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FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 27, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-12740
NEW WEST EYEWORKS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 34-1589514
(State of Incorporation) (I.R.S. Employer Identification No.)
2104 West Southern Avenue, Tempe, Arizona 85282
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (602) 438-1330
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $0.01 par value The Pacific Stock Exchange
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $0.01 par value
(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 definite proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant. The aggregate market value
shall be computed by reference to the price at which the common equity was sold,
or the average bid and asked prices of such common equity, as of a specified
date within 60 days prior to the date of filing.
Common Stock, $0.01 par value: $ 35,027,145 (as of March 20, 1998)
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Common Stock, $0.01 par value: 4,870,436 (as of March 20, 1998)
Portions of the Company's definitive Proxy Statement for the 1998 Annual Meeting
of Stockholders are incorporated by reference into Part III of this Form 10-K.
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NEW WEST EYEWORKS, INC.
Annual Report on Form 10-K
For the Year Ended December 27, 1997
Table of Contents
Page
PART I
Item 1. Business ..................................................... 3
Item 2. Properties.................................................... 14
Item 3. Legal Proceedings ............................................ 14
Item 4. Submission of Matters to a Vote of Security Holders .......... 14
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters .............................. 15
Item 6. Selected Financial Data....................................... 15
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations ................ 18
Item 7A. Quantitative and Qualitative Disclosures about Market Risk ... 26
Item 8. Financial Statements and Supplementary Data .................. 26
Item 9. Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure ....................... 26
PART III
Item 10. Directors and Executive Officers of the Registrant ........... 27
Item 11. Executive Compensation ....................................... 27
Item 12. Security Ownership of Certain Beneficial
Owners and Management ........................................ 27
Item 13. Certain Relationships and Related Transactions ............... 27
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8K ....................................... 28
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PART I
ITEM 1. BUSINESS
GENERAL
New West Eyeworks, Inc. (the "Company") is a leading specialty
retailer of eyewear, operating under the trade names "Vista Optical" and "Lee
Optical." As of March 21, 1998, the Company operated 167 value-priced optical
stores in thirteen states. The stores are located in malls, strip shopping
centers and Fred Meyer, Inc. ("Fred Meyer") host stores. The Company's everyday
value-pricing strategy features its "signature" $64 price point for a wide
selection of quality, brand name eyeglasses offered at attractive, convenient
locations with professional service. The Company's stores also sell brand name
contact lenses and non-prescription sunglasses and offer customers on-site eye
examinations by independent optometrists. The Company operates optical
laboratory and distribution facilities in Tempe, Arizona and near Portland,
Oregon.
The Company's value-pricing strategy differentiates it from
competitors. The Company believes that the economies of scale achieved by
operating centralized laboratory and distribution facilities enable it to
produce eyewear at a lower per unit cost and to maintain lower capital and
inventory investment per sales dollar than optical superstores which operate
individual in-store laboratories to offer "one-hour" service to customers.
Therefore, the Company believes that chains with in-store laboratories are
unable to implement an everyday value-pricing strategy. While certain discount
chains have positioned themselves as low-priced eyewear retailers, the Company
believes that such chains cannot match the combination of product quality,
selection, professional service and mall and strip shopping center locations
offered by the Company. In addition, the Company believes independent retail
outlets, which lack economies of scale, cannot match the Company's everyday
value-pricing, wide selection and number of locations. The Company also believes
that its value-pricing strategy has appeal to today's price-conscious consumer,
especially given the current trend toward cost containment in the health care
industry.
In early 1997, the Company completed a public offering of 1,505,400
shares of its common stock, $0.01 par value per share, including shares sold
upon the exercise of the underwriters' over allotment option (the "Offering").
Net proceeds to the Company from the Offering were $5.5 million. Of the shares
sold, 400,000 shares were sold by selling stockholders. The Company did not
receive any proceeds from the sale of shares by the selling stockholders. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation - Liquidity and Capital Resources."
In 1988, New West, Inc., a Delaware corporation, was formed to
acquire the capital stock of Western States Optical, Inc., an Arizona
corporation, from MEDIQ Incorporated ("MEDIQ"). In 1992, the name Western States
Optical, Inc. was changed to New West Eyeworks, Inc. In a parent-subsidiary
merger in 1993, New West Eyeworks, Inc. was merged with and into New West, Inc.,
and concurrently, New West, Inc. changed its name to New West Eyeworks, Inc. The
Company's principal executive offices are located at 2104 West Southern Avenue,
Tempe, Arizona 85282, and its telephone number is (602) 438-1330.
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EXPANSION STRATEGY
The Company's expansion plan is to open new mall and strip shopping
center stores where it can market its value-pricing strategy under the "Vista
Optical" and "Lee Optical" tradenames. With a portion of the proceeds of the
Offering, the Company accelerated its store opening program with the addition of
17 new stores in 1997, substantially all of which were located in malls and
strip shopping centers. In addition, the Company also remodeled two of its mall
center stores and closed two stores in 1997.
In 1998, the Company began a significant expansion in Florida, a new
market for the Company. Approximately 16 of the anticipated 20 to 25 new store
openings in 1998 will occur in this state. Assuming the Company opens 25 new
stores in 1998, including 24 new stores in malls and strip shopping centers and
one new store within a Fred Meyer host store, the Company expects that the costs
of these new stores, including furniture, fixtures, leasehold improvements,
inventory and optometric equipment, will be approximately $3.5 million. Actual
costs will vary based upon, among other factors, geographic location, the size
of the store and the extent of the build-out required at the selected site. In
addition to opening new stores, the Company may relocate stores within a mall or
strip shopping center if sites become available with better traffic patterns and
better merchandising opportunities. In 1998, the Company plans to remodel four
of its mall and strip shopping center stores at an estimated cost of
approximately $600,000.
The Company will use its modular store construction design in all of
its new, relocated or remodeled stores. The Company believes that its use of
modular store construction reduces store opening and operating costs and
substantially shortens the time required to construct new stores or remodel
existing ones.
The Company's strategy is to improve its market share in existing
markets and to expand into new markets by clustering stores in a particular
metropolitan area or in smaller adjacent markets. For example, in 1996, the
Company entered a new market in Iowa where it has established itself as a
leading eyewear retailer. The Company believes that by clustering stores it can
obtain economies of scale with respect to advertising, distribution and
management costs as well as attract additional managed care business. As
incremental sales occur, the Company anticipates that these economies, as well
as its optical laboratory fixed cost structure, will enable it to enhance its
operating margins. In its new markets, the Company expects that all of its
stores will be operated under the trade name "Vista Optical."
To evaluate the suitability of potential markets, the Company
performs demographic and competitive analyses. Potential store site selection
criteria include market demographics, traffic count, the retail mix of a mall or
strip shopping center, location within the mall or center, overall retail
activity of the area and proposed lease terms.
The Company intends to lease all new store locations under multi-year
leases. The time required to open a store after signing a lease depends
primarily upon the landlord's ability to deliver the premises to the Company.
Upon acceptance of the premises from the landlord, the Company expects, with the
use of its modular construction store design, to be able to open a store
generally within three to five weeks. See "Operations--Store Locations and
Layout."
The Company will consider opportunistic acquisitions of small retail
optical chains or independent retail optical outlets if such acquisitions enable
the Company to improve its market share in existing markets or expand into new
markets. There can be no assurance that any definitive acquisition agreements
will be reached or, if entered into, that any acquisitions will be
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successful. The Company has no outstanding commitments or agreements regarding
any acquisitions.
MERCHANDISING AND MARKETING
The Company's merchandising and marketing strategy focuses on the
following key concepts: (1) selling quality, brand name eyewear at everyday
value prices; (2) offering a wide selection of eyewear products in each of its
stores; (3) using a variety of media, such as television, direct mail, newspaper
and yellow page advertising, to differentiate it from competitors and to create
general consumer awareness and traffic in its retail stores; and (4) providing
knowledgeable and personalized customer service.
Value-Pricing. The Company's merchandising focuses on offering
quality, brand name eyewear at everyday value prices. Beginning in September
1991, the Company implemented a "signature" value price point concept for single
vision, plastic lens eyeglasses (including both the frame and lenses), enabling
consumers to comparison price shop. "Single vision" eyewear refers to a
non-bifocal prescription. Additional pairs of single vision, plastic lens
eyeglasses purchased on the same store visit with the same prescription are sold
at a $10 discount. The Company also features similar value pricing for contact
lenses with daily wear, soft lenses at $22 a pair. In January 1998, over six
years after establishing the initial $59 price point for single vision, plastic
lens eyeglasses, the price point was increased to $64, with additional pairs
purchased on the same store visit with the same prescription increasing to $54
from $49. There can be no assurance that the Company will be able to
successfully implement the price increase.
Wide Selection of Eyewear Products. Each store carries a selection of
650 to 1,200 frames, depending on the size and type of store. The Company
continually analyzes sales of its frames to keep its stores stocked with a wide
selection of the latest in eyewear fashion and a proper assortment of styles,
colors, and sizes. Approximately 65% of each store's inventory consists of
frames that are sold at the Company's value price point, and in 1997,
approximately 80% of the Company's eyeglass unit sales were at the then $59
price point. The balance of each store's inventory is distributed among
higher-priced frames, including recognized designer brand names that are sold at
price points ranging from $84 to $184 complete with single vision, plastic
lenses. The result is that the Company's customers are offered a broad selection
at the value price point with the opportunity to purchase higher-priced designer
frames, many of which the Company believes are sold at lower prices than at
chains offering "one-hour" service to customers. The Company also believes that
its value pricing is conducive to multiple sales.
At its value price point, the Company carries recognizable brand name
eyewear, such as REM, St. Moritz, Zimco and Limited Editions. Designer frames
carried by the Company include Nautica, Liz Claiborne, Stetson, Safilo,
Converse, Perry Ellis, Polo by Ralph Lauren, Monet, Jones of New York, Halston,
and Sophia Loren. The Company sells gas permeable and soft contact lenses,
including daily wear, flexible wear and disposable lenses manufactured by such
nationally-recognized eyewear companies as Bausch & Lomb, Inc., Ciba-Vision
Corporation, Johnson & Johnson and Wesley-Jessen. The Company does not buy
close-out or discontinued inventory.
The Company also offers several different types of eyeglass lenses,
such as, progressive, transition, bi-focal, polycarbonate, polarized and
hi-index lenses, as well as other eyeglass options, including fashion tints,
ultraviolet protection, anti-reflective coatings and scratch resistance. In
keeping with its value-pricing strategy, the Company offers these options at
prices ranging from $15 for options, such as tints or scratch resistance, to $90
for polarized lenses. For
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multiple pair purchases, the customer is offered a package of three options on
all additional pairs for free.
Advertising. The Company uses a variety of media, such as television,
direct mail, newspaper and yellow page advertising, to differentiate it from
competitors and to create general consumer awareness and traffic in its retail
stores. The primary emphasis of the Company's advertising is to inform consumers
that they can spend less and still receive quality, brand name eyewear.
The Company has developed management information systems to quickly
evaluate the effectiveness of advertising and target its advertising expenses
accordingly. Historically, the Company has concentrated its advertising
expenditures in its peak selling seasons of March and April, and again in August
and September. However, the Company has increased its advertising expenditures
during its off-peak seasons and in its existing and new markets where sufficient
stores are clustered to support additional advertising. There is no assurance
that the Company's advertising will be effective.
Customer Service. The Company believes that providing knowledgeable
and personalized customer service is essential to its success. The Company has
employee training programs designed to continually upgrade the technical optical
skills and retail selling techniques of its sales associates. See
"Operations--Personnel and Training." Stores are open during hours that are
convenient for customers, generally from 10 a.m. to 9 p.m. All stores are open
on Saturdays and most are open on Sundays.
The Company's return policy and its service agreement program are
also designed to ensure customer satisfaction. Within 30 days, if a customer is
dissatisfied with a choice of eyeglasses, the Company will exchange them for a
new pair of comparable value, at no additional charge. Historically, the
Company's merchandise return rate has not been significant. As an additional
option to its customers, the Company offers an eyeglass service agreement that
can be purchased for $20. Under the service agreement, all frames or eyeglass
lenses that break within one year are replaced free of charge. In addition, the
customer is entitled to a $10 discount on any pair of eyeglasses purchased
during the service agreement year. For customers who need eyewear quickly, the
Company offers for $10 a guaranteed express service that delivers eyewear within
48 hours.
MANAGED CARE
Managed care is a substantial and rapidly growing area of the retail
optical business. The Company, through Vista Eyecare Network, LLC, a wholly
owned subsidiary of the Company ("Vista Eyecare Network") (formerly Alexis
Vision Plan), uses its stores as a managed care network. The Company markets
Vista Eyecare Network to managed care administrators at health maintenance
organizations ("HMO's"), preferred provider organizations ("PPO's") and other
health insurance plans and to local and state governments and mid-sized to large
companies that offer eyecare benefits to their employees. When the Company
provides benefits to members of an HMO or PPO, beneficiaries of a health care
insurer or employees of a government or company, the covered participants may
use their eyecare benefits at the Company's stores, generally at a small
discount from the Company's everyday value prices. Because of the Company's
value pricing, participants will typically be eligible for greater eyecare
benefits at the Company's stores than at other eyecare providers participating
in managed care programs. The Company believes that the additional customer
traffic generated under the Vista Eyecare Network, including family members of
the covered participants, and purchases by covered
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participants beyond their eyecare benefits, more than offset the reduced gross
margins generated under the Vista Eyecare Network. In 1997, net sales generated
under the Vista Eyecare Network were $14.1 million (or 28.7% of net sales), a
23.4% increase over 1996.
The Company believes that its value-pricing strategy and convenient
store locations are key factors in attracting managed care business. As the
Company increases its presence within existing markets and expands into new
markets, it believes it will be more attractive to managed care administrators
because of its additional store locations. The Company also believes that Vista
Eyecare Network will further benefit from the trend in the health care industry
toward managed care as a means to better manage health care costs. However,
there is no assurance that sales generated under the Vista Eyecare Network will
continue to grow, or that the Company will be able to negotiate satisfactory
agreements with additional managed care providers or maintain its current
agreements with managed care providers.
OPERATIONS
Store Locations and Layout. The Company's stores are located in
regional malls, strip shopping centers and leased departments within Fred Meyer
host stores. The stores operate under the "Vista Optical" trade name other than
the stores located in Arizona and Utah, which use the "Lee Optical" trade name.
In its new markets, the Company expects that its stores will be operated under
the trade name "Vista Optical."
The following table sets forth the Company's stores by location and
type as of March 21, 1998:
<TABLE>
<CAPTION>
LOCATION NUMBER TYPE NUMBER
- -------- ------ ---- ------
<S> <C> <C> <C>
Washington 43 Regional Malls 86
Oregon 31 Fred Meyer Host Stores 53
Arizona 29 Strip Shopping Centers 28
Colorado 17
Idaho 11
Alaska 11
Iowa 9
Florida 6
Montana 3
New Mexico 3
Wyoming 2
Illinois 1
Utah 1
------ -----
Total 167 Total 167
======= =====
</TABLE>
The Company's typical mall location ranges from 700 to 1,500 square feet,
and the typical Company store in a strip shopping center ranges from 700 to
1,200 square feet. The ideal size for the Company's modular design store is
approximately 1,000 square feet. The Fred Meyer host store locations range from
400 to 800 square feet, with the ideal size for the host store modular design
being 700 square feet. The Company believes that its use of modular store
construction reduces store opening and operating costs and substantially
shortens the time required to construct new stores or remodel existing ones. The
Company will use its modular store design in all of its new, relocated or
remodeled stores.
Each of the Company's stores has separate areas for merchandise display,
customer service
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and an independent optometrist to perform eye examinations. The Company
continuously enhances its store design to optimize customer appeal. In 1997, the
Company introduced a new store design in its new and remodeled stores, including
new store colors, improved lighting, enhanced eyeglass frame displays and wood
floors, as well as other improvements in store fixtures and furniture.
Manufacturing and Distribution. To produce prescription eyeglasses and to
distribute eyeglasses, contact lenses and other products to the Company's
stores, the Company operates two optical laboratory and distribution facilities
located in Tempe, Arizona and Clackamas, Oregon, which is near Portland. The
laboratories provide grinding, polishing, cutting, edging, tempering, tinting
and coating for prescription lenses that are custom fitted to eyeglass frames in
the size and style selected by the customer. The two facilities produce
approximately the same number of eyeglasses. The Company believes that having
two facilities provides it with the operational flexibility and additional
capacity for expansion and facilitates the efficient and timely delivery of
eyewear products and customer service.
The Company has made substantial investments in information systems,
including a manufacturing and distribution system and a fully integrated
inventory control, merchandising, and general ledger software system, which
provide management with detailed retail sales, manufacturing, financial and
administrative data on a timely basis. The Company believes that these systems
should help maintain sound fiscal controls as the Company expands its network of
retail stores and Vista Eyecare Network business.
The Company continually seeks to shorten the turnaround time necessary to
deliver completed eyeglasses and contact lenses to its customers. The Company's
stores submit orders daily to the laboratories, which stock many frames. This
"stay-in-stock" program minimizes turnaround time. For frames not in stock at
the laboratories, independent couriers make daily deliveries from the stores.
These couriers also make outbound deliveries from the laboratories to the stores
to replenish store inventories and deliver completed prescription eyeglasses and
contact lenses. Generally, delivery of prescription eyeglasses takes four to six
business days. For customers who need eyewear quickly, the Company offers its
guaranteed express service that delivers eyewear within 48 hours.
Inventory and Suppliers. Inventory control is a major focus for the
Company. The Company has established systems to increase inventory turns and
eliminate overages and shortages.
The Company has not experienced any difficulty in obtaining satisfactory
sources of supply in the past and believes that it has excellent relations with
each of its principal vendors. In addition, the Company believes that it will be
able to obtain greater purchasing leverage as it expands. The Company is not
dependent on any single supplier and has agreements with several of its
suppliers which the Company believes enable it to purchase ophthalmic lenses and
various other supplies on favorable payment terms. A material change in the
Company's current purchase terms could have a material adverse effect on the
Company's financial condition or results of operations.
Personnel and Training. Each of the Company's stores is staffed by a
manager and, depending on the amount of customer traffic, one to six sales
associates. In certain states, in conformity with applicable regulations, each
store is staffed with a licensed optician. See "Government Regulation." Each
store employee receives a basic wage, plus incentive compensation based on sales
performance. Each of the Company's 15 districts is supported by a manager with
general supervisory authority over eight to 19 stores. These managers report
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directly to either the Executive Vice President or the Division Manager of the
Company.
The Company emphasizes employee training. The Company operates a
comprehensive training program led by the Executive Vice President and the
National Training Manager, who supervise two support trainers, each of whom
trains personnel on a regional basis. Training programs have been developed for
employees from entry level to senior management. These programs teach the
Company's sales associates technical information about skills particular to the
optical business, Company policies and procedures and retail sales techniques,
including skills that enable the sales associates to educate consumers about
eyewear options offered by the Company.
The Company developed and operates Vision In Excellence Workshops ("VIEW"
Training) to provide advanced skills to both store managers and store employees
in the critical areas of communication and customer service. In addition, the
Company uses vendor product training seminars that provide the Company's sales
associates with specific product knowledge enabling them to match customer needs
with the eyewear. The Company believes its training programs have assisted in
increasing revenue, as well as reducing employee turnover.
RELATIONSHIP WITH HOST STORES
Fred Meyer. The Company operates 53 stores in Fred Meyer host stores in
the states of Oregon, Washington, Idaho and Alaska. Fred Meyer has 116 stores
located primarily in the Pacific Northwest. Generally, the Fred Meyer stores are
"one-stop" department stores of approximately 140,000 square feet that offer
groceries, soft goods, home improvement items and various other merchandise.
Not all of the Fred Meyer stores have eyewear departments.
The Company's optical store is generally located near the main checkout
counter in the front of the Fred Meyer host store, offering excellent exposure
to customer traffic. In 1997, the Company opened one new store in a Fred Meyer
location. The Company has also opened one new store within Fred Meyer in 1998.
From time to time, Fred Meyer remodels a store and the Company may remodel its
store at that location. In addition, when Fred Meyer closes a store, the
Company's store closes.
The Company has a master lease agreement with Fred Meyer due to expire in
April 1998, that grants the Company the right of first refusal to open an
optical store in any new Fred Meyer store in which Fred Meyer decides to place
an eyewear department. However, Fred Meyer is not required under the master
lease agreement to open any future stores, or when new stores are opened, to
place an eyewear department in the store. The master lease agreement will not be
renewed after April 1998 because the Company has determined there is no
significant benefit associated with the Company's right of first refusal to open
an optical store in any new Fred Meyer location. Each optical store is covered
by its own separate lease. Generally, the term of each store lease is for a
period of five years, with an option to extend the lease term for one renewal
term of five years.
The Company is generally prohibited under the terms of each individual
store lease from operating an optical store within a one mile radius of the Fred
Meyer store in which the Company has a store, unless otherwise approved by Fred
Meyer. Additionally, the Company is required under each lease to pay rent that
is generally the greater of the minimum base rent, which varies according to the
Company's store size, or 13% of all merchandise sales. During the renewal
period, the minimum base rent generally increases annually at a rate of 5% per
year.
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OPTICAL PROFESSIONALS
Optometrists. Each Company store offers customers on-site eye examinations
performed by independent licensed optometrists. These optometrists are not
employed by, and receive no compensation from, the Company. The Company does not
share in the fees which are set and received by the independent optometrists.
