without limitation, operations disposed of during
such period whether or not such operations were classified as
discontinued); and
(8) in the case of a successor to the referent Person by
consolidation or merger or as a transferee of the referent
Person's assets, any earnings of the successor corporation
prior to such consolidation, merger or transfer of assets.
"Consolidated Net Worth" of any Person means the consolidated
stockholders' equity of such Person, determined on a consolidated
basis in accordance with GAAP, less (without duplication) amounts
attributable to Disqualified Capital Stock of such Person.
"Consolidated Non-cash Charges" means, with respect to any
Person, for any period, the aggregate depreciation, amortization and
other non-cash expenses of such Person and its Restricted Subsidiaries
reducing Consolidated Net Income of such Person and its Restricted
Subsidiaries for such period, determined on a consolidated basis in
accordance with GAAP (excluding any such charge which requires an
accrual of or a reserve for cash charges for any future period).
"Consolidated Tangible Assets" means, with respect to any Person,
as of any date of determination, the total assets, less goodwill,
deferred financing costs and other intangibles and less accumulated
amortization, shown on the most recent balance sheet of such Person,
determined on a consolidated basis in accordance with GAAP.
"Covenant Defeasance" has the meaning set forth under " Legal
Defeasance and Covenant Defeasance."
"Currency Agreement" means any foreign exchange contract,
currency swap agreement or other similar agreement or arrangement
designed to protect the Company or any Restricted Subsidiary of the
Company against fluctuations in currency values.
"Default" means an event or condition the occurrence of which is,
or with the lapse of time or the giving of notice or both would be, an
Event of Default.
"Disqualified Capital Stock" means that portion of any Capital
Stock which, by its terms (or by the terms of any security into which
it is convertible or for which it is exchangeable), or upon the
happening of any event, matures or is mandatorily redeemable, pursuant
to a sinking fund obligation or otherwise, or is redeemable at the
sole option of the holder thereof on or prior to the final maturity
date of the notes.
"Dollars" and "$" means lawful money of the United States of
America.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, or any successor statute or statutes thereto.
"fair market value" means, with respect to any asset or property,
the price which could be negotiated in an arm's-length, free market
transaction, for cash, between a willing seller and a willing and able
buyer, neither of whom is under undue pressure or compulsion to
complete the transaction. Fair market value shall be determined by
the Board of Directors of the Company acting reasonably and in good
faith and shall be evidenced by a Board Resolution of the Board of
Directors of the Company delivered to the Trustee.
<PAGE>
"GAAP" means generally accepted accounting principles set forth
in the opinions and pronouncements of the Accounting Principles Board
of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards
Board or in such other statements by such other entity as may be
approved by a significant segment of the accounting profession of the
United States, which are in effect as of the Issue Date and
consistently applied.
108<PAGE>
"Guarantor" means
(1) each domestic Subsidiary of the Company on the Issue Date
other than any Managed Care Entity; and
(2) each of the Company's domestic Restricted Subsidiaries that
in the future executes a supplemental indenture in which such
Restricted Subsidiary agrees to be bound by the terms of the
Indenture as a Guarantor.
For each of clauses (1) and (2), with regard to any domestic
Restricted Subsidiary of the Company formed after the Issue Date which
is or seeks to become a Managed Care Entity such Restricted
Subsidiary's obligations under the Guarantee shall only become
effective if
(1) the approval of the requisite regulatory entity is obtained
(if such approval is required) and
(2) the granting of the Guarantee by such Restricted Subsidiary
shall not have a material adverse effect upon the business,
operations, assets, condition (financial or otherwise) or prospects
of such Restricted Subsidiary (a "material adverse effect").
If a Guarantee is not issued by such Restricted Subsidiary in
reliance on the provisions of clause (2) the Company shall deliver an
officers' certificate to the Trustee stating that the granting of such
Guarantee would have a material adverse effect.
Obligation under the Guarantees shall be limited to the maximum
amount which such Restricted Subsidiary would be permitted to declare
or pay a dividend in compliance with the applicable rules or
regulations of, or undertakings made to, any regulatory entity having
jurisdiction and authority over such Restricted Subsidiary.
Each Managed Care Entity existing on the Issue Date shall use its
reasonable efforts to issue a Guarantee as promptly as practicable
after the Issue Date. Any Person constituting a Guarantor as
described above shall cease to constitute a Guarantor when its
respective Guarantee is released in accordance with the terms of the
Indenture. The documentation evidencing a Guarantee given by a
Managed Care Entity shall be permitted to contain the text of the
restrictions imposed on such Guarantee.
"Indebtedness" means with respect to any Person, without
duplication,
(1) all Obligations of such Person for borrowed money;
(2) all Obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments;
(3) all Capitalized Lease Obligations of such Person;
(4) all Obligations of such Person issued or assumed as the
deferred purchase price of property, all conditional sale
obligations and all Obligations under any title retention
agreement (but excluding trade accounts payable and other
accrued liabilities arising in the ordinary course of
business that are not overdue by 90 days or more or are being
contested in good faith by appropriate action promptly
instituted and diligently conducted);
<PAGE>
(5) all Obligations for the reimbursement of any obligor on any
letter of credit (other than a letter of credit relating to a
trade account payable that is not considered Indebtedness
pursuant to clause (4) above), banker's acceptance or similar
credit transaction;
(6) guarantees and other contingent obligations in respect of
Indebtedness referred to in clauses (1) through (5) above and
clause (8) below;
109<PAGE>
(7) all Obligations of any other Person of the type referred to
in clauses (1) through (6) which are secured by any lien on any
property or asset of such Person, the amount of such Obligation
being deemed to be the lesser of the fair market value of such
property or asset or the amount of the Obligation so secured;
(8) all net Obligations of such Person under currency agreements
and interest swap agreements; and
(9) all Disqualified Capital Stock issued by such Person with
the amount of Indebtedness represented by such Disqualified
Capital Stock being equal to the greater of its voluntary or
involuntary liquidation preference and its maximum fixed
repurchase price, but excluding accrued dividends, if any.
For purposes of this definition, the "maximum fixed repurchase
price" of any Disqualified Capital Stock which does not have a fixed
repurchase price shall be calculated in accordance with the terms of
such Disqualified Capital Stock as if such Disqualified Capital Stock
were purchased on any date on which Indebtedness will be required to
be determined pursuant to the Indenture, and if such price is based
upon, or measured by, the fair market value of such Disqualified
Capital Stock, such fair market value shall be determined reasonably
and in good faith by the Board of Directors of the issuer of such
Disqualified Capital Stock.
"Interest Swap Obligations" means, with respect to any Person,
the Obligations of such Person under (i) interest rate swap
agreements, interest rate cap agreements and interest rate collar
agreements, and (ii) other agreements or arrangements designed to
protect such Person against fluctuations in interest rates.
"Investment" means, with respect to any Person, any direct or
indirect loan or other extension of credit (including, without
limitation, a guarantee) or capital contribution to (by means of any
transfer of cash or other property to others or any payment for
property or services for the account or use of others), or any
purchase or acquisition by such Person of any Capital Stock, bonds,
notes, debentures or other securities or evidences of Indebtedness
issued by, any Person.
This investment excludes extensions of trade credit by the
Company and its Restricted Subsidiaries on commercially reasonable
terms in accordance with normal trade practices of the Company or such
Restricted Subsidiary, as the case may be.
For the purposes of the "Limitation on Restricted Payments"
covenant,
(1) "Investment" shall include and be valued at the fair market
value of the net assets of any Restricted Subsidiary at the
time that such Restricted Subsidiary is designated an
Unrestricted Subsidiary and shall exclude the fair market
value of the net assets of any Unrestricted Subsidiary at the
time that such Unrestricted Subsidiary is designated a Restricted
Subsidiary; and
(2) the amount of any Investment shall be the original cost of
such Investment plus the cost of all additional Investments by
the Company or any of its Restricted Subsidiaries, without any
adjustments for increases or decreases in value, or write-ups,
write-downs or write-offs with respect to such Investment,
reduced by the payment of dividends or distributions in
connection with such Investment or any other amounts received
in respect of such Investment.<PAGE>
No payment of dividends or distributions or receipt of any such
other amounts shall reduce the amount of any Investment if such
payment of dividends or distributions or receipt of any such amounts
would be included in Consolidated Net Income.
If the Company or any Restricted Subsidiary of the Company sells
or otherwise disposes of any Common Stock of any direct or indirect
Restricted Subsidiary of the Company such that, after giving effect to
any such sale or disposition, the Company no longer owns, directly or
110<PAGE>
indirectly, greater than 50% of the outstanding Common Stock of such
Restricted Subsidiary, the Company shall be deemed to have made an
Investment on the date of any such sale or disposition equal to the
fair market value of the Common Stock of such Restricted Subsidiary
not sold or disposed of.
"Issue Date" means the date of original issuance of the notes.
"Legal Defeasance" has the meaning set forth under " Legal
Defeasance and Covenant Defeasance."
"Lien" means any lien, mortgage, deed of trust, pledge, security
interest, charge or encumbrance of any kind (including any conditional
sale or other title retention agreement, any lease in the nature
thereof and any agreement to give any security interest).
"Managed Care Entity" means
(1) NVAL VisionCare Systems of California, Inc., ProCare Eye
Exam, Inc. and NVAL VisionCare Systems of North Carolina, Inc.;
and
(2) any other Subsidiary of the Company whose financial
condition or activities are regulated under the laws of any
state in connection with the provision of health or vision care
products or services (or related administrative services) and
shall include, without limitation, a health maintenance
organization (whether single or multi service), third party
administrator, or any entity similar to any of the foregoing.
"Merger Agreement" means the Agreement and Plan of Merger, dated
as of July 13, 1998, by and among National Vision Associates, Ltd., NW
Acquisition Corp. and New West, as amended and in effect as of the
Issue Date.
"Net Cash Proceeds" means, with respect to any Asset Sale, the
proceeds in the form of cash or Cash Equivalents including payments in
respect of deferred payment obligations when received in the form of
cash or Cash Equivalents (other than the portion of any such deferred
payment constituting interest) received by the Company or any of its
Restricted Subsidiaries from such Asset Sale net of
(1) reasonable out-of-pocket expenses and fees relating to such Asset
Sale (including, without limitation, legal, accounting and
investment banking fees and sales commissions);
(2) taxes paid or payable after taking into account any reduction
in consolidated tax liability due to available tax credits
or deductions and any tax sharing arrangements;
(3) repayment of Indebtedness that is required to be repaid in
connection with such Asset Sale; and
(4) appropriate amounts to be provided by the Company or any
Restricted Subsidiary, as the case may be, as a reserve, in
accordance with GAAP, against any liabilities associated with
such Asset Sale or the assets sold pursuant to such Asset Sale
and retained by the Company or any Restricted Subsidiary, as
the case may be, after such Asset Sale, including, without
limitation, pension and other post-employment benefit
liabilities, liabilities related to environmental matters and
liabilities under any indemnification obligations associated
with such Asset Sale.
<PAGE>
"Net Proceeds Offer" has the meaning set forth under "--Certain
Covenants---Limitations on Asset Sales."
"Net Proceeds Offer Amount" has the meaning set forth under
"--Certain Covenants---Limitations on Asset Sales."
"Net Proceeds Offer Payment Date" has the meaning set forth under
"--Certain Covenants---Limitations on Asset Sales."
111<PAGE>
"Net Proceeds Offer Trigger Date" has the meaning set forth under
"--Certain Covenants---Limitations on Asset Sales."
"New Credit Facility" means the Credit Agreement dated as of
October 8, 1998, between the Company, the Guarantors, the lenders
party thereto in their capacities as lenders thereunder, First Union
National Bank, as administrative agent, and Bank of America, FSB, as
documentation agent, together with the related documents thereto
(including, without limitation, any guarantee agreements and security
documents), in each case as such agreements may be amended (including
any amendment and restatement thereof), supplemented or otherwise
modified from time to time, including any agreement extending the
maturity of, refinancing, replacing or otherwise restructuring
(including increasing the amount of available borrowings thereunder
(provided that such increase in borrowings is permitted by the
"Limitation on Incurrence of Additional Indebtedness" covenant above)
or adding Restricted Subsidiaries of the Company as additional
borrowers or guarantors thereunder) all or any portion of the
Indebtedness under such agreement or any successor or replacement
agreement and whether by the same or any other agent, lender or group
of lenders.
"New West" means New West Eyeworks, Inc.
"Obligations" means all obligations for principal, premium,
interest, penalties, fees, indemnification, reimbursements, damages
and other liabilities payable under the documentation governing any
Indebtedness.
"Permitted Investments" means
(1) Investments by the Company or any Restricted Subsidiary of
the Company in any Person that is or will become immediately
after such Investment a Wholly Owned Restricted Subsidiary of
the Company or that will merge or consolidate into the Company
or a Wholly Owned Restricted Subsidiary of the Company;
(2) Investments in the Company by any Restricted Subsidiary of
the Company; provided that any Indebtedness evidencing such
Investment is unsecured and subordinated, pursuant to a written
agreement, to the Company's obligations under the notes and the
Indenture;
(3) investments in cash and Cash Equivalents;
(4) loans, guarantees and advances to employees and officers of
the Company and its Restricted Subsidiaries in the ordinary
course of business for bona fide business purposes not in
excess of $1,000,000 at any one time outstanding;
(5) Currency Agreements and Interest Swap Obligations entered
into in the ordinary course of the Company's or its Restricted
Subsidiaries' businesses and otherwise in compliance with the
Indenture;
(6) additional Investments not to exceed $5,000,000 at any one
time outstanding;
(7) Investments in securities of trade creditors or customers
received pursuant to any workout, compromise, plan of reorganiza-
tion or similar arrangement upon the bankruptcy or insolvency or
financial distress of such trade creditors or customers;
<PAGE>
(8) Investments made by the Company or its Restricted Subsidiaries
as a result of consideration received in connection with an Asset
Sale made in compliance with the "Limitation on Asset Sales"
covenant;
(9) Investments by the Company or its Restricted Subsidiaries in
joint ventures in an aggregate amount not in excess of
$3,000,000 at any time outstanding; and
112
<PAGE>
(10) Investments by the Company or its Restricted Subsidiaries in
at least a majority of the outstanding common stock of New West
pursuant to the Merger Agreement for the purpose of acquiring New
West as a Wholly Owned Restricted Subsidiary.
"Permitted Liens" means the following types of Liens:
(1) Liens for taxes, assessments or governmental charges or
claims either (a) not delinquent or (b) contested in good faith
by appropriate action and as to which the Company or its
Restricted Subsidiaries shall have set aside on its books such
reserves, if any, as may be required pursuant to GAAP;
(2) statutory Liens of landlords and Liens of carriers,
warehousemen, mechanics, suppliers, materialmen, repairmen and
other Liens imposed by law incurred in the ordinary course of
business for sums not yet delinquent or being contested in good
faith, if such reserve or other appropriate provision, if any,
as shall be required by GAAP shall have been made in respect
thereof;
(3) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment
insurance and other types of social security, or to secure the
performance of tenders, statutory obligations, surety and appeal
bonds, bids, leases, government contracts, performance and
return-of-money bonds and other similar obligations (exclusive
of obligations for the payment of borrowed money), including any
Lien securing letters of credit issued in connection with any
of the foregoing;
(4) judgment Liens not giving rise to an Event of Default;
(5) easements, rights-of-way, zoning restrictions and other
similar charges or encumbrances in respect of real property
not interfering in any material respect with the ordinary conduct
of the business of the Company or any of its Restricted
Subsidiaries;
(6) any interest or title of a lessor under any Capitalized
Lease Obligation; provided that such Liens do not extend to any
property or assets which is not leased property subject to such
Capitalized Lease Obligation;
(7) Liens upon specific items of inventory or other goods and
proceeds of any Person securing such Person's obligations in
respect of bankers' acceptances issued or created for the account
of such Person to facilitate the purchase, shipment or storage of
such inventory or other goods;
(8) Liens securing reimbursement obligations with respect to
commercial letters of credit which encumber documents and other
property relating to such letters of credit and products and
proceeds thereof;
(9) Liens encumbering deposits made to secure obligations
arising from statutory, regulatory, contractual, or warranty
requirements of the Company or any of its Restricted Subsidiaries,
including rights of offset and set-off;
(10) Liens securing Interest Swap Obligations which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted
under the Indenture;
<PAGE>
(11) Liens securing Purchase Money Indebtedness permitted
pursuant to clause (11) of the definition of "Permitted
Indebtedness"; provided, however, that (a) the Indebtedness
shall not exceed the cost of such property or assets and shall
not be secured by any property or assets of the Company or any
Restricted Subsidiary of the Company other than the property and
assets so acquired or constructed and (b) the Lien securing such
113
<PAGE>
Indebtedness shall be created within 180 days of such acquisition
or construction or, in the case of a refinancing of any Purchase
Money Indebtedness, within 180 days of such refinancing;
(12) Liens securing obligations under Currency Agreements;
(13) any lease or sublease not interfering in any material
respect with the business of the Company and its Subsidiaries;
(14) Liens with respect to obligations that do not in the
aggregate exceed $1,000,000 at any one time outstanding;
(15) Liens in favor of customs and revenue authorities arising as
a matter of law to secure payment of custom duties in connection
with the importation of goods;
(16) Liens on the assets of a Managed Care Entity pursuant to the
applicable rules, or regulations of, or undertakings made to, any
regulatory entity having jurisdiction and authority over such
Managed Care Entity;
(17) Liens arising under customary provisions in joint venture
agreements and other similar agreements; and
(18) Liens securing Acquired Indebtedness incurred in accordance
with the "Limitation on Incurrence of Additional Indebtedness"
covenant; provided that
(a) such Liens secured such Acquired Indebtedness at the time of
and prior to the incurrence of such Acquired Indebtedness by
the Company or a Restricted Subsidiary of the Company and
were not granted in connection with, or in anticipation of,
the incurrence of such Acquired Indebtedness by the Company
or a Restricted Subsidiary of the Company, and
(b) such Liens do not extend to or cover any property or assets
of the Company or of any of its Restricted Subsidiaries
other than the property or assets that secured the Acquired
Indebtedness prior to the time such Indebtedness became
Acquired Indebtedness of the Company or a Restricted
Subsidiary of the Company and are no more favorable to
the lienholders than those securing the Acquired
Indebtedness prior to the incurrence of such Acquired
Indebtedness by the Company or a Restricted Subsidiary of
the Company.
"Person" means an individual, partnership, corporation,
unincorporated organization, limited liability company, trust or joint
venture, or a governmental agency or political subdivision thereof.
"Preferred Stock" of any Person means any Capital Stock of such
Person that has preferential rights to any other Capital Stock of such
Person with respect to dividends or redemptions or upon liquidation.
"Purchase Money Indebtedness" means Indebtedness of the Company
and its Restricted Subsidiaries incurred for the purpose of financing
all or any part of the purchase price, or the cost of installation,
construction or improvement, of property or equipment.
"Put Option Agreement" means the Put Option Agreement, dated
October 1, 1997, by and between the Company and Myrel Neumann, O.D. as
such agreement is effect in all material respects on the Issue Date.
"Qualified Capital Stock" means any Capital Stock that is not
Disqualified Capital Stock.
114<PAGE>
"Qualified Proceeds" means any of the following or any
combination of the following:
(1) cash;
(2) Cash Equivalents;
(3) assets that are used or usable in the business of the
Company and its Subsidiaries as existing on the Issue Date or a
business reasonably related or complementary thereto; and
(4) Capital Stock of any Person engaged primarily in the
business of the Company and its Subsidiaries as existing on the
Issue Date or a business reasonably related or complementary
thereto if, in connection with the receipt by the Company or
any Restricted Subsidiary of the Company of such Capital Stock:
(a) such Person becomes a Restricted Subsidiary, or
(b) such Person is merged, consolidated or amalgamated with or
into, or transfers or conveys substantially all of its
assets to, or is liquidated into the Company or any
Restricted Subsidiary of the Company.
"Refinance" means, in respect of any security or Indebtedness, to
refinance, extend, renew, refund, repay, prepay, redeem, defease or
retire, or to issue a security or Indebtedness in exchange or
replacement for, such security or Indebtedness in whole or in part.
