SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 2, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-20001
VISTA EYECARE, INC.
(Exact name of Registrant as specified in its charter)
Georgia
(State or other jurisdiction of
incorporation or organization)
58-1910859
(I.R.S. Employer Identification No.)
296 Grayson Highway
Lawrenceville, Georgia
(Address of principal executive offices)
30045
(Zip Code)
Registrant's telephone number, including area code: (770) 822-3600
Securities registered pursuant to Section 12(b) of the Act:
None
Page 1 of 52
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<PAGE>
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ ]
The number of shares of Common Stock of the registrant outstanding
as of March 1, 1999, was 21,168,728. The aggregate market value of
shares of Common Stock held by non-affiliates of the registrant as of
March 1, 1999, was approximately $97.9 million based on a closing
price of $4.813 on the NASDAQ Stock Market on such date. For purposes
of this computation, all executive officers and directors of the
registrant are deemed to be affiliates. Such determination should
not be deemed to be an admission that such directors and officers
are, in fact, affiliates of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents have been incorporated by
reference into the parts indicated: the Company's definitive Proxy
Statement for the 1999 Annual Meeting of Shareholders to be filed with
the Securities and Exchange Commission not later than 120 days after
the end of the fiscal year covered by this report--Part III.
The Exhibit Index is located at pages 20 - 23.
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PART I
ITEM 1. BUSINESS
Vista Eyecare, Inc. (the "Company") is engaged in the retail sale
of optical goods and services. As of January 2, 1999, the Company
operated a total of 919 vision centers, 893 of which are in 44 states
and Puerto Rico and 26 of which are in Mexico. Of the Company's 919
vision centers, a total of 331 are free-standing vision centers
located in regional shopping centers, power centers, and strip
shopping centers. In addition, 588 of the Company's vision
centers are operated as leased departments, with 373 in Wal-Mart
stores, 121 in Sam's Club stores, 52 in Fred Meyer stores, 26 in Wal-
Mart Mexico stores and 16 in United States Military Exchanges.
To reduce its dependence on Wal-Mart, and to create additional
growth opportunities, the Company decided in 1997 to develop its own
free-standing locations, initially through the acquisition of regional
optical chains. As a result, in October 1997 the Company acquired
Midwest Vision, Inc., a chain of 51 vision centers located primarily
in Minnesota. In July 1998, the Company acquired Frame-n-Lens
Optical, Inc. ("Frame-n-Lens"), a chain of approximately 280 vision
centers located mainly in the western United States. In October 1998,
the Company acquired New West Eyeworks, Inc. ("New West"), which
operated approximately 175 vision centers in 13 states. (See Note 4
to consolidated financial statements.)
MARKETING STRATEGY
The Company generally employs a marketing philosophy of offering
quality and value with "customer satisfaction guaranteed." The
Company employs an everyday low price strategy in its retail
operations. Management constantly strives to identify new means of
accomplishing its overall goal of being a low-cost provider of quality
retail optical products.
VISION CENTER OPERATIONS
Each of the Company's existing vision centers occupies
approximately 1,000 square feet with separate areas for merchandise
display, customer service, and contact lens fitting. Services of
independent optometrists are typically available from clinics which
are approximately 500 square feet and located in, adjacent to, or
nearby the vision center, depending on regulatory requirements. In
each vision center, the Company maintains an on-premises inventory of
approximately 1,000 eyeglass frames, 725 pairs of spectacle lenses,
and 550 pairs of contact lenses, together with assorted sunglasses,
eyeglass cases, eyeglass accessories, and contact lens accessories.
Free-standing locations utilize the Company's centralized laboratories
to provide prompt delivery of prescription eyewear. Vision centers
located in domestic Wal-Mart stores typically have a laboratory
containing a patternless edging and fitting unit and other equipment
that, coupled with the on-site inventory of frames, spectacle lenses,
and contact lenses, allow the Company to give prompt, one-hour service
to many customers who request quick delivery.
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. Additionally, the Company's
<PAGE>
agreement with Wal-Mart requires that such services be available for a
minimum of 48 hours per week to the extent permitted by applicable
law. These optometrists, whose activities and relationships with
entities such as the Company are subject to state and local
regulation, are typically not employed by, and receive no compensation
from the Company. See "Government Regulation." Such independent
optometrists sublicense the eye examination facilities and equipment
from the Company.
MANAGEMENT INFORMATION 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. Depending on the location of the vision center and the nature
of the order, the transaction is electronically sent to one of the
regional laboratories for manufacturing.
Page 3 0f 52<PAGE>
The Company is in the process of developing an enhanced point of
sale software system which will be installed in its vision centers.
The primary objectives of the system are 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 "Management's
Discussion and Analysis of Financial Condition and Results of
Operations Impact of the Year 2000 Issue."
LEASED DEPARTMENT RELATIONSHIPS
Wal-Mart
The Company's relationship with each of Wal-Mart and Wal-Mart
Mexico is governed by a master license agreement (the "Wal-Mart
Agreement" and the "Mexico Agreement", respectively). Each master
license agreement 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
------------ -------
Wal-Mart Agreement <F1> 9 years One for three years
Mexico Agreement <F2> 5 years Two for two years;
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 vision centers located in Wal-Mart stores were acquired as part of
the acquisition of Frame-n-Lens, these stores are not covered by the
Wal-Mart Agreement.
<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
leased 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.
</FN>
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. 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. 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 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<PAGE>
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 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.
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<PAGE>
Sam's Club
The Company also operates 121 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 these leases.
Fred Meyer
The Company operates 52 leased 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.
No Assurances of Expansion in Leased Stores
-------------------------------------------
Future additional expansion in stores of any of the Company's hosts
beyond those currently under contract is out of the control of the
Company and there can be no assurance that any host will offer the
Company any additional vision centers or that any such offer will be
on terms that are the same as or similar to the terms contained in the
current agreements. Management periodically discusses expansion
opportunities and other matters with each host, but there can be no
assurance that these discussions will result in additional vision
centers being offered to the Company.
Wal-Mart operates its own optical division. No assurance can be
given that, after the Company has opened 400 locations pursuant to the
Wal-Mart Agreement, Wal-Mart will not allocate all vision centers to
its own optical division.
The Company regularly explores opportunities to expand outside of
its existing leased environments and continues to consider various
options, such as opening free-standing vision centers. Management
currently believes that the Company's most likely avenue of
additional expansion will be through the acquisition and development
of free-standing locations.
MANUFACTURING AND DISTRIBUTION
The Company currently utilizes four facilities (located in
Lawrenceville, Georgia; Fullerton, California; St. Cloud, Minnesota;
and Tempe, Arizona) which each house an optical laboratory and a
distribution center. 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 state-of-the-art coating facility in its Lawrenceville
laboratory, capable of coating lenses with anti-reflective and mirror
surfaces. Each vision center in Wal-Mart stores (exclusive of the
seven such vision centers acquired from Frame-n-Lens) has its own
finishing laboratory which manufactures lenses for approximately half
of all customers purchasing spectacle lenses.
The Company's distribution centers provide lens blanks, frames,
sunglasses and contact lenses to all vision centers. Exclusive of the
Tempe facility, the Company's distribution centers and all
laboratories are interfaced with the Company's management information
system. The Company's distribution centers ship completed customer
orders and inventory replenishment requirements, including frames,<PAGE>
spectacles and contact lenses, to the Company's vision centers
throughout the United States by overnight delivery services.
The distribution center in Fullerton, California was acquired as a
part of the acquisition of Frame-n-Lens. As part of the acquisition of
New West, the Company acquired laboratory and distribution facilities
located in Tempe, Arizona and Portland, Oregon. The Company has
already consolidated the Portland facility, into its Fullerton,
California facility. The Company intends to consolidate the Tempe
facility into the Fullerton facility in 1999.
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,
Page 5 of 52<PAGE>
<PAGE>
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 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 costs incurred by the
Company 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.
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.
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 locations in a prominent position in its host stores, 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 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 significant competitive advantages.
Some optical retailers and other vision care providers have more
service locations and cover more geographical areas than does the
Company.
MEXICAN OPERATIONS
The Company's Mexico 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. No
assurance can be given that such operations will be able to attain<PAGE>
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.
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 2,
1999 was $4 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.
Page 6 of 52
<PAGE>
<PAGE>
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 1998, the financial
statements of the Mexican operation were remeasured with the U.S.
dollar as the functional currency. During 1998, an immaterial loss
resulted from changes in foreign currency rates between the peso and
the U.S. dollar, as calculated in the re-measurement 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. The Company's
freestanding locations do business under the "Vista Optical" name, a
federally registered trademark.
EMPLOYEES
As of January 2, 1999, the Company employed 3,300 associates on a
full-time basis and 1,000 associates on a part-time basis, of whom
3,600 were engaged in retail sales, 450 in laboratory and distribution
operations, and 250 in management and administration. Apart from its
Mexico operations, 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.
Page 7 of 52
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<PAGE>
ITEM 2. PROPERTIES
The Company's 919 vision centers in operation as of January 2,
1999 are geographically located as follows:
<TABLE>
<CAPTION>
Location Total Location Total
-------- ----- -------- -----
<S> <C> <S> <C>
Alabama 12 Nevada 11
Alaska 16 New Hampshire 4
Arkansas 5 New Jersey 12
Arizona 44 New Mexico 13
California 237 New York 29
Colorado 27 North Carolina 40
Connecticut 10 North Dakota 10
Florida 39 Ohio 3
Georgia 41 Oregon 40
Hawaii 4 Pennsylvania 22
Idaho 12 Puerto Rico 1
Illinois 8 South Carolina 14
Indiana 4 South Dakota 1
Iowa 17 Tennessee 8
Kansas 13 Texas 42
Kentucky 3 Utah 1
Louisiana 3 Virginia 25
Maine 1 Washington 46
Maryland 4 West Virginia 7
Massachusetts 5 Wisconsin 4
Michigan 4 Wyoming 3
Minnesota 34
Missouri 9
Montana 5 Mexico 26
</TABLE>
The Company's headquarters in Lawrenceville, Georgia is located in
a 66,000 square foot facility which includes a distribution center and
lens laboratory. The facility is subleased from Wal-Mart through the
Year 2000. The Company has an option to renew this lease for
approximately seven years.
The Company has regional headquarters located in St. Cloud,
Minnesota and Fullerton, California. The 20,000 square foot St. Cloud
facility is subject to a lease that expires in October 2007. The
45,000 square foot Fullerton facility is subject to a lease that
expires in August 2006. The Company also has an option to extend the
Fullerton lease for five years. Both facilities contain optical
laboratories.
