**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**Form 10-Q**

 

**(Mark One)**

 
| **ý** | ** ** | **Quarterly  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of  1934**  |
|------------|------------|-----------------------------------------------------------------------------------------------------|
|       |       |                                                                                                |
|       |       | **For the quarterly period ended September 25,  2004.**                                        |
|       |       |                                                                                                |
| **OR**     |
|       |       |                                                                                                |
| **o**      | ** ** | **Transition  report pursuant to Section 13 or 15(d) of the Securities Exchange Act of  1934** |

 

**Commissionfile number 33 - 70572**

 

**EYE CARE CENTERS OF AMERICA, INC.**

(Exact name of registrant asspecified in its charter)

 
| **TEXAS**                                                        | ** ** | **74-2337775**                            |
|------------------------------------------------------------------|------------|-------------------------------------------|
| (State or  other jurisdiction of  incorporation or organization) |       | (I.R.S.  Employer  Identification number) |
|                                                             |
| **11103  WEST AVENUE  SAN ANTONIO, TEXAS 78213**                 |
| (Address of  principal executive offices, including zip code)    |
|                                                             |
| **(210)  340-3531**                                              |
| (Registrant’s  telephone number, including area code)       |

 

----

 

Indicate by check mark whether the registrant has (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Actof 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days:

 
| Yes | ý | No | o |
|-----|--------|----|---|

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act):

 
| Yes | o | No | ý |
|-----|---|----|--------|

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock as of the latest practicable date:

 
| **Class**                     | ** ** | **Outstanding at November 9,  2004** |
|-------------------------------|------------|-------------------------------------------|
| Common  Stock, $.01 par value |       | 7,397,689  shares                         |

 

 

----

 

**EYE CARECENTERS OF AMERICA, INC.**

 

**INDEX**

 
| **Part I - Financial  Information**                                                                                                                                               | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                                                                                                                                              |       |
| Item 1. Financial Statements                                                                                                                                                      |       |
|                                                                                                                                                                              |       |
| Condensed  Consolidated Balance Sheets at December 27, 2003 and September 25,  2004 (Unaudited)                                                                         | 3          |
|                                                                                                                                                                              |       |
| Condensed  Consolidated Statements of Operations for the Thirteen Weeks and Thirty-Nine Weeks  Ended September 27, 2003 (Unaudited) and September 25, 2004  (Unaudited) | 4          |
|                                                                                                                                                                              |       |
| Condensed  Consolidated Statements of Cash Flows for the Thirty-Nine Weeks Ended September 27,  2003 (Unaudited) and September 25, 2004 (Unaudited)                     | 5          |
|                                                                                                                                                                              |       |
| Notes  to Condensed Consolidated Financial Statements                                                                                                                             | 6-13       |
|                                                                                                                                                                              |       |
| Item 2. Management’s Discussion  and Analysis of Financial Condition and Results of Operations                                                                               | 14-22      |
|                                                                                                                                                                              |       |
| Item  3. Quantitative and Qualitative Disclosures About Market Risk                                                                                                               | 22-23      |
|                                                                                                                                                                              |       |
| Item  4. Controls and Procedures                                                                                                                                                  | 23         |
|                                                                                                                                                                              |       |
| **Part II - Other Information**                                                                                                                                                   | **23**     |
|                                                                                                                                                                              |       |
| Item 1. Legal Proceedings                                                                                                                                                         | 23         |
|                                                                                                                                                                              |       |
| Item 6.  Exhibits                                                                                                                                                                 | 24         |

 

2

----

 

**PART I. FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**EYE CARECENTERS OF AMERICA, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

(dollars in thousands)

 
| ** **                                      | ** ** | **December 27,  2003** | ** ** | **September 25,  2004** | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| ** **                                      | ** ** | ** **                  | ** ** | **(Unaudited)**              | ** ** |
| **ASSETS**                                      | ** ** | ** **                  | ** ** | ** **                   | ** ** |
| CURRENT  ASSETS:                                |       |                        |       |                         |       |
| Cash and  cash equivalents                      |       | $                           | 3,809      |                         | $          | 3,485 |   |
| Accounts and  notes receivable, net             |       | 11,117                      |       | 11,281                       |       |
| Inventory                                       |       | 25,120                      |       | 25,990                       |       |
| Deferred  income taxes, net                     |       | 570                         |       | 570                          |       |
| Prepaid  expenses and other                     |       | 3,696                       |       | 2,493                        |       |
| Total  current assets                           |       | 44,312                      |       | 43,819                       |       |
|                                            |       |                        |       |                         |       |
| PROPERTY  & EQUIPMENT, net                  |       | 51,715                      |       | 48,465                       |       |
| GOODWILL                                        |       | 107,423                     |       | 107,423                      |       |
| OTHER ASSETS                                    |       | 8,631                       |       | 6,202                        |       |
| DEFERRED  INCOME TAXES, net                     |       | 13,445                      |       | 13,149                       |       |
| Total assets                                    |       | $                           | 225,526    |                         | $          | 219,058 |   |
| **LIABILITIES  AND SHAREHOLDERS’ DEFICIT** |       |                        |       |                         |       |
| CURRENT LIABILITIES:                            |       |                        |       |                         |       |
| Accounts  payable                               |       | $                           | 21,360     |                         | $          | 18,783 |   |
| Current  maturities of long-term debt           |       | 18,980                      |       | 19,604                       |       |
| Deferred  revenue                               |       | 5,743                       |       | 5,510                        |       |
| Accrued  payroll expense                        |       | 5,429                       |       | 5,378                        |       |
| Accrued  interest                               |       | 3,213                       |       | 4,905                        |       |
| Other  accrued expenses                         |       | 8,334                       |       | 8,875                        |       |
| Total  current liabilities                      |       | 63,059                      |       | 63,055                       |       |
| LONG TERM  DEBT, less current maturities        |       | 219,845                     |       | 200,378                      |       |
| DEFERRED  RENT                                  |       | 4,719                       |       | 4,615                        |       |
| DEFERRED  GAIN                                  |       | 1,532                       |       | 1,356                        |       |
| Total  liabilities                              |       | 289,155                     |       | 269,404                      |       |
| SHAREHOLDERS’  DEFICIT:                    |       |                        |       |                         |       |
| Common stock                                    |       | 74                          |       | 74                           |       |
| Preferred  stock                                |       | 62,169                      |       | 68,430                       |       |
| Additional  paid-in capital                     |       | 28,259                      |       | 21,131                       |       |
| Accumulated  deficit                            |       | (154,131                    | )          | (139,981                     | )          |
| Total  shareholders’ deficit               |       | (63,629                     | )          | (50,346                      | )          |
|                                            |       | $                           | 225,526    |                         | $          | 219,058 |   |

 

See Notes to Condensed ConsolidatedFinancial Statements.

 

3

----

 

 

**EYE CARECENTERS OF AMERICA, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

(dollars in thousands)

 
| ** **                                    | ** ** | **Thirteen Weeks  Ended** | ** ** | **Thirty-Nine Weeks  Ended** | ** ** |
|-----------------------------------------------|------------|---------------------------|------------|------------------------------|------------|
| ** **                                    | ** ** | **Sept. 27,  2003**       | ** ** | **Sept. 25,  2004**          | ** ** | **Sept. 27,  2003** | ** ** | **Sept. 25,  2004** | ** ** |
| ** **                                    | ** ** | **(Unaudited)**           | ** ** | **(Unaudited)**              | ** ** | **(Unaudited)** | ** ** | **(Unaudited)** | ** ** |
| REVENUES:                                     |       |                      |       |                         |       |   |   |   |   |
| Optical  sales                                |       | $                         | 95,510     |                         | $          | 97,978 |   | $ | 285,682 |   | $ | 302,416 |   |
| Management  fees                              |       | 786                       |       | 692                          |       | 2,616 |   | 2,452 |   |
| Net revenues                                  |       | 96,296                    |       | 98,670                       |       | 288,298 |   | 304,868 |   |
|                                          |       |                      |       |                         |       |   |   |   |   |
| OPERATING  COSTS AND EXPENSES:                |       |                      |       |                         |       |   |   |   |   |
| Cost of  goods sold                           |       | 29,895                    |       | 31,457                       |       | 88,199 |   | 94,876 |   |
| Selling,  general and administrative expenses |       | 57,179                    |       | 58,503                       |       | 166,705 |   | 174,746 |   |
| Amortization  of intangibles                  |       | 55                        |       | —                       |       | 165 |   | — |   |
| Total  operating costs and expenses           |       | 87,129                    |       | 89,960                       |       | 255,069 |   | 269,622 |   |
|                                          |       |                      |       |                         |       |   |   |   |   |
| INCOME FROM  OPERATIONS                       |       | 9,167                     |       | 8,710                        |       | 33,229 |   | 35,246 |   |
|                                          |       |                      |       |                         |       |   |   |   |   |
| INTEREST  EXPENSE, NET                        |       | 5,261                     |       | 4,721                        |       | 15,501 |   | 14,423 |   |
|                                          |       |                      |       |                         |       |   |   |   |   |
| INCOME TAX  EXPENSE                           |       | 2,717                     |       | 1,141                        |       | 5,274 |   | 6,672 |   |
|                                          |       |                      |       |                         |       |   |   |   |   |
| NET INCOME                                    |       | $                         | 1,189      |                         | $          | 2,848 |   | $ | 12,454 |   | $ | 14,151 |   |

 

See Notes to CondensedConsolidated Financial Statements.