"Refinanced" and "Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means any Refinancing by the Company
or any Restricted Subsidiary of the Company of Indebtedness incurred
in accordance with the "Limitation on Incurrence of Additional
Indebtedness" covenant or clauses (1) and (3) of the definition of
Permitted Indebtedness, in each case that does not
(1) result in an increase in the aggregate principal amount of
Indebtedness of such Person as of the date of such proposed
Refinancing (plus the amount of any premium and accrued interest
required to be paid under the terms of the instrument governing such
Indebtedness and plus the amount of reasonable fees and expenses
incurred by the Company in connection with such Refinancing); or
(2) create Indebtedness with (a) a Weighted Average Life to
Maturity that is less than the Weighted Average Life to Maturity of
the Indebtedness being Refinanced or (b) a final maturity earlier than
the final maturity of the Indebtedness being Refinanced.
If such Indebtedness being Refinanced is Indebtedness of the
Company only, then such Refinancing Indebtedness shall be Indebtedness
solely of the Company and if such Indebtedness being Refinanced is
subordinate or junior to the notes, then such Refinancing Indebtedness
shall be subordinate or junior to the notes at least to the same
extent and in the same manner as the Indebtedness being Refinanced.
"Restricted Subsidiary" of any Person means any Subsidiary of
such Person which at the time of determination is not an Unrestricted
Subsidiary.
"Sale and Leaseback Transaction" means any direct or indirect
arrangement with any Person or to which any such Person is a party,
providing for the leasing to the Company or a Restricted Subsidiary of
any property, whether owned by the Company or any Restricted
Subsidiary at the Issue Date or later acquired, which has been or is
to be sold or transferred by the Company or such Restricted Subsidiary<PAGE>
to such Person or to any other Person from whom funds have been or are
to be advanced by such Person on the security of such Property.
"Significant Subsidiary," with respect to any Person, means any
Restricted Subsidiary of such Person that satisfies the criteria for a
"Significant Subsidiary" set forth in Rule 1.02(w) of Regulation S-X
under the Exchange Act.
115<PAGE>
"Special Redemption Date" means December 15, 1998.
"Special Redemption Notice Date" means November 30, 1998.
"Special Redemption Price" has the meaning set forth under "
Special Redemption."
"Subsidiary," with respect to any Person, means
(1) any corporation of which the outstanding Capital Stock
having at least a majority of the votes entitled to be cast
in the election of directors under ordinary circumstances shall
at the time be owned, directly or indirectly, by such Person;
or
(2) any other Person of which at least a majority of the voting
interest under ordinary circumstances is at the time, directly
or indirectly, owned by such Person.
"Unrestricted Subsidiary" of any Person means
(1) any Subsidiary of such Person that at the time of
determination shall be or continue to be designated an
Unrestricted Subsidiary by the Board of Directors of such
Person in the manner provided below; and
(2) any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors may designate any Subsidiary (including
any newly acquired or newly formed Subsidiary) to be an Unrestricted
Subsidiary unless such Subsidiary owns any Capital Stock of, or owns
or holds any Lien on any property of, the Company or any other
Subsidiary of the Company that is not a Subsidiary of the Subsidiary
to be so designated; provided that
(1) the Company certifies to the Trustee that such designation
complies with the "Limitation on Restricted Payments"
covenant; and
(2) each Subsidiary to be so designated and each of its
Subsidiaries has not at the time of designation, and does not
thereafter, create, incur, issue, assume, guarantee or otherwise
become directly or indirectly liable with respect to any
Indebtedness pursuant to which the lender has recourse to any
of the assets of the Company or any of its Restricted
Subsidiaries.
The Board of Directors may designate any Unrestricted Subsidiary
to be a Restricted Subsidiary only if
(1) immediately after giving effect to such designation, the
Company is able to incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in compliance
with the "Limitation on Incurrence of Additional Indebtedness"
covenant and
(2) immediately before and immediately after giving effect to
such designation, no Default or Event of Default shall have
occurred and be continuing. Any such designation by the Board
of Directors shall be evidenced to the Trustee by promptly
filing with the Trustee a copy of the Board Resolution giving
effect to such designation and an officers' certificate
certifying that such designation complied with the foregoing
provisions.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing
(1) the then outstanding aggregate principal amount of such
Indebtedness into
116<PAGE>
(2) the sum of the total of the products obtained by multiplying
(a) the amount of each then remaining installment, sinking fund,
serial maturity or other required payment of principal, including
payment at final maturity, in respect thereof, by
(b) the number of years (calculated to the nearest one-twelfth)
which will elapse between such date and the making of such
payment.
"Wholly Owned Restricted Subsidiary" of any Person means any
Restricted Subsidiary of such Person of which all the outstanding
voting securities (other than in the case of a foreign Restricted
Subsidiary, directors' qualifying shares or an immaterial amount of
shares required to be owned by other Persons pursuant to applicable
law) are owned by such Person or any Wholly Owned Restricted
Subsidiary of such Person.
REGISTRATION RIGHTS
The Company, the Guarantors and the initial purchasers of the
outstanding notes entered into the Registration Rights Agreement on
the issue date pursuant to which each of the Company and the
Guarantors agreed, for the benefit of holders of the outstanding
notes, that they would, at their expense
(1) on or prior to the 120th day following the issue date, file
the exchange offer Registration Statement with the Commission
with respect to the exchange offer pursuant to which the
outstanding notes will be exchanged for the exchange notes,
which will have terms identical to the outstanding notes
(except that the exchange notes will not contain terms with
respect to transfer restrictions or any provision relating to
this paragraph) and
(2) use their best efforts to cause the exchange offer
Registration Statement to be declared effective under the
Securities Act by the 180th day after the issue date. Upon
effectiveness of the exchange offer Registration Statement, the
Company will offer to all holders of the outstanding notes an
opportunity to exchange their securities for a like principal
amount of the exchange notes.
The Company and the Guarantors agreed to keep the exchange offer
open for acceptance for not less than 20 business days after the date
the exchange offer Registration Statement is declared effective, and
will comply with Regulation 14E and Rule 13e-4 under the Exchange Act
(other than the filing requirements of Rule 13e-4). For each
outstanding note surrendered to the Company for exchange pursuant to
the exchange offer, the holder of such outstanding note will receive
an exchange note having a principal amount at maturity equal to that
of the surrendered outstanding note. Interest on each exchange note
will accrue from the last interest payment date on which interest was
paid on the outstanding note surrendered in exchange therefor or, if
no interest has been paid on such outstanding note, from the issue
date.
Under existing interpretations of the staff of the Commission's
Division of Corporation Finance (the "Staff"), the exchange notes will
generally be freely transferable after the exchange offer without
further registration under the Securities Act; provided, however, that
broker-dealers ("Participating Broker-Dealers") receiving exchange
notes in the exchange offer will be subject to a prospectus delivery
<PAGE>
requirement with respect to resales of such exchange notes. To date,
the Staff has taken the position that Participating Broker-Dealers may
fulfill their prospectus delivery requirements with respect to
transactions involving an exchange of securities such as the exchange
pursuant to the exchange offer (other than a resale of an unsold
allotment from the sale of the outstanding notes to the Initial
Purchasers) with the prospectus contained in the exchange offer
Registration Statement. Pursuant to the Registration Rights
Agreement, the Company and the Guarantors will agree to permit
Participating Broker-Dealers and other persons, if any, subject to
similar prospectus delivery requirements to use the prospectus
contained in the exchange offer Registration Statement in connection
with the resale of such exchange notes.
Each holder of the outstanding notes who wishes to exchange its
outstanding notes for exchange notes in the exchange offer will be
required to make certain representations to the Company and the
Guarantors, including that
117<PAGE>
(1) any exchange notes to be received by it will be acquired in
the ordinary course of its business,
(2) it has no arrangement with any person to participate in a
public distribution (within the meaning of the Securities Act)
of the exchange notes, and
(3) it is not an "affiliate," as defined in Rule 405 of the
Securities Act, of the Company, or if it is such an affiliate,
that it will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent
applicable to it.
In addition, each holder who is not a broker-dealer will be
required to represent that it is not engaged in, and does not intend
to engage in, a public distribution of the exchange notes. Each
holder who is a broker-dealer and who receives exchange notes for its
own account in exchange for outstanding notes that were acquired by it
as a result of market-making activities or other trading activities
will be required to acknowledge that it will deliver a prospectus in
connection with any resale by it of such exchange notes.
In the event that applicable interpretations of the Staff do not
permit the Company and the Guarantors to effect the exchange offer or
if for any other reason the exchange offer is not consummated by the
210th day following the issue date, or if the Initial Purchasers so
request with respect to the outstanding notes not eligible to be
exchanged for exchange notes in the exchange offer or if any holder of
outstanding notes is not eligible to participate in the exchange offer
or does not receive freely tradeable exchange notes in the exchange
offer, the Company and the Guarantors will, at their expense,
(1) promptly file the Shelf Registration Statement permitting
resales from time to time of the outstanding notes,
(2) use their best efforts to cause the Shelf Registration
Statement to become effective, and
(3) use their best efforts to keep the Shelf Registration
Statement current and effective until two years from the issue
date or such shorter period that will terminate when all the
outstanding notes covered by the Shelf Registration Statement
have been sold pursuant thereto.
The Company and the Guarantors, at their expense, will provide to
each holder of the outstanding notes copies of the prospectus, which
is a part of the Shelf Registration Statement, notify each such holder
when the Shelf Registration Statement has become effective and take
certain other actions as are required to permit unrestricted resales
of the outstanding notes from time to time. A holder of outstanding
notes who sells such outstanding notes pursuant to the Shelf
Registration Statement generally will be required to be named as a
selling securityholder in the related prospectus and to deliver a
prospectus to purchasers, will be subject to certain of the civil
liability provisions under the Securities Act in connection with such
sales and will be bound by the provisions of the Registration Rights
Agreement which are applicable to such holder (including certain
indemnification obligations).
In the event that
(1) the exchange offer Registration Statement is not filed with
the Commission on or prior to the 120th day after the issue
date or declared effective on or prior to the 180th day after
the issue date, <PAGE>
(2) the exchange offer is not consummated on or prior to the
210th day following the issue date,
(3) the Shelf Registration Statement is not filed or declared
effective within the required time periods, or
(4) the exchange offer Registration Statement or the Shelf
Registration Statement is declared effective but thereafter
ceases to be effective (except as specifically permitted
therein) for a period of 15 consecutive days without being
succeeded immediately by an additional exchange offer
Registration Statement or Shelf Registration
Statement, as the case may be, filed and declared effective
(each such event, a "Registration Default"),
118<PAGE>
the interest rate borne by the outstanding notes shall be
increased by 0.50% per annum for the 90-day period following such
Registration Default. Such interest rate will increase by an
additional 0.25% per annum at the beginning of each subsequent
90-day period following such Registration Default, up to a
maximum aggregate increase of 1.0% per annum. From and after
the date that all Registration Defaults have been cured, the
outstanding notes will bear interest at the rate set forth on
the cover page of this Offering Memorandum.
The summary herein of certain provisions of the Registration
Rights Agreement does not purport to be complete and is subject to,
and is qualified in its entirety by reference to, all the provisions
of the Registration Rights Agreement, a copy of which is available
upon request to the Company.
119<PAGE>
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
Kilpatrick Stockton LLP, counsel to the Company, has rendered its
opinion, which opinion has been filed as an Exhibit to the
Registration Statement, that (i) adopts the following summary of
certain U.S. federal income tax consequences of the acquisition,
ownership and disposition of notes as its opinion with respect to the
material U.S. federal income tax consequences of the exchange offer,
and (ii) opines that such discussion describes the material U.S.
federal income tax consequences of the acquisition, ownership and
disposition of the notes. Such opinion is based upon the provisions
of the Internal Revenue Code of 1986, as amended (the "Code"), the
final, temporary and proposed regulations promulgated thereunder, and
administrative rulings and judicial decisions in effect as of the date
hereof, all of which are subject to change (possibly with retroactive
effect) or different interpretations. The following summary is not
binding on the Internal Revenue Service ("IRS") and there can be no
assurance that the IRS will take a similar view with respect to the
tax consequences described below. No ruling has been or will be
requested by the Company from the IRS on any tax matters relating to
the notes or the exchange offer. This discussion is limited to the
material U.S. federal income tax consequences, and it does not purport
to address all of the possible federal income tax consequences or any
state, local or foreign tax consequences of the acquisition, ownership
and disposition of the notes, the exchange notes or the exchange
offer. It is limited to investors who will hold the notes and the
exchange notes as capital assets and does not address the federal
income tax consequences that may be relevant to particular investors
in light of their unique circumstances or to certain types of
investors (such as dealers in securities, insurance companies,
financial institutions and tax-exempt entities) who might be subject
to special treatment under federal income tax laws.
As used in the discussion which follows, the term "U.S. Holder"
means a beneficial owner of the notes or the exchange notes that, for
United States federal income tax purposes, is (i) a citizen or
resident of the United States, (ii) a corporation, partnership or
other entity created or organized in or under the laws of the United
States or of any political subdivision thereof, or (iii) an estate or
trust the income of which is subject to United States federal income
taxation regardless of its source. The term "Non-U.S. Holder" means a
beneficial owner of the notes or the exchange notes that, for United
States federal income tax purposes, is not a U.S. Holder.
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE
PARTICULAR TAX CONSEQUENCES TO THEM OF PURCHASING, HOLDING AND
DISPOSING OF THE NOTES OR THE EXCHANGE NOTES, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
TAX CONSEQUENCES TO U.S. HOLDERS
EXCHANGE OFFER
The exchange of the Outstanding notes for exchange notes pursuant
to the exchange offer will not be treated as an "exchange" because the
exchange notes will not be considered to differ materially in kind or
extent from the . Rather, the exchange notes received by a holder of
the outstanding note will be treated as a continuation of the
outstanding note in the hands of such holder. As a result, there will
be no federal income tax consequences to holders exchanging the
outstanding note for the exchange notes pursuant to the exchange
offer.
<PAGE>
INTEREST
Except as provided below in respect of certain Additional
Interest (as described below), a holder of a Note will be required to
report stated interest on the Note as interest income in accordance
with the holder's method of accounting for tax purposes.
The Treasury Regulations relating to original issue discount
("OID") permit the accrual of OID to be determined, in the case of a
debt instrument with alternative payment schedules, based upon the
payment schedule most likely to occur, as determined by the issuer of
the debt, so long as the timing and amounts of each payment schedule
are known as of the issue date. Under the OID rules, holders may be
required to recognize income prior to receipt of cash. Under certain
circumstances, including failure of the Company to register the notes
pursuant to an effective registration statement, additional interest
(the "Additional Interest") will accrue on the notes in the manner
described in "Registration Rights". The Company does not intend to treat
the possibility of Additional Interest as affecting the computation of
120<PAGE>
OID or the yield to maturity. If a holder of a Note becomes entitled
to Additional Interest, then, solely for purposes of determining the
accrual of OID, the yield to maturity on the notes will be determined
by treating the notes as reissued on the date that it is determined
that such Additional Interest will be required to be paid, for an
amount equal to its adjusted issue price on such date. The foregoing
position taken by the Company will be binding on all holders, unless a
holder explicitly discloses that its determination of the yield to
maturity is different from the Company's determination on a statement
attached to the holder's timely filed federal income tax return for
the year that includes the acquisition date of the notes.
TAX BASIS IN OUTSTANDING NOTES AND EXCHANGE NOTES
A holder's tax basis in a Note will be the holder's purchase
price for the Note, increased for OID, if any, previously included in
income by the holder with respect to the notes and not yet paid. If a
holder of an Outstanding Note exchanges the Outstanding Note for an
Exchange Note pursuant to the exchange offer, the tax basis of the
Exchange Note immediately after such exchange should equal the
holder's tax basis in the Outstanding Note immediately prior to the
Exchange.
DISPOSITION OF OUTSTANDING NOTES OR EXCHANGE NOTES
The sale, exchange, redemption or other disposition of a Note
will be a taxable event, except in the case of an exchange pursuant to
the exchange offer (see the above discussion), or certain exchanges in
which gain or loss is not recognized under the Code. A holder will
recognize gain or loss equal to the difference between (i) the amount
of cash(plus the fair market value of any property) received upon such
sale, exchange, redemption or other taxable disposition of the
Outstanding Note or the Exchange Note (except to the extent
attributable to accrued interest) and (ii) the holder's adjusted tax
basis in such Outstanding Note or Exchange Note. Such gain or loss
will be capital gain or loss, and will be long term if the Note has
been held for more than one year at the time of the sale or other
disposition.
PURCHASERS OF NOTES AT OTHER THAN ORIGINAL ISSUANCE PRICE
The foregoing does not discuss special rules that may affect the
treatment of purchasers that acquire notes other than at par,
including those provisions of the Internal Revenue Code relating to
the treatment of "market discount", "bond premium" and "amortizable
bond premium." Any such purchaser should consult its tax advisor as
to the consequences to it of the acquisition, ownership, and
disposition of notes.
TAX CONSEQUENCES TO NON-U.S. HOLDERS
In the case of a Non-U.S. Holder, such Non-U.S. Holder will not
be subject to U.S. federal income tax, including U.S. withholding tax,
on interest paid or OID (if any) on the notes under the "portfolio
interest" exception, provided that (i) the Non-U.S. Holder does not
actually or constructively own 10% or more of the total combined
voting power of all classes of stock of the Company entitled to vote,
(ii) the Non-U.S. Holder is not (a) a bank receiving interest pursuant
to a loan agreement entered into in the ordinary course of its trade
or business or (b) a controlled foreign corporation that is related to
the Company through stock ownership, (iii) such interest or OID is not
effectively connected with a United States trade or business, and (iv)
either (a) the beneficial owner of the notes certifies to the Company
or its agent, under penalties of perjury, that the beneficial owner is<PAGE>
a foreign person and provides a completed IRS Form W-8 ("Certificate
of Foreign Status") or (b) a securities clearing organization, bank or
other financial institution which holds customers' securities in the
ordinary course of its trade or business (a "financial institution")
and holds the notes, certifies to the Company or its agency, under
penalties of perjury, that it has received Form W-8 from the
beneficial owner or that it has received from another financial
institution a Form W-8 and furnishes the payor with a copy thereof.
If any of the situations described in proviso (i), (ii) or (iv) of the
preceding sentence do not exist, then, except as described below for
effectively connected income, interest paid and OID, if any, on the
121
<PAGE>
notes would be subject to U.S. withholding tax at a 30% rate (or lower
tax treaty rate as evidenced by an IRS Form 1001 (Ownership Exemption
or Reduced Rate Certificate)). If the income on the notes is
effectively connected with a Non-U.S. Holder's conduct of a trade or
business within the United States, then, absent tax treaty protection,
the Non-U.S. Holder will be subject to U.S. federal income tax on such
income in essentially the same manner as a United States person and,
in the case of a foreign corporation, may also be subject to the U.S.
branch profits tax.
BACKUP WITHHOLDING
Unless a holder provides its correct taxpayer identification
number (employer identification number or social security number) to
the Company and certifies that such number is correct, under the
federal income tax backup withholding rules, 31% of (i) the interest
paid on the notes, and (ii) proceeds of sale of the notes, must be
withheld and remitted to the United States Treasury. However, certain
holders (including, among others, certain foreign individuals) are not
subject to these backup withholding and reporting requirements. For a
foreign individual to qualify as an exempt foreign recipient, that
holder must submit a statement, signed under penalties of perjury,
attesting to that individual's exempt foreign status.
Backup withholding is not an additional federal income tax.
Rather, the federal income tax liability of a person subject to
withholding will be reduced by the amount of tax withheld. If
withholding results in an overpayment of taxes, a refund may be
obtained from the IRS.
122<PAGE>
PLAN OF DISTRIBUTION
Based on existing SEC staff interpretations, we believe that
the registration and prospectus delivery requirements of the
Securities Act will not apply to holders of exchange notes issued in
this exchange offer who offer those notes for resale, resell, or
otherwise transfer them. This exemption only applies, however, if the
holder:
(1) acquired the exchange notes in the ordinary course of
its business, and
(2) is not participating in, and does not intend to
participate in, a distribution of the exchange notes, either alone
or in cooperation with another.
Each holder of outstanding notes who wishes to participate
in the exchange offer must make certain representations to us
concerning its status and intent. These representations are described
in "The exchange offer -- Terms and Conditions of the Letter of
Transmittal."