The Company's facility in Tempe, Arizona is owned by Alexis
Holdings, Inc., a wholly-owned subsidiary of New West. The 24,000
square foot facility contains a laboratory, distribution center and
administrative offices. After current processing is consolidated to
other regional facilities, management intends to sell the Tempe
facility.
ITEM 3. 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.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
last quarter of fiscal 1998.
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock was traded on the NASDAQ National Market
System under the symbol "NVAL" from May 1992 until January 4, 1999,
when the symbol was changed to "VSTA".
The following table sets forth for the periods indicated the high
and low prices of the Company's Common Stock in the over-the-counter
market on the NASDAQ National Market System.
Quarter Ended High Low
------------------ ------ ------
Fiscal 1997 March 29, 1997 $5.500 $3.875
June 28, 1997 $5.250 $4.250
September 27, 1997 $5.250 $4.063
January 3, 1998 $6.125 $5.125
Fiscal 1998 April 4, 1998 $7.375 $4.875
July 4, 1998 $8.750 $5.000
October 3, 1998 $6.750 $4.125
January 2, 1999 $6.250 $2.188
As of January 2, 1999, there were approximately 560 holders of
record of the Company's Common Stock.
It is the present intention of the Company's board of directors not
to pay dividends but rather to use the Company's cash resources for
the expansion of its operations, acquisitions and repayment of the
Company's revolving credit facility. Future dividend policy will
depend upon the earnings and financial condition of the Company, the
Company's need for funds, and other factors.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company with respect
to the consolidated financial statements for the years ended January 2,
1999, January 3, 1998, December 28, 1996, December 30, 1995, and
December 31, 1994 is derived from the Company's consolidated financial
statements. The selected financial data set forth below should be
read in conjunction with the consolidated financial statements and
notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
1998<F1> 1997<F1><F2> 1996<F1> 1995<F1> 1994<F3>
-------- ------------ -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
(In thousands except per share information)
Net sales $ 245,331 $ 186,354 $ 160,376 $ 145,573 $ 119,395
Cost of goods sold 112,929 86,363 76,692 67,966 53,898
-------- -------- -------- ------- -------
Gross profit 132,402 99,991 83,684 77,607 65,497
Gross profit percentage 54% 54% 52% 53% 55%
Selling, general, and administrative expense 121,413 89,156 76,920 74,390 63,911
Provision for dispositions <F4> -- -- -- 958 --
Other nonrecurring charges <F4> -- -- -- 1,053 --
-------- -------- -------- ------- -------
Operating income 10,989 10,835 6,764 1,206 1,586
Other expense, net 5,538 1,554 2,084 2,626 1,195
-------- -------- -------- ------- -------
Income (loss) before income taxes 5,451 9,281 4,680 (1,420) 391
Income tax expense 2,037 3,708 1,200 100 40
-------- -------- -------- ------- -------
Net income (loss) $ 3,414 $ 5,573 $ 3,480 $ (1,520) $ 351
======== ======== ======== ======= =======
Basic earnings (loss) per common share $ 0.16 $ 0.27 $ 0.17 $ (0.07) $ 0.02
======== ======== ======== ======= =======
Diluted earnings (loss) per common share $ 0.16 $ 0.27 $ 0.17 $ (0.07) $ 0.02
======== ======== ======== ======= =======
STATISTICAL DATA (UNAUDITED):
(In thousands except vision center data)
Domestic vision centers open at end of period:
Free-standing vision centers 331 50 -- -- --
Leased department vision centers 562 364 320 319 261
Average weekly consolidated sales per
vision center <F5> $ 7,800 $ 9,400 $ 9,300 $ 8,700 $ 9,500
Capital expenditures $ 9,183 $ 8,049 $ 2,713 $ 13,175 $ 15,963
Depreciation and amortization 14,177 11,035 10,058 10,378 7,567
EBITDA <F6> 25,166 21,870 16,822 11,584 9,153
EBITDA margin 10.3% 11.7% 10.5% 8.0% 7.7%
Total annual sales growth 31.6% 16.2% 10.2% 21.9% 35.2%
BALANCE SHEET DATA:
(In thousands)
Working capital $ 4,208 $ 12,171 $ 13,502 $ 14,556 $ 8,723
Total assets 229,097 83,250 74,564 81,237 77,612
Current and long-term debt and capital lease 138,838 24,203 26,500 38,480 31,129
obligations
Shareholders' equity 44,697 36,368 29,906 26,326 29,613
Total debt and lease obligations as a
percentage of total capital <F7> 76% 40% 47% 59% 51%
<FN>
<F1> Financial information for 1995 and subsequent years include
results of international operations for the 12 months ended
November 30. (see Note 2 to consolidated financial statements.)
Page 10 of 52<PAGE>
<PAGE>
<F2> Effective January 1, 1995, the Company changed its year end to a
52/53 week retail calendar (see Note 2 to consolidated financial
statements). Fiscal 1997 consisted of 53 weeks ended January 3,
1998. Sales for the 53rd week approximated $3.0 million in
fiscal 1997.
<F3> Financial information for 1994 includes results of international
operations for the 11 months ended November 30, 1994.
<F4> In 1995, the Company decided to dispose of its non-core business
operations, resulting in a $2 million provision.
<F5> Calculated from sales from each month during the period divided
by the number of store weeks of sales during the period,
excluding stores not open a full month.
<F6> EBITDA is calculated as earnings before interest, taxes,
depreciation and amortization.
<F7> Total Capital is calculated as total current and long-term debt
and capital lease obligations combined with total shareholders'
equity.
</FN>
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
The Company's results of operations in any period are significantly
affected by the number of vision centers opened and operating during
such period. Given the Company's rapid expansion through recent
acquisitions, and dispositions of significant operating units, period-
to-period comparisons may not be meaningful and the results of
operations for historical periods may not be indicative of future
results. At January 2, 1999, the Company operated 919 vision centers,
versus 443 vision centers at January 3, 1998.
Effective January 1, 1995, the Company changed its year end to a
more standard 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 (see Note 2 to consolidated financial statements).
YEAR ENDED JANUARY 2, 1999 ("FISCAL 1998") COMPARED TO YEAR ENDED
JANUARY 3, 1998 ("FISCAL 1997")
Consolidated Results
NET SALES. Net sales during fiscal 1998 increased to $245.3
million from $186.4 million in fiscal 1997. The increase was
primarily due to the acquisitions of Frame-n-Lens and New West in 1998
and a full year of operations from Midwest Vision which was acquired
in October 1997. Comparable store sales in leased departments
increased by 3% over levels recorded in fiscal 1997. Consolidated
average weekly net sales per vision center decreased from $9,400
during fiscal 1997 to $7,800 in fiscal 1998, primarily as the result
of recently acquired vision centers with lower net sales levels. <PAGE>
Vision centers acquired in the Frame-n-Lens acquisition recorded
significant negative comparable store sales and had a negative impact
on results following the date of the acquisition. Continuation of
this trend would have a negative impact on earnings and liquidity in
1999.
For the core leased departments, average spectacle unit sales per
week increased and the average spectacle transaction value decreased
over that recorded in fiscal 1997, resulting in a net increase in
spectacle sales for stores open for more than one year. Contact lens
unit sales increased over the prior year, but such increase was more
than offset by a decline in the average transaction value on disposable
contacts resulting from competitive pressure on pricing. Sales under
managed care plans increased over levels recorded in 1997.
Page 11 of 52<PAGE>
<PAGE>
GROSS PROFIT. Gross profit increased to $132.4 million in fiscal
1998 from $100 million in fiscal 1997. The increase was due to the
increase in net sales described above. Gross profit percentage essentially
remained even against levels recorded in fiscal 1997. Promotional monies
from vendors and increased manufacturing efficiencies had a positive
impact on gross profit. However, this was partially offset by the
lower gross profit recorded at the vision centers acquired by the
Company in 1998.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE ("SG&A expense").
SG&A expense (which includes both operating expenses and home office
overhead) increased to $121.4 million in 1998 from $89.2 million in 1997.
As a percentage of sales, SG&A expense increased from 47.8% in 1997 to
49.5% in 1998. Administrative costs increased because of the
acquisitions of Frame-n-Lens and New West. In 1998, the Company did
not have the opportunity to fully eliminate duplicative administrative
costs, but management expects to substantially complete this task during
1999. SG&A expense in 1998 included $800,000 of goodwill amortization
relating to the recent acquisitions. Store expense as a percentage of
sales was negatively affected by the vision centers recently acquired,
which had higher store expenses as a percentage of sales than did
the Company's other vision centers. SG&A expense as a percentage of
net sales was positively affected by reduced incentive payment levels
as a result of the Company's lower earnings in 1998 versus 1997.
Additionally, reserves associated with managed care receivables were
increased.
OPERATING INCOME. Operating income for fiscal 1998 increased to
$11.0 million from $10.8 million in fiscal 1997. As a percentage of
net sales, operating income declined to 4.5% from 5.8% in fiscal 1997.
The decline was primarily due to the increase in SG&A expense discussed
above and lower than expected operating margins from Frame-n-Lens. Before
giving effect to the businesses acquired in 1998, operating income in
1998 improved 21 percent to $13.1 million from $10.8 million recorded
in 1997. The Company's Mexican business operated at a break-even
level in 1998, essentially flat against 1997 results. Mexican
operating results do not include allocated corporate overhead,
interest, and taxes.
OTHER EXPENSE. Other expense increased from $1.6 million in 1997 to
$5.5 million in 1998, primarily as a result of the interest expense
arising out of the issuance of the Company's senior notes in October
1998 (see Note 6 to consolidated financial statements).
PROVISION FOR INCOME TAXES. The effective income tax rate on
consolidated pretax income was 37% in 1998 versus 40% in 1997,
primarily as the result of the 1998 operating losses from Frame-n-Lens
and New West. In 1999, the Company's effective income tax rate will
approximate 48% of pretax income, due to the full utilization of the
remaining net operating loss carryforwards related to the core
business. In 1998, as well as 1999, the Company anticipates making
cash payments for federal and state income taxes approximating 30% of
consolidated pretax earnings primarily due to the utilization of
alternative minimum tax credits.
NET INCOME. Net income was $3.4 million, or $0.16 per share, as
compared to net income of $5.6 million, or $0.27 per share, in 1997.
