<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period Commission File
ended October 2, 1999 Number 0-20001
VISTA EYECARE, INC.
(Exact name of registrant as specified in its charter)
GEORGIA 58-1910859
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
296 Grayson Highway 30045
Lawrenceville, Georgia (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (770) 822-3600
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
----- -----
The number of shares of Common Stock of the registrant outstanding as
of November 8, 1999 was 21,179,103.
The Exhibit Index is located at page 17.
Page 1 of 18
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VISTA EYECARE, INC.
FORM 10-Q INDEX
Page of
Form 10-Q
---------
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets -
October 2, 1999 and January 2, 1999 3
Condensed Consolidated Statements of Operations -
Three Months Ended October 2, 1999 and October 3, 1998
and Nine Months Ended October 2, 1999 and October 3, 1998 5
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended October 2, 1999 and October 3, 1998 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11
PART II - OTHER INFORMATION
- ---------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
Page 2 of 18
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PART I
FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
October 2, 1999 and January 2, 1999
(In thousands except share information)
<TABLE>
<CAPTION>
October 2, January 2,
1999 1999
------------ ---------
(unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,885 $ 7,072
Accounts receivable (net of allowance: 1999-$2,611; 1998-$1,516) 13,210 10,135
Inventories 37,310 31,670
Other current assets 4,296 2,899
------- -------
Total current assets 57,701 51,776
------- -------
PROPERTY AND EQUIPMENT:
Equipment 56,222 54,396
Furniture and fixtures 26,391 23,124
Leasehold improvements 29,693 26,806
Construction in progress 3,289 2,022
------- -------
115,595 106,348
Less accumulated depreciation (59,204) (48,305)
------- -------
Net property and equipment 56,391 58,043
------- -------
OTHER ASSETS AND DEFERRED COSTS (net of accumulated amortization:
1999-$1,667; 1998-$1,292) 10,467 9,953
DEFERRED INCOME TAX ASSET 1,607 385
GOODWILL AND OTHER INTANGIBLE ASSETS (net of accumulated
amortization: 1999-$5,770; 1998-$2,544) 107,179 108,940
------- -------
$233,345 $229,097
======= =======
Page 3 of 18
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 24,513 $ 18,925
Accrued expenses and other current liabilities 24,774 26,637
Current portion long-term debt and capital lease obligations 1,918 2,006
------- -------
Total current liabilities 51,205 47,568
------- -------
SENIOR NOTES (net of discount: 1999-$1,289; 1998-$1,391) 123,711 123,609
REVOLVING CREDIT FACILITY 10,256 6,000
OTHER LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 6,143 7,223
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $1 par value; 5,000,000 shares authorized, none issued -- --
Common stock, $.01 par value; 100,000,000 shares authorized,
21,179,103 and 21,166,612 shares issued and outstanding as
of October 2, 1999, and January 2, 1999 respectively 212 212
Additional paid-in capital 48,122 47,964
Retained earnings (deficit) (2,231) 594
Cumulative foreign currency translation (4,073) (4,073)
------- -------
Total shareholders' equity 42,030 44,697
------- -------
$ 233,345 $ 229,097
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
Page 4 of 18
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<TABLE>
<CAPTION>
VISTA EYECARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share information)
(Unaudited)
Three Months Ended Nine Months Ended
------------------------ -------------------------
October 2, October 3, October 2, October 3,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $83,262 $67,654 $ 252,428 $173,099
COST OF GOODS SOLD 37,474 30,757 111,307 79,112
------- ------- ------- -------
GROSS PROFIT 45,788 36,897 141,121 93,987
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSE 45,355 32,995 130,738 81,838
------- ------- ------- -------
OPERATING INCOME 433 3,902 10,383 12,149
INTEREST EXPENSE, NET 4,809 736 14,218 1,248
------- ------- ------- -------
INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR
INCOME TAXES (4,376) 3,166 (3,835) 10,901
PROVISION (BENEFIT) FOR INCOME TAXES (1,396) 1,314 (1,010) 4,454
------- ------- ------- -------
NET INCOME (LOSS) $(2,980) $ 1,852 $ (2,825) $ 6,447
======= ======= ======= =======
BASIC EARNINGS (LOSS) PER COMMON SHARE $ (0.14) $ 0.09 $ (0.13) $ 0.31
======= ======= ======= =======
DILUTED EARNINGS (LOSS) PER COMMON SHARE $ (0.14) $ 0.09 $ (0.13) $ 0.30
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