 

4

----

 

**EYE CARECENTERS OF AMERICA, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

(dollars in thousands)

 
| ** **                                                                         | ** ** | **Thirty-Nine Weeks  Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                         | ** ** | **September 27,  2003** | ** ** | **September 25,  2004** | ** ** |
| ** **                                                                         | ** ** | **(Unaudited)**              | ** ** | **(Unaudited)** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                         |       |                         |       |   |   |
| Net income                                                                         |       | $                            | 12,454     |   | $ | 14,151 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                         |       |   |   |
| Depreciation  and amortization                                                     |       | 12,978                       |       | 12,046 |   |
| Amortization  of debt issue costs                                                  |       | 1,506                        |       | 1,505 |   |
| Deferred  liabilities and other                                                    |       | (1,413                       | )          | (230 | ) |
| Increase in  operating assets and liabilities                                      |       | 510                          |       | 1,185 |   |
| Net cash  provided by operating activities                                         |       | 26,035                       |       | 28,657 |   |
|                                                                               |       |                         |       |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                         |       |                         |       |   |   |
| Acquisition  of property and equipment, net                                        |       | (8,032                       | )          | (8,783 | ) |
| Note  receivable issued                                                            |       | (1,000                       | )          | — |   |
| Other                                                                              |       | 24                           |       | — |   |
| Net cash  used in investing activities                                             |       | (9,008                       | )          | (8,783 | ) |
|                                                                               |       |                         |       |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                         |       |                         |       |   |   |
| Payments on  debt and capital leases                                               |       | (12,965                      | )          | (18,880 | ) |
| Distribution  to affiliated OD                                                     |       | —                       |       | (800 | ) |
| Payments to  affect IPO                                                            |       | —                       |       | (518 | ) |
| Net cash  used in financing activities                                             |       | (12,965                      | )          | (20,198 | ) |
|                                                                               |       |                         |       |   |   |
| NET  INCREASE/(DECREASE) IN CASH                                                   |       | 4,062                        |       | (324 | ) |
| CASH AND  CASH EQUIVALENTS, beginning of period                                    |       | 3,450                        |       | 3,809 |   |
| CASH AND  CASH EQUIVALENTS, end of period                                          |       | $                            | 7,512      |   | $ | 3,485 |   |

 

See Notes to CondensedConsolidated Financial Statements.

 

5

----

 

**EYE CARECENTERS OF AMERICA, INC.**

 

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

***1.  Basis of Presentation***

 

The condensed consolidatedfinancial statements include all of our accounts, our wholly owned subsidiaries’accounts and certain private optometrists’ accounts for whom we performmanagement services  (the “ODs”).  All significant intercompany accounts andtransactions have been eliminated in consolidation. Certain reclassificationshave been made to the prior period statements to conform to the current periodpresentation.

 

The accompanying unaudited CondensedConsolidated Financial Statements have been prepared in accordance withgenerally accepted accounting principles for interim financial information andwith the instructions to Form 10-Q and Article 10 of Regulation S-X.  The condensed consolidated balance sheet forthe year ended December 27, 2003 was derived from the audited financialstatements as of that date but does not include all of the information andfootnotes required by generally accepted accounting principles for completefinancial statements.  We believe thatall adjustments considered necessary for a fair presentation have been includedand are of a normal, recurring nature. Operating results for the thirteen week and thirty-nine week periodsended September 25, 2004 are not necessarily indicative of the resultsthat may be expected for the fiscal year ended January 1, 2005 (“fiscal2004”).  For further information, referto the consolidated financial statements and footnotes thereto included in ourannual report on Form 10-K for the year ended December 27, 2003 (“fiscal2003”).

 

We account for stock-based employeecompensation under the intrinsic value method. As all options are granted at fair market value, there is nocompensation expense recorded for option grants.  For purposes of pro forma disclosures, theestimated fair value of the options is amortized to expense over the options’vesting periods.  The pro formacalculations include only the effects of 2002, 2003 and 2004 grants as allgrants previous to 2002 were exercised or cancelled.  As such, the impacts are not necessarilyindicative of the effects on reported net income of future years.  Our pro forma net income for the thirteenweeks and thirty-nine weeks ended September 27, 2003 and September 25,2004 are as follows (dollars in thousands):

 
| ** **                                    | ** ** | **Thirteen  Weeks Ended**    | ** ** |
|-----------------------------------------------|------------|------------------------------|------------|
| ** **                                    | ** ** | **September 27,  2003** | ** ** | **September 25,  2004** | ** ** |
| ** **                                    | ** ** | **(Unaudited)**              | ** ** | **(Unaudited)** | ** ** |
| Net income                                    |       | $                            | 1,189      |   | $ | 2,848 |   |
| Fair value  based method compensation expense |       | 36                           |       | 54 |   |
| Pro forma  net income                         |       | $                            | 1,153      |   | $ | 2,794 |   |

 
| ** **                                    | ** ** | **Thirty-Nine  Weeks Ended** | ** ** |
|-----------------------------------------------|------------|------------------------------|------------|
| ** **                                    | ** ** | **September 27,  2003** | ** ** | **September 25,  2004** | ** ** |
| ** **                                    | ** ** | **(Unaudited)**              | ** ** | **(Unaudited)** | ** ** |
| Net income                                    |       | $                            | 12,454     |   | $ | 14,151 |   |
| Fair value  based method compensation expense |       | 111                          |       | 151 |   |
| Pro forma  net income                         |       | $                            | 12,343     |   | $ | 14,000 |   |

 

6

----

 

***2.  CriticalAccounting Policies***

 

Critical accounting policies are those that require us to make assumptions that are difficult or complex about matters that are uncertain and may change in subsequent periods, resulting in changes to reported results.

 

The majority of these accounting policies do not require us to make difficult, subjective or complex judgments or estimates or the variability of the estimates is not material.  However, the following policies could be deemed critical.  We have discussed these critical accounting policies with the audit committee of the Board of Directors.

 

•                  Accounts receivable are primarily from third party payors related to the sale of eyewear and include receivables from insurance reimbursements, optometrist management fees, credit card companies, merchandise, rent and license fee receivables.  Our allowance for doubtful accounts requires significant estimation and primarily consists of amounts owed to us by third party insurance payors.  This estimate is based on the historical ratio of collections to billings.  Our allowance for doubtful accounts was $3.2 million and $4.7 million at September 25, 2004 and September 27, 2003, respectively.

 

•                  Inventory consists principally of eyeglass frames, ophthalmic lenses and contact lenses and is stated at the lower of cost or market.  Cost is determined using the weighted average method which approximates the first-in, first-out (FIFO) method.  Our inventory reserves require significant estimation and are based on product with low turnover or deemed by us to be unsaleable.  Our inventory reserve was $0.9 million and $1.0 million at September 25, 2004 and September 27, 2003, respectively.

 

•                  Goodwillrepresents approximately 49% of our assets and consists of the amounts by whichthe purchase price exceeds the market value of acquired net assets.  Goodwill must be tested for impairment atleast annually using a “two-step” approach that involves the identification ofreporting units and the estimation of fair values.  This fair value estimation requiressignificant judgment by us.

 

•                  Werecord income taxes under SFAS No. 109 using the liability method.  Under this method, deferred tax assets andliabilities are determined based on differences between financial reporting andtax bases of assets and liabilities and are measured using the enacted taxrates and laws that will be in effect when the differences are expected toreverse.  Valuation allowances fordeferred tax assets are used to reduce deferred tax assets when it is deemedprobable that some portion or all of the deferred tax assets will expire beforerealization of the benefit or that future deductibility is not probable due tolack of taxable income.  Althoughrealization is not assured due to our lack of historical taxable income and theunpredictability of future taxable income, we believe that it is probable thatall of our deferred tax asset will be realized.

 

•                  Webegan maintaining our own self-insurance group health plan in June offiscal 2003.  The plan provides medicalbenefits for participating employees.  Wehave an employers’ stop loss insurance policy to cover individual claims inexcess of $200,000 per employee.  Theamount charged to health insurance expense is based on estimates obtained froman actuarial firm.  We believe theaccrued liability of approximately $2.4 million, which is included in otheraccrued expenses, as of September 25, 2004 is adequate to cover futurebenefit payments for claims that occurred prior to September 25, 2004.

 

7

----

 

***3.  New Accounting Pronouncements***

 

On October 13, 2004, the FASB concludedthat Statement 123R, Share-Based Payment, which would require all companies tomeasure compensation cost for all share-based payments at fair value, would beeffective for public companies for interim or annual periods beginning after June 15,2005.  Retroactive application of therequirements of Statement 123 to the beginning of the fiscal year would bepermitted, but not required.  Thecumulative effect of adoption, if any, would be measured and recognized on July 1,2005.  The FASB’s current plan is toissue a final statement on or around December 15, 2004.  We do not expect the adoption of Statement123R to have a material impact on our financial position or results ofoperations.

 

***4.  Related Party Transactions***

 

In connection with the recapitalization ofthe company in 1998, we entered into a management agreement with THL EquityAdvisors IV, LLC, or THL Advisors, dated as of April 24, 1998.  Pursuant to the management agreement, inaddition to one time fees that were payable to THL Advisors at the time of therecapitalization, THL Advisors is entitled to receive (i) management and otherconsulting services fees of $500,000 per year, payable quarterly in advance,(ii) one percent (1.0%) of the gross purchase price for acquisitions for itsparticipation in the negotiation and consummation of any such acquisition,(iii) reimbursement of out-of-pocket expenses and (iv) indemnification forcertain liabilities incurred in connection with the provision of services underthe management agreement.  For each ofthe thirty-nine week periods ended September 27, 2003 and September 25,2004, we paid THL Advisors aggregate fees and expenses of approximately$375,000, related to the management agreement. The management agreement continues unless and until terminated by mutualconsent of the parties in writing, for so long as THL Advisors providesmanagement and other consulting services to us.

 

During fiscal 1998, Bernard W. Andrews, oneof our directors and who was our Chief Executive Officer at the time, purchased$1.0 million of our common stock, which was paid for by the delivery by Mr.Andrews of a promissory note payable to us with an original purchase amount of$1.0 million.  Mr. Andrews’ promissorynote is accruing interest at a fixed annual rate of 9.0% and is secured by96,061 shares of our common stock held by Bernard W. Andrews Revocable TrustU/A.  As of September 25, 2004, theaccrued interest amount of Mr. Andrews’ promissory note was $591,103.