If you tender outstanding notes in the exchange offer with
the intent or for the purpose of participating in a distribution of
the exchange notes, you cannot rely on the staff interpretations and
must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with a secondary resale
transaction. Unless an exemption from registration is available, the
resale transaction should be covered by an effective registration
statement containing the selling security holders information required
by Item 507 of Regulation S-K under the Securities Act.
The registration and prospectus delivery requirements also
continue to apply to holders that are:
(1) our "affiliate(s)" within the meaning of Rule 405 under
the Securities Act,
(2) broker-dealers who acquire exchange notes directly from
us, or
(3) broker-dealers who acquire exchange notes as a result
of market-making or other trading activities.
Broker-dealers who receive exchange notes for their own
account in exchange for outstanding notes that they acquired through
market-making activities or other trading activities are subject to
the prospectus delivery requirement. These broker-dealers must
acknowledge in the letter of transmittal that they will deliver a
prospectus in connection with any resales of exchange notes. To date,
the SEC staff has allowed these broker-dealers to use the prospectus
contained in the exchange offer registration statement to fulfill the
prospectus delivery requirement with respect to exchange transactions
like this offer. This rule does not apply to resales of unsold
allotments from the initial sale of the outstanding notes.
We have agreed to permit broker-dealers and any other person
subject to similar prospectus delivery requirements to use this
Prospectus in connection with the resale of exchange notes. For a
period of 180 days after the exchange offer expires, we will make this
Prospectus, as amended or supplemented, available to any broker-dealer
that so requests in its letter of transmittal. Except as expressly
authorized by us, no person may use this Prospectus in connection with
any offer to resell, resale or other retransfer of exchange notes.
Broker-dealers may resell exchange notes directly to
purchasers or through other broker-dealers, to whom they may pay
commissions or concessions in connection with the resale. Any broker-<PAGE>
dealer that resells exchange notes received for its own account or
that participates in a distribution of exchange notes may be deemed an
"underwriter" under the Securities Act. Any profit on exchange note
resales, including any commissions or concessions received by such
broker-dealers, may be deemed underwriting compensation under the
Securities Act. The letter of transmittal states that by acknowledging
the prospectus delivery requirement and delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter"
within the meaning of the Securities Act.
We will not receive any proceeds from any sale of exchange
notes by broker-dealers. Broker-dealers who receive exchange notes for
their own account in the exchange offer may sell them from time to
time:
123<PAGE>
* in the over-the-counter market,
* in negotiated transactions,
* by writing options on the exchange notes, or
* by a combination of these methods.
The prices received by broker-dealers in resale transactions may
be:
* the market price prevailing at the time of resale,
* prices related to the prevailing market price, or
* negotiated prices.
Certain persons participating in the exchange offer may
engage in transactions that stabilize, maintain, or otherwise affect
the price of the exchange notes. This may include short sales of the
notes. In a short sale, a person agrees to sell more exchange notes
than we issue to them in the exchange offer. The short seller "covers"
its short position by buying additional notes in the open market. In
addition, these persons may stabilize or maintain the price of the
exchange notes by bidding for or purchasing exchange notes in the open
market or by imposing penalty bids. In a penalty bid, the selling
concessions allowed to dealers participating in the offering may be
reclaimed if exchange notes sold by them are repurchased in
stabilization transactions. The effect of these transactions may be to
stabilize or maintain the market price of the exchange notes at a
level above that which might otherwise prevail in the open market.
These transactions may be discontinued at any time.
We have agreed to pay all expenses of the exchange offer,
other than commissions and concessions of any brokers or dealers. We
will indemnify holders of outstanding notes, including broker-dealers,
against certain liabilities, including liabilities under the
Securities Act. Our agreements on these issues are part of the
Registration Rights Agreement we signed in connection with our
original issuance of the outstanding notes.
LEGAL MATTERS
Certain legal matters regarding validity of the exchange notes
offered hereby will be passed upon for the Company by Kilpatrick
Stockton LLP, Atlanta, Georgia.
INDEPENDENT ACCOUNTANTS
The consolidated financial statements of Vista Eyecare, Inc.. as
of December 28, 1996 and January 3, 1998 and for each of the three
years in the period ended January 3, 1998 included in this Prospectus
have been audited by Arthur Andersen LLP, independent auditors, as
stated in their report included herein.
The consolidated financial statements of Frame-n-Lens Optical,
Inc. as of December 29, 1996 and December 28, 1997 and for each of the
three years in the period ended December 28, 1997 included in this
Prospectus have been audited by Ernst & Young LLP, independent
auditors, as stated in their report included herein.
The consolidated financial statements of New West Eyeworks, Inc.
as of December 28, 1996 and December 27, 1997 and for each of the
three years in the period ended December 27, 1997 included in this
Prospectus have been audited by PricewaterhouseCoopers, LLP independent
auditors, as stated in their report included herein.
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Exchange Act, and in accordance therewith files reports, proxy statements
and other information with the Commission. Such reports, proxy statements,
and other information may be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the following Regional Offices of the Commission:
New York Regional Office, Seven World Trade Center, New York, New York
10048, and Chicago Regional Office, 500 West Madison Street, Chicago,
124<PAGE>
Illinois 60661. Copies of such material may be obtained from the
Public Reference Section of the Commission, Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 upon payment of
the prescribed fees. The Commission also maintains a web site that
contains reports, proxy and information statements and other materials
that are filed through the Commission's Electronic Data Gathering,
Analysis, and Retrieval system. This web site can be accessed at
http//www.sec.gov.
The Company has agreed that, whether or not it is required to do
so by the rules and regulations of the Commission, so long as any
notes are outstanding, it will furnish to the holders of the notes and
file with the Commission (unless the Commission will not accept such a
filing) (i) all quarterly and annual financial information that would
be required to be contained in a filing with the Commission on Forms
10-Q and 10-K if the Company were required to file such forms,
including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" that describes the financial
condition and results of operations of the Company and its
consolidated subsidiaries and, with respect to the annual information
only, a report thereon by the Company's certified public accountants
and (ii) all current reports that would be required to be filed with
the Commission on Form 8-K if the Company were required to file such
reports, in each case within the time periods specified in the
Commission's rules and regulations. In addition, for so long as any
of the notes remains outstanding, the Company has agreed to make
available to any prospective purchaser of notes or beneficial owner of
the notes in connection with any sale thereof the information required
by Rule 144A(d) (4) of the Securities Act.
125<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission
pursuant to the Exchange Act, are incorporated in this Prospectus by
reference as of their respective dates:
(1) Annual Report on Form 10-K for the fiscal year ended
January 2, 1998;
(2) Quarterly Report on Form 10-Q for the three months ended
April 4, 1998;
(3) Quarterly Report on Form 10-Q for the three months ended
July 4, 1998;
(4) Quarterly Report on Form 10-Q for the three months ended
October 3,1998;
(5) Current Report on Form 8-K for August 12,1998;
(6) Current Report on Form 8-K for October 23, 1998;
(7) Current Report on Form 8-K for November 9, 1998
(8) Current Report on Form 8-K for December 31, 1998; and
(9) Current Report on Form 8-K/A for January 6, 1999.
All documents filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the date which is 180 days after the
Termination of the exchange offer shall be deemed to be incorporated
by reference in this Prospectus and to be a part hereof from the date
of filing of such documents.
Any statement incorporated herein shall be deemed to be modified
or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document
which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or
superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company will provide without charge to each recipient of this
Prospectus, upon written request, a copy of any or all of the
documents incorporated herein by reference (other than exhibits to
such documents unless such exhibits are specifically incorporated by
reference into the document that this Prospectus incorporates by
reference). Requests should be directed to Investor Relations,
Vista Eyecare, Inc., 296 Grayson Highway, Lawrenceville,
Georgia 30045, telephone (770) 822-3600.
126
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
<S> <C>
VISTA EYECARE, INC. CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public Accountants ............................................................ F-2
Consolidated Balance Sheets as of December 28, 1996 and January 3, 1998 and October 3,
1998 (unaudited) ................................................................................. F-3
Consolidated Statements of Operations for the Years Ended December 30, 1995,
December 28, 1996 and January 3, 1998, and the Nine Months Ended September 27, 1997 and
October 3, 1998 (unaudited) ..................................................................... F-4
Consolidated Statements of Shareholders' Equity for the Years Ended December 30,
1995, December 28, 1996 and January 3, 1998, and the Nine Months Ended October 3,
1998 (unaudited) ................................................................................ F-5
Consolidated Statements of Cash Flows for the Years Ended December 30, 1995,
December 28, 1996 and January 3, 1998, and the Nine Months Ended September 27, 1997 and
October 3, 1998 (unaudited) .................................................................... F-6
Notes to Consolidated Financial Statements ........................................................ F-7
FRAME-N-LENS OPTICAL, INC. CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Auditors .................................................................... F-21
Consolidated Balance Sheets as of December 29, 1996 and December 28, 1997 and
June 28, 1998 (unaudited) ....................................................................... F-22
Consolidated Statements of Operations for the Years Ended December 31, 1995,
December 29, 1996, and December 28, 1997, and the Six Months Ended June 29, 1997
and June 28, 1998 (unaudited) .................................................................. F-23
Consolidated Statements of Shareholders' Equity for the Years Ended December 31,
1995, December 29, 1996, and December 28, 1997, and the Six Months Ended June 28,
1998 (unaudited) ................................................................................ F-24
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995,
December 29, 1996 and December 28, 1997, and the Six Months Ended June 29, 1997
and June 28, 1998 (unaudited) ................................................................... F-25
Notes to Consolidated Financial Statements ......................................................... F-26
NEW WEST EYEWORKS, INC. CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Accountants .................................................................. F-32
Consolidated Balance Sheet as of December 28, 1996 and December 27, 1997 and
September 26, 1998 (unaudited) .................................................................. F-33
Consolidated Statement of Operations for the Years Ended December 30, 1995,
December 28, 1996 and December 27, 1997, and the Nine Months Ended September 27,
1997 and September 26, 1998 (unaudited) ........................................................ F-34
Consolidated Statement of Stockholders' Equity for the Years Ended December 30,
1995, December 28, 1996 and December 27, 1997, and the Nine Months Ended September 26,
1998 (unaudited) ................................................................................ F-35
Consolidated Statement of Cash Flows for the Years Ended December 30, 1995,
December 28, 1996 and December 27, 1997, and the Nine Months Ended September 27,
1997 and September 26, 1998 (unaudited).......................................................... F-36
Notes to Consolidated Financial Statements ........................................................ F-37
(/TABLE>
F-1<PAGE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of National Vision
Associates, Ltd. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of
NATIONAL VISION ASSOCIATES, LTD. (a Georgia corporation) AND
SUBSIDIARIES as of December 28, 1996 and January 3, 1998 and the
related consolidated statements of operations, shareholders' equity,
and cash flows for each of the three years in the period ended January 3,
1998. These financial statements and the schedule referred to below
are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule
based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of
National Vision Associates, Ltd. and subsidiaries as of December 28,
1996 and January 3, 1998 and the results of their operations and their
cash flows for each of the three years in the period ended January 3,
1998 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 17, 1998
F-2
<PAGE>
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
NATIONAL VISION ASSOCIATES, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(000's except share information)
December 28, January 3, October 3,
1996 1998 1998
----------- ---------- -----------
(unaudited)
<S> <S> <S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents .......................... $ 1,110 $ 2,559 $ 2,408
Accounts receivable (net of allowance:
1996 - $353; 1997 - $762) ....................... 4,164 6,066 8,583
Inventories ........................................ 23,970 23,271 28,248
Store preopening costs (net of accumulated
amortization: 1996 - $605; 1997 - $712;
1998 - $912) .................................... 240 295
Other current assets ............................... 944 464 2,347
-------- -------- ---------
Total current assets ....................... 30,428 32,655 41,586
-------- -------- ---------
Property and equipment:
Equipment .......................................... 38,573 44,070 52,291
Furniture and fixtures.............................. 17,136 20,366 23,168
Leasehold improvements.............................. 13,178 15,005 16,500
Construction in progress............................ 1,669 893 2,032
-------- -------- ---------
70,556 80,334 93,991
Less accumulated depreciation....................... (27,206) (36,692) (45,800)
-------- -------- ---------
Net property and equipment ......................... 43,350 43,642 48,191
-------- -------- ---------
Other assets and deferred costs (net of accumulated
amortization:
1996 - $729; 1997 - $846; 1998 - $954)........... 786 1,015 6,032
Assignment agreement and intangible assets (net of
accumulated amortization: 1997 - $733;
1998 - $1,172)...................................... 5,938 41,756
-------- -------- ---------
$ 74,564 $ 83,250 $ 137,565
======== ======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................... $ 8,283 $ 7,252 $ 11,624
Accrued expenses and other current liabilities...... 8,643 12,754 17,354
Current portion long-term debt...................... 478 892
-------- -------- ---------
Total current liabilities................... 16,926 20,484 29,870
-------- -------- ---------
Revolving credit facility - long term ................ 26,500 19,500 52,000
Long-term notes payable, less current portion......... 4,225 6,687
Deferred income tax liabilities ...................... 1,232 2,673 2,595
Commitments and contingencies (Note 8)
Shareholders' Equity:
Preferred stock, $1 par value; 5,000,000 shares
authorized, none issued..........................
Common stock, $.01 par value; 100,000,000 shares
authorized, 20,644,752, 20,819,955, and 21,157,612
shares issued and outstanding as of December 28,
1996, January 3, 1998 and October 3, 1998,
respectively ..................................... 206 208 212
Additional paid-in capital .......................... 42,166 43,053 46,634
Retained deficit..................................... (8,393) (2,820) 3,640
Cumulative foreign currency translation.............. (4,073) (4,073) (4,073)
-------- -------- ---------
Total shareholders' equity................... 29,906 36,368 46,413
-------- -------- ---------
$ 74,564 $ 83,250 $ 137,565
======== ======== =========
(/TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
<PAGE>
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
NATIONAL VISION ASSOCIATES, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(000's except per share information)
Nine Months Ended
---------------------------
December 30, December 28, January 3, September 27, October 3,
1995 1996 1998 1997 1998
------------ ----------- ---------- -------------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net sales .......................... $ 145,573 $ 160,376 $ 186,354 $ 134,736 $ 173,099
Cost of goods sold.................. 67,966 76,692 86,363 61,723 79,112
---------- ---------- ---------- --------- ---------
Gross profit...................... 77,607 83,684 99,991 73,013 93,987
Selling, general, and
administrative expenses........... 74,390 76,920 89,156 63,323 81,838
Provision for disposition of
assets ........................... 958
Other nonrecurring charges ......... 1,053
---------- ---------- ---------- --------- ---------
Operating income ................... 1,206 6,764 10,835 9,690 12,149
---------- ---------- ---------- --------- ---------
Other expense, net ................. 2,626 2,084 1,554 1,193 1,248
---------- ---------- ---------- --------- ---------
Income (loss) before income
taxes ............................ (1,420) 4,680 9,281 8,497 10,901
Provision for income taxes.......... 100 1,200 3,708 3,365 4,454
---------- ---------- ---------- --------- ---------
Net income (loss)................. $ (1,520) $ 3,480 $ 5,573 $ 5,132 $ 6,447
========== ========== ========== ========= =========
Basic earnings (loss) per common
share ......................... $ (.07) $ .17 $ .27 $ .25 $ .31
========== ========== ========== ========= =========
Diluted earnings (loss) per
common share ................. $ (.07) $ .17 $ .27 $ .25 $ .30
========== ========== ========== ========= =========
(/TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE>
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
NATIONAL VISION ASSOCIATES, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(000's except share information)
Common Stock Additional Retained Cumulative
------------------- Paid-In Earnings Translation
Shares Amount Capital (Deficit) Adjustments Total
------ ------ ---------- --------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994 ....................... 20,510,402 $ 205 $42,133 $(10,353) $(2,372) $29,613
Exercise of stock options 76,103 1 14 15
Foreign currency
translation................. (1,782) (1,782)
Net loss...................... (1,520) (1,520)
---------- ------ ------- -------- -------- -------
Balance, December 30,
1995........................ 20,586,505 206 42,147 (11,873) (4,154) 26,326
Exercise of stock options..... 58,247 19 19
Foreign currency
translation ................ 81 81
Net income.................... 3,480 3,480
---------- ------ ------- -------- -------- -------
Balance, December 28,
1996........................ 20,644,752 206 42,166 (8,393) (4,073) 29,906
Issuance of common stock...... 110,795 1 835 836
Restricted stock.............. 54,000 1 35 36
Exercise of stock options..... 10,408 17 17
Net income.................... 5,573 5,573
---------- ------ ------- -------- -------- -------
Balance, January 3,
1998........................ 20,819,955 208 43,053 (2,820) (4,073) 36,368
---------- ------ ------- -------- -------- -------
Restricted stock ............. 52,000 1 74 75
Exercise of stock options..... 285,657 3 212 215
Tax settlement ............... 3,295 3,295
Net income ................... 6,447 6,447
Other ........................ 13 13
---------- ------ ------- -------- -------- -------
Balance, October 3, 1998
(unaudited)................. 21,157,612 $ 212 $46,634 $ 3,640 $ (4,073) $46,413
========== ===== ======= ======== ======== =======
(/TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
<PAGE>
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
NATIONAL VISION ASSOCIATES, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's)
Nine Months Ended
----------------------------
December 30, December 28, January 3, September 27, October 3,
1995 1996 1998 1997 1998
------------ ------------ ---------- ------------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) ...................... $ (1,520) $ 3,480 $ 5,573 $ 5,132 $ 6,447
-------- --------- -------- --------- ---------
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Provision for disposition of
assets............................. 958
Provision for other nonrecurring
charges ........................... 1,053
Depreciation and amortization 10,378 10,058 11,035 7,876 9,227
Provision for Deferred Income Tax
Expense ........................... 1,002 1,441 1,218 3,710
Other ................................ 29 91 268 (610) (400)
Changes in operating assets and
liabilities, net of effects of
acquisitions:
Receivables........................... (701) 2,224 (875) (2,056) (2,142)
Inventories .......................... (2,467) (2,594) 2,031 1,063 836
Store preopening costs ............... (1,288) (657) (643)
Other current assets ................. (34) 67 612 285 (1,267)
Accounts payable, accrued
expenses, and other current
liabilities........................ (88) 725 1,245 3,675 (6,002)
-------- --------- -------- --------- ---------
Total adjustments................ 7,840 10,916 15,114 11,451 3,962
-------- --------- -------- --------- ---------
Net cash provided by
operating activities........... 6,320 14,396 20,687 16,583 10,409
-------- --------- -------- --------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and
equipment ............................ (13,175) (2,713) (8,049) (6,029) (7,198)
Acquisition, net of cash acquired....... (1,772) (30,429)
Payment for non-competition
agreement ............................ (484) (484)
Purchase of Assignment Agreement (500) (500)
-------- --------- -------- --------- ---------
Net cash used in investing
activities..................... (13,175) (2,713) (10,805) (7,013) (37,627)
-------- --------- -------- --------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Advances on revolving credit
facility .............................. 12,000 1,500 5,500 1,500 38,500
Repayments on revolving credit
facility .............................. (4,000) (13,000) (12,500) (10,000) (6,000)
<PAGE>
Repayments of notes payable and
capital leases ........................ (471) (480) (1,450) (862)
Debt issue costs ........................ (4,861)
Proceeds from issuance of common
stock ................................. 15 19 17 38 290
-------- --------- -------- --------- ---------
Net cash provided by (used
in) financing activities........ 7,544 (11,961) (8,433) (8,462) 27,067
-------- --------- -------- --------- ---------
Effect of foreign currency exchange
rate changes . . . . . . . . (1,782) 81
-------- --------- -------- --------- ---------
Net increase (decrease) in cash (1,093) (197) 1,449 1,108 (151)
Cash, beginning of year . . . . 2,400 1,307 1,110 1,110 2,559
-------- --------- -------- --------- ---------
Cash, end of year . . . . . . . $ 1,307 $ 1,110 $ 2,559 $ 2,218 $ 2,408
======== ========= ======== ======== =========
(/TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
<PAGE>
<PAGE>
NATIONAL VISION ASSOCIATES, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS
National Vision Associates, Ltd. (the "Company") is engaged in the
retail sale of optical goods and services, primarily in the United
States and Mexico. The Company is largely dependent on Wal-Mart
Stores, Inc. ("Wal-Mart") for continued operation of current vision
centers (see Note 3). In October 1997, the Company acquired all the
capital stock of Midwest Vision, Inc., a retail optical company with
51 locations in Minnesota and three adjoining states (see Note 4).