Generally, the Company subleases at nominal rates approximately 125 square
feet in each store to an independent optometrist who, in certain instances, is
permitted to re-sublet the space to another optometrist to handle increased
patient loads. Customers of on-site optometrists are not required to have
prescriptions filled in the Company's stores, and the Company may fill any
eyewear prescription whether or not it was written by an on-site optometrist.
The leased space, which is usually developed and equipped by the Company,
includes optometric examination and diagnostic equipment. The cost to fully
equip a store with such optical equipment is approximately $25,000.
The Company operates a formal program of continuing professional education
that provides optometrists with a convenient method of meeting state continuing
education requirements and helps ensure that the Company's customers receive
high quality optical care. The Company offers this continuing education to all
optometrists in certain states, regardless of whether or not they lease space in
one of the Company's stores. This program has been useful in recruiting new
doctors. The Company has formed an internal peer review committee to
periodically review the performance of its independent optometrists who provide
services to Vista Eyecare Network customers. In addition, the Company has
initiated a series of regional optometrist meetings to facilitate communication
among the independent optometrists. The Company believes that its stores offer
excellent practice opportunities for independent optometrists and that relations
with its optometrists are excellent.
Opticians. Certain states require that the Company staff its stores with
one or more opticians licensed by state authorities to fit and dispense
eyeglasses and contact lenses prescribed by optometrists or ophthalmologists.
Unlike optometrists or ophthalmologists, opticians fit and dispense eyeglasses
and contact lenses, but are not licensed to prescribe corrective lenses. See
"Government Regulation." To assist its opticians in maintaining their licenses,
the Company has implemented a formal training and education program. The Company
has not experienced any difficulty in recruiting and employing opticians. Not
all the Company's sales associates are opticians.
COMPETITION
The retail eyecare industry is fragmented and highly competitive and
historically has been subject to severe price competition. According to 20/20, a
leading optical industry trade journal, total sales in the U.S. retail optical
market were $11.4 billion in 1990, and grew to $14.6 billion in 1996. The
Company's competitors include large optical store chains, such as LensCrafters
and Pearle Vision Centers, many of which offer "one-hour" service to customers,
and numerous independent retail outlets, opticians, optometrists and
ophthalmologists. In addition, the increase in the number of optical units in
department store chains (including Sears, Roebuck & Co. and Wal-Mart Stores,
Inc.) and warehouse clubs (including Wholesale Club Inc. and Price/Costco Inc.)
and the emergence of mail order contact lens replacement services have further
increased the Company's competition. The Company believes it is able to compete
in the retail marketplace based on its value-pricing strategy, the wide
selection of frames offered at the Company's value price point, the quality of
its products and services, its attractive stores and its
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convenient store locations. However, many of the Company's competitors are
larger than the Company and have financial and other resources substantially
greater than those of the Company.
The Company's value-pricing strategy differentiates it from competitors.
The Company believes that the economies of scale achieved by operating
centralized laboratory and distribution facilities enable it to produce eyewear
at a lower per unit cost and to maintain lower capital and inventory investment
per sales dollar than optical superstores which operate individual in-store
laboratories to offer "one-hour" service to customers. Therefore, the Company
believes chains with in-store laboratories are unable to implement an everyday
value-pricing strategy. These chains may offer special price promotions or
limited value-priced sections, but the Company believes that these chains do not
compete with the Company's everyday value prices. While certain discount chains
have positioned themselves as low-priced eyewear retailers, the Company believes
that such chains cannot match the combination of product quality, selection,
professional service and mall and strip shopping center locations offered by the
Company. In addition, the Company believes independent retail outlets, which
lack economies of scale, cannot match the Company's everyday value-pricing, wide
selection and number of locations. The Company also believes that its
value-pricing strategy has appeal to today's price-conscious consumer,
especially given the current trends toward cost containment in the health care
industry.
Although the retail eyewear industry is highly competitive, demographic
trends are expected to increase demand for prescription eyewear. According to
20/20, the percentage of the U.S. population wearing prescription eyewear
increases from over 62% between ages 25 and 44 to almost 95% at age 45 and
older. The number of Americans aged 45 and over is expected to increase from
87.6 million in 1996 to approximately 96.0 million in 2000. The aging population
is a major factor in the projected growth of U.S. retail optical sales from
$14.6 billion in 1996 to $18.0 billion in 2000.
GOVERNMENT REGULATION
The retail optical industry is subject to a variety of federal, state and
local laws, regulations and ordinances, including those regarding advertising,
location and design of stores, products sold, qualifications and practices of
opticians, such as those employed by the Company, and relations between
independent optometrists and optical retailers, such as the Company. The state
and local legal requirements vary widely among jurisdictions and are subject to
frequent change. In addition, the Federal Trade Commission has issued
regulations affecting certain aspects of the optical industry, including a
requirement that optometrists deliver a copy of optical prescriptions for
eyeglasses to patients so that they may select optical dispensers of their
choice. Certain products sold by the Company, specifically ophthalmic lenses,
contact lenses and contact lens solutions, must comply with quality control
standards set by the United States Food and Drug Administration.
11
<PAGE> 12
In certain states, the Company is required to staff retail optical stores
with one or more licensed opticians, who fit and dispense eyeglasses or contact
lenses. The extent of these requirements varies from state to state.
State and local regulations also govern the relations between independent
optometrists and optical retail stores. For example, some states and
municipalities restrict the location of optometric offices in relation to
optical stores, such as the Company's stores, and other commercial or mercantile
establishments, such as Fred Meyer host stores. The Company configures its
stores and adjusts the terms and conditions of its arrangements with independent
optometrists to comply with these varying state and local requirements. The
Company believes it is in substantial compliance with all material laws and
regulations applicable to its operations.
In addition, numerous health care related proposals have been made in
recent years in the United States Congress and various state legislatures. The
potential impact of these proposals with respect to the Company and its managed
optical care business is uncertain. There is no assurance that the proposals, if
adopted, would not have a material adverse impact on the Company.
EXECUTIVE OFFICERS
The executive officers and significant employees of the Company and their
respective ages and positions held with the Company, are as follows:
NAME AGE POSITION
Ronald E. Weinberg 56 Chairman of the Board and Treasurer
Barry J. Feld 41 Chief Executive Officer, President and Director
James W. Swanson 51 Chief Operating Officer, Executive Vice President
Darius J. DiTallo 40 Vice President-Finance and Administration
Annette C. Feld 35 Vice President-Marketing and Merchandising
Glenn K. Ozawa 40 Vice President-Manufacturing
Roger W. Deason 54 Vice President-Managed Care
Tricia L. Wood 37 Vice President-Real Estate and Construction
Ronald E. Weinberg has served as Chairman of the Board and Treasurer
since the acquisition of the Company in August 1988. In 1986, Mr. Weinberg led
an investor group in the acquisition of SunMedia Corporation, which publishes a
chain of weekly newspapers in the Cleveland and, until October 1997, Milwaukee
markets and since then, Mr. Weinberg has served as Chairman of the Board of
SunMedia Corporation. Since December 1997, Mr. Weinberg has been the owner of
Timestar Communications Corp., a direct mail business in Cleveland, formerly
owned by SunMedia Corporation. Since 1989, Mr. Weinberg has been Vice Chairman
of the Board, Treasurer and a director of Hawk Corporation, which manufactures
friction products and powdered metal components primarily for aerospace,
industrial and specialty applications.
Barry J. Feld has served as President and a member of the Board of
Directors since joining the Company in May 1991, and as Chief Executive Officer
since February 1994. Previously, Mr. Feld was President of Frame-n-Lens Optical,
Inc., which is the largest chain of retail optical stores in California. Mr.
Feld joined Frame-n-Lens Optical, Inc. in 1987 and served as Executive Vice
President and Chief Operating Officer until January 1990 when he
12
<PAGE> 13
became President. Prior to that, Mr. Feld spent 10 years with Pearle Health
Services, Inc., one of the largest retail optical chains in the United States,
serving in various senior management capacities during his tenure, including
Retail Operations Director of Texas State Optical, Inc., then one of the largest
retail optical subsidiaries of Pearle Health Services, Inc., from 1985 until
1987.
James W. Swanson has served as Chief Operating Officer and Executive
Vice President since September 1997, and as Vice President-Human Resources and
Optometric Relations since April 1992. He also served as Senior Vice President
between May 1996 and August 1997. Mr. Swanson joined the Company in July 1991 as
Vice President-Training and Optometric Relations. Prior to that, Mr. Swanson was
Director of Training and Third-Party Sales at Frame-n-Lens Optical, Inc. from
September 1989 to July 1991, and Director of Operations of Dr. Leventhal's
Vision Care Centers, Inc., a San Diego based chain of retail optical stores,
from March 1984 until September 1989.
Darius J. DiTallo joined the Company in December 1996 and serves as
Vice President - Finance and Administration. Previously, Mr. DiTallo held senior
financial management positions including serving as Chief Financial Officer with
Image Choice, Inc., a Phoenix based document imaging solution provider, from
December 1993 to December 1996. During this period, Mr. DiTallo also served as
Chief Financial Officer of TransEquatorial Holdings, Inc., which sells
electronic components and held a substantial investment in Image Choice, Inc.
Prior to that, he served as a financial consultant to various entities from
January 1993 to December 1993, and held senior financial management positions at
the Arizona facility of Courtaulds Performance Films, Inc., from 1990 to January
1993. Mr. DiTallo is a certified public accountant.
Annette C. Feld has served as Vice President-Marketing and
Merchandising since December 1992. Ms. Feld joined the Company in May 1991 as
Director of Marketing and Merchandising. Previously, she was the Director of
Materials and Marketing for Frame-n-lens Optical, Inc. from March 1988 to April
1991. Prior to that, Ms. Feld was an associate buyer for Bullock's, a chain of
department stores, from 1985 to 1987 and an associate buyer for R.H. Macy & Co.,
from 1983 to 1985. Ms. Feld is the wife of Barry Feld.
Glenn K. Ozawa has served as Vice President-Manufacturing since March
1995. Mr. Ozawa joined the Company in January 1992 as Director of Manufacturing.
Prior to that, he served as Manufacturing Manager for Frame-n-Lens, Inc. from
November 1990 to December 1991 and as Director of Manufacturing of NuVision,
Inc., a chain of optical stores based in California and Michigan, from August
1988 until November 1990 after previously serving in a senior capacity at that
company for three years.
Roger W. Deason has served as Vice President-Managed Care since
October 1995. Previously, Mr. Deason was Vice President-National Marketing &
Sales of The Eye Health Network, Inc., a large Denver based managed eye care
organization, from February 1994 to October 1995. Prior to that, Mr. Deason was
in senior management positions with Sierra Health Services, Inc., a Nevada based
multi-state health maintenance organization, from September 1991 to January
1994.
Tricia L. Wood has served as Vice President-Real Estate and
Construction since September 1997. Ms. Wood served as the Director of Real
Estate from January 1996 to August 1997. Ms. Wood joined the Company in December
1989 as Real Estate Manager.
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<PAGE> 14
EMPLOYEES
As of December 27, 1997, the Company employed 652 persons, 540 on a
full-time basis and 112 on a part-time basis. Approximately 472 of the Company's
employees work in retail sales or retail sales supervision, 95 in the Company's
optical laboratory and distribution facilities, 11 in managed care and 74 in
management and administration. None of the Company's employees are covered under
any collective bargaining agreement. The Company has experienced no strikes and
believes its relations with its employees to be excellent.
TRADEMARKS
"Vista Optical" and "Lee Optical" are federally registered trademarks
of the Company. In addition, the Company has a pending application with the
United States Patent and Trademarks Office to register "Vista Eyecare Network"
as a tradename of the Company. The Company also relies on common law, including
the law of unfair competition to protect its trademarks and services. The
Company is not aware of any pending claims of infringement or other challenges
to the Company's right to use its trademarks.
ITEM 2. PROPERTIES
The Company's stores are located in regional malls, strip shopping
centers, and host stores. Each of the stores located in a mall or strip center
operates under a retail lease agreement which provides for certain base rents
plus, in many circumstances, additional rents based on sales. The host store
sites are leased under a master lease agreement with Fred Meyer which will
expire in April 1998 and each individual site has a separate lease. See
"Business--Operations--Store Locations and Layout" and "-- Relationship with
Host Stores."
The Company's Clackamas, Oregon, laboratory and distribution facility
which is near Portland is located in approximately 6,430 square feet of leased
space. The lease provides for annual payments of $38,000 through August 31,
2001. The Company's executive offices and laboratory and distribution facility
in Tempe, Arizona, are located in a 24,000 square foot building that is owned by
Alexis Holdings, Inc. ("Alexis"), a wholly-owned subsidiary of the Company.
Alexis' sole purpose is ownership of the Tempe building. See "Management
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in legal matters which are
incidental to its operations. In the opinion of management, the ultimate
resolution of these matters is not anticipated to have a material adverse effect
on the Company's financial condition or results of operations.
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 1997.
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<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock, $0.01 par value per share (the "Common
Stock"), trades on The Nasdaq SmallCap Stock Market(sm) ("NASDAQ") under the
symbol "NEWI" and is listed on The Pacific Stock Exchange under the symbol
"NWE." The following table sets forth the high and low closing price of the
Company's Common Stock reflected on NASDAQ for each full quarter in fiscal 1997
and 1996.
<TABLE>
<CAPTION>
1997 1996
---- ----
HIGH LOW HIGH LOW
------- -------- -------- ------
<S> <C> <C> <C> <C>
First Quarter .... $ 7 3/8 $ 5 3/4 $ 5 3/4 $ 4
Second Quarter.... 7 3/8 5 1/4 6 5
Third Quarter .... 10 7 1/8 6 3/4 5 1/4
Fourth Quarter ... 9 3/4 7 3/8 7 1/2 6
</TABLE>
As of March 20, 1998 there were approximately 28 stockholders of
record of the Common Stock of the Company representing approximately 473
beneficial owners of the Common Stock.
The Company has never paid cash dividends on its Common Stock. The
Company intends to retain earnings, if any, to finance the growth and
development of its business and does not anticipate paying any cash dividends in
the foreseeable future. Any future dividends will depend on the earnings,
capital requirements and financial condition of the Company, and on such other
factors as the Company's Board of Directors may consider relevant. Although the
Company's current Credit Facility does not prohibit the payment of cash
dividends on common stock, any new financing agreements entered into by the
Company may limit or prohibit the payment of cash dividends on Common Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The Company did not sell any unregistered securities in 1997.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below under the captions
"Statement of Operations Data", "Balance Sheet Data" and "Statistical Data" are
derived from the Company's annual audited Consolidated Financial Statements and
other historical operating information. The following data should be read in
conjunction with, and are qualified in their entirety by, the Consolidated
Financial Statements and related notes, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the other financial
information included elsewhere herein.
15
<PAGE> 16
<TABLE>
<CAPTION>
FISCAL YEAR ENDED(1)
-------------------------------------------------------------------------
DEC. 27, DEC. 28, DEC. 30, DEC. 31, DEC. 25,
1997 1996 1995 1994 1993
-------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Sales .................................. 49,212 43,940 40,033 37,367 32,964
Gross Profit ............................... 24,959 22,221 19,681 17,692 15,708
Operating income (loss) .................... 1,318 1,048 (1,986) (1,286) (569)
Income (loss) before income taxes,
extraordinary gain and cumulative
effect of change in accounting
principle ................................ 1,262 832 (2,025) (1,288) (1,279)
Income tax expense (benefit)(2) ........... (547) 30 -- -- (469)
Extraordinary gain (3) .................... -- -- -- -- 1,674
Cumulative effect of change in
accounting principle (4) ................ -- -- -- -- 374
-------- -------- -------- -------- --------
Net income (loss) ......................... 1,809 802 (2,025) (1,288) 1,238
Dividends accrued on preferred
stock ................................... (324) (328) (329) (328) (396)
-------- -------- -------- -------- --------
Net income (loss) applicable to
common shares ............................ $ 1,485 $ 474 $ (2,354) $ (1,616) $ 842
======== ======== ======== ======== ========
INCOME (LOSS) PER COMMON SHARES (5):
Income (loss) before extraordinary
gain and cumulative effect of
change in accounting principle........... $ 0.31 $ 0.13 $ (0.63) $ (0.43) $ (1.28)
Extraordinary gain (3) .................... -- -- -- -- 1.78
Cumulative effect of change in
accounting principle (4) ................ -- -- -- -- 0.40
-------- -------- -------- -------- --------
Net income (loss) applicable to
common shares ............................ $ 0.31 $ 0.13 $ (0.63) $ (0.43) $ 0.90
======== ======== ======== ======== ========
BALANCE SHEET DATA:
Total assets .............................. $ 16,352 $ 13,127 $ 11,734 $ 11,721 $ 9,846
Notes payable and
capital lease obligations ................ 659 3,162 556 259 406
Redeemable preferred stock ................ -- -- -- -- 1,752
Convertible preferred stock ............... 5,460 5,460 5,460 5,460 --
STATISTICAL DATA:
Net sales growth .......................... 12.0% 9.8% 7.1% 13.4% 16.1%
Increase in comparable store sales (6) .... 8.6% 8.8% 5.9% 6.7% 15.0%
Stores open at period beginning ........... 146 139 150 134 129
Stores opened during period ............... 17 10 9 21 8
Stores closed during period ............... (2) (3) (20) (5) (3)
-------- -------- -------- -------- --------
Stores open at period end ................. 161 146 139 150 134
======== ======== ======== ======== ========
Types of stores at period end:
Host stores ............................. 52 51 51 65 61
Malls and strip shopping centers ........ 109 95 88 85 73
</TABLE>
- --------------------------
(Footnotes on following page)
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<PAGE> 17
(1) The Company's fiscal year consists of 52 or 53 weeks ending the last
Saturday of the calendar year. The year ended December 31, 1994
consisted of 53 weeks; all other years presented consisted of 52 weeks.
(2) In 1997, amount includes income tax benefit of $579,000 from reversal
of a portion of the valuation allowance applicable to the Company's
deferred tax assets. See "Income Taxes" in Note 7 of Notes to
Consolidated Financial Statements.
(3) Net income for the year ended December 25, 1993 includes an
extraordinary gain of $1,674,000 or $1.78 per share, that was realized
by the Company as a result of the retirement in full of its senior bank
debt.
(4) In 1993, the Company recorded a cumulative effect adjustment of
$374,000, or $0.40 per share resulting from a change in its method of
accounting for income taxes.
(5) The Company adopted Statement of Financial Accounting Standards No.
128, Earnings per Share, (SFAS128) during the fourth quarter of 1997.
Adoption of SFAS128 did not impact previously reported per share
amounts except for periods prior to the Company's initial public
offering in early 1994 as antidilutive stock options and warrants
previously included in the calculation pursuant to then existing
guidelines are no longer included under SFAS128 and other related
guidance. Net income per share for 1993 as previously reported was
$0.40 per share.
(6) A store becomes comparable after it has been open at least 52 weeks.
Stores that are relocated are not included in the comparable store
base.
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<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Unless otherwise stated, references in this report to the years 1997,
1996, and 1995 relate to the fiscal years ended December 27, 1997, December 28,
1996, and December 30, 1995. Fiscal years 1997, 1996 and 1995 include 52 weeks.
OVERVIEW
The Company's everyday value-pricing strategy features its
"signature" $64 price point for a wide selection of quality, brand name
eyeglasses (including frame and lenses) offered at attractive, convenient
locations with professional service. The Company focuses on opening new stores,
primarily in malls and strip shopping centers, entering new geographic markets,
improving its operating efficiency, expanding its managed optical care business
and establishing the informational and operational infrastructure necessary for
further expansion.
The Company believes that the success of its value-pricing strategy
is demonstrated by (1) its 24 consecutive quarters of positive comparable store
sales growth, including an 8.6% increase in 1997 compared to 1996, (2) an
increasing number of repeat customers and referral business and (3) its second
consecutive year of operating income. As of March 21, 1998, the Company operated
167 stores in 13 states.
In 1997, the Company opened 17 stores, 16 of which are located in
malls or strip shopping centers and one of which is located in a Fred Meyer host
store. In addition, the Company remodeled two stores and closed and relocated
two stores during this period. As a part of the Company's strategy to expand
into new geographic markets, approximately 16 of the 20 to 25 stores planned to
open in 1998 will be in Florida, a new market for the Company. Opening stores in
new markets, including Florida, may adversely impact profitability in the
short-term. Opening new stores in markets already served by the Company may
adversely impact existing store profitability and reduce comparable store sales,
although the Company believes that such new stores will lead to increased sales
and profitability in such markets.
The Company believes that as incremental sales occur, from both
existing stores and new stores, the operating leverage provided by its optical
laboratory fixed cost structure will enhance operating margins. However, because
it is the Company's accounting policy to expense pre-opening costs as they are
incurred, the Company expects that, in the short-term, its operating margins may
be adversely affected by increased operating costs associated with new store
openings.
The Company's managed optical care business, Vista Eyecare Network,
is an increasingly important component of its overall business. In 1997, net
sales generated by the Vista Eyecare Network were $14.1 million (or
approximately 28.7% of net sales), a 23.4% increase over 1996. Vista Eyecare
Network sales have a negative impact on the Company's gross profit margin
because they are generally transacted at a small discount from the Company's
everyday value prices, and the Company expects this negative impact to continue.
There is no assurance that sales generated under the Vista Eyecare Network will
continue to increase at all or at the rate of increase of 1996 and 1997.
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<PAGE> 19
Based on a preliminary study by management, the Company does not
expect to incur material costs to modify its computer information and
manufacturing systems to enable proper processing of transactions relating to
the year 2000 and beyond. However, the Company continues to evaluate whether
corrective action will be necessary. There was no amount expensed in 1997 for
year 2000 technology .