 

***5.****  **Supplemental Disclosure of Cash Flow Information (dollars in thousands)***

 
| ** **                            | ** ** | **Thirty-Nine  Weeks Ended** | ** ** |
|---------------------------------------|------------|------------------------------|------------|
| ** **                            | ** ** | **September 27,  2003** | ** ** | **September 25,  2004** | ** ** |
| ** **                            | ** ** | **(Unaudited)**              | ** ** | **(Unaudited)** | ** ** |
| Cash paid  for interest               |       | $                            | 9,374      |   | $ | 11,484 |   |
| Dividends  accrued on preferred stock |       | $                            | 5,510      |   | $ | 6,261 |   |
| Cash paid  for taxes                  |       | $                            | 3,549      |   | $ | 6,107 |   |

 

8

----

 

***6.  Registration Statement***

 

On May 7, 2004, we filed a RegistrationStatement on Form S-1 with the Securities and Exchange Commission (the “SEC”)for an initial public offering of Income Units, where each Income Unit willrepresent a share of our newly issued class A common stock and a newly issuedsenior subordinated note.  Thetransactions contemplated by this Registration Statement are subject to SECapproval and we can provide no assurance that these transactions will becompleted.  In the third quarter of 2004,we expensed $0.5 million of offering costs that had been previously capitalizedin other assets.  A copy of theRegistration Statement is publicly available at http://www.sec.gov.

 

***7. Condensed Consolidating Information (Unaudited) (dollars in thousands)***

 

The $100.0 million in principal amount of 91/8% Senior Subordinated Notes due 2008 and $30.0 million in principal amountof Floating Interest Rate Subordinated Term Securities due 2008 (collectively,the “Notes”) were issued by us and are guaranteed by all of our subsidiariesbut are not guaranteed by ODs. The subsidiaries are wholly owned by us and theguarantees are full, unconditional and joint and several.  The following condensed consolidatingfinancial information presents (i) our financial position, results ofoperations and cash flows, as parent, as if we accounted for our subsidiariesusing the equity method, (ii) the subsidiaries, and (iii) ODs.  There were no transactions between thesubsidiaries during any of the periods presented.  Separate financial statements of thesubsidiaries are not presented herein as we do not believe that such statementswould be material to investors.

 

9

----

 

**CondensedConsolidating Balance Sheet**

**December 27,2003**

 
| ** **                                       | ** ** | **Parent** | ** ** | **Guarantor  Subsidiaries** | ** ** | **ODs** | ** ** | **Eliminations** | ** ** | **Consolidated  Company** | ** ** |
|--------------------------------------------------|------------|------------|------------|-----------------------------|------------|---------|------------|------------------|------------|---------------------------|------------|
| ***ASSETS***                                     |       |       |       |                        |       |    |       |             |       |                      |       |
| Current  assets:                                 |       |       |       |                        |       |    |       |             |       |                      |       |
| Cash and  cash equivalents                       |       | $          | 67         |                        | $          | 3,501   |       | $                | 241        |                      | $          | — |   | $ | 3,809 |   |
| Accounts and  notes receivable                   |       | 166,924    |       | 48,875                      |       | 2,847   |       | (207,529         | )          | 11,117                    |       |
| Inventory                                        |       | —     |       | 22,941                      |       | 2,179   |       | —           |       | 25,120                    |       |
| Deferred  income taxes, net                      |       | 570        |       | —                      |       | —  |       | —           |       | 570                       |       |
| Prepaid  expenses and other                      |       | —     |       | 3,648                       |       | 48      |       | —           |       | 3,696                     |       |
| Total  current assets                            |       | 167,561    |       | 78,965                      |       | 5,315   |       | (207,529         | )          | 44,312                    |       |
|                                             |       |       |       |                        |       |    |       |             |       |                      |       |
| Property and  equipment                          |       | —     |       | 51,715                      |       | —  |       | —           |       | 51,715                    |       |
| Goodwill                                         |       | 166        |       | 107,195                     |       | 87      |       | (25              | )          | 107,423                   |       |
| Other assets                                     |       | 6,414      |       | 2,217                       |       | —  |       | —           |       | 8,631                     |       |
| Deferred  income taxes, net                      |       | 13,445     |       | —                      |       | —  |       | —           |       | 13,445                    |       |
| Investment  in subsidiaries                      |       | (6,952     | )          | —                      |       | —  |       | 6,952            |       | —                    |       |
| Total Assets                                     |       | $          | 180,634    |                        | $          | 240,092 |       | $                | 5,402      |                      | $          | (200,602 | ) | $ | 225,526 |   |
|                                             |       |       |       |                        |       |    |       |             |       |                      |       |
| ***LIABILITIES AND SHAREHOLDERS’ DEFICIT*** |       |       |       |                        |       |    |       |             |       |                      |       |
| Current  liabilities:                            |       |       |       |                        |       |    |       |             |       |                      |       |
| Accounts  payable                                |       | $          | 341        |                        | $          | 221,829 |       | $                | 6,719      |                      | $          | (207,529 | ) | $ | 21,360 |   |
| Current  portion of long-term debt               |       | 18,750     |       | 230                         |       | —  |       | —           |       | 18,980                    |       |
| Deferred  revenue                                |       | 512        |       | 4,785                       |       | 446     |       | —           |       | 5,743                     |       |
| Accrued  payroll expense                         |       | —     |       | 5,027                       |       | 402     |       | —           |       | 5,429                     |       |
| Accrued  interest                                |       | 3,213      |       | —                      |       | —  |       | —           |       | 3,213                     |       |
| Other  accrued expenses                          |       | 246        |       | 6,889                       |       | 1,199   |       | —           |       | 8,334                     |       |
| Total  current liabilities                       |       | 23,062     |       | 238,760                     |       | 8,766   |       | (207,529         | )          | 63,059                    |       |
|                                             |       |       |       |                        |       |    |       |             |       |                      |       |
| Long-term  debt, less current maturities         |       | 217,789    |       | 2,056                       |       | —  |       | —           |       | 219,845                   |       |
| Deferred  rent                                   |       | —     |       | 4,570                       |       | 149     |       | —           |       | 4,719                     |       |
| Deferred  gain                                   |       | 1,213      |       | 319                         |       | —  |       | —           |       | 1,532                     |       |
| Total  liabilities                               |       | 242,064    |       | 245,705                     |       | 8,915   |       | (207,529         | )          | 289,155                   |       |
| Shareholders’  deficit:                     |       |       |       |                        |       |    |       |             |       |                      |       |
| Common stock                                     |       | 74         |       | —                      |       | —  |       | —           |       | 74                        |       |
| Preferred  stock                                 |       | 62,169     |       | —                      |       | —  |       | —           |       | 62,169                    |       |
| Additional  paid-in capital                      |       | 30,458     |       | 25                          |       | (2,199  | )          | (25              | )          | 28,259                    |       |
| Accumulated  deficit                             |       | (154,131   | )          | (5,638                      | )          | (1,314  | )          | 6,952            |       | (154,131                  | )          |
| Total  shareholders’ deficit                |       | (61,430    | )          | (5,613                      | )          | (3,513  | )          | 6,927            |       | (63,629                   | )          |
|                                             |       | $          | 180,634    |                        | $          | 240,092 |       | $                | 5,402      |                      | $          | (200,602 | ) | $ | 225,526 |   |

 

**CondensedConsolidating Statement of Operations**

**For theThirty-Nine Weeks Ended September 27, 2003**

 
| ** **                                    | ** ** | **Parent** | ** ** | **Guarantor  Subsidiaries** | ** ** | **ODs** | ** ** | **Eliminations** | ** ** | **Consolidated  Company** | ** ** |
|-----------------------------------------------|------------|------------|------------|-----------------------------|------------|---------|------------|------------------|------------|---------------------------|------------|
| Revenues:                                     |       |       |       |                        |       |    |       |             |       |                      |       |
| Optical  sales                                |       | $          | 63,429     |                        | $          | 164,994 |       | $                | 57,259     |                      | $          | — |   | $ | 285,682 |   |
| Management  fees                              |       | 405        |       | 18,635                      |       | —  |       | (16,424          | )          | 2,616                     |       |
| Equity  earnings in subsidiaries              |       | 20,216     |       | —                      |       | —  |       | (20,216          | )          | —                    |       |
| Total net  revenues                           |       | 84,050     |       | 183,629                     |       | 57,259  |       | (36,640          | )          | 288,298                   |       |
| Operating  costs and expenses:                |       |       |       |                        |       |    |       |             |       |                      |       |
| Cost of  goods sold                           |       | 21,330     |       | 55,406                      |       | 11,463  |       | —           |       | 88,199                    |       |
| Selling,  general and administrative expenses |       | 37,975     |       | 102,321                     |       | 42,833  |       | (16,424          | )          | 166,705                   |       |
| Amortization  of intangibles                  |       | —     |       | 165                         |       | —  |       | —           |       | 165                       |       |
| Total  operating costs and expenses           |       | 59,305     |       | 157,892                     |       | 54,296  |       | (16,424          | )          | 255,069                   |       |
| Income from  operations                       |       | 24,745     |       | 25,737                      |       | 2,963   |       | (20,216          | )          | 33,229                    |       |
| Interest  expense, net                        |       | 9,549      |       | 5,946                       |       | 6       |       | —           |       | 15,501                    |       |
| Income tax  expense                           |       | 2,742      |       | 1,241                       |       | 1,291   |       | —           |       | 5,274                     |       |
| Net income                                    |       | $          | 12,454     |                        | $          | 18,550  |       | $                | 1,666      |                      | $          | (20,216 | ) | $ | 12,454 |   |

 

10

----

 