YEAR ENDED JANUARY 3, 1998 ("FISCAL 1997") COMPARED TO YEAR ENDED
DECEMBER 28, 1996 ("FISCAL 1996")
<PAGE>
Consolidated Results
NET SALES. Net sales during fiscal 1997 increased to $186.4
million from $160.4 million for the prior year. This increase was
due to a 6.8% improvement 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. This 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.
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.
Page 12 of 52<PAGE>
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
comparable period ending November 30, 1997. The increase is
attributable primarily to new store openings.
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 ELI
and SPI transactions which closed in January 1997 (see Note 3 to
consolidated financial statements). Additionally, the Company's
focus on lifestyle selling contributed to the improvement in gross
profit percentage.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES ("SG&A expense").
SG&A expense (which includes both store operating expenses and home
office overhead) increased to $89.2 million in fiscal 1997 from $76.9
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 store level partially offset by
increases in administrative expenses related to responsibilities
assumed in connection with the ELI and SPI transactions which closed
in January 1997 and transition costs resulting from the acquisition
of Midwest Vision (see Notes 3 and 4 to consolidated financial
statements).
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, the
Company's international operations 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, was due, for the most part, to
reduced interest expense, resulting from the reduction of outstanding
borrowings under the Company's credit facility (see Note 12 to
consolidated financial statements).
PROVISION FOR INCOME TAXES. The effective income tax rate on
consolidated pre-tax income was 40%, which represents a tax provision
of 39% on domestic earnings. Because of the Company's tax net
operating loss carryforward position, fiscal 1997 earnings were not
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 24% of
consolidated pre-tax earnings.
NET INCOME. Net income 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%.
Inflation
Although the Company cannot determine the precise effects of
inflation, it does not believe 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 is monitoring the continuing impact of these inflationary
trends.
Page 13 of 52
<PAGE>
<PAGE>
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 flows from operations and borrowings under bank credit
facilities. At January 3, 1998, the Company had in place a $45.0
million revolving credit facility (the "Prior Credit Facility"), under
which $20 million was outstanding. During 1998, this credit facility
was expanded to $60 million. The July 1998 acquisition of Frame-n-
Lens was funded using borrowings under the Prior Credit Facility.
On July 14, 1998, the Company announced that it had agreed to
acquire New West. The closing of the New West acquisition was
conditioned upon the Company's obtaining financing. To obtain such
financing, the Company issued its $125 million Senior Notes due 2005
(the "Notes") on October 8, 1998 (see Note 6 to consolidated financial
statements). The Company also entered into a new $25.0 million
revolving credit facility (the "New Credit Facility") and utilized
proceeds from the sale of the Notes to repay amounts outstanding under
the Prior Credit Facility. The Company utilized proceeds from the New
Credit Facility and the balance of proceeds from the Notes to
consummate the acquisition of New West and to pay certain expenses
associated with the acquisitions of Frame-n-Lens and New West and the
New Credit Facility. At January 2, 1999, the Company had $6.0 million
outstanding under the New Credit Facility.
The Notes bear annual interest of 12 3/4 %, with interest payments due
on April 15 and October 15 of each year. The Notes were sold at a
discount for an aggregate price of $123.6 million. The Notes were
issued pursuant to an indenture which contains customary provisions,
including, limitations on incurrence of additional indebtedness;
limitations on restricted payments; limitations on asset sales;
payment restrictions affecting subsidiaries; limitations on liens;
limitations on transactions with affiliates; and other customary terms
and provisions. In the event of a Change of Control (as defined), the
Company will be required to offer to repurchase the Notes at a
purchase price equal to 101% of the principal amount thereof, plus
accrued and unpaid interest.
The Notes are guaranteed by a majority of the Company's subsidiaries
and are redeemable at the option of the Company, in whole or in part,
at 105% of their principal amount beginning October 15, 2003 and at
100% on or after October 15, 2004. In addition, the Company may, at
its option, redeem up to 35% of the Notes, plus accrued interest, with
the net cash proceeds of one or more equity offerings at a redemption
price equal to 112.75% of the principal amount.
In anticipation of the sales of the Notes, the Company 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. The settlement costs are treated as deferred financing costs
amortized over the life of the Notes.
On October 8, the Company entered into the New Credit Facility. The
availability under the New Credit Facility is limited to certain
percentages of accounts receivable, inventory and twelve-month
trailing EBITDA (as defined). At January 2, 1999, the Company has
availability under the New Credit Facility of up to $20 million. All
obligations of the Company under the New Credit Facility are guaranteed
by a majority of the Company's subsidiaries. Borrowings under the New
Credit Facility are secured by substantially all assets of the Company
and its subsidiaries.<PAGE>
The New Credit Facility bears interest at rates per annum equal to,
at the option of the Company, either (i) the applicable Reference Rate
plus the applicable margin or (ii) the LIBOR rate plus the applicable
margin. The applicable margin will be a maximum of 2.00% for the
Reference Rate and 3.25% for the LIBOR rate, which may be reduced
depending on the Company's ratio of total debt to EBITDA. The Company
will pay a fee of 0.50% per annum on the unused portion of the New
Credit Facility, which fee may be reduced depending on the Company's
ratio of total debt to EBITDA.
The New Credit Facility contains customary covenants, including,
among others, covenants restricting the incurrence of indebtedness;
the creation of liens; the guarantee of other indebtedness; certain
investments; the declaration or payment of dividends; the repurchase
or redemption of debt and equity securities of the Company; affiliate
transactions and certain corporate transactions, such as sale and
purchase of assets, mergers, or consolidations. The New Credit
Facility also contains certain financial covenants relating to minimum
EBITDA requirements, minimum fixed charge ratios, minimum interest and
rent coverage ratios, maximum leverage ratios, and limitations on
capital expenditures. The New Credit Facility also contains customary
default provisions, including a material adverse change clause.
Page 14 of 52<PAGE>
<PAGE>
At January 2, 1999, the Company had in place a $5 million interest
rate swap which effectively converts the underlying variable rate debt
based on LIBOR to fixed rate debt at a rate of approximately 9.4%.
The fair market value of the fixed rate hedge approximates book value
at the end of 1998. Under existing accounting standards, this
activity is accounted for as a hedging activity. The swap is settled
every 90 days.
As of January 2, 1999, the Company plans to open between 15 and 20
domestic vision centers in leased departments during the next 12
months. Consistent with prior years, the actual number of openings is
dependent on the construction schedules of the host store. In
addition, the Company plans to open up to 10 freestanding vision
centers during the next 12 months. Average costs for opening domestic
vision centers in leased departments have approximated $140,000 for
fixed assets and $25,000 for inventory, whereas the costs for opening
free-standing vision centers range from $100,000 to $140,000 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 are 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.
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.
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. Should the
Company's systems not correctly recognize this date change, computer
applications that rely on the 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
includes (1) identifying all hardware and equipment that require
upgrading and (2) identifying all application software that require
upgrades 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 285 have been replaced as of January 2, 1999.
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.
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.
Page 15 of 52
<PAGE>
<PAGE>
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 to five 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.
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 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 these 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.
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<PAGE>
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.
Page 16 of 52<PAGE>
<PAGE>
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 January 2, 1999
represents approximately 83% of Vista's variable rate debt.
In anticipation of the sale of the 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 Prior Credit Facility. The settlement costs will be treated as
deferred financing costs amortized over the life of the 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.
OPTION TO EXTEND WAL-MART LICENSE AGREEMENT
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 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.
RISK FACTORS
Any expectations, beliefs, and other non-historical statements
contained in this 10-K are forward looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements made in this Form 10-K concern the
following matters:
* generation of EBITDA and cash flow;
* servicing of debt;
* achievement of synergies, including planned consolidation
of manufacturing facilities; planned opening of vision centers;
* funding of expansion through internal cash flow;
* planned development of software systems; Year 2000 compliance; and
* expected exercise of options under the Wal-Mart Agreement.
With respect to such forward-looking statements and others which may be
made by, or on behalf of, the Company, the following factors could
materially affect the Company's actual results:
- The Company's relationship with its host stores, including the
Company's dependence on Wal-Mart for its current and continued
operations.
- The Company's significant leverage and limitations of
availability under the New Credit Facility.
- Operating factors affecting customer satisfaction and quality
controls of the Company in optical manufacturing.
- Risks associated with the integration of any acquired operations,
including, without limitation, soft sales or failure to improve sales
generated by acquired operations and, in addition, the inability of
the Company to achieve synergies, including, without limitation, the
inability of the Company to consolidate manufacturing facilities.
Page 17 of 52<PAGE>
<PAGE>
- The Company's ability to obtain and retain managed care contracts
and business. Management expects that managed care arrangements
will become increasingly important in the optical industry.
- Risks associated with managed care plans, including, without
limitation, complexity of third party plans which may delay or
impair the collectibility of third party claims, and the Company's
dependence on third party reimbursement.
- The Company's ongoing ability to generate continued sales and
contribution improvement at its vision centers operated under the
Wal-Mart Agreement, so as to justify the exercise of options to
extend the licenses of vision centers.
- Risks associated with the Company's Year 2000 compliance program,
including, without limitation, the risks that third parties with
whom the Company deals will not have systems which are Year 2000
compliant, and the risk that the Company's new point of sale
system will not be timely developed or will not function as
planned.
- Pricing and other competitive factors, including, without
limitation, increased price competition with respect to contact
lenses.
- Technological advances in the eyecare industry, such as new
surgical procedures or medical devices, which could reduce the
demand for the Company's products.
- The mix of goods sold.
- Availability of optical and optometric professionals. An element
of the Company's business strategy and a requirement of the Wal-
Mart Agreement is the availability of vision care professionals at
clinics in or nearby the Company's vision centers.
- State and federal regulation of managed care and of the practice
of optometry and opticianry.
- General risks arising from investing and operating in Mexico,
including a different regulatory, political, and governmental
environment, currency fluctuations, high inflation, price
controls, restrictions on profit repatriation, lower per capita
income and spending levels, import duties, value added taxes, and
difficulties in cross-cultural marketing.
- The Company's ability to select in-stock merchandise attractive
to customers.
- Weather affecting retail operations.
- Variations in the level of economic activity affecting employment
and income levels of consumers.
- Seasonality of the Company's business.
Recent Accounting Pronouncements
Effective in 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 ("SFAS 128") "Earnings per Share" and No.
129 ("SFAS 129") "Disclosure of Information and Capital Structure."
SFAS 128 simplifies the calculation of basic earnings per common share
and diluted earnings per common share. Additionally, disclosure is
required presenting a reconciliation of the computations for basic and
diluted earnings per common share. The change in calculations did not<PAGE>
change the Company's reported earnings per common share amounts
presented in previous filings. SFAS 129 requires disclosure of the
pertinent rights and privileges of all securities other than ordinary
common stock. The Company has disclosed such information in previous
years' annual reports filed on Form 10-K.