RESULTS OF OPERATIONS
The following table sets forth for each of the years 1997, 1996, and
1995, certain selected statement of operations data expressed as a percentage of
net sales:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales ................................................ 100.0% 100.0% 100.0%
===== ===== =====
Gross profit ............................................. 50.7 50.6 49.2
Selling, general, and administrative expense ............. 48.0 48.2 54.2
----- ----- -----
Operating income (loss) .................................. 2.7 2.4 (5.0)
Interest income .......................................... 0.1
Interest expense ......................................... 0.2 0.5 0.1
----- ----- -----
Income (loss) before income tax expense .................. 2.6 1.9 (5.1)
Income tax (expense) benefit ............................. 1.1 (0.1)
----- ----- -----
Net income (loss) ........................................ 3.7 1.8 (5.1)
Preferred stock dividends ................................ (0.7) (0.7) (0.8)
----- ----- -----
Net income (loss) applicable to common shares ............ 3.0% 1.1% (5.9)%
===== ===== =====
</TABLE>
1997 COMPARED TO 1996
Net sales increased $5.3 million or 12.0% to $49.2 million in 1997
from $43.9 million in 1996. The net sales increase was primarily attributable to
an increase of 8.6% in comparable store sales. The increase in comparable store
sales was primarily due to increases in eyeglass and contact lens units sold and
sales generated under the Vista Eyecare Network.
Gross profit increased $2.7 million to $25.0 million in 1997, a 12.3%
increase over gross profit of $22.2 million in 1996. The gross profit margin as
a percentage of net sales increased to 50.7% in 1997 compared to 50.6% in 1996,
primarily due to increased sales resulting from price increases on multiple pair
purchases which were implemented in the third quarter of 1996 and to a lesser
extent increased sales volume which covered more of the fixed cost components of
cost of goods sold, largely offset by the number and timing of new store
openings and increased sales under the Vista Eyecare Network. Consistent with
the Company's practice, the Vista Eyecare Network sales are generally transacted
at a small discount from the Company's everyday value prices.
Selling, general and administrative expenses increased $2.5 million
to $23.6 million in 1997 from $21.2 million in 1996. As a percentage of sales,
these expenses decreased to 48.0% in 1997, from 48.2% in 1996. This decrease is
primarily due to an increase in the Company's sales, partially offset by the
number and timing of new store openings and increased advertising costs in the
Iowa market.
Interest income increased to $66,000 in 1997 from zero in 1996 due to
increased cash balances from the proceeds of the Offering.
19
<PAGE> 20
Interest expense decreased by $94,000 to $122,000 in 1997 from
$216,000 in 1996 primarily as a result of the repayment of the Company's former
revolving line of credit with the proceeds of the Offering and to a lesser
extent, interest on two bridge loans initiated in early 1996 that were paid in
full in June 1996.
Income tax benefit was $547,000 in 1997 compared to $30,000 of income
tax expense in 1996 due to the reversal of $579,000 of the valuation allowance
relating to the Company's deferred tax assets in the fourth quarter of 1997. The
Company was able to substantially offset its taxable income in both 1997 and
1996 with the utilization of its net operating loss carryforwards. See "-- Net
Operating Loss Carryforwards."
As a result of the foregoing, net income increased by $1.0 million to
$1.8 million in 1997 compared to $802,000 in 1996.
Dividends were accrued and paid on the Company's Series A and Series
B 6% cumulative convertible preferred stock in the aggregate amount of $324,000
in 1997 compared to $328,000 in 1996.
1996 COMPARED TO 1995
Net sales increased $3.9 million or 9.8% to $43.9 million in 1996
from $40.0 million in 1995. Revenues during 1995 include $1.0 million in sales
from unprofitable or underperforming host stores which were closed during 1995.
If such sales from these closed retail outlets were excluded from 1995 revenues,
the Company would have posted a 12.6% improvement in net sales ($43.9 million
compared to $ 39.0 million). The net sales increase was primarily attributable
to an increase of 8.8% in comparable store sales, which was partially offset by
reduced sales in December 1996 as a result of severe winter weather in the
Northwestern United States. The increase in comparable store sales was primarily
due to increases in eyeglass and contact lens units sold and sales generated
under the Vista Eyecare Network. The comparable store increase at malls and
strip shopping centers was partially offset by a lower rate of comparable store
sales growth in the Company's host stores, consistent with the Company's
historical experience.
Gross profit increased $2.5 million to $22.2 million in 1996, a 12.7%
increase over gross profit of $19.7 million in 1995. The gross profit margin as
a percentage of sales increased to 50.6% in 1996 compared to 49.2% in 1995,
primarily due to increased sales volume which covered more of the fixed cost
components of cost of goods sold, and partially offset by increased sales under
the Vista Eyecare Network. Consistent with the Company's practice, the Vista
Eyecare Network sales are generally transacted at a small discount from the
Company's everyday value prices.
Selling, general and administrative expenses decreased $500,000 to
$21.2 million in 1996 from $21.7 million in 1995. As a percentage of sales,
these expenses decreased to 48.2% in 1996, from 54.2% in 1995. This decrease is
primarily due to an increase in the Company's sales, and to a lesser extent,
reduced advertising expenditures resulting from the Company's switch to a new
advertising agency in the fourth quarter of 1995.
Interest expense increased by $165,000 to $216,000 in 1996 from
$51,000 in 1995 as a result of increased capital lease obligations, interest
payments on two bridge loans from Mesirow Capital Partners VI, a common and
preferred stockholder, and Ronald E. Weinberg, Chairman of the Board, and
interest on the revolving line of credit.
20
<PAGE> 21
Income tax expense increased to $30,000 in 1996 compared to no income
tax expense in 1995 as a result of increased pre-tax income. The Company was
able to substantially offset its taxable income in 1996 with the utilization of
a portion of its net operating loss carryforwards.
As a result of the foregoing, net income increased by $2.8 million to
$802,000 in 1996 compared to a net loss of $2.0 million in 1995.
Dividends were accrued and paid on the Company's Series A and Series
B 6% cumulative convertible preferred stock in the aggregate amount of $328,000
in 1996 compared to $329,000 in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires liquidity and working capital primarily for
operations and the opening of new stores, and, to a lesser extent, management
information systems and optical laboratory equipment to support store growth and
improve operating efficiencies. The Company's primary sources of funds are cash
flow from operations, lease financing of equipment, vendor trade credit, and
bank loans.
In early 1997, the Company completed the Offering. Net proceeds to
the Company from the Offering were $5.5 million. Of the shares sold in the
Offering, 400,000 shares were sold by selling stockholders. The Company did not
receive any proceeds from the sale of the shares by the selling stockholders.
With the proceeds, the Company accelerated its store expansion program,
remodeled two stores, reduced the amount outstanding on the Company's
then-existing revolving line of credit by approximately $2.0 million and retired
a $350,000 bridge loan from the Second National Bank of Warren (Ohio). The line
of credit matured on May 31, 1997, and was secured by guarantees from Mesirow
Capital Partners V, a common and preferred stockholder, Mesirow Capital Partners
VI and Ronald E. Weinberg, Chairman of the Board. William P. Sutter, Jr. is an
officer of the corporate general partner of Mesirow Capital Partners V and VI
and a director of the Company. Barry J. Feld, President and Chief Executive
Officer, agreed to share in the obligations of the guarantors.
In exchange for the guarantee of the Company's obligations under its
revolving line of credit by such officers and shareholders, the Company issued
warrants to them to purchase, in the aggregate, 50,000 shares of the Common
Stock at a price per share of $6.11, subject to customary anti-dilution
adjustments. The value of the warrants, which was determined by independent
valuation to be $0.57 per share, was reflected on the December 28, 1996 balance
sheet in other assets and paid-in capital and was amortized to expense in 1997,
concurrent with the termination of the revolving line of credit.
The bridge loan was guaranteed by Mr. Weinberg, and Mr. Feld agreed to
share in the guaranty. The Company paid Mr. Weinberg and Mr. Feld a total of
$7,500 in exchange for their guaranty of the loan. The Company repaid the loan
in full with the proceeds of the Offering. Norman C. Harbert, a director of the
Company, is also a director of Second Bancorp Inc., the parent holding company
of The Second National Bank of Warren (Ohio).
On August 19, 1997, the Company entered into an agreement with a major
national bank pursuant to which the Company received a new $3.0 million
revolving line of credit (the "Revolving Credit Facility") and a new $2.0
million term loan (the "Term Credit Facility" and together with the Revolving
Credit Facility, the "Credit Facility"). Under the Term Credit
21
<PAGE> 22
Facility, the Company may request advances until August 1, 1998, at which time
the outstanding principal balance will be amortized over a 48 month period. At
December 27, 1997, the Company had available $4,970,000 under the Credit
Facility.
Interest will be due and payable monthly and will accrue under the
Revolving Credit Facility on the principal balance outstanding from time to time
at a variable rate equal to the lending bank's prime rate (the "Prime Rate")
plus 0.125% per annum or, at the Company's option, a rate equal to the then
current London Interbank Offered Rate ("LIBOR") for the term selected by the
Company plus 2.35% per annum. The Revolving Credit Facility matures on August 1,
1999.
Under the Term Credit Facility, interest will accrue on the principal
balance outstanding at a variable rate equal to the Prime Rate plus 0.5% per
annum or, at the Company's option, a rate equal to LIBOR for the term selected
by the Company plus 2.75% per annum. Interest only on the Term Credit Facility
will be payable until August 1, 1998, after which time the Company will be
required to make equal monthly payments consisting of principal and interest
amortized over a period of 48 months. The interest rate under the Term Credit
Facility will continue to fluctuate, but the monthly payments after August 1,
1998 will remain the same. As a result, the Term Credit Facility may negatively
amortize. Any accrued but unpaid interest will be due along with the principal
balance on the maturity date of the Term Credit Facility, August 1, 2002.
The Revolving Credit Facility is secured by the Company's accounts
receivable, inventory and general intangibles. The Term Credit Facility is
secured by substantially all of the Company's furniture, fixtures and equipment.
The Credit Facility contains financial and other covenants with respect to the
Company that, among other matters, restrict the creation of certain liens,
restrict capital expenditures and require the maintenance of certain minimum net
worth and interest rate coverage. The Company is currently in compliance with
the covenants set forth in the Credit Facility.
Short-term trade credit represents a significant source of financing
for inventory. Trade credit arises from the willingness of the Company's vendors
to grant payment terms for inventory purchases. Although the Company has
negotiated what it believes to be favorable payment terms from its primary
vendors, there is no assurance that the Company will obtain such terms in the
future.
The Company leases all of its retail space and its optical laboratory
and distribution facility near Portland, Oregon. Certain retail store leases
require payment of base rent and property taxes, expenses for utilities, common
area maintenance, and insurance, plus, in many circumstances, additional rent
based on sales. Total rent expenses for the Company's retail space and its
facility near Portland, Oregon were $6.0 million, $5.5 million, and $5.0 million
for 1997, 1996, and 1995, respectively, including $1.2 million, $1.0 million,
and $889,000, respectively, for additional rent based on sales. The Company owns
its executive offices and optical laboratory and distribution facility in Tempe,
Arizona.
Net cash from operating activities was $614,000 in 1997 compared to
net cash used in operating activities of $280,000 in 1996. This fluctuation is
primarily attributable to an increase in net income of $1.0 million to $1.8
million in 1997 from net income of $802,000 in 1996, a decrease in accounts
payable of $1.4 million in 1997 compared to a decrease of $363,000 in 1996, an
increase in accrued expenses of $80,000 in 1997 compared to a decrease of $1.2
million in 1996, and an income tax benefit of $579,000 in 1997.
22
<PAGE> 23
Cash flows used in investing activities, primarily for store
expansion, renovation and relocation, were $2.9 million in 1997 compared to $1.5
million in 1996. The increase is primarily attributable to opening 17 new stores
in 1997 compared to ten new stores in 1996.
Cash flows from financing activities were $2.6 million in 1997
compared to $1.8 million in 1996. Cash flows from financing activities in 1997
reflect net proceeds from the Offering of $5.5 million, partially offset by
repayment of the Company's previous revolving line of credit of $2.0 million,
repayment of other debt of $708,000 and payment of preferred stock dividends of
$324,000. Cash flows from financing activities in 1996 reflect proceeds from the
previous revolving line of credit of $2.0 million and proceeds from bridge loans
totaling $1.1 million, partially offset by debt repayment of $936,000 and
payment of preferred stock dividends of $328,000.
The Company currently anticipates opening approximately 20 to 25 new
stores in 1998. Assuming the Company opens 25 new stores in 1998, including 24
new stores in malls and strip shopping centers and one new store within a Fred
Meyer host store, the Company expects that the costs of these new stores,
including furniture, fixtures, leasehold improvements, inventory and optometry
equipment, will be approximately $3.5 million. Actual costs will vary based
upon, among other factors geographic location, the size of the store and the
extent of the build-out required at the selected site. In addition to opening
new stores, the Company may relocate stores within a mall or strip shopping
center if sites become available with better traffic patterns and better
merchandising opportunities. In 1998, the Company plans to remodel four of its
mall and strip shopping center stores at an estimated cost of approximately
$600,000.
The Company believes that the cash flow from operations, funds
available from the Credit Facility and existing capital lease financing will be
sufficient to fund its working capital needs and store expansion and renovation
program for at least the next 12 months. However, the Company may seek
additional equity or debt financing if it determines that such financing is
necessary. There is no assurance that the Company would be able to obtain such
financing on terms that are acceptable to the Company.
NET OPERATING LOSS CARRYFORWARDS
The Company experienced operating losses prior to 1996 and as a
result, established a 100% valuation allowance against its deferred tax assets,
including its net operating loss (NOL) carryforwards, as of December 30, 1995.
The Company generated taxable income in 1996 which it was able to
substantially offset with NOL carryforwards. As the related deferred tax assets
had been fully reserved, the Company's effective income tax rate in 1996 was
unusually low as expected income tax expense was substantially offset by the
reversal of a portion of the valuation allowance. Due to the lack of sustained
profitability, the Company maintained the 100% valuation allowance against its
remaining deferred tax assets as of December 28, 1996.
The Company also generated taxable income in 1997 which it was able
to substantially offset with NOL carryforwards. Utilization of the related
deferred tax assets which had been fully reserved served to reduce the Company's
effective income tax rate. The Company's effective income tax rate was also
impacted by the reversal in the fourth quarter of $579,000 of the valuation
allowance relating to the Company's remaining deferred tax assets
23
<PAGE> 24
as of December 27, 1997 as the Company anticipates that the related tax benefits
will be realized.
The Company will consider further reductions to or elimination of the
remaining valuation allowance as profitable operations continue. As the
valuation allowance is reduced or eliminated, it is anticipated that the
Company's effective income tax rate will return to more normalized levels.
As of December 27, 1997, the Company 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.
SEASONALITY AND QUARTERLY RESULTS
Historically, the Company's operations have been seasonal, with the
highest sales in any year occurring first in February, March and April and then
in August, September and, to a lesser extent, in October. The Company has
historically incurred and may continue to incur net losses and lower net sales
during the Company's fourth quarter because of reduced demand for eyewear during
the holiday season.
The Company's results of operations may also fluctuate from quarter
to quarter as a result of the amount and timing of sales contributed by new
stores and the integration of new stores into the operations of the Company, as
well as other factors. The addition of a large number of new stores can
therefore significantly affect quarterly results of operations.
The following table presents certain unaudited financial data for
each quarter of 1997 and 1996. The quarterly results set forth below are not
necessarily indicative of results for any future period. The Company believes
that all necessary and normal recurring adjustments have been included in the
amounts stated below in order to present fairly and in accordance with generally
accepted accounting principles the following selected quarterly information when
read in conjunction with the Company's Consolidated Financial Statements
included
herein.
24
<PAGE> 25
<TABLE>
<CAPTION>
1997
-----------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
======== ======== ======== ========
(In thousands, except per share and store data)
<S> <C> <C> <C> <C>
Net sales ............................ $ 12,791 $ 12,470 $ 12,594 $ 11,357
Gross profit ......................... 6,669 6,347 6,306 5,637
Operating income (loss) .............. 693 305 422 (102)
Net income ........................... 633 295 427 454(1)
Net income applicable to common shares $ 552 $ 214 $ 346 $ 373
======== ======== ======== ========
Basic and diluted income per share (2) $ 0.13 $ 0.04 $ 0.07 $ 0.08
======== ======== ======== ========
Stores open at period end ............ 149 152 155 161
</TABLE>
<TABLE>
<CAPTION>
1996
-------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
======== ======== ======== ========
(In thousands, except per share and store data)
<S> <C> <C> <C> <C>
Net sales ............................ $11,504 $10,865 $11,674 $ 9,897
Gross profit ......................... 5,704 5,436 6,056 5,025
Operating income (loss) .............. 583 220 416 (171)
Net income (loss) .................... 443 152 307 (100)
Net income (loss) applicable
to common shares ..................... $ 362 $ 71 $ 224 $ (183)
======= ======= ======= =======
Basic and diluted income
(loss) per share (2) ................. $ 0.10 $ 0.02 $ 0.06 $ (0.05)
======= ======= ======= =======
Stores open at period end ............ 141 145 146 146
</TABLE>
------------------
Footnotes
(1) Amount includes income tax benefit of $579,000 from reversal of a
portion of the valuation allowance applicable to the Company's deferred
tax assets. See "Income Taxes" in Note 7 of Notes to Consolidated
Financial Statements.
(2) During the fourth quarter of 1997, the Company adopted SFAS128,
Earnings per Share. See "Earnings per Share" in Note 1 of Notes to
Consolidated Financial Statements.
25
<PAGE> 26
INFLATION
The Company believes that the relatively moderate rate of
inflation over the past few years has not had a significant effect on
its results of operations.
FORWARD-LOOKING STATEMENTS
Statements that are not historical facts, including
statements about the Company's confidence in its prospects and
strategies and its expectations about expansion into new markets,
including Florida, growth in existing markets, comparable store sales
and the Company's ability to attract new sources of financing, are
forward-looking statements that involve risks and uncertainties.
These risks and uncertainties include, but are not limited to, (1)
the effect of the price point increase which occurred in January
1998; (2) market acceptance risks, including whether or not the
Company will be able to successfully implement its value-pricing
concept in new geographic markets, most of which include competitors
of the Company that have financial and other resources substantially
greater than that of the Company, and whether or not the Company will
be able to conduct a successful advertising campaign in new and
existing markets against better-financed competitors; (3) a slowdown
in the growth of managed care in the eyewear industry or in the
Company's share of such business, including whether or not federal or
state health-care legislation will have an adverse impact on managed
care; (4) laboratory capacity and supply constraints, including
whether or not as the Company expands into new geographic markets
whether it will be able to successfully integrate its new markets
into its existing eyewear laboratory manufacturing and distribution
system; (5) the negative impact of an accelerated store expansion
program on the Company's profitability and operating margins; (6) the
Company's ability to attract and retain qualified optometrists; (7)
leasing risks, including whether or not the Company will be able to
lease prime mall and strip shopping center locations at attractive
rates for its expansion into new markets and to fill out its store
locations in the Company's existing markets; and (8) the impact of
government regulations on the opticians employed by the Company and
on the Company's advertising, locations and design of stores, and
products sold, which regulations are subject to frequent change and
vary widely throughout the states in which the Company operates.
These risks and others that are detailed in this Annual Report on
Form 10-K must be considered by any investor or potential investor in
the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Attached hereto and filed as a part of this report are the
consolidated financial statements and financial statement schedule
required by Regulation S-X.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
26
<PAGE> 27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information with respect to the executive officers of
the Registrant, see "Business--Executive Officers" in Part I of this
Form 10-K. The Company will file with the Securities and Exchange
Commission a definitive Proxy Statement relating to its 1998 Annual
Meeting of Stockholders no later than 120 days after the close of its
fiscal year ended December 27, 1997 (the "Proxy Statement"). The
information with respect to the Directors of the Registrant required
by this Item is hereby incorporated by reference to the Proxy
Statement.
ITEM 11. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation and Other
Information" in the Proxy Statement is hereby incorporated by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The section entitled "Principal Stockholders" in the Proxy
Statement is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Certain Relationships And Related
Transactions" in the Proxy Statement is hereby incorporated by
reference.
27
<PAGE> 28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The Consolidated Financial Statements and Schedules of the Company's
Annual Report are filed as part of this Form 10-K and are included in
Item 8:
<TABLE>
<CAPTION>
1. FINANCIAL STATEMENTS PAGE
----
<S> <C>
Report of Independent Accountants............................................... 34
Consolidated Balance Sheet at December 27, 1997 and December 28, 1996........... 35
Consolidated Statement of Operations for each of the three years in the
period ended December 27, 1997.................................................. 36
Consolidated Statement of Stockholders' Equity for each of the three
years in the period ended December 27, 1997..................................... 37
Consolidated Statement of Cash Flows for each of the three years in the
period ended December 27, 1997................................................. 38
Notes to Consolidated Financial Statements...................................... 39
2. FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts................................. 50
</TABLE>
All other accounting schedules for which provision is made in the
applicable accounting regulations of the SEC are not required under the related
instructions or are not applicable, and therefore have been omitted.
28
<PAGE> 29
3. EXHIBITS
The following exhibits are filed herewith or incorporated by
reference including the management contracts listed below at Exhibits 10.1 and
10.2:
Exhibit Description
3.1 Company's Amended and Restated Certificate of Incorporation
(Incorporated by reference to the Company's S-1 Registration
Statement as filed with the Securities and Exchange Commission
(File No. 33-71330))
3.2 Company's Amended and Restated Bylaws (Incorporated by
reference to the Company's S-1 Registration Statement as filed
with the Securities and Exchange Commission (File No.