**CondensedConsolidating Statement of Operations**

**For the ThirteenWeeks Ended September 27, 2003**

 
| ** **                                    | ** ** | **Parent** | ** ** | **Guarantor  Subsidiaries** | ** ** | **ODs** | ** ** | **Eliminations** | ** ** | **Consolidated  Company** | ** ** |
|-----------------------------------------------|------------|------------|------------|-----------------------------|------------|---------|------------|------------------|------------|---------------------------|------------|
| Revenues:                                     |       |       |       |                        |       |    |       |             |       |                      |       |
| Optical  sales                                |       | $          | 1,244      |                        | $          | 75,484  |       | $                | 18,782     |                      | $          | — |   | $ | 95,510 |   |
| Management  fees                              |       | 75         |       | 6,066                       |       | —  |       | (5,355           | )          | 786                       |       |
| Equity  earnings in subsidiaries              |       | 2,924      |       | —                      |       | —  |       | (2,924           | )          | —                    |       |
| Total net  revenues                           |       | 4,243      |       | 81,550                      |       | 18,782  |       | (8,279           | )          | 96,296                    |       |
| Operating  costs and expenses:                |       |       |       |                        |       |    |       |             |       |                      |       |
| Cost of  goods sold                           |       | 848        |       | 25,251                      |       | 3,796   |       | —           |       | 29,895                    |       |
| Selling,  general and administrative expenses |       | (255       | )          | 48,604                      |       | 14,185  |       | (5,355           | )          | 57,179                    |       |
| Noncompete  and other intangibles             |       | —     |       | 55                          |       | —  |       | —           |       | 55                        |       |
| Total  operating costs and expenses           |       | 593        |       | 73,910                      |       | 17,981  |       | (5,355           | )          | 87,129                    |       |
| Income from  operations                       |       | 3,650      |       | 7,640                       |       | 801     |       | (2,924           | )          | 9,167                     |       |
| Interest  expense, net                        |       | 1,430      |       | 3,829                       |       | 2       |       | —           |       | 5,261                     |       |
| Income tax  expense                           |       | 1,031      |       | 1,311                       |       | 375     |       | —           |       | 2,717                     |       |
| Net income                                    |       | $          | 1,189      |                        | $          | 2,500   |       | $                | 424        |                      | $          | (2,924 | ) | $ | 1,189 |   |

 

**CondensedConsolidating Statement of Cash Flows**

**For theThirty-Nine Weeks Ended September 27, 2003**

 
| ** **                                                                                    | ** ** | **Parent** | ** ** | **Guarantor  Subsidiaries** | ** ** | **ODs** | ** ** | **Eliminations** | ** ** | **Consolidated  Company** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|---------|------------|------------------|------------|---------------------------|------------|
| Cash flows  from operating activities:                                                        |       |       |       |                        |       |    |       |             |       |                      |       |
| Net income                                                                                    |       | $          | 12,454     |                        | $          | 18,550  |       | $                | 1,666      |                      | $          | (20,216 | ) | $ | 12,454 |   |
| Adjustments  to reconcile net income to net cash provided by (used in) operating  activities: |       |       |       |                        |       |    |       |             |       |                      |       |
| Depreciation  and amortization                                                                |       | 3,485      |       | 9,493                       |       | —  |       | —           |       | 12,978                    |       |
| Amortization  of debt issue costs                                                             |       | 675        |       | 831                         |       | —  |       | —           |       | 1,506                     |       |
| Deferred  liabilities and other                                                               |       | (6,147     | )          | 5,037                       |       | (303    | )          | —           |       | (1,413                    | )          |
| Equity  earnings in subsidiaries                                                              |       | (20,613    | )          | 397                         |       | —  |       | 20,216           |       | —                    |       |
| Increase/(decrease)  in operating assets and liabilities                                      |       | 25,568     |       | (23,588                     | )          | (1,470  | )          | —           |       | 510                       |       |
| Net cash  provided by (used in) operating activities                                          |       | 15,422     |       | 10,720                      |       | (107    | )          | —           |       | 26,035                    |       |
| Cash flows  from investing activities:                                                        |       |       |       |                        |       |    |       |             |       |                      |       |
| Acquisition  of property and equipment                                                        |       | (3,046     | )          | (4,986                      | )          | —  |       | —           |       | (8,032                    | )          |
| Note  receivable issued                                                                       |       | —     |       | (1,000                      | )          | —  |       | —           |       | (1,000                    | )          |
| Other                                                                                         |       | —     |       | 24                          |       | —  |       | —           |       | 24                        |       |
| Net cash  used in investing activities                                                        |       | (3,046     | )          | (5,962                      | )          | —  |       | —           |       | (9,008                    | )          |
| Cash flows  from financing activities:                                                        |       |       |       |                        |       |    |       |             |       |                      |       |
| Payments on  debt and capital leases                                                          |       | (12,871    | )          | (89                         | )          | (5      | )          | —           |       | (12,965                   | )          |
| Net cash  used in financing activities                                                        |       | (12,871    | )          | (89                         | )          | (5      | )          | —           |       | (12,965                   | )          |
| Net  Increase/(decrease) in cash and cash equivalents                                         |       | (495       | )          | 4,669                       |       | (112    | )          | —           |       | 4,062                     |       |
| Cash and  cash equivalents at beginning of period                                             |       | 554        |       | 2,532                       |       | 364     |       | —           |       | 3,450                     |       |
| Cash and  cash equivalents at end of period                                                   |       | $          | 59         |                        | $          | 7,201   |       | $                | 252        |                      | $          | — |   | $ | 7,512 |   |

 

11

----

 

**CondensedConsolidating Balance Sheet**

**September 25,2004**

 
| ** **                                                | ** ** | **Parent** | ** ** | **Guarantor  Subsidiaries** | ** ** | **ODs** | ** ** | **Eliminations** | ** ** | **Consolidated  Company** | ** ** |
|-----------------------------------------------------------|------------|------------|------------|-----------------------------|------------|---------|------------|------------------|------------|---------------------------|------------|
| ***ASSETS***                                              |       |       |       |                        |       |    |       |             |       |                      |       |
| Current  assets:                                          |       |       |       |                        |       |    |       |             |       |                      |       |
| Cash and  cash equivalents                                |       | $          | 76         |                        | $          | 3,359   |       | $                | 50         |                      | $          | — |   | $ | 3,485 |   |
| Accounts and  notes receivable                            |       | 132,076    |       | 13,770                      |       | 43,171  |       | (177,736         | )          | 11,281                    |       |
| Inventory                                                 |       | —     |       | 24,095                      |       | 1,895   |       | —           |       | 25,990                    |       |
| Deferred  income taxes                                    |       | 570        |       | —                      |       | —  |       | —           |       | 570                       |       |
| Prepaid  expenses and other                               |       | —     |       | 2,448                       |       | 45      |       | —           |       | 2,493                     |       |
| Total  current assets                                     |       | 132,722    |       | 43,672                      |       | 45,161  |       | (177,736         | )          | 43,819                    |       |
|                                                      |       |       |       |                        |       |    |       |             |       |                      |       |
| Property and  equipment                                   |       | —     |       | 48,399                      |       | 66      |       | —           |       | 48,465                    |       |
| Goodwill                                                  |       | 166        |       | 107,195                     |       | 87      |       | (25              | )          | 107,423                   |       |
| Other assets                                              |       | 6,415      |       | (213                        | )          | —  |       | —           |       | 6,202                     |       |
| Deferred  income taxes                                    |       | 12,694     |       | 455                         |       | —  |       | —           |       | 13,149                    |       |
| Investment  in subsidiaries                               |       | 19,750     |       |                        |       | —  |       | (19,750          | )     |                      |       |
| Total assets                                              |       | $          | 171,747    |                        | $          | 199,508 |       | $                | 45,314     |                      | $          | (197,511 | ) | $ | 219,058 |   |
|                                                      |       |       |       |                        |       |    |       |             |       |                      |       |
| ***LIABILITIES AND SHAREHOLDERS’ EQUITY/(DEFICIT)*** |       |       |       |                        |       |    |       |             |       |                      |       |
| Current  liabilities:                                     |       |       |       |                        |       |    |       |             |       |                      |       |
| Accounts  payable                                         |       | $          | 148        |                        | $          | 151,014 |       | $                | 45,357     |                      | $          | (177,736 | ) | $ | 18,783 |   |
| Current  portion of long-term debt                        |       | 19,301     |       | 303                         |       | —  |       | —           |       | 19,604                    |       |
| Deferred  revenue                                         |       | —     |       | 5,060                       |       | 450     |       | —           |       | 5,510                     |       |
| Accrued  payroll expense                                  |       | —     |       | 5,033                       |       | 345     |       | —           |       | 5,378                     |       |
| Accrued  interest                                         |       | 4,907      |       | (2                          | )          | —  |       | —           |       | 4,905                     |       |
| Other  accrued expenses                                   |       | (6,269     | )          | 14,348                      |       | 796     |       | —           |       | 8,875                     |       |
| Total  current liabilities                                |       | 18,087     |       | 175,756                     |       | 46,948  |       | (177,736         | )          | 63,055                    |       |
|                                                      |       |       |       |                        |       |    |       |             |       |                      |       |
| Long-term  debt, less current maturities                  |       | 198,483    |       | 1,895                       |       | —  |       | —           |       | 200,378                   |       |
| Deferred  rent                                            |       | —     |       | 4,456                       |       | 159     |       | —           |       | 4,615                     |       |
| Deferred  gain                                            |       | 1,212      |       | 144                         |       | —  |       | —           |       | 1,356                     |       |
| Total  liabilities                                        |       | 217,782    |       | 182,251                     |       | 47,107  |       | (177,736         | )          | 269,404                   |       |
| Shareholders’  equity/(deficit)                      |       |       |       |                        |       |    |       |             |       |                      |       |
| Common stock                                              |       | 74         |       | —                      |       | —  |       | —           |       | 74                        |       |
| Preferred  stock                                          |       | 68,430     |       | —                      |       | —  |       | —           |       | 68,430                    |       |
| Additional  paid-in capital                               |       | 25,442     |       | (1,062                      | )          | (3,224  | )          | (25              | )          | 21,131                    |       |
| Accumulated  equity/(deficit)                             |       | (139,981   | )          | 18,319                      |       | 1,431   |       | (19,750          | )          | (139,981                  | )          |
| Total  shareholders’ equity/(deficit)                |       | (46,035    | )          | 17,257                      |       | (1,793  | )          | (19,775          | )          | (50,346                   | )          |
|                                                      |       | $          | 171,747    |                        | $          | 199,508 |       | $                | 45,314     |                      | $          | (197,511 | ) | $ | 219,058 |   |