Page 5 of 18
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<TABLE>
<CAPTION>
VISTA EYECARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
-----------------------
October 2, October 3,
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(2,825) $ 6,447
------- -------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 14,254 9,227
Provision (benefit) for deferred income tax expense (1,222) 3,710
Changes in operating assets and liabilities,
net of effects of acquisitions:
Receivables (3,075) (2,142)
Inventories (5,640) 836
Other current assets (1,397) (1,267)
Other assets (1,585) (400)
Accounts payable 5,588 (2,208)
Accrued expenses and other current liabilities (1,863) (3,794)
------- -------
Total adjustments 5,060 3,962
------- -------
Net cash provided by operating activities 2,235 10,409
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (10,522) (7,198)
Proceeds from sale of property and equipment 955 --
Acquisitions, net of cash acquired -- (30,429)
------- -------
Net cash used in investing activities (9,567) (37,627)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances on revolving credit facility 19,000 38,500
Repayments on revolving credit facility (14,744) (6,000)
Debt issuance costs -- (4,861)
Repayments on notes payable and capital leases (1,167) (862)
Proceeds from exercise of stock options 56 290
------- -------
Net cash provided by financing activities 3,145 27,067
------- -------
NET (DECREASE) IN CASH (4,187) (151)
CASH, beginning of period 7,072 2,559
------- -------
CASH, end of period $ 2,885 $ 2,408
======= =======
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
Page 6 of 18
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VISTA EYECARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 2, 1999
(Unaudited)
(1) BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared by Vista Eyecare, Inc., formerly known as National Vision
Associates, Ltd. (the "Company") pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. Although management believes that the disclosures are
adequate to make the information presented not misleading, it is suggested that
these interim condensed consolidated financial statements be read in conjunction
with the Company's most recent audited consolidated financial statements and
notes thereto. In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary for a fair presentation of the financial
position, results of operations, and cash flows for the interim periods
presented have been made. Operating results for the interim periods presented
are not necessarily indicative of the results that may be expected for the year
ending January 1, 2000. Certain amounts in the October 3, 1998 condensed
consolidated financial statements have been reclassified to conform to the
October 2, 1999 presentation.
(2) BENEFIT FOR INCOME TAXES
The effective income tax benefit rate on the consolidated pre-tax loss in
the third quarter of 1999 is 32%. The effective income tax benefit rate for the
year ending January 1, 2000 will be determined by the Company's pre-tax loss
reported for the full year as well as the application of tax rules and
regulations regarding the use of net operating loss carryforwards and
carrybacks. The Company has applied for refunds of substantially all federal and
state income tax payments made with respect to the year ended January 1, 2000.
Page 7 of 18
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(3) EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per common share were computed by dividing net income
(loss) by the weighted average number of common shares outstanding during the
year. Diluted earnings (loss) per common share were computed as basic earnings
per common share, adjusted for outstanding stock options that are dilutive. The
computation for basic and diluted earnings per share may be summarized as
follows (amounts in thousands except per share information):
<TABLE>
Three Months Ended Nine Months Ended
-------------------------- --------------------------
<S> <C> <C> <C> <C>
October 2, October 3, October 2, October 3,
1999 1998 1999 1998
---- ---- ---- ----
Net Income (Loss) $(2,980) $ 1,852 $(2,825) $6,447
Weighted Shares Outstanding 21,070 21,034 21,068 20,909
Basic Earnings (Loss) per Share $ (0.14) $ 0.09 $ (0.13) $ 0.31
Weighted Shares Outstanding 21,070 21,034 21,068 20,909
Net Options Issued to Employees * 172 * 321
Aggregate Shares Outstanding 21,070 21,206 21,068 21,230
Diluted Earnings(Loss) per Share $ (0.14) $ 0.09 $ (0.13) $ 0.30
*Net options issued to employees were not included in the diluted per share
calculation because the effect of inclusion would be anti-dilutive.
</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.