In July 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
"Reporting Comprehensive Income." The statement addresses the
reporting and display of changes in equity that result from
Page 18 of 52
<PAGE>
<PAGE>
transactions and other economic events, excluding transactions with
owners. The adoption of SFAS No. 130 did not have a material impact
on the Company's financial statements, as comprehensive income was
equal to net income in 1998 and 1997 and was $81,000 lower than net
income in 1996.
Effective in 1997, the Company adopted Statement of Financial
Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments
of an Enterprise and Related Information." The statement addresses
reporting of segment information (see Note 15 to consolidated
financial statements).
In 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting
for Derivative Instruments and Hedging Activities." SFAS No. 133 will
be effective in fiscal 2000. The Company is evaluating the effects of
the adoption of this recent pronouncement.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company are included
as a separate section of this Report commencing on page 25.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Page 19 of 52
<PAGE>
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The section entitled "Election of Directors" contained in the
definitive proxy statement to holders of the Company's Common Stock
in connection with the solicitation of proxies to be used in voting at
the 1999 Annual Meeting of Shareholders is hereby incorporated by
reference for the purpose of providing information about the
identification of directors.
ITEM 11. EXECUTIVE COMPENSATION
The section entitled "Compensation of Executive Officers" contained
in the definitive proxy statement to holders of the Company's Common
Stock in connection with the solicitation of proxies to be used in
voting at the 1999 Annual Meeting of Shareholders is hereby
incorporated by reference for the purpose of providing information
about executive compensation.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The section entitled "Common Stock Ownership of Certain Beneficial
Owners and Management" contained in the definitive proxy statement to
holders of the Company's Common Stock in connection with the
solicitation of proxies to be used in voting at the 1999 Annual
Meeting of Shareholders is hereby incorporated by reference for the
purpose of providing information about security ownership of certain
beneficial owners and management.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Compensation Committee Interlocks and Insider
Participation" contained in the definitive proxy statement to holders
of the Company's Common Stock in connection with the solicitation of
proxies to be used in voting at the 1999 Annual Meeting of
Shareholders is hereby incorporated by reference for the purpose of
providing information about transactions with management and others
and certain business relationships.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(a) (1) and (2) The Consolidated Financial Statements and Schedule
of the Company and its subsidiaries are filed herewith as a separate
section of this Report commencing on page 25.
(3) The following exhibits are filed herewith or incorporated by
reference:
Exhibit
Number
2.1 -- Stock Purchase Agreement dated as of September 15, 1997 by
and between the Company and Myrel Neumann, O.D.,
incorporated by reference to the Company's Form 10-K for the
fiscal year ended January 3, 1998.
2.2 -- Stock Purchase Agreement dated as of June 9, 1998 by and
among Frame-n-Lens Optical, Inc., the Company, and the
Sellers named therein, incorporated by reference to the
Company's Form 10-Q for the quarterly period ended July 4,
1998.
2.3 -- Agreement and Plan of Merger dated as of July 13, 1998 by
and among the Company, New West Eyeworks, Inc. and NW
Acquisition Corp, incorporated by reference to the Company's
Schedule 14D-1 filed with the Commission on July 20, 1998.
Page 20 of 52
<PAGE>
<PAGE>
Exhibit
Number
3.1 -- Amended and Restated Articles of Incorporation of the
Company, dated April 8, 1992, along with Articles of
Amendment to the Amended and Restated Articles of
Incorporation of the Company dated January 17, 1997, and
Articles of Amendment to the Amended and Restated Articles
of Incorporation of the Company dated December 31, 1998,
incorporated by reference to the Company's Form 8-K filed
with the Commission on January 6, 1999.
3.2 -- Amended and Restated By-Laws of the Company, incorporated by
reference to the Company's Registration Statement on Form S-1,
registration number 33-46645, filed with the Commission
on March 25, 1992, and amendments thereto.
4.1 -- Form of Common Stock Certificate, incorporated by reference
to the Company's Registration Statement on Form 8-A filed
with the Commission on January 17, 1997.
4.2 -- Rights Agreement dated as of January 17, 1997 between the
Company and Wachovia Bank of North Carolina, N.A.,
incorporated by reference to the Company's Registration
Statement on Form 8-A filed with the Commission on January 17,
1997.
4.3 -- Indenture dated as of October 8, 1998, among the Company,
the Guarantors and State Street Bank & Company, as Trustee
(including form of Exchange Note), incorporated by reference
to the Company's Registration Statement on Form S-4,
registration number 333-71825, filed with the Commission on
February 5, 1998, and amendments thereto.
4.4 -- Purchase Agreement dated as of October 8, 1998, among the
Company, the Guarantors and the Initial Purchasers,
incorporated by reference to the Company's Registration
Statement on Form S-4, registration number 333-71825, filed
with the Commission on February 5, 1998, and amendments
thereto.
4.5 -- Registration Rights Agreement dated as of October 8, 1998,
among the Company, the Guarantors and the Initial
Purchasers, incorporated by reference to the Company's
Registration Statement on Form S-4, registration number 333-
71825, filed with the Commission on February 5, 1998, and
amendments thereto.
10.1 -- Sublease Agreement, dated December 16, 1991, by and
between Wal-Mart Stores, Inc. and the Company,
incorporated by reference to the Company's Registration
Statement on Form S-1, registration number 33-46645, filed
with the Commission on March 25, 1992, and amendments
thereto.
10.2 -- Form indemnification agreement for directors and executive
officers of the Company, incorporated by reference to the
Company's Form 10-K for the fiscal year ended December 31,
1992.
<PAGE>
10.3 -- Vision Center Master License Agreement, dated as of June 16,
1994, by and between Wal-Mart Stores, Inc. and the
Company, incorporated by reference to the Company's Form
10-Q for the quarterly period ended September 30, 1994.
[Portions of Exhibit 10.3 have been omitted pursuant to an
order for confidential treatment granted by the
Commission. The omitted portions have been filed
separately with the Commission.]
10.4++ -- Split Dollar Life Insurance Agreement, dated as of
November 3, 1994, among the Company, A. Kimbrough Davis,
as Trustee, and James W. Krause, incorporated by reference
to the Company's Form 10-K for the fiscal year ended
December 31, 1994.
10.5++ -- Level IV Management Incentive Plan, incorporated by
reference to the Company's Form 10-K for the fiscal year
ended December 31, 1994.
Page 21 of 52<PAGE>
<PAGE>
10.6 -- Agreement dated as of November 23, 1995 by and between
Mexican Vision Associates Operadora, S. de R.L. de C.V.
and Wal-Mart de Mexico, S.A. de C.V. in original Spanish
and an uncertified English translation, incorporated by
reference to the Company's Form 10-K for the fiscal year
ended December 30, 1995. [Portions of Exhibit 10.6 have
been omitted pursuant to a request for confidential
treatment filed with the Commission. The omitted portions
have been filed separately with the Commission.]
10.7++ -- Executive Relocation Policy, incorporated by reference
to the Company's Form 10-Q for the quarterly period ended
March 30, 1996.
10.8++ -- Restated Stock Option and Incentive Award Plan,
incorporated by reference to the Company's Form 10-Q for
the quarterly period ended June 29, 1996.
10.9++ -- First Amendment to Restated Stock Option and Incentive
Award Plan, incorporated by reference to the Company's
Form 10-Q for the quarterly period ended March 29, 1997.
10.10++ -- Form Change in Control Agreement for executive officers
of the Company, incorporated by reference to the Company's
Form 10-K for the fiscal year ended December 28, 1996.
10.11++ -- Form Restricted Stock Award, incorporated by reference
to the Company's Form 10-Q for the quarterly period ended
March 29, 1997.
10.12++ -- Restated Non-Employee Director Stock Option Plan,
incorporated by reference to the Company's Form 10-Q filed
on June 28, 1997.
10.13 -- $45,000,000 Credit Agreement dated as of July 15, 1997
among the Company, Wachovia Bank, N.A., and certain other
banks, incorporated by reference to the Company's Form 10-Q
for the quarterly period ended September 27, 1997.
10.14++ -- Executive Deferred Compensation Plan, incorporated by
reference to the Company's Form 10-K for the fiscal year
ended January 3, 1998.
10.15 -- Credit Agreement dated October 8, 1998 by and among the
Company, Bank of America, FSB, First Union National Bank and
the financial institutions listed hereto, incorporated by
reference to the Company's Registration Statement on Form S-4,
registration number 333-71825, filed with the Commission
on February 5, 1999, and amendments thereto.
21** -- Subsidiaries of the Registrant.
23** -- Consent by Arthur Andersen LLP.
27** -- Financial Data Schedule.
** Filed with this Form 10-K.
++ Management contract or compensatory plan or arrangement in which
a director or named executive officer participates.
Page 22 of 52
<PAGE>
(b) The following reports on Form 8-K have been filed during the last
quarter of the period covered by this report:.
Date of Report Item Reported Financial Statements Filed
-------------- ------------- --------------------------
October 23, 1998 Item 2 Frame-n-Lens Financial Statements
November 9, 1998 Item 2; Item 5
Page 23 of 52
<PAGE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
VISTA EYECARE, INC.
By: /s/James W. Krause
James W. Krause
Chairman of the Board and Chief Executive
Officer and Director
Date: March 29, 1999
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant on March 29, 1999, in the capacities
indicated.
Signature Title
/s/ James W. Krause
_____________________________
James W. Krause Chairman of the Board and
Chief Executive Officer and Director
/s/ Barry J. Feld
______________________________
Barry J. Feld President and Chief Operating Officer
and Director
/s/ Angus C. Morrison
_____________________________
Angus C. Morrison Senior Vice President, Chief Financial
Officer, Treasurer, and Director
(Principal Financial Officer)
/s/ Timothy W. Ranney
_____________________________
Timothy W. Ranney Vice President, Corporate Controller
(Principal Accounting Officer)
/s/ David I. Fuente
_____________________________
David I. Fuente Director
/s/ Ronald J. Green
_____________________________
Ronald J. Green Director
/s/ James E. Kanaley
______________________________
James E. Kanaley Director
/s/ Campbell B. Lanier, III
_____________________________
Campbell B. Lanier, III Director
/s/ J. Smith Lanier, II
_____________________________
J. Smith Lanier, II Director
Page 24 of 52<PAGE>
<PAGE>
VISTA EYECARE, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
AS OF JANUARY 2, 1999, JANUARY 3, 1998 AND DECEMBER 28, 1996
TOGETHER WITH
AUDITORS' REPORT
Page 25 of 52
<PAGE>
<PAGE>
VISTA EYECARE, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
The following consolidated financial statements and schedule of the
registrant and its subsidiaries are submitted herewith in response to
Item 8 and Item 14(a)1 and to Item 14(a)2, respectively.