33-71330))
4.1 Specimen Common Stock Certificate (Incorporated by reference
to the Company's S-1 Registration Statement as filed with the
Securities and Exchange Commission (File No. 33-71330))
4.2 Representative's Warrants and Warrant Agreement (Incorporated
by reference to the Company's S-1 Registration Statement as
filed with the Securities and Exchange Commission (File No.
33-71330))
4.3 Registration Rights Agreement between Registrant and MEDIQ ISI
and amendments thereto (Incorporated by reference to the
Company's S-1 Registration Statement as filed with the
Securities and Exchange Commission (File No. 33-71330))
4.4 Registration Rights Agreement among Registrant, the Mesirow
Group and certain other stockholders and amendments thereto
(Incorporated by reference to the Company's S-1 Registration
Statement as filed with the Securities and Exchange Commission
(File No. 33-71330))
4.5 MEDIQ Registration Rights Letter Agreement and amendments
thereto (Incorporated by reference to the Company's S-1
Registration Statement as filed with the Securities and
Exchange Commission (File No. 33-71330))
4.6 Amendment No. 2 dated November 2, 1993 to the Registration
Rights Agreement dated August 5, 1988 by and between the
Registrant and MEDIQ ISI (Incorporated by reference to the
Company's 10-K for the fiscal year ended 1993)
4.7 Amended and Restated Registration Rights Agreement by and
between the company and MEDIQ ISI dated April 21, 1995
(Incorporated by reference to the Company's 10-Q for the
quarterly period ended September 30, 1995)
29
<PAGE> 30
4.8 Warrant to Purchase Common Stock of the Registrant issued on
June 10, 1996 (Incorporated by reference to the Form 8-K filed
by the Company on June 17, 1996)
4.9 Letter to Ronald E. Weinberg containing First Amendment to
Warrant to Purchase Common Stock of the Registrant, dated
December 19, 1996 (Incorporated by reference to the Company's
S-2 Registration Statement as filed with the Securities and
Exchange Commission (File No. 333-18709))
4.10 Form of Letter containing First Amendment to Representative's
Warrant, dated December 19, 1996 (Incorporated by reference to
the Company's S-2 Registration Statement as filed with the
Securities and Exchange Commission (File No. 333-18709))
4.11 Form of Representative's Warrant Agreement between the
Registrant and Fahnestock & Co. Inc. (Incorporated by
reference to the Company's S-2 Registration Statement as filed
with the Securities and Exchange Commission (File No.
333-18709))
4.12 Form of Letter containing an amendment to the 1993
Representative's Warrant Agreement, dated February 6, 1997
(Incorporated by reference to the Company's S-2 Registration
Statement as filed with the Securities and Exchange Commission
(File No. 333-18709))
10.1 Employment Agreement, effective as of August 1, 1993, between
the Registrant and Barry Feld (Incorporated by reference to
the Company's S-1 Registration Statement as filed with the
Securities and Exchange Commission (File No. 33-71330))
10.2 Employment Agreement, effective as of August 1, 1993, between
the Registrant and Ronald E. Weinberg (Incorporated by
reference to the Company's S-1 Registration Statement as filed
with the Securities and Exchange Commission (File No.
33-71330))
10.3 Master Lease Agreement dated April 26, 1983 between Fred
Meyer, Inc. and Western States Optical, Inc. (predecessor in
interest of Registrant) and amendments thereto (Incorporated
by reference to the Company's S-1 Registration Statement as
filed with the Securities and Exchange Commission (File No.
33-71330))
10.4 Agreement dated August 4, 1988 among Fred Meyer, Inc., MEDIQ
Incorporated and Registrant (Incorporated by reference to the
Company's S-1 Registration Statement as filed with the
Securities and Exchange Commission (File No. 33-71330))
10.5 Industrial Lease dated July 22, 1991, between O.W.N.
Properties, Inc. and Western States Optical, Inc.
(predecessor-in-interest of Registrant) and amendments thereto
(Incorporated by reference to the Company's S-1 Registration
Statement as filed with the Securities and Exchange Commission
(File No. 33-71330))
30
<PAGE> 31
10.6 Form Optometrists' Sublease (Incorporated by reference to the
Company's S-1 Registration Statement as filed with the
Securities and Exchange Commission (File No. 33-71330))
10.7 Notice of Registration Letter to MEDIQ and MEDIQ ISI dated
November 2, 1993, as amended (including Exhibit B only, other
exhibits included elsewhere) (Incorporated by reference to the
Company's S-1 Registration Statement as filed with the
Securities and Exchange Commission (File No. 33-71330))
10.8 Notice of Registration Letter to the Mesirow Group dated
November 2, 1993, as amended (including Exhibit B only, other
exhibits included elsewhere) (Incorporated by reference to the
Company's S-1 Registration Statement as filed with the
Securities and Exchange Commission (File No. 33-71330))
10.9 Open-End Promissory Note, dated January 16, 1996, from Mesirow
Capital Partners VI (Incorporated by reference to the
Company's Form 10-Q for the quarterly period ended March 30,
1996)
10.10 Open-End Promissory Note, dated January 16, 1996, from Ronald
E. Weinberg (Incorporated by reference to the Company's Form
10-Q for the quarterly period ended March 30, 1996)
10.11 Guaranty, Contribution and Indemnification Agreement, dated
June 10, 1996 among the Registrant, Ronald E. Weinberg, Barry
Feld, Mesirow Capital Partners V and Mesirow Capital Partners
VI (Incorporated by reference to the Form 8-K filed by the
Company on June 17, 1996)
10.12 New West Eyeworks, Inc. Amended & Restated Stock Option Plan,
dated February 16, 1996 (Incorporated by reference to the
Company's S-8 filed on June 26, 1996)
10.13 Letter to FLAG Partners from the Registrant, dated December
19, 1996 (Incorporated by reference to the Company's S-2
Registration Statement as filed with the Securities and
Exchange Commission (File No. 333-18709))
10.14 Letter to Barry Feld from the Registrant, dated December 19,
1996 (Incorporated by reference to the Company's S-2
Registration Statement as filed with the Securities and
Exchange Commission (File No. 333-18709))
10.15 Letter to Donald M. Gleklen from the Registrant, dated
December 19, 1996 (Incorporated by reference to the Company's
S-2 Registration Statement as filed with the Securities and
Exchange Commission (File No. 333-18709))
10.16 Letter to Mesirow Capital Partners II, III, IV, V, and VI from
the Registrant, dated December 19, 1996 (Incorporated by
reference to the Company's S-2 Registration Statement as filed
with the Securities and Exchange Commission (File No.
333-18709))
31
<PAGE> 32
10.17 Letter to Ronald E. Weinberg from the Registrant, dated
January 17, 1997 (Incorporated by reference to the Company's
S-2 Registration Statement as filed with the Securities and
Exchange Commission (File No. 333-18709))
10.18 Amendment to Employment Agreement between Ronald E. Weinberg
and the Registrant, dated January 1, 1997 (Incorporated by
reference to the Company's S-2 Registration Statement as filed
with the Securities and Exchange Commission (File No.
333-18709))
10.19 Amendment to Employment Agreement between Barry J. Feld and
the Registrant, dated January 1, 1997 (Incorporated by
reference to the Company's S-2 Registration Statement as filed
with the Securities and Exchange Commission (File No.
333-18709))
10.20 Loan Agreement between KeyBank National Association and the
Registrant, dated August 1, 1997
10.21 Security Agreement executed by the Registrant for the benefit
of KeyBank National Association, for $3.0 million, dated
August 1, 1997
10.22 Security Agreement executed by the Registrant for the benefit
of KeyBank National Association, for $2.0 million, dated
August 1, 1997
10.23 Cross-Default and Cross-Collateralization Agreement between
KeyBank National Association and the Registrant, Dated August
1, 1997
10.24 Revolving Note between KeyBank National Association and the
Registrant, dated August 1, 1997 (Incorporated by reference to
the Form 8-K filed by the Company on September 4, 1997)
10.25 Term Note between KeyBank National Association and the
Registrant, dated August 1, 1997 (Incorporated by reference to
the Form 8-K filed by the Company on September 4, 1997)
21.1 Subsidiaries of the Registrant
23.1 Consent of Price Waterhouse LLP
24.1 Reference is made to the Signatures section of this Report for
the Power of Attorney contained therein
32
<PAGE> 33
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the Company has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
NEW WEST EYEWORKS, INC.
By: /s/ Ronald E. Weinberg Dated: March 26, 1998
-------------------------------------------------------------
Ronald E. Weinberg, Chairman of the Board
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Ronald E. Weinberg and Byron S.
Krantz his true and lawful attorneys-in-fact, each acting alone, with full
powers of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any or all amendments to this report,
and to file the same, with exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorneys-in-fact or their substitutes, each acting
alone, may lawfully do or cause to be done by virtue hereof.
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 and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
/s/ Ronald E. Weinberg Dated: March 26, 1998
-----------------------------------------------------------------
Ronald E. Weinberg, Chairman of the Board, Treasurer and Director
/s/ Barry Feld Dated: March 26, 1998
-----------------------------------------------------------------
Barry Feld, Chief Executive Officer, President and Director
(principal executive officer)
/s/ Darius J. DiTallo Dated: March 26, 1998
-----------------------------------------------------------------
Darius J. DiTallo, Vice President - Finance & Administration
(principal financial and accounting officer)
/s/ Byron S. Krantz Dated: March 26, 1998
-----------------------------------------------------------------
Byron S. Krantz, Secretary and Director
/s/ Donald M. Gleklen Dated: March 26, 1998
-----------------------------------------------------------------
Donald M. Gleklen, Director
/s/ Larry I. Pollock Dated: March 26, 1998
-----------------------------------------------------------------
Larry I. Pollock, Director
/s/ William P. Sutter, Jr. Dated: March 26, 1998
-----------------------------------------------------------------
William P. Sutter, Jr., Director
/s/ Norman C. Harbert Dated: March 26, 1998
-----------------------------------------------------------------
Norman C. Harbert, Director
</TABLE>
33
<PAGE> 34
Report of Independent Accountants
To the Board of Directors and Shareholders
of New West Eyeworks, Inc.
In our opinion, the consolidated financial statements and schedule listed in the
index appearing under Item 14(a) 1 and 2 present fairly, in all material
respects, the financial position of New West Eyeworks, Inc. and its subsidiaries
at December 27, 1997 and December 28, 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
27, 1997, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Phoenix, Arizona
March 6, 1998
34
<PAGE> 35
NEW WEST EYEWORKS, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 27, December 28,
1997 1996
------------ ------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 577,000 $ 256,000
Accounts receivable, net 1,741,000 1,304,000
Inventory 3,519,000 3,190,000
Deferred tax assets 579,000
Other current assets 400,000 309,000
------------ ------------
Total current assets 6,816,000 5,059,000
Property and equipment, net 9,108,000 7,518,000
Goodwill, net 416,000 506,000
Other assets 12,000 44,000
------------ ------------
Total assets $ 16,352,000 $ 13,127,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,022,000 $ 5,392,000
Accrued expenses 1,948,000 1,868,000
Line of credit 30,000 1,968,000
Deferred warranty revenues 271,000 279,000
Notes payable and capital lease obligations, current portion 338,000 320,000
Notes payable to related party 358,000
------------ ------------
Total current liabilities 6,609,000 10,185,000
Notes payable and capital lease obligations 291,000 516,000
------------ ------------
Total liabilities 6,900,000 10,701,000
------------ ------------
Stockholders' Equity:
Series A 6% Cumulative Convertible Preferred Stock, $1,000
par value, 3,960 shares authorized, issued and outstanding 3,960,000 3,960,000
Series B 6% Cumulative Convertible Preferred Stock, $1,000
par value, 1,500 shares authorized, issued and outstanding 1,500,000 1,500,000
Common stock, $0.01 par value, 25,000,000 shares authorized,
4,868,436 and 3,763,036 shares issued and outstanding at
December 27, 1997 and December 28, 1996, respectively 49,000 38,000
Paid-in capital 15,630,000 10,100,000
Accumulated deficit (11,687,000) (13,172,000)
------------ ------------
Total stockholders' equity 9,452,000 2,426,000
------------ ------------
Total liabilities and stockholders' equity $ 16,352,000 $ 13,127,000
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
35
<PAGE> 36
NEW WEST EYEWORKS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------------
December 27, December 28, December 30,
1997 1996 1995
--------------------------------------------------
<S> <C> <C> <C>
Net sales ................................... $ 49,212,000 $ 43,940,000 $ 40,033,000
Cost of sales ............................... 24,253,000 21,719,000 20,352,000
------------ ------------ ------------
Gross profit ............................. 24,959,000 22,221,000 19,681,000
Selling, general and administrative expenses 23,641,000 21,173,000 21,667,000
------------ ------------ ------------
Operating income (loss) ..................... 1,318,000 1,048,000 (1,986,000)
Interest income ............................. 66,000 12,000
Interest expense ............................ 122,000 216,000 51,000
------------ ------------ ------------
Income (loss) before income tax expense ..... 1,262,000 832,000 (2,025,000)
Income tax benefit (expense) ................ 547,000 (30,000)
------------ ------------ ------------
Net income (loss) ........................... 1,809,000 802,000 (2,025,000)
Preferred stock dividends ................... (324,000) (328,000) (329,000)
------------ ------------ ------------
Net income (loss) applicable to common shares $ 1,485,000 $ 474,000 $ (2,354,000)
============ ============ ============
Basic and diluted income (loss) per share ... $ 0.31 $ 0.13 $ (0.63)
============ ============ ============
Weighted average shares outstanding - Basic . 4,717,000 3,763,000 3,763,000
Weighted average shares outstanding - Diluted 4,785,000 3,786,000 3,763,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
36
<PAGE> 37
NEW WEST EYEWORKS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Shares Amounts
-------------------- -------------------------------------------------------------------------
Paid-in Accumulated
Preferred Common Preferred Common Capital Deficit Total
----- --------- --------- ------ ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1994 5,460 3,763,036 $5,460,000 $38,000 $ 10,070,000 $(11,292,000) $ 4,276,000
Preferred stock dividends (329,000) (329,000)
Net loss (2,025,000) (2,025,000)
----- --------- ---------- ------- ------------ ------------ -----------
BALANCES AT DECEMBER 30, 1995 5,460 3,763,036 5,460,000 38,000 10,070,000 (13,646,000) 1,922,000
Issuance of warrants 30,000 30,000
Preferred stock dividends (328,000) (328,000)
Net income 802,000 802,000
----- --------- ---------- ------- ------------ ------------ -----------
BALANCES AT DECEMBER 28, 1996 5,460 3,763,036 5,460,000 38,000 10,100,000 (13,172,000) 2,426,000
Common stock issued 1,105,400 11,000 5,530,000 5,541,000
Preferred stock dividends (324,000) (324,000)
Net income 1,809,000 1,809,000
----- --------- ---------- ------- ------------ ------------ -----------
BALANCES AT DECEMBER 27, 1997 5,460 4,868,436 $5,460,000 $49,000 $ 15,630,000 $(11,687,000) $ 9,452,000
===== ========= ========= ====== ============ ============= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
37
<PAGE> 38
NEW WEST EYEWORKS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Year Ended
--------------------------------------------------
December 27, December 28, December 30,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES:
Net income (loss) $ 1,809,000 $ 802,000 $ (2,025,000)
Adjustments to reconcile net income (loss) to
net cash from (used in) operating activities:
Depreciation and amortization 1,505,000 1,229,000 1,048,000
Loss on disposal of fixed assets 2,000 65,000
Income tax benefit (579,000)
Changes in assets and liabilities:
Accounts receivable (437,000) (305,000) (124,000)
Inventory (329,000) (58,000) (281,000)
Other current assets (91,000) (231,000) 52,000
Accounts payable (1,370,000) (363,000) 1,696,000
Accrued expenses 80,000 (1,228,000) 603,000
Deferred warranty revenues (8,000) (69,000) (240,000)
Other assets and liabilities 32,000 (57,000) (72,000)
------------ ------------ ------------
Net cash from (used in) operating activities 614,000 (280,000) 722,000
------------ ------------ ------------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Purchase of property and equipment (2,864,000) (1,459,000) (1,532,000)
------------ ------------ ------------
Net cash (used in) investing activities (2,864,000) (1,459,000) (1,532,000)
------------ ------------ ------------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Proceeds from the revolving line of credit 8,136,000 24,050,000
Payment on the revolving line of credit (10,074,000) (22,082,000)
Proceeds from the bridge loans 1,050,000
Payment of bridge loans (358,000) (700,000)
Proceeds from capital leases 505,000
Payment of capital leases (350,000) (236,000) (208,000)
Payment of preferred stock dividends (324,000) (328,000) (246,000)
Net proceeds from common stock offering 5,541,000
------------ ------------ ------------
Net cash from financing activities 2,571,000 1,754,000 51,000
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH and CASH EQUIVALENTS 321,000 15,000 (759,000)
CASH and CASH EQUIVALENTS, beginning of year 256,000 241,000 1,000,000
------------ ------------ ------------
CASH and CASH EQUIVALENTS, end of year $ 577,000 $ 256,000 $ 241,000
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid ................................... $ 122,000 $ 208,000 $ 51,000
Income taxes paid ............................... $ 25,000 $ 30,000
Assets acquired under capital lease ............. $ 141,000 $ 524,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
38
<PAGE> 39
NEW WEST EYEWORKS, INC.
NOTE 1 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES:
New West Eyeworks, Inc. (the Company) is a leading specialty retailer of
eyewear, operating under the trade names "Vista Optical" and "Lee Optical." The
Company operates value-priced optical stores in thirteen states. These stores
are located in malls, strip shopping centers and Fred Meyer host stores. The
Company operates optical laboratory and distribution facilities in Tempe,
Arizona and near Portland, Oregon.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
FISCAL YEAR
The Company's fiscal year ends on the last Saturday of the calendar year.
References to the year 1997, 1996, and 1995 relate to the fiscal years ended
December 27, 1997, December 28, 1996, and December 30, 1995, each of which
consisted of 52 weeks.
REVENUE RECOGNITION
Revenues are recognized at the time of customer order. Revenues from separately
priced warranty contracts are deferred and recognized on a pro rata basis over
the contract period.
The Company receives certain vendor rebates and allowances which are reflected
in operations based on the terms of the underlying agreements. Such amounts are
classified as reductions of either selling, general and administrative costs or
cost of sales as appropriate.
STORE OPENING COSTS
The Company expenses store opening costs as incurred.
ADVERTISING COSTS
The Company expenses advertising production costs in the period in which the
related advertisement first takes place. Advertising communication costs such as
television air time and newspaper advertising space are expensed as the related
services are received. All other costs are expensed as incurred. Advertising
expenses totaled $4,228,000, $3,576,000, and $4,136,000, for the years 1997,
1996, and 1995, respectively.
39
<PAGE> 40
NEW WEST EYEWORKS, INC.
NOTE 1 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
CASH AND CASH EQUIVALENTS
The Company considers liquid investments with an original maturity of three
months or less to be cash equivalents.
ACCOUNTS RECEIVABLE
Accounts receivable are primarily comprised of amounts due from insurance and
managed care plans on sales where the Company has contractual arrangements or
has accepted an assignment of insurance benefits from the customer. The reported
balance is net of an allowance for doubtful accounts of $159,000 and $139,000 at
December 27, 1997, and December 28, 1996, respectively.
INVENTORY AND COST OF SALES
Inventory primarily consists of the direct material cost of eyeglass frames,
contact lenses, ophthalmic lenses and optical laboratory supplies and is stated
at the lower of cost or market. Cost is determined using the first-in, first-out
method.
Cost of sales includes the cost of merchandise sold during the year, optical
laboratory costs directly related to manufacturing eyeglasses, store occupancy
expenses, and depreciation expense relating to store and optical laboratory
fixtures and equipment.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is provided using the straight-line method over the estimated
useful lives of the related assets which range from five to ten years. Major
improvements are capitalized while repairs which do not extend the useful life
of the asset are expensed.
GOODWILL
Goodwill represents the cost in excess of the net assets of a business acquired
and is being amortized for financial statement purposes on a straight-line basis
over a period of fifteen years. The reported balance is net of accumulated
amortization of $849,000 and $759,000 at December 27, 1997, and December 28,
1996 respectively. The Company evaluates the possibility of goodwill impairment
when events or changes in economic circumstances indicate that the related
carrying amount may not be recoverable.
ACCOUNTS PAYABLE
Accounts payable includes $641,000 at December 27, 1997 and $644,000 at December
28, 1996 relating to the reclassification of book overdrafts.
STOCK COMPENSATION
The Company measures compensation expense related to employee stock options
using the intrinsic value-based method of accounting prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25) and related interpretations.
40
<PAGE> 41
NEW WEST EYEWORKS, INC.
NOTE 1 - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
INCOME TAXES
The Company accounts for income taxes using the liability method, recognizing
temporary differences between the financial reporting basis of the Company's
assets and liabilities and the related income tax basis for such assets and
liabilities. This method generates a net deferred income tax liability or a net
deferred income tax asset for the Company as of the end of the year, as measured
by the statutory tax rates in effect as enacted. The Company derives its
deferred income tax charge or benefit by recording the change in the net
deferred income tax liability or net deferred income tax asset balance for the
year.
The Company's deferred income tax assets include certain future tax benefits.
The Company records a valuation allowance against the portion of these deferred
income tax assets which it believes it will more likely than not fail to
realize.
EARNINGS PER SHARE
In 1997, the Company adopted Statement of Financial Accounting Standards No.