 

**CondensedConsolidating Statement of Operations**

**For theThirty-Nine Weeks Ended September 25, 2004**

 
| ** **                                    | ** ** | **Parent** | ** ** | **Guarantor  Subsidiaries** | ** ** | **ODs** | ** ** | **Eliminations** | ** ** | **Consolidated  Company** | ** ** |
|-----------------------------------------------|------------|------------|------------|-----------------------------|------------|---------|------------|------------------|------------|---------------------------|------------|
| Revenues:                                     |       |       |       |                        |       |    |       |             |       |                      |       |
| Optical  sales                                |       | $          | (495       | )                           | $          | 239,398 |       | $                | 63,513     |                      | $          | — |   | $ | 302,416 |   |
| Management  fees                              |       | 125        |       | 20,510                      |       | —  |       | (18,183          | )          | 2,452                     |       |
| Equity  earnings in subsidiaries              |       | 26,703     |       |                        |       | —  |       | (26,703          | )          | —                    |       |
| Total net  revenues                           |       | 26,333     |       | 259,908                     |       | 63,513  |       | (44,886          | )          | 304,868                   |       |
| Operating  costs and expenses:                |       |       |       |                        |       |    |       |             |       |                      |       |
| Cost of  goods sold                           |       | 2,833      |       | 79,615                      |       | 12,428  |       | —           |       | 94,876                    |       |
| Selling,  general and administrative expenses |       | (2,623     | )          | 147,235                     |       | 48,317  |       | (18,183          | )          | 174,746                   |       |
| Total  operating costs and expenses           |       | 210        |       | 226,850                     |       | 60,745  |       | (18,183          | )          | 269,622                   |       |
| Income from  operations                       |       | 26,123     |       | 33,058                      |       | 2,768   |       | (26,703          | )          | 35,246                    |       |
| Interest  expense, net                        |       | 12,515     |       | 1,902                       |       | 6       |       | —           |       | 14,423                    |       |
| Income tax  expense/(benefit)                 |       | (543       | )          | 7,198                       |       | 17      |       | —           |       | 6,672                     |       |
| Net income                                    |       | $          | 14,151     |                        | $          | 23,958  |       | $                | 2,745      |                      | $          | (26,703 | ) | $ | 14,151 |   |

 

12

----

 

**CondensedConsolidating Statement of Operations**

**For theThirteen Weeks Ended September 25, 2004**

 
| ** **                                    | ** ** | **Parent** | ** ** | **Guarantor  Subsidiaries** | ** ** | **ODs** | ** ** | **Eliminations** | ** ** | **Consolidated  Company** | ** ** |
|-----------------------------------------------|------------|------------|------------|-----------------------------|------------|---------|------------|------------------|------------|---------------------------|------------|
| Revenues:                                     |       |       |       |                        |       |    |       |             |       |                      |       |
| Optical  sales                                |       | $          | 465        |                        | $          | 75,737  |       | $                | 21,776     |                      | $          | — |   | $ | 97,978 |   |
| Management  fees                              |       | —     |       | 6,873                       |       | —  |       | (6,181           | )          | 692                       |       |
| Equity earnings  in subsidiaries              |       | 5,690      |       | —                      |       | —  |       | (5,690           | )          | —                    |       |
| Total net  revenues                           |       | 6,155      |       | 82,610                      |       | 21,776  |       | (11,871          | )          | 98,670                    |       |
| Operating  costs and expenses:                |       |       |       |                        |       |    |       |             |       |                      |       |
| Cost of  goods sold                           |       | 901        |       | 26,482                      |       | 4,074   |       | —           |       | 31,457                    |       |
| Selling,  general and administrative expenses |       | (786       | )          | 49,040                      |       | 16,430  |       | (6,181           | )          | 58,503                    |       |
| Total  operating costs and expenses           |       | 115        |       | 75,522                      |       | 20,504  |       | (6,181           | )          | 89,960                    |       |
| Income from  operations                       |       | 6,040      |       | 7,088                       |       | 1,272   |       | (5,690           | )          | 8,710                     |       |
| Interest  expense, net                        |       | 4,130      |       | 589                         |       | 2       |       | —           |       | 4,721                     |       |
| Income tax  expense/(benefit)                 |       | (938       | )          | 2,079                       |       | —  |       | —           |       | 1,141                     |       |
| Net income                                    |       | $          | 2,848      |                        | $          | 4,420   |       | $                | 1,270      |                      | $          | (5,690 | ) | $ | 2,848 |   |

 

**CondensedConsolidating Statement of Cash Flows**

**For theThirty-Nine Weeks Ended September 25, 2004**

 
| ** **                                                                                   | ** ** | **Parent** | ** ** | **Guarantor  Subsidiaries** | ** ** | **ODs** | ** ** | **Eliminations** | ** ** | **Consolidated  Company** | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|---------|------------|------------------|------------|---------------------------|------------|
| Cash flows  from operating activities:                                                       |       |       |       |                        |       |    |       |             |       |                      |       |
| Net income                                                                                   |       | $          | 14,151     |                        | $          | 23,958  |       | $                | 2,745      |                      | $          | (26,703 | ) | $ | 14,151 |   |
| Adjustments  to reconcile net income to net cash provided by (used in) operating activities: |       |       |       |                        |       |    |       |             |       |                      |       |
| Depreciation  and amortization                                                               |       | —     |       | 12,046                      |       | —  |       | —           |       | 12,046                    |       |
| Amortization  of debt issue costs                                                            |       | 37         |       | 1,468                       |       | —  |       | —           |       | 1,505                     |       |
| Deferred  liabilities and other                                                              |       | 239        |       | (483                        | )          | 14      |       | —           |       | (230                      | )          |
| Equity  earnings in subsidiaries                                                             |       | (26,703    | )          | —                      |       | —  |       | (26,703          | )          | —                    |       |
| Increase/(decrease)  in operating assets and liabilities                                     |       | 31,076     |       | (27,741                     | )          | (2,150  | )          | —           |       | 1,185                     |       |
| Net cash  provided by operating activities                                                   |       | 18,800     |       | 9,248                       |       | 609     |       | —           |       | 28,657                    |       |
| Cash flows  from investing activities:                                                       |       |       |       |                        |       |    |       |             |       |                      |       |
| Acquisition  of property and equipment                                                       |       | —     |       | (8,783                      | )          | —  |       | —           |       | (8,783                    | )          |
| Net cash  used in investing activities                                                       |       | —     |       | (8,783                      | )          | —  |       | —           |       | (8,783                    | )          |
| Cash flows  from financing activities:                                                       |       |       |       |                        |       |    |       |             |       |                      |       |
| Payments on  debt and capital leases                                                         |       | (18,791    | )          | (89                         | )          | —  |       | —           |       | (18,880                   | )          |
| Distributions  to affiliated OD                                                              |       | —     |       | —                      |       | (800    | )          | —           |       | (800                      | )          |
| Payments to  affect IPO                                                                      |       | —     |       | (518                        | )          | —  |       | —           |       | (518                      | )          |
| Net cash  used in financing activities                                                       |       | (18,791    | )          | (607                        | )          | (800    | )          | —           |       | (20,198                   | )          |
| Net  increase/(decrease) in cash and cash equivalents                                        |       | 9          |       | (142                        | )          | (191    | )          | —           |       | (324                      | )          |
| Cash and  cash equivalents at beginning of period                                            |       | 67         |       | 3,501                       |       | 241     |       | —           |       | 3,809                     |       |
| Cash and  cash equivalents at end of period                                                  |       | $          | 76         |                        | $          | 3,359   |       | $                | 50         |                      | $          | — |   | $ | 3,485 |   |

 

13

----

**Item 2.****           MANAGEMENT’S****DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

***Introduction***

 

We are the second largest optical retail chain as measured by net revenues and the largest company focused solely on the optical retail sector in the United States.  We currently operate 377 stores in 33 states, including 313 directly-owned optical stores and 64 stores owned by an optometrist’s professional entity and managed by us under management agreements.  We operate in the $16.3 billion optical retail market.  We believe that key drivers of our performance include (i) maximizing our store profitability, (ii) increasing transactions by offering both convenience and value to our customers, (iii) capitalizing on the continued role of managed vision care, and (iv) actively managing our store base in targeted markets.

 

We have focused on growing sales by offering convenience and value to our customers.  During the first three quarters of fiscal 2004, we continued to focus on our value retail promotion of two complete pairs of single vision eyewear for $99.  Optical sales increased 5.9% and comparable transaction volume increased 1.2% when compared to the first three quarters of fiscal 2003.  We believe these increases were largely the result of increased promotional activity and overall improvement in the optical market.

 

Our net revenues derived from managed care plans decreased by 2.5% during the first three quarters of fiscal 2004 as compared to the first three quarters of fiscal 2003.  We believe that optical retail sales through funded managed vision care programs will be constant over the next several years.  We have made a strategic decision to pursue funded managed vision care relationships in order to help our retail business grow.  Discount managed care programs will play a less significant role in our sales as our value retail offer becomes more developed throughout our stores.  Discount insurance programs consist of relationships where the customer receives a pre-agreed upon discount on eye care products and often our value promotion prices are lower than these discount prices.

 

While the average ticket price on productspurchased under managed vision care reimbursement plans is typically lower,managed vision care transactions generally require less promotional spendingand advertising support.  We believe thatthe increased volume resulting from managed vision care relationships alsocompensates for the lower average ticket price per transaction.  During the first three quarters of fiscal2004, approximately 29.5% of our optical revenues were derived from managedvision care programs; we expect that the percent of penetration will normalizeat 30.0% as our transition to funded programs continues and our retail valueoffer displaces discount managed vision care plans.  We believe that the role of managed visioncare will continue to benefit us and other large optical retail chains withstrong local market shares, broad geographic coverage and sophisticated informationmanagement and billing systems.