Page
----
Report of Independent Public Accountants 27
Consolidated Balance Sheets as of January 2, 1999 and
January 3, 1998 28
Consolidated Statements of Operations for the
Years Ended, January 2, 1999, January 3, 1998, and
December 28, 1996 30
Consolidated Statements of Shareholders' Equity for
the Years Ended January 2,1999, January 3, 1998,
and December 28, 1996 31
Consolidated Statements of Cash Flows for the Years Ended
January 2, 1999, January 3, 1998, and December 28, 1996 32
Notes to Consolidated Financial Statements and Schedule 33
Schedule II, Valuation and Qualifying Accounts 52
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions, are inapplicable, or have
been disclosed in the notes to consolidated financial statements and,
therefore, have been omitted.
Page 26 of 52
<PAGE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Vista Eyecare, Inc.
and Subsidiaries:
We have audited the accompanying consolidated balance sheets of
VISTA EYECARE, INC. (a Georgia corporation, formerly National Vision
Associates, Ltd.), AND SUBSIDIARIES as of January 2, 1999 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 2, 1999. 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 Vista
Eyecare, Inc. and subsidiaries as of January 2, 1999 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 2, 1999 in conformity
with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedule listed in
the index to consolidated financial statements is presented for
purposes of complying with the Securities and Exchange Commission's
rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the
audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 28, 1999
Page 27 of 52
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
VISTA EYECARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 2, 1999 and January 3, 1998
(In thousands except share information)
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,072 $ 2,559
Accounts receivable (net of allowance: 1998 - $1,516; 1997 - $762) 10,135 6,066
Inventories 31,670 23,271
---------- ----------
Other current assets 2,899 759
---------- ----------
Total current assets 51,776 32,655
---------- ----------
PROPERTY AND EQUIPMENT:
Equipment 54,396 44,070
Furniture and fixtures 23,124 20,366
Leasehold improvements 26,806 15,005
Construction in progress 2,022 893
---------- ----------
106,348 80,334
Less accumulated depreciation (48,305) (36,692)
---------- ----------
Net property and equipment 58,043 43,642
OTHER ASSETS AND DEFERRED COSTS
(net of accumulated amortization: 1998 - $1,292; 1997 - $846) 9,953 1,015
DEFERRED INCOME TAX ASSET 385 --
GOODWILL AND OTHER INTANGIBLE ASSETS
(net of accumulated amortization: 1998 - $2,544; 1997 - $733) 108,940 5,938
---------- ----------
$ 229,097 $ 83,250
========== ==========
</TABLE>
Page 28 of 52
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 18,925 $ 7,252
Accrued expenses and other current liabilities 26,637 12,754
Current portion long-term debt and capital lease obligations 2,006 478
---------- ----------
Total current liabilities 47,568 20,484
SENIOR NOTES (net of discount: 1998 - $1,391) 123,609 --
REVOLVING CREDIT FACILITY 6,000 19,500
OTHER LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 7,223 4,225
DEFERRED INCOME TAX LIABILITIES -- 2,673
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDERS' EQUITY:
Preferred stock, $1 par value; 5,000,000 shares authorized, none issued -- --
Common stock, $0.01 par value, 100,000,000 shares authorized, 21,166,612 and 20,819,955
shares issued and outstanding as of January 2, 1999 and January 3, 1998, respectively 212 208
Additional paid-in capital 47,964 43,053
Retained earnings (deficit) 594 (2,820)
Cumulative foreign currency translation (4,073) (4,073)
---------- ----------
Total shareholders' equity 44,697 36,368
---------- ----------
$ 229,097 $ 83,250
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
Page 29 of 52
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
VISTA EYECARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended January 2, 1999, January 3, 1998, and December 28, 1996
(In thousands except per share information)
1998 1997 1996
---------- ---------- ----------
<S> <S> <C> <C>
NET SALES $ 245,331 $ 186,354 $ 160,376
COST OF GOODS SOLD 112,929 86,363 76,692
---------- ---------- ----------
GROSS PROFIT 132,402 99,991 83,684
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE 121,413 89,156 76,920
OPERATING INCOME 10,989 10,835 6,764
OTHER EXPENSE, NET 5,538 1,554 2,084
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 5,451 9,281 4,680
PROVISION FOR INCOME TAXES 2,037 3,708 1,200
---------- ---------- ----------
NET INCOME $ 3,414 $ 5,573 $ 3,480
========== ========== ==========
BASIC EARNINGS PER COMMON SHARE $ 0.16 $ 0.27 $ 0.17
========== ========== ==========
DILUTED EARNINGS PER COMMON SHARE $ 0.16 $ 0.27 $ 0.17
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
Page 30 of 52
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
VISTA EYECARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended January 2, 1999, January 3, 1998, and December 28, 1996
(In thousands 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 30, 1995 20,586,505 $ 206 $ 42,147 $ (11,873) $ (11,873) $ 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
Awards of 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
Awards of restricted stock 52,000 1 121 122
Exercise of stock options 294,657 3 1,482 1,485
Tax settlement (see Note 10) 3,308 3,308
Net income 3,414 3,414
---------- ------ -------- --------- --------- --------
BALANCE, January 2, 1999 21,166,612 $ 212 $ 47,964 $ 594 $ (4,073) $ 44,697
========== ====== ======== ========= ========= ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
Page 31 of 52
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
VISTA EYECARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended January 2, 1999, January 3, 1998, and December 28, 1996
(In thousands)
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,414 $ 5,573 $ 3,480
Adjustments to reconcile net income to
net cash provided by (used in) operating activities:
Depreciation and amortization 14,177 11,035 10,058
Provision for deferred income tax expense 1,173 1,441 1,002
Changes in operating assets and liabilities, net of effects of
acquisitions:
Receivables (1,504) (875) 2,224
Inventories 1,304 2,031 (2,594)
Store preopening costs (643) (657)
Other current assets (1,630) 612 67
Other assets 936 319 195
Accounts payable (410) (1,872) (254)
Accrued expenses (7,691) 3,117 979
-------- -------- --------
Total adjustments 6,355 15,165 11,020
-------- -------- --------
Net cash provided by operating activities 9,769 20,738 14,500
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (9,183) (8,049) (2,713)
Acquisitions, net of cash acquired (97,357) (1,772) --
Payment for non-competition agreement -- (484) --
Purchase of assignment agreement -- (500) --
-------- -------- --------
Net cash used in investing activities (106,540) (10,805) (2,713)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of senior notes, net of discount 123,580 -- --
Advances on revolving credit facility 52,500 5,500 1,500
Repayments on revolving credit facility (66,000) (12,500) (13,000)
Repayment of notes payable and capital leases (436) (1,450) (480)
Proceeds from exercise of stock options 1,485 17 19
Deferred financing costs (9,845) (51) (104)
-------- -------- --------
Net cash provided by (used in) financing activities 101,284 (8,484) (12,065)
-------- -------- --------
Effect of foreign currency exchange rate changes -- -- 81
-------- -------- --------
NET INCREASE (DECREASE) IN CASH 4,513 1,449 (197)
CASH, beginning of year 2,559 1,110 1,307
-------- -------- --------
CASH, end of year $ 7,072 $ 2,559 $ 1,110
======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
Page 32 of 52
<PAGE>
<PAGE>
VISTA EYECARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
1. ORGANIZATION AND OPERATIONS
Vista Eyecare, Inc., formerly National Vision Associates, Ltd.,
(the "Company") is engaged in the retail sale of optical goods and
services. The Company is largely dependent on Wal-Mart Stores, Inc.
("Wal-Mart") for continued operation of vision centers which generate
a significant portion of the Company's revenues (see Note 3). In
October 1997, the Company acquired the capital stock of Midwest
Vision, Inc., a retail optical company with 51 locations in Minnesota
and three adjoining states. In July 1998, the Company acquired the
capital stock of Frame-n-Lens Optical, Inc., which operated approximately
280 vision centers, mainly in the western United States. In October 1998,
the Company acquired the capital stock of New West Eyeworks, Inc. which
operated approximately 175 vision centers in 13 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 1998 and 1996 is presented for the 52-week period ended
January 2 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 January 3, 1998 and
December 28, 1996 consolidated financial statements have been
reclassified to conform to the January 2, 1999 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 2, 1999 was $816,000 (at January 3,
1998 - $381,000). 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.
<PAGE>
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 are expensed as incurred in accordance with
AICPA Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities."
Page 33 of 52
<PAGE>
<PAGE>
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 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 from five to nine years which
approximate the remaining lease term 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. Periodically, the Company
evaluates the net book value of property and equipment for impairment.
This evaluation is performed for retail locations and compares
management's 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.
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.
Goodwill and other Intangible Assets
Goodwill and other intangible assets represent the excess of the
cost of net assets acquired in certain contract transactions and
business acquisitions over their fair value. Such amounts are
amortized over periods ranging from 11 years to 30 years. The
adjustments to record assets and liabilities at fair market value are
tentative. The Company is continuing its review of assets and
liabilities to finalize the appropriate fair market values for the
1998 acquisitions. Any changes in valuation will be reflected as
purchase price allocation adjustments in 1999 and may affect goodwill.
The Company periodically evaluates the carrying value of goodwill and
other intangible assets based on the expected future undiscounted
operating cash flows of the related business unit. Based on its most
recent analysis, the Company believes that no material impairment of
goodwill exists at January 2, 1999.
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. <PAGE>
Other Deferred Costs
Other deferred costs include capitalized financing costs which are
being amortized on a straight line basis over periods from three to
seven years to correspond with the terms of the underlying debt. In
addition, certain capitalized assets resulting from contractual
obligations are included and are being amortized on a straight line
basis over periods of up to 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 over the course of the
year in which they are incurred.
Page 34 of 52<PAGE>
<PAGE>
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 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 (365 vision
centers were in operation under the Wal-Mart Agreement at fiscal year
end 1998). 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
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<PAGE>
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 $2.9 million pursuant to this
agreement during 1996. The net payments offset occupancy expense
incurred by the Company. Occupancy expense is a component of cost of
goods sold.