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial
statements include the accounts of the Company and its subsidiaries.
All significant intercompany balances and transactions have been
eliminated in consolidation. Effective January 1, 1995, the Company
changed its year end to a 52/53 week retail calendar with the fiscal
year ending on the Saturday closest to December 31. Pursuant to such
calendar, financial information for each of 1995 and 1996 is presented
for the 52-week period ended December 30 and December 28,
respectively. Fiscal 1997 consisted of 53 weeks ended January 3, 1998.
Due to various statutory and other considerations, international
operations were not changed to this 52/53 week calendar. To allow for
more timely consolidation and reporting, international operations are
reported using a fiscal year ending November 30. Certain amounts in
the December 28, 1996 and December 30, 1995 consolidated financial
statements have been reclassified to conform to the January 3, 1998
presentation.
REVENUE RECOGNITION: The Company recognizes revenues and the
related costs from retail sales when at least 50% of the payment has
been received.
CASH AND CASH EQUIVALENTS: The Company considers cash on hand,
short-term cash investments, and checks that have not been processed
by financial institutions to be cash and cash equivalents. The
aggregate amount of outstanding checks not processed at January 3,
1998 was $381,000 (at December 28, 1996 - $440,000). The Company's
policy is to maintain uninvested cash at minimal levels. Cash includes
cash equivalents which represent highly liquid investments with a
maturity of one month or less. The carrying amount approximates fair
value. The Company restricts investment of temporary cash investments
to financial institutions with high credit standing.
INVENTORIES: Inventories are valued at the lower of weighted
average cost or market. Market represents the net realizable value.
STORE PREOPENING COSTS: Prior to 1998, preopening costs which were
directly associated with the opening of new vision centers have been
capitalized and amortized using the straight-line method over 12
months beginning with the commencement of each vision center's
operations. The average cost capitalized per vision center
approximated $20,000. Effective in 1998, preopening costs will be
expensed as incurred in accordance with proposed AICPA Statement of
Position, "Reporting on the Costs of Start-Up Activities."
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost.
For financial reporting purposes, depreciation is computed using the
straight-line method over the assets' estimated useful lives or terms
of the related leases, whichever is shorter. Accelerated depreciation
methods are used for income tax reporting purposes. For financial<PAGE>
reporting purposes, the useful lives used for computation of
depreciation range from five to ten years for equipment, from three to
nine years for furniture and fixtures, from three to six years for
hardware and software related to information systems processing, and
nine years for leasehold improvements. At the time property and
equipment are retired, the cost and related accumulated depreciation
are removed from the accounts and any gain or loss is credited or
charged to income. Annually, the Company evaluates the net book value
of property and equipment for impairment. The evaluation is performed
for retail locations and compares its best estimate of future cash
flows with the net book value of the property and equipment.
Maintenance and repairs are charged to expense as incurred.
Replacements and improvements are capitalized.
BALANCE SHEET FINANCIAL INSTRUMENTS: Fair Values: The carrying
amount reported in the consolidated balance sheets for cash, accounts
receivable, accounts payable and short-term debt approximates fair
value because of the immediate or short-term maturity of these
financial instruments. The carrying amount reported for "Revolving
Credit Facility -- Long-Term" approximates fair value because the
underlying instrument is a variable rate note that reprices
frequently. The fair value of the Company's fixed interest rate swap
agreements and fixed rate debt is based on estimates using standard
pricing models that take into consideration current interest rate
market conditions supplied by independent financial institutions.
F-7<PAGE>
<PAGE>
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade accounts
receivable. The risk is limited due to the large number of individuals
and entities comprising the Company's customer base.
ASSIGNMENT AGREEMENT AND INTANGIBLE ASSETS: Assignment agreement
and intangible assets represent the excess of the cost of net assets
acquired in certain contract transactions and business combinations
over their fair value. Such amounts are amortized over periods ranging
from 11 years to 15 years. The Company evaluates intangible assets for
impairment annually. In completing this evaluation, the Company
compares its best estimate of future cash flows with the carrying
value of the underlying asset.
INCOME TAXES: Deferred income taxes are recorded using current
enacted tax laws and rates. Deferred income taxes are provided for
depreciation, store preopening costs, organization costs, inventory
basis differences, and accrued expenses where there is a temporary
difference in recording such items for financial reporting and income
tax reporting purposes.
OTHER DEFERRED COSTS: Deferred costs represent capitalized assets
resulting from contractual obligations and are being amortized on a
straight line basis over a period of time not to exceed five years.
ADVERTISING AND PROMOTION EXPENSE: Production costs of future media
advertising and related promotion campaigns are deferred until the
advertising events occur. All other advertising and promotion costs
are expensed when incurred.
OTHER INCOME AND EXPENSE: Other income and expense represents net
financing costs associated with the Company's financing activities,
including interest costs on borrowings under the revolving credit
facility and other notes payable, loan commitment fees and
amortization of interest rate hedge and swap agreements, purchase
discounts on invoice payments, interest income on cash investments and
for fiscal 1997, realized exchange gains or losses resulting from
foreign currency transactions.
FOREIGN CURRENCY TRANSLATION: The financial statements of foreign
subsidiaries are translated into U.S. dollars in accordance with
Statement of Financial Accounting Standards No. 52 ("SFAS No. 52").
Translation adjustments, which result from the process of translating
foreign financial statements into U.S. dollars, are accumulated as a
separate component of shareholders' equity.
The Securities and Exchange Commission has classified Mexico as a
highly inflationary economy under the provisions of SFAS No. 52 for
reporting periods starting in 1997. Effective in 1997, the financial
statements of the Company's Mexico operations are remeasured with the
U.S. dollar as the functional currency. Any gain or loss is recorded
in the Company's statement of operations as other income and expense.
USE OF ESTIMATES: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
DERIVATIVES USED IN RISK MANAGEMENT ACTIVITIES: As part of its risk
management activities, the Company uses interest rate swaps to modify
the variable interest rate characteristics of long-term debt on the
revolving credit facility. The Company holds no other derivatives or<PAGE>
similar instruments. The derivative contracts are designated as hedges
when acquired. They are expected to be effective economic hedges and
have high correlation with the debt being hedged.
Interest rate swaps are accounted for using the accrual method, with
an adjustment to interest expense in the income statement. The Company
accounts for the swap by recording the offset of the swap into the
Company's accounts. The swaps are settled every 90 days. Realized
gains and losses from the early settlement or disposition of swap
contracts are deferred on the balance sheet and amortized to interest
expense over the original term of the swap agreement.
3. WAL-MART MASTER LICENSE AGREEMENT AND OTHER AGREEMENTS
WAL-MART AGREEMENT: In 1994, the Company and Wal-Mart replaced
their original agreement with a new master license agreement (the
"Wal-Mart Agreement"), which increased minimum and percentage license
fees payable by the Company and also granted the Company the
opportunity to operate up to 400 vision centers in existing and future
Wal-Mart stores (357 vision centers were in operation at fiscal year
end 1997). In January 1995, the Company made a lump sum payment in
exchange for such opportunity. The payment is being amortized over the
initial term of the vision centers opened subsequent to January 1,
1995. In 1997, the Wal-Mart Agreement was amended to provide that Wal-
Mart must, by April 1, 2000, grant the Company the opportunity to
operate 400 vision centers under the Wal-Mart Agreement, and that,
with one exception, all new vision centers opened after 1997 will be
F-8<PAGE>
<PAGE>
located in California and North Carolina. Each vision center covered
by the Wal-Mart Agreement has a separate license. Pursuant to the Wal-
Mart Agreement, the term of each such license is nine years with a
renewable option for one additional three-year term. Percentage
license fees remain the same over the nine-year base term and three-
year option term, whereas minimum license fees increase during the
three-year option term.
CONSULTING AND MANAGEMENT AGREEMENT: Among other things, the Wal-
Mart Agreement requires an independent, licensed optometrist to
practice adjacent to or near each of the Company's vision centers for
at least 48 hours per week. In 1990, the Company entered into a long-
term consulting and management service agreement, as amended, with two
companies (Eyecare Leasing, Inc. ("ELI") and Stewart-Phillips, Inc.
("SPI")) jointly owned by two shareholders to recruit such
optometrists for certain of its vision centers. Subject to applicable
state regulations, this agreement, among other things, required the
Company to provide space and certain equipment to the optometrists for
which the optometrists pay the Company an occupancy fee. In exchange
for their services, ELI and SPI received certain fees under the
agreement. Net of the fees paid to ELI and SPI, the Company received
$2.5 million and $2.9 million pursuant to this agreement during 1995
and 1996, respectively. The net payments offset occupancy expense
incurred by the Company. Occupancy expense is a component of cost of
goods sold.
In January 1997, the Company completed various transactions related
to its relationship with each of ELI and SPI. The transactions
involved the termination of such consulting agreement and transfer of
the responsibilities of ELI and SPI to a subsidiary of the Company. As
a result of these transactions, the Company acquired the right to the
payments which otherwise would have been made to ELI and SPI under the
consulting agreement. In 1997, the Company received occupancy fees of
$4.0 million, which included $1.4 million which would have been paid
to ELI and SPI if the consulting agreement had been in effect during
1997. The aggregate cost of the transactions was $4.6 million, which
was capitalized as an intangible asset and is being amortized over the
remaining life of the original term of vision center leases. The
Company made a lump sum payment of $500,000 at closing and entered
into promissory obligations for the balance, payable over a 12-year
period at 6.4% interest.
MEXICO AGREEMENT: In 1994, the Company opened 8 vision centers in
stores owned and operated by Wal-Mart de Mexico, S.A. de C.V. ("Wal-
Mart de Mexico"). In 1995, the Company completed the negotiation of a
master license agreement governing these vision centers. Pursuant to
this agreement, each vision center has an individual base term of five
years from the date of opening, followed by two options (each for two
years), and one option for one year. Each party has the right to
terminate a location which fails to meet specified sales levels. The
agreement provides for annual fees based on a minimum and percentage
of sales. The agreement also gives the Company a right of first
refusal to open vision centers in all stores in Mexico owned by Wal-
Mart de Mexico. As of January 3, 1998, the Company operated 26 vision
centers in Wal-Mart de Mexico stores.
4. ACQUISITION
In October 1997, the Company acquired the common stock of Midwest
Vision, Inc., a retail optical company which operated 51 vision
centers in Minnesota, Wisconsin, Iowa, and North Dakota. Unaudited
annual sales for Midwest Vision approximated $14.4 million for the
calendar year 1997. The purchase price was approximately $3.3 million,
excluding direct acquisition costs plus $1.4 million of assumed long-term
debt.<PAGE>
The acquisition was accounted for by the purchase method of
accounting and, accordingly, the purchase price was allocated to the
assets acquired and the liabilities assumed based on the estimated
fair values at the date of acquisition. The excess of purchase price
over the estimated fair values of the net assets acquired was recorded
as an intangible asset (goodwill), which is being amortized on a
straight-line basis over 15 years for financial reporting. Subsequent
to the close date, the Company paid off the outstanding long-term debt
of Midwest Vision.
The estimated fair values of assets and liabilities acquired are
summarized as follows (in 000's):
Cash . . . . . . . . . . . . . . . . . . . . . . . $ 327
Inventory . . . . . . . . . . . . . . . . . . . . . 1,332
Accounts receivable and other assets . . . . . . . 1,398
Property and equipment . . . . . . . . . . . . . . 1,729
Excess of cost over net assets acquired . . . . . . 2,068
Accounts payable and accrued expenses . . . . . . . (1,867)
Debt . . . . . . . . . . . . . . . . . . . . . . . (1,433)
---------
Net Purchase Price . . . . . . . . . . . $ 3,554
=========
The purchase price was paid in cash of $1.9 million, a debt
instrument (in the principal amount of $620,000 payable over five
years), and 110,795 shares of the Company's common stock.
Additionally, the Company made cash payments of $239,000 related to
investment advisory fees and other costs directly associated with the
acquisition. In connection with 100,000 shares of the common stock,
the Company also issued a put option to the seller, entitling the
seller to put such shares to the Company at $7.00 per share in January
1999 or, if such shares are not then put back to the Company, at $9.00
F-9<PAGE>
<PAGE>
per share in January 2000. If the seller exercises the put option, the
Company will settle the transaction by issuing additional shares to
the seller such that the aggregate fair market value of the shares
equals the aggregate guarantee value. The guarantee has been recorded
at a fair market value. In conjunction with the transaction, the
Company entered into an employment agreement with the seller which
requires the performance of certain duties and contains certain
noncompete provisions.
The operating results of Midwest Vision are included in the
Company's consolidated results of operations from the date of
acquisition.
5. INVENTORY
The Company classifies inventory as finished goods if such inventory
is readily available for sale to customers without any assembly or
value added processing to satisfy a customer's order. Finished goods
include contact lens, over the counter sunglasses and accessories. The
Company classifies inventory as raw material if such inventory
requires assembly or value added processing to satisfy a customer's
order. This would include grinding a lens blank, "cutting" the lens in
accordance with a prescription from an optometrist, and fitting the
lens in a frame. Frames and uncut lens are considered raw material. A
majority of the Company's sales represent custom orders; consequently,
the majority of the Company's inventory is classified as raw material.
Inventory balances, by classification, may be summarized as follows
(in 000's):
1996 1997 1998
-------- ------- ---------
Raw material . . . . . . . . . . . $ 15,199 $15,646 $ 22,687
Finished goods . . . . . . . . . . 8,279 7,003 4,518
Supplies . . . . . . . . . . . . . 492 622 1,043
-------- ------- ---------
$ 23,970 $23,271 $ 28,248
======== ======= =========
6. LONG-TERM DEBT
Long-term debt obligations at December 28, 1996 and January 3, 1998
consisted of the following (in 000's):
1996 1997
------- -------
Borrowings under revolving credit facility . . $26,500 $19,500
Other promissory notes . . . . . . . . . . . . 4,703
------- -------
26,500 24,203
Less current portion . . . . . . . . . . . . . 478
------- -------
$26,500 $23,725
======= =======
In July 1997, the Company entered into a syndicated $45 million two-
year unsecured revolving credit facility. The aggregate outstanding
balance is due for repayment in July 1999. The Company's credit
facility contains, among other covenants, a material adverse change
clause and certain minimum net worth and other requirements.
Commitment fees payable on the average daily balance of the unused
portion of the credit facility were .25% per annum in 1997. The
Company paid approximately $150,704 and $125,611 in various fees
related to the revolving credit facility in 1996 and 1997,
respectively. Interest on the outstanding advances is based on certain<PAGE>
financial covenants and applicable interest rates for Eurodollar or
base loan borrowings, as defined in the agreement.
As of January 3, 1998, the Company had borrowed $19.5 million under
its credit facility at a weighted average interest rate of 6.9%. The
aggregate fair value of the Company's long-term debt obligation under
the credit facility is estimated to approximate its carrying value.
The Company has entered into rate swap agreements which effectively
convert underlying variable rate debt based on Eurodollar rates to
fixed rate debt. The agreements extend through February 20, 2000. The
notional principal amount on one agreement is $20 million, with an
effective fixed rate of 6.93%, which will expire on February 20, 1998.
At that date, two separate agreements will commence with an aggregate
notional principal amount of $10 million and an effective fixed rate
which averages 7.52%. The fair market value of the fixed rate hedges
approximates book value. Under existing accounting standards, this
activity is accounted for as a hedging activity. The swaps are settled
every 90 days.
The Company entered into unsecured promissory notes relative to
various transactions completed with ELI and SPI (see Note 3) and the
Midwest Vision acquisition (see Note 4). The notes are fixed rate
instruments, with rates ranging from 6.4% to 8.5%. The promissory
notes with ELI and SPI require quarterly payments through January 2009
whereas the Midwest Vision note requires monthly payments through
October 2002. Based on current market rates at January 3, 1998, the
fair market value of the promissory notes is approximately $80,000
F-10<PAGE>
<PAGE>
less than book value. At January 3, 1998, future minimum principal
payments on the promissory notes were as follows (in 000's):
1998 . . . . . . . . . . . . . . . . . . . $ 478
1999 . . . . . . . . . . . . . . . . . . . 487
2000 . . . . . . . . . . . . . . . . . . . 498
2001 . . . . . . . . . . . . . . . . . . . 509
2002 . . . . . . . . . . . . . . . . . . . 495
Thereafter . . . . . . . . . . . . . . . . 2,236
------
$4,703
======
The Company maintains an unsecured line of credit agreement with a
financial institution which, at the discretion of the lender, allows
the Company to borrow up to $5 million. The agreement is available to
fund financing needs on a short-term basis at a variable interest
rate, determined by the lender. As of year-end, there were no
borrowings outstanding under the agreement.
7. RELATED-PARTY TRANSACTIONS
In 1991, a receivable from the Company was assigned to a lease
finance company which is owned by a shareholder/director of the
Company. The Company made lease payments (including principal and
interest) of $417,000 and $341,000 to this lease finance company in
1995 and 1996, respectively. Such lease was paid in full as of
September, 1996.
During 1995, 1996, and 1997, the Company purchased its business and
casualty insurance policies through an insurance agency in which a
shareholder/director has a substantial ownership interest. Total
premiums paid for policies acquired through the insurance company
during 1995, 1996, and 1997 were approximately $910,000, $844,000, and
$904,732, respectively. The Audit Committee of the Company's Board of
Directors has approved such purchases.
In 1996, Edward G. Weiner, the Company's then Vice Chairman, was
employed at an annual salary of $165,000 pursuant to an employment
agreement with the Company with a term ending March 1, 2000. In
connection with Mr. Weiner's resignation from the Board of Directors
in February 1997, the employment agreement was terminated, and the
Company (in exchange for a non-competition agreement through March
2000) paid Mr. Weiner an amount equal to a discounted present value of
the payments which would have been made under the employment
agreement. The payment amount was capitalized as other deferred costs
and will be amortized over the term of the non-compete agreement.
8. COMMITMENTS AND CONTINGENCIES
NONCANCELABLE OPERATING LEASE AND LICENSE AGREEMENTS: As of
January 3, 1998, the Company is a lessee under noncancelable operating
lease agreements for certain equipment which expire at various dates
through 1998. Additionally, the Company is required to pay minimum
and percentage license fees pursuant to certain commercial leases and
pursuant to its agreements with its host department store companies.
Effective December 20, 1991, the Company entered into a lease
agreement with Wal-Mart for approximately 66,000 square feet of
corporate office space. The term of the lease is ten years with a
renewal option of seven years. The Company paid Wal-Mart approximately
$215,000 annually in rental fees in 1995, 1996, and 1997.
Effective July 1995, the Company entered into an operating lease for
a computer equipment upgrade that provides processing for the newly<PAGE>
installed management information and financial systems. The term of
the lease is three years. Lease expense is approximately $8,000
monthly.
Effective the first quarter 1996, the Company entered into operating
leases for 34 vehicles. The terms of the leases are cancelable by the
Company at any time, but the Company expects to retain the leases for
the three-year term. Lease expense is approximately $13,800 monthly.
Under the lease for its Los Angeles laboratory, the Company paid
$102,000, $101,000, and $87,000 in rental fees in 1995, 1996, and
1997, respectively. In December 1997, the Company entered into a new
five-year lease for a successor facility in the Los Angeles area.
Lease expense is approximately $5,528 monthly.
In connection with its acquisition of Midwest Vision, Inc. (see
Note 4), the Company entered into a ten-year lease for administrative
headquarters and an optical laboratory located in St. Cloud,
Minnesota. The facility is leased from the former owner of Midwest
Vision. Lease expense on the headquarters and laboratory is
approximately $6,667 monthly which, in the opinion of management,
F-11<PAGE>
<PAGE>
represents a fair market lease rate. Additionally, the Company assumed
operating lease agreements in connection with 51 freestanding
locations obtained from the acquisition. Lease expense on such leases
is approximately $64,000 monthly.
Aggregate future minimum payments under the license and lease
arrangements are as follows (in 000's):
1998 . . . . . . . . . . . . . . . . . . . $ 19,529
1999 . . . . . . . . . . . . . . . . . . . 19,296
2000 . . . . . . . . . . . . . . . . . . . 17,553
2001 . . . . . . . . . . . . . . . . . . . 14,592
2002 . . . . . . . . . . . . . . . . . . . 11,110
Thereafter . . . . . . . . . . . . . . . . 18,237
--------
$100,317
========
Total expenses recognized under these license and lease arrangements
were approximately $17.0 million, $19.9 million, and $22.8 million for
the years ended December 30, 1995, December 28, 1996, and January 3,
1998, respectively.