 

14

----

 

##### ***Results of Operations (unaudited)***

 

The following table sets forth the percentagerelationship to net revenues of certain income statement data.  The period-to-period comparison of financialresults is not necessarily indicative of future results.

 
| ** **                                    | ** ** | **Thirteen  Weeks Ended**    | ** ** | **Thirty-Nine  Weeks Ended** | ** ** |
|-----------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                    | ** ** | **September 27,  2003** | ** ** | **September 25,  2004** | ** ** | **September 27,  2003** | ** ** | **September 25,  2004** | ** ** |
| **Statement  of Income Data:**                |       |                         |       |                         |       |   |   |   |   |
| NET  REVENUES:                                |       |                         |       |                         |       |   |   |   |   |
| Optical  sales                                |       | 99.2                         | %          | 99.3                         | %          | 99.1 | % | 99.2 | % |
| Management  fees                              |       | 0.8                          | %          | 0.7                          | %          | 0.9 | % | 0.8 | % |
| Total net  revenues                           |       | 100.0                        | %          | 100.0                        | %          | 100.0 | % | 100.0 | % |
|                                          |       |                         |       |                         |       |   |   |   |   |
| OPERATING  COSTS AND EXPENSES:                |       |                         |       |                         |       |   |   |   |   |
| Cost of  goods sold                           |       | *31.3                        | %          | *32.1                        | %          | *30.9 | % | *31.4 | % |
| Selling,  general and administrative expenses |       | *59.9                        | %          | *59.7                        | %          | *58.4 | % | *57.8 | % |
| Amortization  of intangibles                  |       | 0.1                          | %          | 0.0                          | %          | 0.1 | % | 0.0 | % |
|                                          |       |                         |       |                         |       |   |   |   |   |
| Total  operating costs and expenses           |       | 90.5                         | %          | 91.2                         | %          | 88.5 | % | 88.4 | % |
|                                          |       |                         |       |                         |       |   |   |   |   |
| INCOME FROM  OPERATIONS                       |       | 9.5                          | %          | 8.8                          | %          | 11.5 | % | 11.6 | % |
|                                          |       |                         |       |                         |       |   |   |   |   |
| INTEREST  EXPENSE, NET                        |       | 5.5                          | %          | 4.7                          | %          | 5.4 | % | 4.8 | % |
|                                          |       |                         |       |                         |       |   |   |   |   |
| INCOME TAX  EXPENSE                           |       | 2.8                          | %          | 1.2                          | %          | 1.8 | % | 2.2 | % |
|                                          |       |                         |       |                         |       |   |   |   |   |
| NET INCOME                                    |       | 1.2                          | %          | 2.9                          | %          | 4.3 | % | 4.6 | % |

 

----

*** **Percentages based on optical sales only

 

Thefollowing is a discussion of certain factors affecting our results ofoperations from the first three quarters of fiscal 2004 as compared to thefirst three quarters of fiscal 2003 and our liquidity and capitalresources.  This discussion should be readin conjunction with the consolidated financial statements and notes theretoincluded elsewhere in this document.

 

##### ***The Thirteen Weeks Ended September 25,2004 Compared to the Thirteen Weeks Ended September 27, 2003.***

 

*NetRevenues.** *Net revenues increased to $98.7million for the thirteen weeks ended September 25, 2004 from $96.3 millionfor the thirteen weeks ended September 27, 2003.  This was largely the result of the additionof seven new stores, five of which were in the Atlanta market, and a comparablestore sales increase of 1.1% compared to the third quarter of fiscal 2003.  Transaction volume increased by 0.8% over thethird quarter of fiscal 2003 and average ticket prices increased by 0.4%compared to the third quarter of fiscal 2003. The trend in comparable store sales and transactions was due to a weakerback-to-school where tax rebates received in the third quarter of fiscal 2003were absent in 2004.  Severe hurricaneactivity affected the Southeastern United States affecting comparable samestore sales in the period. The slight increase in average ticket prices waslargely the result of the increase in the sales mix of branded product whichhas a higher price point than non-branded frames.  Total managed vision care sales increased by1.2% compared to the third quarter of fiscal 2003 was primarily due toparticipation in new funded managed care contracts sold by strategic partners inthe third quarter of fiscal 2004.

 

15

----

 

*GrossProfit.** *Gross profit increased to $66.5million for the thirteen weeks ended September 25, 2004 from $65.6 millionfor the thirteen weeks ended September 27, 2003.  This increase was primarily the result of theincrease in store base.  Gross profit asa percentage of optical sales decreased to 67.9% for the thirteen weeks ended September 25,2004 as compared to 68.7% for the thirteen weeks ended September 27,2003.  This decrease was largely due tohigher penetration of kids lenses and higher labmanufacturing costs.

 

*SellingGeneral & Administrative Expenses (SG&A).** *SG&A increasedto $58.5 million for the thirteen weeks ended September 25, 2004 from$57.2 million for the thirteen weeks ended September 27, 2003 which isconsistent with the increase in sales. SG&A, as a percentage of optical sales, decreased to 59.7% for thethirteen weeks ended September 25, 2004 from 59.9% for the thirteen weeksended September 27, 2003.  Thispercentage decrease was primarily due to increased sales from more costeffective advertising promotions.  Wealso achieved economies of scale in overhead expense as the expense decreasedcompared to the third quarter of fiscal 2003 while sales improved.

 

*AmortizationExpense.** *No amortization expense occurred for the thirteen weeks ended September 25,2004 as compared to $0.1 million for the thirteen weeks ended September 27,2003.  Our amortizable intangiblebalances have been fully amortized.

 

*NetInterest Expense.** *Net interest expense decreased to$4.7 million for the thirteen weeks ended September 25, 2004 from $5.3million for the thirteen weeks ended September 27, 2003.  This decrease was primarily due to loweroutstanding debt balances as compared to the third quarter of fiscal 2003.

 

*Income TaxExpense.** *Income tax expense decreased to$1.1 million for the thirteen weeks ended September 25, 2004 from $2.7million for the thirteen weeks ended September 27, 2003.  This decrease was largely the result ofunusually high income tax expense in the third quarter of fiscal 2003.

 

*Net Income.** *Net income increasedto $2.8 million for the thirteen weeks ended September 25, 2004 from $1.2million for the thirteen weeks ended September 27, 2003.

 

##### ***The Thirty-nine Weeks Ended September 25,2004 Compared to the Thirty-nine Weeks Ended September 27, 2003.***

 

*NetRevenues.** *The increase**innet revenues to $304.9 million for the thirty-nine weeks ended September 25,2004 from $288.3 million for the thirty-nine weeks ended September 27,2003 was largely the result of the addition of seven new stores since the endof the third quarter of fiscal 2003, five of which were in the Atlanta market,and a comparable store sales increase of 2.1% compared to the first thirty-nineweeks of fiscal 2003.  Transaction volumeincreased by 1.2% compared to the first three quarters of fiscal 2003 andaverage ticket prices increased by 1.1% compared to the first three quarters offiscal 2003.  The increase in comparablestore sales and transaction volume was mostly the result of an overallimprovement in the retail optical market and an increase in promotionalactivity in the first three quarters of fiscal 2004.  The increase in average ticket prices waslargely the result of the increase in the sales mix of branded product whichhas a higher price point than non-branded frames.  Total managed vision care sales decreased by2.5% compared to the first three quarters of fiscal 2003.  The total managed vision care sales declinewas primarily due to the discontinuation of our participation in discount,affinity and Medicaid plans and the shift of managed care participants to ourretail value 

 

16

----

 

promotion.  This decline through the first three quartersof fiscal 2004 was slightly offset by participation in new funded managed carecontracts sold by strategic partners in the third quarter of fiscal 2004.  In addition, we opened six new stores in thefirst three quarters of fiscal 2004.

 

*GrossProfit.** *Gross profit increased to $207.5million for the thirty-nine weeks ended September 25, 2004 from $197.5million for the thirty-nine weeks ended September 27, 2003, primarily as aresult of an increase in store base. Gross profit as a percentage of optical sales decreased to 68.6% for thethirty-nine weeks ended September 25, 2004 as compared to 69.1% for thethirty-nine weeks ended September 27, 2003.  This decrease was largely due to an increasein the mix of branded frames which have a higher acquisition cost thannon-branded frames and a mix shift in kids lens sales as well as higher labmanufacturing costs.

 

*SellingGeneral & Administrative Expenses (SG&A).** *SG&A increasedto $174.7 million for the thirty-nine weeks ended September 25, 2004 from$166.7 million for the thirty-nine weeks ended September 27, 2003 which isconsistent with the increase in sales. SG&A, as a percentage of optical sales, decreased to 57.8% for thethirty-nine weeks ended September 25, 2004 from 58.4% for the thirty-nineweeks ended September 27, 2003. This percentage decrease was primarily due to the leveraging ofdepreciation expense and economies of scale achieved in overhead expense asoverhead expense decreased compared to the first three quarters of fiscal 2003while sales improved.

 

*AmortizationExpense.** *No amortization expense occurred for the thirty-nine weeks endedSeptember 25, 2004 as compared to $0.2 million for the thirty-nine weeksended September 27, 2003.  Ouramortizable intangible balances have been fully amortized.

 

*NetInterest Expense.** *Net interest expense decreased to$14.4 million for the thirty-nine weeks ended September 25, 2004 from $15.5million for the thirty-nine weeks ended September 27, 2003.  This decrease was primarily due to loweroutstanding debt balances as compared to the first three quarters of fiscal2003.

 

*Income TaxExpense.** *Income tax expense increased to$6.7 million for the thirty-nine weeks ended September 25, 2004 from $5.3million for the thirty-nine weeks ended September 27, 2003.  This increase was primarily due to anincrease in earnings before taxes.

 

*Net Income.** *Net income increasedto $14.2 million for the thirty-nine weeks ended September 25, 2004 from$12.5 million for the thirty-nine weeks ended September 27, 2003.