128, Earnings per Share (SFAS No. 128). Basic earnings per share is computed by
dividing income applicable to common shares by the weighted average number of
common shares outstanding for the year. Diluted earnings per share is similar to
basic earnings per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if potential
dilutive common shares had been issued. Adoption of SFAS No. 128 did not effect
the Company's previously reported income (loss) per share computations for years
subsequent to its initial public offering. The following table presents a
reconciliation of the basic and diluted earnings per share calculations:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Basic earnings per share:
Numerator:
Net income (loss) applicable
to common shares $ 1,485,000 $ 474,000 $(2,354,000)
----------- ----------- -----------
Denominator:
Weighted average common shares
outstanding 4,717,000 3,763,000 3,763,000
----------- ----------- -----------
Basic earnings (loss) per share $ 0.31 $ 0.13 $ (0.63)
=========== =========== ===========
Diluted earnings per share:
Numerator:
Net income (loss) applicable
to common shares $ 1,485,000 $ 474,000 $(2,354,000)
----------- ----------- -----------
Denominator:
Weighted average common shares
outstanding 4,717,000 3,763,000 3,763,000
Weighted average employee stock
options 68,000 23,000 --
----------- ----------- -----------
4,785,000 3,786,000 3,763,000
----------- ----------- -----------
Diluted earnings per share $ 0.31 $ 0.13 $ (0.63)
=========== =========== ===========
</TABLE>
41
<PAGE> 42
NEW WEST EYEWORKS, INC.
NOTE 2 - PROPERTY, EQUIPMENT AND LEASES:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 27, December 28,
1997 1996
------------ ------------
<S> <C> <C>
Store fixtures and equipment $ 13,796,000 $ 11,549,000
Laboratory fixtures and equipment 2,286,000 2,100,000
Other fixtures and equipment 2,717,000 2,558,000
Building and improvements 686,000 641,000
Construction in progress 188,000
------------ ------------
19,673,000 16,848,000
Less: accumulated depreciation (10,565,000) (9,330,000)
------------ ------------
$ 9,108,000 $ 7,518,000
============ ============
</TABLE>
The Company leases substantially all of its store facilities under operating
leases which expire at various dates through 2002. Certain leases require
payment of property taxes, utilities, common area maintenance and insurance as
well as additional rent if sales exceed specified amounts. Total rent expense
incurred during 1997, 1996, and 1995 approximated $6,069,000, $5,493,000, and
$5,000,000, respectively, including additional rent expense of $1,192,000,
$1,045,000, and $889,000, respectively. At December 27, 1997, future minimum
annual rental commitments under noncancelable operating leases were as follows:
<TABLE>
<S> <C> <C>
1998 $ 3,820,000
1999 3,184,000
2000 2,455,000
2001 2,016,000
2002 1,554,000
Thereafter 3,109,000
-------------
$ 16,138,000
=============
</TABLE>
NOTE 3 - LINE OF CREDIT:
The Company entered into a new $3.0 million revolving line of credit agreement
and a $2.0 million term loan agreement with a major national bank in August
1997. The revolving line of credit matures on August 1, 1999, and is secured by
the Company's inventory, accounts receivable, and general intangibles. The
revolving line of credit bears interest at a rate of prime plus one-eighth
percent (8.625% at December 27, 1997) or, at the Company's option, a rate equal
to the then current London Interbank Offered Rate ("LIBOR") for the term
selected by the Company plus 2.35% on any principal outstanding; interest is
payable on a monthly basis. The Company may request advances on the term loan
until August 1, 1998, at which time the balance will be amortized over a 48
month period. The term loan is secured by the Company's property and equipment,
and bears interest at a rate of prime plus one-half percent or, at the Company's
option, a rate equal to LIBOR for the term selected by the Company plus 2.75% on
any principal outstanding. At December 27, 1997, $30,000 was outstanding on the
revolving line of credit while no amounts were outstanding under the term loan.
42
<PAGE> 43
NEW WEST EYEWORKS, INC.
NOTE 3 - LINE OF CREDIT: (CONTINUED)
The Company entered into a $2.0 million revolving line of credit with a bank in
June 1996. The revolving line of credit matured on May 31, 1997, and was secured
by substantially all of the Company's assets, including the Company's executive
office building and optical laboratory in Tempe, Arizona, but excluding
furniture, fixtures, and equipment. The Company repaid the line of credit
borrowings with a portion of the proceeds from its February 1997 common stock
offering described in Note 5.
NOTE 4 - NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS:
Notes payable, and capital lease obligations consist of the following:
<TABLE>
<CAPTION>
December 27, December 28,
1997 1996
---------- ----------
<S> <C> <C>
Capital lease obligations $ 629,000 $ 836,000
Notes payable - related party 358,000
---------- ----------
Total debt 629,000 1,194,000
Less: current portion 338,000 678,000
---------- ----------
Total long-term debt $ 291,000 $ 516,000
========== ==========
</TABLE>
In early 1996, the Company entered into two bridge loans with Mesirow Capital
Partners VI, a common and preferred stockholder, and Ronald E. Weinberg,
Chairman of the Board, totaling $700,000 to fund the Company's expansion and
advertising needs. The loans bore interest at an annual rate of 15% and were
secured by a deed of trust on the Company's executive office building and
optical laboratory facility in Tempe, Arizona. The bridge loans were retired
with the proceeds of the former revolving line of credit described in Note 3.
In December 1996, the Company entered into a bridge loan for $350,000 with The
Second National Bank of Warren (Ohio). The loan was scheduled to mature on June
2, 1997 and bore interest at a rate equal to the lending bank's prime rate plus
1.5% per annum, payable upon maturity. The loan was guaranteed by Mr. Weinberg
and Mr. Feld agreed to share in the guaranty. The Company paid Mr. Weinberg and
Mr. Feld a total of $7,500 in exchange for their guaranty of the loan. Norman C.
Harbert, a director of the Company, is also a director of Second Bancorp Inc.,
the parent holding company of the Second National Bank of Warren (Ohio). The
Bridge Loan was retired with a portion of the proceeds from the February 1997
common stock offering described in Note 5.
43
<PAGE> 44
NEW WEST EYEWORKS, INC.
NOTE 5 - STOCKHOLDERS' EQUITY:
In February 1997, the Company completed a public offering (the "Offering") of
1,505,400 shares of its common stock, including shares sold upon the exercise of
the underwriters' over allotment option. Gross proceeds, direct costs, and net
proceeds of this Offering totaled approximately $6,626,000, $1,085,000, and
$5,541,000, respectively. Of the shares sold, 400,000 shares were sold by
selling stockholders. The Company did not receive any proceeds from the sale of
shares by the selling stockholders.
In December 1993, the Company issued 3,960 shares of Series A and 1,500 shares
of Series B $1,000 par value 6% Cumulative Convertible Preferred Stock (the
"Preferred Stock"). The Preferred Stock is redeemable by the Company at par
value plus accrued but unpaid dividends; however, Series B shares cannot be
redeemed while any Series A shares are outstanding. The number of common shares
issuable upon conversion is determined by dividing the par value of outstanding
Preferred Stock by $8.40, subject to customary adjustments. Dividends on the
Preferred Stock are payable quarterly, at an annual rate of $60 per share.
NOTE 6 - COMMON STOCK OPTIONS AND WARRANTS:
In October 1993, the Company established the New West Eyeworks Stock Option Plan
under which certain eligible employees and directors of the Company may receive
awards in the form of stock options. Certain stock options become exercisable on
the date the Company achieves annual earnings per share targets while others
become exercisable immediately or over a multi-year period with the options
vesting ratably during that period. The exercise price is generally equal to the
fair market price of the Company's common stock on the date of the grant. The
stock option exercise period may not exceed ten years from the date of grant.
44
<PAGE> 45
NEW WEST EYEWORKS, INC.
NOTE 6 - COMMON STOCK OPTIONS AND WARRANTS: (CONTINUED)
A summary of the status of the Company's Stock Option Plan as of December 27,
1997, December 28, 1996, and December 30, 1995 and changes during the years
ended is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------ ----------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------------------ ----------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
beginning of year 143,500 $5.56 131,500 $5.89 108,500 $7.00
Granted 159,000 $6.75 53,000 $4.25 99,500 $4.10
Exercised
Forfeited (7,000) $4.75 (41,000) $5.00 (76,500) $4.99
---------------------- -------------------------- ----------------------
Options outstanding at
end of year 295,500 $6.29 143,500 $5.56 131,500 $5.89
====================== ========================== ======================
Options exercisable at end of
year
163,600 $6.31 77,000 $6.90 86,500 $7.00
Weighted-average fair value of
options granted during the year $3.61 $2.12 $2.17
</TABLE>
The following table summarizes information about the stock options granted
during 1997, 1996, and 1995 which are outstanding at December 27, 1997:
<TABLE>
<CAPTION>
Weighted Weighted Weighted
Range of Average Average Average
Exercise Options Remaining Exercise Options Exercise
Prices Outstanding Contract Life Price Exercisable Price
- --------------- ----------- --------------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$3.44-$4.63 64,500 7.2-8.2 years $ 4.14 6,600 $ 4.63
$5.50-$7.00 189,000 6.0-9.1 years $ 6.31 157,000 $ 6.38
$ 9.50 42,000 9.8 years $ 9.50 -- --
----------- -----------
295,500 163,600
</TABLE>
For purposes of determining the weighted average fair market value of the
options granted during the year, the Company used the Black-Scholes
option-pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------
<S> <C> <C> <C>
Expected dividend yield 0% 0% 0%
Expected stock price volatility 50% 50% 50%
Risk free interest rate 4.6% 5.3% 7.1%
Expected option life 5 years 5 years 5 years
</TABLE>
45
<PAGE> 46
NEW WEST EYEWORKS, INC.
NOTE 6 - COMMON STOCK OPTIONS AND WARRANTS: (CONTINUED)
In accordance with the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company applies APB 25 and related interpretations in
accounting for its stock option plan and, accordingly, does not recognize
compensation expense. If the Company had elected to recognize compensation
expense based on the fair value of the options granted at grant date as
prescribed by SFAS No. 123, net income and earnings per share (basic and
diluted) for 1997 would have been reduced by approximately $170,000 and $0.04,
respectively. Similar pro forma disclosures for 1996 and 1995 have not been
presented as the effect of such pro forma adjustments is not material.
In connection with the initial public offering in December 1993, the Company
sold warrants to its primary underwriter and two individuals at a nominal price
(1993 Warrants). The 1993 Warrants, which are exercisable for a four-year period
commencing December 23, 1994, entitle the holders to purchase a total of 106,563
shares of the Company's common stock at an exercise price of 125% of the initial
public offering price of $7.00 per share ($8.75 per share). In conjunction with
the Offering in early 1997, the Company reduced the exercise price of the 1993
Warrants from $8.75 to $8.00 per share.
In connection with the Offering, the Company granted to its primary underwriter
and certain individuals warrants (1997 Warrants) to purchase a number of shares
of common stock equal to the number of shares of common stock that remain
issuable and unexercised under the 1993 Warrants upon their termination. The
1997 Warrants are exercisable beginning on December 23, 1998, the termination
date of the 1993 Warrants, for a period of three years terminating on December
23, 2001. The initial exercise price for the 1997 Warrants will equal the
exercise price under the 1993 Warrants upon their termination, which price is
currently $8.00.
In exchange for the guarantee of the Company's obligations under its former line
of credit by certain officers and shareholders, the Company issued warrants to
them to purchase, in the aggregate, 50,000 shares of the Company's common stock
at a price per share of $6.11, subject to customary anti-dilution adjustments.
The value of the warrants, which was determined by independent valuation to be
$0.57 per share, is reflected on the December 28, 1996 balance sheet in other
assets and paid-in capital and was amortized to expense in 1997, concurrent with
the termination of the revolving line of credit.
46
<PAGE> 47
NEW WEST EYEWORKS, INC.
NOTE 7 - INCOME TAXES:
Income tax (expense) benefit is comprised of the following:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
Current (expense) benefit:
Federal $ (32,000) $ (30,000) --
State -- -- --
--------- --------- --------
Total (32,000) (30,000) --
--------- --------- --------
Deferred (expense) benefit:
Federal 521,000 -- --
State 58,000 -- --
--------- --------- --------
Total 579,000 -- --
--------- --------- --------
Total (expense) benefit $ 547,000 $ (30,000) --
========= ========= ========
</TABLE>
Deferred tax assets are comprised of the following:
<TABLE>
<CAPTION>
December 27, December 28,
1997 1996
----------- -----------
<S> <C> <C>
Net operating loss carryforwards $ 2,297,000 $ 2,873,000
Employee benefits 289,000 244,000
Deferred warranty revenues 108,000 112,000
Other 317,000 306,000
----------- -----------
Deferred tax assets 3,011,000 3,535,000
Less: valuation allowance (2,432,000) (3,535,000)
----------- -----------
Net deferred tax assets $ 579,000 $ --
=========== ===========
</TABLE>
47
<PAGE> 48
NEW WEST EYEWORKS, INC.
NOTE 7 - INCOME TAXES: (CONTINUED)
Income tax (expense) benefit differs from the amount determined by applying the
U.S. statutory federal tax rate of 34% to income (loss) before income tax
(expense) benefit as a result of the following:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ------------
<S> <C> <C> <C>
Expected income tax (expense) benefit $ (429,000) $(283,000) $ 689,000
Nondeductible expenses (49,000) (56,000) (38,000)
(Increase) decrease in valuation 1,025,000 309,000 (651,000)
allowance
----------- ----------- ------------
Income tax (expense) benefit $ 547,000 $ (30,000) $ --
=========== =========== =============
</TABLE>
The Company increased its valuation allowance in 1995 due to the net operating
loss (NOL) incurred during the year coupled with the lack of sustained
historical profitability. In 1996, the Company returned to profitability and
reduced its valuation allowance as it was able to substantially offset taxable
income generated during the year with existing NOL carryforwards. The Company
further reduced its valuation allowance in 1997 because of its ability to once
again substantially offset taxable income generated during the year as well as
the Company's belief that it will be able to realize a portion of its remaining
deferred tax assets. The Company will consider further reduction to or
elimination of the remaining valuation allowance as profitable operations
continue.
As of December 27, 1997, the Company had NOL carrryforwards of $5.7 million and
$4.9 million for regular tax and alternative minimum tax purposes, respectively,
which begin to expire in 2006. The Company also has nonexpiring alternative
minimum tax credit carryforwards of $79,000 available to offset future regular
taxes.
NOTE 8 - EMPLOYEE BENEFIT PLAN:
The Company established the New West Eyeworks, Inc. Profit Sharing and 401(k)
Savings Plan (the Plan) for the benefit of employees (participants) who meet
certain age and eligibility requirements. The Plan provides for discretionary
profit sharing contributions as well as employer matching contributions on
participants' pre-tax savings deferrals. A profit sharing contribution was not
made in 1997, 1996 or 1995; however, employer matching contributions
approximated $106,000, $90,000, and $97,000 in 1997, 1996 and 1995,
respectively.
NOTE 9 - RELATED PARTY TRANSACTIONS:
The Company is a party to an expense sharing arrangement whereby it pays an
entity owned by an officer of the Company for certain services provided by such
entity for the Company and as reimbursement for certain expenses incurred
directly on behalf of the Company. The
48
<PAGE> 49
NEW WEST EYEWORKS, INC.
NOTE 9 - RELATED PARTY TRANSACTIONS: (CONTINUED)
aggregate amount of the payments by the Company to such entity, including
expenses incurred directly on behalf of the Company, were approximately
$137,000, $109,000, and $136,000 in 1997, 1996 and 1995, respectively.
A director of the Company is a partner in a law firm which provides legal
services to the Company. The aggregate amount of expense included in 1997 and
1996 for services provided to the Company by this entity amount to $173,000 and
$158,000, respectively.
NOTE 10 - COMMITMENTS AND CONTINGENCIES:
From time to time, the Company is involved in legal matters which are incidental
to its operations. In the opinion of management, the ultimate resolution of
these matters is not anticipated to have a material adverse effect on the
Company's financial condition or results of operations.
49
<PAGE> 50
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
<TABLE>
<CAPTION>
Charged to
Balance at costs and Balance at
Description beginning of year expenses Deductions end of year
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995
Allowance for doubtful accounts $ 186,000 $ 143,000 $ (169,000) $ 160,000
Deferred tax valuation allowance $ 3,194,000 $ 880,000 $ $ 4,074,000
1996
Allowance for doubtful accounts $ 160,000 $ 65,000 $ (86,000) $ 139,000
Deferred tax valuation allowance $ 4,074,000 $ $ (539,000) $ 3,535,000
1997
Allowance for doubtful accounts $ 139,000 $ 263,000 $ (243,000) $ 159,000
Deferred tax valuation allowance $ 3,535,000 $ $(1,103,000) $ 2,432,000
</TABLE>
50
<PAGE> 51
NEW WEST EYEWORKS, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
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<S> <C>
10.20 Loan Agreement between KeyBank National Association and the Registrant,
dated August 1, 1997
10.21 Security Agreement executed by the Registrant for the benefit of KeyBank
National Association, for $3.0 million, dated August 1, 1997
10.22 Security Agreement executed by the Registrant for the benefit of KeyBank
National Association, for $2.0 million, dated August 1, 1997
10.23 Cross-Default and Cross-Collateralization Agreement between KeyBank National
Association and the Registrant, Dated August 1, 1997
21.1 Subsidiaries of the Registrant
23.1 Consent of Price Waterhouse LLP
24.1 Reference is made to the Signatures section of this Report for the
Power of Attorney contained therein
27.1 Financial Data Schedule for Period Ended 12-27-97
27.2 Restated Financial Data Schedule for the Interim periods of 1997
27.3 Restated Financial Data Schedule for the Interim Periods of 1996
27.4 Restated Financial Data Schedule for the fiscal year ended 12-28-1996
</TABLE>
<PAGE> 1
Exhibit 10.20
COMMERCIAL SECURITY AGREEMENT
<TABLE>
<CAPTION>
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PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$3,000,000.00 08-01-1997 08-01-1999 1009501 303 7803-387236 SJB03
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References in the shaded area are for Lender's use only and do not limit the applicability of this document to any
particular loan or item.
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BORROWER: NEW WEST EYEWORKS, INC. LENDER: KEYBANK NATIONAL ASSOCIATION
2106 WEST SOUTHERN AVE. SEATTLE METROPOLITAN COMMERCIAL BANKING
TEMPE, AZ 85282 CENTER
700 FIFTH AVENUE, 48TH FLOOR
P. O. BOX 90 WA-31-10-4871
SEATTLE, WA 98111-0490
====================================================================================================================================
</TABLE>
THIS COMMERCIAL SECURITY AGREEMENT IS ENTERED INTO BETWEEN NEW WEST EYEWORKS,
INC. (REFERRED TO BELOW AS "GRANTOR"); AND KEYBANK NATIONAL ASSOCIATION
(REFERRED TO BELOW AS "LENDER"). FOR VALUABLE CONSIDERATION, GRANTOR GRANTS
SUBJECT TO EXISTING SECURITY INTERESTS TO LENDER A SECURITY INTEREST IN THE
COLLATERAL TO SECURE THE INDEBTEDNESS AND AGREES THAT LENDER SHALL HAVE THE
RIGHTS STATED IN THIS AGREEMENT WITH RESPECT TO THE COLLATERAL, IN ADDITION TO
ALL OTHER RIGHTS WHICH LENDER MAY HAVE BY LAW.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
AGREEMENT. The word "Agreement" means this Commercial Security Agreement,
as this Commercial Security Agreement may be amended or modified from time
to time, together with all exhibits and schedules attached to this
Commercial Security Agreement from time to time.
COLLATERAL. The word "Collateral" means the following described property of
Grantor, whether now owned or hereafter acquired, whether now existing or
hereafter arising, and wherever located:
ALL EQUIPMENT AND FIXTURES, TOGETHER WITH THE FOLLOWING SPECIFICALLY
DESCRIBED PROPERTY: FURNITURE
In addition, the word "Collateral" includes all the following, whether now
owned or hereafter acquired, whether now existing or hereafter arising, and
wherever located:
(a) All attachments, accessions, accessories, tools, parts, supplies,
increases, and additions to and all replacements of and substitutions
for any property described above.
(b) All products and produce of any of the property described in this
Collateral section.
(c) All accounts, general intangibles, instruments, rents, monies,
payments, and all other rights, arising out of a sale, lease, or other
disposition of any of the property described in this Collateral
section.
(d) All proceeds (including insurance proceeds) from the sale,
destruction, loss, or other disposition of any of the property
described in this Collateral section.
(e) All records and data relating to any of the property described in
this Collateral section, whether in the form of a writing, photograph,
microfilm, microfiche, or electronic media, together with all of
Grantor's right, title, and interest in and to all computer software
required to utilize, create, maintain, and process any such records or
data on electronic media.
EVENT OF DEFAULT. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "Events of Default."
GRANTOR. The word "Grantor" means NEW WEST EYEWORKS, INC., its successors
and assigns.
GUARANTOR. The word "Guarantor" means and Includes without limitation each
and all of the guarantors, sureties, and accommodation parties in
connection with the Indebtedness.
INDEBTEDNESS. The word "Indebtedness" means the indebtedness evidenced by
the Note, including all principal and interest, together with all other
indebtedness and costs and expenses for which Grantor is responsible under
this Agreement or under any of the Related Documents. In addition, the word
"Indebtedness" includes all other obligations, debts and liabilities, plus
interest thereon, of Grantor, or any one or more of them, to Lender, as
well as all claims by Lender against Grantor, or any one or more of them,
whether existing now or later; whether they are voluntary or involuntary,
due or not due, direct or indirect, absolute or contingent, liquidated or
unliquidated; whether Grantor may be liable individually or jointly with
others; whether Grantor may be obligated as guarantor, surety,
accommodation party or otherwise; whether recovery upon such indebtedness
may be or hereafter may become barred by any statute of limitations; and
whether such indebtedness may be or hereafter may become otherwise
unenforceable.