Page 8 of 18
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(4) SUPPLEMENTAL DISCLOSURE INFORMATION
Inventory balances, by classification, may be summarized as follows:
<TABLE>
<S> <C> <C>
October 2, January 2,
1999 1999
------ ------
Raw Material $25,177 $22,814
Finished Goods 10,996 7,634
Supplies 1,137 1,222
------ ------
$37,310 $31,670
====== ======
The components of interest expense, net, may be summarized as follows:
Three Months Ended Nine Months Ended
------------------------------ ---------------------------
October 2, October 3, October 2, October 3,
1999 1998 1999 1998
----- ----- ----- -----
Interest expense on debt
and capital leases $4,516 $ 868 $13,433 $1,653
Purchase discounts on invoice
payments (1) (137) (37) (435)
Fees, amortization of hedge and
swap agreements, and other 294 5 822 30
------ ------ ------ ------
$4,809 $ 736 $14,218 $1,248
====== ====== ====== ======
Other data may be summarized as follows:
Three Months Ended Nine Months Ended
------------------------------ ---------------------------
October 2, October 3, October 2, October 3,
1999 1998 1999 1998
----- ----- ----- -----
Earnings before interest,
taxes, depreciation and
amortization expense $5,041 $7,672 $24,410 $21,846
Capital expenditures $3,235 $1,230 $10,522 $ 7,198
Depreciation and amortization
expense $4,879 $3,316 $14,254 $ 9,227
</TABLE>
Page 9 of 18
<PAGE>
(5) INTEREST PAYMENT ON SENIOR NOTES
The Company's $125 million senior notes due 2005 (the "Senior Notes"),
provide for semi-annual interest payments due on October 15 and April 15 of each
year. The indenture governing the Senior Notes provides for a 30 day grace
period after each payment due date. On November 12, 1999, the Company entered
into a new credit facility (see Note 6) and used proceeds from such facility to
make, on November 15, 1999, the October 15, 1999 payment due on the Senior
Notes.
(6) SUBSEQUENT EVENT
On November 12, 1999, the Company replaced its secured credit facility with
a new $25.0 million secured credit facility with Foothill Capital Corporation
(the "New Facility"). The New Facility consists of a $12.5 million term loan and
a $12.5 million revolver. Availability under the revolver portion is limited to
certain percentages of accounts receivable and inventory, subject to other
limitations based on a rolling six-month historical EBITDA covenant and a
rolling 60-day cash collections covenant. The New Facility expires on May 31,
2002.
The proceeds of the New Facility were available for making the October 15,
1999 payment under the Senior Notes, refinancing existing debt, working capital,
and general corporate purposes. All obligations of the Company under the New
Facility are unconditionally and irrevocably guaranteed jointly and severally by
certain of the Company's subsidiaries.
The revolver under the New Facility bears interest at rates per annum equal
to, at the option of the Company, either (i) Foothill's Reference Rate plus
2.00% or (ii) the LIBOR rate plus 3.25%. The term loan portion bears interest at
the rate of 15% per annum and may be prepaid at any time, but only if at the
time of the payment the Company meets certain minimum availability requirements.
Payment of the principal of the term loan is due on May 31, 2002.
The Company paid origination fees of 0.50% and 2.00% on the revolver and
the term loan portions, respectively. The Company will pay a fee of 0.50% per
annum on the unused portion of the revolver and an annual fee of .25% on the
full amount of the revolver. In December 2000, the Company, to the extent the
term loan has not been repaid, must elect to pay a fee, or interest on the term
loan increases monthly. (The term loan is divided into Term Loan A (in the
amount of $2.5 million) and Term Loan B (in the amount of $10 million); the fee
is 1% and 4%, respectively (payable on the outstanding balance of Term Loan A
and Term Loan B), and the monthly interest increase is .125% and .375%,
respectively.) In addition, the Company will pay fees of 1.5% on any letters of
credit issued under the New Facility, which are calculated based on the amount
of outstanding letters of credit. There is a prepayment fee of 1% under the
revolver portion of the New Facility.
Page 10 of 18
<PAGE>
The New Facility contains customary covenants including, among others,
covenants restricting the incurrence of indebtedness, the creation or existence
of liens, the guarantee of other indebtedness, the declaration or payment of
dividends, the repurchase or redemption of debt and equity securities of the
Company, change in business activities, affiliate transactions, change in key
management and certain corporate transactions, such as sales and purchases of
assets, mergers, or consolidations. The New Facility also contains certain
financial covenants relating to minimum rolling six-month EBITDA and rolling
three-month net worth requirements, and limitations on capital expenditures,
investments, prepayments of other indebtedness, and delivery of financial and
other information to Foothill and other matters.
The New Facility contains certain customary default provisions, including,
among others, payment events of default, breach of representations or
warranties, covenant defaults, an event of default based on a change in control
of the Company, a material adverse change clause, cross-defaults to other
indebtedness of, and bankruptcy and judgment defaults against, the Company, and
uninsured losses.