 

**Liquidity and Capital Resources**

 

Our capital requirements aredriven principally by our obligations to service debt and to fund the followingcosts:

 

•                  Constructionof new stores

•                  Repositioningof existing stores

•                  Purchasinginventory and equipment

•                  Leaseholdimprovements

 

The amount of capitalavailable to us will affect our ability to service our debt obligations and tocontinue to grow our business through expanding the number of stores andincreasing comparable store sales.

 

17

----

 

**Sources ofCapital**

 

Our principal sources of capital are fromcash on hand, cash flows from operating activities and funding from our creditfacility.  Cash flows from operatingactivities provided net cash of $28.6 million for the thirty-nine weeks ended September 25,2004 and $26.0 million for the thirty-nine weeks ended September 27, 2003.As of September 25, 2004 we had $3.5 million of cash available to meet ourobligations.

 

Payments on debt have beenour principal financing activity.  Cashflows from financing activities used net cash of $20.2 million for thethirty-nine weeks ended September 25, 2004 compared to $13.0 million forthe thirty-nine weeks ended September 27, 2003.

 

Our working capitalprimarily consists of cash and cash equivalents, accounts receivable,inventory, accounts payable and accrued expenses and was a deficit of $19.2million for the thirty-nine weeks ended September 25, 2004.  Our level of working capital has remainedrelatively consistent from September 27, 2003.

 

Capital expenditures were$8.7 million for the thirty-nine weeks ended September 25, 2004 comparedto $8.0 million for the thirty-nine weeks ended September 27, 2003.  Capital expenditures for all of fiscal 2004are projected to be approximately $11.0 million.  Of the planned fiscal 2004 capitalexpenditures, approximately $3.4 million is related to commitments to newstores and approximately $7.6 million is expected to be for maintenance ofexisting facilities and systems.

 

**Long-Term Debt**

 

***Credit Facility.****** ***Our existing credit facility consists of (i) a $55.0million term loan facility (the “Term Loan A”); (ii) a $62.0 million term loanfacility (the “Term Loan B”); and (iii) a $25.0 million revolving creditfacility (the “Revolver” and together with the Term Loan A and Term Loan B, the“Facilities”).

 

Borrowings under the Facilities accrueinterest, at our option, at the Base Rate or the LIBOR rate, plus theapplicable margin. The Base Rate is a floating rate equal to the higher of theovernight Federal Funds Rate plus 1⁄2 % or the Fleet prime rate. The marginsapplicable to the Base Rate and LIBOR for each of the Facilities are set forthin the following table:

 
| **Facility** | ** ** | **Base Rate Margin** | ** ** | **LIBOR Margin** | ** ** |
|--------------|------------|----------------------|------------|------------------|------------|
| Term Loan A  |       | 3.25                 | %          | 4.25             | %          |
| Term Loan B  |       | 3.75                 | %          | 4.75             | %          |
| Revolver     |       | 3.50                 | %          | 4.50             | %          |

 

In connectionwith the borrowings made under the Facilities, we incurred approximately $4.8million in debt issuance costs.  Theseamounts are classified within other assets in the accompanying balance sheetsand are being amortized over the life of the Facilities. The unamortized amountof debt issuance costs as of September 25, 2004 related to the Facilitieswas $2.6 million.

 

At September 25, 2004, we had $129.8 million innotes payable outstanding evidenced by the Notes (as defined below), $24.2million and $59.8 million in term loans outstanding under the

 

18

----

 

Term Loan A and Term Loan B, respectively,$4.0 million outstanding under the revolving credit facility and $2.2 millionin capital lease and equipment obligations. We had $18.8 million of our revolving credit facility available tofinance working capital requirements and general corporate purposes as of September 25,2004.

 

The Facilities arecollateralized by all of our tangible and intangible assets, including thestock of our subsidiaries.  In addition,we must meet certain financial covenants including minimum EBITDA, interestcoverage, leverage ratio and capital expenditures.  As of September 25, 2004, we were incompliance with all of our financial covenants.

 

***Notes.****** ***In 1998, weissued $100.0 million aggregate principal amount of our 9 1/8% SeniorSubordinated Notes due 2008 (the “Fixed Rate Notes”) and $50.0 millionaggregate principal amount of our Floating Interest Rate Subordinated TermSecurities due 2008 (the “Floating Rate Notes” and, together with the FixedRate Notes, the “Notes”).  We used aportion of the initial borrowings under the Facilities to redeem $20.0 millionof the Floating Rate Notes.  Interest onthe Notes is payable semiannually on May 1 and November 1 of each yearuntil maturity.  Interest on the FixedRate Notes accrues at the rate of 9 1/8% per annum.  The Floating Rate Notes bear interest at arate per annum, reset semiannually, and equal to LIBOR plus 3.98%.  The Fixed Rate Notes and Floating Rate Notesare not entitled to the benefit of any mandatory sinking fund.

 

The Notes are guaranteed ona senior subordinated basis by all of our subsidiaries.  The Notes and related guarantees:

 

•                  aregeneral unsecured obligations of ours and our guarantors;

•                  aresubordinated in right of payment to all current and future senior indebtednessincluding indebtedness under the Facilities; and

•                  rank *pari passu* in right ofpayment with any of our future senior subordinated indebtedness or of ourguarantors and senior in right of payment with any of our future subordinatedobligations or our guarantors.

 

We may redeem the Notes, at our option, in whole atany time or in part from time to time. The redemption prices for the Fixed Rate Notes are set forth below forthe 12-month periods beginning May 1 of the year set forth below, plus in eachcase, accrued interest to the date of redemption:

 
| **YEAR**             | ** ** | **REDEMPTION PRICE** | ** ** |
|----------------------|------------|----------------------|------------|
|                 |       |                 |       |
| 2004                 |       | 103.042              | %          |
| 2005                 |       | 101.521              | %          |
| 2006 and  thereafter |       | 100.000              | %          |

 

Beginning on May 1, 2003,the Floating Rate Notes became redeemable at 100% of the principal amount thereofplus accrued and unpaid interest to the date of redemption.

 

The indenture governing theNotes contains certain covenants that, among otherthings, limit our and each of our guarantors’ ability to:

 

•                  incuradditional indebtedness;

•                  paydividends or make other distributions in respect of its capital stock;

 

19

----

 

•                  purchaseequity interests or subordinated indebtedness;

•                  createcertain liens;

•                  enterinto certain transactions with affiliates;

•                  consummatecertain asset sales; and

•                  mergeor consolidate.

 

**Preferred Stock.***** ***In 1998, we issued 300,000 shares of a new series ofpreferred stock (the “Preferred Stock”), par value $.01 per share. Dividends on shares of the Preferred Stock are cumulative from thedate of issue (whether or not declared) and are payable when and as may bedeclared from time to time by our Board of Directors.  Such dividends accrue on a daily basis fromthe original date of issue at an annual rate per share equal to 13% of theoriginal purchase price per share, with such amount to be compoundedannually.  The Preferred Stock will beredeemable at our option, in whole or in part, at $100 per share plus (i) theper share dividend rate and (ii) all accumulated and unpaid dividends, if any,to the date of redemption, upon occurrence of an offering of equity securities,a change of control or certain sales of assets.

 

**Contractual Obligations.** We are committed to make cash payments in the future on the followingtypes of agreements:

 

•                  Long term debt; and

•                  Operating leases for stores and officefacilities.

 

The following tablereflects a summary of our contractual obligations as of September 25,2004:

 
| ** **                                                  | ** ** | **Payments due by period (dollars in thousands)** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                  | ** ** | **Total**                                         | ** ** | **Less than 1 yr** | ** ** | **1 to 3 yrs** | ** ** | **3 to 5 yrs** | ** ** | **More than 5 yrs** | ** ** |
|                                                        |       |                                              |       |   |   |   |   |   |   |   |   |
| Long Term  Debt                                             |       | $                                                 | 217,784    |   | $ | 19,301 |   | $ | 54,525 |   | $ | 143,958 |   | $ | — |   |
| Capital  Lease Obligations                                  |       | 2,198                                             |       | 303 |   | 806 |   | 1,002 |   | 87 |   |
| Operating  Leases                                           |       | 148,596                                           |       | 31,828 |   | 52,835 |   | 38,383 |   | 25,550 |   |
| Purchase  Obligations                                       |       | —                                            |       | — |   | — |   | — |   | — |   |
| Total future  principal payments on contractual obligations |       | $                                                 | 368,578    |   | $ | 51,432 |   | $ | 108,166 |   | $ | 183,343 |   | $ | 25,637 |   |

 

We have no off-balancesheet debt or unrecorded obligations and have not guaranteed the debt of anyother party.

 

**AdjustedEBITDA Reconciliation.***** ***We present a discussion ofAdjusted EBITDA because certain covenants in our Notes and Facilities containratios which are based on this measure. Adjusted EBITDA should not be considered as an alternative to, or moremeaningful than, operating income or net income, in each case, as determined inaccordance with GAAP as an indicator of our operating performance or cash flowas a measure of liquidity.  Additionally,Adjusted EBITDA presented may not be comparable to similarly titled measuresreported by other companies.  Thefollowing table sets forth a reconciliation of Net Income to Adjusted EBITDAfor each of the fiscal periods presented:

 