LENDER. The word "Lender" means KEYBANK NATIONAL ASSOCIATION, its
successors and assigns.
NOTE. The word "Note" means the note or credit agreement dated August 1,
1997, in the principal amount of $2,000,000.00 from NEW WEST EYEWORKS, INC.
to Lender, together with all renewals of, extensions of, modifications of,
refinancings of, consolidations of and substitutions for the note or credit
agreement.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the Indebtedness.
OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as follows:
<PAGE> 2
COMMERCIAL SECURITY AGREEMENT
08-01-1997 (CONTINUED) PAGE 2
LOAN NO 1009501
================================================================================
PERFECTION OF SECURITY INTEREST. Grantor agrees to execute such financing
statements and to take whatever other actions are requested by Lender to
perfect and continue Lender's security interest in the Collateral. Upon
request of Lender, after an event of default, Grantor will deliver to
Lender any and all of the documents evidencing or constituting the
Collateral, and Grantor will note Lender's interest upon any and all
chattel paper if not delivered to Lender for possession by Lender. Grantor
hereby appoints Lender as its irrevocable attorney-in-fact for the purpose
of executing any documents necessary to perfect or to continue the security
interest granted in this Agreement. Lender may at any time, and without
further authorization from Grantor, file a carbon, photographic or other
reproduction of any financing statement or of this Agreement for use as a
financing statement. Grantor will reimburse Lender for all reasonable
expenses for the perfection and the continuation of the perfection of
Lender's security interest in the Collateral. Grantor promptly will notify
Lender before any change in Grantor's name including any change to the
assumed business names of Grantor.
NO VIOLATION. The execution and delivery of this Agreement will not violate
any law or agreement governing Grantor or to which Grantor is a party, and
its certificate or articles of incorporation and bylaws do not prohibit any
term or condition of this Agreement.
ENFORCEABILITY OF COLLATERAL. To the extent the Collateral consists of
accounts, chattel paper, or general intangibles, the Collateral is
enforceable in accordance with its terms, is genuine, and complies with
applicable laws concerning form, content and manner of preparation and
execution, and all persons appearing to be obligated on the Collateral have
authority and capacity to contract and are in fact obligated as they appear
to be on the Collateral. At the time any account becomes subject to a
security interest in favor of Lender, the account shall be a good and valid
account representing an undisputed, bona fide indebtedness incurred by the
account debtor, for merchandise held subject to delivery instructions or
theretofore shipped or delivered pursuant to a contract of sale, or for
services theretofore performed by Grantor with or for the account debtor;
there shall be no setoffs or counterclaims against any such account; and no
agreement under which any deductions or discounts may be claimed shall have
been made with the account debtor except those disclosed to Lender in
writing.
LOCATION OF THE COLLATERAL. Grantor, upon request of Lender, will deliver
to Lender in form satisfactory to Lender a schedule of real properties and
Collateral locations relating to Grantor's operations, including without
limitation the following: (a) all real property owned or being purchased by
Grantor; (b) all real property being rented or leased by Grantor; (c) all
storage facilities owned, rented, leased, or being used by Grantor; and (d)
all other properties where Collateral is or may be located. Except in the
ordinary course of its business, Grantor shall not remove the Collateral
from its existing locations without the prior written consent of Lender.
The information should be in the normal course of business.
REMOVAL OF COLLATERAL. Grantor shall keep the Collateral (or to the extent
the Collateral consists of intangible property such as accounts, the
records concerning the Collateral) at Grantor's address shown above, or at
such other locations as are acceptable to Lender. Except in the ordinary
course of its business, including the sales of inventory, Grantor shall not
remove the Collateral from its existing locations without the prior written
consent of Lender.
TRANSACTIONS INVOLVING COLLATERAL. Except for inventory sold or accounts
collected in the ordinary course of Grantor's business, Grantor shall not
sell, offer to sell, or otherwise transfer or dispose of the Collateral.
While Grantor is not in default under this Agreement, Grantor may sell
inventory, but only in the ordinary course of its business and only to
buyers who qualify as a buyer in the ordinary course of business. A sale in
the ordinary course of Grantor's business does not include a transfer in
partial or total satisfaction of a debt or any bulk sale. Grantor shall not
pledge, mortgage, encumber or otherwise permit the Collateral to be subject
to any lien, security interest, encumbrance, or charge, other than the
security interest provided for in this Agreement, without the prior written
consent of Lender. This includes security interests even if junior in right
to the security interests granted under this Agreement. Unless waived by
Lender, all proceeds from any disposition of the Collateral (for whatever
reason) shall be held in trust for Lender and shall not be commingled with
any other funds; provided however, this requirement shall not constitute
consent by Lender to any sale or other disposition. Upon receipt, Grantor
shall immediately deliver any such proceeds to Lender.
TITLE. Grantor represents and warrants to Lender that it holds good and
marketable title to the Collateral, free and clear of all liens and
encumbrances except for the lien of this Agreement. No financing statement
covering any of the Collateral is on file in any public office other than
those which reflect the security interest created by this Agreement or to
which Lender has specifically consented. Grantor shall defend Lender's
rights in the Collateral against the claims and demands of all other
persons.
COLLATERAL SCHEDULES AND LOCATIONS. As often as Lender shall require, and
insofar as the Collateral consists of accounts and general intangibles,
Grantor shall deliver to Lender schedules of such Collateral, including
such information as Lender may require, including without limitation names
and addresses of account debtors and agings of accounts and general
intangibles. Insofar as the Collateral consists of inventory, Grantor shall
deliver to Lender, as often as Lender shall require, such lists,
descriptions, and designations of such Collateral as Lender may require to
identify the nature, extent, and location of such Collateral. Such
information shall be submitted for Grantor and each of its subsidiaries or
related companies.
MAINTENANCE AND INSPECTION OF COLLATERAL. Grantor shall maintain all
tangible Collateral in good condition and repair. Grantor will not commit
or permit damage to or destruction of the Collateral or any part of the
Collateral. Lender and its designated representatives and agents shall have
the right at all reasonable times to examine, inspect, and audit the
Collateral wherever located. Grantor shall immediately notify Lender of all
cases involving the return, rejection, repossession, loss or damage of or
to any Collateral; of any request for credit or adjustment or of any other
dispute arising with respect to the Collateral; and generally of all
happenings and events affecting the Collateral or the value or the amount
of the Collateral. The amount for notification is $150,000.00.
TAXES, ASSESSMENTS AND LIENS. Grantor will pay when due all taxes,
assessments and liens upon the Collateral, its use or operation, upon this
Agreement, upon any promissory note or notes evidencing the Indebtedness,
or upon any of the other Related Documents. Grantor may withhold any such
payment or may elect to contest any lien if Grantor is in good faith
conducting an appropriate proceeding to contest the obligation to pay and
so long as Lender's interest in the Collateral is not jeopardized in
Lender's sole opinion. If the Collateral is subjected to a lien which is
not discharged within fifteen (15) days, Grantor shall deposit with Lender
cash, a sufficient corporate surety bond or other security satisfactory to
Lender in an amount adequate to provide for the discharge of the lien plus
any interest, costs, attorneys' fees or other charges that could accrue as
a result of foreclosure or sale of the Collateral. In any contest Grantor
shall defend itself and Lender and shall satisfy any final adverse judgment
before enforcement against the Collateral. Grantor shall name Lender as an
additional obligee under any surety bond furnished in the contest
proceedings.
COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Grantor shall comply promptly,
in all material respects, with all laws, ordinances, rules and regulations
of all governmental authorities, now or hereafter in effect, applicable to
the ownership, production, disposition, or use of the Collateral. Grantor
may contest in good faith any such law, ordinance or regulation and
withhold compliance during any proceeding, including appropriate appeals,
so long as Lender's interest in the Collateral, in Lender's opinion, is not
jeopardized.
HAZARDOUS SUBSTANCES. Grantor represents and warrants that the Collateral
never has been, and never will be so long as this Agreement remains a lien
on the Collateral, used for the generation, manufacture, storage,
transportation, treatment, disposal, release or threatened release of any
hazardous waste or
<PAGE> 3
COMMERCIAL SECURITY AGREEMENT
08-01-1997 (CONTINUED) PAGE 3
LOAN NO 1009501
================================================================================
substance, as those terms are defined in the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended, 42 U.S.C.
Section 9601, et seq. ("CERCLA"), the Superfund Amendments and
Reauthorization Act of 1986, Pub. L. No. 90-499 ("SARA"), the Hazardous
Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource
Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., or other
applicable state or Federal laws, rules, or regulations adopted pursuant to
any of the foregoing. The terms "hazardous waste" and "hazardous substance"
shall also include, without limitation, petroleum and petroleum by-products
or any fraction thereof and asbestos. The representations and warranties
contained herein are based on Grantor's due diligence in investigating the
Collateral for hazardous waste and substances. Grantor hereby (a) releases
and waives any future claims against Lender for indemnity or contribution
in the event Grantor becomes liable for cleanup or other costs under any
such laws, and (b) agrees to indemnify and hold harmless Lender against any
and all claims and losses resulting from a breach of this provision of this
Agreement. This obligation to indemnify shall survive the payment of the
Indebtedness and the satisfaction of this Agreement.
MAINTENANCE OF CASUALTY INSURANCE. Grantor shall procure and maintain all
risks insurance, including without limitation fire, theft and liability
coverage together with such other insurance as Lender may require with
respect to the Collateral, in form, amounts, coverages and basis reasonably
acceptable to Lender and issued by a company or companies reasonably
acceptable to Lender. Grantor, upon request of Lender, will deliver to
Lender from time to time the policies or certificates of insurance in form
satisfactory to Lender, including stipulations that coverages will not be
cancelled or diminished without at least ten (10) days' prior written
notice to Lender and not including any disclaimer of the Insurer's
liability for failure to give such a notice. Each insurance policy also
shall include an endorsement providing that coverage in favor of Lender
will not be impaired in any way by any act, omission or default of Grantor
or any other person. In connection with all policies covering assets in
which Lender holds or is offered a security interest, Grantor will provide
Lender with such loss payable or other endorsements as Lender may require.
If Grantor at any time fails to obtain or maintain any insurance as
required under this Agreement, Lender may (but shall not be obligated to)
obtain such insurance as Lender deems appropriate, including if it so
chooses "single interest insurance," which will cover only Lender's
interest in the Collateral.
APPLICATION OF INSURANCE PROCEEDS. Grantor shall promptly notify Lender of
any loss or damage to the Collateral. Lender may make proof of loss if
Grantor fails to do so within fifteen (15) days of the casualty. All
proceeds of any insurance on the Collateral, including accrued proceeds
thereon, shall be held by Lender as part of the Collateral. If Lender
consents to repair or replacement of the damaged or destroyed Collateral,
Lender shall, upon satisfactory proof of expenditure, pay or reimburse
Grantor from the proceeds for the reasonable cost of repair or restoration.
If Lender does not consent to repair or replacement of the Collateral,
Lender shall retain a sufficient amount of the proceeds to pay all of the
Indebtedness, and shall pay the balance to Grantor. Any proceeds which have
not been disbursed within six (6) months after their receipt and which
Grantor has not committed to the repair or restoration of the Collateral
shall be used to prepay the Indebtedness.
INSURANCE REPORTS. Grantor, upon request of Lender, shall furnish to Lender
reports on each existing policy of insurance showing such information as
Lender may reasonably request including the following: (a) the name of the
insurer; (b) the risks insured; (c) the amount of the policy; (d) the
property insured; (e) the then current value on the basis of which
insurance has been obtained and the manner of determining that value; and
(f) the expiration date of the policy.
GRANTOR'S RIGHT TO POSSESSION. Until default and except as otherwise provided
below with respect to accounts, Grantor may have possession of the tangible
personal property and beneficial use of all the Collateral and may use it in any
lawful manner not inconsistent with this Agreement or the Related Documents,
provided that Grantor's right to possession and beneficial use shall not apply
to any Collateral where possession of the Collateral by Lender is required by
law to perfect Lender's security interest in such Collateral. Until otherwise
notified by Lender, Grantor may collect any of the Collateral consisting of
accounts. At any time after an Event of Default exists, Lender may exercise its
rights to collect the accounts and to notify account debtors to make payments
directly to Lender for application to the Indebtedness. If Lender at any time
has possession of any Collateral, whether before or after an Event of Default,
Lender shall be deemed to have exercised reasonable care in the custody and
preservation of the Collateral if Lender takes such action for that purpose as
Grantor shall request or as Lender, in Lender's reasonable discretion, shall
deem appropriate under the circumstances, but failure to honor any request by
Grantor shall not of itself be deemed to be a failure to exercise reasonable
care. Lender shall not be required to take any steps necessary to preserve any
rights in the Collateral against prior parties, nor to protect, preserve or
maintain any security interest given to secure the Indebtedness.
EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but
shall not be obligated to) discharge or pay any amounts required to be
discharged or paid by Grantor under this Agreement, including without limitation
all taxes, liens, security interests, encumbrances, and other claims, at any
time levied or placed on the Collateral. Lender also may (but shall not be
obligated to) pay all costs for insuring, maintaining and preserving the
Collateral. All such expenditures incurred or paid by Lender for such purposes
will then bear interest at the rate charged under the Note from the date
incurred or paid by Lender to the date of repayment by Grantor. All such
expenses shall become a part of the Indebtedness and, at Lender's option, will
(a) be payable on demand, (b) be added to the balance of the Note and be
apportioned among and be payable with any installment payments to become due
during either (i) the term of any applicable insurance policy or (ii) the
remaining term of the Note, or (c) be treated as a balloon payment which will be
due and payable at the Note's maturity. This Agreement also will secure payment
of these amounts. Such right shall be in addition to all other rights and
remedies to which Lender may be entitled upon the occurrence of an Event of
Default.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
DEFAULT ON INDEBTEDNESS. Failure of Grantor to make any payment when due on
the Indebtedness.
OTHER DEFAULTS. Failure of Grantor to comply with or to perform any other
term, obligation, covenant or condition contained in this Agreement or in
any of the Related Documents or in any other agreement between Lender and
Grantor.
DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or person
that may materially affect Borrower's or any Grantor's ability to repay the
Loans or perform their respective obligations under this Agreement or any
of the Related Documents.
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Grantor under this Agreement, the
Note or the Related Documents is false or misleading in any material
respect, either now or at the time made or furnished.
DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any collateral
documents to create a valid and perfected security interest or lien) at any
time and for any reason.
INSOLVENCY. The dissolution or termination of Grantor's existence as a
going business, the insolvency of Grantor, the appointment of a receiver
for any part of Grantor's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Grantor.
<PAGE> 4
COMMERCIAL SECURITY AGREEMENT
08-01-1997 (CONTINUED) PAGE 4
LOAN NO 1009501
================================================================================
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Grantor or by any
governmental agency against the Collateral or any other collateral securing
the Indebtedness. This includes a garnishment of any of Grantor's deposit
accounts with Lender. However, this Event of Default shall not apply if
there is a good faith dispute by Grantor as to the validity or
reasonableness of the claim which is the basis of the creditor or
forfeiture proceeding and if Grantor gives Lender written notice of the
creditor or forfeiture proceeding and deposits with Lender monies or a
surety bond for the creditor or forfeiture proceeding, in an amount
determined by Lender, in its sole discretion, as being an adequate reserve
or bond for the dispute.
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect
to any Guarantor of any of the Indebtedness or such Guarantor dies or
becomes incompetent. Lender, at its option, may, but shall not be required
to, permit the Guarantor's estate to assume unconditionally the obligations
arising under the guaranty in a manner satisfactory to Lender, and, in
doing so, cure the Event of Default.
ADVERSE CHANGE. A material adverse change occurs in Grantor's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
RIGHT TO CURE. If any default, other than a Default on Indebtedness, is
curable and if Grantor has not been given a prior notice of a breach of the
same provision of this Agreement, it may be cured (and no Event of Default
will have occurred) if Grantor, after Lender sends written notice demanding
cure of such default, (a) cures the default within fifteen (15) days; or
(b), if the cure requires more than fifteen (15) days, immediately
initiates steps which Lender deems in Lender's sole discretion to be
sufficient to cure the default and thereafter continues and completes all
reasonable and necessary steps sufficient to produce compliance as soon as
reasonably practical.
RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this
Agreement, at any time thereafter, Lender shall have all the rights of a secured
party under the Washington Uniform Commercial Code. In addition and without
limitation, Lender may exercise any one or more of the following rights and
remedies:
ACCELERATE INDEBTEDNESS. Lender may declare the entire Indebtedness,
including any prepayment penalty which Grantor would be required to pay,
immediately due and payable, without notice.
ASSEMBLE COLLATERAL. Lender may require Grantor to deliver to Lender all or
any portion of the Collateral and any and all certificates of title and
other documents relating to the Collateral. Lender may require Grantor to
assemble the Collateral and make it available to Lender at a place to be
designated by Lender. Lender also shall have full power to enter upon the
property of Grantor to take possession of and remove the Collateral. If the
Collateral contains other goods not covered by this Agreement at the time
of repossession, Grantor agrees Lender may take such other goods, provided
that Lender makes reasonable efforts to return them to Grantor after
repossession.
SELL THE COLLATERAL. Lender shall have full power to sell, lease, transfer,
or otherwise deal with the Collateral or proceeds thereof in its own name
or that of Grantor. Lender may sell the Collateral at public auction or
private sale. Unless the Collateral threatens to decline speedily in value
or is of a type customarily sold on a recognized market, Lender will give
Grantor reasonable notice of the time after which any private sale or any
other intended disposition of the Collateral is to be made. The
requirements of reasonable notice shall be met if such notice is given at
least ten (10) days before the time of the sale or disposition. All
expenses relating to the disposition of the Collateral, including without
limitation the expenses of retaking, holding, insuring, preparing for sale
and selling the Collateral, shall become a part of the Indebtedness secured
by this Agreement and shall be payable on demand, with interest at the Note
rate from date of expenditure until repaid.
APPOINT RECEIVER. To the extent permitted by applicable law, Lender shall
have the following rights and remedies regarding the appointment of a
receiver: (a) Lender may have a receiver appointed as a matter of right,
(b) the receiver may be an employee of Lender and may serve without bond,
and (c) all fees of the receiver and his or her attorney shall become part
of the Indebtedness secured by this Agreement and shall be payable on
demand, with interest at the Note rate from date of expenditure until
repaid.
COLLECT REVENUES, APPLY ACCOUNTS. Lender, either itself or through a
receiver, may collect the payments, rents, income, and revenues from the
Collateral. Lender may at any time in its discretion transfer any
Collateral into its own name or that of its nominee and receive the
payments, rents, income, and revenues therefrom and hold the same as
security for the Indebtedness or apply it to payment of the Indebtedness in
such order of preference as Lender may determine. Insofar as the Collateral
consists of accounts, general intangibles, insurance policies, instruments,
chattel paper, choses in action, or similar property, Lender may demand,
collect, receipt for, settle, compromise, adjust, sue for, foreclose, or
realize on the Collateral as Lender may determine, whether or not
Indebtedness or Collateral is then due. For these purposes, Lender may, on
behalf of and in the name of Grantor, receive, open and dispose of mail
addressed to Grantor; change any address to which mail and payments are to
be sent; and endorse notes, checks, drafts, money orders, documents of
title, instruments and items pertaining to payment, shipment, or storage of
any Collateral. To facilitate collection, Lender may notify account debtors
and obligors on any Collateral to make payments directly to Lender.
OBTAIN DEFICIENCY. If Lender chooses to sell any or all of the Collateral,
Lender may obtain a judgment against Grantor for any deficiency remaining
on the Indebtedness due to Lender after application of all amounts received
from the exercise of the rights provided in this Agreement. Grantor shall
be liable for a deficiency even if the transaction described in this
subsection is a sale of accounts or chattel paper.
OTHER RIGHTS AND REMEDIES. Lender shall have all the rights and remedies of
a secured creditor under the provisions of the Uniform Commercial Code, as
may be amended from time to time. In addition, Lender shall have and may
exercise any or all other rights and remedies it may have available at law,
in equity, or otherwise.
CUMULATIVE REMEDIES. All of Lender's rights and remedies, whether evidenced
by this Agreement or the Related Documents or by any other writing, shall
be cumulative and may be exercised singularly or concurrently. Election by
Lender to pursue any remedy shall not exclude pursuit of any other remedy,
and an election to make expenditures or to take action to perform an
obligation of Grantor under this Agreement, after Grantor's failure to
perform, shall not affect Lender's right to declare a default and to
exercise its remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given in writing and signed by the
party or parties sought to be charged or bound by the alteration or
amendment.
<PAGE> 5
COMMERCIAL SECURITY AGREEMENT
08-01-1997 (CONTINUED) PAGE 5
LOAN NO 1009501
================================================================================
APPLICABLE LAW. This Agreement has been delivered to Lender and accepted by
Lender in the State of Washington. If there is a lawsuit, Grantor agrees
upon Lender's request to submit to the jurisdiction of the courts of King
or Pierce County, the State of Washington. Lender and Grantor hereby waive
the right to any jury trial in any action, proceeding, or counterclaim
brought by either Lender or Grantor against the other. This Agreement shall
be governed by and construed in accordance with the laws of the State of
Washington.