GITANO AND GUY LAROCHE TRADEMARK LICENSES: The Company has separate
license agreements with Gitano, Inc. and Guy Laroche of North America,
Inc., giving the Company the right to use the trademarks "Gitano" and
"Guy Laroche", respectively, in its vision centers in North America.
Each agreement requires the Company to pay minimum and percentage
royalties on retail and wholesale sales.
Pursuant to its terms, the Gitano agreement expired on June 30,
1997. The agreement has, however, continued to be performed by the
parties. The Guy Laroche agreement, as amended, expires on December 31,
2001. Under the Gitano agreement, the Company paid $113,000, $111,000,
and $121,000 in fees during 1995, 1996, and 1997, respectively.
Under the Guy Laroche agreement, the Company paid $150,000, $238,000,
and $176,000 in fees during 1995, 1996, and 1997, respectively.
CHANGE IN CONTROL AND OTHER ARRANGEMENTS: There are agreements
between the Company and seven of its executive officers which provide
severance benefits in the event of termination of employment under
certain circumstances following a change in control of the Company (as
defined). The circumstances are termination by the Company other than
because of death or disability commencing prior to a threatened change
in control (as defined), or for cause (as defined), or by the officer
as the result of a voluntary termination (as defined). Following any
such termination, in addition to compensation and benefits already
earned, the officer will be entitled to receive a lump sum severance
payment equal to up to three times the officer's annual rate of base
salary. The term of each agreement is for a rolling three-years unless
the Company gives notice that it does not wish to extend such term, in
which case the term of the agreement would expire three years from the
date of the notice.
One executive officer is employed pursuant to an employment
agreement which provides for an annual salary and certain other
benefits. Such agreement further provides that the Company may at any
time terminate the executive's employment upon six months notice or
upon no notice if such termination is for cause, as defined.
9. INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounts Standards (SFAS) No. 109 "Accounting for Income Taxes," which
requires the use of the liability method of accounting for deferred<PAGE>
income taxes. The components of the net deferred tax
assets/(liabilities) are as follows (in 000's):
</TABLE>
<TABLE>
<CAPTION>
As of December 28, As of January 3,
1996 1998
------------------ ----------------
<S> <C> <C>
Total deferred tax (liabilities)......... $(9,484) $(9,005)
Total deferred tax assets.......... 10,658 8,738
Valuation allowance...................... (2,406) (2,406)
------- -------
Net deferred tax (liabilities)........... $(1,232) $(2,673)
(/TABLE>
F-12<PAGE>
<PAGE>
The sources of the difference between the financial accounting and tax
basis of the Company's liabilities and assets which give rise to the
deferred tax liabilities and deferred tax assets and the tax effects of
each are as follows (in 000's):
</TABLE>
<TABLE>
<CAPTION>
As of December 28, As of January 3,
1996 1998
------------------ ----------------
<S> <C> <C>
Deferred tax liabilities:
Depreciation .................................. $ 6,062 $ 5,506
Reserve for foreign losses..................... 3,137 3,137
Store preopening costs......................... 91 99
Other.......................................... 194 263
------- -------
$ 9,484 $ 9,005
======= =======
Deferred tax assets:
Accrued expenses and reserves.................. $ 1,471 $ 1,393
Inventory basis differences.................... 326 145
Net operating loss carryforwards............... 8,650 4,677
Alternative minimum tax........................ 135 2,117
Other.......................................... 76 406
------- -------
$10,658 $ 8,738
======= =======
</TABLE>
The consolidated provision for income taxes consists of the following
(in 000's):
<TABLE>
<CAPTION>
Year Ended
----------------------------------------
December 30, December 28, January 3,
1995 1996 1998
------------ ------------ ---------
<S> <C> <C> <C>
Current:
Federal ................................. $ 50 $ 135 $1,937
State ................................... 50 63 330
----- ------- ------
100 198 2,267
----- ------- ------
Deferred:
Federal ................................. 897 1,296
State ................................... 105 145
----- ------- ------
0 1,002 1,441
----- ------- ------
Total provision for income taxes...... $ 100 $ 1,200 $3,708
===== ======= ======
(/TABLE>
<PAGE>
The tax expense (benefit) differs from the amounts resulting from
multiplying income before income taxes by the statutory federal income
tax rate for the following reasons (in 000's):
</TABLE>
<TABLE>
<CAPTION>
Year Ended
------------------------------------------
December 30, December 28, January 3,
1995 1996 1998
------------ ------------ ----------
<S> <C> <C> <C>
Federal income tax (benefit) at statutory rate.......... $(483) $ 1,591 $3,156
State income taxes, net of federal income tax
benefit .............................................. 50 69 314
Foreign losses not deductible for U.S. federal
tax purposes ........................................... 686 63 65
Valuation allowance for U.S. state and federal
taxes ................................................ (181) (556)
Other .................................................. 28 33 173
----- ------- ------
$ 100 $ 1,200 $3,708
===== ======= ======
</TABLE>
At January 3, 1998, the Company recorded a valuation allowance of
$2.4 million due to the uncertainty regarding the realizability of its
net operating loss carryforwards. A portion of the net operating loss
carryforward deferred tax asset (approximately $3.2 million) relates
to tax benefits (subject to the outcome of the audit discussed below)
from the exercise of stock options granted by the former Chairman of
the Company to two shareholders who own companies which recruited
optometrists for the Company. (See Note 12.) This benefit will be
recorded as an addition to paid-in-capital (and a reduction in the
valuation allowance) when realized.
At January 3, 1998, the Company had U.S. regular tax net operating
loss carryforwards of $12 million (of which $8.3 million relates to
the tax benefits from the exercise of stock options discussed above)
which can reduce future federal income taxes. If not utilized, these
carryforwards will expire beginning in 2007.
As a result of an examination by the Internal Revenue Service
("IRS") of the Company's 1992 tax return, the Company received a
deficiency notice in 1996 from the IRS, challenging the tax benefit
relating to the exercise of stock options referred to above. The
Company has filed a petition in the U.S. Tax Court, contesting the
deficiency notice. The Company does not expect that the outcome of
this proceeding will have a material adverse impact on the financial
statements or conditions of the Company. Subject to the execution of
definitive documents, an agreement to settle this matter was reached
in February 1998. (See Note 15.)
F-13
<PAGE>
<PAGE>
In Mexico, the location of the Company's major foreign operations,
the Company pays the greater of its income tax or an asset tax.
Because the Company has operating losses in Mexico, the Company pays
no income tax, but it is subject to the asset tax. Therefore, no
provision for income taxes has been made on the Company's books for
its operations in Mexico.
10. EARNINGS PER COMMON SHARE
In 1997, the Company adopted SFAS No. 128, "Earnings per Share".
Basic earnings per common share were computed by dividing net income
by the weighted average number of common shares outstanding during the
year. Diluted earnings per common share were computed as basic
earnings per common share, adjusted for outstanding stock options that
are dilutive. The computation for basic and diluted earnings per share
may be summarized as follows (in 000's except per share information):
1995 1996 1997
------- -------- -------
Net income (loss)........................ $(1,520) $ 3,480 $ 5,573
======= ======== =======
Weighted shares outstanding.............. 20,538 20,618 20,676
Basic earnings (loss) per share........ $ (0.07) $ 0 .17 $ 0.27
======= ======== =======
Weighted shares outstanding.............. 20,538 20,618 20,676
Net options issued to employees......... 88 163
------- -------- -------
Aggregate shares outstanding............ 20,538 20,706 20,839
Diluted earnings (loss) per share..... $ (0.07) $ 0.17 $ 0.27
======== ========= ========
Outstanding options with an exercise price below the average price
of the Company's common stock have been included in the computation of
dilutive earnings per common share, using the treasury stock method,
as of the date of the grant. Stock options have been excluded from the
calculation of weighted average shares outstanding during 1995, as the
effect would be antidilutive.
11. SUPPLEMENTAL DISCLOSURE INFORMATION
Supplemental disclosure information is as follows (in 000's):
(i) Supplemental Cash Flow Information
1995 1996 1997
---------- -------- --------
Cash paid for --
Interest . . . . . . . . . . . . . $ 2,750 $ 2,565 $ 1,582
Income taxes . . . . . . . . . . . 244 149 2,383
(ii) Supplemental Noncash Investing and Financial Activities
The acquisition information relates to the ELI and SPI transactions
and the purchase of Midwest Vision, Inc. (see Notes 3 and 4).
1997
--------
Business acquisitions, net of cash acquired
Fair value of assets acquired . . . . . . . . . . . . . . . $ 4,459
Purchase price in excess of net assets acquired . . . . . . 6,671
Liabilities assumed . . . . . . . . . . . . . . . . . . . . (8,022)
Stock issued . . . . . . . . . . . . . . . . . . . . . . . (836)
--------
Net cash paid for acquisitions . . . . . . . . . . $ 2,272
========<PAGE>
(iii) Supplemental Balance Sheet Information
Significant components of accrued expenses and other current
liabilities may be summarized as follows:
1996 1997
------ ------
Accrued employee compensation and benefits . . $2,903 $5,425
Accrued license fees . . . . . . . . . . . . . 1,851 2,349
At January 3, 1998, accrued expenses and other current liabilities
include an increase of $875,000 related to the Midwest Vision
operation.
(iv) Supplemental Income Statement Information
F-14<PAGE>
<PAGE>
The components of other expense, net, may be summarized as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------ ------
<S> <C> <C> <C>
Interest expense on debt and capital leases............... $ 2,818 $2,338 $1,853
Purchase discounts on invoice payments.................... (230) (430) (483)
Finance fees and amortization of hedge and swap
agreements.............................................. 150 230 236
Interest income........................................... (99) (66) (38)
Other..................................................... (13) 12 (14)
------ ------ ------
$ 2,626 $2,084 $1,554
======= ====== ======
(/TABLE>
12. EQUITY TRANSACTIONS
EMPLOYEE STOCK OPTION AND INCENTIVE AWARD PLAN: In 1996, the
Company adopted the Restated Stock Option and Incentive Award Plan
(the "Plan") pursuant to which incentive stock options qualifying
under Section 422A of the Internal Revenue Code and nonqualified stock
options may be granted to key employees. The Plan also provides for
the issuance of other equity awards, such as awards of restricted
stock. The Plan replaced and restated all the Company's prior employee
stock option plans. A total of up to 3,350,000 shares of common stock
may be granted under the Plan (a total of up to 2,350,000 shares were
available for grant under the prior plans). The Plan is administered
by the Compensation Committee of the Company's Board of Directors. The
Compensation Committee has the authority to determine the persons
receiving options, option prices, dates of grants, and vesting
periods, although no option may have a term exceeding ten years.
Options granted prior to 1996 have a term of five years.
DIRECTORS' STOCK OPTION PLAN: In April 1997, the Company adopted
the Restated Non-Employee Director Stock Option Plan (the "Directors
Plan"), pursuant to which stock options for up to 500,000 shares of
Common Stock may be granted to nonemployee directors. The Directors
Plan replaced and restated the Company's prior non-employee director
stock option plan. The Directors Plan provides for automatic grants of
options to purchase 7,500 shares of the Company's common stock to each
nonemployee director serving on the date of each annual meeting of
shareholders, beginning with the 1997 annual meeting. Of the options
granted, 50% of the shares under each option are exercisable on the
second anniversary of the grant date, 75% in three years, and 100% in
four years. All option grants are at exercise prices no less than the
market value of a share of Common Stock on the date of grant and are
exercisable for a ten-year period. Options granted under the
predecessor stock option plan are exercisable for a five-year period.
Options covering 67,500 shares under the Directors Plan were
exercisable at January 3, 1998.
RESTRICTED STOCK AWARDS: Restricted stock grants, with an
outstanding balance of 54,000 shares at January 3, 1998, were awarded
to certain officers and key employees which require five years of
continuous employment from the date of grant before vesting and
receiving the shares without restriction. The number of shares to be
received without restriction is based on the Company's performance
relative to a peer group of companies. Unamortized deferred
compensation expense with respect to the restricted stock amounted to
$225,000 at January 3, 1998 and is being amortized over the five-year
vesting period. Deferred compensation expense aggregated $54,000 in
1997. A summary of restricted stock granted during 1997 is as follows:
<PAGE>
1997
-------
Shares granted . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
Shares forfeited . . . . . . . . . . . . . . . . . . . . . . . . 6,000
Weighted-average fair value of stock granted during year . . . . $ 4.81
ALL STOCK OPTION PLANS: All exercise prices represent the estimated
fair value of the Common Stock on the date of grant as determined by
the Board of Directors. Of the options granted, 50% of the shares
under each option are exercisable after two years from the grant date,
75% in three years, and 100% in four years.
Stock option transactions during the three years ended January 3,
1998 were as follows:
1995 1996 1997
---------- ---------- ----------
Options outstanding beginning of year 1,736,150 1,813,195 1,950,166
Options granted . . . . . . . . . . . 576,044 395,305 631,864
Options exercised . . . . . . . . . . (75,927) (55,371) (7,840)
Options cancelled . . . . . . . . . . (423,072) (202,963) (279,987)
---------- ---------- ----------
Options outstanding end of year . . . 1,813,195 1,950,166 2,294,203
========== ========== ==========
Options exercisable end of year . . . 386,644 734,109 1,020,674
========== ========== ==========
Weighted average option prices per
share:
Granted . . . . . . . . . . . . . . $ 4.638 $ 3.394 $ 4.878
Exercised . . . . . . . . . . . . . 0.248 0.278 2.168
Cancelled . . . . . . . . . . . . . 8.376 7.816 9.640
Outstanding end of year . . . . . . 7.569 6.904 6.028
Exercisable end of year . . . . . . 11.376 9.806 7.891
F-15<PAGE>
<PAGE>
The Company has adopted the disclosure provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." The Company will continue to account for stock option
awards in accordance with APB Opinion No. 25. Had compensation cost
for the Plan been determined based on the fair value at the grant date
for awards in 1995, 1996 and 1997 consistent with the provisions of
SFAS No. 123, the Company's net earnings and earnings per share would
have been reduced to the pro forma amounts indicated below (amounts in
000's except per share information):
As Reported:
-----------
1995 1996 1997
---------- ---------- --------
Net earnings (loss) . . . . . . . . . $ (1,520) $ 3,480 $ 5,573
========= ========= ========
Earnings per share . . . . . . . . . $ (0.07) $ 0.17 $ 0.27
========= ========= ========
Pro forma:
---------
Net earnings (loss) . . . . . . . . . $ (1,769) $ 3,163 $ 5,142
========= ========= ========
Earnings per share . . . . . . . . . $ (0.09) $ 0.15 $ 0.25
======== ======= =======
Basic and diluted earnings per share are the same for each year.
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model. The following
weighted average assumptions were used in the model:
1995 1996 1997
----- ----- -----
Dividend yield . . . . . . . . . . . 0.00% 0.00% 0.00%
Expected volatility . . . . . . . . . 86% 86% 74%
Risk free interest rates . . . . . . 6.70% 5.90% 6.14%
Expected lives (years) . . . . . . . 4.34 4.34 4.51
The following table shows the options outstanding and the options
exercisable with pertinent data related to each:
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- --------------------------
Weighted
Average Weighted Number Weighted
Number Remaining Average Exercisable Average
Range of Outstanding Contractual Exercise As of Exercise
Exercise Prices As of 1/3/98 Life Price 1/3/98 Price
- ---------------- ------------ ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$3.12 $4.81 . . . . . . . . . 890,877 7.48 $4.059 79,856 $ 3.863
$4.88 $7.00 . . . . . . . . . 1,022,915 3.17 $5.417 562,157 $ 5.490
$7.25 $21.38 . . . . . . . 380,411 0.90 $12.282 378,661 $12.306
--------- ---- ------- --------- -------
$3.12 $21.38 . . . . . . . . 2,294,203 4.47 $ 6.028 1,020,674 $ 7.891
</TABLE>
PRINCIPAL SHAREHOLDER TRANSACTIONS: On November 13, 1990, in
consideration of the services rendered by two principals in two
companies recruiting optometrists for the Company (Note 3), the then
Chairman and largest shareholder of the Company entered into option
agreements which granted each of the two principals the option (the<PAGE>
"Option") to acquire from the then Chairman 683,775 shares of Common
Stock. The Options were exercised in 1992 and 1994.
Upon the exercise of all the Options, the Company became entitled to
a tax benefit valued at approximately $4.1 million, which is equal to
the number of option shares multiplied by the difference between the
market price of the option shares as of the date of exercise and the
exercise price for the option shares, adjusted for the impact of tax
rates. The tax benefit will be treated as a contribution to capital
and will have no impact on earnings for financial reporting purposes.
The timing and the amount of the benefit from the tax deduction will
depend on future earnings of the Company. The Company has recorded a
valuation allowance against the tax benefit. The Company has received
a deficiency notice from the Internal Revenue Service with respect to
the tax benefit the Company expects to realize from the exercise of
the Options. (See Note 9.)
PREFERRED STOCK: The Company is authorized to issue up to 5,000,000
shares of preferred stock, par value $1 per share, with such terms,
characteristics and designations as may be determined by the Board of
Directors. No such shares are issued and outstanding.
SHAREHOLDER RIGHTS PLAN: In January of 1997, the Company's Board of
Directors approved a Shareholders Rights Plan (the "Rights Plan"). The
Rights Plan provides for the distribution of one Right for each
outstanding share of the Company's Common Stock held of record as of
the close of business on January 27, 1997 or that thereafter becomes
outstanding prior to the earlier of the final expiration date of the
Rights or the first date upon which the Rights become exercisable.
Each Right entitles the registered holder to purchase from the Company
one one-hundredth of a share of Series A Participating Cumulative
Preferred Stock, par value $0.01 per share, at a price of $40.00 (the
"Purchase Price"), subject to adjustment. The Rights are not
exercisable until ten calendar days after a person or group (an
"Acquiring Person") buys or announces a tender offer for 15% or more
of the Company's Common Stock, or if any person or group has acquired
such an interest, the acquisition by that person or group of an
additional 2% of the Company's Common Stock. In the event the Rights
F-16<PAGE>
<PAGE>
become exercisable, then each Right will entitle the holder to receive
that number of shares of Common Stock (or, under certain
circumstances, an economically equivalent security or securities of
the Company) having a market value equal to the Purchase Price. If,
after any person has become an Acquiring Person (other than through a
tender offer approved by qualifying members of the Board of
Directors), the Company is involved in a merger or other business
combination where the Company is not the surviving corporation, or the
Company sells 50% or more of its assets, operating income, or cash
flow, then each Right will entitle the holder to purchase, for the
Purchase Price, that number of shares of common or other capital stock
of the acquiring entity which at the time of such transaction have a
market value of twice the Purchase Price. The Rights will expire on
January 26, 2007, unless extended, unless the Rights are earlier
exchanged, or unless the Rights are earlier redeemed by the Company in
whole, but not in part, at a price of $0.001 per Right. The
Shareholder Rights Plan was amended in February 1998. (See Note 16.)
F-17
<PAGE>
<PAGE>
13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly data for the Company for the fiscal years ended
December 28, 1996 and January 3, 1998 is as follows (in 000's except
per share information). The fourth quarter of fiscal 1997 consisted of
14 weeks; all other quarters consisted of 13 weeks.