20

----

 
| ** **                                            | ** ** | **Thirteen Weeks  Ended** | ** ** | **Thirty-Nine Weeks  Ended** | ** ** |
|-------------------------------------------------------|------------|---------------------------|------------|------------------------------|------------|
| ** **                                            | ** ** | **Sept. 27,  2003**       | ** ** | **Sept. 25,  2004**          | ** ** | **Sept. 27,  2003** | ** ** | **Sept. 25,  2004** | ** ** |
| ** **                                            | ** ** | **(Unaudited)**           | ** ** | **(Unaudited)**              | ** ** | **(Unaudited)** | ** ** | **(Unaudited)** | ** ** |
| **Reconciliation  of Adjusted EBITDA to Net Income:** |       |                      |       |                         |       |   |   |   |   |
| Net Income                                            |       | $                         | 1,189      |                         | $          | 2,848 |   | $ | 12,454 |   | $ | 14,151 |   |
| Reconciling  items:                                   |       |                      |       |                         |       |   |   |   |   |
| Depreciation  and amortization                        |       | 4,239                     |       | 4,086                        |       | 12,978 |   | 12,046 |   |
| Interest  expense                                     |       | 5,261                     |       | 4,721                        |       | 15,501 |   | 14,423 |   |
| Income tax  expense                                   |       | 2,717                     |       | 1,141                        |       | 5,274 |   | 6,672 |   |
|                                                  |       |                      |       |                         |       |   |   |   |   |
| EBITDA                                                |       | 13,406                    |       | 12,796                       |       | 46,207 |   | 47,292 |   |
| Reconciling  items:                                   |       |                      |       |                         |       |   |   |   |   |
| Expensing of  payments to affect IPO                  |       | —                    |       | 518                          |       | — |   | 518 |   |
| Thomas H.  Lee Partners, L.P. management fees         |       | 173                       |       | 124                          |       | 375 |   | 370 |   |
| Adjusted  EBITDA                                      |       | $                         | 13,579     |                         | $          | 13,438 |   | $ | 46,582 |   | $ | 48,180 |   |

 

**Future Capital Resources.**

 

Based upon currentoperations, anticipated cost savings and future growth, we believe that ourcash flow from operations, together with borrowings currently available underthe Revolver, are adequate to meet our anticipated requirements for workingcapital, capital expenditures and scheduled principal and interest paymentsthrough the next twelve (12) months.  Ourability to satisfy our financial covenants under the Facilities, to meet ourdebt service obligations and to reduce our debt will depend on our futureperformance, which in turn, will be subject to general economic conditions andto financial, business, and other factors, including factors beyond ourcontrol.  In the event we do not satisfyour financial covenants set forth in the Facilities, we may attempt torenegotiate the terms of the Facilities with our lenders for further amendmentsto, or waivers of, the financial covenants of the Facilities.  We believe that our ability to repay the TermLoan A and Term Loan B and amounts outstanding under the Revolver at maturitywill likely require additional financing. We cannot assume that additional financing will be available to us.  A portion of our debt bears interest atfloating rates; therefore, our financial condition is and will continue to beaffected by changes in prevailing interest rates.

 

**Inflation**

 

The impact of inflation on our operations hasnot been significant to date.  While wedo not believe our business is highly sensitive to inflation, there can be noassurance that a high rate of inflation would not have an adverse impact on ouroperations.

 

**Seasonality and Quarterly Results**

 

Our sales fluctuate seasonally.  Historically, our highest sales and earningsoccur in the first and third fiscal quarters; however, the opening of newstores may affect seasonal fluctuations. Hence, quarterly results are not necessarily indicative of results forthe entire year.

 

21

----

 

# **Forward-Looking Statements**

 

Certain statements containedherein constitute “forward-looking statements” within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended. All statements other than statements of historical facts included inthis report regarding our financial position, business strategy, budgets andplans and objectives of management for future operations are forward-lookingstatements.  Although we believe that theexpectations reflected in such forward-looking statements are reasonable, wecan give no assurance that such expectations will prove to have beencorrect.  Such forward-looking statementsinvolve known and unknown risks, uncertainties and other factors that may causeour actual results, performance or achievements, or industry results, to bematerially different from those contemplated or projected, forecasted,estimated or budgeted in or expressed or implied by such forward-lookingstatements.  Such factors include, amongothers, the risk and other factors set forth under “Risk Factors” in our AnnualReport on Form 10-K for fiscal 2003 as well as the following: general economicand business conditions; industry trends; the loss of major customers,suppliers or managed vision care contracts; cost and availability of raw materials;changes in business strategy or development plans; availability and quality ofmanagement; and availability, terms and deployment of capital.  SPECIAL ATTENTION SHOULD BE PAID TO THE FACTTHAT CERTAIN STATEMENTS CONTAINED HEREIN ARE FORWARD-LOOKING INCLUDING, BUT NOTLIMITED TO, STATEMENTS RELATING TO (I) OUR ABILITY TO EXECUTE OUR BUSINESSSTRATEGY (INCLUDING, WITHOUT LIMITATION, WITH RESPECT TO NEW STORE OPENINGS ANDINCREASING OUR PARTICIPATION IN MANAGED VISION CARE PROGRAMS), (II) OUR ABILITYTO OBTAIN SUFFICIENT RESOURCES TO FINANCE OUR WORKING CAPITAL AND CAPITALEXPENDITURE NEEDS AND PROVIDE FOR OUR OBLIGATIONS; (III) THE CONTINUING SHIFTIN THE OPTICAL RETAIL INDUSTRY OF MARKET SHARE FROM INDEPENDENT PRACTITIONERSAND SMALL REGIONAL CHAINS TO LARGER OPTICAL RETAIL CHAINS; (IV) INDUSTRY SALESGROWTH; (V) IMPACT OF REFRACTIVE SURGERY AND OTHER CORRECTIVE VISIONTECHNIQUES; (VI) DEMOGRAPHIC TRENDS; (VII) OUR MANAGEMENT ARRANGEMENTS WITHPROFESSIONAL CORPORATIONS; (VIII) OUR ABILITY TO OBTAIN ADDITIONAL FINANCING TOREPAY OUR CREDIT FACILITY OR NOTES AT MATURITY AND (IX) THE CONTINUED MEDICALINDUSTRY EFFORTS TO REDUCE MEDICAL COSTS AND THIRD PARTY REIMBURSEMENTS.

 

**ITEM 3.****                                 ****QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

We are exposed to various market risks.  Market risk is the potential loss arisingfrom adverse changes in market prices and rates.  We do not enter into derivative or otherfinancial instruments for trading or speculative purposes.  There have been no material changes in ourmarket risk during the first three quarters of fiscal 2004.  For further discussion, refer to our annualreport on Form 10-K for the year ended December 27, 2003.

 

Ourprimary market risk exposure is interest rate risk.  As of September 25, 2004, $117.8 millionof our long-term debt bore interest at variable rates.  Accordingly, our net income is affected bychanges in interest rates with specific vulnerability to changes in LIBOR.  For every two hundred basis point change inthe average interest rate under our $117.8 million in long-term borrowings, ourannual interest expense would change by approximately $2.4 million.

 

22

----

 

Inthe event of an adverse change in interest rates, we could take actions to mitigateour exposure.  However, due to theuncertainty of the actions that would be taken and their possible effects, thisanalysis assumes no such actions. Further, this analysis does not consider the effects of the change inthe level of overall economic activity that could exist in such an environment.

 

**ITEM 4.****                                 ****CONTROLS AND PROCEDURES**

 

Inaccordance with Exchange Act Rules 13a-15 and 15d-15, we carried out anevaluation, under the supervision and with the participation of management,including our Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of our disclosure controls andprocedures as of the end of the period covered by this report.  Based on that evaluation, our Chief ExecutiveOfficer and Chief Financial Officer concluded that the design and operation ofour disclosure controls and procedures were effective as of September 25,2004 to provide reasonable assurance that information required to be disclosedin our reports filed or submitted under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms.

 

There has been no change inour internal controls over financial reporting that occurred during the thirty-nineweeks ended September 25, 2004 that has materially affected, or isreasonably likely to materially affect, our internal controls over financialreporting.

 

##### ***PART II***. OTHERINFORMATION

 

**ITEM 1.****LEGAL PROCEEDINGS**

 

We are a party to routine litigation in the ordinarycourse of our business.  There have beenno such pending matters, individually or in the aggregate,that we have deemed to be material to our business or our financialcondition that have arisen during the third quarter of fiscal 2004.  For further discussion, refer to our annualreport on Form 10-K for the year ended December 27, 2003.

 

23

----

 

**Item 6.****Exhibits and Reports onForm 8-K**

 
| The following documents are filed as part of this report. |
|-----------------------------------------------------------|
|                                                      |   |   |
| 3.1                                                       |   | Restated Articles of Incorporation of Eye Care Centers of America,  Inc. (a) |
| 3.2                                                       |   | Statement of Resolution of the Board of Directors of Eye Care Centers  of America, Inc. designating a series of Preferred Stock. (a) |
| 3.3                                                       |   | Amended and Restated By-laws of Eye Care Centers of America, Inc. (a) |
| 4.1                                                       |   | Indenture, dated as of April  24, 1998,  among Eye Care Centers of America, Inc., the Guarantors named therein and  United States Trust Company of New York, as Trustee for the 9 1/8% Senior  Subordinated Notes Due 2008 and Floating Interest Rate Subordinated Term  Securities. (c) |
| 4.2                                                       |   | Form of Fixed Rate Exchange Note. (b) |
| 4.3                                                       |   | Form of Floating Rate Exchange Note. (b) |
| 4.4                                                       |   | Form of Guarantee.  (b) |
| 4.5                                                       |   | Registration Rights Agreement, dated April 24, 1998, between Eye  Care Centers of America, Inc., the subsidiaries of the Company named as  guarantors therein, BT Alex. Brown Incorporated and Merrill Lynch, Pierce,  Fenner & Smith Incorporated. (a) |
| 31.1                                                      |   | Certification of Chief Executive Officer (d) |
| 31.2                                                      |   | Certification of Chief Financial Officer (d) |
| 32.1                                                      |   | Certification pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (d) |

 

----

(a)                                  Incorporated by reference from theRegistration Statement on Form S-4 (File No. 333 – 56551).

 

(b)                                 Previously provided with, and incorporated byreference from, our Quarterly Report on Form 10-Q for the quarter ended September 29,2001.

 

(c)                                  Previously provided with, and incorporated byreference from, our Quarterly Report on Form 10-Q for the quarter ended September 28,2002.

 

(d)                                 Filed herewith

 

24

----

 

**SIGNATURE**

**EYE CARECENTERS OF AMERICA, INC.**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
| Date: November 09, 2004                              |
|------------------------------------------------------|
|                                                 |
| /s/ Alan E. Wiley                                    |   |
|                                                 |
| Alan E. Wiley                                        |
| Executive Vice President and Chief Financial Officer |

 

25

----