ATTORNEYS' FEES; EXPENSES. Grantor agrees to pay upon demand all of
Lender's costs and expenses, including attorneys' fees and Lender's legal
expenses, incurred in connection with the enforcement of this Agreement.
Lender may pay someone else to help enforce this Agreement, and Grantor
shall pay the costs and expenses of such enforcement. Costs and expenses
include Lender's attorneys' fees and legal expenses whether or not there is
a lawsuit, including reasonable attorneys' fees and legal expenses for
bankruptcy proceedings (and including efforts to modify or vacate any
automatic stay or injunction), appeals, and any anticipated post-judgment
collection services. Grantor also shall pay all court costs and such
additional fees as may be directed by the court.
CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Grantor under
this Agreement shall be joint and several, and all references to Grantor
shall mean each and every Grantor. This means that each of the persons
signing below is responsible for ALL obligations in this Agreement.
NOTICES. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile (unless otherwise required
by law), and shall be effective when actually delivered or when deposited
with a nationally recognized overnight courier or deposited in the United
States mail, first class, postage prepaid, addressed to the party to whom
the notice is to be given at the address shown above. Any party may change
its address for notices under this Agreement by giving formal written
notice to the other parties, specifying that the purpose of the notice is
to change the party's address. To the extent permitted by applicable law,
if there is more than one Grantor, notice to any Grantor will constitute
notice to all Grantors. For notice purposes, Grantor will keep Lender
informed at all times of Grantor's current address(es).
POWER OF ATTORNEY. Grantor hereby appoints Lender as its true and lawful
attorney-in-fact, irrevocably, with full power of substitution to do the
following after an Event of Default: (a) to demand, collect, receive,
receipt for, sue and recover all sums of money or other property which may
now or hereafter become due, owing or payable from the Collateral; (b) to
execute, sign and endorse any and all claims, instruments, receipts,
checks, drafts or warrants issued in payment for the Collateral; (c) to
settle or compromise any and all claims arising under the Collateral, and,
in the place and stead of Grantor, to execute and deliver its release and
settlement for the claim; and (d) to file any claim or claims or to take
any action or institute or take part in any proceedings, either in its own
name or in the name of the Grantor, or otherwise, which in the discretion
of Lender may seem to be necessary or advisable. This power is given as
security for the Indebtedness, and the authority hereby conferred is and
shall be irrevocable and shall remain in full force and effect until
renounced by Lender.
PREFERENCE PAYMENTS. Any monies Lender pays because of an asserted
preference claim in Borrower's bankruptcy will become a part of the
Indebtedness and, at Lender's option, shall be payable by Borrower as
provided above in the "EXPENDITURES BY LENDER" paragraph.
SEVERABILITY. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of
this Agreement in all other respects shall remain valid and enforceable.
SUCCESSOR INTERESTS. Subject to the limitations set forth above on transfer
of the Collateral, this Agreement shall be binding upon and inure to the
benefit of the parties, their successors and assigns.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender of
a provision of this Agreement shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with that provision or
any other provision of this Agreement. No prior waiver by Lender, nor any
course of dealing between Lender and Grantor, shall constitute a waiver of
any of Lender's rights or of any of Grantor's obligations as to any future
transactions. Whenever the consent of Lender is required under this
Agreement, the granting of such consent by Lender in any instance shall not
constitute continuing consent to subsequent instances where such consent is
required and in all cases such consent may be granted or withheld in the
sole discretion of Lender.
WAIVER OF CO-OBLIGOR'S RIGHTS. If more than one person is obligated for the
Indebtedness, Borrower irrevocably waives, disclaims and relinquishes all
claims against such other person which Borrower has or would otherwise have
by virtue of payment of the Indebtedness or any part thereof, specifically
including but not limited to all rights of indemnity, contribution or
exoneration.
ADDITIONAL OBLIGATIONS OF GRANTOR. This is a continuing Security Agreement and
will continue in affect even though all or any part of the Indebtedness is paid
in full and even though for a period of time Grantor may not be indebted to
Lender; provided that when all the obligations of Grantor to Lender, including
but not limited to the Indebtedness, have been paid in full and Grantor has no
further rights to borrow funds under the Note, the security interest provided
herein shall terminate. At such time, no party hereto shall have any further
rights or obligations hereunder.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY
AGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AUGUST 1,
1997.
GRANTOR:
NEW WEST EYEWORKS, INC.
BY: /S/ BARRY J. FELD BY: /S/ DARIUS J. DITALLO
------------------------------- --------------------------------------
BARRY J. FELD, PRESIDENT/CEO DARIUS J. DITALLO, V.P. FINANCE/ADMIN
================================================================================
<PAGE> 6
ADDENDUM TO
COMMERCIAL SECURITY AGREEMENT
$3,000,000
To be attached to the last sentence of paragraph "Perfection of Security
Interest".
This is a continuing Security Agreement and will continue in effect even though
all or any part of this Indebtedness is paid in full and even though for a
period of time Grantor may not be indebted to Lender; provided that when all the
obligations of Grantor to Lender, including but not limited to the Indebtedness,
have been paid in full and Grantor has no further rights to borrow funds under
the Note, the security interest provided herein shall terminate. At such time,
no party hereto shall have any further rights or obligations hereunder.
<PAGE> 1
Exhibit 10.21
COMMERCIAL SECURITY AGREEMENT
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$2,000,000.00 08-01-1997 08-01-2002 2009701 303 7803-387236 SJB03
- ------------------------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any
particular loan or item.
- ------------------------------------------------------------------------------------------------------------------------------------
BORROWER: NEW WEST EYEWORKS, INC. LENDER: KEYBANK NATIONAL ASSOCIATION
2106 WEST SOUTHERN AVE. SEATTLE METROPOLITAN COMMERCIAL BANKING
TEMPE, AZ 85282 CENTER
700 FIFTH AVENUE, 48TH FLOOR
P. O. BOX 90 WA-31-10-4871
SEATTLE, WA 98111-0490
====================================================================================================================================
</TABLE>
THIS COMMERCIAL SECURITY AGREEMENT IS ENTERED INTO BETWEEN NEW WEST EYEWORKS,
INC. (REFERRED TO BELOW AS "GRANTOR"); AND KEYBANK NATIONAL ASSOCIATION
(REFERRED TO BELOW AS "LENDER"). FOR VALUABLE CONSIDERATION, GRANTOR GRANTS
SUBJECT TO EXISTING SECURITY INTERESTS TO LENDER A SECURITY INTEREST IN THE
COLLATERAL TO SECURE THE INDEBTEDNESS AND AGREES THAT LENDER SHALL HAVE THE
RIGHTS STATED IN THIS AGREEMENT WITH RESPECT TO THE COLLATERAL, IN ADDITION TO
ALL OTHER RIGHTS WHICH LENDER MAY HAVE BY LAW.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
AGREEMENT. The word "Agreement" means this Commercial Security Agreement,
as this Commercial Security Agreement may be amended or modified from time
to time, together with all exhibits and schedules attached to this
Commercial Security Agreement from time to time.
COLLATERAL. The word "Collateral" means the following described property of
Grantor, whether now owned or hereafter acquired, whether now existing or
hereafter arising, and wherever located:
ALL EQUIPMENT AND FIXTURES, TOGETHER WITH THE FOLLOWING SPECIFICALLY
DESCRIBED PROPERTY: FURNITURE
In addition, the word "Collateral" includes all the following, whether now
owned or hereafter acquired, whether now existing or hereafter arising, and
wherever located:
(a) All attachments, accessions, accessories, tools, parts, supplies,
increases, and additions to and all replacements of and substitutions
for any property described above.
(b) All products and produce of any of the property described in this
Collateral section.
(c) All accounts, general intangibles, instruments, rents, monies,
payments, and all other rights, arising out of a sale, lease, or other
disposition of any of the property described in this Collateral
section.
(d) All proceeds (including insurance proceeds) from the sale,
destruction, loss, or other disposition of any of the property
described in this Collateral section.
(e) All records and data relating to any of the property described in
this Collateral section, whether in the form of a writing, photograph,
microfilm, microfiche, or electronic media, together with all of
Grantor's right, title, and interest in and to all computer software
required to utilize, create, maintain, and process any such records or
data on electronic media.
EVENT OF DEFAULT. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "Events of Default."
GRANTOR. The word "Grantor" means NEW WEST EYEWORKS, INC., its successors
and assigns.
GUARANTOR. The word "Guarantor" means and Includes without limitation each
and all of the guarantors, sureties, and accommodation parties in
connection with the Indebtedness.
INDEBTEDNESS. The word "Indebtedness" means the indebtedness evidenced by
the Note, including all principal and interest, together with all other
indebtedness and costs and expenses for which Grantor is responsible under
this Agreement or under any of the Related Documents. In addition, the word
"Indebtedness" includes all other obligations, debts and liabilities, plus
interest thereon, of Grantor, or any one or more of them, to Lender, as
well as all claims by Lender against Grantor, or any one or more of them,
whether existing now or later; whether they are voluntary or involuntary,
due or not due, direct or indirect, absolute or contingent, liquidated or
unliquidated; whether Grantor may be liable individually or jointly with
others; whether Grantor may be obligated as guarantor, surety,
accommodation party or otherwise; whether recovery upon such indebtedness
may be or hereafter may become barred by any statute of limitations; and
whether such indebtedness may be or hereafter may become otherwise
unenforceable.
LENDER. The word "Lender" means KEYBANK NATIONAL ASSOCIATION, its
successors and assigns.
NOTE. The word "Note" means the note or credit agreement dated August 1,
1997, in the principal amount of $2,000,000.00 from NEW WEST EYEWORKS, INC.
to Lender, together with all renewals of, extensions of, modifications of,
refinancings of, consolidations of and substitutions for the note or credit
agreement.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the Indebtedness.
OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as follows:
<PAGE> 2
COMMERCIAL SECURITY AGREEMENT
08-01-1997 (CONTINUED) PAGE 2
LOAN NO 2009701
================================================================================
PERFECTION OF SECURITY INTEREST. Grantor agrees to execute such financing
statements and to take whatever other actions are requested by Lender to
perfect and continue Lender's security interest in the Collateral. Upon
request of Lender, after an event of default, Grantor will deliver to
Lender any and all of the documents evidencing or constituting the
Collateral, and Grantor will note Lender's interest upon any and all
chattel paper if not delivered to Lender for possession by Lender. Grantor
hereby appoints Lender as its irrevocable attorney-in-fact for the purpose
of executing any documents necessary to perfect or to continue the security
interest granted in this Agreement. Lender may at any time, and without
further authorization from Grantor, file a carbon, photographic or other
reproduction of any financing statement or of this Agreement for use as a
financing statement. Grantor will reimburse Lender for all reasonable
expenses for the perfection and the continuation of the perfection of
Lender's security interest in the Collateral. Grantor promptly will notify
Lender before any change in Grantor's name including any change to the
assumed business names of Grantor.
NO VIOLATION. The execution and delivery of this Agreement will not violate
any law or agreement governing Grantor or to which Grantor is a party, and
its certificate or articles of incorporation and bylaws do not prohibit any
term or condition of this Agreement.
ENFORCEABILITY OF COLLATERAL. To the extent the Collateral consists of
accounts, chattel paper, or general intangibles, the Collateral is
enforceable in accordance with its terms, is genuine, and complies with
applicable laws concerning form, content and manner of preparation and
execution, and all persons appearing to be obligated on the Collateral have
authority and capacity to contract and are in fact obligated as they appear
to be on the Collateral.
REMOVAL OF COLLATERAL. Grantor shall keep the Collateral (or to the extent
the Collateral consists of intangible property such as accounts, the
records concerning the Collateral) at Grantor's address shown above, or at
such other locations as are acceptable to Lender. Except in the ordinary
course of its business, including the sales of inventory, Grantor shall not
remove the Collateral from its existing locations without the prior written
consent of Lender.
TRANSACTIONS INVOLVING COLLATERAL. Except for inventory sold or accounts
collected in the ordinary course of Grantor's business, Grantor shall not
sell, offer to sell, or otherwise transfer or dispose of the Collateral.
Grantor shall not pledge, mortgage, encumber or otherwise permit the
Collateral to be subject to any lien, security interest, encumbrance, or
charge, other than the security interest provided for in this Agreement,
without the prior written consent of Lender. This includes security
interests even if junior in right to the security interests granted under
this Agreement. Unless waived by Lender, all proceeds from any disposition
of the Collateral (for whatever reason) shall be held in trust for Lender
and shall not be commingled with any other funds; provided however, this
requirement shall not constitute consent by Lender to any sale or other
disposition. Upon receipt, Grantor shall immediately deliver any such
proceeds to Lender.
TITLE. Grantor represents and warrants to Lender that it holds good and
marketable title to the Collateral, free and clear of all liens and
encumbrances except for the lien of this Agreement. No financing statement
covering any of the Collateral is on file in any public office other than
those which reflect the security interest created by this Agreement or to
which Lender has specifically consented. Grantor shall defend Lender's
rights in the Collateral against the claims and demands of all other
persons.
COLLATERAL SCHEDULES AND LOCATIONS. Insofar as the Collateral consists of
equipment, Grantor shall deliver to Lender, as often as Lender shall
require, such lists, descriptions, and designations of such Collateral as
Lender may require to identify the nature, extent, and location of such
Collateral. Such information shall be submitted for Grantor and each of its
subsidiaries or related companies.
MAINTENANCE AND INSPECTION OF COLLATERAL. Grantor shall maintain all
tangible Collateral in good condition and repair. Grantor will not commit
or permit damage to or destruction of the Collateral or any part of the
Collateral. Lender and its designated representatives and agents shall have
the right at all reasonable times to examine, inspect, and audit the
Collateral wherever located. Grantor shall immediately notify Lender of all
cases involving the return, rejection, repossession, loss or damage of or
to any Collateral; of any request for credit or adjustment or of any other
dispute arising with respect to the Collateral; and generally of all
happenings and events affecting the Collateral or the value or the amount
of the Collateral. The amount for notification is $150,000.00.
TAXES, ASSESSMENTS AND LIENS. Grantor will pay when due all taxes,
assessments and liens upon the Collateral, its use or operation, upon this
Agreement, upon any promissory note or notes evidencing the Indebtedness,
or upon any of the other Related Documents. Grantor may withhold any such
payment or may elect to contest any lien if Grantor is in good faith
conducting an appropriate proceeding to contest the obligation to pay and
so long as Lender's interest in the Collateral is not jeopardized in
Lender's sole opinion. If the Collateral is subjected to a lien which is
not discharged within fifteen (15) days, Grantor shall deposit with Lender
cash, a sufficient corporate surety bond or other security satisfactory to
Lender in an amount adequate to provide for the discharge of the lien plus
any interest, costs, attorneys' fees or other charges that could accrue as
a result of foreclosure or sale of the Collateral. In any contest Grantor
shall defend itself and Lender and shall satisfy any final adverse judgment
before enforcement against the Collateral. Grantor shall name Lender as an
additional obligee under any surety bond furnished in the contest
proceedings.
COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Grantor shall comply promptly,
in all material respects, with all laws, ordinances, rules and regulations
of all governmental authorities, now or hereafter in effect, applicable to
the ownership, production, disposition, or use of the Collateral. Grantor
may contest in good faith any such law, ordinance or regulation and
withhold compliance during any proceeding, including appropriate appeals,
so long as Lender's interest in the Collateral, in Lender's opinion, is not
jeopardized.
HAZARDOUS SUBSTANCES. Grantor represents and warrants that the Collateral
never has been, and never will be so long as this Agreement remains a lien
on the Collateral, used for the generation, manufacture, storage,
transportation, treatment, disposal, release or threatened release of any
hazardous waste or substance, as those terms are defined in the
Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund
Amendments and Reauthorization Act of 1986, Pub. L. No. 90-499 ("SARA"),
the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et
seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901,
et seq., or other applicable state or Federal laws, rules, or regulations
adopted pursuant to any of the foregoing. The terms "hazardous waste" and
"hazardous substance" shall also include, without limitation, petroleum and
petroleum by-products or any fraction thereof and asbestos. The
representations and warranties contained herein are based on Grantor's due
diligence in investigating the Collateral for hazardous waste and
substances. Grantor hereby (a) releases and waives any future claims
against Lender for indemnity or contribution in the event Grantor becomes
liable for cleanup or other costs under any such laws, and (b) agrees to
indemnify and hold harmless Lender against any and all claims and losses
resulting from a breach of this provision of this Agreement. This
obligation to indemnify shall survive the payment of the Indebtedness and
the satisfaction of this Agreement.
MAINTENANCE OF CASUALTY INSURANCE. Grantor shall procure and maintain all
risks insurance, including without limitation fire, theft and liability
coverage together with such other insurance as Lender may require with
respect to the Collateral, in form, amounts, coverages and basis reasonably
acceptable to Lender and issued by a company or companies reasonably
acceptable to Lender. Grantor, upon request of Lender, will deliver to
Lender from time to time the policies or certificates of insurance in form
satisfactory to Lender, including stipulations that coverages will not be
cancelled or diminished without at least ten (10) days' prior written
notice to Lender and not including any disclaimer of the Insurer's
liability for failure to give such a notice. Each insurance policy also
shall include
<PAGE> 3
COMMERCIAL SECURITY AGREEMENT
08-01-1997 (CONTINUED) PAGE 3
LOAN NO 2009701
================================================================================
an endorsement providing that coverage in favor of Lender will not be
impaired in any way by any act, omission or default of Grantor or any other
person. In connection with all policies covering assets in which Lender
holds or is offered a security interest, Grantor will provide Lender with
such loss payable or other endorsements as Lender may require. If Grantor
at any time fails to obtain or maintain any insurance as required under
this Agreement, Lender may (but shall not be obligated to) obtain such
insurance as Lender deems appropriate, including if it so chooses "single
interest insurance," which will cover only Lender's interest in the
Collateral.
APPLICATION OF INSURANCE PROCEEDS. Grantor shall promptly notify Lender of
any loss or damage to the Collateral. Lender may make proof of loss if
Grantor fails to do so within fifteen (15) days of the casualty. All
proceeds of any insurance on the Collateral, including accrued proceeds
thereon, shall be held by Lender as part of the Collateral. If Lender
consents to repair or replacement of the damaged or destroyed Collateral,
Lender shall, upon satisfactory proof of expenditure, pay or reimburse
Grantor from the proceeds for the reasonable cost of repair or restoration.
If Lender does not consent to repair or replacement of the Collateral,
Lender shall retain a sufficient amount of the proceeds to pay all of the
Indebtedness, and shall pay the balance to Grantor. Any proceeds which have
not been disbursed within six (6) months after their receipt and which
Grantor has not committed to the repair or restoration of the Collateral
shall be used to prepay the Indebtedness.
INSURANCE REPORTS. Grantor, upon request of Lender, shall furnish to Lender
reports on each existing policy of insurance showing such information as
Lender may reasonably request including the following: (a) the name of the
insurer; (b) the risks insured; (c) the amount of the policy; (d) the
property insured; (e) the then current value on the basis of which
insurance has been obtained and the manner of determining that value; and
(f) the expiration date of the policy.
GRANTOR'S RIGHT TO POSSESSION. Until default, Grantor may have possession of the
tangible personal property and beneficial use of all the Collateral and may use
it in any lawful manner not inconsistent with this Agreement or the Related
Documents, provided that Grantor's right to possession and beneficial use shall
not apply to any Collateral where possession of the Collateral by Lender is
required by law to perfect Lender's security interest in such Collateral. If
Lender at any time has possession of any Collateral, whether before or after an
Event of Default, Lender shall be deemed to have exercised reasonable care in
the custody and preservation of the Collateral if Lender takes such action for
that purpose as Grantor shall request or as Lender, in Lender's reasonable
discretion, shall deem appropriate under the circumstances, but failure to honor
any request by Grantor shall not of itself be deemed to be a failure to exercise
reasonable care. Lender shall not be required to take any steps necessary to
preserve any rights in the Collateral against prior parties, nor to protect,
preserve or maintain any security interest given to secure the Indebtedness.
EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but
shall not be obligated to) discharge or pay any amounts required to be
discharged or paid by Grantor under this Agreement, including without limitation
all taxes, liens, security interests, encumbrances, and other claims, at any
time levied or placed on the Collateral. Lender also may (but shall not be
obligated to) pay all costs for insuring, maintaining and preserving the
Collateral. All such expenditures incurred or paid by Lender for such purposes
will then bear interest at the rate charged under the Note from the date
incurred or paid by Lender to the date of repayment by Grantor. All such
expenses shall become a part of the Indebtedness and, at Lender's option, will
(a) be payable on demand, (b) be added to the balance of the Note and be
apportioned among and be payable with any installment payments to become due
during either (i) the term of any applicable insurance policy or (ii) the
remaining term of the Note, or (c) be treated as a balloon payment which will be
due and payable at the Note's maturity. This Agreement also will secure payment
of these amounts. Such right shall be in addition to all other rights and
remedies to which Lender may be entitled upon the occurrence of an Event of
Default.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
DEFAULT ON INDEBTEDNESS. Failure of Grantor to make any payment when due on
the Indebtedness.
OTHER DEFAULTS. Failure of Grantor to comply with or to perform any other
term, obligation, covenant or condition contained in this Agreement or in
any of the Related Documents or in any other agreement between Lender and
Grantor.
DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or person
that may materially affect Borrower's or any Grantor's ability to repay the
Loans or perform their respective obligations under this Agreement or any
of the Related Documents.
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Grantor under this Agreement, the
Note or the Related Documents is false or misleading in any material
respect, either now or at the time made or furnished.
DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any collateral
documents to create a valid and perfected security interest or lien) at any
time and for any reason.