YEAR ENDED DECEMBER 28, 1996:
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------
March 30 June 29 September 28 December 28
-------- -------- ------------ -----------
<S> <C> <C> <C> <C>
Net sales . . . . . . . . . . . . . . $40,133 $ 40,525 $41,347 $38,371
Cost of goods sold . . . . . . . . . 18,724 19,133 19,684 19,151
------- -------- ------- -------
Gross profit . . . . . . . . . . . . 21,409 21,392 21,663 19,220
Selling, general, and administrative
expenses . . . . . . . . . . . . . 19,386 19,202 19,679 18,653
------- -------- ------- -------
Operating income . . . . . . . . . . 2,023 2,190 1,984 567
Other expense, net . . . . . . . . . 659 507 453 465
------- -------- ------- -------
Income before income taxes . . . . . 1,364 1,683 1,531 102
Provision for income taxes . . . . . 373 431 321 75
------- -------- ------- -------
Net income . . . . . . . . . . . . . $ 991 $ 1,252 $ 1,210 $ 27
======= ======== ======= =======
Basic earnings per common share . . . $ .05 $ .06 $ .06 $ .00
======= ======== ======= =======
Diluted earnings per common share . . $ .05 $ .06 $ .06 $ .00
======= ======== ======= =======
(/TABLE>
YEAR ENDED JANUARY 3, 1998:
Quarter Ended
-------------------------------------------------
March 29 June 28 September 27 January 3
--------- -------- ------------ ---------
Net sales . . . . . . . . . . . . . . $ 44,362 $ 44,512 $ 45,862 $51,618
Cost of goods sold . . . . . . . . . 20,143 20,654 20,926 24,640
-------- -------- -------- -------
Gross profit . . . . . . . . . . . . 24,219 23,858 24,936 26,978
Selling, general, and administrative
expenses . . . . . . . . . . . . . 20,971 20,793 21,559 25,833
-------- -------- -------- -------
Operating income . . . . . . . . . . 3,248 3,065 3,377 1,145
Other expense, net . . . . . . . . . 488 391 314 361
-------- -------- -------- -------
Income before income taxes . . . . . 2,760 2,674 3,063 784
Provision for income taxes . . . . . 1,107 1,054 1,204 343
-------- -------- -------- -------
Net income . . . . . . . . . . . . . $ 1,653 $ 1,620 $ 1,859 $ 441
======== ======== ======== =======
Basic earnings per common share . . . $ .08 $ .08 $ .09 $ .02
======== ======== ======== =======
Diluted earnings per common share . . $ .08 $ .08 $ .09 $ .02
======== ======== ======== =======
<PAGE>
14. DISPOSITIONS
SALE OF FRENCH OPERATIONS: On December 29, 1995, the Company sold
its shares in IVACAR, S.A., its French subsidiary, to Carrefour
France, for the sum of 18,000,000 FF ($3.7 million U.S.), paid in cash
at the closing. The initial sum was received the first business day of
1996. In connection with this transaction, the Company recorded a gain
of $491,000 in 1995. Such gain was offset by the provisions discussed
below.
SALE OF VENTURE OPERATIONS: The Company's vision centers located in
Venture Department Stores were disposed of in the fourth quarter 1995
and the first quarter 1996. In anticipation of the disposition of the
Venture operations, a provision of $1.4 million was recorded in 1995
to reduce the net assets of the Venture operations to management's
estimate of net realizable value.
Net sales and operating losses for each operation (exclusive of
disposition costs, allocated corporate overhead, interest and taxes)
for each period presented is summarized as follows (in 000's):
Venture France
---------- -------
Year ended December 28, 1996
Net sales . . . . . . . . . . . . . . . . . . . $ 37 $ 402
Operating losses . . . . . . . . . . . . . . . $ (81) $ (240)
Year ended December 30, 1995
Net sales . . . . . . . . . . . . . . . . . . . $ 2,257 $ 5,117
Operating losses . . . . . . . . . . . . . . . $ (2,073) $ (523)
INVESTMENT IN CZECH REPUBLIC AND SLOVAKIA: In 1995, the Company
decided that it would pursue the disposition of its interest in the
joint venture which operated three vision centers in Eastern Europe. A
provision has been recorded to reflect management's estimate of net
realizable value of the Company's investment in such joint venture.
F-18<PAGE>
<PAGE>
AURRERA STORE CLOSURES: In 1995, the Company decided to close 16
underperforming vision centers located in Aurrera stores. The Mexican
operations recorded a $346,000 provision to reduce the assets in those
locations to management's estimate of net realizable value and record
separation costs for employees. The Company closed six vision centers
in February 1995 and the remainder in the first quarter 1996.
FORECLOSURE PROCEEDINGS---FRAME MANUFACTURER: In February 1995, the
Company foreclosed on its security interest covering the assets of
CompuFrame, a frame manufacturer. The Company recorded a provision of
$400,000 to reduce the net carrying amount of assets held for sale to
management's estimate of their net realizable value. The remaining
assets were liquidated in 1996.
The net assets of the Venture operations and the frame manufacturer
were classified as assets held for sale in the current asset section
of the Company's balance sheet at December 30, 1995. The dispositions
were completed in 1996. For purposes of the accompanying statements of
cash flows, the change in components comprising assets held for sale
is reflected in the original balance sheet classification.
15. REPORTABLE BUSINESS SEGMENTS
The Company's operating business segments provide quality retail
optical services and products that represent high value and
satisfaction to the customer. Vision centers offer eyewear through
each retail location, which includes eyeglasses, contact lenses, and
sunglasses. Optometrists are available on-site to provide eye
examinations. The separate businesses within the Company use the same
production processes for eyeglass lens manufacturing, offer products
and services to a broad range of customers and utilize the Company's
central administrative offices to coordinate product purchases and
distribution to retail locations. A field organization provides
management support to individual store locations. The Mexico operation
has a separate laboratory and distribution center in Mexico and buys a
majority of its products from local vendors. However, market demands,
customer requirements, laboratory manufacturing and distribution
processes, as well as product offerings, are substantially the same
for the domestic and Mexico business. Consequently, the Company
considers its domestic and Mexico businesses as one reportable segment
under the definitions required by SFAS 131 - Disclosures about
Segments of an Enterprise and Related Information.
Information relative to sales and identifiable assets for the United
States and Mexico for the fiscal years ended December 30, 1995,
December 28, 1996, and January 3, 1998 are summarized in the following
tables (in 000's). Identifiable assets include all assets associated
with operations in the indicated reportable segment excluding
intercompany receivables and investments.
United States Mexico Other Consolidated
------------- ------ ----- ------------
1997
Sales . . . . . . . . . . $ 182,333 $2,988 $1,033 $ 186,354
========= ====== ====== =========
Identifiable assets . . . $ 80,284 $2,279 $ 687 $ 83,250
========= ====== ====== =========
1996
Sales . . . . . . . . . . $ 156,599 $2,068 $1,709 $ 160,376
========= ====== ====== =========
Identifiable assets . . . $ 72,209 $1,811 $ 544 $ 74,564
========= ====== ====== =========
<PAGE>
1995
Sales . . . . . . . . . . $ 136,633 $2,915 $6,025 $ 145,573
========= ====== ====== =========
Identifiable assets . . . $ 74,270 $2,611 $4,356 $ 81,237
========= ====== ====== =========
16. SUBSEQUENT EVENTS AND INTERIM FINANCIAL STATEMENTS (UNAUDITED)
The accompanying unaudited condensed consolidated financial
statements as of October 3, 1998 and for the nine months ended
September 27, 1997 and October 3, 1998, have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant
to such rules and regulations. Although management believes that the
disclosures are adequate to make the information presented not
misleading, it is suggested that these interim condensed consolidated
financial statements be read in conjunction with the Company's most
recent audited consolidated financial statements and notes thereto. In
the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary for a fair presentation of the
financial position, results of operations, and cash flows for the
interim periods presented have been made. Operating results for the
interim periods presented are not necessarily indicative of the
results that may be expected for the year ending January 2, 1999.
Certain amounts in the September 27, 1997 condensed consolidated
financial statements have been reclassified to conform to the October 3,
1998 presentation.
In the first quarter of 1998, the Company and the Internal Revenue
Service executed a definitive settlement agreement to settle
litigation in the U.S. Tax Court arising out of the grant and exercise
of certain stock options and a tax deduction claimed by the Company in
connection therewith. The settlement provides that the Company will
receive substantially all of the deduction it has claimed. As a result
of the settlement, the Company has reassessed the realizability of
F-19<PAGE>
<PAGE>
related net operating loss carryforwards and, accordingly, reduced the
related valuation allowance in the first quarter. An after-tax benefit
of $3.3 million has been recorded as a contribution to capital and
will have no impact on earnings for financial reporting purposes.
In February 1998, the Company's Board of Directors amended the
Company's Shareholder Rights Plan (See Note 12) effective March 1,
1998 to provide that Rights under such plan can be redeemed and
certain amendments to such plan can be effected only with the approval
of the Continuing Directors, which are defined in the Rights Plan as
the current directors and any future directors that are approved or
recommended by Continuing Directors.
On July 28, 1998, the Company acquired all of the issued and
outstanding capital stock of Frame-n-Lens Optical, Inc. ("Frame-n-
Lens"), which operates approximately 156 freestanding retail vision
centers as well as approximately 130 retail vision centers located
primarily in Sam's Clubs. Frame-n-Lens also operates an optical
laboratory and has its administrative offices in Fullerton,
California. The purchase price was $32.3 million consisting of cash
and the assumption of debt. The transaction was financed through the
Company's revolving credit facility. Annual sales for Frame-n-Lens for
1997 were $78.4 million.
On October 23, 1998, the Company completed its tender offer for all
the issued and outstanding capital stock of New West Eyeworks, Inc.
("New West"), which operates approximately 126 free-standing retail
vision centers as well as approximately 52 retail vision centers located
in Fred Meyer stores. New West also operates an optical laboratory
and has its administrative offices in Tempe, Arizona. The Company
paid approximately $68.3 million consisting of cash and the assumption
of approximately $43.2 million of debt. The transaction was financed
through the issuance of the Company's $125 million Senior Notes due
2005. The Company intends to continue to operate subsequently all of
the vision centers and to achieve administrative and manufacturing
synergies.
In anticipation of the Offering, the Company entered into three
anticipatory hedging transactions. The Company settled these
transactions for approximately $4.6 million in September 1998 with $.6
million cash and additional borrowings of $4.0 million on the Existing
Credit Facility. The settlement costs will be treated as deferred
financing costs amortized over the life of the Notes.
F-20
<PAGE>
<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-21
<PAGE>
<PAGE>
FRAME-N-LENS OPTICAL, INC.
CONSOLIDATED BALANCE SHEETS
</TABLE>
<TABLE>
<CAPTION>
December 29, December 28, June 28,
1996 1997 1998
------------ ------------ -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS <F2>
Current asset:
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
<PAGE>
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-22
<PAGE>
<PAGE>
</TABLE>
<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-23
<PAGE>
<PAGE>
</TABLE>
<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-24<PAGE>
<PAGE>
</TABLE>
<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)
----------- ----------- ----------- ---------- -----------
<PAGE>
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-25<PAGE>
<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.
<PAGE>
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.
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.
F-26<PAGE>
<PAGE>
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.
<PAGE>
2. BANK FINANCING
Long-term debt consists of the following:
December 29, December 28,
1996 1997
------------ ------------
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 $ ---
=========== ===========
The Company maintains a credit facility with a bank (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.
F-27<PAGE>
<PAGE>
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.
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.
F-28<PAGE>
<PAGE>
5. INCOME TAXES
Significant components of the provision (benefit) for income taxes
attributable to operations are as follows:
December 31, December 29, December 28,
1995 1996 1997
------------ ------------ ------------
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 $ ---
=========== ========= ========
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:
<PAGE>
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.
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.
F-29<PAGE>
<PAGE>
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:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-------- -----------
<s. <C> <C>
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
========
</TABLE>
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.
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.
<PAGE>
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.
F-30<PAGE>
<PAGE>
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>
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 of the Company's Credit Facility was repaid.
F-31
<PAGE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of New West Eyeworks, Inc.
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations, of stockholders' equity
and of cash flows present fairly, in all material respects, the
financial position of New West Eyeworks, Inc. and its subsidiaries at
December 27, 1997 and December 28, 1996, and the results of their
operations and their cash flows for each of the three years in the
period ended December 27, 1997, in conformity with generally accepted
accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Phoenix, Arizona
March 6, 1998
F-32
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
NEW WEST EYEWORKS, INC.
CONSOLIDATED BALANCE SHEET
December 28, December 27, September 26,
1996 1997 1998
------------ ------------ -------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents . . . . . . . . . $ 256,000 $ 577,000 $ 397,000
Accounts receivable, net . . . . . . . . . 1,304,000 1,741,000 2,483,000
Inventory . . . . . . . . . . . . . . . . . 3,190,000 3,519,000 4,466,000
Deferred tax assets . . . . . . . . . . . . 579,000 508,000
Other current assets . . . . . . . . . . . 309,000 400,000 269,000
--------------- ------------ ------------
Total current assets . . . . . . . 5,059,000 6,816,000 8,123,000
Property and equipment, net . . . . . . . . . 7,518,000 9,108,000 11,550,000
Goodwill, net . . . . . . . . . . . . . . . . 506,000 416,000 348,000
Other assets . . . . . . . . . . . . . . . . 44,000 12,000 14,000
--------------- ------------ ------------
Total assets . . . . . . . . . . . $ 13,127,000 $ 16,352,000 $ 20,035,000
=============== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable . . . . . . . . . . . . . $ 5,392,000 $ 4,022,000 $ 5,256,000
Accrued expenses . . . . . . . . . . . . . 1,868,000 1,948,000 1,894,000
Line of credit . . . . . . . . . . . . . . 1,968,000 30,000 542,000
Deferred warranty revenues . . . . . . . . 279,000 271,000 301,000
Notes payable and capital lease obligations,
current portion . . . . . . . . . . . . 320,000 338,000 673,000
Notes payable to related party . . . . . . 358,000
--------------- ------------ ------------
Total current liabilities . . . . . 10,185,000 6,609,000 8,666,000
Notes payable and capital lease obligations . 516,000 291,000 1,936,000
--------------- ------------ ------------
Total liabilities . . . . . . . . . 10,701,000 6,900,000 10,602,000
--------------- ------------ ------------
Stockholders' Equity:
Series A 6% Cumulative Convertible Preferred
Stock, $1,000 par value, 3,960 shares
authorized, issued and outstanding . . . 3,960,000 3,960,000 3,960,000
Series B 6% Cumulative Convertible Preferred
Stock, $1,000 par value, 1,500 shares
authorized, issued and outstanding . . . 1,500,000 1,500,000 1,500,000
Common stock, $0.01 par value, 25,000,000
shares authorized, 4,868,436 and 3,763,036
shares issued and outstanding at December
27, 1997 and December 28, 1996,
respectively . . . . . . . . . . . . . . 38,000 49,000 49,000
Paid-in capital . . . . . . . . . . . . . . 10,100,000 15,630,000 15,746,000
Accumulated deficit . . . . . . . . . . . . (13,172,000) (11,687,000) (11,822,000)
--------------- ------------ ------------
Total stockholders' equity . . . . 2,426,000 9,452,000 9,433,000
--------------- ------------ ------------
Total liabilities and stockholders'
equity . . . . . . . . . . . . . $ 13,127,000 $ 16,352,000 $ 20,035,000
=============== ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-33<PAGE>
<PAGE>
<TABLE>
<CAPTION>
NEW WEST EYEWORKS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Fiscal Year Ended Nine Months Ended
----------------------------------------- ----------------------------
December 30, December 28, December 27, September 27, September 26,
1995 1996 1997 1997 1998
----------- ------------ ------------ ------------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Net sales................ $ 40,033,000 $43,940,000 $49,212,000 $37,855,000 $41,449,000
Cost of sales............ 20,352,000 21,719,000 24,253,000 18,533,000 20,556,000
------------- ----------- ----------- ----------- -----------
Gross profit........... 19,681,000 22,221,000 24,959,000 19,322,000 20,893,000
Selling, general and
administrative
expenses............... 21,667,000 21,173,000 23,641,000 17,902,000 20,290,000
------------- ----------- ----------- ----------- -----------
Operating income (loss) (1,986,000) 1,048,000 1,318,000 1,420,000 603,000
Acquisition related
expenses............... 270,000
Interest income.......... 12,000 66,000 64,000
Interest expense......... 51,000 216,000 122,000 102,000 154,000
------------- ----------- ----------- ----------- -----------
Income (loss) before
income tax expense (2,025,000) 832,000 1,262,000 1,382,000 179,000
Income tax benefit
(expense).............. (30,000) 547,000 (27,000) (71,000)
------------- ----------- ----------- ----------- -----------
Net income (loss)........ (2,025,000) 802,000 1,809,000 1,355,000 108,000
Preferred stock
dividends.............. (329,000) (328,000) (324,000) (243,000) (243,000)
------------- ----------- ----------- ----------- -----------
Net income (loss)
applicable to common
shares................. $ (2,354,000) $ 474,000 $ 1,485,000 $ 1,112,000 $ (135,000)
============ =========== =========== =========== ===========
Basic and diluted income
(loss) per share....... $ (0.63) $ 0.13 $ 0.31 $ 0.24 $ (0.03)
============ =========== =========== =========== ===========
Weighted average shares
outstanding - Basic..... 3,763,000 3,763,000 4,717,000 4,666,000 4,877,000
Weighted average shares
outstanding - Diluted.. 3,763,000 3,786,000 4,785,000 4,720,000 5,027,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-34
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
NEW WEST EYEWORKS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Shares Amounts
--------------------- ---------------------------------------------------------------
Paid-in Accumulated
Preferred Common Preferred Common Capital Deficit Total
--------- ------ --------- ------ ------- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31,
1994.......................... 5,460 3,763,036 $5,460,000 $38,000 $10,070,000 $(11,292,000) $ 4,276,000
Preferred stock dividends (329,000) (329,000)
Net loss ....................... (2,025,000) (2,025,000)
----- --------- ----------- ------- ----------- ------------ ------------
BALANCES AT DECEMBER 30,
1995.......................... 5,460 3,763,036 5,460,000 38,000 10,070,000 (13,646,000) 1,922,000
Issuance of warrants............ 30,000 30,000
Preferred stock dividends....... (328,000) (328,000)
Net income...................... 802,000 802,000
----- --------- ----------- ------- ----------- ------------ ------------
BALANCES AT DECEMBER 28,
1996.......................... 5,460 3,763,036 5,460,000 38,000 10,100,000 (13,172,000) 2,426,000
Common stock issued............. 1,105,400 11,000 5,530,000 5,541,000
Preferred stock dividends....... (324,000) (324,000)
Net income...................... 1,809,000 1,809,000
----- --------- ----------- ------- ----------- ------------ ------------
BALANCES AT DECEMBER 27,
1997.......................... 5,460 4,868,436 5,460,000 49,000 15,630,000 (11,687,000) 9,452,000
Exercise of stock options
(unaudited)................... 19,000 116,000 116,000
Preferred stock dividends
(unaudited)................... (243,000) (243,000)
Net income (unaudited).......... 108,000 108,000
----- --------- ----------- ------- ----------- ------------ ------------
BALANCES AT SEPTEMBER 26,
1998 (unaudited).............. 5,460 4,887,436 $5,460,000 $49,000 $15,746,000 $(11,822,000) $ 9,433,000
===== ========= ========== ======= =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-35
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
NEW WEST EYEWORKS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Fiscal Year Ended Nine Months Ended
---------------------------------------- ---------------------------
December 30, December 28, December 27, September 27, September 26,
1995 1996 1997 1997 1998
------------ ------------ ------------ ------------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING
ACTIVITIES:
Net income (loss)................................ $(2,025,000) $ 802,000 $1,809,000 $1,355,000 $ 108,000
Adjustments to reconcile net income
(loss) to net cash from (used in)
operating activities:
Depreciation and amortization.................. 1,048,000 1,229,000 1,505,000 1,129,000 1,289,000
Loss on disposal of fixed assets............... 65,000 2,000 3,000 15,000
Income tax benefit............................. (579,000) 71,000
Changes in assets and liabilities:
Accounts receivable ........................... (124,000) (305,000) (437,000) (518,000) (742,000)
Inventory...................................... (281,000) (58,000) (329,000) (686,000) (947,000)
Other current assets........................... 52,000 (231,000) (91,000) 213,000 131,000
Accounts payable............................... 1,696,000 (363,000) (1,370,000) (1,458,000) 1,234,000
Accrued expenses............................... 603,000 (1,228,000) 80,000 489,000 (54,000)
Deferred warranty revenues..................... (240,000) (69,000) (8,000) (6,000) 30,000
Other assets and liabilities................... (72,000) (57,000) 32,000 29,000 (2,000)
----------- ----------- ---------- ---------- -----------
Net cash from (used in) operating
activities................................ 722,000 (280,000) 614,000 550,000 1,132,000
----------- ----------- ---------- ---------- -----------
CASH FLOWS FROM (USED IN) INVESTING
ACTIVITIES:
Purchase of property and equipment............... (1,532,000) (1,459,000) (2,864,000) (1,970,000) (3,407,000)
----------- ----------- ---------- ---------- -----------
Net cash (used in) investing
activities................................ (1,532,000) (1,459,000) (2,864,000) (1,970,000) (3,407,000)
CASH FLOWS FROM (USED IN) FINANCING
ACTIVITIES:
Proceeds from the revolving line of
credit......................................... 24,050,000 8,136,000 5,126,000 45,522,000
Payment on the revolving line of
credit......................................... (22,082,000) (10,074,000) (7,094,000) (43,010,000)
Proceeds from the bridge loans................... 1,050,000
Payment of bridge loans.......................... (700,000) (358,000) (358,000)
Proceeds from capital leases..................... 505,000
Payment of capital leases........................ (208,000) (236,000) (350,000) (252,000) (290,000)
Payment of preferred stock dividends............. (246,000) (328,000) (324,000) (243,000) (243,000)
Net proceeds from common stock
offering....................................... 5,541,000 5,541,000
Exercise of stock options........................ 116,000
----------- ----------- ---------- ---------- -----------
Net cash from financing
activities................................ 51,000 1,754,000 2,571,000 2,720,000 2,095,000
----------- ----------- ---------- ---------- -----------
Net increase (decrease) in cash and cash
equivalents ..................................... (759,000) 15,000 321,000 1,300,000 (180,000)
Cash and Cash equivalents, beginning of
year............................................. 1,000,000 241,000 256,000 256,000 577,000
----------- ----------- ---------- ---------- -----------
<PAGE>
Cash and Cash equivalents, end of
year............................................. $ 241,000 $ 256,000 $ 577,000 $ 1,556,000 $ 397,000
=========== ========== ========== =========== ==========
SUPPLEMENTAL CASH FLOW
INFORMATION:
Interest paid.................................... $ 51,000 $ 208,000 $ 122,000 102,000 153,000
Income taxes paid................................ 30,000 25,000 11,000 19,000
Assets acquired under capital lease.............. 524,000 141,000 136,000 270,000
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-36
<PAGE>
<PAGE>
NEW WEST EYEWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company and Its Significant Accounting Policies
New West Eyeworks, Inc. (the Company) is a leading specialty
retailer of eyewear, operating under the trade names "Vista Optical"
and "Lee Optical." The Company operates value-priced optical stores in
thirteen states. These stores are located in malls, strip shopping
centers and Fred Meyer host stores. The Company operates optical
laboratory and distribution facilities in Tempe, Arizona and near
Portland, Oregon.