Page 35 of 52<PAGE>
<PAGE>
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 of fees
that would have been paid to ELI and SPI if the consulting agreement
had been in effect for all of fiscal 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 2, 1999, the Company operated 26 vision centers in Wal-
Mart de Mexico stores.
Sam's Club
----------
The Company also operates 121 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 these leases.
Fred Meyer
----------
The Company operates 52 leased 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.
4. ACQUISITIONS
On July 28, 1998, the Company acquired all the outstanding capital
stock of Frame-n-Lens Optical, Inc. ("Frame-n-Lens") in a transaction
accounted for as a purchase business combination. Prior to the
acquisition, Frame-n-Lens operated approximately 280 retail optical
centers in 23 states. The aggregate purchase price was $50 million of
which $23 million was paid in cash and additional borrowings from the
Company's credit facilities, $24 million was assumed in debt and liabilities,
<PAGE>
and $3 million was established as a deferred purchase obligation to be paid
in quarterly installments over six years. The Company has the right
to withhold payment of the deferred purchase obligation based upon the
identification of any undisclosed liabilities.
The excess of cost over fair value of assets acquired was $41
million, and is being amortized over 30 years using the straight-line
method. At the date of acquisition the assets of Frame-in-lens included
approximately $9 million of goodwill. Frame-n-Lens' financial position
and results of operations are included with those of the Company for
the periods subsequent to the date of the acquisition.
Page 36 of 52
<PAGE>
<PAGE>
On October 23, 1998, the Company acquired all the outstanding
capital stock of New West Eyeworks, Inc. ("New West") in a transaction
accounted for as a purchase business combination. Prior to the
acquisition, New West operated approximately 175 retail optical centers
in 13 states. The aggregate purchase price was $79 million, including
the assumption of certain indebtedness and acquisition-related expenses
which were paid with a portion of the proceeds of the Company's 12 3/4%
Senior Notes due 2005 (the "Notes") (see Note 6 to consolidated financial
statements). The excess of cost over fair value of the assets acquired
was $64 million and is being amortized over 30 years using the straight-line
method. New West's financial position and results of operations are
included with those of the Company in the period subsequent to the date
of the acquisition.
The adjustments to record assets and liabilities at fair market
value are tentative. The Company is continuing its review of assets
and liabilities to finalize the appropriate fair market values. Any
changes in valuation will be reflected as purchase price allocation
adjustments in 1999.
The following summary prepared on an unaudited basis presents the
results of operations of the Company combined with Frame-n-Lens and
New West as if the acquisitions had occurred at the beginning of the
periods presented, after the impact of certain adjustments. These
adjustments include 1) the cost savings related to the consolidation
of duplicative manufacturing and administrative support facilities, 2)
the amortization of goodwill, 3) increased interest expense on the
acquisition debt, 4) elimination of interest on debt repaid with
proceeds from the Notes and 5) the related income tax effects for the
following years ended (amounts in thousands, except per share amounts):
January 2, January 3,
1999 1998
(unaudited) (unaudited)
---------- -----------
Net sales $ 325,670 $ 313,937
Operating income $ 15,831 $ 18,518
Net income (loss) $ (2,811) $ (475)
Earnings (loss) per share $ (0.13) $ (0.02)
- -----------------------------------------------------------------------
The pro forma results are not necessarily indicative of what
actually would have occurred if the acquisitions had occurred as of
the beginning of the periods presented.
In October 1997, the Company acquired all the outstanding common
stock of Midwest Vision, Inc. ("Midwest") in a transaction accounted
for as a purchase business combination. Prior to the acquisition,
Midwest operated 51 retail optical centers in Minnesota, Wisconsin,
Iowa and North Dakota. The aggregate purchase price was approximately
$5 million, including assumed long-term debt of approximately $1
million. The excess of cost over fair value of the assets acquired
was $2 million and is being amortized on a straight-line basis over 15
years. The purchase price was paid in cash of $2 million, a note
payable of $0.6 million and 110,975 shares of the Company's common
stock. In addition, the Company issued a put option to the seller,
entitling the seller to put such shares to the Company at $9.00 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 fair market value.
<PAGE>
5. INVENTORY
The Company classifies inventory as finished goods if such
inventory is readily available for sale to customers without assembly
or value added processing. Finished goods include contact lenses,
over the counter sunglasses and accessories. The Company classifies
inventory as raw material if such inventory requires assembly or value
added processing. 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.
Page 37 of 52
<PAGE>
<PAGE>
Inventory balances, by classification, may be summarized as follows
(amounts in thousands):
1998 1997
--------- ---------
Raw material $ 22,814 $ 15,646
Finished goods 7,634 7,003
Supplies 1,222 622
--------- ---------
$ 31,670 $ 23,271
========= =========
6. LONG-TERM DEBT
Senior Notes
------------
On October 8, 1998, the Company issued its $125 million 12 3/4% Senior
Notes due 2005 (the "Notes") pursuant to Rule 144A of the Securities
Act. The Notes, which were sold at a discount for an aggregate price
of $123.6 million, require semiannual interest payments commencing on
April 15, 1999. The Notes were issued pursuant to an indenture
containing customary provisions including: limitations on incurrence
of additional indebtedness; limitations on restricted payments;
limitations on asset sales; payment restrictions affecting
subsidiaries; limitations on liens; limitations on transactions with
affiliates; and other customary terms. In the event of a Change of
Control (as defined), the Company will be required to offer to
repurchase the Notes at a purchase price equal to 101% of the
principal amount thereof, plus accrued and unpaid interest. The Notes
are guaranteed by a majority of the Company's subsidiaries and are
redeemable at the option of the Company, in whole or in part, at 105%
of their principal amount beginning October 15, 2003 and at 100% on or
after October 15, 2004. In addition, the Company may, at its option,
redeem up to 35% of the Notes, plus accrued interest, with the net
cash proceeds of one or more equity offerings at a redemption price
equal to 112.75% of the principal amount (see Note 7 for financial
information of guarantors).
A portion of the proceeds from the Notes was utilized to extinguish
outstanding indebtedness on the Company's existing credit facility
(such credit facility was terminated simultaneously with the
repayment), with the remainder to be utilized to complete the
acquisition of New West and pay for miscellaneous expenses related to
the acquisitions of Frame-n-Lens and New West.
In anticipation of the Notes offering, the Company 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. The
settlement costs are being treated as deferred financing costs
amortized over the life of the Notes.
New Credit Facility
-------------------
On October 8, 1998, the Company entered into a new $25.0 million
revolving credit facility (the "New Credit Facility"). The
availability under the New Credit Facility is limited to certain
percentages of accounts receivable, inventory and twelve-month
trailing EBITDA. All obligations of the Company under the New Credit
Facility are guaranteed by a majority of the Company's subsidiaries.
Borrowings under the New Credit Facility will be secured by<PAGE>
substantially all assets of the Company and its subsidiaries.
The New Credit Facility bears interest at rates per annum equal
to, at the option of the Company, either (i) the applicable Reference
Rate plus the applicable margin or (ii) the LIBOR rate plus the
applicable margin. The applicable margin will be a maximum of 2.00%
for the Reference Rate and 3.25% for the LIBOR rate, which may be
reduced depending on the Company's ratio of total debt to EBITDA. The
Company will pay a fee of 0.50% per annum on the unused portion of the
New Credit Facility, which may be reduced depending on the Company's
ratio of total debt to EBITDA.
Page 38 of 52
<PAGE>
<PAGE>
The New Credit Facility contains customary covenants, including,
among others: covenants restricting the incurrence of indebtedness;
the creation of liens; the guarantee of other indebtedness; certain
investments; the declaration or payment of dividends; the repurchase
or redemption of debt and equity securities of the Company; affiliate
transactions and certain corporate transactions, such as sale and
purchase of assets, mergers, or consolidations. The New Credit
Facility also contains certain financial covenants relating to minimum
EBITDA requirements, minimum fixed charge ratios, minimum interest and
rent coverage ratios, maximum leverage ratios, and limitations on
capital expenditures. The New Credit Facility also contains customary
default provisions, including a material adverse change clause.
Other
-----
In July 1997, the Company entered into a syndicated $45 million
two-year unsecured revolving credit facility (the "Prior Credit
Facility"). Commitment fees payable on the average daily balance of
the unused portion of the credit facility were 0.25% per annum in 1998
and 1997 and 0.50% per annum on the New Credit Facility. The Company
paid approximately $710,110 and $125,611 in various fees related to
the Prior and New Credit Facilities in 1998 and 1997, respectively.
The applicable interest rate on the outstanding advances was based on
certain financial covenants as defined in the new agreement.
At January 2, 1999, the Company had in place a $5 million
interest rate swap which effectively converts the underlying variable
rate debt based on LIBOR to fixed rate debt at a rate of approximately
9.4%. The fair market value of the fixed rate hedge approximates book
value at the end of 1998. Under existing accounting standards, this
activity is accounted for as a hedging activity. The swap is settled
every 90 days.
The Company entered into unsecured promissory notes relative to
various transactions completed with the Frame-n-Lens and New West
acquisitions in 1998 and the ELI and Midwest Vision acquisitions
in 1997 (see Notes 3 and 4). The notes are fixed rate instruments,
with rates ranging from 6.4% to 8.5%. At January 2, 1999, future
minimum principal payments on total indebtedness were as follows
(amounts in thousands):
1999 $ 1,518
2000 1,349
2001 7,480
2002 1,032
2003 860
Thereafter 125,714
-------
$ 137,953
=======
<PAGE>
Long-term debt obligations at January 2, 1999 and January 3, 1998
consisted of the following (amounts in thousands):
<TABLE>
<CAPTION>
1998 1997
--------- ----------
<S> <C> <C>
12 3/4% Senior Notes Due 2005 $ 125,000
Discount on 12 3/4 % Senior Notes (1,391)
Borrowings under New Credit Facility 6,000
Borrowings under Prior Credit Facility $ 19,500
Other promissory notes 8,344 4,703
--------- ---------
$ 137,953 $ 24,203
Less current portion 1,518 478
--------- ---------
$ 136,435 $ 23,725
========= =========
</TABLE>
Page 39 of 52<PAGE>
<PAGE>
As of January 2, 1999, the Company had borrowed $6.0 million under
the New Credit Facility at a weighted average interest rate of 9.0%.
The aggregate fair value of the Company's long-term debt obligation
under the New Credit Facility is estimated to approximate its carrying
value.