ITEM 2. 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 and mix of vision centers opened and operating during
such period. At October 2, 1999, the Company operated 931 vision centers, versus
737 vision centers at October 3, 1998.
THREE MONTHS ENDED OCTOBER 2, 1999 (THE "CURRENT THREE MONTHS") COMPARED TO
THREE MONTHS ENDED OCTOBER 3, 1998 (THE "PRIOR THREE MONTHS")
CONSOLIDATED RESULTS
NET SALES. Net sales during the Current Three Months increased to $83.3
million from $67.7 million for the Prior Three Months due in substantial part to
the increase in the number of operating vision centers. Average weekly net sales
per vision center decreased from $7,800 in the Prior Three Months to $6,900 in
the Current Three Months, primarily as a result of lower average net sales per
store recorded in vision centers acquired in the Frame-n-Lens acquisition
(purchase date of July 28, 1998) and the New West acquisition (purchase date of
October 23, 1998) (the "Acquired Vision Centers").
The Acquired Vision Centers, particularly those acquired from Frame-n-Lens,
experienced significant negative comparable store sales and had a substantial
negative impact on results and liquidity during the period. This negative trend
was partially offset by a 4.0% increase in comparable store sales growth in the
domestic core business. Management continues to concentrate on improving the
performance of the Acquired Vision Centers and has implemented various measures
including intensive training programs and increased in-store marketing programs
and special promotions for these vision centers. No assurances can be given that
net sales levels at the Acquired Vision Centers will improve. Failure to improve
such sales levels will have a substantial negative impact on earnings and
liquidity.
Page 11 of 18
<PAGE>
Net sales from international operations increased to $1,037,000 in the
three-month period ended August 31, 1999 from $868,000 in the comparable period
a year ago.
GROSS PROFIT. In the Current Three Months, gross profit increased to $45.8
million from $36.9 million in the Prior Three Months. This increase was
primarily due to the increased net sales described above. Gross profit as a
percent of sales increased to 55.0% from 54.5% in the Prior Three Months. The
increase was due primarily to the net effect of the following: (a) cost savings
resulting from the lab consolidation during the integration of Frame-n-Lens and
New West; and (b) lower inventory prices from vendors; offset in part by (c)
lower store margins due primarily to pricing pressure on contact lens sales as
well as higher remake and warranty costs on the Acquired Vision Centers.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE ("SG&A expense"). SG&A expense
(which includes both store operating expenses and home office overhead)
increased to $45.4 million in the Current Three Months from $33.0 million for
the Prior Three Months. The increase was due to the increase in the number of
vision centers. As a percentage of net sales, SG&A expense was 54.5% in the
Current Three Months, compared to 51.8% for the Prior Three Months. This
increase was due to higher payroll costs as a percentage of sales at the
Acquired Vision Centers; increased spending for advertising; costs associated
with placing doctors in the Acquired Vision Centers; and goodwill amortization
related to the 1998 acquisitions of Frame-n-Lens and New West.
OPERATING INCOME. Operating income for the Current Three Months decreased
to $433,000 from $3.9 million in the Prior Three Months. Operating income as a
percentage of sales was 1.0% in the Current Three Months, compared to 5.8% in
the Prior Three Months.
INTEREST EXPENSE. The increase in interest expense to $4.8 million,
compared to $736,000 in the Prior Three Months, is due to increased interest
costs arising out of the issuance of the Company's senior notes in October 1998.
BENEFIT FOR INCOME TAXES. The effective income tax benefit rate on the
consolidated pre-tax loss in the third quarter of 1999 is 32%. The effective
income tax benefit rate for the year ending January 1, 2000 will be determined
by the Company's pre-tax loss reported for the full year as well as the
application of tax rules and regulations regarding the use of net operating loss
carryforwards and carrybacks. The Company has applied for refunds of
substantially all federal and state income tax payments made with respect to the
year ended January 1, 2000.
NET INCOME. The Company posted a net loss of $3.0 million, or $0.14 per
share, versus net income of $1.9 million, or $0.09 per share, in the Prior Three
Months.
Page 12 of 18
<PAGE>
NINE MONTHS ENDED OCTOBER 2, 1999 (THE "CURRENT NINE MONTHS") COMPARED TO
NINE MONTHS ENDED OCTOBER 3, 1998 (THE "PRIOR NINE MONTHS")
NET SALES. Net sales during the Current Nine Months increased to $252.4
million from $173.1 million for the Prior Nine Months. Average weekly net sales
per vision center decreased from $8,500 during the Prior Nine Months to $7,000
during the Current Nine Months. The decrease is due primarily to the low average
weekly net sales from the Acquired Vision Centers.