USE OF ESTIMATES: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amount of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION: The accompanying financial statements
include the accounts of the Company and its wholly-owned subsidiaries.
All significant intercompany accounts and transactions have been
eliminated.
FISCAL YEAR: The Company's fiscal year ends on the last Saturday of
the calendar year. References to the year 1995, 1996, and 1997 relate
to the fiscal years ended December 30, 1995, December 28, 1996, and
December 27, 1997, each of which consisted of 52 weeks.
REVENUE RECOGNITION: Revenues are recognized at the time of
customer order. Revenues from separately priced warranty contracts are
deferred and recognized on a pro rata basis over the contract period.
The Company receives certain vendor rebates and allowances which are
reflected in operations based on the terms of the underlying
agreements. Such amounts are classified as reductions of either
selling, general and administrative costs or cost of sales as
appropriate.
STORE OPENING COSTS: The Company expenses store opening costs as
incurred.
ADVERTISING COSTS: The Company expenses advertising production
costs in the period in which the related advertisement first takes
place. Advertising communication costs such as television air time and
newspaper advertising space are expensed as the related services are
received. All other costs are expensed as incurred. Advertising
expenses totaled $4,136,000, $3,576,000, and $4,228,000, for the years
1995, 1996, and 1997, respectively.
CASH AND CASH EQUIVALENTS: The Company considers liquid investments
with an original maturity of three months or less to be cash
equivalents.
ACCOUNTS RECEIVABLE: Accounts receivable are primarily comprised of
amounts due from insurance and managed care plans on sales where the
Company has contractual arrangements or has accepted an assignment of
insurance benefits from the customer. The reported balance is net of
an allowance for doubtful accounts of $139,000 and $159,000 at
December 28, 1996, and December 27, 1997, respectively.
<PAGE>
INVENTORY AND COST OF SALES: Inventory primarily consists of the
direct material cost of eyeglass frames, contact lenses, ophthalmic
lenses and optical laboratory supplies and is stated at the lower of
cost or market. Cost is determined using the first-in, first-out
method.
Cost of sales includes the cost of merchandise sold during the year,
optical laboratory costs directly related to manufacturing eyeglasses,
store occupancy expenses, and depreciation expense relating to store
and optical laboratory fixtures and equipment.
F-37<PAGE>
<PAGE>
PROPERTY AND EQUIPMENT: Property and equipment are stated at cost
less accumulated depreciation. Depreciation is provided using the
straight-line method over the estimated useful lives of the related
assets which range from five to ten years. Major improvements are
capitalized while repairs which do not extend the useful life of the
asset are expensed.
GOODWILL: Goodwill represents the cost in excess of the net assets
of a business acquired and is being amortized for financial statement
purposes on a straight-line basis over a period of fifteen years. The
reported balance is net of accumulated amortization of $759,000 and
$849,000 at December 28, 1996, and December 27, 1997 respectively. The
Company evaluates the possibility of goodwill impairment when events
or changes in economic circumstances indicate that the related
carrying amount may not be recoverable.
ACCOUNTS PAYABLE: Accounts payable includes $644,000 at December 28,
1996 and $641,000 at December 27, 1997 relating to the
reclassification of book overdrafts.
STOCK COMPENSATION: The Company measures compensation expense
related to employee stock options using the intrinsic value-based
method of accounting prescribed by Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and
related interpretations.
INCOME TAXES: The Company accounts for income taxes using the
liability method, recognizing temporary differences between the
financial reporting basis of the Company's assets and liabilities and
the related income tax basis for such assets and liabilities. This
method generates a net deferred income tax liability or a net deferred
income tax asset for the Company as of the end of the year, as
measured by the statutory tax rates in effect as enacted. The Company
derives its deferred income tax charge or benefit by recording the
change in the net deferred income tax liability or net deferred income
tax asset balance for the year.
The Company's deferred income tax assets include certain future tax
benefits. The Company records a valuation allowance against the
portion of these deferred income tax assets which it believes it will
more likely than not fail to realize.
EARNINGS PER SHARE: In 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, Earnings per Share (SFAS No.
128). Basic earnings per share is computed by dividing income
applicable to common shares by the weighted average number of common
shares outstanding for the year. Diluted earnings per share is similar
to basic earnings per share except that the denominator is increased
to include the number of additional common shares that would have been
outstanding if potential dilutive common shares had been issued.
Adoption of SFAS No. 128 did not effect the Company's previously
reported income (loss) per share computations for years subsequent to
its initial public offering. The following table presents a
reconciliation of the basic and diluted earnings per share
calculations:
<PAGE>
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Basic earnings per share:
Numerator:
Net income (loss) applicable to common
shares.................................... $(2,354,000) $ 474,000 $ 1,485,000
----------- ----------- -----------
Denominator:
Weighted average common shares
outstanding............................... 3,763,000 3,763,000 4,717,000
----------- ----------- -----------
Basic earnings (loss) per share............... $ (0.63) $ 0.13 $ 0.31
=========== =========== ===========
Diluted earnings per share:
Numerator:
Net income (loss) applicable to common
shares.................................... $(2,354,000) $ 474,000 $ 1,485,000
----------- ----------- -----------
Denominator:
Weighted average common shares
outstanding............................... 3,763,000 3,763,000 4,717,000
Weighted average employee stock
options ................................. --- 23,000 68,000
----------- ----------- -----------
3,763,000 3,786,000 4,785,000
----------- ----------- -----------
Diluted earnings (loss) per share............... $ (0.63) $ 0.13 $ 0.31
=========== =========== ===========
</TABLE>
F-38<PAGE>
<PAGE>
UNAUDITED INTERIM FINANCIAL STATEMENTS: The interim consolidated
financial statements as of September 26, 1998 and for the nine-month
periods ended September 26, 1998 and September 27, 1997 are unaudited.
In the opinion of management, such interim consolidated financial
statements include all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the Company's
consolidated financial position as of September 26, 1998 and the
consolidated results of operations and cash flows for the periods
ended September 26, 1998 and September 27, 1997. The interim results
are not necessarily indicative of results which may occur for the full
year.
2. PROPERTY, EQUIPMENT AND LEASES
Property and equipment consists of the following:
December 28, December 27,
1996 1997
----------- -------------
Store fixtures and equipment......... $11,549,000 $ 13,796,000
Laboratory fixtures and equipment.... 2,100,000 2,286,000
Other fixtures and equipment......... 2,558,000 2,717,000
Building and improvements............ 641,000 686,000
Construction in progress............. 188,000
----------- ------------
16,848,000 19,673,000
Less: accumulated depreciation....... (9,330,000) (10,565,000)
----------- ------------
$ 7,518,000 $ 9,108,000
=========== ============
The Company leases substantially all of its store facilities under
operating leases which expire at various dates through 2002. Certain
leases require payment of property taxes, utilities, common area
maintenance and insurance as well as additional rent if sales exceed
specified amounts. Total rent expense incurred during 1995, 1996, and
1997 approximated $5,000,000, $5,493,000, and $6,069,000,
respectively, including additional rent expense of $889,000,
$1,045,000, and $1,192,000, respectively. At December 27, 1997, future
minimum annual rental commitments under noncancelable operating leases
were as follows:
1998......... $ 3,820,000
1999......... 3,184,000
2000......... 2,455,000
2001......... 2,016,000
2002......... 1,554,000
Thereafter... 3,109,000
-----------
$16,138,000
===========
3. LINE OF CREDIT
The Company entered into a new $3.0 million revolving line of credit
agreement and a $2.0 million term loan agreement with a major national
bank in August 1997. The revolving line of credit matures on August 1,
1999, and is secured by the Company's inventory, accounts receivable,
and general intangibles. The revolving line of credit bears interest
at a rate of prime plus one-eighth percent (8.625% at December 27,
1997) or, at the Company's option, a rate equal to the then current
London Interbank Offered Rate ("LIBOR") for the term selected by the
Company plus 2.35% on any principal outstanding; interest is payable
on a monthly basis. The Company may request advances on the term loan<PAGE>
until August 1, 1998, at which time the balance will be amortized over
a 48 month period. The term loan is secured by the Company's property
and equipment, and bears interest at a rate of prime plus one-half
percent or, at the Company's option, a rate equal to LIBOR for the
term selected by the Company plus 2.75% on any principal outstanding.
At December 27, 1997, $30,000 was outstanding on the revolving line of
credit while no amounts were outstanding under the term loan.
The Company entered into a $2.0 million revolving line of credit
with a bank in June 1996. The revolving line of credit matured on May
31, 1997, and was secured by substantially all of the Company's
assets, including the Company's executive office building and optical
laboratory in Tempe, Arizona, but excluding furniture, fixtures, and
equipment. The Company repaid the line of credit borrowings with a
portion of the proceeds from its February 1997 common stock offering
described in Note 5.
F-39<PAGE>
<PAGE>
4. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
Notes payable, and capital lease obligations consist of the
following:
December 28, December 27,
1996 1997
------------ ------------
Capital lease obligations.......... $ 836,000 $ 629,000
Notes payable - related party...... 358,000
---------- ----------
Total debt............... 1,194,000 629,000
Less: current portion.............. 678,000 338,000
---------- ----------
Total long-term debt..... $ 516,000 $ 291,000
========== ==========
In early 1996, the Company entered into two bridge loans with Mesirow
Capital Partners VI, a common and preferred stockholder, and Ronald E.
Weinberg, Chairman of the Board, totaling $700,000 to fund the
Company's expansion and advertising needs. The loans bore interest at
an annual rate of 15% and were secured by a deed of trust on the
Company's executive office building and optical laboratory facility in
Tempe, Arizona. The bridge loans were retired with the proceeds of the
former revolving line of credit described in Note 3.
In December 1996, the Company entered into a bridge loan for
$350,000 with The Second National Bank of Warren (Ohio). The loan was
scheduled to mature on June 2, 1997 and bore interest at a rate equal
to the lending bank's prime rate plus 1.5% per annum, payable upon
maturity. The loan was guaranteed by Mr. Weinberg and Mr. Feld agreed
to share in the guaranty. The Company paid Mr. Weinberg and Mr. Feld a
total of $7,500 in exchange for their guaranty of the loan. Norman C.
Harbert, a director of the Company, is also a director of Second
Bancorp Inc., the parent holding company of the Second National Bank
of Warren (Ohio). The Bridge Loan was retired with a portion of the
proceeds from the February 1997 common stock offering described in
Note 5.
5. STOCKHOLDERS' EQUITY
In February 1997, the Company completed a public offering (the
"Offering") of 1,505,400 shares of its common stock, including shares
sold upon the exercise of the underwriters' over allotment option.
Gross proceeds, direct costs, and net proceeds of this Offering
totaled approximately $6,626,000, $1,085,000, and $5,541,000,
respectively. Of the shares sold, 400,000 shares were sold by selling
stockholders. The Company did not receive any proceeds from the sale
of shares by the selling stockholders.
In December 1993, the Company issued 3,960 shares of Series A and
1,500 shares of Series B $1,000 par value 6% Cumulative Convertible
Preferred Stock (the "Preferred Stock"). The Preferred Stock is
redeemable by the Company at par value plus accrued but unpaid
dividends; however, Series B shares cannot be redeemed while any
Series A shares are outstanding. The number of common shares issuable
upon conversion is determined by dividing the par value of outstanding
Preferred Stock by $8.40, subject to customary adjustments. Dividends
on the Preferred Stock are payable quarterly, at an annual rate of $60
per share.
<PAGE>
6. COMMON STOCK OPTIONS AND WARRANTS
In October 1993, the Company established the New West Eyeworks Stock
Option Plan under which certain eligible employees and directors of
the Company may receive awards in the form of stock options. Certain
stock options become exercisable on the date the Company achieves
annual earnings per share targets while others become exercisable
immediately or over a multi-year period with the options vesting
ratably during that period. The exercise price is generally equal to
the fair market price of the Company's common stock on the date of the
grant. The stock option exercise period may not exceed ten years from
the date of grant.
F-40<PAGE>
<PAGE>
A summary of the status of the Company's Stock Option Plan as of
December 30, 1995 December 28, 1996, and December 27, 1997, and
changes during the years ended is presented below:
<TABLE>
<CAPTION>
1995 1996 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 at beginning of
year..................................... 108,500 $7.00 131,500 $5.89 143,500 $5.56
Granted.................................. 99,500 $4.10 53,000 $4.25 159,000 $6.75
Exercised................................
Forfeited................................ (76,500) $4.99 (41,000) $5.00 (7,000) $4.75
Options outstanding at end of
year..................................... 131,500 $5.89 143,500 $5.56 295,500 $6.29
Options exercisable at end of
year..................................... 86,500 $7.00 77,000 $6.90 163,600 $6.31
Weighted-average fair value of
options granted during the year.......... $2.17 $2.12 $3.61
</TABLE>
The following table summarizes information about the stock options granted
during 1995, 1996, and 1997 which are outstanding at December 27, 1997:
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Range of Average Average Average
Exercise Options Remaining Exercise Options Exercise
Prices Outstanding Contract Life Price Exercisable Price
---------- ----------- ------------- -------- ----------- --------
<C> <C> <S> <C> <C> <C>
$3.44-$4.63 64,500 7.2-8.2 years $4.14 6,600 $4.63
$5.50-$7.00 189,000 6.0-9.1 years $6.31 157,000 $6.38
$9.50 42,000 9.8 years $9.50 --- ---
------- -------
295,500 163,600
======= =======
</TABLE>
For purposes of determining the weighted average fair market value of the
options granted during the year, the Company used the Black-Scholes
option-pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Expected dividend yield................ 0% 0% 0%
Expected stock price volatility........ 50% 50% 50%
Risk free interest rate................ 7.1% 5.3% 4.6%
Expected option life................... 5 years 5 years 5 years
</TABLE>
<PAGE>
In accordance with the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company applies APB 25 and related
interpretations in accounting for its stock option plan and,
accordingly, does not recognize compensation expense. If the Company
had elected to recognize compensation expense based on the fair value
of the options granted at grant date as prescribed by SFAS No. 123,
net income and earnings per share (basic and diluted) for 1997 would
have been reduced by approximately $170,000 and $0.04, respectively.
Similar pro forma disclosures for 1996 and 1995 have not been
presented as the effect of such pro forma adjustments is not material.
In connection with the initial public offering in December 1993, the
Company sold warrants to its primary underwriter and two individuals
at a nominal price (1993 Warrants). The 1993 Warrants, which are
exercisable for a four-year period commencing December 23, 1994,
entitle the holders to purchase a total of 106,563 shares of the
Company's common stock at an exercise price of 125% of the initial
public offering price of $7.00 per share ($8.75 per share). In
conjunction with the Offering in early 1997, the Company reduced the
exercise price of the 1993 Warrants from $8.75 to $8.00 per share.
In connection with the Offering, the Company granted to its primary
underwriter and certain individuals warrants (1997 Warrants) to
purchase a number of shares of common stock equal to the number of
shares of common stock that remain issuable and unexercised under the
1993 Warrants upon their termination. The 1997 Warrants are
exercisable beginning on December 23, 1998, the termination date of
the 1993 Warrants, for a period of three years terminating on December
23, 2001. The initial exercise price for the 1997 Warrants will equal
the exercise price under the 1993 Warrants upon their termination,
which price is currently $8.00.
F-41<PAGE>
<PAGE>
In exchange for the guarantee of the Company's obligations under its
former line of credit by certain officers and shareholders, the
Company issued warrants to them to purchase, in the aggregate, 50,000
shares of the Company's common stock at a price per share of $6.11,
subject to customary anti-dilution adjustments. The value of the
warrants, which was determined by independent valuation to be $0.57
per share, is reflected on the December 28, 1996 balance sheet in
other assets and paid-in capital and was amortized to expense in 1997,
concurrent with the termination of the revolving line of credit.
7. INCOME TAXES
Income tax (expense) benefit is comprised of the following:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Current (expense) benefit:
Federal......................... --- $ (30,000) $(32,000)
State........................... --- --- ---
------ ---------- --------
Total....................... --- (30,000) (32,000)
------ ---------- --------
Deferred (expense) benefit:
Federal......................... --- --- 521,000
State........................... --- --- 58,000
------ ---------- --------
Total....................... --- --- 579,000
------ ---------- --------
Total (expense) benefit..... --- $ (30,000) $547,000
====== ========== ========
</TABLE>
Deferred tax assets are comprised of the following:
<TABLE>
<CAPTION>
December 28, 1996 December 27, 1997
----------------- -----------------
<S> <C> <C>
Net operating loss carryforwards................... $ 2,873,000 $ 2,297,000
Employee benefits.................................. 244,000 289,000
Deferred warranty revenues......................... 112,000 108,000
Other.............................................. 306,000 317,000
----------- -----------
Deferred tax assets................................ 3,535,000 3,011,000
Less: valuation allowance.......................... (3,535,000) (2,432,000)
----------- -----------
Net deferred tax assets..................... $ --- $ 579,000
=========== ===========
</TABLE>
Income tax (expense) benefit differs from the amount determined by
applying the U.S. statutory federal tax rate of 34% to income (loss)
before income tax (expense) benefit as a result of the following:
<PAGE>
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Expected income tax (expense) benefit............... $ 689,000 $(283,000) $ (429,000)
Nondeductible expenses.............................. (38,000) (56,000) (49,000)
(Increase) decrease in valuation allowance.......... (651,000) 309,000 1,025,000
---------- --------- ----------
Income tax (expense) benefit........................ $ --- $ (30,000) $ 547,000
========== ========= ==========
</TABLE>
The Company increased its valuation allowance in 1995 due to the net
operating loss (NOL) incurred during the year coupled with the lack of
sustained historical profitability. In 1996, the Company returned to
profitability and reduced its valuation allowance as it was able to
substantially offset taxable income generated during the year with
existing NOL carryforwards. The Company further reduced its valuation
allowance in 1997 because of its ability to once again substantially
offset taxable income generated during the year as well as the
Company's belief that it will be able to realize a portion of its
remaining deferred tax assets. The Company will consider further
reduction to or elimination of the remaining valuation allowance as
profitable operations continue.