7. FINANCIAL INFORMATION OF GUARANTORS
The Company's wholly owned domestic subsidiaries, Midwest Vision,
Inc.; NVAL Healthcare Systems, Inc.; International Vision Associates,
Ltd.; Frame-n-Lens Optical, Inc.; Vision Administrators, Inc.; Family
Vision Centers, Inc.; New West Eyeworks, Inc.; Alexis Holdings
Company, Inc.; and Vista Eyecare Network, LLC (collectively, the
"Guarantors"), have guaranteed on a senior unsecured basis, jointly
and severally, the payment of the principal of, premium, if any, and
interest on the Notes. Combined summarized financial information of
the Guarantors is presented below (amounts in thousands):
<TABLE>
<CAPTION>
For the years ending: January 2, 1999 January 3, 1998 December 28, 1996
--------------- --------------- -----------------
<S> <C> <C> <C>
Net sales $ 49,904 $ 3,540 $ --
Gross profit $ 21,545 $ 1,816 $ --
Net income (loss) $ (2,861) $ (39) $ --
January 2, 1999 January 3, 1998
---------------- ---------------
Current assets $ 22,080 $ 2,239
Noncurrent assets $ 124,772 $ 3,970
Current liabilities $ 18,979 $ 836
Noncurrent liabilities $ 3,748 $ --
</TABLE>
8. 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 $341,000 to this lease finance company in 1996. This
lease was paid in full as of September 1996.
During 1998, 1997, and 1996 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 1998, 1997, and 1996 were approximately, $1,035,000, $905,000,
and $844,000, respectively. The Audit Committee of the Company's Board
of Directors has approved these purchases.
In 1996, 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 the Vice
Chairman'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 him 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.
<PAGE>
9. COMMITMENTS AND CONTINGENCIES
Noncancelable Operating Lease and License Agreements
----------------------------------------------------
As of January 2, 1999, the Company is a lessee under noncancelable
operating lease agreements for certain equipment which expire at
various dates through 2009. 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 store companies.
Page 40 of 52<PAGE>
<PAGE>
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 1998, 1997, and
1996.
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,
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 these
leases is approximately $64,000 monthly.
In connection with its acquisitions of Frame-n-Lens and New West
(see Note 4), the Company assumed operating lease agreements in
connection with approximately 280 and 175 vision centers, respectively,
obtained from the acquisitions. Through the Frame-n-Lens acquisition,
the Company assumed a lease for a manufacturing and distribution facility
located in Fullerton, California. This facility is subject to a lease
with a term expiring on August 31, 2006. Lease expense is $408,000
annually for this facility.
Aggregate future minimum payments under the license and lease
arrangements are as follows (amounts in thousands):
<TABLE>
<CAPTION>
Capital Operating
Fiscal Year Leases Leases
----------- ------ ------
<S> <C> <C>
1999 $ 532 $ 31,083
2000 264 27,739
2001 150 23,371
2002 35 17,959
2003 --- 12,915
Thereafter --- 18,461
------- ---------
Total minimum lease payments $ 981 $ 131,528
Less amounts representing interest 96 =========
-------
Present value of minimum capital lease
payments 885
Less current installments of obligations under 488
capital leases -------
Obligations under capital leases excluding
current installments $ 397
=======
</TABLE>
Total rental expenses related to cancelable and non-cancelable
operating leases were approximately, $30.1 million $22.8 million, and
$19.9 million for the years ended January 2, 1999, January 3, 1998,
and December 28, 1996, respectively.
<PAGE>
Guy Laroche and Gitano Trademark Licenses
-----------------------------------------
The Company has a license agreement with Guy Laroche of North
America, Inc., giving the Company the right to use the trademark "Guy
Laroche" in its vision centers in North America. The agreement
requires the Company to pay minimum and percentage royalties on retail
and wholesale sales. The Guy Laroche agreement, as amended, expires
on December 31, 2001. Under the Guy Laroche agreement, the Company
paid $389,000, $397,000, and $238,000 in fees during 1998, 1997, and
1996, respectively.
Page 41 of 52<PAGE>
<PAGE>
In 1998, 1997, and 1996, the Company paid $96,000, $121,000, and
$111,000 in fees to Gitano, Inc. and its successors in connection with
a license agreement (which expired in 1998) which gave the Company the
right to use the "Gitano" trademark in its vision centers.
Change in Control and Other Arrangements
----------------------------------------
There are agreements between the Company and twelve 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.
The Company's wholly-owned subsidiary, Frame-n-Lens, is currently
under audit by the Internal Revenue Service for fiscal 1995.
Management believes that any potential liability resulting from this
audit will not materially impact the Company's financial statements.
10. INCOME TAXES
The Company accounts for income taxes under Statement of
Financial Accounting Standards (SFAS No. 109) "Accounting for Income
Taxes," which requires the use of the liability method of accounting
for deferred income taxes. The components of the net deferred tax
assets/(liabilities) are as follows (amounts in thousands):
As of January 2, As of January 3,
1999 1998
---------------- ----------------
Total deferred tax (liabilities) $ (9,001) $ (9,005)
Total deferred tax assets 12,757 8,738
Valuation allowance (3,371) (2,406)
-------- ---------
Net deferred tax asset (liabilities) $ 385 $ (2,673)
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 (amounts in thousands):
Page 42 of 52
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
As of January 2, As of January 3,
1999 1998
---------------- ----------------
<S> <C> <C>
Deferred tax liabilities:
Depreciation $ 4,691 $ 5,506
Reserve for foreign losses 2,218 3,137
Store preopening costs -- 99
Other 2,092 263
-------- ---------
$ 9,001 $ 9,005
======== =========
Deferred tax assets:
Accrued expenses and reserves $ 3,292 $ 1,393
Inventory basis differences 456 145
Net operating loss carryforwards 5,507 4,677
Alternative minimum tax 2,483 2,117
Other 1,019 406
-------- ---------
$ 12,757 $ 8,738
========= =========
</TABLE>
The consolidated provision for income taxes consists of the
following (amounts in thousands):
Year Ended
------------------------------------
January 2, January 3, December 28,
1999 1998 1996
---- ---- ----
Current:
Federal $ 1,426 $ 1,937 $ 135
State 191 330 63
-------- --------- --------
1,617 2,267 198
-------- --------- --------
Deferred:
Federal 338 1,296 897
State 82 145 105
-------- --------- --------
420 1,441 1,002
-------- --------- --------
Total Provision for Income $ 2,037 $ 3,708 $ 1,200
Taxes ======== ======== ========
Page 43 of 52
<PAGE>
<PAGE>
The tax expense differs from the amounts resulting from multiplying
income before income taxes by the statutory federal income tax rate
for the following reasons (amounts in thousands):
<TABLE>
<CAPTION>
Year Ended
-----------------------------------------------------
January 2, January 3, December 28,
1999 1998 1996
---------- ---------- ------------
<S> <C> <C> <C>
Federal income tax at statutory rate $1,853 $3,156 $1,591
State income taxes, net of federal income tax benefit 180 314 69
Foreign losses not deductible for U.S. federal tax purposes 37 65 63
Valuation allowance for U.S. federal and state taxes (548) (556)
Nondeductible goodwill 292
Other 223 173 33
------ ------ ------
$2,037 $3,708 $1,200
====== ====== ======
</TABLE>
At January 2, 1999, the Company had U.S. regular tax net operating
loss carryforwards of $14 million that can reduce future federal
income taxes. If not utilized, these carryforwards will expire
beginning in 2007. The Company also has non-expiring alternative
minimum tax credit carryforwards of $2.4 million available to offset
future regular taxes.
On July 28, 1998, the Company acquired all of the outstanding
capital stock of Frame-n-Lens. The Company accounted for the
acquisition as a purchase, with the excess of the purchase price
over the fair value of the net assets acquired to be allocated
to goodwill. Frame-n-Lens had net operating loss carryforwards of
$1.4 million.
On October 25, 1998, the Company acquired all of the outstanding
common stock and common stock equivalents of New West. The Company
accounted for the acquisition as a purchase, with the excess of
the purchase price over the fair value of the net assets acquired
to be allocated to goodwill. New West had net operating loss
carryforwards of $5.7 million and $4.9 million for regular tax and
alternative minimum tax purposes, respectively, which begin to expire
in 2006. These net operating losses are subject to limitations from a
prior ownership change.
In 1990, as part of the ELI and SPI transaction (See Note 3 to
consolidated financial statements), the Company entered into stock
option agreements with the former principals. These stock options
were exercised in 1992 and 1994. Upon exercise of all the options,
the Company became entitled to a tax benefit valued at approximately
$4.0 million. At that time, the Company recorded a valuation
allowance against the tax benefit.
In the first quarter of 1998, the Company and the Internal Revenue
Service executed a definitive agreement to settle litigation in the
U.S. Tax Court arising out of the grant and exercise of the options
and the tax claimed by the Company in connection therewith. The
settlement provided the Company substantially all of the deduction it
had claimed. As a result of the settlement, the Company reassessed
the realizability of related net operating loss carryforwards and
accordingly, reduced the related valuation allowance in the first
quarter. An after-tax benefit of $3.3 million was recorded as a
<PAGE>
contribution to capital and had no impact on earnings for financial
reporting purposes.
In Mexico, the location of the Company's 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.
11. EARNINGS PER COMMON SHARE
In 1997, the Company adopted SFAS No. 128, "Earnings per Share".
Basic earnings per common share are computed by dividing net income by
the weighted average number of common shares outstanding during the
year. Diluted earnings per common share are 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 (amounts in thousands except per
share information):
Page 44 of 52<PAGE>
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net Income $ 3,414 $ 5,573 $ 3,480
======== ======== ========
Weighted shares outstanding 20,949 20,676 20,618
Basic earnings per share $ 0.16 $ 0.27 $ 0.17
======== ======== ========
Weighted shares outstanding 20,949 20,676 20,618
Net options issued to employees 285 163 88
-------- -------- --------
Aggregate shares outstanding 21,234 20,839 20,706
Diluted earnings per share $ 0.16 $ 0.27 $ 0.17
========= ======== ========
</TABLE>
Outstanding options with an exercise price below the average price
of the Company's common stock have been included in the computation of
diluted earnings per common share, using the treasury stock method, as
of the date of the grant.
12. SUPPLEMENTAL DISCLOSURE INFORMATION
Supplemental disclosure information is as follows (amounts in thousands):
(i) Supplemental Cash Flow Information
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash paid for
Interest $2,257 $1,582 $2,565
Income taxes 1,918 2,383 149
</TABLE>
(ii) Supplemental Noncash Investing and Financial Activities
The acquisition information relates to the Frame-n-Lens and New West
acquisitions in 1998 and the ELI and SPI transactions and the
purchase of Midwest Vision, Inc. in 1997 (see Notes 3 and 4).