The Acquired Vision Centers, experienced negative comparable store sales in
the Current Nine Months which had a negative impact on results and liquidity
during the period. This negative trend was partially offset by an increase in
comparable store sales growth in the domestic core business. Management
continues to focus on improving net sales levels at the Acquired Vision Centers.
Failure to improve such sales levels will have an ongoing negative impact on
Company earnings, cash flow and liquidity.
Net sales from international operations in the nine-month period ended
August 31, 1999 remained consistent with the comparable period ended August 31,
1998, at $2.9 million.
GROSS PROFIT. For the Current Nine Months, gross profit increased to $141.1
million from $94.0 million in the Prior Nine Months. This increase was primarily
due to the increased net sales described above. Gross profit as a percentage of
sales increased from 54.3% in the Prior Nine Months to 55.9% in the Current Nine
Months. The increase was due primarily to lower manufacturing costs due to the
consolidation of manufacturing facilities and lower material costs due to
increased purchasing leverage.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE ("SG&A expense"). SG&A expense
(which includes both store operating expenses and home office overhead)
increased to $130.7 million in the Current Nine Months from $81.8 million for
the Prior Nine Months, reflecting operating expenses of the additional vision
centers. As a percentage of net sales, SG&A expense increased to 51.8% in the
Current Nine Months, from 47.3% for the Prior Nine Months. The percentage
increase was due primarily to (a) low sales levels recorded at the Acquired
Vision Centers, which served to increase store expenses as a percentage of sales
to a level higher than that recorded by the domestic core host business, and (b)
increase in advertising spending.
OPERATING INCOME. Operating income for the Current Nine Months decreased to
$10.4 million, from $12.1 million in the Prior Nine Months. Operating income as
a percentage of sales was 4.1% in the Current Nine Months, compared to 7.0% in
the Prior Nine Months.
INTEREST EXPENSE. The increase in interest expense to $14.2 million,
compared to $1.2 million in the Prior Nine Months, is due to increased interest
costs arising out of the issuance of the Company's senior notes in October 1998.
Page 13 of 18
<PAGE>
BENEFIT FOR INCOME TAXES. The effective income tax benefit rate on the
consolidated pre-tax loss in the first nine months of 1999 is 26%. The effective
income tax benefit rate for the year ending January 1, 2000 will be determined
by the Company's pre-tax loss reported for the full year as well as the
application of tax rules and regulations regarding the use of net operating loss
carryforwards and carrybacks. The Company has applied for refunds of
substantially all federal and state income tax payments made with respect to the
year ended January 1, 2000.
NET INCOME. Net loss was $2.8 million, or $0.13 per share, as compared to
net income of $6.4 million, or $0.31 per share, in the Prior Nine Months.
LIQUIDITY AND CAPITAL RESOURCES
On October 14, 1999, the Company announced that, because of continued sales
and profit shortfalls at the Acquired Vision Centers, it would not timely make
the October 15, 1999 interest payment called for under its $125 million senior
notes. On November 12, 1999, the Company announced that it had entered into a
new credit facility (the "New Facility") with Foothill Capital Corporation and
that it would make such interest payment within the 30 day grace period
permitted under the senior notes (see notes 5 and 6 to financial statements).
Upon the closing of the New Facility, the Company discharged its indebtedness
under its previous credit facility and made the interest payment under the
senior notes. As of November 16, 1999, the Company had borrowed $18.1 million
under the New Facility.
The New Facility is divided into a $12.5 million revolver and a $12.5
million term loan. The New Facility contains customary covenants including a
six-month historical rolling minimum EBITDA and a quarterly net worth
requirement. Failure to comply with such covenants would constitute an event of
default which, if not cured, could, among other things, restrict availability
under the revolver portion of the New Facility. Such restriction would have a
substantial negative impact on operations and liquidity of the Company, and may
negatively affect the Company's ability to meet its ongoing obligations,
including future interest payments on the senior notes.
The Company opened six vision centers and closed five vision centers in the
third quarter of 1999. As of October 2, 1999, the Company plans to open an
additional two vision centers in the remainder of 1999. The actual number of
openings is dependent on various factors, including, but not limited to
construction schedules, weather conditions, the Company's continued ability to
obtain suitable locations, and changes in economic conditions such as inflation
or recession. Average costs for opening domestic host vision centers have
approximated $140,000 for fixed assets and $35,000 for inventory, whereas the
costs for opening free-standing vision centers range from $120,000 to $155,000
for fixed assets and $20,000 for inventory. The Company incurs approximately
$20,000 for pre-opening expenses for each vision center opening. These costs are
expensed as incurred.