INSOLVENCY. The dissolution or termination of Grantor's existence as a
going business, the insolvency of Grantor, the appointment of a receiver
for any part of Grantor's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Grantor.
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Grantor or by any
governmental agency against the Collateral or any other collateral securing
the Indebtedness. This includes a garnishment of any of Grantor's deposit
accounts with Lender. However, this Event of Default shall not apply if
there is a good faith dispute by Grantor as to the validity or
reasonableness of the claim which is the basis of the creditor or
forfeiture proceeding and if Grantor gives Lender written notice of the
creditor or forfeiture proceeding and deposits with Lender monies or a
surety bond for the creditor or forfeiture proceeding, in an amount
determined by Lender, in its sole discretion, as being an adequate reserve
or bond for the dispute.
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect
to any Guarantor of any of the Indebtedness or such Guarantor dies or
becomes incompetent. Lender, at its option, may, but shall not be required
to, permit the Guarantor's estate to assume unconditionally the obligations
arising under the guaranty in a manner satisfactory to Lender, and, in
doing so, cure the Event of Default.
ADVERSE CHANGE. A material adverse change occurs in Grantor's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
RIGHT TO CURE. If any default, other than a Default on Indebtedness, is
curable and if Grantor has not been given a prior notice of a breach of the
same provision of this Agreement, it may be cured (and no Event of Default
will have occurred) if Grantor, after Lender sends written notice demanding
cure of such default, (a)
<PAGE> 4
COMMERCIAL SECURITY AGREEMENT
08-01-1997 (CONTINUED) PAGE 4
LOAN NO 2009701
================================================================================
cures the default within fifteen (15) days; or (b), if the cure requires
more than fifteen (15) days, immediately initiates steps which Lender deems
in Lender's sole discretion to be sufficient to cure the default and
thereafter continues and completes all reasonable and necessary steps
sufficient to produce compliance as soon as reasonably practical.
RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this
Agreement, at any time thereafter, Lender shall have all the rights of a secured
party under the Washington Uniform Commercial Code. In addition and without
limitation, Lender may exercise any one or more of the following rights and
remedies:
ACCELERATE INDEBTEDNESS. Lender may declare the entire Indebtedness,
including any prepayment penalty which Grantor would be required to pay,
immediately due and payable, without notice.
ASSEMBLE COLLATERAL. Lender may require Grantor to deliver to Lender all or
any portion of the Collateral and any and all certificates of title and
other documents relating to the Collateral. Lender may require Grantor to
assemble the Collateral and make it available to Lender at a place to be
designated by Lender. Lender also shall have full power to enter upon the
property of Grantor to take possession of and remove the Collateral. If the
Collateral contains other goods not covered by this Agreement at the time
of repossession, Grantor agrees Lender may take such other goods, provided
that Lender makes reasonable efforts to return them to Grantor after
repossession.
SELL THE COLLATERAL. Lender shall have full power to sell, lease, transfer,
or otherwise deal with the Collateral or proceeds thereof in its own name
or that of Grantor. Lender may sell the Collateral at public auction or
private sale. Unless the Collateral threatens to decline speedily in value
or is of a type customarily sold on a recognized market, Lender will give
Grantor reasonable notice of the time after which any private sale or any
other intended disposition of the Collateral is to be made. The
requirements of reasonable notice shall be met if such notice is given at
least ten (10) days before the time of the sale or disposition. All
expenses relating to the disposition of the Collateral, including without
limitation the expenses of retaking, holding, insuring, preparing for sale
and selling the Collateral, shall become a part of the Indebtedness secured
by this Agreement and shall be payable on demand, with interest at the Note
rate from date of expenditure until repaid.
APPOINT RECEIVER. To the extent permitted by applicable law, Lender shall
have the following rights and remedies regarding the appointment of a
receiver: (a) Lender may have a receiver appointed as a matter of right,
(b) the receiver may be an employee of Lender and may serve without bond,
and (c) all fees of the receiver and his or her attorney shall become part
of the Indebtedness secured by this Agreement and shall be payable on
demand, with interest at the Note rate from date of expenditure until
repaid.
COLLECT REVENUES, APPLY ACCOUNTS. Lender, either itself or through a
receiver, may collect the payments, rents, income, and revenues from the
Collateral. Lender may at any time in its discretion transfer any
Collateral into its own name or that of its nominee and receive the
payments, rents, income, and revenues therefrom and hold the same as
security for the Indebtedness or apply it to payment of the Indebtedness in
such order of preference as Lender may determine. Insofar as the Collateral
consists of accounts, general intangibles, insurance policies, instruments,
chattel paper, choses in action, or similar property, Lender may demand,
collect, receipt for, settle, compromise, adjust, sue for, foreclose, or
realize on the Collateral as Lender may determine, whether or not
Indebtedness or Collateral is then due. For these purposes, Lender may, on
behalf of and in the name of Grantor, receive, open and dispose of mail
addressed to Grantor; change any address to which mail and payments are to
be sent; and endorse notes, checks, drafts, money orders, documents of
title, instruments and items pertaining to payment, shipment, or storage of
any Collateral. To facilitate collection, Lender may notify account debtors
and obligors on any Collateral to make payments directly to Lender.
OBTAIN DEFICIENCY. If Lender chooses to sell any or all of the Collateral,
Lender may obtain a judgment against Grantor for any deficiency remaining
on the Indebtedness due to Lender after application of all amounts received
from the exercise of the rights provided in this Agreement. Grantor shall
be liable for a deficiency even if the transaction described in this
subsection is a sale of accounts or chattel paper.
OTHER RIGHTS AND REMEDIES. Lender shall have all the rights and remedies of
a secured creditor under the provisions of the Uniform Commercial Code, as
may be amended from time to time. In addition, Lender shall have and may
exercise any or all other rights and remedies it may have available at law,
in equity, or otherwise.
CUMULATIVE REMEDIES. All of Lender's rights and remedies, whether evidenced
by this Agreement or the Related Documents or by any other writing, shall
be cumulative and may be exercised singularly or concurrently. Election by
Lender to pursue any remedy shall not exclude pursuit of any other remedy,
and an election to make expenditures or to take action to perform an
obligation of Grantor under this Agreement, after Grantor's failure to
perform, shall not affect Lender's right to declare a default and to
exercise its remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given in writing and signed by the
party or parties sought to be charged or bound by the alteration or
amendment.
APPLICABLE LAW. This Agreement has been delivered to Lender and accepted by
Lender in the State of Washington. If there is a lawsuit, Grantor agrees
upon Lender's request to submit to the jurisdiction of the courts of King
or Pierce County, the State of Washington. Lender and Grantor hereby waive
the right to any jury trial in any action, proceeding, or counterclaim
brought by either Lender or Grantor against the other. This Agreement shall
be governed by and construed in accordance with the laws of the State of
Washington.
ATTORNEYS' FEES; EXPENSES. Grantor agrees to pay upon demand all of
Lender's costs and expenses, including attorneys' fees and Lender's legal
expenses, incurred in connection with the enforcement of this Agreement.
Lender may pay someone else to help enforce this Agreement, and Grantor
shall pay the costs and expenses of such enforcement. Costs and expenses
include Lender's attorneys' fees and legal expenses whether or not there is
a lawsuit, including reasonable attorneys' fees and legal expenses for
bankruptcy proceedings (and including efforts to modify or vacate any
automatic stay or injunction), appeals, and any anticipated post-judgment
collection services. Grantor also shall pay all court costs and such
additional fees as may be directed by the court.
CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Grantor under
this Agreement shall be joint and several, and all references to Grantor
shall mean each
<PAGE> 5
COMMERCIAL SECURITY AGREEMENT
08-01-1997 (CONTINUED) PAGE 5
LOAN NO 2009701
================================================================================
and every Grantor. This means that each of the persons signing below is
responsible for ALL obligations in this Agreement.
NOTICES. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile (unless otherwise required
by law), and shall be effective when actually delivered or when deposited
with a nationally recognized overnight courier or deposited in the United
States mail, first class, postage prepaid, addressed to the party to whom
the notice is to be given at the address shown above. Any party may change
its address for notices under this Agreement by giving formal written
notice to the other parties, specifying that the purpose of the notice is
to change the party's address. To the extent permitted by applicable law,
if there is more than one Grantor, notice to any Grantor will constitute
notice to all Grantors. For notice purposes, Grantor will keep Lender
informed at all times of Grantor's current address(es).
POWER OF ATTORNEY. Grantor hereby appoints Lender as its true and lawful
attorney-in-fact, irrevocably, with full power of substitution to do the
following after an Event of Default: (a) to demand, collect, receive,
receipt for, sue and recover all sums of money or other property which may
now or hereafter become due, owing or payable from the Collateral; (b) to
execute, sign and endorse any and all claims, instruments, receipts,
checks, drafts or warrants issued in payment for the Collateral; (c) to
settle or compromise any and all claims arising under the Collateral, and,
in the place and stead of Grantor, to execute and deliver its release and
settlement for the claim; and (d) to file any claim or claims or to take
any action or institute or take part in any proceedings, either in its own
name or in the name of the Grantor, or otherwise, which in the discretion
of Lender may seem to be necessary or advisable. This power is given as
security for the Indebtedness, and the authority hereby conferred is and
shall be irrevocable and shall remain in full force and effect until
renounced by Lender.
PREFERENCE PAYMENTS. Any monies Lender pays because of an asserted
preference claim in Borrower's bankruptcy will become a part of the
Indebtedness and, at Lender's option, shall be payable by Borrower as
provided above in the "EXPENDITURES BY LENDER" paragraph.
SEVERABILITY. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of
this Agreement in all other respects shall remain valid and enforceable.
SUCCESSOR INTERESTS. Subject to the limitations set forth above on transfer
of the Collateral, this Agreement shall be binding upon and inure to the
benefit of the parties, their successors and assigns.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender of
a provision of this Agreement shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with that provision or
any other provision of this Agreement. No prior waiver by Lender, nor any
course of dealing between Lender and Grantor, shall constitute a waiver of
any of Lender's rights or of any of Grantor's obligations as to any future
transactions. Whenever the consent of Lender is required under this
Agreement, the granting of such consent by Lender in any instance shall not
constitute continuing consent to subsequent instances where such consent is
required and in all cases such consent may be granted or withheld in the
sole discretion of Lender.
WAIVER OF CO-OBLIGOR'S RIGHTS. If more than one person is obligated for the
Indebtedness, Borrower irrevocably waives, disclaims and relinquishes all
claims against such other person which Borrower has or would otherwise have
by virtue of payment of the Indebtedness or any part thereof, specifically
including but not limited to all rights of indemnity, contribution or
exoneration.
ADDITIONAL OBLIGATIONS OF GRANTOR. This is a continuing Security Agreement and
will continue in affect even though all or any part of the Indebtedness is paid
in full and even though for a period of time Grantor may not be indebted to
Lender; provided that when all the obligations of Grantor to Lender, including
but not limited to the Indebtedness, have been paid in full and Grantor has no
further rights to borrow funds under the Note, the security interest provided
herein shall terminate. At such time, no party hereto shall have any further
rights or obligations hereunder.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY
AGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AUGUST 1,
1997.
GRANTOR:
NEW WEST EYEWORKS, INC.
BY: /S/ BARRY J. FELD BY: /S/ DARIUS J. DITALLO
------------------------------ -------------------------------------
BARRY J. FELD, PRESIDENT/CEO DARIUS J. DITALLO, V.P. FINANCE/ADMIN
================================================================================
<PAGE> 6
ADDENDUM TO
COMMERCIAL SECURITY AGREEMENT
$2,000,000
To be attached to the last sentence of paragraph "Perfection of Security
Interest".
This is a continuing Security Agreement and will continue in effect even though
all or any part of this Indebtedness is paid in full and even though for a
period of time Grantor may not be indebted to Lender; provided that when all the
obligations of Grantor to Lender, including but not limited to the Indebtedness,
have been paid in full and Grantor has no further rights to borrow funds under
the Note, the security interest provided herein shall terminate. At such time,
no party hereto shall have any further rights or obligations hereunder.
<PAGE> 1
Exhibit 10.22
CROSS-DEFAULT AND CROSS-COLLATERALIZATION AGREEMENT
August 1, 1997
Names and Addresses of the Parties:
KeyBank, National Association ("Lender")
SEATTLE METROPOLITAN COMMERCIAL BANKING CENTER
700 5th Avenue, 48th Floor
Seattle, WA. 98104
NEW WEST EYEWORKS, INC.
2104 WEST SOUTHERN AVE.
TEMPE, AZ 85282
Reference is hereby made to the following described credit arrangements
between Lender and the Borrowers (inclusive of all future amendments,
modifications, renewals or extensions thereof):
LOAN NUMBER NOTE DATE NOTE FACE AMOUNT MATURITY DATE
- -----------------------------------------------------------------------------
387236-2009701 080197 $2,000,000.00 080102
387236-1009501 080197 $3,000,000.00 080199
It is agreed between Lender and the Borrower(s) that a default under one
of such credit arrangements is and shall be a default under all of such credit
arrangements. If any of such credit arrangements is payable on demand, without
regard to the occurrence of a specific event of default, then, (i) the
occurrence of a demand for payment under a credit arrangement payable on demand
is and shall be an event of default under a credit arrangement not payable on
demand and (ii) the occurrence of an event of default under any of such credit
arrangements shall be a basis for demanding payment of any of such credit
arrangements as are payable on demand.
It is further agreed that all collateral which secures any of such credit
arrangements shall secure all of such credit arrangements.
KEYBANK NATIONAL ASSOCIATION NEW WEST EYEWORKS, INC.
BY:
/s/ Michael P. Righi /s/ Barry Feld, CEO and President
- ----------------------------- ------------------------------------------
Authorized Officer
/s/ Darius J. DiTallo, CFO
------------------------------------------
<PAGE> 1
EXHIBIT 10.23
CROSS-DEFAULT AND CROSS-COLLATERALIZATION AGREEMENT
August 1, 1997
Names and Addresses of the Parties:
KeyBank, National Association ("Lender")
SEATTLE METROPOLITAN COMMERCIAL BANKING CENTER
700 5th Avenue, 48th Floor
Seattle, WA 98104
NEW WEST EYEWORKS, INC.
2104 WEST SOUTHERN AVE.
TEMPE, AZ 85282
Reference is hereby made to the following described credit arrangements
between Lender and the Borrowers (inclusive of all future amendments,
modifications, renewals or extensions thereof):
<TABLE>
<CAPTION>
LOAN NUMBER NOTE DATE NOTE FACE AMOUNT MATURITY DATE
- -------------------------------------------------------------------------
<S> <C> <C> <C>
387236-2009701 080197 $2,000,000.00 080102
387236-1009501 080197 $3,000,000.00 080199
</TABLE>
It is agreed between Lender and the Borrower(s) that a default under one
of such credit arrangements is and shall be a default under all of such credit
arrangements. If any of such credit arrangements is payable on demand, without
regard to the occurrence of a specified event of default, then, (i) the
occurrence of a demand for payment under a credit arrangement payable on demand
is and shall be an event of default under a credit arrangement not payable on
demand and (ii) the occurrence of an event of default under any of such credit
arrangements shall be a basis for demanding payment of any of such credit
arrangements as are payable on demand.
It is further agreed that all collateral which secures any of such credit
arrangements shall secure all of such credit arrangements.
KEYBANK NATIONAL ASSOCIATION NEW WEST EYEWORKS, INC.
BY:
- ---------------------------- /s/ Barry Feld, CEO & President
Authorized Officer ---------------------------------
/s/ Darius DiTallo, CFO
---------------------------------
<PAGE> 1
EXHIBIT 21.1
Subsidiaries of New West Eyeworks, Inc.
Alexis Holdings, Inc.
Vista Eyecare Network, LLC
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-79612) of New West Eyeworks, Inc. of our report
dated March 6, 1998 appearing on page 34 of this Form 10-K.
PRICE WATERHOUSE LLP
Phoenix, Arizona
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-START> DEC-29-1996
<PERIOD-END> DEC-27-1997
<EXCHANGE-RATE> 1
<CASH> 577,000
<SECURITIES> 0
<RECEIVABLES> 1,900,000
<ALLOWANCES> 159,000
<INVENTORY> 3,519,000
<CURRENT-ASSETS> 979,000
<PP&E> 19,674,000
<DEPRECIATION> 10,565,000
<TOTAL-ASSETS> 16,352,000
<CURRENT-LIABILITIES> 6,609,000
<BONDS> 629,000
0
5,460,000
<COMMON> 49,000
<OTHER-SE> 3,943,000
<TOTAL-LIABILITY-AND-EQUITY> 16,352,000
<SALES> 49,212,000
<TOTAL-REVENUES> 0
<CGS> 24,253,000
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 23,641,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 122,000
<INCOME-PRETAX> 1,262,000
<INCOME-TAX> (547,000)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,809,000
<EPS-PRIMARY> .31
<EPS-DILUTED> .31
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-27-1997 DEC-27-1997 DEC-27-1997
<PERIOD-START> DEC-29-1996 DEC-29-1996 DEC-29-1996
<PERIOD-END> MAR-29-1997 JUN-28-1997 SEP-27-1997
<CASH> 2,325,000 2,612,000 1,556,000
<SECURITIES> 0 0 0
<RECEIVABLES> 1,671,000 1,835,000 2,041,000
<ALLOWANCES> 157,000 197,000 219,000
<INVENTORY> 3,817,000 3,444,000 3,876,000
<CURRENT-ASSETS> 53,000 80,000 96,000
<PP&E> 17,236,000 17,824,000 18,783,000
<DEPRECIATION> 9,684,000 10,047,000 10,223,000
<TOTAL-ASSETS> 15,774,000 16,045,000 16,363,000
<CURRENT-LIABILITIES> 6,786,000 6,890,000 6,936,000
<BONDS> 758,000 410,000 348,000
5,460,000 5,460,000 5,460,000
0 0 0
<COMMON> 49,000 49,000 49,000
<OTHER-SE> 3,052,000 3,236,000 3,570,000
<TOTAL-LIABILITY-AND-EQUITY> 15,774,000 16,045,000 16,363,000
<SALES> 12,791,000 25,261,000 37,855,000
<TOTAL-REVENUES> 0 0 0
<CGS> 6,122,000 12,245,000 18,533,000
<TOTAL-COSTS> 0 0 0
<OTHER-EXPENSES> 5,976,000 12,018,000 17,902,000
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 53,000 85,000 102,000
<INCOME-PRETAX> 653,000 955,000 1,382,000
<INCOME-TAX> 20,000 27,000 27,000
<INCOME-CONTINUING> 0 0 1,355,000
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 633,000 928,000 1,355,000
<EPS-PRIMARY> .13 .17 .24
<EPS-DILUTED> .13 .17 .24
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-28-1996 DEC-28-1996 DEC-28-1996
<PERIOD-START> DEC-31-1995 DEC-31-1995 DEC-31-1995
<PERIOD-END> MAR-30-1996 JUN-29-1996 SEP-28-1996
<CASH> 183,000 149,000 126,000
<SECURITIES> 0 0 0
<RECEIVABLES> 1,262,000 1,400,000 1,519,038
<ALLOWANCES> 162,000 166,000 195,000
<INVENTORY> 3,487,000 3,234,000 3,488,00
<CURRENT-ASSETS> 4,894,000 4,779,000 5,127,000
<PP&E> 15,237,000 15,836,000 16,255,000
<DEPRECIATION> 6,486,000 8,764,000 9,042,000
<TOTAL-ASSETS> 12,250,000 12,460,000 12,920,000
<CURRENT-LIABILITIES> 9,653,000 9,825,000 10,051,000
<BONDS> 313,000 2,330,000 2,443,000
0 5,460,000 5,460,000
5,460,000 0 0
<COMMON> 38,000 38,000 38,000
<OTHER-SE> (3,214,000) (3,115,000) (2,889,000)
<TOTAL-LIABILITY-AND-EQUITY> 12,500,000 12,460,000 12,920,000
<SALES> 11,504,000 22,359,000 34,043,000
<TOTAL-REVENUES> 0 0 0
<CGS> 5,800,000 11,229,000 16,847,000
<TOTAL-COSTS> 0 0 0
<OTHER-EXPENSES> 5,121,000 10,337,000 15,977,000
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 36,000 82,000 143,000
<INCOME-PRETAX> 547,000 721,000 1,074,000
<INCOME-TAX> 104,000 126,000 172,000
<INCOME-CONTINUING> 443,000 595,000 0
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 443,000 595,000 902,000
<EPS-PRIMARY> .10 .12 .18
<EPS-DILUTED> .10 .12 .18
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-START> DEC-31-1995
<PERIOD-END> DEC-28-1996
<CASH> 256,000
<SECURITIES> 0
<RECEIVABLES> 1,443,000
<ALLOWANCES> 139,000
<INVENTORY> 3,190,000
<CURRENT-ASSETS> 5,059,000
<PP&E> 16,848,000
<DEPRECIATION> 9,330,000
<TOTAL-ASSETS> 13,127,000
<CURRENT-LIABILITIES> 10,185,000
<BONDS> 576,000
5,460,000
0
<COMMON> 38,000
<OTHER-SE> (3,072,000)
<TOTAL-LIABILITY-AND-EQUITY> 13,127,000
<SALES> 43,940,000
<TOTAL-REVENUES> 0
<CGS> 21,719,000
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 21,173,000
<LOSS-PROVISION> 139,000
<INTEREST-EXPENSE> 216,000
<INCOME-PRETAX> 832,000
<INCOME-TAX> 30,000
<INCOME-CONTINUING> 802,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 802,000
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
</TABLE>