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Business acquisitions, net of cash acquired
Fair value of assets acquired $ 30,240 $ 4,459
Purchase price in excess of net assets acquired 104,813 6,671
Liabilities assumed (37,696) (8,022)
Stock issued -- (836)
-------- --------
Net cash paid for acquisitions $ 97,357 $ 2,272
======== ========
</TABLE>
(iii) Supplemental Balance Sheet Information
Page 45 of 52
<PAGE>
<PAGE>
Significant components of accrued expenses and other current liabilities
may be summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Accrued employee compensation and benefits $ 6,966 $ 5,425 $ 2,903
Accrued license fees 2,184 2,349 1,851
Accrued acquisition expenses 5,215 875 --
</TABLE>
(iv) Supplemental Income Statement Information
The components of other expense, net, may be summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Interest expense on debt and capital leases $ 5,721 $ 1,853 $ 2,338
Purchase discounts on invoice payments (509) (483) (430)
Finance fees and amortization of hedge and swap
agreements 407 236 230
Interest income (86) (38) (66)
Other 5 (14) 12
--------- -------- --------
$ 5,538 $ 1,554 $ 2,084
========= ======== ========
</TABLE>
13. 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 non-employee 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 non-employee
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<PAGE>
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 2, 1999.
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. Two executive officers were
granted options the vesting of which can be accelerated if the Company
obtains certain earnings per share goals.
Page 46 of 52<PAGE>
<PAGE>
Stock option transactions during the three years ended January 2,
1999 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Options outstanding beginning of year 2,294,203 1,950,166 1,813,195
Options granted 1,171,750 631,864 395,305
Options exercised (294,657) (7,840) (55,371)
Options cancelled (588,916) (279,987) (202,963)
--------- --------- ---------
Options outstanding end of year 2,582,380 2,294,203 1,950,166
========= ========= =========
Options exercisable end of year 748,803 1,020,674 734,109
========= ========= =========
Weighted average option
prices per share:
Granted $ 5.030 $ 4.878 $ 3.394
Exercised $ 4.989 $ 2.168 $ 0.278
Cancelled $ 9.461 $ 9.640 $ 7.816
Outstanding at year end $ 4.881 $ 6.028 $ 6.904
Options exercisable end of year $ 4.973 $ 7.891 $ 9.806
</TABLE>
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 1998, 1997, and 1996 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
thousands except per share information):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- ---------
<S> <C> <C> <C>
As reported:
Net earnings $ 3,414 $ 5,573 $ 3,480
======== ======== ========
Earnings per share $ 0.16 $ 0.27 $ 0.17
======== ======== ========
Pro forma:
Net earnings $ 2,655 $ 5,142 $ 3,163
======== ======== ========
Earnings per share $ 0.13 $ 0.25 $ 0.15
======== ======== ========
</TABLE>
Basic and diluted earnings per share are the same for each year.
Page 47 of 52
<PAGE>
<PAGE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Dividend yield 0.00% 0.00% 0.00%
Expected volatility 76% 74% 86%
Risk free interest rates 4.87% 6.14% 5.90%
Expected lives (years) 4.91 4.51 4.34
</TABLE>
The following table shows the options outstanding and the options
exercisable with pertinent data related to each:
<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 1/2/99 Life Price 1/2/99 Price
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$3.12 - $4.81 997,727 7.58 $ 3.983 213,000 $ 3.598
$4.88 - $5.31 992,600 7.86 $ 5.248 133,750 $ 5.104
$5.38 - $7.81 592,053 3.43 $ 5.778 402,053 $ 5.658
--------- -------
$3.12 - $7.81 2,582,380 6.74 $ 4.881 748,803 $ 4.973
</TABLE>
Restricted Stock Awards
-----------------------
Restricted stock grants, with an outstanding balance of 106,000
shares at January 2, 1999, 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 For awards made in 1998, restricted shares, to the extent
not awarded after five years, vest after ten years of employment.
Unamortized deferred compensation expense with respect to the
restricted stock was $430,000 and $225,000 at January 2, 1999 and
January 3, 1998, respectively, and is being amortized over the five-
year vesting period. Deferred compensation expense aggregated
$120,000 and $54,000 in 1998 and 1997, respectively. A summary of
restricted stock granted during 1998 and 1997 is as follows:
<PAGE>
1998 1997
------- -------
Shares granted 67,000 60,000
Shares forfeited 15,000 6,000
Weighted-average fair value of
stock granted during year $ 5.34 $ 4.81
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.
Page 48 of 52
<PAGE>
<PAGE>
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 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. In February 1998, the Company's Board
of Directors amended the Rights Plan effective March 1, 1998 to
provide that Rights under this plan can be redeemed and certain
amendments to this 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.
Page 49 of 52
<PAGE>
14. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
Selected quarterly data for the Company for the fiscal years ended
January 2, 1999 and January 3, 1998 is as follows (amounts in
thousands except per share information). The fourth quarter of fiscal
1997 consisted of 14 weeks; all other quarters consisted of 13 weeks.
<TABLE>
<CAPTION>
FISCAL 1998 Quarter Ended
- --------------------------------------------------------------------------------------------------------------------------
April 4 July 4 October 3 January 2
----------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 54,408 $ 51,037 $ 67,654 $ 72,232
Cost of goods sold 24,465 23,890 30,757 33,817
-------- -------- -------- --------
Gross profit 29,943 27,147 36,897 38,415
Selling, general, and administrative expense 25,557 23,286 32,995 39,575
-------- -------- -------- --------
Operating income (loss) 4,386 3,861 3,902 (1,160)
Other expense, net 277 235 736 4,290
-------- -------- -------- --------
Income (loss) before income taxes 4,109 3,626 3,166 (5,450)
Provision (benefit) for income taxes 277 1,483 1,314 (2,417)
-------- -------- -------- --------
Net income (loss) 2,452 2,143 1,852 (3,033)
======== ======== ======== ========
Basic earnings (loss) per common share $ 0.12 $ 0.10 $ 0.09 ($ 0.14)
======== ======== ======== ========
Diluted earnings (loss) per common share $ 0.12 $ 0.10 $ 0.09 ($ 0.14)
======== ======== ======== =========
<CAPTION>
FISCAL 1997 Quarter Ended
- ---------------------------------------------------------------------------------------------------------------------------
March 29 June 28 September 27 January 3
----------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
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 expense 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
Profition for income taxes 1,107 1,054 1,204 343
-------- -------- -------- --------
Net income $ 1,653 $ 1,620 $ 1,859 $ 441
======== ======== ======== ========
Basic earnings per common share $ 0.08 $ 0.08 $ 0.09 $ 0.02
======== ======== ======== ========
Diluted earnings per common share $ 0.08 $ 0.08 $ 0.09 $ 0.02
======== ======== ======== ========
</TABLE>
Page 50 of 52<PAGE>
<PAGE>
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. 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
<PAGE>
United States and Mexico for the fiscal years ended January 2, 1999,
January 3, 1998, and December 28, 1996 are summarized in the
following tables (amounts in thousands). Identifiable assets include
all assets associated with operations in the indicated reportable
segment excluding inter-company receivables and investments.
<TABLE>
<CAPTION>
1998 United States Mexico Other Consolidated
------------- ------ ----- ------------
<S> <C> <C> <C> <C>
Sales $ 241,705 $ 3,429 $ 197 $ 245,331
========== ======== ====== ==========
Identifiable Assets $ 226,797 $ 2,160 $ 140 $ 229,097
========== ======== ====== ==========
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
========== ======== ====== ==========
</TABLE>
Page 51 of 52
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE II
VISTA EYECARE, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
January 2, 1999, January 3, 1998, and December 28, 1996
(In thousands)
Additions
-------------------------------------
Description Balance at Charged to Charged to Balance at
Beginning of Period Cash and Expenses Other Accounts Deductions End of Period
------------------- ------------------- ----------------- --------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Year ended
December 28, 1996
Allowance for
Uncollectible
Accounts $ 339 $ 177 -- $ 163 $ 353
Receivable
Year ended
January 3, 1998
Allowance for
Uncollectible
Accounts $ 353 $ 928 -- $ 519 $ 762
Receivable
Year ended
January 2, 1999
Allowance for
Uncollectible
Accounts Receivable $ 762 $ 900 $ 726 <F1> $ 872 $ 1,516
</TABLE>
_________________
[FN]
<F1> Relates to receivables acquired from Frame-n-Lens and New West.
</FN>
Page 52 of 52
<PAGE>
Exhibit 21
Company Subsidiaries
Name of Subsidiary Jurisdiction of Incorporation
------------------ -----------------------------
International Vision Associates, Ltd. Georgia
Mexican Vision Associates, S.A. de C.V. Mexico
Mexican Vision Associates Operadora, S. Mexico
de R.L. de C.V.
Mexican Vision Associates Servicios, S. Mexico
de R.L. de C.V.
Midwest Vision, Inc. Minnesota
NVAL Healthcare Systems, Inc. Georgia
NVAL Visioncare Systems of California, California
Inc.
Frame-n-Lens Optical, Inc. California
Vision Administrators, Inc. California
ProCare Eye Exam, Inc. California
Family Vision Centers, Inc. Delaware
New West Eyeworks, Inc. Delaware
Alexis Holdings, Inc. Arizona
Vista Eyecare Network, LLC Delaware
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form10-K, into the Company's previously filed
Registration Statement File No. 333-06579 and File No. 333-21782.
/s/ Arthur Andersen LLP
Atlanta, Georgia
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000868263
<NAME> VISTA EYECARE, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-04-1998
<PERIOD-END> JAN-02-1999
<CASH> 7,072
<SECURITIES> 0
<RECEIVABLES> 11,651
<ALLOWANCES> 1,516
<INVENTORY> 31,670
<CURRENT-ASSETS> 51,776
<PP&E> 106,348
<DEPRECIATION> 48,305
<TOTAL-ASSETS> 229,097
<CURRENT-LIABILITIES> 47,568
<BONDS> 136,832
0
0
<COMMON> 212
<OTHER-SE> 44,485
<TOTAL-LIABILITY-AND-EQUITY> 229,097
<SALES> 245,331
<TOTAL-REVENUES> 245,331
<CGS> 112,929
<TOTAL-COSTS> 112,929
<OTHER-EXPENSES> 121,413
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,538
<INCOME-PRETAX> 5,451
<INCOME-TAX> 2,037
<INCOME-CONTINUING> 3,414
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,414
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
</TABLE>