Page 14 of 18
<PAGE>
The Company expects that fourth quarter results for 1999 will include
nonrecurring and other charges pertaining to the write-off of capitalized fees
because of the refinancing of its credit facility as well as write-offs of
certain managed care receivables. The charges represent non-cash expenses. In
addition, the Company announced that it was conducting a strategic review of a
limited number of free-standing retail vision centers. The amount of the
potential write-offs has not yet been determined.
IMPACT OF THE YEAR 2000 ISSUE
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 October 2, 1999. The remaining systems will be replaced in the
fourth quarter of 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 deploying a new point of sale software
system. 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 is designed to
be Year 2000 compliant. The current point of sale system is in the final stage
of testing for Year 2000 compliance. The compliant software is scheduled to be
in the retail stores by the end of the fourth quarter, 1999. No assurance can be
given that the remediated, current or new systems will perform as planned or
that they will not cause disruptions at the retail or administrative levels of
the organization. Such disruptions could have a material, adverse impact on the
Company.
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 $1.3 million. The Company has currently spent approximately $1.0
million for its Year 2000 project. The remaining planned expenditures of $0.3
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 system modifications
have been completed and are expected to be fully implemented by the end of the
fourth quarter of 1999.
Page 15 of 18
<PAGE>
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 is in the process of completing its contingency planning with
respect to these and other scenarios. It has been and is continuing to contact
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 processes until
appropriate repairs or upgrades can be made.
RISK FACTORS
Any expectations, beliefs, and other non-historical statements contained in
this Form 10-Q are forward looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements represent
the Company's expectations or belief concerning future events, including the
following: any statements regarding future sales levels, any statements
regarding the continuation of historical trends, and any statements regarding
the Company's liquidity. Without limiting the foregoing, the words "believes,"
"anticipates," "plans," "expects," and similar expressions are intended to
identify forward-looking statements. With respect to such forward-looking
statements and others which may be made by, or on behalf of, the Company, the
factors described as "Risk Factors" in the Company's Report on Form 10-K for
1998 could materially affect the Company's actual results.
Page 16 of 18
<PAGE>
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following exhibits are filed herewith or incorporated by reference:
<TABLE>
<CAPTION>
Exhibit
Number
-------
<S> <C>
Amended and Restated Articles of Incorporation 3.1*
Amended and Restated Bylaws 3.2**
Form of Common Stock Certificate 4.1***
Financial Data Schedule 27****
*Incorporated by reference to the Company's Form 8-K filed with the
Commission on January 6, 1999.
**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.
***Incorporated by reference to the Company's Registration Statement on Form 8-A
filed with the Commission on January 17, 1997.
****Filed with this Form 10-Q.
</TABLE>
(b) Reports on Form 8-K.
None.
Page 17 of 18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
VISTA EYECARE, INC.
By: /s/ Angus C. Morrison
---------------------
Angus C. Morrison
Senior Vice President
Chief Financial Officer
November 16, 1999
Page 18 of 18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT OCTOBER 2, 1999 (UNAUDITED) AND THE
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED
OCTOBER 2, 1999 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000868263
<NAME> VISTA EYECARE, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> OCT-02-1999
<CASH> 2,885
<SECURITIES> 0
<RECEIVABLES> 15,821
<ALLOWANCES> 2,611
<INVENTORY> 37,310
<CURRENT-ASSETS> 57,701
<PP&E> 115,595
<DEPRECIATION> 59,204
<TOTAL-ASSETS> 233,345
<CURRENT-LIABILITIES> 51,205
<BONDS> 123,711
0
0
<COMMON> 212
<OTHER-SE> 41,818
<TOTAL-LIABILITY-AND-EQUITY> 233,345
<SALES> 83,262
<TOTAL-REVENUES> 83,262
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<OTHER-EXPENSES> 45,355
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<INTEREST-EXPENSE> 4,809
<INCOME-PRETAX> (4,376)
<INCOME-TAX> (1,396)
<INCOME-CONTINUING> (2,980)
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<EXTRAORDINARY> 0
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<NET-INCOME> (2,980)
<EPS-BASIC> (0.14)
<EPS-DILUTED> (0.14)
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