As of December 27, 1997, the Company had NOL carryforwards of $5.7
million and $4.9 million for regular tax and alternative minimum tax
purposes, respectively, which begin to expire in 2006. The Company
also has nonexpiring alternative minimum tax credit carryforwards of
$79,000 available to offset future regular taxes.
F-42<PAGE>
<PAGE>
8. EMPLOYEE BENEFIT PLAN
The Company established the New West Eyeworks, Inc. Profit Sharing
and 401(k) Savings Plan (the Plan) for the benefit of employees
(participants) who meet certain age and eligibility requirements. The
Plan provides for discretionary profit sharing contributions as well
as employer matching contributions on participants' pre-tax savings
deferrals. A profit sharing contribution was not made in 1995, 1996 or
1997; however, employer matching contributions approximated $97,000,
$90,000, and $106,000 in 1995, 1996 and 1997, respectively.
9. RELATED PARTY TRANSACTIONS
The Company is a party to an expense sharing arrangement whereby it
pays an entity owned by an officer of the Company for certain services
provided by such entity for the Company and as reimbursement for
certain expenses incurred directly on behalf of the Company. The
aggregate amount of the payments by the Company to such entity,
including expenses incurred directly on behalf of the Company, were
approximately $136,000, $109,000, and $137,000 in 1995, 1996 and 1997,
respectively.
A director of the Company is a partner in a law firm which provides
legal services to the Company. The aggregate amount of expense
included in 1996 and 1997 for services provided to the Company by this
entity amount to $158,000 and $173,000, respectively.
10. COMMITMENTS AND CONTINGENCIES
From time to time, the Company is involved in legal matters which
are incidental to its operations. In the opinion of management, the
ultimate resolution of these matters is not anticipated to have a
material adverse effect on the Company's financial condition or
results of operations.
11. (UNAUDITED) SUBSEQUENT EVENT
On October 23, 1998, Vista Eyecare, Inc. completed its tender offer
for all the issued and outstanding capital stock of the Company. In
connection with this transaction, the Company incurred approximately
$270,000 of related costs through September 26, 1998. These costs
have been reflected as acquisition related expenses in the
accompanying consolidated statement of operations.
F-43
<PAGE>
==========================================================================
WE HAVE NOT AUTHORIZED ANY
DEALER, SALESPERSON OR OTHER PERSON
TO GIVE ANY INFORMATION OR REPRESENT
ANYTHING NOT CONTAINED IN THIS PROSPECTUS.
YOU MUST NOT RELY ON ANY UNAUTHORIZED
INFORMATION. THIS PROSPECTUS DOES NOT
OFFER TO SELL OR BUY ANY SECURITY IN ANY
JURISDICTION WHERE IT IS UNLAWFUL. THE
INFORAMATION IN THIS PROSPECTUS IS CURRENT
AS OF MARCH 1, 1999.
=========================================================================
[VISTA EYECARE, INC. LOGO APPEARS HERE]
12 3/4% Senior Notes
due 2005
MARCH 1, 1999
==========================================================================
<PAGE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's Amended and Restated Articles of
Incorporation provide that no director will be personally liable to
the Registrant or its shareholders for monetary damages for breach of
duty of care or other duty owed to the Registrant as a director,
except that such provision will only eliminate or limit the liability
of a director to the extent permitted from time to time by the Georgia
Business Corporation Code or any successor law or laws.
Article VII of the Bylaws of the Registrant authorizes
indemnification of the Registrant's officers and directors for any
liability and expense incurred by them in connection with or resulting
from any threatened, pending or completed legal action or other
proceeding or investigation by reason of his being or having been an
officer or director. An officer or director may only be indemnified
if he acted in good faith and in a manner he reasonably believed to be
in, or not opposed to, the best interests of the Registrant, and, with
respect to a criminal matter, he did not have reasonable cause to
believe that his conduct was unlawful. No officer or director who has
been adjudged liable to the Registrant or adjudged liable for the
improper receipt of a personal benefit is entitled to indemnification.
Any officer or director who has been wholly successful on
the merits or otherwise in defense of any proceeding to which he was a
party, or in defense of any claim because of his official capacity is
entitled to indemnification as to reasonable expenses by the
Registrant as of right. All other determinations in respect of
indemnification shall be made by either: (i) a majority vote of a
quorum of directors not at the time parties to the proceeding, or if a
quorum cannot be obtained, then by a majority vote of a committee duly
designated by the board of directors (in which designation directors
who are parties may participate) consisting solely of two or more
directors not at the time parties to the proceeding; (ii) independent
legal counsel selected in accordance with the Bylaws and at the
request of the Board; or (iii) the holders of a majority of the
Registrant's stock who at such time are entitled to vote for the
election of directors.
The provisions of the Registrant's Bylaws on indemnification
are consistent in all material respects with the laws of the State of
Georgia, which authorize indemnification of corporate officers and
directors.
The Registrant's directors and officers are insured against
losses arising from any claim against them as such for wrongful acts
or omissions, subject to certain limitations. In addition, the
Registration Rights Agreement filed as Exhibit 4.3 hereto contains
certain provisions pursuant to which certain officers, directors and
controlling persons of the Company may be entitled to be indemnified
by the Initial Purchasers and other holders of Notes.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed as part of this
Registration Statement:
<PAGE>
Exhibit
Number Description of Exhibit
------- ----------------------
*4.1 Indenture dated as of October 8, 1998, among the
Company, the Guarantors and State Street Bank &
Trust Company, as Trustee (including form of
Exchange Note).
*4.2 Purchase Agreement dated as of October 8, 1998,
among the Company, the Guarantors and the Initial
Purchasers.
*4.3 Registration Rights Agreement dated as of October 8,
1998, among the Company, the Guarantors and the
Initial Purchasers.
II-1
<PAGE>
*4.4 Form of Exchange Note (included in Exhibit 4.1).
5 Opinion of Kilpatrick Stockton LLP.
*8 Tax Opinion of Kilpatrick Stockton LLP.
*10.58 Credit Agreement dated October 8, 1998 by and
among the Company, Bank of America, FSB, First
Union National Bank and the financial institutions
listed therein.
*21 Subsidiaries of the Registrant.
23.1 Consent of Kilpatrick Stockton LLP (See Exhibit 5)
*23.2 Consent of Arthur Anderson LLP.
*23.3 Consent of PricewaterhouseCoopers LLP.
*23.4 Consent of Ernst & Young LLP.
*24 Powers of Attorney (see signature pages).
*25 Statement of Eligibility of Trustee under the
Trust Indenture Act on Form T-1.
*99.1 Form of Transmittal Letter.
*99.2 Form of Notice of Guaranteed Delivery.
____________________________
* Previously filed.
(b) Financial Statement Schedules
None.
(c) Reports, Opinions or Appraisals
Not Applicable.
ITEM 22. UNDERTAKINGS.
(a) (i) The undersigned Registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act of
1933, each filing of the Registrant's annual report pursuant to
Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934
(and, where applicable, each filing of an employee benefit plan's
annual report pursuant to section 15(d) of the Securities Exchange Act
of 1934) that is incorporated by reference in this registration
statement shall be deemed to be a new registration statement relating
to the securities offered therein and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(ii) Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and
is, therefore, unenforceable. In the event that a claim for
II-2
<PAGE>
indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered,
the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
(b) The undersigned Registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the
prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within
one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt
means. This include information contained in documents filed
subsequent to the effective date of the registration statement through
the date of responding to the request.
(c) The undersigned Registrant hereby undertakes to supply by
means of a post-effective amendment all information concerning a
transaction, and the Company being acquired involved therein, that was
not the subject of and included in the registration statement when it
became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant has duly caused this Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Atlanta, State of Georgia, on February 26, 1999.
VISTA EYECARE, INC.
By: /s/ James W. Krause
James W. Krause
Chief Executive Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Amendment No. 1 to the Registration Statement has been
signed by the following persons in the capacities indicated on the
26th day of February, 1999.
/s/ James W. Krause Chairman of the Board, and
James W. Krause Chief Executive Officer
(Principal Executive Officer)
* Director, President, and Chief
Barry J. Feld Operating Officer (Principal
Executive Officer)
* Vice President, Chief
Angus C. Morrison Financial Officer and Treasurer
(Principal Financial and
Accounting Officer)
* Director
David I. Fuente
* Director
Ronald J. Green
* Director
James E. Kanaley
* Director
Campbell B. Lanier, III
* Director
J. Smith Lanier, II
By: /s/ James W. Krause
as attorney-in-fact
II-4<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the undersigned has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Atlanta, State of Georgia, on February 26,
1999.
FAMILY VISION CENTERS, INC.
By: /s/ Mitchell Goodman
Mitchell Goodman
Vice President
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Amendment No. 1 to the Registration Statement has been
signed by the following persons in the capacities indicated on the
26th day of February, 1999.
* President, Chief Executive Officer and
James W. Krause Director (Principal Executive Officer)
* Vice President, Chief Financial
Angus C. Morrison Officer and Director (Principal Financial
and Accounting Officer)
/s/ Mitchell Goodman Director
Mitchell Goodman
By: /s/ Mitchell Gooeman
as attorney-in-fact
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the undersigned has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Atlanta, State of Georgia, on February 26,
1999.
FRAME-N-LENS OPTICAL, INC.
By: Mitchell Goodman
Mitchell Goodman
Vice President
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Amendment No. 1 to the Registration Statement has been
signed by the following persons in the capacities indicated on the
26th day of February, 1999.
* President, Chief Executive Officer and
James W. Krause Director (Principal Executive Officer)
* Vice President, Chief Financial
Angus C. Morrison Officer and Director (Principal Financial
and Accounting Officer)
/s/ Mitchell Goodman Director
Mitchell Goodman
By: /s/ Mitchell Goodman
as attorney-in-fact
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the undersigned has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Atlanta, State of Georgia, on February 26,
1999.
INTERNATIONAL VISION ASSOCIATES, LTD.
By: /s/ Mitchell Goodman
Mitchell Goodman
Vice President
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Amendment No. 1 to the Registration Statement has been
signed by the following persons in the capacities indicated on the
26th day of February, 1999.
* President, Chief Executive Officer and
James W. Krause Director (Principal Executive Officer)
* Vice President, Chief Financial
Angus C. Morrison Officer and Director (Principal Financial
and Accounting Officer)
/s/ Mitchell Goodman Director
Mitchell Goodman
By: /s/ Mitchell Goodman
as attorney-in-fact
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the undersigned has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Atlanta, State of Georgia, on February 26,
1999.
MIDWEST VISION, INC.
By: /s/ Mitchell Goodman
Mitchell Goodman
Vice President
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Amendment No. 1 to the Registration Statement has been
signed by the following persons in the capacities indicated on the
26th day of February, 1999.
* President, Chief Executive Officer and
James W. Krause Director (Principal Executive Officer)
* Vice President, Chief Financial
Angus C. Morrison Officer and Director (Principal Financial
and Accounting Officer)
/s/ Mitchell Goodman Director
Mitchell Goodman
By: /s/ Mitchell Goodman
as attorney-in-fact
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the undersigned has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Atlanta, State of Georgia, on February 26,
1999.
NVAL HEALTHCARE SYSTEMS, INC.
By: /s/ Mitchell Goodman
Mitchell Goodman
Vice President
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Amendment No. 1 to the Registration Statement has been
signed by the following persons in the capacities indicated on the
26th day of February, 1999.
* President, Chief Executive Officer and
James W. Krause Director (Principal Executive Officer)
* Vice President, Chief Financial
Angus C. Morrison Officer and Director (Principal Financial
and Accounting Officer)
/s/ Mitchell Goodman Director
Mitchell Goodman
By: /s/ Mitchell Goodman
as attorney-in-fact
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the undersigned has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Atlanta, State of Georgia, on February 26,
1999.
VISION ADMINISTRATORS, INC.
By: /s/ Mitchell Goodman
Mitchell Goodman
Vice President
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Amendment No. 1 to the Registration Statement has been
signed by the following persons in the capacities indicated on the
26th day of February, 1999.
* President, Chief Executive Officer and
James W. Krause Director (Principal Executive Officer)
* Vice President, Chief Financial
Angus C. Morrison Officer and Director (Principal Financial
and Accounting Officer)
/s/ Mitchell Goodman Director
Mitchell Goodman
By: /s/ Mitchell Goodman
as attorney-in-fact
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the undersigned has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Atlanta, State of Georgia, on February 26,
1999.
NEW WEST EYEWORKS, INC.
By: /s/ Mitchell Goodman
Mitchell Goodman
Vice President
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Amendment No. 1 to the Registration Statement has been
signed by the following persons in the capacities indicated on the
26th day of February, 1999.
* President, Chief Executive Officer and
James W. Krause Director (Principal Executive Officer)
* Vice President, Chief Financial
Angus C. Morrison Officer and Director (Principal Financial
and Accounting Officer)
/s/ Mitchell Goodman Director
Mitchell Goodman
By: /s/ Mitchell Goodman
as attorney-in-fact
II-11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the undersigned has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Atlanta, State of Georgia, on February 26,
1999.
ALEXIS HOLDINGS COMPANY, INC.
By: /s/ Mitchell Goodman
Mitchell Goodman
Vice President
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Amendment No. 1 to the Registration Statement has been
signed by the following persons in the capacities indicated on the
26th day of February, 1999.
* President, Chief Executive Officer and
James W. Krause Director (Principal Executive Officer)
* Vice President, Chief Financial
Angus C. Morrison Officer and Director (Principal Financial
and Accounting Officer)
/s/ Mitchell Goodman Director
Mitchell Goodman
By: /s/ Mitchell Goodman
as attorney-in-fact
II-12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the undersigned has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Atlanta, State of Georgia, on February 26,
1999.
VISTA EYECARE NETWORK, LLC
By: /s/ Mitchell Goodman
Mitchell Goodman
Vice President
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Amendment No. 1 to the Registration Statement has been
signed by the following persons in the capacities indicated on the
26th day of February, 1999.
* President, Chief Executive Officer and
James W. Krause Director (Principal Executive Officer)
* Vice President, Chief Financial
Angus C. Morrison Officer and Director (Principal Financial
and Accounting Officer)
/s/ Mitchell Goodman Director
Mitchell Goodman
By: /s/ Mitchell Goodman
as attorney-in-fact
II-13
<PAGE>
Exhibit Index
Exhibit
Number Description of Exhibit
------- ----------------------
*4.1 Indenture dated as of October 8, 1998, among the
Company, the Guarantors and State Street Bank &
Trust Company, as Trustee (including form of
Exchange Note).
*4.2 Purchase Agreement dated as of October 8, 1998,
among the Company, the Guarantors and the Initial
Purchasers.
*4.3 Registration Rights Agreement dated as of October 8,
1998, among the Company, the Guarantors and the
Initial Purchasers.
*4.4 Form of Exchange Note (included in Exhibit 4.1).
5 Opinion of Kilpatrick Stockton LLP.
*8 Tax Opinion of Kilpatrick Stockton LLP.
*10.58 Credit Agreement dated October 8, 1998 by and
among the Company, Bank of America, FSB, First
Union National Bank and the Financial institutions
listed therein.
*21 Subsidiaries of the Registrant.
23.1 Consent of Kilpatrick Stockton LLP (See Exhibit 5)
*23.2 Consent of Arthur Anderson LLP.
*23.3 Consent of PricewaterhouseCoopers LLP.
*23.4 Consent of Ernst & Young LLP.
*24 Powers of Attorney (see signature pages).
*25 Statement of Eligibility of Trustee under the
Trust Indenture Act on Form T-1.
*99.1 Form of Transmittal Letter.
*99.2 Form of Notice of Guaranteed Delivery.
______________________________
* Previously filed.
II-14
Attorneys at Law
Suite 2800
KILPATRICK STOCKTON LLP 1100 Peachtree Street
Atlanta, Georgia 30309-4530
Telephone: 404.815.6500
Facsimile: 404.815.6555
Web site: www.kilstock.com
E-mail: [email protected]
February 26, 1999
Direct Dial: 404.815.6444
Vista Eyecare, Inc.
296 Grayson Highway
Lawrenceville, Georgia 30045
Re: Registration Statement on Form S-4
File No. 333-71825
Ladies and Gentlemen:
We have acted as counsel for Vista Eyecare, Inc., a Georgia
corporation (f/k/a National Vision Associates, Ltd.) (the "Company"),
in connection with the preparation and filing of a registration
statement on Form S-4, File No. 333-71825 (the "Registration
Statement"), with the Securities and Exchange Commission under the
Securities Act of 1933, as amended. The Registration Statement
relates to the exchange of up to an aggregate principal amount of
$125,000,000 of the Company's 12 3/4% Senior Notes Due 2005, Series B
(the "Exchange Notes") for up to an aggregate principal amount of
$125,000,000 of its outstanding 12 3/4% Senior Notes Due 2005, Series
A. Capitalized terms used but not defined herein shall have the
meanings as set forth in the Registration Statement.
This letter is governed by, and shall be interpreted in
accordance with, the Legal Opinion Accord (the "Accord") of the
American Bar Association Section of Business Law (1991). As a
consequence, it is subject to a number of qualifications, exceptions,
definitions, limitations on coverage and other limitations, all as
more particularly described in the Accord, and this letter should be
read in conjunction with the Accord. Notwithstanding anything in the
Accord to the contrary, the Accord shall not be deemed to limit or
otherwise qualify any of the express qualifications, exceptions and
limitations that are set forth herein, each of which shall be
cumulative of the Accord.
In connection with this opinion, we have relied as to matters of
fact, without investigation, upon certificates of public officials and
others and upon affidavits, certificates and written statements of
directors, officers and employees of, and the accountants for, the
Company. We have also examined originals or copies, certified or
otherwise identified to our satisfaction, of such instruments,
documents and records as we have deemed relevant and necessary to
examine for the purpose of this opinion, including (a) the
Registration Statement, (b) the Articles of Incorporation of the
Company, as amended to date, (c) the By-laws of the Company, as
amended to date, (d) the minutes of meetings of the Board of Directors
of the Company, (e) the Indenture for the Notes, (f) the Form of
<PAGE>
Vista Eyecare, Inc.
February 26, 1999
Page 2
Exchange Note, and (g) the Statement on Form T-1 under the Trust
Indenture Act of 1939, as amended, relating to the Indenture.
In connection with this opinion, we have assumed the accuracy and
completeness of all documents and records that we have reviewed, the
genuineness of all signatures, the due authority of the parties
signing such documents, the authenticity of the documents submitted to
us as originals and the conformity to authentic original documents of
all documents submitted to us as certified, conformed or reproduced
copies. We have further assumed that:
(i) All natural persons involved in the transactions
contemplated by the Registration Statement (the "Offering") and
the Indenture have sufficient legal capacity to enter into and
perform their respective obligations under the Indenture and to
carry out their roles in the Offering.
(ii) Each party involved in the Offering other than the
Company (collectively the "Other Parties") has satisfied all
legal requirements that are applicable to it to the extent
necessary to make the Indenture enforceable against it.
(iii) Each of the Other Parties has complied with all
legal requirements pertaining to its status as such related to
its rights to enforce the Indenture against the Company.
The opinions set forth below are limited to the laws of the
State of Georgia and the federal laws of the United States of
America. We are not members of the state bar of New York, and we
are not experts on the laws of such state.
Further, we note that the Exchange Notes provide that they
are to be governed by the laws of the State of New York. For
purposes of this letter, we have assumed with your consent that,
notwithstanding their express terms, the Exchange Notes will be
governed by the laws of the State of Georgia (without giving
effect to its conflicts of laws principles). We express no
opinion on what laws will actually govern the Exchange Notes.
<PAGE>
Vista Eyecare, Inc.
February 26, 1999
Page 3
Based upon and subject to the foregoing, it is our opinion
that:
(1) The Company is a corporation duly incorporated and existing
under the laws of the State of Georgia.
(2) The Exchange Notes covered by the Registration Statement,
when executed in the manner set forth in the Indenture and issued and
delivered in the manner set forth in the Registration Statement, will
be legally issued, will be binding obligations of, and will be
enforceable against, the Company.
The General Qualifications apply to the opinions set forth above.
We hereby consent to the reference to our name in the
Registration Statement under the caption "Legal Matters" and further
consent to the filing of this opinion as Exhibit 5 to the Registration
Statement.
Very truly yours,
KILPATRICK STOCKTON LLP
By: /s/ David A. Stockton
David A. Stockton, a Partner
